The Facts Or The "Con" In Con-Game:
In 2005, Stephen King, managing director of economics at HSBC and also a columnist for the Independent.uk news site stated that there was a crisis of faith among central bankers. Two years later, we can see why this confession should have read as: central bankers must stick to their pseudo-religious tones to proliferate public delusions of invincibility.
Since psychology has become more important that fundamentals, we need to ask what would dampen Chinese enthusiasm and confidence - after all confidence is the "con" in con-game.
The carnival of debt goes beyond the U.S: at the other end of the world, Australians owe a staggering $160 -and counting-for every $100 of disposable income. Reserve Bank figures show that families are now siphoning a record 12 per cent of their disposable incomes to cope with interest payments. Closer, in the UK, the warnings have followed one another for about at least 5 years. The latest one (31st May) was as dramatic as the previous ones: Britons are edging ever nearer to a debt nightmare. According to the Registry Trust, up to a million households will face court action over their debts this year. On the Old Continent, the situation is truly appalling: Europe's Credit Bubble More Dangerous Than China's
Alas this definition couldn't be more appropriate since the Chinese stock market went up 400% from January 2006. If you think this is hysterical, wait there is more: a pattern of appalling confidence exposed by the USAtoday stating that the amount of government debt is equal to $516,348 for every U.S. household, while by comparison, U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined. A grand total that is a little bit more than 628,000 dollars! So when the Chinese and even Japanese will realize the futility of keeping their USDs, one of the most popular doomsday scenario will play out. A Forbes columnist confirms that China accumulates $20Bn of dollar-based reserve monthly and without its sweatshops the country cannot export profit margins already under pressure. As a result we should expect more dollar reserve accumulation says a JP Morgan analysis. For how long exactly? Musical chair games are not ever lasting. Some nations are already scaling back and diversifying. Which is why the Euro has gained value against the USD. But a growing number of economists lean toward the end of the "world dollarization" whose effects will be devastating.
And it is not all: a columnist (working for Bloomberg.com and whose articles are definitely a must read in my view) explains why a $12 trillion monster threatens globalization. He has interviewed a London-based global head of currency research at Morgan Stanley tells us to expect our doom by 2015 (this deadline is much too optmistic in my view). 12Tn is the current size of the U.S. economy, and it could create interesting problems for the world economy.
Having gotten themselves into an untenable situation, Asian governments are mulling how to use the money. Let's just hope they do it wisely and carefully. Nothing less than the future of globalization may hang in the balance.
Considering our global hyper-leveraged environment all this would help detonate very likely the credit derivatives bubble on the Old Continent. The buy low, sell high insurance risk against defaults is what derivatives are in a few words. Economists regard the current situation as a Ponzi scheme, derived from an infamous conman in early 20th century, and whose scheme eventually collapsed. This would also be enough to send tremors throughout the system. With the American consumers behaving like spending robots running out of steam, it wouldn't be wise to bet on what seems "an ever lasting prosperity". In fact the USD has already lost 30% against all major currencies.
Pundits who watch the sputtering housing boom (read: the beginning of the end) still believe in a recovery some time later this year or early 2008. But if the currency has already lost 30%, since its 2002 peak, it means that 1,000,000 condo is now 700,000 worth bucks. Many currency traders see the dollar lose another 10-15% before it stabilizes. Stabilization is the word to sustain con-fidence of course. This very extremely bad news: it will backfire and may prompt the US debt holders to dump their (worthless) dollars as more investors begin to do the same at record pace. The cynicism of this ugly tale is that there isn't one single major currency that is worth investing in it anymore. We are awash with liquidity, not wealth… awash with debts!
The planet is a debt neutron bomb, which was engineered by people thinking they can get rich by just embracing endless speculation while the masses mesmerized by their success have come to believe that "saving" was an obsolete concept. The big squeeze of the world consumers along with the sweatshops' exploitation have led to the birth of highly creative financial instruments never seen before.
Now one really has to wonder why the Democrats are in the hurry to raise the minimum wage standing now at $5,15 and which is scheduled to rise in 3 steps up to $7,25 an hour as of mid-2009. Considering the awful economic big picture, after the complete demise the plan surely would make more sense since at least 40% of the population will be without a job. CEOs will surely appreciate to have 2 employees for the price of one. Yep, dear readers, this is the harsh reality which is going to replace the rosy scenario that has played out so far. Look closer: this wage increase sounds like the beginning of communism. The ever profit seekers called corporation executives could easily be tempted to extend this new law whenever they see it fit and the 40% would quickly ten become 50... 60%? And when this time comes, many are going to finally understand the hoax behind such "socialist intention" and so-called tax-cuts. There never was any real tax-cut by the way. Like so many other things in the world where con-fidence has taken over the rules of Knowledge: it is a myth. Tax-cut was in fact replaced with inflationary pressures caused by a government whose budget is definitely out of control since 9-11. Deficit spending has a price and soon the bill will come due. This time we cannot ask the next generation to hold the bag.
How grave is it? Let's summarize the latest Greenspan's comment. He said that there was very little risk (if none at all) to see China dump the US treasuries because there wasn't any buyer out there. With nearly 60 trillion liabilities and the need to sell $2.5BN of debt daily to stay afloat, there are at least 70% of all the banknotes printed by the Federal Reserve abroad, held by central banks for the most part. Since the dotcom crash the same central banks were driven to buy the US dollars to support the world boom, so the countries they manage could also profit. This is what does currency hegemony. If the world currency is deadly inflated, the others must do the same to avoid a recession and/ or remain competitive. Japan is the most blatant example in the sense that the yen must remain cheaper than the greenback to remain productive. But as we now can see with the plunging dollar, that strategy was doomed since the start. At least Greenspan admits:
As usual such a warning comes too late. Cheap money has a curse: it gives an impression of wealth while it discourages or gobbles savings. And fatally when the cycle has played out, we have a recession or worst a depression.
"We cannot continue this rate of growth in China and the Third World. This cannot continue indefinitely," Greenspan said in a speech. "Some of these price/earnings ratios are discounting nirvana."
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Have you noticed the aggressive trade mood between America and China lately? The red hot Chinese economy was fed with easy electronic money all the way long, and with the participation of the US consumers maxing out their credit cards or morphing their houses/condos into ATM machines. But now with the housing bust that has begun this year (and which is already affecting the wallets of so many) protectionism has become a daily preoccupation. You will not hear on TV what is the real cause of the tensions. The truth is that the Sino-US marriage of convenience is breaking up as the US households' willingness to borrow and spend gets exhausted. It is not without a reason that the instruments against defaults called "derivatives" have risen 24 percent in the first quarter to a record $533 trillion, BIS said as of June 10, 2007. Considering the state of the world economy, the problem is that those derivatives have been insuring "junk" for quite a while.
Yes for junk, you read well and if you've got difficulties to get the full picture, Steven Pearlstein has written a useful article about the current equity takeover, which depicts how to get filthy rich in 'Wall Street Paradise'. High valuations driven by cheap debt reached a new level. Although it is hard to see why one would buy a firm 10 times (or more) its generating profits, on Wall Street it is now accepted as conventional wisdom. Pearlstein agrees that predicting when the magic will end is kind of tricky. The expansion of America and the rest of the world were based on the delusion. In the developing countries too borrowing went without any restraint, $900bn between 2005-07. The moment of convergence is fast approaching and when that happens, we'll see an alignment of dominoes fall one by one.
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