Sunday, November 07, 2010

Are We There Yet?

With the US$ sinking and Gold setting new highs every few days those, like me, who have been waiting for the final collapse of the current $ based international financial system have one question on our minds- “are we there yet?”

“Not yet.  But we’re getting very close.”

This past week the US electorate, in a fit of justified pique over Democratic failure to fix the broken (at least from the perspective of the majority of US citizens) economy, put Republicans back in charge of the House of Representatives.  Big Finance must have viewed election results with glee.  Gridlock, as we Americans lovingly refer to government divided and thus incapable of passing radical legislation, means the Volcker Rules (or other meaningful financial reforms) have an even slimmer chance of becoming law. 

Coincidentally, the Federal Reserve announced plans to buy, during the next 9 months, $600B of long dated US Treasuries- a policy they refer to as “quantitative easing”.  I prefer “monetizing debt” to avoid confusion.   

While Big Finance in the US celebrated the return of Gridlock and the gift from the Fed, our foreign financiers most likely took a less sanguine view of the policy changes.  US banks will soon be free to take even bigger risks while the Fed actively drives the value of the US$- the ultimate “asset” our financiers are promised- ever lower. 

The wonderfully apt, in this case,  phrase, “thick face,” no doubt crossed many Chinese minds as they pondered US Treasury Secretary Geithner’s proposed current account targets to “accelerate global rebalancing” in the context of US debt monetization and ever more impotent regulation of the big banks who have led the world to the current impasse. 

To wit-  Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday, “We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.”
It seems to me a sign of the times that Mr. Geithner didn’t respond to current concerns over the declining $ as Nixon’s Treasury Secretary, John Connally once did, i.e. the US$ “is our currency, but your problem.”  The swagger of US policy makers evident in decades past is now shrouded in sophisticated euphemism- but the effects will be similar.

“But, are we there yet?”

“Not yet.”

There is, in my view, one last road sign before we reach our destination.  When the US Bond Market begins to “fight the Fed”- a strategy normally as wise as spitting into the wind- we will begin the end stage of our journey to a new system of international finance.  When US Bond prices fall despite Fed intervention (better yet, when bond prices fall on news of increased intervention) the excrement will be about to hit the fan in international finance. 

We must, however, be getting close.  I noticed the Fed established the Office of Financial Stability and Research this past Thursday.  Talk about closing the barn door after the horses have all escaped.


nilys said...

I ask everyone who is being critical of the current financial authorities: do you have a better plan that could be actually implemented?

To me it seems that we are all slaves of the current arrangement. Everyone does what they have to do, including the FED whose job it is to keep the unemployment down and CPI inflation at a certain level. And so the FED does what it's role is under the current system.

The big multinationals keep pocketing the labor arbitrage and sacrificing long-term growth for short term profit and share price. To the banks the labor arbitrage is not available, so they support their profits by pillaging the local population through usurious landing and robing the taxpayer through bailouts.

The wealthy labor to preserve and increase their wealth by any means, including through a control of the government and political discourse. The populace is still infatuated with large houses, gas-guzzling cars and the stock market. If you are a laborer and have a 401K, you would get raped on wages and compensation, but, hey, could get back some of those rape profits back through dividend and share appreciation.

I doubt any of these actors would voluntary relinquish their purposes and motivations until the whole arrangement is exhausted and no longer workable. We have to walk a path of the logic of these arrangements until the very bitter end. To me it seems a more productive undertaking would be to image a new world that would come after the end.

Dude said...

I agree, the world is most often enslaved by the arrangements, monetary and otherwise, that have been previously imposed (or agreed upon, depending on perspective).

Those arrangements all have life spans (which may or not may not be evident upon conception). My view is not so much a critique but an acceptance of such lifespans.

We had a good run, as have many nations before, and our time at the top of the heap is, for now, at least, soon to be at an end, or so I believe.

In hindsight future students of political economy might come to the view that our time at the top was very skillfully managed, even though it, by its nature, had to eventually end.

rjs said...

i think you're missing part of the broader picture of what's going on here, dude; you have missed the mess the banks have made of mortgage securitization which has come to light in the past few months...they've been using an electronic system for property transfers bypassing the state real estate laws...there is now speculation that the entire RMBS
market could be in jeopardy, as the actual notes may have never been rightly conveyed to the RMBS trusts, thus invalidating those detailing of that is probably here; thus i think that this new round of QE is a continuing of the ongoing bailing out of the's my perspective;

as a tie in to my speculation with more troubles at the banks (not included in theabove), LPS (lender processing services) reported last week that the average delinquent loan now in foreclosure had not made a payment for 484 days, with the delinquency time in five states (NY, NJ, FL, HI,& ME) now over 500 days...while the fraudulent foreclosure problems continue, the larger problems stem from lawsuits alleging deficiencies in mortgage backed securities packaged & sold by the of america notified shareholder in their 10Q (quarterly disclosure) that they were facing repurchase lawsuits amounting to $375 on mortgage securities, while the citigroup 10Q noted that they "cannot at this time estimate the possible loss or range of loss"...since real estate owned by govt agencies (fannie, freddie & FHA) increased 24% in the 3rd quarter, there's speculation that the banks are saddled with a similar amount of unproductive properties they must upkeep...

Dude said...


It seems to me there is a difference between an essay leaving out aspects of an issue a reader finds crucial and a person "missing the broader picture." I'll assume you meant the former and I've written quite a bit on the problems with mortgage bonds (The Mortgage Option @ is one such).

I didn't intend the essay as a comprehensive study of causal factors, but rather a quick view of the final piece in the puzzle if one was of a like mind with respect to an upcoming sea change in the global financial system.

rjs said...

you're right, dude, it was my poor choice of words...and btw, the number on the BofA 10Q should be $375 billion...goes to show how anyone could leave out a critical piece of information...

Dude said...


I'm not sure of the source of the BoA figure to which you refer but I'm sure there are many such transcription (if not outright conceptual or semantic) errors in my writing.

Thanks for catching the problem (if I only knew which article to edit).

rjs said...

it wasnt your error; it was mine...i was quoting a BofA figure in my previous comment and noticed i'd left the "B" off $375...