The Strong Dollar Illusion
http://www.financialsense.com/fsu/ed...2008/0815.html


The Strong Dollar Illusion
by Peter Schiff, Euro Pacific Capital | August 15, 2008
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Economists who now see American troubles spreading around the world are predicting that foreign central banks will ignore the gathering inflation threat and follow the Fed down the rate cutting path. Similarly, they argue that since the downturn began here, the U.S. recovery will likely be underway while the rest of world is still decelerating. These assumptions have prompted a rally in the dollar, a sell-off in gold, commodities and foreign stocks, and have cast doubts on the ability of foreign economies to “decouple” from the United States. Investors should not take the bait.

America does indeed pose a global threat, but not for the reasons these economists suppose. Foreign economies are suffering not because Americans have slowed their voracious spending, but because they are defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world.

The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.

The current losses that banks in Europe and Asia are now suffering are real, but future losses can be avoided by suspending future lending to Americans. Shutting off this credit will of course torpedo the dollar, but that is precisely what must occur. By allowing the dollar to drop to its natural, unsupported level, not only will the American caboose be decoupled from the global gravy train, but the rest of the cars will move along the tracks much faster. Absent the U.S., there will still be plenty of consumers to buy what is produced, and plenty of investment opportunities for those with savings. Rather than dragging the global economy down, such a development would actually un-tether it.

On the other hand, left to its own devices, the American economy will implode. There will be fewer products for American consumers to buy and very little savings for anyone to borrow.

Some foolishly believe that many of the world’s problems result from dollar weakness, and that pushing the dollar back up would be good for all. For example, since the weak dollar is contributing to the rise in oil prices, a stronger dollar should help bring prices down. However, if foreign governments weaken their own currencies to push the dollar up, they will simply succeed in bringing oil prices down for Americans. Oil prices will go up for their own citizens. This can’t be an attractive bargain for any European or Asian political leader.

The weak dollar is merely a manifestation of substantial structural problems underlying the American economy. Unfortunately for us, the solution to those problems, as well as the global economic imbalances, can only be found in a weaker dollar. Efforts to artificially prop the dollar up will only exacerbate those imbalances, and make its ultimate fall that much more severe

Russia dumps $50 Billion of GSE paper
They want hard assets!

Russia dumped $50 billion of mortgage bonds and now owns just $50 billion worth. Two weeks ago, they said this:

MOSCOW, Jul 14, 2008 (Dow Jones Commodities News via Comtex) -- The Russian Finance Ministry reiterated Monday that it doesn't see a threat in holding parts of its gold and foreign-exchange reserves in debt of U.S. mortgage companies, including Fannie Mae (FNM) and Freddie Mac (FRE).

"We don't see a reason to change anything because the rating of the debt of those agencies hasn't changed," Deputy Finance Minister Dmitry Pankin told journalists, adding that the debt obligations are backed by the U.S. government.
http://www.marketwatch.com/news/story/dj-r...AB3E96E2541A%7D

Russia learned from Wall Street. Tout them, while you dump them. Now you know where PIMCO got their inventory from!
Posted by Palmoni at 10:49 AM

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http://aaronandmoses.blogspot.com/2008/07/...-gse-paper.html

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Looks like Russia is about to dump the rest now...


PUTIN'S CHOICE: Flyswatter or Blunderbuss
by Mike Whitney | August 12, 2008 - 1:43pm

article tools: email | print | read more Mike Whitney

Washington's bloody fingerprints are all over the invasion of South Ossetia. Georgia President Mikhail Saakashvili would never dream of launching a massive military attack unless he got explicit orders from his bosses at 1600 Pennsylvania Ave. After all, Saakashvili owes his entire political career to American power-brokers and US intelligence agencies. If he disobeyed them, he'd be gone in a fortnight. Besides an operation like this takes months of planning and logistical support; especially if it's perfectly timed to coincide with the beginning of the Olympic games. (another petty neocon touch) That means Pentagon planners must have been working hand in hand with Georgian generals for months in advance. Nothing was left to chance.

Another tell-tale sign of US complicity is the way President Bush has avoided ordering Georgian troops to withdraw from a province that has been under the protection of international peacekeepers. Remember how quickly Bush ordered Sharon to withdraw from his rampage in Jenin? Apparently it's different when the aggression serves US interests.

Saakashvili has been working closely with the Bush administration ever since he replaced Eduard Shevardnadze as president in 2003. That's when US-backed NGOs and western intelligence agencies toppled the Shevardnadze regime in the so-called color-coded "Rose Revolution". Since then, Saakashvili has done everything that's been asked of him; he's built up the military and internal security apparatus, he's allowed US advisers to train and arm Georgian troops, he's applied for membership in NATO, and he's been a general nuisance to his Russian neighbors. Now, he has sent his army into battle ostensibly on Washington's orders. At least, that is how the Kremlin sees it. Vladimir Vasilyev, the Chairman of Russia's State Duma Security Committee, summed up the feelings of many Russians like this: "The further the situation unfolds, the more the world will understand that Georgia would never be able to do all this without America. In essence, the Americans have prepared the force, which destroys everything in South Ossetia, attacks civilians and hospitals."

True. That's why Bush is flying Georgian troops back home from Iraq to join the fighting rather than pursuing peaceful alternatives. An Israeli newspaper is also reporting that the US is shipping weaponry to the war zone. Bush still believes that political solutions only arise through the use of force.

But that still doesn't answer the larger question: Why would Saakashvili embark on such a pointless military adventure when he had no chance of winning? After all, Russia has 20 times the firepower and has been conducting military maneuvers anticipating this very scenario for months. Does Bush really want another war that bad or is the fighting in South Ossetia is just head-fake for a larger war that is brewing in the Straits of Hormuz?

Mikhail Saakashvili is a western educated lawyer and a favorite of the neocons. He rose to power on a platform of anti-corruption and economic reform which emphasized free market solutions and privatization. Instead of raising the standard of living for the Georgian people, Saakashvili has been running up massive deficits to expand the over-bloated military. Saakashvili has made huge purchases of Israeli and US-made (offensive) weapon systems and has devoted more than "4.2% of GDP (more than a quarter of all Georgian public income) to military hardware.

The Chairman of Russia's State Duma Security Committee, Vladimir Vasiliyev, summed it up like this:

"Georgia could have used the years of Saakashvili's presidency in different ways - to build up the economy, to develop the infrastructure, to solve social issues both in South Ossetia, Abkhazia and the whole state. Instead, the Georgian leadership with president Saakashvili undertook consistent steps to increase its military budget from US$30 million to $1 billion - Georgia was preparing for a military action." Naturally, Russia is worried about these developments and has brought the matter up repeatedly at the United Nations but to no avail.

Israeli arms manufacturers have also been supplying Saakashvili with state-of-the-art weaponry. According to Israeli newspaper Ha'aretz:

"In addition to the spy drones, Israel has also been supplying Georgia with infantry weapons and electronics for artillery systems, and has helped upgrade Soviet-designed Su-25 ground attack jets assembled in Georgia, according to Koba Liklikadze, an independent military expert in Tbilisi. Former Israeli generals also serve as advisers to the Georgian military." ("Following Russian pressure, Israel freezes defense sales to Georgia" Associated Press)

The Israeli news source DebkaFile elaborates on the geopolitical implications of Israeli involvement in the Georgia's politics:

"The conflict has been sparked by the race for control over the pipelines carrying oil and gas out of the Caspian region....The Russians may just bear with the pro-US Georgian president Mikhail Saakashvili’s ambition to bring his country into NATO. But they draw a heavy line against his plans and those of Western oil companies, including Israeli firms, to route the oil routes from Azerbaijan and the gas lines from Turkmenistan, which transit Georgia, through Turkey instead of hooking them up to Russian pipelines.

Jerusalem owns a strong interest in Caspian oil and gas pipelines reach the Turkish terminal port of Ceyhan, rather than the Russian network. Intense negotiations are afoot between Israel Turkey, Georgia, Turkmenistan and Azarbaijan for pipelines to reach Turkey and thence to Israel’s oil terminal at Ashkelon and on to its Red Sea port of Eilat. From there, supertankers can carry the gas and oil to the Far East through the Indian Ocean." (Paul Joseph Watson, "US Attacks Russia Through Client State Georgia")

The United States and Israel are both neck-deep in the "Great Game"; the ongoing war for vital petroleum and natural gas supplies in Central Asia and the Caspian Basin. So far, Putin appears to have the upper-hand because of his alliances with his regional allies–under the Commonwealth of Independent States—and because most of the natural gas from Eurasia is pumped through Russian pipelines. An article in “Today’s Zaman� gives a good snapshot of Russia’s position vis a vis natural resources in the region:

“As far as natural resources are concerned Russia’s hand is very strong: It holds 6.6 percent of the worlds proven oil reserves and 26 percent of the world’s gas reserves. In addition, it currently accounts for 12 percent of world oil and 21 of recent world gas production. In May 2007, Russia was the world’s largest oil and gas producer.

As for national champions, Putin has strengthened and prepared Gazprom (the state-controlled gas company), Transneft (oil pipeline monopoly) and Rosneft (the state-owned oil giant). That is why in 2006 Gazprom retained full ownership in the giant Shtokman gas field (7) and took a controlling stake in the Sakhalin-2 natural gas project. In June 2007, it took back BP’s Kovytka gas field and now is behind Total’s Kharyaga oil and gas field.� (“Vladimir Putin’s Energystan and the Caspian� Today’s Zaman)

Putin–the black belt Judo-master–has proved to be as adept at geopolitics as he is at “deal-making�. He has collaborated with the Austrian government on a huge natural gas depot in Austria which will facilitate the transport of gas to southern Europe. He has joined forces with German industry to build an underwater pipeline through the Baltic to Germany (which could provide 80% of Germany’s gas requirements) He has selected France’s Total to assist Gazprom in the development of the massive Shtokman gas field. And he is setting up pipeline corridors to provide gas to Turkey and the Balkans. Putin has very deliberately spread Russia’s influence evenly throughout Europe with the intention of severing the Transatlantic Alliance and, eventually, loosening America’s vice-like grip on the continent.

Putin’s overtures to Germany’s Merkel and France’s Sarkozy are calculated to weaken the resolve of Bush’s neocon allies in the EU and put them in Russia’s corner. Putin is also attracting considerable foreign investment to Russian markets and has adopted “a ‘new model of cooperation’ in the energy sector that would ‘allow foreign partners to share in the economic benefits of the project, share the management, and take on a share of the industrial, commercial and financial risks’�. (M K Bhadrakumar “Russia plays the Shtokman card�, Asia Times) All of these are intended to strengthen ties between Europe and Russia and make it harder for the Bush administration to isolate Moscow.

Putin has played his cards very wisely, which makes it look like the fighting in South Ossetia may be Washington's way of trying to win through military force what they could not achieve via the free market.

Currently, news agencies are reporting that Russian warplanes are pounding Georgia's military bases, airfields, and the Black sea port of Poti.

According to Bill Van Auken on the World Socialist Web Site:

"Much of the city (Tskhinvali) was reportedly in flames Friday. The regional parliament building had burned down, the university was on fire, and the town’s main hospital had been rendered inoperative by the bombardment."

An estimated 1,500 people have died in the onslaught and 30,000 more fled across the Russian border. Large swaths of the city have been reduced to rubble including the one hospital that was pounded by Georgia bombers. Georgia has cut off the water supply to the city.The Red Cross now anticipates a "humanitarian catastrophe" as a result of the fighting.

“I saw bodies lying on the streets, around ruined buildings, in cars,� Lyudmila Ostayeva, 50, told the Associated Press after fleeing the city with her family to a village near the Russian border. “It’s impossible to count them now. There is hardly a single building left undamaged.�

At least 15 Russia peacekeepers were killed in the initial fighting and 70 more were sent to hospital. Georgia's army stormed the South Ossetia capital, Tskhinvali, killing more than 1,000 fleeing civilians.

According to South Ossetia's president, Eduard Kokoyti, Georgian troops had been taking part in NATO exercises in the region since the beginning of August. Kokoyti claims that there is a connection between the NATO's activities and the current violence.

Russian President Dmitry Medvedev said on Sunday:

"The actions of Georgia have led to deaths - among them are Russian peacekeepers. The situation reached the point that Georgian peacekeepers have been shooting at Russian peacekeepers. Now women, children and old people are dying in South Ossetia - most of them are citizens of the Russian Federation. As the President of the Russian Federation, I am obligated to protect lives and the dignity of Russian citizens wherever they are. Those responsible for the deaths of our citizens will be punished."

PUTIN'S OPTIONS: Flyswatter or Blunderbuss?

But how will Medvedev and Putin bring an end to the hostilities? Will they engage the Georgian army and its western allies in conventional warfare creating the possibility of a decades-long Chechnya-type conflict or will they launch an asymmetrical attack on the fragile US financial system by selling all $50 billion of their Fannie Mae mortgage-backed bonds and all of their US dollar-backed assets while refusing to sell oil or natural gas in any currencies other than rubles and euros. Such an announcement could send the dollar crashing and the Dow Jones into a death-spiral. Why would Putin use a blunderbuss when a flyswatter will do just fine.

http://www.smirkingchimp.com/thread/16442

Putin's Energy Diplomacy Has Not Yet Swayed Europe

Here are the charts of currencies for the G8 (Eurozone nations obviously are lumped into EUR).

You have to change the FROM: date at the bottom to 6/1/2008 to get a good view (8/1/2008 might be more to the point):

http://tinyurl.com/6c3fzg

As can be seen, not only the Euro (EUR), but also the Swiss Franc (CHF), the Japanese Yen (JPY), the Canadian Dollar (CAD) and the British Pound (GBP) have fallen off dramatically vs. the dollar since August 1st.

The Ruble has fallen, too, but there is some kind of charting anomaly that has inverted the RUBUSD=X chart, so it looks like the ruble is rising. That is rather egregious on the part of the chart provider.

The yuan (CNY) has remained pretty much level with the US dollar.

Since there is only bad economic news coming out of the U.S., I get the impression that there is currency intervention going on to prop up the dollar. There is no present indication of Russian moves against the dollar, but Mike's "flyswatter" thesis still seems believable as a possible future option.

The European and Swiss Central Banks were perhaps the instruments of this recent dollar support, since the depreciation of their currencies vs. the dollar was the greatest. Canada is more resource based, so given the central bank support for the US Dollar from ECB and the Swiss, the Canadian dollar (CAD) may have fallen just because of its commodity dependence - or maybe it actively helped the US Dollar, too. As for Japan, they've been supporting the US dollar for a long time via the carry trade, but now carry is down somewhat due to the volatility in the forex, which makes those trades more risky (which by the way does not indicate much confidence that the recent USD moves will continue monotonically, or stabilize, either). But Japan has problems of its own, in part from having supported the carry trade for so long. So, maybe the yen's decline vs. dollar is just a knock-on effect of ECB and Swiss pro-USD intervention, combined with Japanese economic weakness.

As evidence that there is direct intervention (as mentioned above, probably by the ECB and the Swiss Central Bank), I found a very interesting article here (go to this page and then click on "Mystery Solved"):

http://goldmoney.com/en/commentary.php

"When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

"On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve's custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks."

That is $650 billion in just three weeks. To give an idea of how much money this is, I think it is about 4.4 percent of the GDP for the entire Eurozone. One would have to think that intervention at those levels is not sustainable. Rather, it is probably an attempt to batten down the hatches by wringing out speculative bets vs. the dollar in preparation for the inevitable continued eruption of very, very bad economic news from the U.S. The goal would probably be to prevent a disorderly decline of the U.S. currency.

If the above is correct, then it seems as though Europe (with Sarkozy as the present rotating head of the EU) is supporting the dollar. If Russia ends up opposing that policy, per Mike's flyswatter option, that could put Europe at loggerheads with Putin on the issue of the U.S. currency.

So, although, as the article says, Putin may be engaged in outreach through Russia's massive energy resources to woo Europe out of the U.S. orbit, the fact of Sarkozy's active involvement in pressuring Russia to back off on Georgia, combined with the evidence of a dollar-supportive European central bank currency policy vs. the dollar, show that Russia's energy diplomacy has a long way to go before the E.U. and Russia are on the same page.

Who knows - maybe Russia has some of the same concerns as the E.U. about the generally disruptive effects of a precipitous decline of the U.S. dollar at this time, despite its antipathy toward the U.S. itself. And perhaps that will cause Russia to not pursue the economic warfare suggested as a possibility by Mike.

Just take a look at the houseing market and that's all you need to know what's going on in the U.S.A.

US Food Stamp.

Bailout concerns slam Freddie, Fannie shares

By Lynn Adler 2 hours, 37 minutes ago

NEW YORK (Reuters) - Investors dumped shares of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.
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A government move to recapitalize the two companies by injecting funds could wipe out existing holders of the largest U.S. home funding companies' common stock, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Shares of Fannie Mae sank more than 22 percent to a 19-year low on Monday, closing at $6.15, while Freddie's shares plunged 25 percent to $4.39. Some of their bonds sharply underperformed Treasuries. A $4 billion sale of new Freddie Mac debt drew weak bids compared with similar issues last week.

A spokeswoman for the U.S. Treasury said the department has no plans to use its authority to backstop the two funding agencies. That authority was greatly increased by a rescue plan approved at the end of July.

"The Barron's article overstated Freddie Mac's financial situation," Sharon McHale, a Freddie Mac spokeswoman, told Reuters. "We continue to be adequately capitalized."

Fannie Mae spokeswoman Janis Smith declined to comment.

The poor performance of the U.S. mortgage market has pulled home loan rates up by about a percentage point from a year ago, just as the worst housing market since the Great Depression struggles to find a bottom.

"Investors have been trying to put the housing and credit crisis behind them. They want to believe we're in the eighth or ninth inning, but every time news like this comes up, they have to readjust their thinking," said Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois.

Overseas central banks have sold nearly $11 billion from their holdings of agency-related securities in the past four weeks, awaiting clarity on the extent and nature of U.S. government backing of the two faltering companies, which are chartered by Congress to support housing by keeping money flowing in the mortgage market.

The two companies, known as GSEs, together own or guarantee more than $5 trillion in U.S. mortgages.

"There is a lot of uncertainty with what happens in terms of capital raising and a lot of investors are in a wait-and-see mode," said Rajiv Setia, analyst at Barclays Capital. "From a GSE perspective, as long as they get funding it does not matter at what price as they will just pass it on with higher mortgage rates."

The value of some of the two companies' debt that is at the biggest risk of loss in the event of a government rescue fell to a record low in comparison with similar Treasury securities. Spreads on some Freddie Mac 10-year subordinated debt widened over Treasury notes to a bid of 400 basis points and offer of 360 basis points, from a close of 285 basis points on Friday, according to one investor, citing a dealer's data.

An insider in the Bush administration told Barron's that Fannie and Freddie "are being jawboned" by the Treasury Department and their new regulator, the Federal Housing Finance Agency, to raise more equity.

But government officials do not expect the agencies to succeed, Barron's reported.

If the GSEs fail to raise fresh capital, the administration is likely to mount its own recapitalization, with the Treasury infusing taxpayer money into the agencies, according to the Barron's source.

A government infusion would take the form of a preferred stock with such seniority, dividend preferences and convertibility rights that Fannie's and Freddie's existing common shares "effectively would be wiped out, and their preferred shares left bereft of dividends," according to the Barron's report,

The report said an equity injection by the government would be a quasi-nationalization -- without having to put the agencies' liabilities on the U.S. balance sheet, and thus doubling U.S. debt.

Merrill Lynch also weighed in on Freddie Mac on Monday, saying the company will likely raise fresh capital in the third quarter, comprised of at least 50 percent common stock. Merrill also cut its price target on the company.

Freddie Mac early on Monday said it will sell $3 billion of five-year notes on Tuesday in a sale that is sure to draw heightened scrutiny to gauge investor interest.

"Lukewarm was my overall characterization," Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates, said in an e-mail on Freddie Mac's $4 billion debt sale. "The bid-to-cover ratios were weak for all three bill auctions. Spreads weren't uniformly bad, however.

"The Barron's story seems to be getting a lot of attention, rightly or wrongly," Vanden Houten added.

A bid-to-cover ratio reflects the amount of total bids compared with the amount offered. A lower ratio indicates weaker demand.

"The pricing was in line with where swaps and in accordance with the market, Freddie Mac's McHale said.

Several U.S. insurance companies have "substantial" exposure to securities issued by Fannie Mae and Freddie Mac but should avoid big write-downs because of the federal government's backing of much of those securities, A.M. Best Co said on Monday.

The U.S. insurance industry invested $371 billion in securities issued by the mortgage financiers at year end, but $366.4 billion of the sum was in fixed income, A.M. Best said.

"Much of the industry's exposure represents fixed-income securities, which should benefit from the added financial backing of the federal government," A.M. Best said.

(Additional reporting by Al Yoon, Steven C. Johnson, Chris Sanders, Julie Haviv, Jonathan Stempel; Editing by Leslie Adler)

http://news.yahoo.com/s/nm/20080818/bs_nm/fannie_freddie_dc

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Smells like Russia has done its counter attack. GSEs $50 billion of them have been floated out, China will follow suit with 3 Trillion worth of GSEs and Dollar bonds, this may happen as soon as the Olympics are over. Prepare for the worst!!!!

You know that we have like 90% of people wanting to come to the USA and 10% of people wanting to leave the USA.

What does it tell you? Make your own conclusions and stop being so ignorant.

Dollar has been going up lately making oil prices go down.

Read somewhere that there are three ways to put US economy back on track.

1. Increase Taxes

2. Drastic Spending Cuts

3. Go back to Gold Standard. They would do this by printing tons of dollars which would be used to payoff the nations that are owed. Then with that extra money floating around the US would buy tons of gold. Then US would change its currency. The new currency would be backed by gold. All the people paid off before in old dollars would need to change to the new dollar or they would get stuck with worthless currency. Would be a nice trick to play.

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Not going to happen. If it does, there will be war. Tons of countries that were conned will use this reason to attack the US with Nuclear weapons and heck they deserve it if they did such a thing.

To be honest countries like China, Russia, Saudia Arabia, Japan and South Korea (most likely victims of the US switch) fully knows this possibility, so before the US does this, the nations around the world will float the dollar out first and sell off the GSEs to liquidate the US economy. The philosophy is simple, if we go down, we'll also take you with us.

Large U.S. Bank Collapse Seen Ahead

By Jan Dahinten

19/08/08 "Reuters" -- - SINGAPORE (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.

A government move to recapitalize the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.

"There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they're great buys, sovereign wealth funds come in and make a lot of money by buying them.

"That view neglects the point that the financial system has become very bloated in size and needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek have invested billions in Merrill Lynch and Citigroup

In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S. Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.

Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it did.

"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States."

(Editing by Neil Chatterjee)

© Thomson Reuters 2008 All rights reserved

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http://www.informationclearinghouse.info/article20557.htm

The Greenback Blues: Something's Gotta Give

By Mike Whitney

19/08/08 "ICH" --- - In a matter of weeks, the euro has been pounded into ground-chuck while the dollar has regained much of its former glory. What gives? The mighty greenback has surged 6% in the last month alone. Apparently, the early reports of the dollar's demise have been greatly exaggerated. The euro is caught in the same recessionary downdraft that is buffeting a number of currencies, all of which are unwinding at the same time although unevenly. Currency markets don't move in straight lines. But, don't be fooled, most paper money is steadily losing value due to the wild expansion of credit which started at the Federal Reserve. Investors are moving to cash and hunkering down. Who can blame them? As the massive equity bubble loses gas, balance sheets will have to be mended and lending will slow to a crawl. At present, Germany's slowdown and Spain's housing crash are drawing most of the attention but, just wait, the spotlight is shifting fast. Next week it could be shining down on the America's failing banking system or poor corporate-earnings reports in the US. Then it will be the dollar marching off to the gallows.

Europe's troubles have put to rest to idea that other countries can "decouple" from the US and thrive without help from the US consumer. That might be true in the long-term, but falling demand is already visible everywhere. Retail and auto sales are really taking a thumping and 2009 is shaping up to be even tougher. It's looking more and more like the Europeon Central Bank was faked-out by the early signs of inflation and missed the deflationary sledgehammer that was about to come crashing down. It was a rookie error by European Central Bank (ECB) chief Jean Claude Trichet and it should cost him his job. Raising interest rates while sliding into the jaws of recession is madness. Now all of Europe is headed for a hard landing and there's no way to soften the blow. The ECB doesn't have the same tools as the Fed; Trichet can't simply backstop the whole system with green paper and T-Bills like Bernanke. He can either slash rates or take a bleacher-seat and hope for the best.

The UK Telegraph's Ambrose Evans-Pritchard, sums up Europe's woes in last week's article "ECB Slammed as Europe Crumbles":

"The economies of Germany, France and Italy all contracted in the first quarter and may now be in full recession, shattering assumptions that Europe would prove able to shrug off the effects of the credit crunch....The picture is darkening so fast in Spain that Prime Minister Jose Luis Zapatero canceled holidays and called his cabinet back to Madrid yesterday for the first emergency session of its kind since the Franco dictatorship.

Growth has turned negative in Ireland, Denmark, Latvia, and Estonia, while grinding to a halt in Sweden and The Netherlands. Iceland contracted by a staggering 3.7pc. The grim data from Eurostat follows a recession warning in Britain, and shock news that the Japanese economy had shrunk 0.6pc in the second quarter. Almost the entire bloc of rich Organization for Economic Co-operation and Development (OECD) countries - still two thirds of the world economy - are now in the grip of a major downturn."

Evans-Pritchard's article reads like a chapter from the Book of Revelation all that's missing is the plague of locusts. The ECB is in a pickle and will have to allow the economy to cool off so the credit excesses can work themselves out. It's like a pig passing through the belly of the boa; it takes time.
As a result, deficits are likely to soar in the south (particularly Spain, Greece and Italy) while growth in the industrial north, Germany, will continue to shrink. Spain, Ireland and England are undergoing the biggest housing meltdown in history having fallen prey to the same Greenspan-inspired hanky-panky we've seen in the US. Hundreds of billions of dollars of low interest loans that were issued to unqualified mortgage applicants has clogged up the system. Now the bill has come due and the losses have to be written off. Expect more blood to come.

The problem is so big that the future of the EU and the euro are now very much in doubt. Currency traders are expecting the ECB to lower rates (and weaken the euro) just as the future's market is wagering that the Fed will raise rates to fight inflation. But don't bet on it. Interest rates are going down not up, regardless of the Fed's well-orchestrated PR campaign. Bernanke is just waiting for Trichet to make his move before he produces the Fed-scimitar and begins slashing rates. Don't forget, the Federal Reserve is essentially the board of directors for the nations banking system. If Bernanke is forced to choose between the people who depend on the dollar as a reliable store of value or bailing out the high-stakes gamblers who run the banks; the Fed chief will choose the banks 100 per cent of the time. In Vegas, that's called a "sure thing".

The perception that the dollar is getting stronger is an illusion. Deflation is "dollar positive" because investors who flee from toxic assets naturally move into cash. But that doesn't mean they have faith in the dollar; far from it. The fundamentals for the greenback get worse by the day. Fiscal and trade deficits are out of control, the national debt is tipping $10 trillion, foreign investment is drying up, and confidence in US leadership has never been lower. The dollar is on a time-line of roughly 6 to 18 months before it's rolled into spools and sold as toilet paper. Paper currency is a country's IOU; and foreign central banks are wary of taking checks from a country that no longer wins wars or has the capacity to pay off its debts. That's why, for the first time, there's serious talk about the US losing its triple A rating on government debt; and it could happen sooner than anyone thinks. Every time the Fed uses the dollar to prop up the faltering banking system or provide limitless capital for defunct GSEs like Fannie Mae and Freddie Mac; the dollar comes under greater pressure. At a certain point the dollar will crumble and the country will have to sell off its assets and industries to pay the bills. That's when the private equity vultures and Sovereign Wealth Funds will swoop down and scavenge anything of value for pennies on the dollar.

As the US housing market continues to collapse, trillions of dollars in equity and credit are disappearing in a deflationary bonfire. When a $400,000 home--with no down payment and negative equity--goes into foreclosure; $400,000 vanishes from the digital-pool of credit and has to be written down as a loss. So far, much of the losses have not yet been accounted for because the banks are using their own internal models for determining the downgraded value of their mortgage-backed assets. Two weeks ago, Merrill Lynch sold $30 billion of Mortgage-backed junk for 20 cents on the dollar. But they also financed the deal, so they really only received 5 cents on the dollar. This reflects the true "market value" of these assets. Naturally, Merrill's sale sent tremors through Wall Street where banks and other financial institutions are sitting on trillions of dollars of this garbage marking it down at a few percentage points every reporting period rather than doing what Merrill did and putting it all behind them. As a result, the banks have less capital to lend, which means economic activity will slow and the country will go into a deep recession. The point is, that the Federal Reserve now holds about $400 billion of this junk-paper on their balance sheets and the US Treasury is planning to take hundreds of billions more (perhaps as mush as $800 billion more under the new legislation!) to prop up Fannie Mae and Freddie Mac. The Bush administration is using the US taxpayer and the credibility of the dollar as collateral in its plan to bail out the most reckless, high-stakes Wall Street gamblers and their multi-trillion dollar ponzi scheme that has blown up in their face.

So, how does this affect the dollar?

The nation's debts are entirely balanced atop its currency. The greenback is like a circus strongman holding a barbell precariously over his head; as the weigh increases, the sweat begins to appear on his brow and the veins begin to bulge in his neck and forehead. Finally, the knees buckle and the and the over-matched weightlifter crashes to the canvas in a heap. That's the future of the dollar in a nutshell. Its just a matter of time.

But how does that explain the sudden fall in gold prices; after all, gold is the logical alternative to paper money, right?

Wrong. Gold is "real money" alright, but it's also a commodity. And when commodities are smashed by a deflationary tidal wave--as they have been the last few weeks-- gold will follow them into the basement. In truth, gold has taken an even worse pasting than the euro; free-falling from $980 per ounce in mid-July to $786 at Friday's market close. $194 in a month. Goldbugs are so fanatically committed to their views about "real currency" and "fiat money", that any correction in the market is seen as proof of government manipulation. (Even though they are right many times) There's plenty of evidence of meddling in the currency markets, just as one would expect. After all, the western banking system, led by the Fed, operates as a cartel. The head honchos are about as committed to free markets as Bush is to democracy, which isn't saying much. It's all a public relations ruse that's used to defend a de facto monopoly; the paper money scam. So, we shouldn't be surprised when foreign central banks unexplainably purchase $28 billion of US government securities at the 11th hour (as they did last month) to conceal our trade imbalance and prop up the waning dollar. Don't forget, it's their chestnuts they're keeping out of the fire, too. But, that doesn't mean the Fed has super powers or that every time gold goes into a tailspin its because the black helicopters fired invisible lasers into the currency markets. When the economy is in the grips of deflation; all asset-classes get dragged down, gold included. Many of the hedge funds and other big market players are selling their gold positions recognizing that the commodities boom is over and it's time to move on. That doesn't mean that gold won't rebound sharply when Bernanke slashes rates or if Bush blows up some new part of the globe. It simply means that in the short term, "cash is king". Pension funds and hedge funds will continue to deleverage to reduce their credit exposure to put themselves in a better position to roll over their debt. That means that gold's slide could last a while. This doesn't look like a conspiracy to me, but I intend to keep my tin-foil hat firmly strapped-on just in case.

No one knows where the bottom is for gold, but one thing is certain; it's future prospects are a lot brighter than the dollar's. The Bush administration has yet to demonstrate that it can enforce Dollar Hegemony via military intervention. That is a very big deal. If the dollar isn't backed by (stolen) Iraqi oil, then the $6 trillion stockpile of dollars and dollar-denominated assets that are languishing in foreign central banks and funds, will continue to dwindle until the dollar's position as "reserve currency" comes to an end.

That's one doomsday scenario, but there is another. If Bernanke and Paulson continue to pile all of the nation's credit problems on top of the greenback; foreign capital will head for the exits and the dollar will crash. Either way, the troubles are mounting and something's got to give.

http://www.informationclearinghouse.info/article20547.htm
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Jim Rogers Predicts Bigger Financial Shocks Loom

Fueling a Malaise That May Last for Years

By Keith Fitz-Gerald
Investment Director

19/08/08 " Money Morning/The Money Map Report" --- - VANCOUVER, B.C. – The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae (FNM) and Freddie Mac (FRE) – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.

Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.

The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.”

During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said that:

* U.S. Federal Reserve Chairman Ben S. Bernanke should “resign” for the bailout deals he’s handed out as he’s tried to battle this credit crisis.
* That the U.S. national debt – the roughly $5 trillion held by the public– essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.
* That U.S. consumers and investors can expect much-higher interest rates – noting that if the Fed doesn’t raise borrowing costs, market forces will make that happen.
* And that the average American has no idea just how bad this financial crisis is going to get.

“The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”

Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as "Investment Biker" and the recently released "A Bull in China." And he made some historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that’s fueled a year-long bull market in the agriculture, energy and mining sectors.

Rogers’ candor has made him a popular figure with individual investors, meaning his pronouncements are always closely watched. Here are some of the highlights from the exclusive interview we had with the author and investor, who now makes his home in Singapore:

Keith Fitz-Gerald (Q): Looks like the financial train wreck we talked about earlier this year is happening.

Jim Rogers: There was a train wreck, yes. Two or three – more than one, as you know. [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue. Which is going to cover things up for a while. And then I don’t know how long the rally will last and then we’ll be off to the races again. Whether the rally lasts six days or six weeks, I don’t know. I wish I did know that sort of thing, but I never do.

(Q):What would Chairman Bernanke have to do to “get it right?”

Rogers: Resign.

(Q): Is there anything else that you think he could do that would be correct other than let these things fail?

Rogers: Well, at this stage, it doesn’t seem like he can do it. He could raise interest rates – which he should do, anyway. Somebody should. The market’s going to do it whether he does it or not, eventually.

The problem is that he’s got all that garbage on his balance sheet now. He has $400 billion of questionable assets owing to the feds on his balance sheet. I mean, he could try to reverse that. He could raise interest rates. Yeah, that’s what he could do. That would help. It would cause a shock to the system, but if we don’t have the shock now, the shock’s going to be much worse later on. Every shock, so far, has been worse than the last shock. Bear-Stearns [now part of JP Morgan Chase & Co. (JPM)] was one thing and then it’s Fannie Mae (FNM), you know, and now Freddie Mac (FRE).

The next shock’s going to be even bigger still. So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management. They’ve been bailing everyone out and [former Fed Chairman Alan] Greenspan took interest rates down and then he took them down again after the “dot-com bubble” shock, so I guess Bernanke could try to start reversing some of this stuff.

But he has to not just reverse it – he’d have to increase interest rates a lot to make up for it and that’s not going to solve the problem either, because the basic problems are that America’s got a horrible tax system, it’s got litigation right, left, and center, it’s got horrible education system, you know, and it’s got many, many, many [other] problems that are going to take a while to resolve. If he did at least turn things around – turn some of these policies around – we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better.

But this is academic – he’s not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign. That’ll be the best solution. Is he going to do that? No, of course not. He still thinks he knows what he’s doing.

(Q): Earlier this year, when we talked in Singapore, you made the observation that the average American still doesn’t know anything’s wrong – that anything’s happening. Is that still the case?

Rogers:Yes.

(Q): What would you tell the “Average Joe” in no-nonsense terms?

Rogers: I would say that for the last 200 years, America’s elected politicians and scoundrels have built up $5 trillion in debt. In the last few weekends, some un-elected officials added another $5 trillion to America’s national debt.

Suddenly we’re on the hook for another $5 trillion. There have been attempts to explain this to the public, about what’s happening with the debt, and with the fact that America’s situation is deteriorating in the world.

I don’t know why it doesn’t sink in. People have other things on their minds, or don’t want to be bothered. Too complicated, or whatever.

I’m sure when the [British Empire] declined there were many people who rang the bell and said: “Guys, we’re making too many mistakes here in the U.K.” And nobody listened until it was too late.

When Spain was in decline, when Rome was in decline, I’m sure there were people who noticed that things were going wrong.

(Q): Many experts don’t agree with – at the very least don’t understand – the Fed’s current strategies. How can our leaders think they’re making the right choices? What do you think?

Rogers: Bernanke is a very-narrow-gauged guy. He’s spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.

Bernanke was [on the record as saying] that there is no problem with housing in America. There’s no problem in housing finance. I mean this was like in 2006 or 2005.

(Q): Right.

Rogers: He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else.

(Q): That’s problematic.

Rogers: It’s mind-boggling. Here’s a man who doesn’t understand the market, who doesn’t understand economics – basic economics. His intellectual career’s been spent on the narrow-gauge study of printing money. That’s all he knows.

Yes, he’s got a PhD, which says economics on it, but economics can be one of 200 different narrow fields. And his is printing money, which he’s good at, we know. We’ve learned that he’s ready, willing and able to step in and bail out everybody.

There’s this worry [whenever you have a major financial institution that looks ready to fail] that, “Oh my God, we’re going to go down, and if we go down, the whole system goes down.”

This is nothing new. Whole systems have been taken down before. We’ve had it happen plenty of times.

(Q): History is littered with failed financial institutions.

Rogers: I know. It’s not as though this is the first time it’s ever happened. But since [Chairman Bernanke’s] whole career is about printing money and studying the Depression, he says: “Okay, got to print some more money. Got to save the day.” And, of course, that’s when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.

(Q): And now we’ve got a dangerous precedent.

Rogers: That’s exactly right. And when the next guy calls him up, he’s going to bail him out, too.

(Q): What do you think [former Fed Chairman] Paul Volcker thinks about all this?

Rogers: Well, Volcker has said it’s certainly beyond the scope of central banking, as he understands central banking.

(Q): That’s pretty darn clear.

Rogers: Volcker’s been very clear – very clear to me, anyway – about what he thinks of it, and Volcker was the last decent American central banker. We’ve had couple in our history: Volcker and William McChesney Martin were two.

You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] – when the party starts getting out of control – pours more moonshine in. McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the party’s out of control.

(Q): This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure – correct?

Rogers: Yes. We had two central banks that disappeared for whatever reason. This one’s going to disappear, too, I say.

(Q): Throughout your career you’ve had a much-fabled ability to spot unique points in history – inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.

Rogers: That’s the way to invest, as far as I’m concerned.

(Q): So conceivably, history would show that the highest returns go to those who invest when there’s blood in the streets, even if it’s their own.

Rogers: Right.

(Q): Is there a point in time or something you’re looking for that will signal that the U.S. economy has reached the inflection point in this crisis?

Rogers: Well, yeah, but it’s a long way away. In fact, it may not be in our lifetimes. Of course I covered my shorts – my financial shorts. Not all of them, but most of them last week.

So, if you’re talking about a temporary inflection point, we may have hit it.

If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn’t let the Chinese buy the oil company, wouldn’t let the [Dubai firm] buy the ports, et cetera.

But I’m really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they’re somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.

Before World War II, Japan’s yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That’s a collapse. That was also a bottom.

These are not predictions for the U.S., but I’m just saying that things have to usually get pretty, pretty, pretty, pretty bad.

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation. And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.

(Q): Treason? Wow, I didn’t know that.

Rogers: Yes…an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies. Anything. You could even use other people’s currencies.

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by ’39 they had full-exchange controls. And then, of course, they had the war and that disaster. It was a disaster before the war. The war just exacerbated the problems. And by the mid-70s, the U.K. was bankrupt. They could not sell long-term government bonds. Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world.

Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing. And the U.K. suddenly had a huge balance-of-payment surplus.

You know, even if Mother Teresa had come in [as prime minister] in ’79, or Joseph Stalin, or whomever had come in 1979 – you know, Jimmy Carter, George Bush, whomever – it still would’ve been great.

You give me the largest oil field in the world and I’ll show you a good time, too. That’s what happened.

(Q): What if Thatcher had never come to power?

Rogers: Who knows, because the U.K. was in such disastrous straits when she came in. And that’s why she came to power…because it was such a disaster. I’m sure she would’ve made things better, but short of all that oil, the situation would’ve continued to decline.

So it may not be in our lifetimes that we’ll see the bottom, just given the U.K.’s history, for instance.

(Q): That’s going to be terrifying for individual investors to think about.

Rogers: Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you don’t just change that in a decade or two. It takes a lot of hard work by a lot of incompetent people to change the situation. The U.K. situation I just explained…that decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time.

Even Zimbabwe, you know, took 10 or 15 years to really get going into it’s collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, it’s a major disaster.

That’s one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people. So even if it started squandering it in 2008, which they may be, it’s going to take them forever to do so.

(Q): Is there a specific signal that this is “over?”

Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.

(Q): They’ll move their own money.

Rogers: Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.

(Q): We saw that in South Africa and other countries, for example, as people tried to get their money out.

Rogers: Everybody figures it out, eventually, including the politicians. They say: “You know, others can’t do this, but it’s alright for us.” Those days will come. I guess when all the congressmen have foreign bank accounts, we’ll be at the bottom.

But we’ve got a long way to go, yet.

[Editor’s note: After interviewing legendary investor Jim Rogers at his home in Singapore back in March, Investment Director Keith Fitz-Gerald caught up with Rogers again in July – this time in Vancouver, where both were speaking at the Agora Wealth Symposium. Rogers talked extensively about the ill-advised bailouts of Bear Stearns, Fannie Mae and Freddie Mac, and the potentially ruinous fallout from the financial “Super Crash” that’s about to engulf the U.S. market. To find out how to get a report on the once-in-a-lifetime profit plays that will emanate from this so-called "SuperCrash" – and to also get a free copy of noted market analyst Peter D. Schiff’s New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" – please click here. And look for Part 2 of Money Morning’s latest interview with Jim Rogers tomorrow (Wednesday).]

http://www.informationclearinghouse.info/article20558.htm

If the Dollar falls then the USA will just shift to Amero with all their gold reserves intact.

Bank of China flees Fannie-Freddie

By Saskia Scholtes in New York and James Politi in Washington

Published: August 28 2008 23:33 | Last updated: August 28 2008 23:33

28/08/08 "FTimes" --- Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June.

The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn, is a s ign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities.over the mortgage financiers’ capital positions and the timing and structure of a potential government rescue has made some investors reassess their exposures. Asian investors in particular have become net sellers of agency debt, said analysts.
Federal Reserve custody data shows that for the year to July, foreign official and private investors bought an average of $20bn of agency debt a month, including debt issued by other government agencies such as Ginnie Mae and the Federal Home Loan Banks. Purchases of US Treasuries averaged $9.25bn.

From July 16 to August 20, foreign investors sold $14.7bn of agency debt, trimming their overall holdings to $972bn. They purchased $71.1bn of Treasuries in the same period.

The US Treasury was granted powers last month to extend its credit lines to Fannie and Freddie and invest in their debt and equity. The rescue plan came after a collapse in the companies’ shares heightened concerns about their ability to raise equity capital to cushion losses and whether they could maintain their access to the debt markets.

By making a historically implicit government guarantee for the mortgage financiers’ debt increasingly explicit, the Treasury sought to reassure foreign and domestic investors by providing a safety net. Fannie and Freddie have a combined $1,500bn of debt outstanding.

This weekend, the Group of Twenty developed and advanced developing countries will be holding a preparatory meeting in Brazil. Although the crisis at Fannie Mae and Freddie Mac is not on the agenda, there is speculation that Treasury officials could informally encourage big holders of agency debt and mortgage-backed securities not to scale back their investments.

After a sharp drop in the market value of their stock last week, Fannie and Freddie have made a strong recovery after successful short-term debt sales. Fannie was 13.5 per cent higher on Thursday and Freddie was up 12 per cent.

Bank of China’s disclosure on its holdings of Fannie and Freddie securities came as the bank reported a 15 per cent increase in second-quarter profit.

Click on "comments" below to read or post comments

http://www.informationclearinghouse.info/article20648.htm

And you're feeling not a bit of glee about it!

Why such arrogance? China and America needs each other. We need each other.

The value of all currencies are an illusion and even more so when the value is state controlled. All currencies depend on the confidence of the people, that is why the FED can print as much as they want as long as people BELIEVE the dollar is worth something.

Now you know why dollar is showed in hollywood movies

In sure sign that the yamkistani economy colosus on clay legs get's it's shaky foundadtion all in cracks, the two base mortgage firms Freddie Mac and Fannie Mae went down the $hitter hole and had to be bailed out by the BROKE yankistani government using US taxpayer money. It's nice for the zionazi criminals controlled banking to rob the retarded yankz TWICE

Very desperate move by idiots who overspent themselfs on military adventures, then beg COMMUNIST China for handouts

PESTON'S PICKS
For the US Treasury, the bailout could turn out to be one of the most expensive financial rescues in history


US takes over key mortgage firms

US financial officials have outlined plans for the government to take over the failing mortgage giants Freddie Mac and Fannie Mae.

The two companies account for nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.

The most recent figures show about 9% of US homeowners were behind on their payments or faced repossession.

The federal takeover is one of the largest bail-outs in US history.

'Comprehensive action'

As part of the changes, the management of the two companies will be replaced while the firms will be given access to extra funding to support their business going forward.

Treasury Secretary Henry Paulson said the government was intervening in the wider interests of the financial system and of taxpayers since the financial position of the two firms was fast deteriorating.

He added that the two firms' debt levels posed a "systemic risk" to financial stability and that, without action, the situation would get worse.

"We examined all options available and determined this comprehensive and complementary set of actions best met the objectives of market stability, mortgage availability and taxpayer protection," he said.

"Fannie Mae and Freddie Mac are so large and interwoven in our financial system that a failure of either of them would create great turmoil in financial markets here and around the globe."

US treasury statement on the future of Freddie Mac and Fannie Mae

The move is intended to keep the two companies afloat, amid fears that either could go bankrupt as borrowers default on their home loans.

The two firms will be administered by the Federal Housing Finance Agency until their long-term future is decided.

The Congressional Budget Office has said such a move could cost up to $25bn but Mr Paulson said there was no reason why taxpayers should have to directly foot the bill.

Funding guarantee

Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (£3 trillion) of mortgages.

But they have made a combined loss of about $14bn in the past year and officials were worried that they would no longer be able to continue functioning if such losses continued.

The Treasury's funding guarantees to the two firms - which will include it buying up high-risk mortgage backed securities used to fund the mortgage market - will last until the end of 2009.

During that period, neither Fannie Mae nor Freddie Mac will be able to make any payments to their shareholders.

But Mr Paulson warned that the move was only a short-term "stabilisation" exercise.

He said it would be up to Congress to agree proposals to reform the two firms and address their "pervasive weaknesses".

Federal Reserve chairman Ben Bernanke said he "strongly endorsed" the proposals to ensure the two firms remained financially sound.

"These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," he said.

Banks around the world are highly exposed to the two companies and therefore, given the febrile state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities, says the BBC's business editor Robert Peston.

A rescue plan passed by Congress in July gave the US government the authority to offer unlimited liquidity to the two companies, and to buy their shares, in order to keep them afloat.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/h...ss/7602992.stm

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U.S. Payrolls Fell 84,000; Jobless Rate Jumps to 6.1% (Update2)

By Shobhana Chandra


Sept. 5 (Bloomberg) -- The U.S. lost more jobs than forecast in August and the unemployment rate climbed to a five- year high, heightening the risk that the economic slowdown will worsen.

Payrolls fell by 84,000 in August, and revisions added another 58,000 to job losses for the prior two months, the Labor Department said today in Washington. The jobless rate jumped to 6.1 percent, matching the level of September 2003, from 5.7 percent the prior month.

Workforce reductions at companies from UAL Corp. to Gannett Co. are adding to the woes of Americans hurt by lower home values, scarcer credit and higher prices. The report may fuel concern that consumer spending, the biggest part of the economy, will decline and bring the expansion to a halt. Stock-index futures dropped and Treasury notes climbed.

``It certainly increases the probability that we really are in a recession,'' William Poole, former president of the Federal Reserve Bank of St. Louis, said in an interview with Bloomberg Television. ``It is a weak number, including the revisions.''

Payrolls were forecast to drop 75,000 after a previously reported 51,000 decline in July, according to the median estimate of 76 economists surveyed by Bloomberg News. Estimates ranged from declines of 40,000 to 150,000. The jobless rate was projected to remain at 5.7 percent.

Factory payrolls dropped 61,000 after decreasing 38,000 in July. Economists had forecast a drop of 35,000. The decline included a loss of 39,000 jobs in auto manufacturing and parts industries.

Factory Workforce

Today's report also showed the effects of the housing slump and the credit crisis that it triggered. Payrolls at builders fell 8,000 after decreasing 20,000. Financial firms trimmed payrolls by 3,000 for a second consecutive month.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 27,000 workers after cutting 12,000 in July. Retail payrolls fell by 19,900 after a drop of 18,100.

``We're losing jobs in all kinds of industries now,'' Roger Kaubarych, chief U.S. economist at UniCredit Global Research in New York, said in an interview with Bloomberg Radio. ``This is the clearest recessionary signal we've seen.''

Government payrolls increased by 17,000 after rising 6,000. That meant private payrolls fell by 101,000 in August.

Today's report brings the total decline in payrolls so far this year to 605,000. The economy created 1.1 million jobs in 2007.

Recession Indicators

Employment is among the indicators tracked by the National Bureau of Economic Research, the official arbiter of U.S. economic cycles, in calling a recession. The others are sales, incomes, production and gross domestic product.

The group defines a recession as a ``significant'' decrease in activity over a sustained period of time, and usually takes six to 18 months to make a determination.

Job losses are one reason economic growth will soften after a second-quarter rate of 3.3 percent. The economy may expand at an average 0.7 percent annual pace from July through December, according to the median forecast in a Bloomberg survey.

Consumer spending, which accounts for more than two-thirds of the economy, in July posted the biggest drop in four years after inflation.

``The pace of economic activity has been slow in most districts,'' the Federal Reserve said in its Beige Book report this week. There's ``a general pullback in hiring.''

`Close to Stagnating'

The economy ``is close to stagnating,'' Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said in an interview with Bloomberg Radio. In part because of continued gains in worker productivity, employers will keep cutting jobs, sending the U.S. unemployment rate to 6.75 percent next year, he said.

Goldman economists projected a 100,000 decline in payrolls for August.

The average work week remained at 33.7 hours. Average weekly hours worked by production workers fell to 40.9 hours from 41 hours, while overtime decreased to 3.7 hours from 3.8 hours.

Workers' average hourly wages rose 7 cents, or 0.4 percent, to $18.14 from the prior month. Hourly earnings were 3.6 percent higher than August 2007. Economists surveyed by Bloomberg had forecast a 0.3 percent increase from July and a 3.4 percent gain for the 12-month period. Average weekly earnings increased to $611.32 from $608.96.

To contact the reporter on this story: Shobhana Chandra in Washington

http://www.bloomberg.com/apps/news?p...M_Y&refer=news

U.S. Mortgage Foreclosures, Delinquencies Rise to 29-Year Highs

By Kathleen M. Howley


Sept. 5 (Bloomberg) -- Foreclosures accelerated in the second quarter to the fastest pace in almost three decades as interest rates increased and home values fell, prompting more Americans to walk away from homes they couldn't refinance or sell.

New foreclosures increased to 1.19 percent, rising above 1 percent for the first time in the survey's 29 years, the Mortgage Bankers Association said in a report today. The total inventory of homes in foreclosure reached 2.75 percent, almost tripling since the five-year housing boom ended in 2005. The share of loans with one or more payments overdue rose to a seasonally adjusted 6.41 percent of all mortgages, an all-time high, from 6.35 percent in the first quarter.

Tumbling home prices are depriving owners with adjustable- rate loans of the ability to sell or get a new loan as financing costs rise, said Jay Brinkmann, MBA's chief economist. Subprime ARMs accounted for 36 percent of new foreclosures and prime ARMs, held by the most creditworthy borrowers, were 23 percent, he said.

``People chose the lowest payment option to get into some of the very expensive housing markets and now that prices are coming way down, they can't sell and they can't afford the higher payments,'' Brinkmann said in an interview.

The three-year-old housing slump has slowed growth of the world's largest economy, caused more than half a trillion dollars of losses at banks such as Citigroup Inc. and UBS AG, and crimped earnings for companies such as Home Depot Inc. and Lowe's Cos. that rely on home purchases to fuel demand.

Economic Growth

The drop in home sales and prices, along with tighter credit conditions and higher energy costs, probably will ``weigh on economic growth over the next few quarters,'' Federal Reserve policy makers said Aug. 5 when they decided to hold their benchmark rate at 2 percent. The central bankers cut the rate seven times in the last year in an attempt to avert a U.S. recession.

The Fed probably will keep the rate level for the next few months, according to the price of Fed funds futures. There's an 81 percent chance of no change at the Sept. 16 meeting and a 75 percent chance of no action at the Oct. 29 meeting, they indicate.

New foreclosures on subprime loans rose to 4.7 percent from 4.06 percent in the first quarter, according to the report. The total foreclosure inventory increased to 11.81 percent from 10.74 percent and the so-called seriously delinquent share of loans that are 90 days or more overdue rose to 17.85 from 16.42 percent.

Foreclosures started on prime mortgages rose to 0.67 percent from 0.54 percent and the foreclosure inventory increased to 1.42 percent from 1.22 percent, the report said. The share of seriously delinquent prime mortgages was 2.35 percent, up from 1.99 percent.

Existing home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6 percent, according to the National Association of Realtors in Chicago.

About 75 percent of U.S. banks surveyed indicated they tightened standards on prime mortgages, up from 60 percent in the previous survey, the Federal Reserve said on Aug. 11.

The Mortgage Bankers report is based on a survey of 45.4 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.

http://www.bloomberg.com/apps/news?p...a_E&refer=news

-------------------

Auto industry to press Congress for $50B in loans

By KEN THOMAS, Associated Press Writer 1 hour, 33 minutes ago

WASHINGTON - Auto industry allies hope to secure up to $50 billion in government loans this month that would pay to modernize plants and help struggling car makers build more fuel-efficient vehicles.
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With Congress returning this coming week from its summer break, the industry plans an aggressive lobbying campaign for the low-interest loans. The situation is growing dire after months of tumbling sales, high gasoline prices and consumers' abandoning profitable trucks and sport utility vehicles.

Lawmakers authorized $25 billion in loans in last year's energy bill to help the companies build fuel-efficient vehicles such as hybrids and electric vehicles. With credit tight, automakers and suppliers now want lawmakers to come up with the money for the program — and expand the pool of money available to $50 billion over three years.

Industry leaders have argued that the loan guarantees are not a government bailout because it would hasten production of fuel-efficient vehicles and reduce dependence on imported oil.

"This is not about benefiting Wall Street," said Ford Motor Co.'s President of the Americas Mark Fields, referencing recent federal support for the investment firm Bear Stearns and troubled mortgage companies Fannie Mae and Freddie Mac. "This is benefiting Main Street, the working men and women. The auto industry is part of the backbone of the U.S. economy."

The low-interest loans, at rates of about 4 percent to 5 percent, would pay for up to 30 percent of the cost of retooling plants to build hybrids, plug-in hybrids, electric cars and other alternatives.

Ford and General Motors Corp.'s credit ratings have fallen below investment grade, making it difficult for the companies to borrow money at affordable rates. Chrysler, which has been heavily dependent upon truck sales, has been privately held since last year and faces similar problems accessing capital.

"This industry could fall down, literally, or be absorbed if they don't get something in place very soon. I think it's that severe," said Rep. Joe Knollenberg, R-Mich. "Something has to happen pretty quickly because they can't compete paying 15 to 20 percent (interest)."

Industry lobbyists pressed the issue at the recent presidential conventions in Denver and St. Paul, Minn., and members of Michigan's congressional delegation have talked to legislative leaders and the Bush administration about the program. Discussions surround a three-year plan that would make $25 billion in loans available in the first year, followed by $15 billion the second year and $10 billion in the third.

To provide $50 billion in loans, Congress would need to set aside about $7.5 billion to guard against a loan default.

Automakers want to secure the money for the loans before November's election because a new president and Congress could delay the companies' ability to access the loans.

The White House said last week it was talking to members of Congress and the industry about the financing. The issue, meanwhile, has gained a foothold in the presidential campaign in states with many auto workers such as Michigan and Ohio.

Democrat Barack Obama has criticized Republican rival John McCain for not supporting the full $50 billion loan program. McCain said last week he supported fully covering the $25 billion loan program in the energy law.

Congressional leaders have said they are open to an expanded program. But the industry will face a compressed schedule in an election year when many lawmakers will push to leave Washington so they can campaign for re-election this fall.

"We're hopeful that we're making an effective case to get this done between now and the end of this session," said John Bozzella, Chrysler's vice president of external affairs and public policy.

The loans would be available to foreign automakers, but the companies are not expected to seek the money because they are in a better financial situation and priority would be given to companies with plants 20 years or older.

http://news.yahoo.com/s/ap/20080907/ap_on_...makers_congress

China may cut its dollar holdings - CICC
(China Daily)
Updated: 2008-09-12 07:32
Comments(38) PrintMail

China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks.

Related readings:
China's forex reserve reaches $1.809 trillion by June
Experts: China should still be alert to subprime impact
Subprime impact limited on major Chinese banks
US govt takes over Fannie, Freddie
The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world's biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms' debt, CICC Chief Economist Ha Jiming said in a report Thursday.

"The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote Hong Kong-based Ha. "This will likely lead to greater diversification of foreign exchange reserve investments."

China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

Countries in Asia have stockpiled foreign exchange reserves since the 1997-98 financial crisis to act as a cushion against a run on their exchange rates. That in turn has increased pressure on policymakers to ensure higher returns from more than $4 trillion in assets.

China will expand its investments in corporate bonds and equities, according to Ha. Treasury and agency bonds account for 50 percent and 40 percent of total dollar assets held by the central bank, he wrote.


http://www.chinadaily.com.cn/china/2008-09...ent_7020656.htm

USA needs China more than China needs USA.

China can find new markets to sell her products (goods) but USA can't replace China with any banana republic.

It tells me that 90% of the USA population are nothing but total dumb @$$ and stupid.

While the other 10% are SMART and knows what they are doing.

And sadly everyone's vote counts the same. Votes should be weighted by IQ score. 130 IQ? Then your vote is worth 1.3x as much.

The World Tires of Dollar Hegemony

By Paul Craig Roberts

October 30, 2008 ""Information Clearinghouse"" -- What explains the paradox of the dollar’s sharp rise in value against other currencies (except the Japanese yen) despite disproportionate US exposure to the worst financial crisis since the Great Depression?

The answer does not lie in improved fundamentals for the US economy or better prospects for the dollar to retain its reserve currency role.

The rise in the dollar’s exchange value is due to two factors.

One factor is the traditional flight to the reserve currency that results from panic. People are simply doing what they have always done. Pam Martens predicted correctly that panic demand for US Treasury bills would boost the US dollar.

The other factor is the unwinding of the carry trade. The carry trade originated in extremely low Japanese interest rates. Investors and speculators borrowed Japanese yen at an interest rate of one-half of one percent, converted the yen to other currencies, and purchased debt instruments from other countries that pay much higher interest rates. In effect, they were getting practically free funds from Japan to lend to others paying higher interest.

The financial crisis has reversed this process. The toxic American derivatives were marketed worldwide by Wall Street. They have endangered the balance sheets and solvency of financial institutions throughout the world, including national governments, such as Iceland and Hungary. Banks and governments that invested in the troubled American financial instruments found their own debt instruments in jeopardy.

Those who used yen loans to purchase, for example, debt instruments from European banks or Icelandic bonds, faced potentially catastrophic losses. Investors and speculators sold their higher-yielding financial instruments in a scramble for dollars and yen in order to pay off their Japanese loans. This drove up the values of the yen and the US dollar, the reserve currency that can be used to repay debts, and drove down the values of other currencies.

The dollar’s rise is temporary, and its prospects are bleak. The US trade deficit will lessen due to less consumer spending during recession, but it will remain the largest in the world and one that the US cannot close by exporting more. The way the US trade deficit is financed is by foreigners acquiring more dollar assets, with which their portfolios are already heavily weighted.

The US government’s budget deficit is large and growing, adding hundreds of billions of dollars more to an already large national debt. As investors flee equities into US government bills, the market for US Treasuries will temporarily depend less on foreign governments. Nevertheless, the burden on foreigners and on world savings of having to finance American consumption, the US government’s wars and military budget, and the US financial bailout is increasingly resented.

This resentment, combined with the harm done to America’s reputation by the financial crisis, has led to numerous calls for a new financial order in which the US plays a substantially lesser role. “Overcoming the financial crisis” are code words for the rest of the world’s intent to overthrow US financial hegemony.

Brazil, Russia, India and China have formed a new group (BRIC) to coordinate their interests at the November financial summit in Washington, D.C.

On October 28, RIA Novosti reported that Russian prime minister Vladimir Putin suggested to China that the two countries use their own currencies in their bilateral trade, thus avoiding the use of the dollar. China’s prime Minister Wen Jiabao replied that strengthening bilateral relations is strategic.

Europe has also served notice that it intends to exert a new leadership role. Four members of the Group of Seven industrial nations, France, Britain, Germany and Italy, used the financial crisis to call for sweeping reforms of the world financial system. Jose Manual Barroso, president of the European Commission, said that a new world financial system is possible only “if Europe has a leadership role.”

Russian president Dmitry Medvedev said that the “economic egoism” of America’s “unipolar vision of the world” is a ”dead-end policy.”

China’s massive foreign exchange reserves and its strong position in manufacturing have given China the leadership role in Asia. The deputy prime minister of Thailand recently designated the Chinese yuan as “the rightful and anointed convertible currency of the world.”

Normally, the Chinese are very circumspect in what they say, but on October 24 Reuters reported that the People’s Daily, the official government newspaper, in a front-page commentary accused the US of plundering “global wealth by exploiting the dollar’s dominance.” To correct this unacceptable situation, the commentary called for Asian and European countries to “banish the US dollar from their direct trade relations, relying only on their own currencies.” And this step, said the commentary, is merely a starting step in overthrowing dollar dominance.

The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication, Chinastates.com, recently asked: “Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”

Zhou Jiangong’s solution to American excesses is for China to take over Wall Street.

China has the money to do it, and the prudent Chinese would do a better job than the crowd of thieves who have destroyed America’s financial reputation while exploiting the world in pursuit of multi- million dollar bonuses.

http://www.informationclearinghouse.info/article21122.htm

http://www.leap2020.eu/SEQUENCE-6-Very-Gre...rter_a2036.html


SEQUENCE 6 - 'Very Great Depression' in the US, social unrest and army's growing influence on public affairs (2nd quarter 2007 – 4th quarter 2009)
- Excerpt GEAB N°18 (October 2007) -


SEQUENCE 6 - 'Very Great Depression' in the US, social unrest and army's growing influence on public affairs (2nd quarter 2007 – 4th quarter 2009)
If you were a subscriber to the GEAB, you would have read what will follow as early as October 16, 2007:

As described previously by LEAP/E2020, the epicentre of the global systemic crisis is in the US, collapsing pillar of the global order. For this reason, the impact of this crisis is a lot more violent and enduring than anywhere else in the world.

For instance, the bursting of the housing bubble is provoking the sudden impoverishment of millions of American citizens whose houses are foreclosed: each month, foreclosures double (1) leading dozens of millions of US citizens (women and children who live in the foreclosed houses) to end up on the street (2) or to find new homes in the worst conditions (3).

The ongoing recession creates unemployment concealed by the official statistics (the same statistics which negated that a housing bubble was bursting or that there was subprime crisis as long as they could) but nevertheless driving millions of Americans (the same ones most often) to the street. This being so, the crisis is beginning to hit middle classes (4) sometimes even above that (as in the case of the Wall Street layoffs).

The drop of house prices today affects all the categories of US households who used their house mortgage to finance their lifestyle (i.e. a large majority of Americans). They are now rushing on their credit cards (at a prohibitive cost) to avoid downgrading too much their “way of life” (5), but it is a short term solution (6).

Throughout the country already, local authorities started to reduce public services by lack of sufficient fiscal income. States are beginning to wonder (7). The federal government solely, speaking with the voice of G.W. Bush, demands more money for its wars and refuses to extend social protection to poor children.

Social unrest has in fact started and it aggravates each day (8). LEAP/E2020 wishes to remind that without a general social protection, the impact of an economic recession in the US is socially terrible. The magnitude of this crisis, combining housing collapse, economic recession, inflation of consuming goods and imported energy via USD weakness,… all this together with a political blockade in Washington provide the background for a « regime crisis ».

The army is the only institution in the US with a strong credibility. Dozens of millions of US citizens depend on it for their jobs, studies, contracts,… It is one of the only national backbone of the country. Its generals receive media coverage. They criticize more and more the political class accusing it of betraying the people and the army. The recent success of former US commander in Iraq General Sanchez using this rhetoric is eloquent about the state of mind in the country (9). The warm welcome of today’s US commander in Iraq General Petraeus by the Congress during an audition on the situation in Iraq completes the image: as highlighted by various commentators, it looked like a victorious Roman general welcomed by a Roman senate at beck and call. The militaries are now those in charge of making all the important decisions concerning the war in Iraq. Let’s wait and see what they will do with the Turkish case. No one in the political class, including among the democrats, dares to criticize the military chiefs despite the fact that they are more than mere “victims” of “irresponsible policies” in the Iraqi rout.

For this now central component of the US political system, the financial and economic crisis is becoming a problem, because in a context of unpopular wars in Iraq and Afghanistan and of economic recession in the country, the probable election of a Democrat to the presidency in one year time would entail a significant reduction of the budget allocated to the defence. And this is simply unacceptable for the last structuring force of the country.

The « Very Great Depression » is already triggered in the US and, according to LEAP/E2020, it will result before the end of 2009 in a regime crisis in the US, where the army will play an important role.

--------
Notes:

(1) « US home foreclosures double », Financial Times, 11/10/2007

(2) « Subprime tidal wave », Wall Street Journal, 12/10/2007

(3) « Subprime crisis good, bad, deja vu for trailer parks », Reuters, 10/10/2007

(4) « Working families need help to afford the basics », MarketWatch/DowJones, 10/10/2007

(5) « Le fossé riches-pauvres s'est creuse de 2004 à 2005 aux Etats-Unis », Yahoo/Reuters, 12/10/2007

(6) « Boom times for dentists, but nor for teeth », New York Times, 11/10/2007

(7) « State budget : revenues fall, projected deficit soars », Sacbe, 10/10/2007

(8) « The American Dream turns into a debtor's nightmare », Los Angeles Times, 08/10/2007

(9) « Ovation for Sanchez, Iraq ex-commander », Boston Globe, 22/09/2007


------------------


GEAB N°30 is available! Global systemic crisis – New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'
- Public announcement GEAB N°30 (December 16, 2008) -


GEAB N°30 is available! Global systemic crisis – New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'
LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:

• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems

A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.

In this 30th issue of the GEAB, the LEAP/E2020 team describes these three destabilizing processes (two of them are described in this public announcement) and gives recommendations to cope with the surge in risks. In addition, this issue also provides the opportunity to make an objective assessment of the reliability of LEAP/E2020's anticipations and specifies a number of methodological aspects of the analytical process used. In 2008, LEAP/E2020's success rate reaches 80%, and even 86% when it comes to strictly socio-econimic anticipations. In a year of major upheavals, our teal ise altogether quite proud of this result.

The crisis will last at least until the end of 2010
Evolution of the US money base and indications of related major US crisis periods (1910 – 2008) - Source: Federal Reserve Bank of Saint Louis / Mish’s Global Economic Analysis
Evolution of the US money base and indications of related major US crisis periods (1910 – 2008) - Source: Federal Reserve Bank of Saint Louis / Mish’s Global Economic Analysis
As we already explained in GEAB N°28, the crisis will affect in different ways the different regions of the world. However, and LEAP/E2020 wishes to be very clear on that aspect, contrary to the dominant stance today (coming from those experts who denied the fact that a crisis was coming up three years ago, who denied that it was global two years ago, and who denied the fact that it was systemic six months ago), we anticipate that the minimum duration of the decanting phase of the crisis is 3 years (1). It shall be finished neither in spring 2009, nor in summer 2009, nor at the beginning of 2010. It is only towards the end of 2010 that the situation will start stabilizing again and improving a little in some regions of the world, i.e. Asia and the Eurozone, as well as in countries producing energy, mineral and food commodities (2). Elsewhere, it will continue; in particular in the US and UK, and in all the countries depending on their economy, were the duration could approximate a decade. In fact these countries should not expect any real return to growth before 2018.

Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.

The risk of sudden collapse of all capital-based pension systems
Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7), knowing that it is only in a few weeks time that most of these funds will start calculating their total losses (8). Most of them are still deluding themselves about their capacity to build up again their capital after the markets turn around. In March 2009, when pension fund managers, pensioners and governments will become simultaneously aware of the fact that the crisis is there to last, that it coincides with the « baby-boomer » generation’s age of retirement and that the markets will not resume their 2007 levels until many long years (9), chaos will flood this sector and governments will reach the moment when they will be compelled to nationalize all these funds. And Argentina, who took this decision a few months ago already, will appear a pioneer.

All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide.

Finally, this GEAB N°30 presents a series of 13 questions & answers designed to enhance savers'/investors'/decision-makers' capacity to understand and anticipate the next stages of the global systemic crisis:
1. Is this crisis different from the previous crises which affected capitalism?
2. Is this crisis different from the 1930s crisis?
3. Is the crisis as serious in Europe or Asia as in the USA?
4. Are the current actions undertaken by public authorities worldwide sufficient to curb the crisis?
5. What are the major risks still weighting on the world financial system? And are all savings equal in front of the crisis?
6. Is the Eurozone a true protection shield against the worst aspects of the crisis and what should the Eurozone do to improve its protection status?
7. Is the Bretton Woods system (in its 1970s last version) currently collapsing? Should the Euro take the place of the Dollar?
8. What can be expected from the next G20 meeting in London?
9. Do you think that deflation is right now the biggest threat to economies worldwide?
10. Do you think that the Obama administration will be able to prevent the USA from sinking into what you called the ‘Very Great US Depression’?
11. In terms of currencies, beyond your anticipation of the Dollar resuming its collapse in the very next months, do you think that the UK Pound and the Swiss Franc are still currencies with an international status?
12. Do you think that the CDS market is about to implode in the coming months? And what could be the consequences of such a phenomenon?
13. Is there a ‘US Treasury Bonds Bubble” about to burst?

---------
Notes:

(1) It can be useful to read on this crisis a very interesting contribution by Robert Guttmann published in the 2nd half of 2008 on the website Revues.org, supported by the Maison des Sciences de l'Homme Paris-Nord.

(2) As a matter of fact, commodities have already started contributing to boost the market of international sea transport. Source: Financial Times, 12/14/2008

(3) It is in those countries that capital-based pension systems were most developed (see GEAB N°23) but is also the case of Ireland. Source: Independent, 11/30/2008

(4) Source: OECD, 11/12/2008

(5) Source: NU.NL, 12/15/2008

(6) Source: BBC, 12/09/2008

(7) Sources: WallStreetJournal, 11/17/2008; Phillyburbs, 11/25/2008; RockyMountainNews, 11/19/2008

(8) Source: CNBC, 12/05/2008

(9) Not to mention the effect of an explosion of the US T-Bond bubble on pension funds. See Q&A, GEAB N°30.

http://www.leap2020.eu/GEAB-N-30-is-availa...this_a2567.html

June 2008
Asian Monetary Fund, Take Two
by Ulrich Volz

Posted June 18, 2008

So they finally did it. On May 4 the finance ministers of 13 East Asian countries agreed on the sidelines of the annual meeting of the Asian Development Bank in Madrid to set up a pool of foreign-exchange reserves. The member countries of the Association of Southeast Asian Nations together with China, Japan and South Korea decided that at least $80 billion of the region’s foreign reserves are to be funneled into a regional fund to protect regional currencies against speculative attacks and provide countries in crisis with liquidity. Of the funds, 20% are to be provided by the 10 Asean members and the remaining 80% by the “Plus Three” countries (China, Japan and Korea).

The idea for this regional pooling mechanism, which apparently doesn’t have a proper name yet, goes back to a proposal that was launched by Japan during the 1997 Asian financial crisis. In August of that year—just weeks after the outbreak of the crisis in Thailand—the Japanese government proposed the creation of an Asian Monetary Fund as a framework for financial cooperation and policy coordination in the region. The AMF, which was to be endowed with $100 billion of central bank reserves, was envisaged as a lender to countries in financial distress and a complementary means of defense against financial crises in East Asia. The AMF proposal was well received by several Asian countries, including Malaysia, the Philippines and Thailand. But after massive opposition from the United States Treasury and the International Monetary Fund—which saw the AMF as an agent of conflict and a danger to the IMF’s role in the region and the world—the Japanese government withdrew its proposal.

But the idea of an AMF was revived when the Asean finance ministers met with their Plus Three counterparts on the occasion of the annual meeting of the ADB in May 2000, in Chiang Mai, Thailand. Instead of a fund, they established a system of bilateral short-term financing facilities within the group. This agreement, called the Chiang Mai Initiative, provides for mutual assistance in the event of a financial crisis. The CMI consists of an expanded Asean swap arrangement that includes Asean and a network of bilateral swap arrangements among Asean Plus Three countries. The Asean swap arrangement is now $2 billion in size, while 17 bilateral swap arrangements have been successfully concluded among eight countries with a combined total size of $83 billion. In May 2007, at the 10th Asean Plus Three finance ministers’ meeting in Kyoto, ministers agreed to further develop the CMI and in particular seek multilateralization of the arrangement. This is what just happened in Madrid, potentially transforming the CMI into what the Japanese originally had in mind when they proposed the AMF back in 1997.

The prospects for success are much greater this time around. Not only is the region currently in a position of economic strength, much in contrast to the late 1990s when it got hit by the Asian crisis. East Asian countries can now also look back on a 10-year history of financial cooperation, which has helped, at least partly, to overcome suspicion among East Asian countries and foster general agreement on the usefulness of such a fund. Whereas China, for instance, was highly skeptical of the original AMF proposal as it feared a Japanese quest for regional dominance, it has become one of the main supporters of the CMI. (Allegedly, U.S. emissaries tried to strengthen Chinese fears of Japanese dominance to secure Beijing’s opposition against the AMF plan.) Since 2001, the Asean Plus Three countries have not only launched the CMI, they have also established an Economic Review and Policy Dialogue for exchange of information between governments and better monitoring of developments in the region’s financial market as well as the Asian Bond Market Initiative to foster development of securities markets in the region. Although each of these initiatives might be limited in scope, it is beyond question that regional financial and monetary cooperation has gained momentum.

Moreover, East Asian countries have greatly improved their diplomatic skills. Whereas integrationist rhetoric at times had a rather confrontational tone, East Asian policy makers nowadays like to emphasize that any regional cooperation efforts shall only complement cooperation on a global level. To avoid a second clash with the U.S. government and soothe fears that a regional fund would undermine the IMF’s role, the region has carefully avoided any wording or action that could give rise to such concerns. When the CMI was discussed, for instance, the Asean Plus Three finance ministers made sure that the CMI was not perceived in Washington as a threat to the IMF. To ease concerns that the IMF’s position would be damaged, the ministers agreed to include an “IMF link,” which allowed only 10% of the credit lines to be disbursed without the borrowing country having a lending program with the IMF. In 2005 the portion that could be disbursed without IMF program was increased to 20%. This gradual approach to developing something similar to a regional fund has made it hard for the U.S. government or anyone else to oppose the CMI, especially as the sums involved so far are relatively modest.

But also the U.S. government has moved and changed from a negative to a more neutral attitude toward East Asian monetary integration. This change in attitude can be attributed to the realization that any attempt to undermine East Asian monetary and financial cooperation would only backfire and further diminish the reputation and influence of the U.S. and the IMF in the region, which have already been tarnished since the Asian crisis. Also, with China’s ascent, the U.S. would rather see a regional monetary fund where Japan, its most important ally in East Asia, is involved rather than an agreement solely centered around China.

So does that mean the path forward is clear for an AMF? Maybe, but the Asian finance ministers still need to agree on the details, which might prove tricky. In the statement they released after the Madrid meeting, the they concede that they still have to “further accelerate…work in order to reach consensus on all of the elements which include concrete conditions eligible for borrowing and contents of covenants specified in borrowing agreements.” In other words, they might have agreed on the general line, but now they have to get down to the nitty-gritty. And as always, the devil is in the details.

Borrowing conditions and the contents of covenants are the most important aspects of such an agreement, and also the most controversial. Every lender wants to ensure that he or she gets repaid, thus ruling out moral hazard through a straightforward lending agreement is key. The IMF has always been blamed for tough lending conditions and interference in its borrowers’ sovereignty. Parts of the idea for creating a regional alternative to the IMF was exactly to make it easier for countries in crisis to quickly access liquidity. Still, the main contributors to the pooling arrangement—Japan, China and South Korea—will want to make certain that their money is not recklessly misused.

Assuming they succeed in agreeing on an arrangement that all Asean Plus Three countries can live with, a last question remains: what is the purpose of all this? One of the original criticisms that was directed at the Japanese AMF proposal was duplication of institutions, i.e., why would you need a regional fund when there already exists an International Monetary Fund? The answer back then, at least by supporters of the AMF idea, was that a regional fund would provide a second line of defense against crisis and that the specific regional expertise of AMF staff could help identify a looming crisis before it breaks out. Ten years after the Asian crisis the situation looks very different. Most East Asian countries experience current-account surpluses and have turned into net creditors. Central banks are hoarding foreign-exchange reserves, and most countries have loosened their exchange-rate links to the U.S. dollar.

East Asian currencies today are facing appreciation pressure, and a currency crisis seems unlikely. At a time when the East Asia region boosts with cash and the IMF is running out of lending business and its very existence is constantly being questioned, one might thus be inclined to ask: Why need two funds to watch over East Asia, a regional and an international, when already one is too much? Hasn’t demand for IMF credit dried up completely so that the once mighty Fund had to start laying off staff? And aren’t we regularly told that with the sums traded in today’s foreign-exchange markets IMF credit lines would be nothing but a drop in the ocean?

It is true that East Asia today cannot be compared with the East Asia before the 1997-98 financial crisis. The region has become much more resilient and even the U.S. subprime crisis doesn’t seem to have any significant impact on the East Asian economies so far. Still, before the Asian crisis occurred, most observers were lulled by stories about the East Asian miracle so that the crisis caught them by utter surprise. It is not only wise but paramount that policy makers think ahead and take precautions for bad times while times are good. Therefore contemplating appropriate crisis responses when no crisis is in sight is just the right thing to do and might even help to ensure the crisis will never arrive. Asean Plus Three finance ministers and central bankers are thus well advised to strengthen their efforts in developing an early warning system and crisis response mechanisms. If a regional monetary fund is part of such a package, it is hard to see why this should harm; East Asia needs more financial and exchange-rate cooperation, not less.

It is also hard to see why a regional fund in East Asia should undermine the IMF’s position. The World Bank is also coexisting with institutions such as the Asian Development Bank, the African Development Bank, the Inter-American Development Bank and the European Bank for Reconstruction and Development. Similarly, regional pooling arrangements have been in place in several other regions for years, without any notable problems between the IMF and arrangements such as the Latin American Reserve Fund, the North American Framework Agreement, the Arab Monetary Fund or the European Union Medium-Term Financial Assistance Facility. Indeed, competition between these arrangements and the IMF might not only lead to better availability of emergency lending in a time of crisis, it could also spur a competition for ideas.

It still remains to be seen if and when Asean Plus Three will eventually create a full-fledged regional fund, and whether the sums involved would exceed the currently envisaged $80 billion to make it really relevant. But for all one can tell now, most East Asian leaders have come to understand the importance of better regional economic cooperation. A regional monetary fund, if properly designed, could be a helpful means for strengthening cooperation and financial stability in the region.

Mr. Ulrich Volz is senior economist at the German Development Institute.

http://www.feer.com/economics/2008/june/an...fund-second-try

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Asian Monetary Fund to be approved in February, say reports
Posted: 17 December 2008 1338 hrs


Photos 1 of 1

ASEAN chief Surin Pitsuwan



KUALA LUMPUR: An Asian Monetary Fund worth US$120 billion is set to be approved at a regional summit in February, Malaysian Foreign Minister Rais Yatin said according to reports Wednesday.

The initiative, modelled on the International Monetary Fund and mooted since the 1997-98 financial meltdown that felled emerging Asian economies, could be deployed in the event of another crisis.

“The matter is being discussed through the ASEAN finance ministers meeting in Singapore at present and we should receive news soon," Rais said according to state news agency Bernama.

"But we have been informed that the fund would be a reality by the time the summit is held in February," he said.

Leaders of the 10-member Association of Southeast Asian Nations (ASEAN) group are to meet with their dialogue partners including China, Japan and South Korea, in Bangkok on February 24-26.

Rais said ASEAN secretary-general Surin Pitsuwan has been asked to help appoint a "top-notch financial and economic adviser" to be based in Jakarta, home of the ASEAN secretariat.

He said that as the world faces a deep downturn, there was now the "political will" to take action on the long-discussed Asian Monetary Fund.

"All member states have expressed their appreciation under the circumstances that we are now faced with," he said according to the New Straits Times.

The leaders of Japan, China and South Korea last week called for quick action to set up the regional financial crisis fund, which will supercede a system of bilateral currency swaps known as the Chiang Mai Initiative.

The 10 ASEAN members and their three East Asian dialogue partners agreed in October to create the fund aimed at averting regional financial crises, then valuing it at US$80 billion.

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

- AFP/yb
http://www.channelnewsasia.com/stories/afp.../396905/1/.html

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PM Putin suggests Russia, China ditch dollar in trade deals
Quote:
MOSCOW, October 28 (RIA Novosti) - Russian Prime Minister Vladimir Putin proposed on Tuesday that Russia and China gradually switch over to national currency payments in bilateral trade, expected to total $50 billion in 2008.
"We should consider improving the payment system for bilateral trade, including by gradually adopting a broader use of national currencies," Putin told a bilateral economic forum.

He admitted the task would be tough, but said it was necessary amid the current problems with the dollar-based global economy.
Chinese Prime Minister Wen Jiabao described strengthening bilateral relations as "strategic."

"Mutual investment by Russia and China has already exceeded $2 billion, this is a very good index," Jiabao said.

He praised the success of numerous projects, including additional construction of China's Tianwan nuclear power plant and the opening of a joint pharmaceuticals center in Moscow.

A number of large Russian companies, including state-run oil producer Rosneft and aluminum champion RusAl, are seeking to develop investment projects in China, Jiabao said.

The Chinese premier said bilateral cooperation in the helicopter industry, mechanical engineering, the energy sector, timber production and innovation sector was also showing signs of progress.

"China is a staunch supporter of Russia's accession to the WTO, but is categorically against politicizing the issue," Jiabao said.

The Russian premier invited Chinese investors to join Russian timber projects.

"We welcome both domestic and foreign investment in Russia's timber sector," Putin said. "As one of the largest consumers of our products, China could be a source of such investment."

He also offered Beijing Russia's assistance in developing a large passenger plane on the basis of Russia's experience with its wide-bodied Il-96 aircraft.

Source:http://en.rian.ru/russia/20081028/117991229.html