The World Wobbles
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“War’s going on across the sea, street soldiers killing the elderly. What ever happened to unity? It’s like that, and that’s the way it is.” --Run DMC
In my (controversial) January column, "How realistic is a North American Currency," we offered:
"As governments take on more risk—as they price assets on behalf of the market and transfer debt from private to public—the common denominator, or release valve, becomes the currency.
If our economic condition is allowed to take medicine in the form of debt destruction, the greenback will appreciate and asset classes, as a whole, will deflate. If we continue to inject drugs that mask symptoms rather than address the disease, the likelihood of a seismic readjustment increases in kind."
It continues,
"I've long contended that much like the Internet prophecy proved true—but not before the tech crash—so too would globalization, albeit not without painful yet necessary debt destruction.
To get through this, we need to go through this. If we’re not allowed to go through it, foreigners will seek alternative avenues. Remember, for holders of dollar-denominated assets, seeds of discontent have been sowing under the surface for years with the greenback off 30% since 2002. More likely than not, global leaders will watch how our new administration attempts to tackle the financial crisis before taking drastic steps. They understand codependent risk exists as a function of the derivatives that interweave our financial infrastructure. If they could disassociate from our economic ecosystem without inflicting massive damage on themselves, they would have done so long ago.
If forward policy attempts to induce more debt rather than allowing savings and obligations to align, we must respect the potential for a system shock—such as a two-tier currency—to gain traction if, and likely after, the dollar meaningfully debases from current levels.
If this dynamic plays out—I sincerely hope that it doesn't—the global balance of powers would fragment into four primary regions: North America, Europe, Asia and the Middle East. In such a scenario, ramifications would manifest through social unrest and geopolitical conflict.
This particular path isn’t something one would wish for but the cumulative imbalances that steadily built in our finance-based economy must be resolved one way or another. Therein lies the critical crossroads we together face as our wary world attempts to find its way."
Why am I quoting myself? You mean, other than being a narcissist?
I draw your attention to those thoughts as a context for two recent data points. First, the saber rattling in Russia and second, the "Buy China" policy that is part of its new stimulus program.
There are two sides to every trade and the "other side" of globalization is protectionism, isolationism and, potentially, every man (or country) for themselves. This isn't a thought for the day as much as an evolving dynamic worth watching as it will set the stage for future generations.
Food for thought as we together find our way.
R.P.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.
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Thing is they are both right. China needs to direct their efforts inward if they hope to create a viable and thriving economy. They can no longer afford to neglect their citizens. They must distribute the rewards of their economic growth to their own people if they are to have any hope maintaining a civilized nation.
And Russia and the BRIC is right; to rely on one reserve currency in this global economy is really consolidating risk and exposes the entire system to continued volatility.
The fact that these issues are on deck is comforting because it signals that outside the "Good Ol' USA" somebody get's it and they have the where with all to do something about it.
Minyan Terry
Hughio Ooffdahfious was the son of Dahheaded Polish immigrants who in his early years realized the need to change his first name to Ken and later assumed the last name of his first wife Lewis. This gave him the Americanization needed to achieve success in becoming the manager of the largest Bank of America. With the help of a Dahheaded President who favored deregulation and had a blind eye to leverage and a penchant for war mongering and booze Ken was able to risk money that was not his to a level not known since the Great Depression. He built a house of cards financed with leveraged Fiat money then insured it to the hilt with bogus promises backed by a truckload of Dah from AIG. He later bought into a defunct brokerage house which was up to its Arse in crocodiles and more Dah which increased his leverage ratio even more. Not wanting to panic his shareholder he kept a tight lip and bought a pair of hip waders. Now he is up to his ears in Dah and swimming in a cesspool with other bankers and wondering why in the hell did He ever change his name from Ooffdahfious.
Backed into a corner of to big to fail Hughio faces another challenge of to big to absorb and thus lacks the option of deleveraging by way of destroying shareholders and debt holders like WaMu, Indy-Mac, Wachovia and Countrywide did and so he faces a Black Swan who may have to nationalize his bank. In a last ditch effort he may climb the Bean Stock in search of Zombie Bankers and move his Bank Headquarters into the shadows of the Bean Stock itself. In the shadows he could resume being non transparent and bury his Dahhead in the sand in hopes that time will cure his problems or he could strap on some Sac and apologize to his shareholders and the nation. It would make no sense to strap on a set of wings and try to fly away. Everyone knows that pigs can't fly except in fantasy land.
LOOOOK! Zee Plane! Zee Plane. Ooof Dah. .
Whoops! (Dead Cat Bounce)
JPM
We are expected to accept the destruction of our economic infrastructure at the hands of mercantalist, centrally controlled export economies as inevitable and even desirable on the grounds of 'efficiencies of production'.
This is insanity. It is and has always been every nation for itself.
'Globalization' is just the smoke screen being used to hide what is going on. THe US is the only country that does not seem to get it.
The 'Little Red Book' by Chairman Mao Tse Tung widely distributed in the 1960s should be required reading by anyone defending 'globalization'. It is the game plan for what is being done to Western economies and China is right on plan. To persist in self destructive national trade policies while the manifesto outlining how those policies will bring the downfall of the west is right up there with the SEC ignoring the red flags pointing to the Madoff scandal.
There really is a limit to how much stupidity any nation can endure, even a nation as great as the USA once was.
Great article.
I just wanted to mention something about Latvia. They may have a currency readjustment. And according to RGE Monitor two reasons were given:
1. A failed debt auction
2. Deflation would take too long to adjust wages and prices and extend the recession
I am in the deflation camp, but #2 gives me the greatest concern. It would be a real #2 to savers if we end up doing that here, sometime in the future
A simple 30% VAT on all things chinese would work
Your brief for but salient and probative comments here should be required reading for all.
Nice article Mr. Harrison, spot on.
