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Having previously exposed the world to the "nominal stock market cheerleaders," it is clear that Kyle Bass sees things as only having got worse among developed nations. In fact, the following interview shows that he does not fear US losing its credibility since "developed western economies with the largest debt loads are all in the same boat." The discussion expands from the debt ceiling debacle to bonds and stocks, "given the lack of nominal yield in the bond market, all of the new money is going to continue into stocks. The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off," adding that being in stocks "is not your choice," thanks to Fed repression and that deficit contraction is all that can stop the Fed now.

 

As Bass warned previously,

he caveats that nominally bullish statement with a critical point, "Zimbabwe's stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs" as purchasing power is crushed. Investors, he says, are "too focused on nominal prices" as the rate of growth of the monetary base is destroying true wealth.

Via Financial Sense Newshour:

Jim: Do you feel the debt ceiling debate and the political theater in Washington are hurting U.S. credibility and our capital markets in the long-run?

Kyle: No…the entire world is in the same position we are in one way or another. That’s painting the world with a broader brush, but when you look at the developed western economies (and, of course, we’ll exclude countries with no net debt like Australia and Canada that are natural resource heavy), but the developed western economies with the largest debt loads are all in the same boat. Whether or not they have debt ceilings in the U.S. or bank note agreements like they had in Japan until they recently abolished them, there are all of these potential glass ceilings that are put on the marketplace that always tend to move. I think since 1960 we’ve raised our debt something like 82 times.

Jim: Economists have often said—I’m thinking of “This Time Is Different” by Reinhart and Rogoff—when countries have debt-to-GDP ratios over 100%, they get into trouble; Japan’s is 230%. Why have they not had trouble up until now?

Kyle: When you think about what Reinhart and Rogoff’s book says, it kind of gets to an answer but it’s not the right way to look at things; there are many more variables to analyze the situation with. One is, of course, debt to central government tax revenues—that ratio. Another one is what percentage of your central government tax revenues do you spend on interest alone? Those barometers are much more impactful than just using a debt-to-GDP barometer. And then when you think about Reinhart and Rogoff’s work, if you’ve read all the white papers that they’ve written prior to writing the book, one of the other conclusions that they draw is when debt gets to be about 100% GDP it becomes problematic. Well, what that means is, typically—and, again, painting the world with a broad brush—central government tax revenues are roughly 20% of GDP. So what they’re telling you is when debt gets to be 5 times your revenue, that’s when you start to have a problem. Historically, the analysis that’s been done empirically by academics has focused on the countries that have fallen into a restructuring or a default as a result of this ratio that you and I are discussing. Historically, those have been emerging market economies that have higher borrowing costs. So, it actually makes complete sense that that number is too low when you’re talking about a developed market economy versus an emerging economy because, in theory, a developed economy can borrow at lower rates than an emerging economy can. That being said, in Japan, when the debts are 24 times their central government tax revenue, they are already completely insolvent—it’s just a question of when does it blow up.

Jim: I want to turn our attention to the stock market right now and your view of where you see the markets right now. They don’t seem overvalued when you compare them to 2000 or 2007, but they’re not cheap; and, where do you go in a market when the rate of return on cash or bonds is hardly anything?

Kyle: I think that as long as the Fed—for instance, the Fed is still buying $85 billion a month; almost a trillion a year—you could argue that the Fed is being more stimulative today than they were a year or year and a half ago. When we were running a trillion to a trillion and a half deficits, the Fed, at a trillion dollars in a deficit, was buying every bond that was issued. Today, you have a scenario where the fiscal deficit in the U.S., we think, is somewhere around 650 to 700 billion dollars. So, in theory, the Fed is actually adding more money to the economy today than it was a year ago because the deficit is lower and they’re still buying the same number of bonds. So what I’m saying is the monetary base continues to expand. What the economists are saying is velocity continues to drop at a faster rate than the base is expanding. Well, velocity, I believe, is a coincident indicator at best—possibly a lagging indicator. So, when the v [velocity] turns around that’s when inflation shows up, but for now–you’re asking about stocks…I think, given the lack of nominal yield in the bond market, all of the new money is going to continue into stocks. The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off.  

Jim: What is your outlook on when the Fed will taper or, eventually, raise interest rates?

Kyle: I personally think that what enables the Fed to taper, again, is a contraction in the fiscal deficit. Now, part of that equation will be remedied by higher tax collections; unfortunately, the other side of that equation is, of course, lesser spending, which isn’t going to happen. So, I believe they can taper to the extent that the fiscal deficit has contracted. I don’t think that they’ll be able to raise the Fed funds rate any time in the foreseeable future—3 to 5 years.

Jim: So, that would argue that stocks would be a better play.

Kyle: Unfortunately…because it feels like they’re making it the only game in town. It’s not your choice, but it’s the only answer though. [End transcript]

In the rest of this must-listen interview, legendary hedge fund manager Kyle Bass gives investors his most recent views on Japan, the impact and outlook for shale gas in the U.S., and a wide range of other topics.

If you would like to hear this full must-listen interview with Kyle Bass airing this Wednesday, CLICK HERE to subscribe.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/MS7BSkzUXJU/story01.htm Tyler Durden

Having previously exposed the world to the "nominal stock market cheerleaders," it is clear that Kyle Bass sees things as only having got worse among developed nations. In fact, the following interview shows that he does not fear US losing its credibility since "developed western economies with the largest debt loads are all in the same boat." The discussion expands from the debt ceiling debacle to bonds and stocks, "given the lack of nominal yield in the bond market, all of the new money is going to continue into stocks. The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off," adding that being in stocks "is not your choice," thanks to Fed repression and that deficit contraction is all that can stop the Fed now.

 

As Bass warned previously,

he caveats that nominally bullish statement with a critical point, "Zimbabwe's stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs" as purchasing power is crushed. Investors, he says, are "too focused on nominal prices" as the rate of growth of the monetary base is destroying true wealth.

Via Financial Sense Newshour:

Jim: Do you feel the debt ceiling debate and the political theater in Washington are hurting U.S. credibility and our capital markets in the long-run?

Kyle: No…the entire world is in the same position we are in one way or another. That’s painting the world with a broader brush, but when you look at the developed western economies (and, of course, we’ll exclude countries with no net debt like Australia and Canada that are natural resource heavy), but the developed western economies with the largest debt loads are all in the same boat. Whether or not they have debt ceilings in the U.S. or bank note agreements like they had in Japan until they recently abolished them, there are all of these potential glass ceilings that are put on the marketplace that always tend to move. I think since 1960 we’ve raised our debt something like 82 times.

Jim: Economists have often said—I’m thinking of “This Time Is Different” by Reinhart and Rogoff—when countries have debt-to-GDP ratios over 100%, they get into trouble; Japan’s is 230%. Why have they not had trouble up until now?

Kyle: When you think about what Reinhart and Rogoff’s book says, it kind of gets to an answer but it’s not the right way to look at things; there are many more variables to analyze the situation with. One is, of course, debt to central government tax revenues—that ratio. Another one is what percentage of your central government tax revenues do you spend on interest alone? Those barometers are much more impactful than just using a debt-to-GDP barometer. And then when you think about Reinhart and Rogoff’s work, if you’ve read all the white papers that they’ve written prior to writing the book, one of the other conclusions that they draw is when debt gets to be about 100% GDP it becomes problematic. Well, what that means is, typically—and, again, painting the world with a broad brush—central government tax revenues are roughly 20% of GDP. So what they’re telling you is when debt gets to be 5 times your revenue, that’s when you start to have a problem. Historically, the analysis that’s been done empirically by academics has focused on the countries that have fallen into a restructuring or a default as a result of this ratio that you and I are discussing. Historically, those have been emerging market economies that have higher borrowing costs. So, it actually makes complete sense that that number is too low when you’re talking about a developed market economy versus an emerging economy because, in theory, a developed economy can borrow at lower rates than an emerging economy can. That being said, in Japan, when the debts are 24 times their central government tax revenue, they are already completely insolvent—it’s just a question of when does it blow up.

Jim: I want to turn our attention to the stock market right now and your view of where you see the markets right now. They don’t seem overvalued when you compare them to 2000 or 2007, but they’re not cheap; and, where do you go in a market when the rate of return on cash or bonds is hardly anything?

Kyle: I think that as long as the Fed—for instance, the Fed is still buying $85 billion a month; almost a trillion a year—you could argue that the Fed is being more stimulative today than they were a year or year and a half ago. When we were running a trillion to a trillion and a half deficits, the Fed, at a trillion dollars in a deficit, was buying every bond that was issued. Today, you have a scenario where the fiscal deficit in the U.S., we think, is somewhere around 650 to 700 billion dollars. So, in theory, the Fed is actually adding more money to the economy today than it was a year ago because the deficit is lower and they’re still buying the same number of bonds. So what I’m saying is the monetary base continues to expand. What the economists are saying is velocity continues to drop at a faster rate than the base is expanding. Well, velocity, I believe, is a coincident indicator at best—possibly a lagging indicator. So, when the v [velocity] turns around that’s when inflation shows up, but for now–you’re asking about stocks…I think, given the lack of nominal yield in the bond market, all of the new money is going to continue into stocks. The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off.  

Jim: What is your outlook on when the Fed will taper or, eventually, raise interest rates?

Kyle: I personally think that what enables the Fed to taper, again, is a contraction in the fiscal deficit. Now, part of that equation will be remedied by higher tax collections; unfortunately, the other side of that equation is, of course, lesser spending, which isn’t going to happen. So, I believe they can taper to the extent that the fiscal deficit has contracted. I don’t think that they’ll be able to raise the Fed funds rate any time in the foreseeable future—3 to 5 years.

Jim: So, that would argue that stocks would be a better play.

Kyle: Unfortunately…because it feels like they’re making it the only game in town. It’s not your choice, but it’s the only answer though. [End transcript]

In the rest of this must-listen interview, legendary hedge fund manager Kyle Bass gives investors his most recent views on Japan, the impact and outlook for shale gas in the U.S., and a wide range of other topics.

If you would like to hear this full must-listen interview with Kyle Bass airing this Wednesday, CLICK HERE to subscr
ibe.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/MS7BSkzUXJU/story01.htm Tyler Durden

For all your, well just one really, New Normal daytrading needs.

courtesy of @Not_Jim_Cramer

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/vhab-9dB35w/story01.htm Tyler Durden

Authored by John Taylor, originally posted at WSJ.com,

It is a common view that the shutdown, the debt-limit debacle and the repeated failure to enact entitlement and pro-growth tax reform reflect increased political polarization. I believe this gets the causality backward. Today’s governance failures are closely connected to economic policy changes, particularly those growing out of the 2008 financial crisis.

The crisis did not reflect some inherent defect of the market system that needed to be corrected, as many Americans have been led to believe. Rather it grew out of faulty government policies.

In the years leading up to the panic, mainly 2003-05, the Federal Reserve held interest rates excessively low compared with the monetary policy strategy of the 1980s and ’90s—a monetary strategy that had kept recessions mild. The Fed’s interest-rate policies exacerbated the housing boom and thus the ensuing bust. More generally, extremely low interest rates led individual and institutional investors to search for yield and to engage in excessive risk taking, as Geert Bekaert of Columbia University and his colleagues showed in a study published by the European Central Bank in July.

Meanwhile, regulators who were supposed to supervise large financial institutions, including Fannie Mae and Freddie Mac, allowed large deviations from existing safety and soundness rules. In particular, regulators permitted high leverage ratios and investments in risky, mortgage-backed securities that also fed the housing boom.

After the housing bubble burst the value of mortgage-backed securities plummeted, putting the solvency of the many banks and other financial institutions at risk. The government stepped in, but its ad hoc bailout policy was on balance destabilizing.

Whether or not it was appropriate for the Federal Reserve to bail out the creditors of Bear Stearns in March 2008, it was a mistake not to lay out a framework for future interventions. Instead, investors assumed that the creditors of Lehman Brothers also would be bailed out—and when they weren’t and Lehman declared bankruptcy in September, it was a big surprise, raising grave uncertainty about government policy going forward.

The government then passed the Troubled Asset Relief Program which was supposed to prop up banks by purchasing some of their problematic assets. The purchase plan was viewed as unworkable and financial markets continued to plummet—the Dow fell by 2,399 points in the first eight trading days of October—until the plan was radically changed into a capital injection program. Former Treasury Secretary Hank Paulson, appearing last month on CNBC on the fifth anniversary of the Lehman bankruptcy, argued that TARP saved us. Former Wells Fargo CEO Dick Kovacevich, appearing later on the same show, argued that TARP significantly worsened the crisis by creating even more uncertainty.

In any case, the crisis ended, but rather than simply winding down its short-term liquidity facilities the Fed continued to intervene through massive asset purchases—commonly called quantitative easing. Many outside and inside the Fed are unconvinced quantitative easing is meeting its objective of spurring economic growth. Yet there is a growing worry about the Fed’s ability to reduce its asset purchases without market disruption. Bond and mortgage markets were roiled earlier this year by Chairman Ben Bernanke’s mere hint that the Fed might unwind.

The crisis ushered in the 2009 fiscal stimulus package and other interventions such as cash for clunkers and subsidies for first-time home buyers, which have not led to a sustained recovery. Crucially, the actions taken during the immediate crisis set a precedent for giving the federal government more power to intervene and regulate, which has added to uncertainty.

The Dodd-Frank Act, meant to promote financial stability, has called for hundreds of new rules and regulations, many still unwritten. The law was supposed to protect taxpayers from bailouts. Three years later it remains unclear how large complex financial institutions operating in many different countries will be “resolved” in a crisis. Any fear in the markets about whether a troubled big bank can be handled through Dodd-Frank’s orderly resolution authority can easily drive the U.S. Treasury to resort to another large-scale bailout.

Regulations and interventions also increased in other industries, most significantly in health care. The mandates at the core of the Affordable Care Act represent an unprecedented degree of control by the federal government of the activities of businesses and individuals, adversely affecting incentives to hire and work and eventually worsening the federal-budget outlook.

Federal debt held by the public has increased to 73% of GDP this year from 41% in 2008—and according to the Congressional Budget Office, it will rise to more than 250% without a change in policy. This raises uncertainty about how the debt can be brought under control.

Despite a massive onslaught of legislation and regulation designed to foster prosperity, economic growth remains low and unemployment remains high. Rhetoric aside, many both inside and outside the government quite reasonably seek to return to the kinds of policies that worked well in the not-so-distant past. Claiming that one political party has been hijacked by extremists misses this key point, and prevents a serious discussion of the fundamental changes in economic policies in recent years, and their effects.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zN-oCk2HCjY/story01.htm Tyler Durden

Earlier this afternoon, it was Steve Cohen’s final fall from grace. Now, Bloomberg reports that Brazil’s one time super billionaire, and now negativeworthaire, Eike Batista, whose sprawling petroleum empire was once valued in the tens of billions, is set to file for bankruptcy tomorrow.

• BRAZIL’S OGX SAID TO PLAN BANKRUPTCY PROTECTION FILING TOMORROW

We are confident that just like in Europe, there is no bank with any exposure to either OGX, Brazil, or whatever potential intercreditor avalanche will tear down many more Brazilian companies once this first insolvent domino finally tips over.

Those who missed the preface to this story, we repost it below.

When on October 1, fallen billionaire Eike Batista’s OGX Petroleo & Gas, missed a $45 million bond coupon payment, some were surprised but most  had seen the writing on the wall. After all, Brazil’s second largest oil company after Petrobras, and the crowning jewel of Batista’s EBX Group, had been under the microscope of investors and certainly creditors (and if it wasn’t it certainly should have been) after oil deposits that Batista had valued at $1 trillion turned out to be commercial failures. And so the countdown to the inevitable bankruptcy filing began. Overnight, Bloomberg reports that the wait should not be long (in fact it may coincide with the default of that other insolvent mega-creditor: the United States), and will mostly certainly take place before the end of the month, following the retention of bankruptcy specialist law firm Quinn Emanuel.

From Bloomberg:

Quinn Emanuel was hired to work on restructuring and potential litigation matters in the U.S. for Batista, said the people, who asked not to be named because they weren’t authorized to speak publicly.

 

OGX Petroleo & Gas Participacoes SA (OGXP3) is considering filing for bankruptcy protection by the end of this month, two people with direct knowledge of the matter said last week. The filing would be done in Rio de Janeiro where OGX is based, said the people, asking not to be identified as discussions are private. While Batista is negotiating with creditors to avoid the same process for shipbuilder OSX Brasil SA (OSXB3), the most likely outcome is that both companies will seek legal protection, they said.

Prior stakeholder representations by Quinn Emmanuel have been the bankruptcies of energy trader Enron Corp., futures trader Refco Inc. and oil-trader SemGroup LP, according to the firm’s website, so they are quite proficient at representing what is about to be Latin America’s largest energy-related bankruptcy in a long time.

And while it is unclear if the company will file concurrently in the US under Chapter 15, Batista’s creditors, awoken from their “all is well” slumber and scrambling, have decided to pull an Elliott management, and take possession of at least two ships used as collateral by another Batista company, shipbuilder OSX and sister company to OGX, whose assets may also be impaired as unknown cross-default provisions are triggered and a vicious intercreditor fight ensues.

Bloomberg reports that OSX Brasil bank creditors considering taking possession of 2 vessels used as collateral on loans to Batista’s shipbuilder, say 6 people with knowledge. The banks are talking to advisers and company officials to see if they should execute guarantees if OSX’s oil sister co. goes into  default, which would trigger cross-default clauses on OSX. Bloomberg adds that OSX already hired Credit Suisse to help sell OSX-1, OSX-2 platforms that guarantee loans.

One question is what the waterfall effects on local banks would be in the case of a bankruptcy filing, due to massive exposure to the company by both local and foreign financial firms – case in point OSX borrowed $1.27 billion from banks including Santander, DVB and others.  Naturally officials at neither DVB nor Santander commented.

Either way, the seemingly endless period of financial stability in Latin America, and particularly Brazil (where record consumer debt is a far greater issue), long seen as a derivative of China, is ending. Luckily, the next steps in the global overlevered soap opera are about to be unveiled. So sit back, grab the popcorn and watch as the world receives yet another Donald Trump, i.e., fallen billionaire angel, this time in Latin America, and all the associated entertainment, even if it is not quite as entertaining for the thousands of Brazilians who are about to lose their jobs as the debt tsunami finally rolls over.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9CnS-zhMz_A/story01.htm Tyler Durden

Earlier this afternoon, it was Steve Cohen’s final fall from grace. Now, Bloomberg reports that Brazil’s one time super billionaire, and now negativeworthaire, Eike Batista, whose sprawling petroleum empire was once valued in the tens of billions, is set to file for bankruptcy tomorrow.

• BRAZIL’S OGX SAID TO PLAN BANKRUPTCY PROTECTION FILING TOMORROW

We are confident that just like in Europe, there is no bank with any exposure to either OGX, Brazil, or whatever potential intercreditor avalanche will tear down many more Brazilian companies once this first insolvent domino finally tips over.

Those who missed the preface to this story, we repost it below.

When on October 1, fallen billionaire Eike Batista’s OGX Petroleo & Gas, missed a $45 million bond coupon payment, some were surprised but most  had seen the writing on the wall. After all, Brazil’s second largest oil company after Petrobras, and the crowning jewel of Batista’s EBX Group, had been under the microscope of investors and certainly creditors (and if it wasn’t it certainly should have been) after oil deposits that Batista had valued at $1 trillion turned out to be commercial failures. And so the countdown to the inevitable bankruptcy filing began. Overnight, Bloomberg reports that the wait should not be long (in fact it may coincide with the default of that other insolvent mega-creditor: the United States), and will mostly certainly take place before the end of the month, following the retention of bankruptcy specialist law firm Quinn Emanuel.

From Bloomberg:

Quinn Emanuel was hired to work on restructuring and potential litigation matters in the U.S. for Batista, said the people, who asked not to be named because they weren’t authorized to speak publicly.

 

OGX Petroleo & Gas Participacoes SA (OGXP3) is considering filing for bankruptcy protection by the end of this month, two people with direct knowledge of the matter said last week. The filing would be done in Rio de Janeiro where OGX is based, said the people, asking not to be identified as discussions are private. While Batista is negotiating with creditors to avoid the same process for shipbuilder OSX Brasil SA (OSXB3), the most likely outcome is that both companies will seek legal protection, they said.

Prior stakeholder representations by Quinn Emmanuel have been the bankruptcies of energy trader Enron Corp., futures trader Refco Inc. and oil-trader SemGroup LP, according to the firm’s website, so they are quite proficient at representing what is about to be Latin America’s largest energy-related bankruptcy in a long time.

And while it is unclear if the company will file concurrently in the US under Chapter 15, Batista’s creditors, awoken from their “all is well” slumber and scrambling, have decided to pull an Elliott management, and take possession of at least two ships used as collateral by another Batista company, shipbuilder OSX and sister company to OGX, whose assets may also be impaired as unknown cross-default provisions are triggered and a vicious intercreditor fight ensues.

Bloomberg reports that OSX Brasil bank creditors considering taking possession of 2 vessels used as collateral on loans to Batista’s shipbuilder, say 6 people with knowledge. The banks are talking to advisers and company officials to see if they should execute guarantees if OSX’s oil sister co. goes into  default, which would trigger cross-default clauses on OSX. Bloomberg adds that OSX already hired Credit Suisse to help sell OSX-1, OSX-2 platforms that guarantee loans.

One question is what the waterfall effects on local banks would be in the case of a bankruptcy filing, due to massive exposure to the company by both local and foreign financial firms – case in point OSX borrowed $1.27 billion from banks including Santander, DVB and others.  Naturally officials at neither DVB nor Santander commented.

Either way, the seemingly endless period of financial stability in Latin America, and particularly Brazil (where record consumer debt is a far greater issue), long seen as a derivative of China, is ending. Luckily, the next steps in the global overlevered soap opera are about to be unveiled. So sit back, grab the popcorn and watch as the world receives yet another Donald Trump, i.e., fallen billionaire angel, this time in Latin America, and all the associated entertainment, even if it is not quite as entertaining for the thousands of Brazilians who are about to lose their jobs as the debt tsunami finally rolls over.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9CnS-zhMz_A/story01.htm Tyler Durden

Yes, The Dollar Is Losing Its Status as Reserve Currency

The average life expectancy for a fiat currency is less than 40 years.

But what about “reserve currencies”, like the U.S. dollar?

JP Morgan noted last year that “reserve currencies” have a limited shelf-life:

As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns.  It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.

Remember, China is entering into more and more major deals with other countries to settle trades in Yuans, instead of dollars.  This includes the European Union (the world’s largest economy).

And China is quietly becoming a gold superpower, and China has long been rumored to be converting the Yuan to a gold-backed currency.

Why China Doesn’t Want the Yuan to Become the Reserve Currency

But a switch to a totally-different system – say, a gold-backed yuan – would cause enormous disruption and chaos. China – which has been a long-term planner for thousands of years – doesn’t want such a sudden change.

Moreover, housing the world’s reserve currency is a huge burden, as well as a privilege.  Venture Magazine notes:

The inherent burden of housing the world’s reserve currency is that the U.S. must continue to run a balance of payment deficit to meet the growing demand. However, it was this outstanding external debt that caused investors to lose confidence in the value of the reserve assets.

Michael Pettis – the well-known American economist teaching at  Peking University in Beijing – explains:

A world without the dollar would mean faster growth and less debt for the United States, though at the expense of slower growth for parts of the rest of the world, especially Asia.

 

***

 

When foreigners actively buy dollar assets they force down the value of their currency against the dollar. U.S. manufacturers are thus penalized by the overvalued dollar and so must reduce production and fire American workers. The only way to prevent unemployment from rising then is for the United States to increase domestic demand — and with it domestic employment — by running up public or private debt. But, of course, an increase in debt is the same as a reduction in savings. If a rise in foreign savings is passed on to the United States by foreign accumulation of dollar assets, in other words, U.S. savings must decline. There is no other possibility.

 

***

 

By definition, any increase in net foreign purchases of U.S. dollar assets must be accompanied by an equivalent increase in the U.S. current account deficit. This is a well-known accounting identity found in every macroeconomics textbook. So if foreign central banks increase their currency intervention by buying more dollars, their trade surpluses necessarily rise along with the U.S. trade deficit. But if foreign purchases of dollar assets really result in lower U.S. interest rates, then it should hold that the higher a country’s current account deficit, the lower its interest rate should be.

 

Why? Because of the balancing effect: The net amount of foreign purchases of U.S. government bonds and other U.S. dollar assets is exactly equal to the current account deficit. More net foreign purchases is exactly the same as a wider trade deficit (or, more technically, a wider current account deficit).

 

So do bigger trade deficits really mean lower interest rates? Clearly not. The opposite is in fact far more likely to be true. Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits — which are handicapped by slower growth and higher debt.

 

The United States, it turns out, does not need foreign purchases of government bonds to keep interest rates low any more than it needs a large trade deficit to keep interest rates low. Unless the United States were starved for capital, savings and investment would balance just as easily without a trade deficit as with one.

 

***

 

Only the U.S. economy and financial system are large enough, open enough, and flexible enough to accommodate large trade deficits. But that badge of honor comes at a real cost to the long-term growth of the domestic economy and its ability to manage debt levels.

For the reasons outlined by Pettis, China – which has the world’s 2nd biggest economy (or 1st … depending on the measure used)  – doesn’t want the burden of housing the world’s reserve currency.

As such, China is pushing for a basket of currencies to replace the dollar as reserve currency.

Indeed, China – as well as Russia, the U.N. and many other countries and agencies – have called for the “SDR” to become the new reserve currency.  SDR stands for “Special Drawing Rights”, and it is a basket of 4 currencies – the US dollar
,  Euro, British pound, and Japanese yen – administered by the International Monetary Fund.

Jim Rickards – one of the leading authorities on currency, having briefed the CIA, Pentagon and Congress on currency issues – says:

China is not buying gold to create a new gold standard; rather it is aiming to make the Yuan more attractive, with the end result of being included in a basket of currencies, referred to as the Special Drawing Rate (SDR). He added that there is a move to make the SDR the new global reserve currency.

 

“Everybody knows that the U.S. dollar’s days are numbered but there is no really currency to take its place except for the SDR,” he said.

 

“What the world is trying to do is move to the SDR and China is fine with that.”

Rickards added that China’s goal of being in an SDR basket is the best of both worlds; the country can still have total control over its monetary policy and capital accounts but still influence global economics by being part of a basket of currencies.

 

“What the Chinese want is to have the Yuan in the SDR basket but not open up their capital account,” he said. “That is a backdoor way for the Yuan to be a de facto reserve currency without having to give up control.”

What’s Missing?

It is silly to exclude the Yuan from the basket of currencies.

Indeed, given that there are privileges and burdens of having the reserve currency, I would argue that – if we are going to move away from the dollar as sole reserve currency – all of the currencies of the world could be in the basket … in proportion to the size of their economies.   It is simple to look up the GDP of the world’s nations.

That way, each country would all share in the benefits and costs, in proportion to its size and strength.

(Obviously, some countries have such small or unstable economies that no one would want to settle in their currency.  To be realistic, they’d probably be dropped out of the basket.  But the ideal of including everyone is worth maintaining.)

Keynes and Other Economists Say We Should Use a Basket of Commodities

While having a basket of different things acting as the world’s reserve currency may sound like a new idea, John Maynard Keynes – creator of our modern “liberal” economics in the 1930s – promoted a basket of 30 commodities called the “Bancor” to replace the dollar as the world’s reserve currency.

The arguments for currency fixed on a basket of commodities – as opposed to currencies – was that it would stabilize the average prices of commodities, and with them the international medium of exchange and a store of value.

As China’s head central banker said in 2009, the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”. Likewise, China suggested pegging SDRs to commodities.

Economics Professor Leanne Ussher of Queens College in New York concludes that a reserve currency made up of a basket of 30 or so commodities would:

Reduce the disorderly swings in individual commodity prices … reduce supply constraints, stabilize costs of production, promote global effective demand from the periphery and balance growth between periphery and core countries.

Monetary expert Bernard Liataer – formerly with Belgium’s Central Bank – writes:

The idea of a commodity-based currency may seem to some a step backwards to a more primitive form of exchange. But in fact, from a practical point of view, commodity-secured money (for example, gold- and silver-based money) is the only type of money that can be said to have passed the test of history in market economics. The kind of unsecured currency (bank notes and treasury notes) presently used by practically all countries has been acceptable only for about half a century, and the judgment of history regarding its soundness still remains to be written.

 

With a commodity-based currency, a central bank could issue a New Currency backed by a basket of from three to a dozen different commodities for which there are existing international commodity markets. For instance, 100 New Currency could be worth 0.05 ounces of gold, plus 3 ounces of silver, plus 15 pounds of copper, plus 1 barrel of oil, plus 5 pounds of wool.

 

This New Currency would be convertible because each of its component commodities is immediately convertible. It also offers several kinds of flexibility. The central bank would agree to deliver commodities from this basket whose value in foreign currency equals the value of that particular basket. The bank would be free to substitute certain commodities of the basket for others as long as they were also part of the basket. The bank could keep and trade its commodity inventories wherever the international market was most convenient for its own purposes–Zurich for gold, London for copper, New York for silver, and so on. Because of arbitrage between all these places, it doesn’t really matter where the trades would be executed, as the final hard currency proceeds would be practically equivalent. Finally, since the commodities also have futures markets, it would be perfectly possible for the bank to settle any forward amounts in New Currency, while offsetting the risks in the futures market if it so desired.

 

This flexibility results in a currency with very desirable characteristics. First of all, the reserves that the country could rely on–actual reserves plus production capacity–are much larger than its current stock of hard currencies and gold. The New Currency would be automatically convertible without the need for new international agreements. Since the necessary international commodity exchanges already exist, the system could be started unilaterally, without any negotiations. Because of the diversification offered by the basket of several commodities, the currency would be much more stable than any of its components–more stable, really, than any other convertible currency in today’s market.

3 Choices for
a More Stable Money System

The 2 choices for reserve currency discussed above are using a (1) basket of currencies or (2) basket of commodities.

A third choice – which may be the best – is to use a mixture.

For example, we could have 50% currencies and 50% commodities.

That would give us some of the desirable characteristics (like stability) of a commodity basket, but not immediately move away from the fiat money systems which are now status quo for the current system.

Any of these 3 choices would give us far more stability and prosperity than we have today … without the chaos and misery – especially for Americans and perhaps Chinese – that switching to a Yuan-only reserve currency would bring.

Notes:  You might assume that public banking advocates would be for a currency-only basket. But Bernard Lietaer was one of leading public banking advocate Ellen Brown’s main teachers, and he is pushing for a basket made up solely of commodities.   (But public banking advocates might argue for adding currencies to the basket currencies to allow for some elasticity in the money supply.)

Gold standard advocates would obviously prefer commodities to currencies.  A basket of commodities might not have the simplicity of a gold standard, but it would accomplish a lot of the same goals.

As an American who wants stability and prosperity for my country, I think a basket would be the best option for a healthy future for the U.S.  And as someone who wants good things for the rest of the world, I believe that a basket would help to share political influence more widely.

BONUS:

Bill to Curb NSA Spying Introduced Today

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dplJ6c0oYr0/story01.htm George Washington

Not only would SocGen be shocked if the Fed made any significant policy shift this week, they appear to be finding “belief” in a growth renaissance hard to sustain in light of the dismal reality that keeps getting in the way of ‘faith’. Undertaking any policy shifts at this meeting would be akin to driving at night with no headlights, they note, taking the opportunity to slash Q3 and Q4 GDP expectations – pushing off hope for any Taper announcement until late Q1 at its earliest. Of course, they remain “fundamentally bullish” on US growth (or every assumption about the world would implode) but the mid-year inflection point they hoped for appears to be further into the future than they hoped.

 

Via SocGen,

We expect no material changes in the FOMC statement this week, with odds of the Fed either increasing or decreasing the pace of purchases very close to zero. The economy is currently going through a period of uncertainty following the government shutdown, and has yet to digest fully the impact of higher rates. Therefore, we expect the Fed to take this opportunity to take stock of recent events, but opt to wait for more clarity before making any policy adjustments. We are also taking this opportunity to update our own economic forecasts. By our estimates, Q3 GDP is currently tracking at 2.3%, marginally lower than our published forecast of 3.0%. We are also downgrading our Q4 projection from 3.6% to 3.0% to account for the negative effects of the government shutdown. This would put the full- year growth rate at 2.2% on Q4/Q4 basis. We continue to look for a meaningful acceleration next year to 3.2%. We believe that these forecasts are consistent with a tapering announcement in late Q1.

 

Undertaking any policy shifts at this meeting would be akin to driving at night with no headlights. Since the September FOMC meeting, visibility on the outlook has not improved at all and, if anything, has gotten worse. The Fed’s concerns about fiscal policy have materialized, though the impact on growth remains uncertain. And, although financial conditions are easing again (see chart below), the net effect is still one of reduced visibility.

 

In this context, it would be far more prudent to wait for more clarity on the economic outlook. This is precisely what we expect the FOMC to do, not just this week, but also at the December meeting. In the meantime, the Fed will likely use the next two meetings as an opportunity to take stock of recent events and evaluate their impact on the economy.

 

Hitting a reset button on our economic forecasts

 

We also take the opportunity to update our GDP projections to account for recent events. Data available to date suggests that the economy clocked in a 2.3% annualized growth rate in Q3, i.e. marginally lower than our published forecast of 3%. The chart below shows a breakdown of contributions to growth by sector. While nearly every sector of the economy has shown some deceleration vs. Q2, consumer demand is the major reason for our revision, with real consumption now assumed to have grown at just 1.5% (today’s retail sales will be the next key data input into this estimate). We are also revising down our Q4 forecast from 3.6% to 3.0% to account for the effects of the government shutdown and for the slightly weaker momentum coming out of Q3.

 

 

We remain fundamentally bullish on the US growth. Since the start of the year, we have been calling for an inflection point around mid-year as the last of the headwinds began to dissipate. While the government shutdown has prolonged the period of fiscal uncertainty, the reality remains that new austerity – above and beyond what was legislated at the start of this year – is quite unlikely. Policy uncertainty is also on a downtrend, notwithstanding recent spike. And, housing should continue to be supported by declining real mortgage rates.

So in summary, our bullish hope based forecasts missed by a mile, so we are taking a hatchet to them, time-shifting them, and hope that we will be right again at some point in the future…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lZNEjYsEUx8/story01.htm Tyler Durden

Not only would SocGen be shocked if the Fed made any significant policy shift this week, they appear to be finding “belief” in a growth renaissance hard to sustain in light of the dismal reality that keeps getting in the way of ‘faith’. Undertaking any policy shifts at this meeting would be akin to driving at night with no headlights, they note, taking the opportunity to slash Q3 and Q4 GDP expectations – pushing off hope for any Taper announcement until late Q1 at its earliest. Of course, they remain “fundamentally bullish” on US growth (or every assumption about the world would implode) but the mid-year inflection point they hoped for appears to be further into the future than they hoped.

 

Via SocGen,

We expect no material changes in the FOMC statement this week, with odds of the Fed either increasing or decreasing the pace of purchases very close to zero. The economy is currently going through a period of uncertainty following the government shutdown, and has yet to digest fully the impact of higher rates. Therefore, we expect the Fed to take this opportunity to take stock of recent events, but opt to wait for more clarity before making any policy adjustments. We are also taking this opportunity to update our own economic forecasts. By our estimates, Q3 GDP is currently tracking at 2.3%, marginally lower than our published forecast of 3.0%. We are also downgrading our Q4 projection from 3.6% to 3.0% to account for the negative effects of the government shutdown. This would put the full- year growth rate at 2.2% on Q4/Q4 basis. We continue to look for a meaningful acceleration next year to 3.2%. We believe that these forecasts are consistent with a tapering announcement in late Q1.

 

Undertaking any policy shifts at this meeting would be akin to driving at night with no headlights. Since the September FOMC meeting, visibility on the outlook has not improved at all and, if anything, has gotten worse. The Fed’s concerns about fiscal policy have materialized, though the impact on growth remains uncertain. And, although financial conditions are easing again (see chart below), the net effect is still one of reduced visibility.

 

In this context, it would be far more prudent to wait for more clarity on the economic outlook. This is precisely what we expect the FOMC to do, not just this week, but also at the December meeting. In the meantime, the Fed will likely use the next two meetings as an opportunity to take stock of recent events and evaluate their impact on the economy.

 

Hitting a reset button on our economic forecasts

 

We also take the opportunity to update our GDP projections to account for recent events. Data available to date suggests that the economy clocked in a 2.3% annualized growth rate in Q3, i.e. marginally lower than our published forecast of 3%. The chart below shows a breakdown of contributions to growth by sector. While nearly every sector of the economy has shown some deceleration vs. Q2, consumer demand is the major reason for our revision, with real consumption now assumed to have grown at just 1.5% (today’s retail sales will be the next key data input into this estimate). We are also revising down our Q4 forecast from 3.6% to 3.0% to account for the effects of the government shutdown and for the slightly weaker momentum coming out of Q3.

 

 

We remain fundamentally bullish on the US growth. Since the start of the year, we have been calling for an inflection point around mid-year as the last of the headwinds began to dissipate. While the government shutdown has prolonged the period of fiscal uncertainty, the reality remains that new austerity – above and beyond what was legislated at the start of this year – is quite unlikely. Policy uncertainty is also on a downtrend, notwithstanding recent spike. And, housing should continue to be supported by declining real mortgage rates.

So in summary, our bullish hope based forecasts missed by a mile, so we are taking a hatchet to them, time-shifting them, and hope that we will be right again at some point in the future…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lZNEjYsEUx8/story01.htm Tyler Durden