The Stench of US Economic Decay Grows Stronger

By Paul Craig Roberts

November 29, 2010 “Information Clearing House” – On Thanksgiving eve the English language China Daily and People’s Daily Online reported that Russia and China have concluded an agreement to abandon the use of the US dollar in their bilateral trade and to use their own currencies in its place.  The Russians and Chinese said that they had taken this step in order to insulate their economies from the risks that have undermined their confidence in the US dollar as world reserve currency.

This is big news, especially for the news dead Thanksgiving holiday period, but I did not see it reported on Bloomberg, CNN, New York Times or anywhere in the US print or TV media. The ostrich’s head remains in the sand.

Previously, China concluded the same agreement with Brazil.

As China has a large and growing supply of dollars from trade surpluses with which to conduct trade, China is signaling that she prefers Russian rubles and Brazilian reals to more US dollars.

The American financial press finds solace in the episodes when sovereign debt scares in the EU send the dollar up against the euro and UK pound. But these currency movements are just measures of financial players shorting troubled EU-denominated debt. They are not a measure of dollar strength.

The dollar’s role as world reserve currency is one of the main instruments of American financial hegemony. We haven’t been told how much damage Wall Street fraud has inflicted on EU financial institutions, but the EU countries no longer need the US dollar for trade between themselves as they share a common currency. Once the OPEC countries cease to hold the dollars that they are paid for oil, dollar hegemony will have faded away.

Another instrument of American financial hegemony is the IMF. Whenever a country cannot make good on its debts and pay back the American banks, in steps the IMF with an austerity package that squeezes the country’s population with higher taxes and cuts in education, medical and income support programs until the bankers get their money back.

This is now happening to Ireland and is likely to spread to Portugal, Spain, and perhaps even to France. After the American-caused financial crisis, the IMF’s role as a tool of US imperialism is less and less acceptable. The point could come when governments can no longer sell out their people for the sake of the American banks.

There are other signs that some countries are tiring of America’s irresponsible use of power. Turkey’s civilian governments have long been under the thumb of the American influenced Turkish military. However, recently the civilian government moved against two top generals and an admiral suspected of involvement in planning a coup. The civilian government further asserted itself when the prime minister announced on Thanksgiving day that Turkey is prepared to react to any Israeli offensive against Lebanon. Here is an American NATO ally freeing itself from American suzerainty exercised through the Turkish military. Who knows, Germany could be next.

Meanwhile in America the sheeple remain content with, or blind to, their role as sheep to be slaughtered to feed the rich. The Obama administration has managed to come up with a Deficit Commission whose members want to pay for the multi-trillion dollar wars that are enriching the military/security complex and the multi-trillion dollar bailouts of the financial system by reducing annual cost-of-living increases for Social Security, raising the retirement age to 69, ending the mortgage interest deduction, ending the tax deduction for employer-provided health insurance, imposing a 6.5% federal sales tax,
while cutting the top tax rate for the rich.

Even the Federal Reserve’s low interest rates are aimed at helping the banksters.
The low interest rates deprive retirees and those living on their savings of interest income. The low interest rates have also deprived corporate pensions of funding. To fill the gap corporations are issuing billions of dollars in corporate bonds in order to fund their pensions. Corporate debt is increasing, but not plant and equipment that would produce earnings to service the debt. As the economy worsens, servicing the additional debt will be a problem.

In addition, America’s elderly are finding that fewer and fewer doctors will accept them as patients as a 23% cut looms in the already low Medicare payments to doctors.

The American government only has resources for wars of aggression, police state intrusions, and bailouts of rich banksters. The American citizen has become a mere subject to be bled for the ruling oligarchies.

The police state attitude of the TSA toward airline travelers is a clear indication that Americans are no longer citizens with rights but subjects without rights. Perhaps the day will come when oppressed Americans will take to the streets like the French, the Greeks, the Irish, and the British.

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand.

BRIC Nations: The Fundamentals

By Chuck Butler

10/14/09 St. Louis, Missouri

A few years ago, someone coined the term: BRICs. This was an acronym for the countries of Brazil, Russia, India, and China. Before the huge deleveraging of risk assets leading up the collapse of Lehman Brothers in the fall of 2008, the currencies of these 4 countries were very strong versus the dollar, and growing in global prominence.

But then came the huge deleveraging of risk assets beginning in July of 2008. There’s an old saying that when established currencies that are widely traded and very liquid, get grounded, the emerging market currencies (like the BRICs) get sent to the woodshed. And so, we had the BRIC currencies lose major ground to the dollar during this period of time.

However, in March of this year, the non-dollar currencies began to rebound versus the dollar once more. This rebound in the established currencies like, euro, francs, yen, and Aussie dollars, has led to an even stronger rebound in the emerging market currencies, including the BRICs.

So… I thought it best to take a step back, and look at the fundamentals of each of the BRIC countries, and see if the stage if set for yet another strong run on the dollar.

Before we start though, I wanted to tell you the two reasons I originally put these countries together to form EverBank’s BRIC MarketSafe CD.

In the spring of 2009, China was making noise about the need for a new reserve currency to replace the dollar. The other BRIC nations joined in and at the next G-7 meeting, all four nations stood up and wanted to be counted as countries that want a new reserve currency, for they had see enough deficit spending in the US to convince them the dollar had no other avenue to follow but down.

The “markets” sort of shrugged off the BRIC nations call for a new reserve currency to replace the dollar. But I looked at it differently. I saw nations that had HUGE Treasure chests of dollar reserves, and nations that currently have a very large portion of the globe’s population. I believed then as I do now, that these countries would need to be reckoned with, and eventually their cries for a new reserve currency to replace the dollar would be heard, loud and clear.

Since we announced the creation of the BRIC MarketSafe CD, where an owner of the CD receives the positive gains in the currencies over 3 years, but does not experience any currency risk, as the CD has 100% principal protection, the BRIC nations are receiving more notice!

At the last G-20 meeting, of which the BRIC nations are a part of, it was announced that the watchdog duties for the global economies were being taken over by G-20 (from G-8). And a week later, the G-7 Finance Ministers suggested that G-20 take over the currency watchdog duties!

Now G-20 has both global economies and currencies under their watch and care, and the BRIC nations are right there to offer their suggestions…

So… Now that we’ve gone through the background, let’s take a look at the current fundamentals of these four nations, to see if the prospect of further potential currency appreciation is warranted.

First up… Brazil!

Brazil was the first Latin American country and first in the Americas to see its economy grind out of its recession. Brazilian GDP for 2009 overall will probably be just a nick over flat, while the forecasts for 2010 GDP show that economic growth will expand by 3.8%, as firmer domestic demand leads the economy.

For instance, Brazil’s recent Industrial Production output grew 1.2% in August, which was the eighth consecutive month of growth.

Brazil currently enjoys a Trade Surplus of 1.5% of GDP, with forecasts for the Surplus to also grow to 3.1% of GDP by 2011.

Overall, Brazil’s Current Account Balance is a narrowing 1.1% of GDP Deficit… as the economy gets back on track; the Current Account Deficit is expected to grow to 1.5% of GDP.

These are “manageable” deficit figures, and ones that would be welcomed in many countries of the world.

Inflation as always been a problem in Brazil, but assuming no economic shocks, and a strong currency (the real), it is expected that inflation could fall to 4.1% by year-end 2009, and remain stable throughout 2010-2011.

Brazil is one of the world’s largest democracies and emerging markets, which leads one to believe that their influence on the international stage will only continue to grow. Recently, China has moved past the US as Brazil’s top trading partner. It is believed that Brazil and China will sign a currency swap agreement that would remove the dollar in trade settlements. I’ll talk more about this in the “China segment”.

The prospects for the real are good. However, one must always remember, that even with strong economic fundamentals, any mass sell off of risk assets, would be magnified for an emerging currency like the real.

Next, we have Russia…

When we announced the BRIC MarketSafe CD, I received a lot of responses to the announcement with wishes that we had not included Russia in the CD. Well, it wouldn’t be a BRIC without Russia!

I told people that in essence, the only way I would buy Russian rubles is in a MarketSafe CD, and that the only way to look at Russia was as an “oil play”…

Who among us believes that oil prices will continue to remain in the $70 a barrel range?

OK… now that we’ve played that game… Let’s get to the data!

Russia went against the flow in September, by cutting their base interest rate, when it was believed that a good number of countries around the world were preparing to begin rate hike cycles.

Russia’s economy is still mired in a deep recession, as witnessed by the 10.5% fall in GDP from a year earlier, and industrial activity contracted by 12.6% in August!

Russia’s economy had seen two consecutive months of growth before this step backwards in August, and thus the rate cut in September. There are only mixed signs that the recession in Russia has bottomed out. But that means the Russian ruble is much cheaper than a year ago, and will probably remain weak as long as 1. The price of oil remains in the $70 range, and 2. The Russian economy remains mired in a deep recession.

Growth for 2010 is forecast to be 3.5%, which would mean that Russia’s recession will have ended late in 2009. An end of the recession and economic growth are very dependent on the persisting problems of the bad assets on the books of Russian Banks.

So… the rebound in the ruble may take some time to come to fruition. The good thing about that is that the ruble will remain cheap for new buyers.

Next… India…

India has maintained strong economic growth through the global financial meltdown, and will post a very impressive growth of 5.5% this year. This does represent a sharp deceleration from the 10% growth rates during the go-go years before the global financial meltdown. So, while 5.5% growth is lower than previous growth rates, it remains one of the best rates of economic growth in Asia!

Economic growth in India is forecast to grow 6.3% in 2010 as private consumption, investment and trade growth all show renewed strength.

Inflation in India, at present is not a problem coming in at 1.3% in 2009. However, as domestic growth takes hold, inflation is expected to rise to 5.1% in 2010.

The Indian Central Bank will continue to fight inflation, probably raising rates as we go along in 2010. The higher interest rates will go a long way toward additional currency strength.

India does not have a problematic current account deficit, like many emerging market countries. With rising exports at a 9.6% rate, the current account deficit will be the equivalent of 0.5% of GDP… Future growth in India will present itself as a problem as far as the Current Account Deficit is concerned. But it will remain manageable, and again, not the stuff that some countries experience.

The prospects for the rupee remain strong going forward.

And, last on the roster, but number one in the hearts of the fans….

China…

This is the proverbial 200 lb gorilla in the room! China has long been on my mind as the most undervalued currency on the planet, and as long as the Chinese government has their hands on the purse strings of the renminbi, it will remain that way.

However, there are signs that the Chinese government is looking to widen the use of the renminbi, which would eventually lead to more of a free float or at least a wider band of currency movement allowed.

The IMF recently wrote that the renminbi remains the most undervalued currency at probably a level of 40% undervalued versus the dollar. As long as the renminbi’s daily movement is controlled so strictly by the Chinese government the renminbi will not be allowed to cut into that 40% figure by very much. However, with the signs of a wider use of the currency, it is thought that the renminbi could be allowed to float more in the future.

What is this “wider use” I’m talking about? Well… you see, the renminbi is not a transactional currency, it is not liquid, and is traded on what’s called a “non-deliverable forward”. Which simply means it cannot be converted to physical form, or deliverable form.

It is my belief that China is taking baby steps to one day, have their currency take over the title of reserve currency of the world replacing the dollar. And to do this, the Chinese must begin to obtain a wider use of their currency.

They began this process by signing currency swap agreements with most of the Asian countries, and then moved on to Argentina. As I said earlier, it is believed that China will soon sign another of these currency swap agreements with Brazil.

The currency swap agreement between two countries eliminates the dollar from any transaction between the two countries, and only uses the currencies of the two respective countries. This is the “first step” toward gaining a wider use.

The “second step” came in September when China issued renminbi denominated bonds in Hong Kong. These were the first renminbi denominated bonds issued by China.

A wider use, in my mind, is equal to a stronger renminbi versus the dollar going forward.

Now for some data!

China’s GDP is expected to grow 8% in 2009, and 8.6% in 2010. China’s economic recovery this year has been fueled by government stimulus. But Hey! China has a treasure chest of reserves and surpluses… So, if any country was going to spend some money to boost their economy, China would be the one, for they have the money to do so!

And… with China being a Communist country, they were able to dictate where and to whom the money was being directed to, and how it was to be spent. This has gone a long way toward seeing the results of China’s stimulus.

Inflation remains a problem in China, and the sooner the Chinese realize that a strong currency can go a long way toward fighting inflation, the better!

So… For now, the renminbi remains pegged to a basket of currencies, and controlled by the Chinese Government, through the Chinese central bank. However, there are signs that this arrangement for the currency is changing, and a wider use of the renminbi is the objective… If that’s the case, then the prospects for a potentially stronger renminbi versus the dollar are very good.

And that’s how I see the BRIC currencies/ countries…

Regards,

Chuck Butler
for The Daily Reckoning

Link to Article

The Sun Sets on the West

By Chris Mayer

What will the global economy look like in 2050?…and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63- year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

China ought to be the world’s largest economy by then, Faber predicts. The economies of the U.S. and India, should be neck and neck for the No. 2 spot – about 60% of the size of China’s. A distant fourth, at maybe a quarter of the size of the U.S. economy, will be Brazil, followed closely by Mexico, Russia, Indonesia and Japan.

That’s a very different world than the one we live in now, where the U.S. is No. 1 by a large margin and the European countries, such as Germany and the U.K., still figure prominently. What interests us most, though, is not so much the destination of 2050, but the path of growth to get there.

There are as many ways to show this growth trend as there are golf balls in the water at No. 15 at my local golf course. But Faber cites the trend in motor vehicle sales to illustrate the trend.

You can see that the “emerging 16? – the largest of the emerging markets, which includes China and India – caught up and passed the U.S., the European Union and Japan in 2008 as the world’s largest auto markets. What’s interesting here is that even in this recession that gap has widened.

There are all kinds of ideas that spin out of just that one observation. Cars don’t operate in a vacuum. They require an entire operating system to run, as software does. You need roads, for instance, and you need gasoline stations and gasoline. You need a lot of oil.

Just think about oil for a minute. The U.S. eats up about 25 barrels of oil per capita per year. Even countries such as South Korea and Japan consume around 15-20 barrels of oil per capita per year. China and India are tiny compared with that. China is at 1.5 barrels of oil per capita annually. And India barely registers.

So one can only imagine that as these economies grow and take up more of a share of the global economy, their oil consumption will rise exponentially. As far as investing goes, it boils down to investing in what these economies need, but don’t have.

In other words, we ought to ask the question, “For which commodities will demand not collapse?” Faber presents a chart that provides a partial answer. The chart presents China’s proven reserves of each commodity as a percentage of the world’s total reserves.

 

This chart does not include the agricultural commodities like soybeans and potash that China has in very short supply, but the chart does include many other important (and investible) commodities like copper, natural gas, uranium, bauxite (important in making aluminum), chromium (a steel additive) and manganese (important for making stainless steels). As investors, the left-hand side of the vertical line on the chart is where you want to be.

The commodities bull market, Faber ventured, is still on, though he cautioned that the road will be bumpy.

Even in commodity bull markets, 50% corrections are common.

“Hard asset booms are fueled as much by pessimism about economic prospects as by optimism about a continuously high appreciation of the commodity in question,” Faber explains. “In this sense, commodity booms are characterized by greed based on fear.”

On the question of the dollar, Faber was emphatic that we would see it lose value against the real world of things. Faber predicted that sooner or later we would have major inflation thanks to government stimulus and money printing. Therefore, Faber is long gold and silver.

He also thinks Japanese equities are depressed and points out that many Asian equities are near 20-year lows, except China’s. He also likes financial services in emerging economies and infrastructure stocks. On this latter idea, Faber said, “There are bottlenecks everywhere,” and noted a potential problem of delays or cancellations. He likes farmland, too.

As for what to avoid, Faber says turn your nose up at real estate and government bonds. There are also potential oversupply problems in tourism, with too many hotels, resorts and the like. Faber cautioned against these industries…and there are certainly too many government bonds as well.

We’ll see how it plays out, but I’m with Faber. The world is changing dramatically. And it’s the emerging markets that will provide the light at the end of the tunnel.

The Economy: Fixers Aim to Fix Fixes With Another Phony Fix

By Bill Bonner

From California comes word that the summer program of Singularity University came to an end this week. The idea of SU is simple enough. Put smart people together with the latest technology; let them figure out solutions to the world’s problems.

‘The Singularity’ is an idea from Ray Kurzweil. The gist of it is that computers will soon be smarter than humans; by the middle of this century they’ll be smart enough to figure out how to get smarter and smarter, faster and faster.

No doubt, many of them will go into finance. And no doubt, many will make a fast buck. But will more smartness really make the world a better place? According to the singularists, increased brainpower will be able to solve all sorts of problems – from global climate change to market crises.

But the brain is a big disappointment. No mechanical engineer has ever improved the old-fashioned kiss. Nor has any brain ever straightened out the business cycle. Dumb as a slide rule, the brain does what it is told to do; it doesn’t ask questions. Tell it to build a bridge and it is on the case. Put it to work packaging tranches of toxic assets or selling aluminum siding…it is just as happy with one task as with the next. And the more a man’s brain bends to a challenge, the more it elbows out of the way his finer senses…and the dumber the man becomes. He turns his back on his own intuition as well as the accumulated wisdom from previous bust- ups and bruises. Like a man who has gone crazy, as G.K. Chesterton put it, all he has left is his sense of reason. Then, with nothing more to work with, he comes down on his work like a blacksmith’s hammer on a fine Swiss watch.

During the bubble period, the big banks were the biggest employers of top graduates from the world’s top schools. Oxford, Cambridge, Harvard, Yale…the financial sector drew them in like flies to an open latrine. The financial industry made so much money it had a hard time explaining it. The smart dudes did not toil in the fields, neither did they spin. Then, what did they do? They earned millions, bought BMWs and got dates with actresses. They claimed they were doing a fine job of allocating the world’s wealth and making everyone better off.

But when the bubble blew up, it was apparent that the financial world they created was fragile and perverse. Not a single one of the largest Wall Street banks survived without government handouts. And a news report from this week tells us that Americans were so damaged by the Bubble Epoque that their discretionary spending has now been cut to levels not seen in 50 years. The geniuses wiped out a half- century of economic progress in the richest, most successful economy the world has ever seen.

Smart people were also to blame for the biggest single error of the last century: central planning. The central planners thought they could fix the supposed evils of the natural economy with logic and reason. The idea was so alluring half the world fell for it. If the Nobel Committee had been on the ball they would have given Karl Marx a prize.

If the bug had come from stupid people…smart people might have avoided it. They might have come through the period without permanent scaring. But the wheezy intellectuals behind it were too clever for their own good. They soon infected the top universities…and the government. They convinced almost everyone that central planning was the wave of the future and that anyone who stood against it was a bumpkin, a parasite or a fool. Then, in the name of human progress, they took control in two of the world’s largest countries and turned them into prison camps.

But by the last decades of the 20th century it was obvious even to central planners themselves that it wouldn’t work; in both Russia and China, the planners simply gave up.

Central planning didn’t work because people had plans of their own. They resisted. Then, the planners brought down their hammers. “If you’re going to make an omelet, you have to break some eggs,” said chef Vladimir Lenin. The “Black Book of Communism” puts the death toll as high as 100 million.

Then too, central planning didn’t work for less obvious reasons. Planning requires information. The planners had plenty of it. But private individuals had far more – local, current, more accurate information from first-hand observation and experience. With better information, they could make better plans. Most important, individuals didn’t limit themselves to only the fresh fruit of their rational brains. They put their hearts in it…and drew on instinct and tradition – the distilled spirits of previous generations – giving them a huge advantage over the apparatchiks.

But the brains kept at it. When the forensic experts sifted through the debris from the 2007-2008 financial blow-up they found fingerprints from a whole list of Nobel winners. It was they who had developed the formulae and the theories that deceived investors, and themselves. They believed they could tame risk…by calculation! They figured out the odds and worked out prices – to as many decimals as needed to put investors to sleep. And then along came a risk they had not foreseen – the risk that their own formulae were claptrap and that they were idiots.

Meanwhile, the brains were at work in the public sector too. There, they were still pushing central planning…albeit on a much less ambitious scale than in the last century. In Western countries, government economists fixed lending rates and credit policies in order to encourage over-consumption. In the East, they fixed exchange rates and recycled credit back to their customers in the West in order to encourage over-production. And what ho! Wouldn’t you know it; now the world has too much debt and too much capacity.

And so the brains are back on the job. In China, the government boosts production. In America, the central planners are trying to boost consumption. In short, the fixers are still fixing. And soon, the world will be in an even worse fix than it is now.

A Silkier Road

By Chris Mayer

Change is like a pin to the balloons of conventional wisdom. Just when people settle into their views, here comes the pin.

For instance, it’s become widely accepted when talking about emerging economies to focus on the so-called BRIC countries – Brazil, Russia, India and China. But there is a very important region that gets lost in that discussion.

In fact, this region collectively has a bigger economy than Brazil, Russia or India. And in terms of growth, it is growing faster than any of these countries. In terms of population, it’s bigger than the U.S. and nearly as populous as the EU. It holds 60% of the world’s proven oil reserves and nearly half of its natural gas.

That last clue probably gives it away. I’m talking about the Middle East and North Africa, or MENA.

Among its largest economies are Saudi Arabia and the United Arab Emirates.

In one of my presentations at Vancouver, I focused on the growth in these economies because it touches on nearly everything we’ve talked about here recently – water and food scarcity issues, infrastructure needs, energy and the growth in non-U.S. trade. To start, let’s look at a couple of basic facts that push this along.

The first is explosive population growth. MENA is one of the fastest-growing regions in the world. Over the last 50 years, MENA’s population is up more than fourfold. And the population is still young, with the majority of the population under 25 years old. Over the next 30 years, MENA’s population will grow more than 60%, to nearly 700 million people.

The second is that trade is expanding in this part of the world, as I highlighted in last month’s letter. To show this in a different way, let’s look at Syria.

Yes, Syria. Long a pariah state with which the U.S. maintained frosty relations, all that is beginning to change. In July, the U.S. made a couple of announcements that I thought signaled an important shift. First, the U.S. would send an ambassador to Damascus after a four-year absence. Second, the U.S. would ease export bans to Syria.

But more important than this political thaw is the economic story. Syria has been a mercantile crossroads between East and West since its days as a link on the old Silk Road.

The ancient city of Aleppo, for instance, was a key stop along the old Silk Road. Even today, it still has the longest covered market in the Middle East – a souk seven miles long. There you can find goods that take you back in history – soap made from olive oil or silk scarves and keffiyehs of a variety of colors. Head down an alleyway and find gold jewelry and stands of fresh pistachios and sacks of spices and more. Then there are the backstreets of hawkers with lamb – always plenty of lamb – and you smell the scent of lime, garlic and mint.

But much has changed, as Ben Simpfendorfer relates in his book, The New Silk Road. Today, for the first time in 22 years, banks in Syria can set their own interest rates on loans and deposits. Today, you can change money on the street without the threat of a ball and chain winding up around your ankles. A stock market even opened for business in March.

The largest investor in the country is Haier, a Chinese company. It makes 50,000 washing machines and 50,000 microwave ovens in Syria every year. Another Chinese company, Sichuan Machinery Import & Export, recently completed a $180 million hydroelectric plant here. There are big real estate projects, including a new $300 million resort on the Syrian Mediterranean coast. There are some 40,000 new hotel beds coming online in the next three years – up from 48,000 currently. Tourism is already 13% of the economy.

Syria is basically following the “China model” of maintaining a closed political order but carving out free zones and allowing trade.

Of course, this isn’t some Big Rock Candy Mountain fantasy where the sun shines every day on the birds and the bees and the cigarette trees. There are all kinds of problems in Syria, and elsewhere, but I find the changes taking place so far absolutely remarkable.

In a sense, we’ve seen this movie before. Roger Owen wrote the classic study on the Middle East and its place in the economy. In his book, he covers the period 1800-1914. This was a time of growth and transformation. At least a few points are similar to today. Then, as now, the region experienced a huge population growth. The Middle East’s population alone grew 300%. Then, as now, trade grew even faster under a more liberalized economic regime.

Then, the Middle East benefited from growing demand for agricultural goods from European markets. (Somewhat ironic, in view of the situation today.) Today, the region benefits from expanded trade with China and the rest of Asia for the region’s oil.

The most interesting thing about this growth is that it is happening in a part of the world where it is most difficult to grow food. Water is scarce. MENA consumes far more water than it gets via rainfall. In some places, the disparity is dramatic. In Kuwait, for instance, annual water consumption is 22 times annual rainfall. No wonder the whole area is a net importer of food.

The Middle East is the world’s largest regional importer of food. Egypt, for instance, actually imports more wheat than China. The GCC countries – or Gulf Cooperation Council countries – will import 60% of their food by 2010. And it’s likely to get worse. Saudi Arabia aims to phase out wheat production by 2016 to conserve water.

For this reason, these MENA countries are looking to invest in farmland overseas. The Saudis have grabbed farmland in Indonesia. The UAE has locked down farmland in the Sudan and Pakistan. As Eckart Woertz of the Gulf Research Center in Dubai says: “In a global food crisis, you may find it difficult to secure food supplies at any price no matter how many oil revenues you have.”

Move over BRIC! There’s a new acronym in town, and its name is MENA!

The Golden Achilles Heel

The Golden Achilles Heel

Three Super Powers are confronting one another:  the USA, China and Russia.

Nuclear option is not on the agenda because of M.A.D (mutual assured destruction)

At stake are the controls over:

global finance and markets,

the world’s energy flow and

the world’s prime resources.

The battlefields:

the currency and bond markets,

the global share and commodity markets,

the oilfields, pipelines, mineral concessions,

global transport routes,

the realm of public opinion.

Here we are not touching on the military aspects of confrontation, but on:

The fierce undercover battle that is being fought by means of:

Bribing politicians and governments

Financing opposition parties in unfriendly countries

Arming terrorist organisations in enemy territory

Influencing foreign elections (Colour Revolutions)

Promoting friends into key positions in foreign countries

Manipulating own as well as “unfriendly” currencies and markets

Placing agents abroad through NGOs, International Organisations, etc.

Controlling the flow of information and disinformation

Cyber infiltration at government, industrial and financial level.

The USA in particular:

enslaving countries into debt with the help of the IMF, BIS, World Bank,

control of SWIFT, global automated inter-bank currency exchange.

Russiain particular:

forcing countries into energy dependency

Chinain particular:

population infiltration (for instance already one million plus Chinese in Africa),

soft loans

bypassing the anglo-commodity markets by means of direct bilateral contracts.

Introducing the yuan in competition to the dollar as international reserve currency.

Not even taking into account the yearly burden of U$ 250 billion the USA is carrying already for maintaining their more than 700 bases overseas, their

world wide undercover operations need money and more money by the day.

And as long as the dollar reigned supreme the USA had the strategic advantage of being the greatest spender on undercover operations.

But…

A dollar is not a dollar any longer. America is far overstretched and has widely overplayed its hand. America is not the almighty America of old anymore. America has been high-jacked, stripped of its potential and taken to the cleaners by an elite financial oligarchy. Government Sachs has taken over and is in control of what is left of America.

On the other side of the globe,

China turned the tables on Goldman Sachs and the Rothschilds. Under Deng, after having called in the foreign bankers to reorganize Chinese banking, painting the illusion that they would be allowed to run the Chinese financial show in future, once the foreign devils had done the job, the Peoples Republic of China reasserted its control over the banking system.

In post-Yeltsin Russia,

Putin undid the privatisation and promoted the giant industrial semi State conglomerates under his control, that today in turn control Russia’s banking system.

Both in Russia and China financial interests run parallel with the national interests. But not so in America. There a tiny handful of oligarchs pursue but their own interests and dammed be the nation and the people.

The Russians and the Chinese know that the dollar is the Achilles Heel of America. Slay the dollar and America will be stripped of all its power. No more money for anything!

Paper curencies are based on trust. And once it is revealed that the dollar is but hot air, not backed any longer by industrial productivity and sound economics and finance, but hollowed out by debt without any means left to repay, then trust will evaporate.

Then nothing but real money, gold and silver, will be acceptable. Alas, the American coffers are empty. Government Sachs has taken care of that.

The main battlefield does not lie in Iraq, Iran or Afghanistan but in the realm of the dollar. If the Russians or Chinese can prove that there is no more precious metal left in Fort Knox by forcing a system failure on the precious metal markets, then they will have cut the golden Achilles Heel of the USA and won the main battle. The recents developments on the precious metal markets point to big players having joined in.

So be careful what you wish for! A far more desirable outcome would be if the American people were to stand up and get rid of Government Sachs and the Federal Reserve and get back to honest money and honest business. Then the world might regain its equilibrium.

Hans Schicht
Vienna
August 6^th 2009

What have become of the promising “green shoots” of recovery?

Eric Fry, reporting from Laguna Beach, California….

What have become of the promising “green shoots” of recovery?

Back on March 15, Federal Reserve Chairman, Ben Bernanke, remarked that the “green shoots” of recovery had become evident. Instantly, the phrase captured the hearts and imagination of the investing public. No matter how dismal the actual economic news, green shoots seemed to be spouting up everywhere.

Every economic data point, no matter how horrible, provided yet another opportunity to exclaim, “Aha!…Another green shoot!”

Sure, unemployment continued to soar, home prices continued to slide, and industrial production continued to contract, but things could have been much worse. And since the bad news has not been as awful as it could have been, the economy must be recovering, right?

Ummmm….not exactly. To gain a little insight on this curious case of “green shoots,” let’s consult a 2,000-year-old perspective.

“Listen!” Jesus declared in the Gospel of Mark, “A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants, so that they did not bear grain. Still other seed fell on good soil. It came up, grew and produced a crop, multiplying thirty, sixty, or even a hundred times.”

Although Jesus intended this parable to describe an individual’s receptivity to his message of hope and salvation, the metaphor of sowing seeds could also pertain to the character of economic recoveries. For example, what sorts of seeds are sprouting from the soil of the American economy?

The answer to this question may hold the key to stock market trends over the coming months.

Christ’s parable presents four possibilities:

1) Seeds that the birds consume;

2) Seeds that sprout in shallow soil, then quickly wither

3) Seeds that sprout among thorns, and cannot grow

4) Seeds that take root in fertile soil and flourish

So, to repeat the question, what sort of green shoots have been sprouting from the soil of the U.S. economy?

If you believe that #4 is the correct answer, you will want to be buying stocks tomorrow morning…and for several mornings thereafter. However, if you, like your California editor, believe that America’s green shoots more closely resemble the seeds that sprout among thorns and/or in shallow soil, you will want to hide out in the safest assets you can find.

Your editor would like to trust in the green shoots that so many folks claim to see. But he doesn’t. He can’t. “Less bad” is not good, and it never will be. “Less bad” might throw off a greenish hue for a short while, but it will never grow into an oak tree…or even a daffodil.

Green shoots need roots…and that’s what’s missing. The underlying American economy is still sick; it cannot provide very much nourishment to resurgent economic activity. Almost all essential “root systems” of economic activity remained impaired, diseased or compromised in some way.

Meanwhile, above ground, the economy continues to contract in every imaginable (and unimaginable) way.

Chris Mayer provides the details in a fascinating column below…

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Depression Then and Now
By Chris Mayer

This is an eye-opener. Whenever I talk about the Great Depression and compare it with what is going on today, I get a lot of skepticism. I hear a lot of people say, definitively, “This isn’t as bad as the Great Depression.”

What you have to remember, though, is the Great Depression unfolded like a train wreck in slow motion. It took awhile before it became the Great Depression. It wasn’t like someone flipped a switch and poof! — bread lines, Hoovervilles and hobos.

Another point to remember is that the Great Depression was a global economic event. It wasn’t just confined to the U.S. You have a take a wide-angle view of the global economy to get a better sense of the breadth of the slump. And so it is today.

Take a look at the next few charts, from economists Barry Eichengreen and Kevin O’Rourke. The first plots world industrial output from June 1929 against industrial output from April 2008:

We’re tracking that path pretty closely.

Then there are world stock markets:

We’re actually worse off right now.

Finally, take a look at the volume of world trade:

Again, here we’re actually ahead of the pace set in the Great Depression.

There are several other charts, but I think you get the point. Eichengreen and O’Rourke conclude:

“To summarize: The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the U.S. leads one to overlook how alarming the current situation is even in comparison with 1929-30.”

Even so, there are many differences between now and then. One big difference that doesn’t get much play is the fact that today we have large emerging economies such as China, India, Russia and Brazil.

Investment strategist Murray Stahl, in a recent letter, pointed out “the most important difference between that era and this era…is the robust economic development of China, India, Russia and Brazil. During the Great Depression, those nations were in the opposite condition.”

China was in the midst of a civil war and then had to fend off a Japanese invasion. India wasn’t even on the economic map as anything of any consequence. Russia was backward and militantly communist. And Brazil had all kinds of political problems, including trying to put down a communist movement.

Today, those four countries are in much better shape. They are much larger and are still growing.

There are many more differences, and I don’t expect what we’re going through to play out like the Great Depression, except maybe in some of the broadest outlines. This is, or will be, known as the greatest crisis the world has faced since the Great Depression.

How it is similar is also in some of the valuations in individual stocks and securities. As Stahl writes, we share with the Great Depression the “bizarre valuations on highly liquid securities in the world capital markets [such] that I have never before seen in my 30-plus years of investment practice.” In that, there is opportunity.

As I’ve written before, I think there is room for investing even in a weak economy. There are lessons we can learn from the Great Depression. Some stocks will do better than others. I expect the needed commodities that fuel those big emerging economies will be good places to be.

And these hard assets also provide some protection in a world where paper currencies are not likely to hold their value as cash-strapped governments around the world crank up the printing presses.

Fall of the West

Fall of the West

Neville Bennett

Is the West in long time decline relative to the rest of the world? I believe it is, and will indicate some sources bearing that out. It is not a new question for me as in my youth I enjoyed reading Toynbee, Spengler and others.

Many of my generation received a broad liberal education at a state grammar school. Science was very strong at my school, where many friends later became engineers, but we were all taught to love literature, art, music (you had to play an instrument), history and 5 years of at least two languages. At school we debated the rise and fall of Rome, plus the British and other Empires.

West below 50% world GDP

“The Greater Depression (NBR 12 June ) has accelerated the decline of Western GDP of 60% to 64% of global GDP over 1995-2004. A British think-tank, CEBR, had earlier forecast 2015 as the date when the West’s GDP would go below 50% of world GDP, but the credit crunch and changes in foreign exchange has brought the date forward from 2015 to 2009. Defined as US, Canada and Europe, the West’s share of global GDP is predicted to decline further to 45% by 2012.

The report identifies an inventory-led recovery conforming to my bullish attitude to oil and metals (NBR May 29). They predict some bounce in 2009, but in 2010 recovery will be held back by fiscal retrenchment and the impact of structural deleveraging. They conclude, the West “has to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way”. China’s recovery is having a marked effect on oil and commodities.

Oil as an indicator

Crude oil prices have increased by 120% since February, at a time when the IMF confirms a recession in the world economy. Normally, falling crude prices would be expected. Actually, the price is about $72 p.b. and the futures market is predicting $88. So the prices defy “demand destruction”, or the idea that price rises lower demand. BP’s statistical review has shown that for the first time in history, emerging market demand has outstripped the West’s. This is significant in our oil-based civilization.

Until now traders have tended to look at US conditions for oil market leads. Henceforth, Western demand can slump while overall consumption is rising. Perhaps this is one reason why oil prices are strong now. 2008 oil consumption fell in the US by 6.4%; in the BRICs consumption grew y-o-y by 3.3% in China, 4.8% in India, 5.3% in Brazil, and 3.1% in Russia.

The BRICs

The BRICs now muster 20% of global GDP, about the same as the USA. These are rapidly changing societies with a large propensity to consume oil and commodities. Presumably their oil demand will burgeon, as industrialization proceeds at pace. One tends to think of them as financially undeveloped, but they have at least one huge advantage: they save.

Collectively their currency reserves are half of the global total. A recent Telegraph article said G7’s reserves’ (excluding Japan) has only 6% of world reserves. This makes it a little odd that the US dominates the IMF, World Bank etc. How can that last?

The BRIC’s are holding their first formal summit this week in Yekaterinburg, Russia. Curious that it gets little reported because the BRICs could stop lending the West money and deepen the recession. Their agenda includes ways to reshape the financial system and perhaps produce a new reserve currency. The Brazilian President wants the BRICs “change the political and trade geography of the world”.

The Chinese premier arrived as I went to press. I imagine that China will be much less confrontational than Brazil and Russia. China holds the most US Treasuries and does not want to undermine the dollar. It merely wants to supplant the USA as the world’s biggest economy, as it may do in 20 years.

World Economic Forum

Readers may recall an earlier article in which I outlined the briefing for the upcoming Davos meeting. The article specifically questioned the western model of development, and adopted the spirit of Asian capitalism with stronger central direction, saving and heavy capital investment. The report went beyond extending current trends and explicitly discussed “critical uncertainties”, and “potential discontinuities”. It also stressed rapidly shifting geo-economic power. (NBR Jan 23). Changing demography is a factor: “western” populations are shrinking, but emerging country populations are not.

Philosophers: Oswald Spengler

Spengler insisted in the 1920’s, when he was extremely influential, that we were living in the winter time of the Faustian civilization. His description of the Faustian civilization is where the populace constantly strives for the unattainable—making the western man a proud but tragic figure, for while he strives and creates he secretly knows the actual goal will never be reached. His “unattainable” is materialism.

Spengler asserted that democracy is simply the political weapon of money, and the media is the means through which money operates a democratic political system. Politics becomes an unprincipled struggle for executive power. Instead of conversations between men, the press and the “electrical news-service keep the waking-consciousness of whole people and continents under a deafening drum-fire of theses, catchwords, standpoints, scenes, feelings, day by day and year by year.”

Philosopher: Arnold Toynbee

Toynbee wrote magnificent Annual reports during the 1930’s are which I often set as required reading for graduate students. I had the joy once of meeting him. He dropped into Hong Kong University and asked if he could help. I took him to a tutorial, where unforgettably he raged against the state but lauded the polis (city).

Toynbee predicted the decline of the west. All civilizations are surrounded by peripheral countries of greater resources. Once the periphery absorbs the civilizations superior technology, especially military technology, it conquers.

Conclusion

Two centuries of western dominance has passed. The emerging world has caught up in terms of development. The West still has cutting-edge technology and military power, but it is being challenged on every front.

Sell Bonds, Buy Energy

Sell Bonds, Buy Energy
By Dan Denning, editor of the Australian Daily Reckoning

When a large holder of U.S. dollars declares that the dollar is in “great shape,” should we believe him? My answer is, “Probably not.”

Russia’s Finance Minister Alexei Kudrin told journalists this week that the U.S. dollar is in “good shape.” He added that, “It’s too early to speak of an alternative [to the U.S. dollar].” These remarks came after Chinese and Russian officials have quite publicly suggested that the world’s financial system would benefit from using a currency that wasn’t being run by a bunch of inflationistas in America.

But the dilemma for the large dollar-holders of the world – Japan, Russia, and China to name a few – is how candidly they should verbalize in public about what everyone knows in private. By blowing the whistle on the Fed’s inflationary monetary policy, dollar- holders penalize themselves. The lesson? There’s a price to pay for rightly pointing out that a huge supply of Treasury bonds threatens the credit rating of the U.S. That price is paid by owners of dollar-denominated assets.

The dollar-supportive remarks by Kudrin, then, should be seen for what they are: a white lie, designed to halt the dollar’s slide…at least temporarily. In the meantime, however, you can bet that these same dollar-holders are working behind the scenes to find alternatives to the greenback and, of course, to diversify their currency reserves into other currencies or tangible assets. It’s just that you don’t want to precipitate a crisis until you’re good and ready to profit from it with a well-planned trade. Goldman Sachs would never make that kind of mistake!

There may be a few escape avenues from the dollar. It comes down to figuring out what-if anything-will go up when the U.S. dollar resumes going down. In fact, the question on everyone’s minds is what U.S. creditors will do with their money if they aren’t lending it to Barack Obama to spend.

“Over time,” says Nouriel Roubini, professor of economics at the Stern School of Business at NYU, “the willingness of the U.S. creditors to finance U.S. spending and buy dollar reserves is going to be reduced. People are getting nervous rightly about us devaluing or inflating our way out of the debt problem and causing real losses on the holdings of those assets.”

If you’re losing money on an asset, naturally you’re going to either sell of it, or at the very least, accumulate less of it. But then what? Where does your money go after that? We’d suggest the investment needs of the emerging market nations are the natural replacement for throwing away money in the U.S. Treasury market. Granted, there’s risk in emerging markets. But it’s now clear there’s risk in the sovereign bond market too. Take your pick.

Speaking of those emerging markets, four of them spoke with one voice in Russia this week. The leaders of Brazil, Russia, India, and China gathered to figure out how to solve their dollar dilemma. Criticize it too much, you lose value on your current dollar- denominated holdings. Do nothing, you lose value on your dollar- denominated holdings as Obama and his Congress spend America into poverty and servitude…and then inflate like mad men.

“There is a strong need for a stable, predictable and more diversified international monetary system,” the final statement from the BRIC nations read. Russia’s Dmitry Medvedev added his own “two roubles,” saying that existing reserve currencies, “have not managed to perform their functions.”

And what is the function of a reserve currency? Well, it’s probably the same as the tripartite function of any money: as a store of value, a unit of account, and a medium of exchange. Countries hold baskets of currencies (yen, Euros, Swiss Francs, U.S. dollars) in order to conduct international trade and commerce.

Of course all this is relatively new. That is, when money used to be a commodity (gold and/or silver) then a country’s monetary reserves were the same as its precious metal reserves. Debtor nations that consumed more than they produced and borrowed to do so paid the price in a net outflow of commodity money. But things don’t work that way in a world where everyone uses fiat money. So what we’re seeing now is a worldwide monetary system that is, well, systemically flawed.

Make of it what you will. What we make of it is that the very foundation of the world’s commerce and the currency in which it’s conducted is shifting. The stock markets of the world have no idea what to make of all this because it is not clear yet who the winners and losers will be.

All that we know is that paper currencies and government debts are proliferating very rapidly. We also know that natural resources are not. In fact, they are depleting very steadily. So we conclude that the prices of most natural resources will go up…a lot. That’s why lots of bears on the U.S. dollar suggest buying gold. We are sympathetic to this idea, but we’d suggest a slightly different strategy: Sell bonds. Buy energy.

German Gold Vending Machine… Gold… Currencies… Government Tampering

Chuck Butler’s latest contributions…

Did you hear about the Gold vending machine in Germany? I saw this yesterday morning, and thought it to be a hoax… Then someone in the office brought me a print out of a story in the U.K. Telegraph… OK, so maybe it’s not a hoax… Any way… Here’s the skinny… In Germany, they’ve come up with a vending machine that can update prices of Gold every few minutes, and… Dispense 1 gram Gold wafers, 10 gram Gold bars, or coins… There’s about a 30% increase in the market price! WOW! Imagine that, you need some Gold in your pocket just for GP, and you simply walk up to a vending machine and buy some, as simple as getting that Zero bar, or Snickers!

OK… What gives a guy this kind of idea to make a vending machine that disperses Gold? It’s all about taking advantage of the times, folks… I may have told you this in the Pfennig before, I don’t recall, but I use it in my presentation for Gold… Investment in Gold increased 427% last year… To put it into Tonnes of Gold, retail investment purchases of Gold reached approximately 108 Tonnes of Gold in 2008, up from 36 Tonnes in 2007, and 28 Tonnes in 2006!

I was talking to the Big Boss, Frank Trotter, the other day, and Frank mentioned that he was concerned that Gold could be the next bubble… I assured him that I didn’t see it that way, not until my neighbors are asking if they can buy Gold at $1,200 oz! (I tried to get them to buy it at $800 oz, to no avail!)

Remember when we were kids? No wait, we wouldn’t all have been kids at the same time you dufus Chuck! OK, when I was a kid… We used to have these bomb shelters in our schools, and we would practice going into them… It was a different time, the cold war was strong, and the fear was put in all of us toward Russia… I had a teacher, many moons ago, that told the class that it was a good thing that Russia and China didn’t see eye-to-eye… Well… I wonder what he thinks about the news that China and Russia have agreed to use each other’s currencies and eliminate the use of dollars in their trade?

It kind of feels like Russia and China are ganging up on the dollar!

The other “new kid on the block” Brazil, is joining in with Russia and China… But that news didn’t help the Brazilian real yesterday, as it saw one of its worst days in weeks! But that’s the real… I watch it trade some days, and your eyes grow very wide open in amazement of the wild swings in this currency. It will move 2-3% in a day, either way, in a heartbeat! Which tells you that the “number of players” in real, is smallish when compared to the second most liquid currency in the world… The euro! So… If you’re going to own reals, you need to be aware that it has these wild swings!

Speaking of the euro… It’s getting a boost this morning from an improved outlook for risk today, as U.S. stock futures are stronger. The “Big Dog” looks a little tired of chasing the dollar, and then being pulled back on to the porch over and over again recently… But, as always, always I tell you tutor turtle, be yourself… No wait! I always tell you that all this is “noise”… Investment portfolio diversification into currencies and precious metals is a long-term relationship… The dollar didn’t lose over 90% of its value overnight! The euro didn’t gain over 50% VS the dollar overnight! These things are long sweeping moves, and you have to drown out the “noise”… Otherwise, you’ll become a currency and metals “trader”, and chasing these assets all over the board!

Pound sterling is getting hit on the chin this morning, as retail sales fell in May, which was the first drop in 3 months… Retail Sales fell .6% in May, and pretty much squashes those so-called “green shoots” that have been talked about for the U.K. economy… I think you can expect to see stuff like this for the next year… Up and down, in and out, green and brown shoots… And… Like I’ve said before, if it’s happening in the U.K. it won’t be long before we experience the same, as the U.K. just seems to be ahead of the U.S., time-wise…

The Swiss franc is stronger this morning than recent trading sessions as the Swiss National Bank (SNB) met, left rates unchanged, and made a statement that has given a green light to franc traders to buy… The SNB announced that they were not targeting a specific exchange rate for the currency. You may recall that the SNB had previously stated that they were not happy with franc strength, and had intervened on occasion to keep the currency from strengthening… I would be careful here, as this could be a “trap”  Oh, you don’t think Central Banks set traps for traders? OK, well, maybe they don’t really set a “trap”, but they do send mixed messages that cause losses!

Big Al Greenspan was famous for these “mixed messages” that were called “Greenspeak”… After reading two books on Big Al, I can tell you that I personally think that “Greenspeak” was gobble-de-gook! Confuse everyone so they think you are some sort of messiah! Right Big Al? When… In reality, he was just “a guy”, who really screwed things up!

Today, we will see the Weekly Initial Jobless Claims, which for me has turned into watching the “Continuing Claims”… This part of the data tells me if unemployed people are being re-hired… I haven’t see that happening, as Continuing Claims have continued to grow larger in numbers… We’ll also see the Philly Fed Index, (manufacturing)…

The real meat (where’s the beef?) will come from a testimony before the Senate Banking Committee by U.S. Treasury Sec. Geithner, on the President’s plan to overhaul the U.S. Financial regulatory system… I doubt these Senators will understand what Geithner is talking about, and will “rubber stamp” the plan… Which means, folks… That the Gov’t gets its foot in the door further…

I know, I know, I get quite a few emails from people that take exception to me getting upset with the Gov’t getting more involved in the markets, etc. as they say, “Yeah, Chuck, and you think the “markets” have done a better job?” Well… The markets are the markets, folks… If left alone, they will act as markets should… What? You didn’t like the fact that the Mr. Market, as my friend, Bill Bonner, calls it, turned the whole credit, and deficit spending on its ear? Mr. Market was just trying to correct what was wrong… Getting the Gov’t involved is just plain, wrong! One foot in the door… Then next it’s the next thing, and the next, and pretty soon, the Gov’t is completely in the door, and hanging out on your couch!

Please… These are just my opinions… If you don’t like them, you have that right! It is still a free country for speech! Just delete it and go on with your life! OR… You didn’t pay anything for all this, that I’ve been giving to people since 1992…