Update from the Currency War Front

The war has begun that I voiced concern about early last month.  It appears that the first salvos have been fired and the battle lines are being drawn.  I suspect some may raise their eyebrows when I say that this is the most dangerous war the world has ever dealt with in its history.  What is so dangerous about this war?

First, it is a war that very few people understand.  Politicians have no clue and the average person cannot make the connection between this war and their personal lives.  That is until the war swings into full combat mode.  Then they will understand too late.  Let’s just say when you have to take a truck load of money to the grocery store to buy a loaf of bread everyone will understand then.  What we really need now is intervention to prevent this war from escalating.  This is the job for international economic agencies like the International Monetary Fund (IMF), the G20, or the World Bank to step in!

Well…. According to the Telegraph today, it looks like we have had our first opportunity to see these diligent and social responsible agencies in action on the war front.

The IMF policy committee, which has been struggling to agree a consensus on easing currency tensions among key economies including China and the US, said the organisation should instead keep the issue under watch.  Pressure has been piling on China to speed up the pace of economic reform by dropping its policy of using a weak currency and reserve accumulation to boost exports. Finance ministers at the 187-strong lending agency have accused China of imperiling the global recovery by fostering the imbalances that are preventing deficit countries like the US and UK from returning to economic health.

IMF officials argue that if China let its currency appreciate, Chinese imports would become more expensive, potentially sparking demand for US goods. The US is facing crippling levels of unemployment despite returning to growth, which has raised fears of a “jobless recovery” that could trigger political and social unrest.

European Central Bank president Jean-Claude Trichet last night pointedly reminded China of its commitment last June to “engage in exchange rate flexibility”, adding: “There is no need for [emerging economies] to continue to accumulate immense amount of reserve assets.”

Earlier, US Treasury Secretary Timothy Geithner told the committee that the IMF had to speak more forcefully about how countries manage their currencies. He called on the IMF to “increase the candour of its surveillance” and said that “meaningful reform of IMF surveillance is a core challenge of the institution”.

Despite calls for tougher action, the IMF could only pledge to “work towards a more balanced pattern of global growth, recognising the responsibilities of deficit and surplus countries”.

Mr Trichet added that while “we have a consensus on imbalances, the problem is implementation – as always”. China on Friday hit back at calls for it to let the currency rise, saying it rejected such “shock therapy” but is committed to a more “flexible” currency regime.

George Soros, the respected hedge fund manager, also weighed into the debate. Speaking in London, he said a global “currency war” pitting China versus the rest of the world could lead to the collapse of the world economy. Mr Soros said the China had created a “lopsided currency” system and suggested it allow the yuan to appreciate by 10pc a year – far more than the Chinese will contemplate.

The IMF Committee’s chairman Youssef Boutros-Ghali said at the conclusion of talks at the agency’s Washington headquarters that “frictions” did exist. “These are being addressed. We have come to the conclusion that the IMF is the place to deal with these issues,” he said.

IMF managing director Dominique Strauss-Kahn, when asked about the failure to come up with a stronger statement, said that “there is only one obstacle, and that is an agreement of the members”, before adding that the line was a joke. He added that “I don’t believe action can be done in a way other than in a co-operative way.”

Recent IMF figures showed Beijing had currency reserves of $2.447 trillion, the largest in the world and nearly 30pc of the global total.

So maybe bankers will step in and save the day.  Well… maybe not.  Consider this:

The Institute of International Finance, a group that represents 420 of the world’s largest banks and finance houses, has issued yet another call for a one-world global currency, Jerome Corsi’s Red Alert reports.

“A core group of the world’s leading economies need to come together and hammer out an understanding,” Charles Dallara, the Institute of International Finance’s managing director, told the Financial Times.  An IIF policy letter authored by Dallara and dated Oct. 4 made clear that global currency coordination was needed, in the group’s view, to prevent a looming currency war.

“The narrowly focused unilateral and bilateral policy actions seen in recent months – including many proposed and actual measures on trade, currency intervention and monetary policy – have contributed to worsening underlying macroeconomic imbalances,” Dallara wrote. “They have also led to growing protectionist pressures as countries scramble for export markets as a source of growth.”

Dallard encouraged a return to the G-20 commitment to utilize International Monetary Fund special drawing rights to create an international one-world currency alternative to the U.S. dollar as a new standard of foreign-exchange reserves.

Likewise, a July United Nations report called for the replacement of the dollar as the standard for holding foreign-exchange reserves in international trade with a new one-world currency issued by the International Monetary Fund.

The 176-page report, titled “United Nations World Economic and Social Survey 2010,” was issued at a high-level meeting of the U.N. Economic and Social Council and published in its entirety on the U.N. website.

What is obvious is that no agency or governmental body in the world, no matter its size or scope has either the courage or the power to stop the escalation.  The major governments involved, US, EU, China, and India cannot muster the political strength within their respective regions to implement the policies that must be put in place to correct the existing imbalances.

I am certain that if the general public understood that this is a war in which every home, every family on the planet will be victims and causalities of the war, maybe we can rally our weak-kneed and greedy politicians and bankers to implement the policies now to stop this insane war.  You know, a Godfather like discussion.  An offer they can’t refuse.

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The Anatomy of a Perfect Storm

Today, Wednesday, October 6, the market flirted with 11,000 and gold also flirted with $1300 per ounce.  I really believe the market is being controlled by financial spin doctors, with more than a helping hand from the Fed and the US Treasury.  But as in Depression 1, is this the calm before the second storm, the storm that overwhelms our global economy?

I happen to believe that this is exactly what is happening.  I base my conclusion on the facts that the financial community doesn’t want you to look at the real threats to the market and currencies.  Why? Because a leopard doesn’t change it spots, they are poised to make another killing on sovereign credit facilities.  Just watch Spain, Greece, and Italy in the next few weeks and see how the bankers extract the final life out of those economies.

As with all storms, when analyzed, bad storms, killer storms happen because of a unique infrequent combination of elements.  Here are some of the elements I believe can lead to “intensifying” the coming financial storm.

US will likely lose another 39,000 jobs this month.  Given that we should be generating at least 125,000 jobs just to meet emerging people to the job market, you can say we have another 164,000 people without jobs this month.

Lenders across Europe and the US are facing a $4 trillion refinancing hurdle in the coming 24 months and many still need to recapitalize, The IMF,the Washington-based organization, said in its Global Financial Stability Report.  Here you can say BOHICA, another major bailout on the way, but from where?

The IMF report – “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation” – implicitly argues that austerity will do more damage than so far admitted.  There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects.

The former chief economist of the World Bank and a Nobel  prize winner, Joseph Stiglitz said that the different needs of countries with high trade surpluses, particularly Germany, and those running deficits such as Ireland, Portugal and Greece, meant that the single currency, the Euro, was under intense pressure and may not survive.  Now, just ask yourself the question being currently held by the 800 pound gorilla in the room.  If the Euro fails and EU  nations revert to local currencies, what happens to trillions in contracts and financial instruments currently floating in Euros??

Major mortgage lenders Bank of American, JPMorgan Chase and GMAC have in recent days announced they were suspending tens of thousands of foreclosure processes across the country due to apparent improper handling of documents.

China is pouring another $7bn (£4.4bn) into Brazil’s oil industry, reigniting fears of a global “land grab” of natural resources.

Paul Volcker spoke at the Chicago Federal Reserve Bank on September 23rd, as part of a symposium co-sponsored by the IMF.  He said: “The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government.”

Goldman Sachs Group Inc. said the U.S. economy is likely to be “fairly bad” or “very bad” over the next six to nine months.

“The Greek deficit and debt figures will be revised upwards, the figures will be bigger,” said Amadeu Altafaj Tardio, the spokesman for the bloc’s economic affairs commissioner Olli Rehn.

The number of Americans receiving food stamps rose to a record 41.8 million in July as the jobless rate hovered near a 27-year high, the government said.

The recession put a 3.1 percent dent in the personal incomes of New York state residents, who endured their first full-year decline in more than 70 years, according to a report released Tuesday.

In the UK, spending cuts may be delayed because of their impact.  There is no doubt that most of the £32bn of spending cuts and tax rises set for 2011-12 will still be implemented, but the fiscal consolidation might be delayed without undermining the government’s ambition to eliminate the current structural deficit before the next election, scheduled in 2015.

Middle-class Americans made their deepest spending cuts in more than two decades, slashing spending on such discretionary items as restaurant meals and alcohol during the recession.  Households in the middle fifth of the population sliced their average annual spending to $41,150 in 2009, the Labor Department said Tuesday in its annual spending breakdown. That was down 3.1% from 2007 and 3.5% from 2008, the steepest one-year drop since records began in 1984.

Now I ask you, am I crazy or are those some ugly looking storm clouds on the horizon?  I leave it to you to decide, but I am going to dig out my boots and slicker!