It bubbles

16565003-gold-bars-with-dollar-stamp-3d-rendered-image

Looming unscathed

Today’s global financial markets are comparable to the coasts of the United States and the Philippines right before the onslaught of Sandy and Bopha. Markets world over face a potentially crippling cyclone of their own which threatens to tear the world economy into pieces with its expansive public debt, some $50 Trillion1, now dancing toe to toe with the gross world product (GWP) sitting somewhere at $70 Trillion2. The immediate cause of this next inevitable overhanging financial crisis is called the ‘bond bubble’ and is said to be of catastrophic proportions, biblical for some. This new bubble dwarfs the real estate bubble not unlike the Earth that dwarfs the Moon. Bursting of such bubble will reverberate in most homes between the two poles, unfortunately not just as dinner table conversation.

Collusion

Governments meanwhile can be routinely seen kicking cans down the road, the fiscal cliff is a case in point3, and are too busy colluding with the media in what can be called the mother of all cover ups. US central bankers (or should I say banksters?) have become ever more aggressive (if that is even possible) wooing foreign governments/institutions into buying more of their debt in the form of government bonds thereby artificially increasing bond prices to record highs4, providing definite shape to the bubble. How US still maintains a credit rating of AA+ is truly beyond me. To recover from previous crises and set the economy back on the path of recovery banksters indulge in a cabalistic process known as ‘quantitative easing’ (QE). Essentially they print money out of thin air to provide liquidity to the economy (for more borrowing and consumption) by buying government and corporate bonds, further inflating bond prices. This has extensive negative fallout on pensions and exacerbates inflation5 (another widely debated topic in economic echelons worldwide). If we go by contemporary economics, US should be facing an escalating level of inflation by now because of the excessive money they’ve pumped into their financial system, however things seem eerily calm at the moment partly because they export their inflation to China and also because most banks are presently hoarding cash pumped in by the Fed21 (for a rainy day eh?).

The Governments that buy into US debt such as China do so because they sell a lot (of goods and services) to the west and re-invest the dollars they’ve earned in ‘safe’ US treasuries6. Of course, they don’t want the US economy to fail or the world economy to crash (as that would affect the value of their very own bond holdings or future earnings). This is why they deliberately keep the Yuan pegged to the US dollar, not letting the price of their exports rise naturally, therefore helping their own economy grow at the expense of their western counterparts, further swelling up the bond bubble, and potentially creating a much bigger mess than necessary. Bonds/debts carry interest liabilities which need to be paid periodically to creditors along with a date of maturity upon which the entire bond value is to be repatriated. Since none of the western economies are producing enough ‘goods’ or ‘services’ to manage this burden (which has primarily been fuelled by US’s consumption of foreign goods and services in the first place), they keep raising their debt-ceiling and allow printing of more money to pay previous debt obligations. Peter Schiff says “it is impossible to pay your bills by going into debt”; what the US is doing to avoid their debt resembles what I do by paying my VISA bill with my MasterCard, except the US uses the same credit card. It doesn’t take genius to see the cyclical counter-productive policies of the Federal Reserve Bank or the US Government and how it’s inescapably driving them and the rest of the world into the deep rut of recession.

What is interesting to note is how the government sells QE to its people along with low interest rates in the name of economic growth and recovery. Present day Keynesian economists like Paul Krugman will have us believe the real problem US tackles today is deflation (a fall in prices) which will result in sustained recession7. So, it follows that cheap credit (or low interest rates) have to be maintained to stimulate demand and economic growth. The fear of duplicating the great depression of the 1930s and 40s seems to have diverted US toward the path of a greater depression – a much bigger cliff. Growth based on QE and low interest rates is a deterrent to savers and pensioners and posits the threat of a partial wipe-out to their life savings8. The fact that real wages have steadily deteriorated over the past decade9 is proof that near zero interest rates and QE haven’t really done the job, haven’t trickled down in the least bit; even the diminutive recovery said to have been made by the US has been hollow. According to Peter Schiff though, recession is exactly what the US economy needs along with a rise in the interest rates. The US is afraid to let the interest rates rise because of its massive debt floating around the globe, which they find impossible to finance even at rock bottom interest rates, how do we expect them to repay such debt at higher interest rates? – we don’t!

Alarm bells

How banksters have conned entire countries into full blown sovereign debt crises and insolvency is also an intriguingly well kept secret; Jeff Nielson explains it quite brilliantly in his ‘Economic Rape of Europe Nearly Complete’10 articles. Each day new cases of banker fraud and complete inaction against them are unearthed; HSBC is deemed ‘too big to jail’ after its head honchos admit to money laundering for drug cartels and some of its clients are proven to have terrorist ties11. Barclays along with many other banks has been found guilty of fixing LIBOR, which is considered one of the most crucial interest rates in finance12. It will no doubt be fined a couple of billion dollars a fraction of what it would’ve wrongfully gained, but what of the real damages inflicted on ordinary people because of what Max Keiser calls ‘financial terrorism’? How will the people be repaid?  The first signs of pension defaults are beginning to show in the US, where San Bernardino, a city in California has failed to make pension payments for its employees to CalPERS (California Public Employees’ Retirement System)13 – I am guessing it won’t be the last.

Every financial expert who predicted the debilitating crisis of 2008 (Max Keiser, Peter Schiff, Gerard Celente to name a few) has thrown up his arms, for all such rhetoric falls on deaf governments, banks and people. Banks are too busy convincing the world of their socially responsible practices and ‘we are recovering’ platitudes, whilst still managing to pay themselves hefty bonuses14. Now we also know what happened to TARP15 (the bailout). The question is: are these doomsayers wrong when they question US’s ability to pay back its debt with its diminishing manufacturing and all its consumerist spending? I would think not. The day when the Fed can’t print more to repay its obligations is nearing which is why most countries are running around hoarding and holding all the gold they can possibly get their hands on16, contrary to what they did 40 years ago when gold was dumped onto the markets to crash its price. This is also probably why there are now talks of minting a trillion dollar coin!? dear lord! While Republican Ron Paul questions the very existence of US gold reserves in Fort Knox17 and forces the ‘Grand Old Party’ to mull returning to the gold standard, the Queen of England is witnessed visiting the vault of Bank of England to reassure herself of her bullion18.

Truth from what I gather

Why this sudden gold rush? They obviously know something we don’t and fear the worst form of market and currency crash, which may send the US economy in a hyper-inflationary spiral, devastating the global economy. How it will pan out according to the doomsayers is as follows – a sudden spike in the price of an essential commodity, like oil, will force the governments, banks, corporations, institutions holding US treasury bonds to sell these bonds in order to buy further into the spiked commodity and make a killing in the perceived bull run; the Fed will be forced to buy these treasuries in order to stabilize bond prices and not let them drastically fall. Since the bond-bubble rhetoric is already doing rounds, other holders of such bonds will want to cash out while the going is good and while the Fed is still buying. Those who are able to get out of the fire-sale early will seek to park their cash in ‘safer’ commodities such as precious metals, food, consumables, oil, thereby rapidly increasing the price of such commodities. This will trigger market panic and mass bond sell-out, the Fed will have to print trillions of more dollars it doesn’t have to buy bonds which will debase and destabilise the dollar further making goods expensive still. The fiat dollar will rapidly lose its intrinsic value and send the US economy into hyperinflation. Losses will be incurred across the board; the rest of the holders of US bonds, who aren’t able to exit like China and Japan, will receive their payment in worthless fiat dollars; their earnings will evaporate sending panic throughout global markets causing every single one of them to crash.

In the face of such an incapacitating predicament, where silver and gold may prove to be the only real refuge, the US has advised India to stop buying gold in order to reduce its current account deficit19 (I wonder why?). What’s worse is that India’s listening; RBI is planning to impose heavy import duties on gold in budget 2013-1420. I fail to comprehend why we always have to fetch.

The only country that has defied all odds, gone completely against the natural order of bail-outs and 100 cents on the dollar payments to bond holders, and put people before banksters has been Iceland. And where has that led them after being nearly wiped out in 2008? – To an impressive economic recovery22 only because they didn’t consider their banks ‘too big to fail’.

We should also remember how US is based on a fiat currency system and is also the reserve currency of the world (meaning it is perpetually in demand for trading goods and services in the global market by every globalised nation). Therefore, it can go on printing money into oblivion without having to worry about causing inflation as it will always have foreign buyers for its currency. But even this is only true till the time the world considers US credit-worthy and capable of repaying its debt. From where I stand, that trust is falling. The real worry will begin once the world realises that US doesn’t really intend to pay its debt with anything that’s worth any value. A currency is only as good as the amount of goods/services it can buy. Paper currency backed by air has zero intrinsic value. So, even though I have full faith in the ability of our leaders to delay the inevitable and avert crises, Chidambaram and co. don’t fool me; a crash is coming and you better fasten your seat-belts, we’re in for a rocky ride! It’s not a matter of if it’s a matter of when.

Eagerly I wait for the day I can paint a brighter picture of the global financial-economic scenario.

Sources:

  1. http://www.economist.com/content/global_debt_clock
  2. http://www.indexmundi.com/world/economy_profile.html
  3. http://www.forbes.com/sites/beltway/2013/01/01/with-lame-fiscal-cliff-deal-congress-cant-even-kick-the-can-right/
  4. http://www.bloomberg.com/news/2012-07-12/bond-danger-reaches-record-high-as-yields-lure-credit-markets.html
  5. http://www.guardian.co.uk/commentisfree/2011/oct/07/quantitative-easing-banks-pensions
  6. http://www.businessinsider.com/why-japan-and-china-buy-us-debt-2012-9
  7. http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/, http://www.thedailybeast.com/newsweek/2009/06/05/deflation-and-inflation.html
  8. http://www.thisismoney.co.uk/money/pensions/article-2232391/Is-QE-bond-bubble-wreck-pension.htmlhttp://www.guardian.co.uk/money/2012/apr/18/compensate-pensioners-savings-qe
  9. http://www.bullionbullscanada.com/intl-commentary/25368-the-great-western-revenue-crisis-part-i
  10. http://www.bullionbullscanada.com/gold-commentary/21645-economic-rape-of-europe-nearly-complete-part-i, http://www.bullionbullscanada.com/gold-commentary/21645-economic-rape-of-europe-nearly-complete-part-ii, http://www.bullionbullscanada.com/intl-commentary/21699-economic-rape-of-europe-nearly-complete-part-iii, http://www.bullionbullscanada.com/intl-commentary/21703-economic-rape-of-europe-nearly-complete-part-iv
  11. http://www.rollingstone.com/politics/blogs/taibblog/outrageous-hsbc-settlement-proves-the-drug-war-is-a-joke-20121213, http://www.huffingtonpost.com/2013/01/02/hsbc-money-laundering-colombian-drug-traffickers_n_2395167.html
  12. http://www.bbc.co.uk/news/business-18671255
  13. http://www.reuters.com/article/2012/11/20/us-sanbernardino-bankruptcy-plan-idUSBRE8AJ07Y20121120
  14. http://www.mergersandinquisitions.com/2012-investment-banking-bonuses/
  15. http://www.guardian.co.uk/commentisfree/cifamerica/2010/sep/20/tarp-bailout-banks-wall-street
  16. http://www.businessinsider.com/countries-biggest-gold-reserves-2012-9?op=1
  17. http://money.cnn.com/2011/06/24/news/economy/ron_paul_gold_audit/index.htm?iid=HP_LN
  18. http://www.dailymail.co.uk/news/article-2247578/Queen-gives-Bank-chiefs-ticking-orf-crash-visits-vaults.html
  19. http://www.bloomberg.com/news/2012-12-11/india-must-tap-household-temple-gold-to-reduce-imports.html
  20. http://www.business-standard.com/india/news/rbi-may-seek-heavy-dutygold-imports/497475/
  21. http://www.commodityonline.com/news/why-us-is-not-facing-hyper-inflation-22696-3-22697.html
  22. http://www.bloomberg.com/news/2012-09-26/is-remedy-for-next-crisis-buried-in-iceland-view-correct-.html

Image source: http://www.123rf.com/photo_16565003_gold-bars-with-dollar-stamp-3d-rendered-image.html

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Complicity & Consciousness

An economic problem

I would like to start by sharing some very interesting data:

Gross World Product (GWP) – 2007: $72 Trillion approx.1

World Population – 2007: 6.6 Billion approx. 2

Per Capita GWP – 2007: $11,000 approx. 1

World Bank Poverty Line – Present: $1.25 per day per person 3

US Poverty Level – 2010: $11,139 annual income for an individual 4

Size of Global Derivatives Market – 2012: $1200 Trillion approx. 5

People living below World Bank Poverty Line – 2005: 1 Billion at least 3

GWP, albeit ambiguous, is the sum total of all the goods and services produced in the world expressed in PPP or Purchasing Power Parity terms. Any economist / statistician / mathematician / analyst would rightly argue that this data is not sacrosanct; it is an oversimplification of much more complex calculations that need to be taken into account prior to presenting that which I intend to present. Fact: these are the standards used world-wide, by economists and analysts alike, to make all sorts of analogies; I would request you to extend to me the same courtesy and discount the exactitude of these stats, for the point I wish to make is much larger.

US is the world’s richest country, so their standards for poverty are much higher than say India’s or Uganda’s. In 2007, enough goods and services were produced worldwide to completely wipe poverty off, with respect to the standards of the richest country in the world. If we consider the much more generous World Bank standards, we could’ve wiped poverty off some 24 times. What’s even more staggering is that at least 1 Billion people, an extremely conservative estimate, 15% of world’s population lives in abject poverty, closer to 25% if we consider more recent estimates. The precision of this data notwithstanding, the sheer inequality we all live amidst is clear, present and mind-boggling. (For the sake of simplicity, other qualitative measures of economic well-being such as Human Development Index (HDI) have been ignored).

Any rational mind would there after ask the obvious question? Why then are we letting so many of our fellow homo sapiens live in such awfully impoverished conditions? The answer provided by contemporary economics is ‘improper allocation’. Wealth as we all know is skewed substantially in favour of the developed nations and primarily towards the top 1% of the large developing / developed economies 6. What is even more intriguing is how the same individuals keep propping up every time Forbes conducts its top-ten billionaires survey in emerging nations such as Mexico, Russia, India year after year, a fact so vividly elaborated by Ruchir Sharma in his bestseller book ‘Breakout Nations’. This is testimony to the poor churning of wealth and its concentration in private hands in these nations.

Finance and our complicity

The next apparent question then: why do we allow such poor distribution of wealth in our nations? To find clues to this amazing puzzle, we have to go back in history, and examine the roots of finance and capitalism. Finance was created only as a means to allow the ‘proper allocation’ of capital; to provide excess unused capital to those who needed it most and could put it to productive use, a process that required financial ingenuity and provided a lot of power to the harbingers of this ingenuity, namely the Financiers or the Bankers. Recent and frequent turmoil in the global financial sector is testimony to the use and abuse of power by these harbingers. Credit Default Swaps (CDSs) and Credit Debt Obligations (CDOs) might have been the immediate cause of the 2007 crisis but there is something more profoundly wrong with and intrinsic to Capitalism: systemic risk or ‘internal contradictions of capital accumulation’, a term coined by Marx, which essentially implies how Capitalism never solves its crises, it just geographically shifts them (US, now under recovery, has managed to shift the crisis to Europe), a concept beautifully articulated by David Harvey here:

http://www.youtube.com/watch?v=qOP2V_np2c0&feature=my_liked_videos&list=LLWZDZNpUbu2pGsecH1LJh2A

Psychological factors such as human frailty; greed and cultural origins play their part in exacerbating the inherent systemic problem of Capitalism.  Raghuram Rajan examines the roots of consumerist culture and its consequent effects in this exacerbation with his award winning book ‘Fault Lines’. I attempt to explain the mind-set of the politicians who use credit expansion as a means to appease the economically weak with this excerpt:

“…it is not income that matters but consumption. Stripped to its essentials, the argument is that if somehow the consumption of middle-class householders keeps up, if they can afford a new car every few years and the occasional exotic holiday, perhaps they will pay less attention to their stagnant monthly paychecks.

Politicians endorse consumerism amongst the sluggish poor by using credit expansion policies and eventually end up feeding the greed of the bankers. This helps the banker coup amass huge wealth and culminates in the sort crisis we’re accustomed to seeing and is immensely detrimental largely to the poor. The sheer size of the derivatives market, $1200 trillion, at least 15 times the GWP, is another glaring mishap waiting to happen yet again.

I want to be clear, this problem is not local to the US or Europe or the other NATO countries; these issues encompass all their trading partners, essentially almost the entire world, especially because western economic policies are shadowed across the globe. Those of us who abuse or even use the system are just as complicit in this ungodliness as the financiers. What is unfolding is clear evidence to how we all lie in the direct path of economic instability.

One might argue that this is the bankers’ problem, or the problem of an empowered isolated group, regulate them properly and we are solved. However, this is not how I see it at all. Poor distribution of wealth is inherent in our system, no amount of regulation or morally correct behaviour on the part of parties involved will help resolve it. Till most major players (nations) accept responsibility and alter their policies to act towards a common global goal, we will have to witness crisis after crisis, meltdown after meltdown. Those of us with means will keep surviving at the expense of the poor, and inequality will keep raging. An open debate with mutual understanding, between people of intellect and significance, is crucial to preventing future economic disasters and the further widening of income inequality.

If we, the educated, the people with means, lie blind to what is staring us in our face, are we not complicit? Are we not then living under a facade?

Philosophy; the search for who we are

A true master of philosophy said the following words to me which stuck, “Recognizing systems of values we are all part of uncover[s] structural oppressions we are all unconsciously complicit in”. How our system is structurally oppressive and we complicit I have dealt with above, now I want to talk about ‘systems of values’. Matthew Taylor masterfully expresses the need for a new enlightenment; system of values here:

http://www.youtube.com/watch?v=AC7ANGMy0yo&feature=my_liked_videos&list=LLWZDZNpUbu2pGsecH1LJh2A

His wonderful logic states the case for new ideals to lead us into the 21st century. He explains the need for a concrete understanding of who we are as human beings and what progress really means to us now, today. Progress cannot just be measured in terms of material or money. Progress has to include the well-being of others. Responsibility and sustainability are key to future progress, and in turn our own existence. He also discusses the arguable decline of widening human empathy and the imperative role of empathic capacity in our collective future. For only a feeling of empathy will force us into action and truly be able to eliminate inequality.

Who we should aspire to be; consciousness

So how do we contribute? There are some of us who think the answer lies in charity. I would like to quote the great Slavoj Zizek in this respect, “In charity there is hypocrisy”. He goes on to argue that we should be trying to eradicate the very problem that created the need for charity; poverty in the first place, instead of delaying the inevitable with our charity 7.

There are a few among us who are aware and are working toward solutions. The need of the hour is clear: business decisions cannot be taken just to create more money, for there is already too much money in the world. Decisions have to be taken to create value, to fulfil a real need. We need to produce strictly what the world needs production of, nothing more, nothing less. There is need for sustainable businesses, clean, green energy and education of the unprivileged. There is a need to stop wasteful consumption and expenditure; reduce our own carbon-footprint (I don’t wish to stress the obvious importance and enormity of climate change here; there are new found threats of geo-engineering and weather manipulation which need to be looked at right away). There is a need to conserve water. There is a need to re-use and recycle. There will always be a need for research in science and technology. There is a need to alleviate the conditions of the poor and bring them up to a decent standard of living; the onus is squarely on the able shoulders of the privileged. There is a need to ask questions, of the government and of policy; of ourselves. Do we need more foreign capital? Will it really benefit the farmer? Do we really understand the consequences of our own decisions? Do we know the flip-side to every cause we support?  Does the social construct of means I was born into give me more of a right to a fulfilling life, more than that of the average Joe? Is it even fulfilling then, now that I know what I know?

To those of us who don’t see or comprehend the gravity of the situation, this has been my effort to create a little bit of awareness, the tip of the iceberg if you will. For now is the time for real reflection and deep introspection. Moreover, there is a need to change the way we perceive and conceive life itself.

It is only when we ask questions, do we come close to unearthing real answers. I certainly haven’t found all the answers, but I sure as hell won’t stop asking questions! I think it is about time we all do the same.

Sources:

  1. http://www.worldwatch.org/node/5456
  2. http://www.prb.org/Publications/Datasheets/2007/2007WorldPopulationDataSheet.aspx
  3. http://www.reuters.com/article/2008/08/26/idUSN26384266
  4. http://www.huffingtonpost.com/2012/07/22/us-poverty-level-1960s_n_1692744.html
  5. http://www.washingtonsblog.com/2012/05/top-derivatives-expert-finally-gives-a-credible-estimate-of-the-size-of-the-global-derivatives-market.html
  6. http://www.zerohedge.com/article/detailed-look-global-wealth-distribution
  7. http://www.youtube.com/watch?v=hpAMbpQ8J7g