The greatest illusionists; (September 13, 2009)
The Federal Reserve, the World Bank, the International Monetary Fund, the European Central Bank, The Central Bank of France, and the Central Bank of Germany are spreading false data of economic improvements with the main target of cheating the public to regain “confidence” on the archaic liberal capitalist system. For a year now no substantive regulations on liberal capitalism have been instituted. The Chairman of the Federal Reserve Ben Bernarke is at it again; he said lately “We should not attempt to impose on credit lenders heavy restrictions that might prevent the development of new financial products and services in the future. We all know that the improvement of easier access to credit has reduced costs and widened the range of choices.” Are not the liberal new financial gimmicks for easier credit that brought on the crash of 2008 and the several crashes before it?
What “confidence” is these great illusionists trying to resurrect from the tomb without a clear alternative financial system? So far, bonuses are extended to the financial acrobats crossing dry rivers while employees are sinking in troubled water and not finding decent jobs. The USA is experiencing an official rate of unemployment of 10% and the European States even higher rates. For 2010, the International Organization of Labor (IOL) is expecting an additional 60 millions of unemployed and an additional 200 millions of people earning below two dollars a day.
The States of California, Illinois, and New Jersey have declared bankruptcy; they lost over 30% of their assets during the financial crash. These States refused to increase taxes for decades and they are no longer able to increase taxes because of their restricting legislative structures. The Security and Exchange Commission (SEC) is allocated a budget of one billion dollars to spend on 3,500 employees. The same SEC that failed to uncover Madoff’s practices for over 30 years and even asked for his expertise many times! There is this joke in the financial circle of Shadock maxim “The more you fail the higher the odds for success in the future”.
There are several economic time bombs strewn around; they may blast one after another or all together. Among these time bombs we can explain the following: Obligatory Crash, Effective increase of interest rates, Refinancing of public dept, Monetary over valuation, and Newer and botoxed up (lifting) exotic financial derivatives.
The public debts of the USA, France, and Britain are expected to reach 90% of the GNP in a couple of years; Japan will hit the 200% mark. Obligatory Crash is more imminent than forecasted previously. The real values of the treasury bills of these nations designed to refinance the public dept will collapse abruptly. Chinese households have been saving for two decades and accumulated three folds during the last 7 years; these savings are re-invested in purchasing treasury bills of the developed States. Pretty soon, the citizens of the developed nations will start bypassing their State middlemen and purchase directly Chinese treasury bills for higher returns; especially that the Chinese currency is endemically undervalued and cannot but goes up. Then, what will happen? Would the USA declare the Chinese treasury bills illegal or not marketable in the US market? The USA did that previously but antagonizing China is a different ball game.
Effective increase of interest rates has been eating up any economic improvement in the indebted nations. The price of obligations has been decreasing. Let us say if an obligation returned $30 on the thousand and it is re-purchased at half the price for the same return then the State is effectively paying $60 for the thousand. Thus, with the doubling of the interest rate States will not find takers for new issues of obligations but by offering the higher interest rate.
When allowed, central banks of States may refinance public debts by purchasing titles on the open market and thus sustain the prevalent interest rate. This process is in fact creating new money printing and devaluing the currency value.
The developed nations have over valuated currencies because they are unable to compete in other emerging markets like China, India, and Brazil. The exterior balance of commerce is thus in deficit and the currency keeps over valuating; it is a vicious cycle unless the developed nations reduce drastically the price of their products to be able to compete. China is able to keep its currency under valued simply because it can afford to sell at competitive prices.
Before WWI the economic principle was “Demands carry the economy”. Then this principle was upturned; it now states “Offers carry the economy” which means “We produce and then we find ways to encourage consumers to purchase. We entice the consumers by promotional gimmicks, by much lower prices, by creating new trends of standards of living, and by lavishing plenty of credits.” It worked for a while until what is being produced is getting too expensive, of lower quality, and basically not that essential in tight financial downturns. How about educating the consumers of what is essential for resuming a decent life without the faked propaganda of what constitute a “high standard of living”?
Note: I read lately that 48 States in the US are bankrupt and the real deficit is 56 trillion instead of the official 13 trillion.
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