- The Wave Is gathering force & could hit between the
first & second quarter of 2010.
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- Many of my friends who have been receiving my e-mail
alerts over the last two years have lamented that in recent weeks I have
not commented on the state of the global economy. I appreciate their anxiety
but they forget that I am not a stock market analyst who is paid to write
articles to lure investors back into the market. My website is free and
I do not sell a financial newsletter so there is no need for me to churn
out daily forecasts or analysis.
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- However, when the data is compelling and supports an
inevitable trend, it is time for another review. This Red Alert is to enable
visitors to my website to take appropriate actions to safeguard their wealth
and welfare of their families in the coming months.
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- Since the last quarter of 2008, unrelenting currency
warfare has been waged by the key global economies and while this competition
thus far has been non-antagonistic, it will soon be antagonistic because
the inherent differences are irreconcilable. The consequences to the global
economy will be devastating and for the ordinary people, massive unemployment
and social unrest are assured.
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- The policy-makers of these countries faced with the total
collapse of the international financial architecture have concluded that
the solution, the only solution is quantitative easing (i.e.
massive injection of liquidity) to salvage the "too big to fail"
banks and reflate their depressed economies. This is best reflected in
Bernanke's candid remark that, "the US government has a technology,
called the printing press (or today, its electronic equivalent), that allows
it to produce as many US dollars as it wishes at essentially no cost".
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- This is the crux of the problem!
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- The Irreconcilable Differences
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- Some two decades ago, it was decided by the global financial
elites that the framework for the global economy shall consist of:
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- 1. A global derivative-based financial system, controlled
by the US Federal Reserve Bank and its associate global banks in the developed
countries.
- 2. The re-location from the West to the East in the production
of goods, principally to China and India to "feed"
the developed economies.
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- The entire system was built on a simple principle, that
of a FED-controlled global reserve currency which will be the engine for
growth for the global economy. It is essentially an imperialist economic
principle.
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- Once we grasp this fundamental truth, Bernanke's boast
that the "US can produce as many US dollars as it wishes at no cost"
takes on a different dimension.
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- I have talked to so many economists and when asked what
is the crux of the present financial problem, they all respond in unison,
"it is the global imbalances... the West consumes too much while the
East saves too much and consumes not enough". This is exemplified
by the huge US trade deficits on the one part and China's
massive surpluses on the other.
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- Incredible wisdom and almost everyone echoes this mantra.
The recent concluded APEC Summit was no different. This mantra was repeated
as well as the call for freer trade between trading nations.
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- This is a grand hoax. All the current leaders on the
world's stage are corrupted to the rotten core and as such have no interest
to call a spade a spade and expose the inherent contradictions within the
existing financial system.
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- The call for a multi-polar world is meaningless when
the entire global financial system is based on the unipolar US dollar reserve
currency. This is the inherent contradiction within the present system
and the problems associated with it cannot be resolved by another global
reserve currency based on the IMF's Special Drawing Rights as advocated
by some countries. It was stillborn, the very moment it was conceived!
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- The leaders of China, Japan and the oil
producing countries of the Middle East are all cursing and pissing
about the current situation, but they don't have the courage of their convictions
to spell it out to their countrymen that they have been conned by the financial
spin masters from the Fed acting on the instructions from Goldman Sachs.
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- Tell me which leader would dare admit that they have
exchanged the nation's wealth for toilet papers?
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- The toilet paper currency pantomime continues.
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- We have now reached a stalemate in the current currency
war, not unlike the situation of the Cold War between the NATO pact countries
and theWarsaw pact countries. Both sides were deterred by the MAD
(Mutually Assured Destruction) doctrine of nuclear wars. The costs to both
sides were horrendous and it was only when the Soviet Union could
not continue with the pace and cost of maintaining a nuclear deterrent
and was forced into bankruptcy that the balance tilted in favour of the
NATO alliance.
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- But it was a pyrrhic victory for the US and
it allies. What kept the ability of the US to maintain its military
might and outspend the Soviet Union was the right to print toilet
paper currency and the acceptance of the US dollar by her allies as the
world's reserve currency.
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- But why did the countries allied to the US during
the Cold War accepted the status quo?
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- Simple! They were all conned into believing that without
the protection of Big Brother and its military outreach, they would be
swallowed up by the communist menace. They agreed to march to the tune
of the US Pied-Piper.
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- The next big question why did the so-called "liberated"
former communist allies of the Soviet bloc jump on the bandwagon?
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- Simple! They all believed in the illusion that was fostered
by the global banks, led by Goldman Sachs that trading and selling their
goods and services for the toilet paper US reserve currency would
ensure untold wealth and prosperity.
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- But the biggest game in town was the Asia gambit. Japan,
after a decade of recession following the burst of her property bubble
did not have the means and the capacity to bring the game to the next level
as envisaged by the financial architects in Goldman Sachs.
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- And China was the biggest beneficiary. The
senior management of Goldman Sachs brokered a secret pact with China's
leaders that in exchange for orchestrating the most massive injection of
US dollar capital and wholesale re-location of manufacturing capacity in
the history of the global economy,China would recycle their hard-earned US toilet
paper reserve currency wealth into US treasuries and other US debt
instruments.
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- This was the necessary condition precedent for the global
financial casino to rise to the next level of play.
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- Why?
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- The New Game
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- The financial architects at Goldman Sachs had a master
plan to dominate the global financial system. The means to achieve
this financial power was the Shadow Banking System, the lynchpin being
the derivative market and the securitization of assets, real and synthetic.
The stakes would be huge, in the hundreds of US$ trillions and the way
to transform the market was through massive leverage at all levels of the
financial game.
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- But there was an inherent weakness in the overall scheme
the threat of inflation, more precisely hyperinflation. Such huge
amounts of liquidity in the system would invariably trigger the depreciation
of the reserve currency and the confidence in the system.
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- Hence the need for a system to keep in check price inflation
and the illusion that the purchasing power of the toilet paper reserve
currency could be maintained.
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- This is where China came in. Once China became
the world's factory, the problem would be resolved. When a suit which previously
cost US$600 could be had for less than US$100, and a pair of shoes for
less than US$5, the scam masterminds concluded that there would be no foreseeable
threat to the largest casino operation in history.
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- China agreed to the exchange as it has over a billion
mouths to feed and jobs for hundreds of millions needed to be secured,
without which the system could not be maintained. But China was pragmatic
enough to have two "economic systems" a Yuan based domestic
economy and a US$ based export economy, in the hope that the profits and
benefits of the export economy would enable China to transform and establish
a viable and dynamic domestic market which in time would replace the export
dependent economy. It was a deal made with the devil, but there were no
viable alternative options at the material time, more so after the collapse
of the Soviet Union.
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- The Next Level of the Game
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- The next level of the game was reached when the toilet
paper reserve currency literally went virtual through the simple
operation of a click of the mouse in the computers of the global banks.
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- The big boys at Goldman Sachs and other global banks
were more than content to leave Las Vegas for the mafia and their
miserable billions in turnover. The profits were considered dimes when
compared to the hundreds of trillions generated by the virtual casino.
It was a financial conquest beyond their wildest dreams. They even called
themselves, "Master of the Universe". Creating massive debts
was the new game, and the big boys could even leverage more than 40 times
capital! Asset values soared with so much liquidity chasing so few good
assets.
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- However, the financial wizards failed to appreciate and
or underestimate the amount of financial products that were needed to keep
the game in play. They resorted to financial engineering the securitization
of assets. And when real assets were insufficient for securitization, synthetic
assets were created. Soon enough, toxic waste was even considered as legitimate
instruments for the game so long as it could be unloaded to greedy suckers
with no recourse to the originators of these so-called investments.
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- For a time, it looked as if the financial wizards have
solved the problem of how to feed the global casino monster.
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- Unfortunately, the music stopped and the bubble burst!
And as they say the rest is history.
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- The Goldman Sachs Remedy
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- When losses are in the US$ trillions and whatever
assets / capital remaining are in the US$ billions, we have a huge
problem a financial black-hole.
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- The preferred remedy by the financial masterminds at
Goldman Sachs was to create another hoax that if the big global banks
were to fail triggering a systemic collapse, there would be Armageddon.
These "too big to fail" banks must be injected with massive amount
of virtual monies to recapitalize and get rid of the toxic assets on their
balance sheet. The major central banks in the developed countries in cahoots
with Goldman Sachs sang the same tune. All sorts of schemes were conjured
to legitimize this bailout.
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- In essence, what transpired was the mere transfer of
monies from the left pocket to the right pocket, with the twist that the
banks were in fact helping the Government to overcome the financial crisis.
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- The Fed and key central banks agreed to lend "virtual
monies" to the "too big to fail" global banks at zero or
near zero interest rate and these banks in turn would "deposit"
these monies with the Fed and other central banks at agreed interest rates.
These transactions are all mere book entries. Other "loans" from
the Fed and central banks (again at zero or near zero interest rates) are
used to purchase government debts, these debts being the stimulus monies
needed to revive the real economy and create jobs for the growing unemployed.
So in essence, these banks are given "free money" to lend to
the government at prior agreed interest rates with no risks at all. It
is a hoax!
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- These "monies" are not even the dollar bills,
but mere book entries created out of thin air.
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- So when the Fed injects US$ trillions into the banking
system, it merely credits the amount in the accounts of the "too big
to fail" banks at the Fed.
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- When the system is applied to international trade, the
same modus operandi is used to pay for the goods imported from China,
Japan etc.
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- For the rest of world, when buying goods denominated
in US$, these countries must produce goods and services, sell them for
dollars in order to purchase goods needed in their country. Simply put,
they have to earn an income to purchase whatever goods and services needed.
In contrast, all that theUS needs to do is to create monies out of
thin air and use them to pay for their imports!
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- The US can get away with this scam because
it has the military muscle to compel and enforce this hoax. As stated earlier,
this status quo was accepted especially during the Cold War and with some
reluctance post the collapse of the Soviet Union, but with a proviso
that the US agrees to be the consumer of last resort. This arrangement
provided some comfort because countries which have sold their goods to
the US, can now use the dollars to buy goods from other countries as more
than 80 per cent of world trade is denominated in dollars especially crude
oil, the lifeline of the global economy.
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- But with the US in full bankruptcy and its
citizens (the largest consumers in the world) being unable to borrow further
monies to buy fancy goods fromChina, Japan and the rest of the
world, the demand for dollar has evaporated. The dollar status as a reserve
currency and its usefulness is being questioned more vocally.
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- The End Game
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- The present fallout can be summarized in simple terms:
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- Should a bankrupt country (the US) be allowed to
use money created out of thin air to pay for goods produced with the sweat
and tears of hardworking citizens of exporting countries? Adding insult
to injury, the same dollars are now purchasing a lot less than before.
So what is the use of being paid in a currency that is losing rapidly its
value?
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- On the other hand, the US is telling the whole
world, especially the Chinese that if they are not happy with the status
quo, there is nothing to stop them from selling to the other countries
and accepting their currencies. But if they want to sell to the mighty USA,
they must accept US toilet paper reserve currency and its right
to create monies out of thin air!
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- This is the ultimate poker game and whosoever blinks
first loses and will suffer irreparable financial consequences. But who
has the winning hand?
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- The US does not have the winning hand. Neither
has China the winning hand.
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- This state of affairs cannot continue for long, for whatever
cards the US or China may be contemplating to throw
at the table to gain strategic advantage, any short term gains will be
pyrrhic, for it will not be able to address the underlying antagonistic
contradictions.
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- When the survival of the system is dependent on the availability
of credit (i.e. accumulating more debts) it is only a matter of time before
both the debtor and creditor come to the inevitable conclusion that the
debt will never be paid. And unless the creditor is willing to write off
the debt, resorting to drastic means to collect the outstanding debt is
inevitable.
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- It would be naïve to think that the US would
quietly allow itself to be foreclosed! When we reach that stage, war will
be inevitable. It will be the US-UK-Israel Axis against the rest of the
world.
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- The Prelude to the End Game
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- The US economy will be spiraling out of control
in the coming months and will reach critical point by the end of the 1st
quarter 2010 and implode by the 2nd quarter.
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- The massive US$ trillions of dollars stimulus has failed
to turn the economy around. The massive blood transfusion may have kept
the patient alive, but there are numerous signs of multi-organ failure.
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- There will be another wave of foreclosures of residential
and more importantly commercial properties by end December and early 2010.
And the foreclosed properties in 2009 will lead to depressed prices once
they come through the pipeline. Home and commercial property values will
plunge. Banks' balance sheets will turn ugly and whatever "record
profits" in the last two quarters of 2009 will not cover the additional
red ink.
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- Given the above situation, will the Fed continue to buy
mortgage-backed securities to prop up the markets? The Fed has already
spent trillions buying Fannie Mae and Freddie Mac mortgages with no potential
substitute buyer in sight. Therefore, the Fed's balance sheet is as toxic
as the "too big to fail" banks that it rescued.
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- In the circumstances, it makes no sense for anyone to
assert that the worst is over and that the global economy is on the road
to recovery.
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- And the surest sign that all is not well with the big
banks is the recent speech by the President of the Federal Reserve Bank
of New York, William Dudley at Princeton, New Jersey when he said that
the Fed would curtail the risk of future liquidity crisis by providing
a "backstop" to solvent firms with sufficient collateral.
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- This warning and assurance deserves further consideration.
Firstly, it is a contradiction to state that a solvent firm with sufficient
collateral would in fact encounter a liquidity crisis to warrant the need
for a fall back on the Fed. It is in fact an admission that banks are not
sufficiently capitalized and when the second wave of the tsunami hits them
again, confidence will be sorely lacking.
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- Dudley actually said that, "the central bank
could commit to being the lender of last resort... [and this would reduce]
the risk of panics sparked by uncertainty among lenders about what other
creditors think".
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- To put it bluntly what he is saying is that the Fed will
endeavour to avoid the repeat of the collapse of Bear Stearns, Lehman Bros
and AIG. It is also an indication that the remaining big banks are in trouble.
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- It is interesting to note that a Bloomberg report in
early November revealed that Citigroup Inc and JP Morgan Chase have been
hoarding cash. The former has almost doubled its cash holdings to US$244.2
billion. In the case of the latter, the cash hoard amounted to US$453.6
billion. Yet, given this hoarding by the leading banks, the New York Federal
Reserve Bank had to reassure the financial community that it is ready to
inject massive liquidity to prop up the system.
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- It should come as no surprise that the value of the dollar
is heading south.
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- When currencies are being debased, volatility in the
stock market increases. But the gains are not worth the risks and if anyone
is still in the market, they will be wiped out by the 1st quarter of 2010.
The S&P may have shot up since the beginning of the year by over 25
per cent but it has been out-performed by gold. The gains have also lagged
behind the official US inflation rate. It has in fact delivered
a total return after inflation of approximately minus 25 per cent. When
Meredith Whitney remarked that, "I don't know what's going on in the
market right now, because it makes no sense to me", it is time to
get out of the market fast.
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- In a report to its clients, Société Générale
warned that public debt would be massive in the next two years 105
per cent of GDP in the UK, 125 per cent in the US and in
Europe and 270 per cent in Japan. Global debt would reach US$45 trillion.
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- At some point in time, all these debts must be repaid.
How will these debts be repaid?
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- If we go by what Bernanke has been preaching and practising,
it means more toilet paper currency will be created to repay the debts.
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- As a result, debasement of currencies will continue and
this will further aggravate existing tensions between the competing economies.
And when creditors have enough of this toilet paper scam, expect violent
reactions!
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