More Currency Warfare US Vs. World
October 13th, 2010
This article that I have excerpted below explains much of what is going on in international finance. The USA is flooding the world with dollars and is causing major disruptions in world financial markets as currencies rise against the depreciating dollar. This is the interesting point behind the recent Chinese deal with Turkey in that they are doing business in their currencies, not dollars. China is trying to create an alternative currency system to counteract the USA flooding the world with dollars and debt.
What is needed is a write down of the debt. Take losses where they need to be taken, and let the game begin again. Naturally we should be coming up with a rational alternative to capitalism. But until we decide to end international speculation and put wealth to productive purposes, this wild west of debt financed military aggression will continue to destabilize the world. Money will continue to be made in financial speculation and not in investment in domestic industry or infrastructure. Will we stop it? Not through Congress, these guys are up to their necks in this system and are pocketing whatever profits they can. Its a spoils game in Washington and a winner takes all game on Wall Street. Regulation, sure but who will watch the regulators. There is too much money floating around at the top of this game. What we need is radical redistribution and restructuring to a more equitable system.
"CounterPunch / By Michael Hudson
Why the U.S. Has Launched a New Financial World War — and How the Rest of the World Will Fight Back
Finance is the new form of warfare — without the expense of a military overhead and an occupation against unwilling hosts.
October 12, 2010 |
What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost? This is the game that is being played today.
Finance is the new form of warfare - without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy's banking system can create the most credit, using an army of computer keyboards to appropriate the world's resources. The key is to persuade foreign central banks to accept this electronic credit.
U.S. officials demonize foreign countries as aggressive "currency manipulators" keeping their currencies weak. But they simply are trying to protect their currencies from being pushed up against the dollar by arbitrageurs and speculators flooding their financial markets with dollars. Foreign central banks find them obliged to choose between passively letting dollar inflows push up their exchange rates - thereby pricing their exports out of global markets - or recycling these dollar inflows into U.S. Treasury bills yielding only 1% and whose exchange value is declining. (Longer-term bonds risk a domestic dollar-price decline if U.S interest rates should rise.)
"Quantitative easing" is a euphemism for flooding economies with credit, that is, debt on the other side of the balance sheet. The Fed is pumping liquidity and reserves into the domestic financial system to reduce interest rates, ostensibly to enable banks to "earn their way" out of negative equity resulting from the bad loans made during the real estate bubble. But why would banks lend more under conditions where a third of U.S. homes already are in negative equity and the economy is shrinking as a result of debt deflation?
The problem is that U.S. quantitative easing is driving the dollar downward and other currencies up, much to the applause of currency speculators enjoying a quick and easy free lunch.
The great question in global finance today is thus how long other nations will continue to succumb as the cumulative costs rise into the financial stratosphere? The world is being forced to choose between financial anarchy and subordination to a new U.S. economic nationalism. This is what is prompting nations to create an alternative financial system altogether.
The global financial system already has seen one long and unsuccessful experiment in quantitative easing in Japan's carry trade that sprouted in the wake of Japan's financial bubble bursting after 1990. Bank of Japan liquidity enabled the banks to lend yen credit to arbitrageurs at a low interest rate to buy higher-yielding securities. Iceland, for example, was paying 15 per cent. So Japanese yen were converted into foreign currencies, pushing down its exchange rate.
It was Japan that refined the "carry trade" in its present-day form. After its financial and property bubble burst in 1990, the Bank of Japan sought to enable its banks to "earn their way out of negative equity" by supplying them with low-interest credit for them to lend out. Japan's recession left little demand at home, so its banks developed the carry trade: lending at a low interest rate to arbitrageurs at home and abroad, to lend to countries offering the highest returns. Yen were borrowed to convert into dollars, euros, Icelandic kroner and Chinese renminbi to buy government bonds, private-sector bonds, stocks, currency options and other financial intermediation. This "carry trade" was capped by foreign arbitrage in bonds of countries such as Iceland, paying 15 per cent. Not much of this funding was used to finance new capital formation. It was purely financial in character - extractive, not productive.
Joseph Stiglitz recently explained that instead of helping the global recovery, the "flood of liquidity" from the Federal Reserve and the European Central Bank is causing "chaos" in foreign exchange markets. "The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy. … It's doing nothing for the American economy, but it's causing chaos over the rest of the world."
The Fed's new credit creation is not increasing bank loans to real estate, consumers or businesses. Banks are not lending - at home, that is. They are collecting on past loans. This is why the U.S. savings rate is jumping. The "saving" that is reported (up from zero to 3 per cent of GDP) is taking the form of paying down debt, not building up liquid funds on which to draw. Just as hoarding diverts revenue away from being spent on goods and services, so debt repayment shrinks spendable income.
Brazil has been more a victim than a beneficiary of what is euphemized as a "capital inflow." The inflow of foreign money has pushed up the real by 4 per cent in just over a month (from September 1 through early October). The past year's run-up has eroded the competitiveness of Brazilian exports, prompting the government to impose 4 per cent tax on foreign purchases of its bonds on October 4 to deter the currency's rise. "It's not only a currency war," Finance Minister Guido Mantega said on Monday. "It tends to become a trade war and this is our concern." And Thailand's central bank director Wongwatoo Potirat warned that his country was considering similar taxes and currency trade restrictions to stem the baht's rise, and Subir Gokarn, deputy governor of the Reserve Bank of India announced that his country also was reviewing defenses against the "potential threat" of inward capital flows."
The potentially largest speculative prize of all promises to be an upward revaluation of China's renminbi. The House Ways and Means Committee is backing this gamble, by demanding that China raise its exchange rate by the 20 per cent that the Treasury and Federal Reserve are suggesting. A revaluation of this magnitude would enable speculators to put down 1 per cent equity - say, $1 million to borrow $99 million and buy Chinese renminbi forward. The revaluation being demanded would produce a 2000 per cent profit of $20 million by turning the $100 million bet (and just $1 million "serious money") into $120 million. Banks can trade on much larger, nearly infinitely leveraged margins, much like drawing up CDO swaps and other derivative plays.
The problem is that the supply of dollar credit has become potentially infinite. The "dollar glut" has grown in proportion to the U.S. payments deficit. Growth in central bank reserves and sovereign-country funds has taken the form of recycling of dollar inflows into new purchases of U.S. Treasury securities - thereby making foreign central banks (and taxpayers) responsible for financing most of the U.S. federal budget deficit. The fact that this deficit is largely military in nature - for purposes that many foreign voters oppose - makes this lock-in particularly galling. So it hardly is surprising that foreign countries are seeking an alternative.
The corollary is that other countries' balance-of-payments surpluses do not stem primarily from trade relations, but from financial speculation and a spillover of U.S. global military spending. Under these conditions the maneuvering for quick returns by banks and their arbitrage customers is distorting exchange rates for international trade. U.S. "quantitative easing" is coming to be perceived as a euphemism for a predatory financial attack on the rest of the world. Trade and currency stability are part of the "collateral damage" being caused by the Federal Reserve and Treasury flooding the economy with liquidity in their attempt to re-inflate U.S. asset prices. Faced with U.S. quantitative easing flooding the economy with reserves to "save the banks" from negative equity, all countries are obliged to act as "currency manipulators." So much money is made by purely financial speculation that "real" economies are being destroyed.
Under this condition, foreign countries can prevent their currencies from rising against the dollar (thereby pricing their labor and exports out of foreign markets) only by (1) recycling dollar inflows into U.S. Treasury securities, (2) by imposing capital controls, or (3) by avoiding use of the dollar or other currencies used by financial speculators in economies promoting "quantitative easing."
The BRIC countries are simply creating their own parallel system. In September, China supported a Russian proposal to start direct trading between the yuan and the ruble. It has brokered a similar deal with Brazil. And on the eve of the IMF meetings in Washington on Friday, October 8, Chinese Premier Wen stopped off in Istanbul to reach agreement with Turkish Prime Minister Erdogan to use their own currencies in tripling Turkish-Chinese trade to $50 billion over the next five years, effectively excluding the U.S. dollar. "We are forming an economic strategic partnership In all of our relations, we have agreed to use the lira and yuan," Mr. Erdogan said.
On the deepest economic lane, the present global financial breakdown is part of the price to be paid for the Federal Reserve and U.S. Treasury refusing to accept a prime axiom of banking: Debts that cannot be paid, won't be. They tried to "save" the banking system from debt write-downs in 2008 by keeping the debt overhead in place. The resulting repayment burden continues to shrink the U.S. economy, while the Fed's way to help the banks "earn their way out of negative equity" has been to fuel a flood of international financial speculation. Faced with normalizing world trade or providing opportunities for predatory finance, the U.S. and Britain have thrown their weigh behind the latter. Targeted economies understandably seeking alternative arrangements.
For more of this
http://www.alternet.org/story/148481/why_the_u.s._has_launched_a_new_financial_world_war_–_and_how_the_rest_of_the_world_will_fight_back_
No comments:
Post a Comment