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Newsbud Exclusive- The Fed’s Supposed Balance Sheet Tightening: Few Options Left, Tight Rope Walking & Presumed ‘Creative Destruction’.

What will happen as the US Federal Reserve decides to pull away the domestic stimulus punch bowl? How capable are they to do so, considering true economic weaknesses in the system? Will their actions truly be for the good of the US and wider global economies, or is it all part of a much wider, longer term design for collective economic and political synthesis?

Since the 2008 Global Financial Crisis, which commenced in mid-2007 and started receiving major government stimulus and bailouts in late 2008, the Fed has expanded its balance sheet from $897 billion to $4.5 trillion, in unprecedented government economic interventions meant to avoid the onset of another Great Depression. The Fed’s adding of essentially money which they conjured out of thin air, amounted to over $3.5 trillion for buying up toxic securities, and constituted “about 25% of the size of the entire US economy at the time”, per author Simon Black, up from only 7% prior to the 2008 Crisis.

The Fed thus owns, per economist and trader Stephen Guilfoyle, “a portfolio bearing an ownership stake of 17% of the entire Treasury market, and 29% of the entire market for mortgage bonds issued by government-related entities that we expect the Fed to try to, if not tackle... at least manage. This is the monster under your bed.” The imminent QT is then, in essence, “the reverse of QE, with reverse effects.”

What that stimulus did was have the Fed buy up long-term US Treasuries and mortgage-backed securities, along with artificially prop up financial asset prices, with wildly asset-bubble-ridden US stock, bond and real estate markets now sitting at all-time highs due to speculation. Meanwhile, the actual US economy suffers from much higher unemployment and lack of consumer and corporate savings than what the government is deciding is fair to report. Plus, the US employment participation rate, which is an often ignored yet key indicator, is still stuck at 60%, below its pre-2008 Crisis peak of 63%, suggesting that the US is up to 8 million jobs short at the very least. The real unemployment rate is at a multiple of what the Bureau of Labor Statistics claims as well. [READ MORE]

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European Bank Failures: When Do They Go Globally Systemic, and Who Decides?

(USD 1 = .87 Euro)

The 2007 – 2009 Financial Crisis was not a one-off historical event, and it was most certainly global in scope.  Yet the means deployed to quell and contain it by the world’s central and private banks, as well as their corresponding governments and other regulatory bodies, ultimately served to kick fiscal and monetary cans down the road.  Various central bank balance sheets ballooned to unprecedented debt levels, foremost being the books of the US Federal Reserve, which saw its balance sheet climb from $869 billion to over $4.5 trillion in a decade of both treating, and preventing a reprise of, said crisis.

Yet, the problems that led to the first crisis are still latent – and threaten at clearly larger scales – within the world economy.  So, when and how would the ‘second leg’, as it were, of this extended global deflationary cycle commence?  What event(s) would trigger it, and could said event(s) be prudently forecast, let alone prevented?

European Banking Contagion 

Four European banks have failed over the past eight months alone, giving strong indications that another 2007 corrective brink may be at hand.  These institutions were Banco Popular of Spain, and three Italian banks - Monte dei Paschi di Siena (MPS), Veneto Banca and Banca Popolare di Vicenza.  Popular was taken over by rival Spanish Banco Santander with help from the EU, MPS was taken over by the Italian government in a state recapitalization, and the latter two banks were also assumed by Rome in order to split their “good” versus “bad” assets and liabilities between Intesa Sanpaolo, Italy’s largest bank, and the Italian state, respectively.

Notedly, no state aid was provided to Banco Popular in its sale to Santander.  Popular apparently had financial books in better shape than did MPS upon its takeover.  Per analyst Don Quijones , “[i]n fact, if anything, Popular had a better problem loan ratio on its balance sheet than MPS. While the Spanish entity was ‘resolved’ through the cancellation and redemption of its convertible and subordinated shares and bonds, MPS was recapitalized with government money.”

Private versus public economic priorities evidently become lucid through such desperate cleanup exercises, among other items.

Intesa bought the “good bank” assets of both latter failed banks while the “bad bank” assets, including non-performing loans (NPLs), subordinated bonds and non-functional legal arrangements were bought by the Italian state, which will pass the costs onto taxpayers, as per the advice of Rothschild Bank, advisor to the Italian Treasury.  Italian citizens will bear the €5bn - €6bn arrived at immediate cost of these twin bailouts, on top of their lost savings.  Senior bondholders received protection by Rome whereas junior creditors and the banks’ shareholders lost their shirts via this “rescue”.

In what has come to be fairly predictable denial behavior, merely weeks before the Veneto and Vicenza seizures, and per finance analyst and writer Wolf Richter, “Italy’s Minister of Economy Pier Carlo Padoan insisted that the two banks would not be wound down. Last year, to dispel the mountain of evidence to the contrary, he insisted that that there would be no need of any future bail outs; and that, furthermore, Italy did not even have a banking problem.”  Said denials officially precede what they deny could or will happen, yet which then often do, and this latest theater is thus seemingly no different from denials floated prior to the worst of 2008’s failures.

Public Outrage, Private Blessings

The use of taxpayer money for the Veneto and Vicenza bailouts went against provisions established by the European Commission and European Central Bank (ECB), ultimately revealing the frantic stakes reached in conducting such emergency measures, despite lack of admissions from banking and government officials.  These bailouts sidestepped a 2016 EU law involving the need for the specially designated Single Resolution Board to coordinate matters.

Yet said board, taking the lead from the ECB, “decided that resolution of the banks under the new EU rules was ‘not warranted in the public interest’”.  There were political reasons for handling the twin banks’ bailouts with such haste but also presumably reasons involving the need for averting systemic fiscal risks spiking.  The former reasons tend to be emphasized in the mainstream corporate press; the latter, not so much.

Despite established EU protocols for handling distressed banks and public objections raised by EU bureaucrats over these twin Italian bailouts, signals here point toward tacit blessings having been given by the EU and ECB because “Italy was able to argue there was regional economic risk from the failure of two important regional lenders.”  Confidence would’ve suffered dramatically, and the two lenders had failed to raise private capital as prescribed since the beginning of 2017.  By contrast, Santander raised some €7bn to fund Popular’s takeover.

Warning in early June of the potential for a systemic crisis, the Italian Economy Undersecretary Pierpaolo Baretta stated that, the “collapse of two regional banks in Italy's Veneto region [would’ve triggered] a systemic crisis [that’d have] risked dragging down the whole domestic economy.”  Brussels got out of the way of timber falling, and especially by avoiding their prescribed “bail-in”[i] procedures, which would’ve caused outright public panic in said instances.  Per US based geopolitical analyst George Friedman,

The bail-in is a formula for bank runs.  Rome wants to make sure depositors don’t lose their deposits. A run on the banks would guarantee a meltdown …The bail-in rule exists because Berlin doesn't want to bail out banking systems using German money.

Additionally, and as per Analyst Don Quinones, the

Italian government decided to commit €17 billion in taxpayer funds to bail out senior bondholders and depositors. This includes a €5 billion capital injection for Intesa, which is getting the good assets and liabilities, such as deposits. The €5 billion is to protect Intesa against losses from those assets. Prohibited “state aid” under EU rules? No problem. It has now been cleared by the EU Commission. [emphasis added]

This is all a mere hint of what’s expected to come further, both in Italy as well as other plagued EU economies.  Why?  For one, monstrously unprecedented levels of public and private continental debt.

How ‘Systemic’ Could It Get?

The twin Venetian bank failures are consistently portrayed as small and thus relatively insignificant events.  This is judged based on the collective €60bn price tag of bailing them out - certainly not a loss figure to sneeze at - yet that nonetheless is indeed modest by comparison to Italy’s wider economy, which retains a nearly $2tn GDP.  Still, said summary ignores the systemic basis of risks which sit latent in many institutions due to their derivatives and off balance sheet exposures.  Per Economist Francisco Pereira, though “there were disagreements over the prospect of contagion given the small size of the banks, the Italian government, the Commission and some within the ECB clearly felt the risk that it might impact other bank bonds, or even Italian sovereign debt, was still too big and dangerous to ignore.”

As of Fall 2016, the stock index of Italian banks and that of Deutsche Bank (DB) of Germany, which retains over $46+ trillion of gross derivatives risk exposure as well as questions regarding its solvency health, had been “moving in tandem” despite DB and said Italian banks carrying different surface challenges.

I.E. DB doesn’t have the Italians’ NPL problems.  And yet, why the correlated graphical movements?  Perhaps because DB is also so exposed to Italy that an Italian banking crisis would eventually pose contagion to a multiple size of what happened in 2008?

Source:  SeekingAlpha.com

Per Friedman again, since “Italy is the fourth largest economy in Europe, [hers] is the mother of all systemic threats … [T]he IMF recently said Deutsche Bank is the single largest contributor to systemic risk in the world. A rippling default through Europe will hit Deutsche Bank”, let alone trigger an EU-wide banking crisis which would most certainly spread immediately across the Atlantic.

Relatedly last Fall, the Bank of Italy categorized the nation’s top three banks UniCredit, Intesa Sanpaolo and Monte dei Paschi as “systemically important institutions”.  Hence the bailout of MPS, and per Reuters, the categorization of UniCredit as “Italy’s only globally systemically important institution (G-SIFI)”, alongside all three Italian banks also being labelled as “Other Systemically Important Institutions” (O-SII).

What – or better yet, who – could or even would tip the perceptual balance into “crisis mode”?  During negotiations for bailing out MPS, not only did JPMorgan walk away, but so did two prominent New York hedge funds – Fortress and Elliott - despite being offered an 80% mark down on MPS’ NPLs, which was clearly not enough to attract and keep such private investors.  The government then stepped in.  Can it continue to under such continuing perceptual duress and growing lack of confidence?

Wider Banking Consolidation Agenda

As with the 2007 – 2009 Crisis, there is an inevitable, widespread, transatlantic shrinkage expected in the number of banks out there, and not only by acute fiscal necessity, but seemingly by longer term design as well.  In such a game, the largest global banks routinely stand to assign, rearrange or outright ‘hoover up’ the assets of ‘expendable’ banks deemed to be culled.  In Europe, the “Club Med” or Mediterranean nations’ banks are seemingly more expendable and ripe for consolidation versus, say, German or French mega-banks like BNP Paribas, Société Générale and Deutsche Bank.

Per Analyst Pascal Straeten,

the capital of the top EU banks averages 4.5% of total assets (versus 6.6% with the top US banks) […] Two of France’s biggest banking institutions, namely BNP Paribas and Société Générale, have capital of only 4% of total assets as of end 2016 while Deutsche Bank sits at the bottom of the barrel with 3.5% …

Additionally, as always, the northern EU countries are imposing their will onto their southern brothers with middleman the ECB and the EU Commission acting as middlemen. Look at how much austerity is being imposed on the citizens of Greece, Spain, Portugal and Italy; look at the restructuring measures being imposed on the Spanish and Italian banks, but not too much onto the French or German banks. To illustrate this point, look at the Spanish bank Banco Popular, until recently Spain’s sixth largest banking institution, is no longer alive. Its assets, including a massive portfolio of small-business clients, now belong to Banco Santander, Spain’s biggest bank. The fact that neither German nor French banks have suffered a similar fate is a clear demonstration of the double standard ingrained in the EU’s finance industry.

Per an oddly frank admission within the otherwise City/Wall Street establishment-abiding FT of London,

“Bank consolidation is definitely the hidden agenda at the EU level — they want to move to a US-style model centred around a few larger players,” says a hedge fund manager specialising in bank debt. “The only issue is that this cannot be done without victims: big banks don’t want to buy small banks when they are going concerns,” he adds. [sic]

Who assigns and executes such ‘wash and rinse cycles’, how frequently, and why, ultimately?  Is the European Commission itself co-tasked with such bank consolidation duties?  “Clearly this [I.E. Deciding the fate of European lenders]  is putting way too much power on the European Commission — the European Commission is not supposed to be a resolution authority; it is only supposed to deal with competition,” per this cited head of research at a European investment firm.

Relatedly, JPMorgan was recruited to help save the twin Italian banks but ultimately walked away, and presumably not just for fiscal reasons; said bank is the most powerful in the US, and one of the top five in the world.  Hence it will tend to influence wider global banking practices, trends and strategies.  The desire for wider EU banking consolidation is palpable as the inevitability of another global financial meltdown nears.  JPMorgan recently ordered US domestic consolidation among mid-sized banks, per the Federal Reserve’s imminent (I.E. As early as December 2017) balance sheet shrinkage, which it deems as eventually presenting funding problems for said tiers of banks.  This event begged structural and systemic questions over JPMorgan’s relationship with the Fed itself.

How much have the 2008 and imminent global financial crises served, or will serve, for wider, sweeping macro-strategic imperatives and expected ‘debt jubilees’ among the West’s largest banks?  For global financial ‘governing bodies’ such as the IMF and Bank for International Settlements?  What extensive, longer term international money order is being sought through part and parcel ‘creative destruction’ involving such periodic transcontinental asset consolidations via seemingly nonlinear chaos?

Italian Economy Generally Weak, as is the Wider EU Economy

Said three Italian banks were merely reflective of wider, more disturbing trends in the country’s economy.  Italy’s general NPL ratio is close to 14% of its overall banking industry’s loan book, and close to 12% of Italy’s GDP itself as of the end of 2016.  Italy

belongs to the EU country group with the highest level of non-performing loans, with an NPL coverage ratio of 49% (as of December 2016), above the 45% EU average. Within such an environment of financial duress, almost any bank failure could send shockwaves through the system, pushing other banks closer to the tipping point.

Italy’s general banking foundation is so fragile, and a viable market for accommodating deteriorated credit so lacking, that it has not been able, per Don Quinones again, “to offload their estimated €360 billion of non-performing loans, many of them with very weak, if any remaining, collateral underpinning them. Yet on average, they are marked at around 50 cents on the euro.”

Per Reuters last Fall, “Italian banks are widely seen as undercapitalised and they are struggling under a pile of bad loans left behind by a deep recession that ended in 2013.” [sic]

Source:  FT.com

Macroeconomically speaking, Italy’s debt to GDP ratio is in excess of a shocking 130%, its national youth unemployment is north of 37%, with overall official unemployment at 11.3% (well over twice official US unemployment) and the labor force participation rate is only at 65%.  Deeper public and institutional confidence has been negatively affected because of this reckless finance gamesmanship over the years, only to be followed by such wanton bailing out of banks inevitably buckling under said gamesmanship.

Source: FT.com

Per Analyst Iakov Frizis, according “to research on Italian bank balance sheets conducted by Mediobanca Research, out of 500 Italian banks, 114 are at risk, exposed to an excessive amount of credit that surmounts the net value of their tangible assets.”  These 114 have Texas ratios[ii] north of 100%, “meaning that they don’t have enough capital to cover all the bad stuff on their books.”

Additionally, Intesa Sanpaolo and UniCredit, Italy’s largest banks, have weak general solvency data registered and are clearly reliant upon the broader collective stability of Italy’s overall banking industry.  UniCredit is the largest lender yet cannot help in such bailouts because it already has raised €13bn this year for salvaging itself as a going concern.

Source:  TheMarketMogul.com

Genoa-based Banca Carige, Italy’s ninth largest, founded in 1483 and carrying over €26bn in assets, is another problem case, having been told by the ECB to fix its asset quality issues lest it too be culled.  Carige has lost over €2bn over the past four years, and although technically in better shape than the previously closed three banks, still faces a third cash call since 2014.  It will also face troubles in ridding its books of bad loans, especially as the Italian and wider EU economies sour further.  Will Carige require the same controversial treatment by the state which Veneto and Vicenza just received?

It’s a waiting game, due in part to perception management by governments and banks which directly influence them.  There’s a tactical delaying factor at work as far as debt handling goes, alongside generally desperate hoping for a rapid turnaround in the Italian economy’s performance.  Possibly overly ambitious – even reaching – national economic growth forecast figures have been issued by the IMF and internal organizations.  One rosy depiction states that “Confindustria, the Italian employer federation, last week increased its 2018 growth forecast to 1.1 percent from 1.0 percent. But even those forecasts might have been jeopardized had the distressed Venetian banks been left to fester.”  Yes, but how did their bailing out necessarily lead to boosted collective consumer – let alone institutional – confidence?  Especially as, again, more “zombie banks” litter the Italian financial landscape, waiting to roam at night?

The same source cited above then goes on to provide negative caveats regarding Italy’s weaknesses:

The [GDP] growth numbers are still too low to fully dispel the risk that Italy’s NPL problem will prove an economic drag. And Rome cannot rescue bigger banks the same way; only robust growth of, say, 2 percent to 2.5 percent per year can hope to make a real dent in the NPL problem given the fact that many of the NPL are in obsolete industries like clothing and textiles for which growth is largely irrelevant. Private capital inflow into the banks is still required to finance the write down of these loans which often are carried on the banks’ books at inflated prices.

Note the flippant criticism of “clothing and textiles” (why not lambast the added banalities of the Italian food, olive oil, wine and tourism industries while they’re at it?) as obsolete for “growth”.  Because Italy must essentially and effectively mimic German machine manufacturing, exporting, aggressive technology and Anglo-American finance innovation, to truly become a viable “player” alongside other “growth” economies, correct?  Because Italy clearly cannot continue to remain, in essence, *Italian*?  We’re sure there are drastic emergency pedagogical measures available – via distance learning or otherwise – for getting millions of leisurely Italians to learn how to code within six months…

Per Frizis again, Italy faces a three-pronged national banking problem:  A seemingly unresolvable bad loan issue, a housing crisis due to correcting property prices which further threaten collateral sanctities for bank lending, and a dysfunctional, “politicized governance of lending institutions” which holds back collective financial sector performance.  Meaning:  Bail out all the tepid financial institutions you want, Rome and / or the ECB/EC/EU – you still will not structurally resolve the matters at hand.

What would otherwise push these banks over the cliff?  A systemic event triggered foremost by a derivatives meltdown, either within Italy or certainly elsewhere, due to the opaquely defined counterparty relationships between institutions which have traded them, and the wider nature of how derivatives risks go from “net” to “gross” fairly quickly – thus defying prescribed definitions – thereby spreading contagion across borders.

Too Much Global Debt – and thus Risk – As Is

Systemic risk could easily spread from a financially, pandemically plagued Europe to the US, considering that, despite announced governmental figures painting economic indicators as generally healthy, the state of the US economy is much more precarious than advertised.

Per veteran bond king Bill Gross, market risk is at its highest since the pre-2008 Crisis era due to central bank policies for low-and negative-interest rates “artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies.”

Very similar sober sentiments are shared by other senior investors, including Paul Singer of the Elliott hedge fund, who very recently admonished investors and the public that

“distorted” monetary and regulatory policies have increased risks for investors almost a decade after the financial crisis.

“I am very concerned about where we are,” Singer said … “What we have today is a global financial system that’s just about as leveraged -- and in many cases more leveraged -- than before 2008, and I don’t think the financial system is more sound.”

The US consumer debt picture isn’t pretty.  Per Bloomberg,

In the first quarter [2017], 17 percent of U.S. consumers said they were likely to default on a loan payment over the next year, up from 12 percent in the third quarter, before the election … 

The percentage of debt that’s at least 90 days delinquent rose to 3.37 percent in the first quarter, the second consecutive quarterly gain, according to data from the New York Fed. It’s the first time those delinquency figures have risen twice in a row since the end of 2009 and beginning of 2010. About 46 percent of Americans surveyed by the Federal Reserve could not pay a hypothetical $400 emergency expense, or would have to borrow to do so, according to a 2016 report …

Mortgage debt has been growing slowly since 2012. The fastest-growing types of borrowings have been student loans, credit cards and auto debt. For much of this debt, there is either no collateral, like credit card loans, or collateral whose value declines over time, such as cars …

Further, there is little to no wage growth in the US economy, which hampers not just consumption trends but savings and investment.  On top of this, consumers are more reliant on credit to make their way.  Per Bloomberg again,

Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance.

Italy’s banking fiasco can thus easily infect not simply its neighboring EU economies, but thereby rapidly spread across the Atlantic, tipping over North American financial institutions into crisis as well.  The dynamics, esoteric or exoteric, involved in such a worst-case scenario must be scrutinized as they are matters of both national and world security.  For the serious observer, the tools required for said scrutiny by necessity will extend well beyond surface-level academic and even corporate prescribed tools.

Source:  Bloomberg

Source:  Ibid.

[i] A “Bail-In” involves “rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings. A bail-in is the opposite of a bail-out, which involves the rescue of a financial institution by external parties, typically governments using taxpayers’ money. Typically, bail-outs have been far more common than bail-ins, but in recent years after massive bail-outs some governments now require the investors and depositors in the bank to take a loss before taxpayers. Source:  http://www.investopedia.com/terms/b/bailin.asp

[ii] “The Texas ratio takes the amount of a bank's non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the firm's tangible capital equity plus its loan loss reserve. A ratio of more than 100 (or 1:1) is considered a warning sign.” Texas Ratio http://www.investopedia.com/terms/t/texas-ratio.asp#ixzz4mmC7OgNP

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Pye Ian, Newsbud Senior Analyst & Commentator, is an independent economic and geopolitical researcher as well as a strategic planning and business development advisor.  His articles and analyses on international affairs, economic trends and cultural topics have been published in various mainstream and alternative press sources. Mr. Ian’s wider intellectual interests are reflected in his writings on the convergence of foreign affairs, political philosophy, history, global finance and energy policy. He has undergraduate degrees in economics and political science from the University of California and a Master’s degree in finance from Cambridge University. In addition to English, Mr. Ian has proficiency in Farsi.

Newsbud Exclusive- Latent Economic Risks Are High & Rising

A 372-point drop in the Dow Jones Industrial Average on Wednesday, May 17th, 2017 seemed to only register a fractional blip on the concern map of many an analyst and government-compliant economist.  Volatility is present, sure, yet for the most part it was rendered innocuous structurally, being rather blamed on acute political concerns involving Donald Trump’s agenda, and especially considering the gains in the equity markets in subsequent days.

That is not OK.  Neither is the acute display of volatility in said markets, nor the blasé response to them from inter-reliant governmental, media and academic official-dom.  Rather, both phenomena are reflective of the general public’s oblivion – like boiling frogs in slowly heating pots – about the true state of the tightly linked US and European economies, especially when it comes to latent, rising risks.

Debt: Enemy #1

The material and psychological burdens which debt places on consumers, institutions and whole nations can prove pivotal regarding the public’s confidence in the economy, or lack thereof.  Oddly, Americans are misinformed about both the collective quantity and nature of debt in the system.  Being kept in the dark, especially regarding what said excessive debt could eventually do to the system, is seemingly by design and for the sake of maintaining said manufactured levels of confidence.

However, consumer debt levels are at nearly $13 trillion, with corporate and government debt at nearly $30 trillion and approaching $23 trillion, respectively.  The US Debt to GDP ratio is over 104%, and has steadily risen over the years.

Source:  http://www.tradingeconomics.com/united-states/government-debt-to-gdp

Rising longer term debt levels were partly due to the US economy transforming from a post-World War II manufacturing, production and infrastructure development-driven one, to a service, technology and speculative finance-driven economy.  Economic “growth” thus became increasingly calculated via an altered GDP measure as well as the routine performance evaluation of the equity and bond markets.  As analyst Lance Roberts astutely observes, said changes led to gradual drops in workers’ wage levels over the decades:  “The decline in economic output was further exacerbated by increased productivity through technological advances and outsourcing of manufacturing which plagued the economy with steadily decreasing wages.”  High debt, coupled with dropping wages, is a recipe for disaster when it comes to long term standards of living.  Per Roberts, as Americans’

wages declined, they were forced to turn to credit to fill the gap in maintaining their current standard of living. This demand for credit became the new breeding ground for the financed based economy. Easier credit terms, lower interest rates, easier lending standards and less regulation fueled the continued consumption boom. By the end of 2007, the household debt outstanding had surged to 140% of GDP.

Credit and debt expansion have dangerously ‘Fed the American Dream’ since roughly 1980, as banks and other lending institutions grew wealthy at an unprecedented pace.

Source: https://realinvestmentadvice.com/the-great-american-economic-growth-myth/

The gargantuan levels of debt resulting from decades of real estate, mortgage, equity and derivative innovations slash speculation have led to a debt overhang of some $35 trillion which must eventually ‘clear out’, or adjust lower, by mathematical necessity.  Then, consumer institutional savings rates and increasingly sustainable investment patterns based on more tangible standards can return.

“*Structural Debt Level – Estimated trend of debt growth in a normalized economic environment which would be supportive of economic growth levels of 150% of debt-to-GDP.”  Source: Ibid.

The US Fed has already raised, and is considering doing further raising of, interest rates.  Yet due to the nature of corporate and sovereign debt burdens, it ultimately cannot raise rates in a substantive enough fashion to defend the dollar in the long run.  The IMF recently sounded alarm over the dangers of rising interest rates against nearly the highest levels of corporate debt and leverage.  Per the IMF via ZeroHedge, corporate

earnings have dropped to less than six times interest expense close to the weakest multiple since the onset of the global financial crisis … Such a sharp rise in interest rates amid tepid earnings growth could further compromise the ability of firms to service their debtUnder this scenario, the combined assets of [fiscally] challenged firms could reach almost $4 trillion.

Heavily debt challenged firms have spread across the energy, real estate and utilities sectors, accounting “for about half of firms struggling to meet debt service obligations and higher borrowing costs … As for the biggest risk denoted by the IMF [is] the threat of mass defaults should interest rates spike making debt service impossible for up to 22% of US corporations”.

Source:  https://www.imf.org/en/Publications/GFSR/Issues/2017/03/30/global-financial-stability-report-april-2017 via ZeroHedge

The IMF also reveals how the “ratio of earnings to interest payments is worsening … There are some $4 trillion worth of companies at risk if U.S. plans for fiscal stimulus [I.E. further quantitative easing, or essentially, money printing] are enacted but don’t significantly boost the economy.”

Source: MarketWatch.com

 Debt financing has been utilized further by the corporate sector while the credit fundamentals of firms have been weakening, “which create the conditions that can precede a credit cycle downturn.”  Meanwhile, the government continues rewarding speculators, as expected tax reform dividends “may accrue mainly to sectors that have engaged in substantial financial risk taking.”

Other Risk Factors:  Real Estate, Retail Sales, Volatility

Although books can be – and have been - written on the myriad risks facing expected further economic stability in the US, we’ll continue briefly with only a couple of other bullet points.  Commercial real estate (CRE), for one, as a sector retains risks which could pose systemic risks to banks.  Boston Federal Reserve President Eric Rosengren warned about a CRE lending bubble.  Per Business Insider, “[r]eal estate has a significant financial stability implication because real estate tends to be leveraged by the owners, and those loans represent a significant exposure for financial institutions that are themselves highly leveraged.”  Collectively, real estate as an investment category holds over $14 trillion worth of loans, spread out between CRE loans ($3.8 trillion) and residential mortgages ($10.3 trillion).  Smaller banks are over-exposed to CRE loans, begging the question over further bank culling approaching a la 2008 - 2010.  Since 2016, “holdings of commercial mortgages by the banking sector have increased 8.9%, while bank holdings of multifamily mortgages have increased 12.0%.  This growth has occurred while bank supervisors have been cautioning about the potential risks emanating from the high valuations in some sectors of the real estate market.”

Retail sales numbers are plummeting as major, historically vital retailers such as Sears and JC Penney are on the verge of outright failure.  Other major retailers such as Payless, Macy’s and even previously sector leading major technology firms are also suffering.  As of March, 2017, retail sales figures had the largest two-month drops in over two years (below).

Source: TheBurningPlatform.com

Per Yahoo Finance, more “than 3,500 [retail] stores are expected to close over the next several months … Traditional retailers with large fleets of physical stores have been hit the hardest.”

Source:  Business Insider / Yahoo Finance

Although brick and mortar store closures are blamed on the rising efficiencies presented by online purchasing options, the underlying realities behind store and whole mall closures has more to do with higher unemployment than “officially” reported and again, weakening income growth.

Source:  TheBurningPlatform.com

Tellingly, further scrutinizing of the so-called “fear gauge” is back, as it was eight to ten years ago.  I.E. The Chicago Board Options Exchange Volatility Index, or VIX for short, which measures levels of near-term equity volatility risk as gathered through the S&P 500 stock index option prices.  The VIX has risen as of late, which can only logically dovetail into what was referenced at the start of this article regarding the Dow’s aggressive drop last week.

Source: http://www.marketwatch.com/investing/index/vix/charts

Relatedly, the levels of shorting interest by investors have risen as well.  This indicates that further equity losses have been, and continue to be, expected by investors.  The core measurement vehicle for gauging such shorting interest is the SPDR S&P 500 ETF, the rather telling one year chart for which is listed below.

Source:  Yahoo Finance

Clearly, there are plenty of other indicators, metrics and means for taking the pulse of an overleveraged economic system that presents dissipating returns to hard working Americans.  I just thought I’d list a few, taking acute snapshots of current data, hoping that readers will in turn track said data for themselves.

We face serious economic and thus political consequences resulting from decades of a macro level of profligacy which resulted from a collusion of corporate and governmental/regulatory actions.  How the US government – and, crucially, foreign-based ruling banking institutions such as the IMF and Bank for International Settlements – intend to either work collectively toward a ‘soft landing’ equivalent (as much as possible, certainly) versus a purposeful, ‘Creative Destruction’-driven sense of aggressive transnational asset consolidations, is a separate subject worth tracking.  Yet the size and nature of the stakes, when viewed with clarity through viable economic metrics, should ideally drive citizens, investors and analysts toward attaining the requisite tools for provisioning a rare sense of preparation for what is approaching.

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 Pye Ian, Newsbud Senior Analyst & Commentator, is an independent economic and geopolitical researcher as well as a strategic planning and business development advisor.  His articles and analyses on international affairs, economic trends and cultural topics have been published in various mainstream and alternative press sources. Mr. Ian’s wider intellectual interests are reflected in his writings on the convergence of foreign affairs, political philosophy, history, global finance and energy policy. He has undergraduate degrees in economics and political science from the University of California and a Master’s degree in finance from Cambridge University. In addition to English, Mr. Ian has proficiency in Farsi.

Newsbud Exclusive- Oil on Gold: The Demise of the Ponzi Petrodollar via a Sustainable Multi-Commodity Eastern Alternative

Much of the US dollar’s global hegemonic status as both perennial transnational reserve currency, most common means of value storage, means of exchange and even economic weapon, is based upon a nearly half-century old collusive political arrangement made between the Nixon administration and the Saudi Arabian government involving the necessary monetary means of pricing, trading, storing and investing with energy resources – The petrodollar standard, or petrodollar recycling, for shorthand.  Said standard is increasingly under threat from various economic and political alignments globally, thereby begging significant questions not only about which institutions and old, private, hyper-wealthy families sit at the top of western political power structures, but what they’re threatened by, and who or what are doing the threatening.

History:  Gold Standard Ends, Oil Standard Begins

Petrodollar recycling and its resulting standard in many critically functioning fiscal ways effectively replaced the U.S. gold standard as it had existed from a post-World War II-established Bretton Woods Agreement until August 15, 1971, when Nixon closed the nation’s gold window to exchanges for increasingly worthless dollars.  The US government essentially defaulted on its obligations to deliver gold to foreign asking parties under Bretton Woods.  Hence Nixon, under abiding orders from Wall Street and, in many respects, the City of London banking establishment, ordered the multi-decade linking of the dollar to gold at $35/oz. to cease ‘temporarily’ (hint: it became permanent, by longer term design).  The gold standard had provided fiscal discipline in rebuilding the economy after WWII, yet excessively powerful domestic (I.E. President Johnson’s Great Society domestic spending program) and foreign (I.E. Vietnam War) spending needs, as perceived by Washington, required ultimately shifting the backing of the US dollar’s credibility from one commodity - gold (which is the core global money, rather than merely “commodity”) – to another, much more industrially vital one – oil.  Hence the quiet agreements made between Henry Kissinger and the US Treasury Department on one side, and Saudi oil minister Yamani, finance ministers and, ultimately, the House of Saud itself, on the other.  Saudi Arabia was then the largest OPEC oil producer and exporter, with the largest proven reserves, hence its price standard setting role within the group.  Petrodollar recycling, then became the politically engineered means by which oil producers (OPEC and non-OPEC), Atlanticist banking institutions, the largest industrialized economies (the OECD), newly industrialized and less developed nations, would all rely upon the dollar as the sole global currency for, at core, purchasing oil and housing their monetary savings.

Legend

NICs = Newly Industrialized Countries

LDCs = Less Developed Countries [i]

The US Treasury would greatly benefit, as would NY and London banks, because earned billions in oil revenues would then be forced to purchase US Treasury Bonds.  For the Saudis, said oil-for-Treasury paper arrangement guaranteed US military protection of the House of Saud.  For Washington, said scheme practically ensured the ability to run hypothetically infinite debts and deficits … because significant global oil supplies could not be recalled by other nations like gold could, and was, in the late 1960s and very early 1970s.  Petrodollar recycling was and remains, essentially, the largest institutionalized Ponzi Scheme in history because artificial demand for a currency (the dollar) “is created at the expense of the purchasing power of other currencies”.

The dollar gets to be debased in unprecedented fashion without solvency checks against it due to imperial military threats posed by noncompliant nations (I.E. Iraq and Libya, the maverick anti-Washington Consensus leaders of each of which sought immediate, direct petrodollar recycling circumvention), while the US Treasury bill becomes the de facto global investment to be held, not just by OPEC and OECD nations, but by any nation seeking oil and natural gas, other vital industrial resources, trade and general economic development.

Source:  ZeroHedge.com

Long-term, Systemic Economic Risks Triggered

The mentioned sense of nonstop dollar printing and debasement has its long-term costs and consequences for its printers, as does the current state of predominantly Anglo-American financial alchemy, which involves inventions and usages of dollar-denominated, highly risky synthetic financial hedging and investment instruments such as derivatives. [ii]  Globally combined, the anticipated volume of derivatives contracts number north of $1 quadrillion.

Most career, status and wage-beholden finance executives and Federal Reserve-tethered academia and punditry routinely claim that said collective volume is a notional (or “gross”) figure, and that most derivatives contracts thus essentially cancel each other out (hence, ‘worries are overblown by alarmists who do not understand what we do.’).  Yet the definitively chaos-theory-like nature of how derivatives actually can, and sometimes do, avalanche under truly systemically dangerous events (a la the 2008 Global Financial Crisis, or the 1998 collapse of Long Term Capital Management) – where, as economist, banker and lawyer Jim Rickards reveals, seemingly innocuous “net” risks become “gross” fairly promptly, thus wiping out whole financial institutions - begs deeper questions over methodology, requisite opacity, and the truly desperate straits wildly over-leveraged global finance finds itself in today. [iii]  We are bound for the dropping of the ‘second leg’ of the 2008 financial crisis, which Western-based global monetary authorities no less influential than the International Monetary Fund and secretively run, Swiss-based Bank for International Settlements have even warned about.

Graphical sizing up of the global derivatives market.  Source:  Jutia Group

The East Rises to the Challenge

Russia, China and their Eurasian, East, South and West Asian partners are starting to sustainably confront this unjust, profligate and played out arrangement in global finance.  Per Andrew Brennan of The Asia Times, in 2012 and 2013, Iranians circumvented the US Treasury’s imposed sanctions, thereby providing a model for other economically targeted nations to follow.  They did so by selling oil to India in exchange for gold, which was transferred to Turkey, the leading gold player in the MENA, [iv] which then gave Turkish gold to Iranian banks.  The gold went to the Central Bank of Iran.  This high-level barter arrangement avoided the SWIFT system and the increasingly digitized, trackable global banking system.

The Russians and Chinese are also coordinating dollar reliance circumvention.  The Russians take payments for their oil in their Chinese yuan currency, transfer said money to the Shanghai Gold Exchange (already the largest global physical gold market), then buy gold.  The interplay of oil, nondollar currencies and physical gold will eventually evolve into a sophisticated countering – and eventually, replacement – monetary standard mechanism for petrodollar hegemony.

Much of general rising US antagonism toward the East, especially in the recent Trump Era, is due to such multilateral Eastern actions in the financial and currency war realms.   Per banking veteran and economist Alasdair Macleod, “Beijing is convinced that America’s belligerency is driven by financial factors, and it is possible that Trump is stoking up American patriotism to force Congress to increase the debt limit. In short, China probably believes America has become desperate.”  Note the calm, patient, culturally seasoned and thus superior sense of strategy from China, despite – or possibly because of – the wider global economic and political stakes.

Pointing out a more systematized strategy on the part of Russia alone, Macleod continues:

Before the failure of the gold pool in the late sixties, and the subsequent abandonment of the dollar-gold standard in 1971, oil, in common with all other commodities, was effectively priced in gold, the dollar being merely the settlement medium. Since 1971, the oil price measured in gold has varied in a 350% range, while in dollars the range has been many magnitudes greater. If the dollar is to be undermined, the dollar-oil price may rise, but the dollar’s purchasing power eliminates any benefit. Russia will almost certainly want to revert to the pre-1971 regime, of oil priced in gold, allowing her to accumulate monetary reserves that retain their value.

Recently, Russia’s central bank opened its first foreign office in Beijing, a step widely perceived as aiming to ally with China in averting dollar reliance en route to potentially re-implementing their own gold standard.  Calculated bond issuance by Moscow, yet in China’s currency, is one of the most provocative moves in international finance in years.  Per ZeroHedge.com, via the South China Morning Post,

Russia is preparing to issue its first federal loan bonds denominated in Chinese yuan. Officials from China’s central bank and financial regulatory commissions attended the ceremony at the Russian embassy in Beijing, which was set up in October 1959 in the heyday of Sino-Soviet relations. Financial regulators from the two countries agreed last May to issue home currency-denominated bonds in each other’s markets, a move that was widely viewed as intended to eventually test the global reserve status of the US dollar.

In turn, Beijing is establishing its own clearing bank in Moscow for handling transactions in yuan.  This mutual experiment is aimed at, for one, servicing the fiscal needs of nations in the Eurasian Economic Union.

These dynamic moves by the spine nations of the Shanghai Cooperation Organization are coupled with their dumping record amounts of US Treasury bonds.  China dumped $188 billion worth of US paper last year alone.  Collectively, foreign central banks – including Japan’s - sold off over $300 billion of US bonds between 2015 and 2016.  Eastern nations’ dumping bonds while buying gold, and planning how to provide a newer fiscal basin for energy pricing and trading, are at the core of Anglo-American finance’s concerns over what they consider acts of war.

Conclusion

‘Ending the petrodollar standard’ cannot, and will not, happen overnight.  Especially as Washington/London have put on the full court press in all domains from selecting a purposefully intimidating – and seemingly even delirious – US Commander in Chief, to implementing a rushed tactic of attempting a separation of Russia, China and Iran from each other, to outright saber rattling against North Korea, which is actually serving as a proxy spar against China.  However, the clear global economic momentum leans Eastward, due to the confluence of rich energy and mineral resources (Russia, Iran, Turkey, the central Asian ‘Stan states, et al.), productivity, savings and investment muscle (China alone), well-armed and agile military forces (Russia, China and their SCO allies), and simply better strategic coordination.

As Metternich-Machiavelli reincarnated, Henry Kissinger himself stated: “Control oil and you control nations.”  Well, said “control” occurs through monetary and military means.  The military means are difficult to implement against a rising, defensively alert, nuclear armed and routinely drill sharing Russia-China.

The monetary means, however, might prove to be even harder to deploy, especially considering that the collective West’s worst enemy … is itself.

*For an in-depth analysis of this article download the PDF attachment here.

# # # #

Pye Ian, Newsbud Senior Analyst & Commentator, is an independent economic and geopolitical researcher as well as a strategic planning and business development advisor.  His articles and analyses on international affairs, economic trends and cultural topics have been published in various mainstream and alternative press sources. Mr. Ian’s wider intellectual interests are reflected in his writings on the convergence of foreign affairs, political philosophy, history, global finance and energy policy. He has undergraduate degrees in economics and political science from the University of California and a Master’s degree in finance from Cambridge University. In addition to English, Mr. Ian has proficiency in Farsi.

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[i]  Source:  Spiro, David.  The Hidden Hand of American Hegemony:  Petrodollar Recycling and International Markets.  Ithaca, NY:  Cornell University Press, 1999.  Print.  P. 75.

[ii]  Financial derivatives come in four basic types:  Forward, futures, and option contracts, and swaps.  Included in their make-up are equity, interest rate and credit derivatives, over-the-counter (or “OTC”) swaps, on-exchange, interest rate swaps, et al.  Sophisticated financial instruments, yet opaque enough in the “gross” calculation sense to where Warren Buffett once labelled them as financial “weapons of mass destruction”.

[iii]  Jim Rickards lucidly explores such systemic risk issues, along with the abject need for a revised Economics academic discipline (let alone the finance profession and its methodologies for risk assessment), across his multiple texts, including most recently The Road to Ruin, The Death of Money and Currency Wars.

[iv]  MENA being the “Middle East and North Africa”.

Numerical Hat Tricks & Interventions: ‘Official’ government statistics vs. U.S. economic reality

The true state of the American economy in a post-2008 Financial Crisis world is not what it is depicted and sold as being by the U.S. Government and the sycophantic mainstream corporate financial press which remains mostly obedient to its dictations.  Credible statistics for such vital economic indicators as the “official” rates of unemployment, inflation and the gross domestic product (GDP) growth rate are vastly different from what is routinely reported by government entities including the Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA), U.S. Treasury and most certainly the U.S. Federal Reserve itself, which practically runs the economy via diktat monetary and fiscal policies with little to no oversight by any formal constitutional branch of the U.S. Government.

Proof of said divergences in data reporting can be found by critically observing the key differences in how said metrics had been measured in decades past by the government versus how they are being measured today, and why.  Confirmation can also be found by contrasting the differences in stories reported in said mainstream press itself; namely, reports relaying supposed economic strength – as judged by cooked metrics - alongside consistent reports openly discussing rising homelessness and crime in urban and even suburban areas, collapsing retail spending, and a reprising real estate correction – trends which traditionally indicate widespread and growing economic distress.

The reasons for such purposeful statistical misreporting include key political ones involving the need by the government for maintaining an image of the US economy as still the strongest on earth despite enduring the “worst economic crisis since the Great Depression”, as the financial press nonetheless oddly, willingly admits.  This ‘officially’ propped up image helps justify foreigners keeping US Treasury Bonds.  Reasons also include the government avoiding adjusting entitlement payments higher due to the real rate of inflation, considering already record-level U.S. debt.

America’s (‘Massaged’) Unemployment Diagnosis

The current “official” U.S. Unemployment Rate – meaning that which is revealed by the BLS (a division of the U.S. Department of Labor) – listed as 4.5% for the month of March 2017.  Said reported rate had ranged between 4.6% and 5.0% throughout 2016.  The March 2017 number was even touted as being “the lowest in [a] decade”, with the November 2016 figure of 4.6% having been praised as at a “nine-year low”, seemingly indicating that the U.S. economy is back on track after a brutal 2007-2009 Financial Crisis, which – again -- heaved many sustaining aftershocks for years.

The problem, and resulting controversy, with how the BLS tabulates monthly, seasonal and yearly unemployment figures is that the means of data collection involve a limited survey which skews the meaning of incentives for people seeking work.  The Current Population Survey conducted monthly by U.S. Census employees reaches out to only a limited number of households as a supposedly accurate, representative sample of tens of millions of Americans. Said survey uses opaquely random sampling methods while rendering household participants who are “not actively looking” for work as effectively out of the counted labor force.  Per Investopedia, “[t]his is a controversial issue, as many feel the unemployment rate excludes a large number of people who are out of the labor force, not because they do not want a job, but because they have simply given up looking [for work]”.

The BLS’s official unemployment figure – labeled the “U3” - is expectedly not the definitive metric for all economists, analysts and money managers, despite serving as the monthly news headline figure.  There is also the “U5” figure, which counts the U3 along with “discouraged workers” who have stopped looking for work because current economic conditions make them believe that viable work is simply unavailable.  The U5 also includes “loosely attached workers” who are capable & prefer to work, yet haven’t actively sought it in recent months (perhaps due to lowered self-esteem resulting from months of unemployment – again, not a concern for government economists).  There is also the “U6” unemployment figure, which includes the U5 along with part-time workers who prefer full-time labor yet cannot secure it due to more systemic or structural economic faults such as “underemployment”.

The March 2017 U5 figure listed at 5.4%, while the U6 came in at 8.9%, clearly nearly twice the “official”, headline-grabbing U3 number.

Lastly, a valuable independent economic research organization based in Northern California entitled Shadow Government Statistics (“ShadowStats”), calculates a separate, much wider metric entitled the “ShadowStats Alternate” unemployment estimate, which purposefully includes much longer term discouraged American workers who’ve been unemployed for over a year.  I.E. People tactically ignored by the BLS for said tabulations.  Per ShadowStats, their estimate relies upon means of government calculations which were abandoned – ostensibly for political reasons -- by the BLS in 1994.

Said ShadowStats Alternate unemployment figure registers at a staggering 23% - well in range for what America endured during The Great Depression (although the government and press ‘urge’ us not to go near that phrase again...).

Source:  http://www.shadowstats.com/alternate_data/unemployment-charts

America’s (‘Massaged’) Inflation Diagnosis

The U.S. Government will tout currently low inflation, with many mainstream commentators even warning of outright chronic deflation.  Yet, Americans feel the clearly rising burdens of paying rents and fuel, medical costs, insurance premiums, certain foods, medicinal drug prices and a myriad other consumer staples.

Similar to how determinant metrics for unemployment were changed by the BLS in 1994 as per changes in census measurements, the BLS performed methodological shifts in calculating and reporting consumer inflation, as displayed monthly by the Consumer-Price Index (CPI).  The resulting numbers have been consistently lowered, with the underlying reasons remaining perceptual and firmly political.

Again, per ShadowStats, the CPI has been remolded since the early 1980s to purposefully understate the “official” rate of inflation, versus the actual consumer experiences:

CPI no longer measures the cost of maintaining a constant standard of living.  CPI no longer measures full inflation for out-of-pocket expenditures.  With the misused cover of academic theory, politicians forced significant underreporting of official inflation, to cut annual cost-of-living adjustments to Social Security, etc.

Use of the CPI to adjust retirement benefits, private income or to set investment goals impairs the ability of retirees, income earners and investors to stay ahead of inflation.  Understated inflation used in estimating inflation-adjusted growth has created the illusion of recovery in reported GDP.

Hence, these critical statistical figures are purposefully misstated for both domestic political reasons (I.E. entitlement expenditures and the U.S. federal budget deficit) as well as vital foreign considerations (I.E. international perception of the U.S. economy, trust in the U.S. Dollar as global reserve currency, continuing necessary reliance on a Petrodollar Standard, etc.).

Thus, when ShadowStats calculates formal inflation figures while relying upon the more data-inclusive yet shrewdly abandoned methods from past decades – methods which, again, incorporate vital consumer costs – they naturally arrive at much higher percentages:

Source:  http://www.shadowstats.com/alternate_data/inflation-charts

Source:  Ibid.

Questioning the official CPI figures has persisted for some time by contrarian and “heterodox” economists and hard money (I.E. gold standard) advocates, with even divisions of the U.S. Federal Reserve attesting to government metrics differing from household experiences.

U.S. GDP:  Overstated?

Although the U.S.GDP figure has been contested as a viable measure of a nation’s genuine economic development, sustainability and wellbeing, it is nonetheless relied upon as a core measure of economic strength.  That said, and as related to the above quantitative phenomena, questions also linger over the credibility of U.S. GDP growth rate figures.

We defer again to ShadowStats, which conveniently provides an “SGS-Alternate GDP” annual rate of growth.  This more transparent figure “… reflects the inflation-adjusted, or real, year-to-year GDP change, adjusted for distortions in government inflation usage and methodological changes that have resulted in a built-in upside bias to official reporting.”

Their estimated blue line for the SGS-Alternate below illustrates the multiple percentage point reduction from the official, BEA-issued U.S. GDP growth rate:

http://www.shadowstats.com/alternate_data/gross-domestic-product-charts

U.S. Equity Markets:  The “Invisible Hand” Made Increasingly Visible

Per 18th Century philosopher and accepted father of modern capitalism, Adam Smith, the marketplace is ultimately guided by an “invisible hand”.  I.E. An “unobservable market force” helps the supply and demand of goods and services in free markets “automatically” reach an equilibrium position for trade.  It sounds great in theory, until one studiously observes movement behavior in the indices of major U.S. stock and equity markets over the past few decades.

“There are no markets anymore, just interventions.” -  Chris Powell of GATA.org

After the October 1987 U.S. stock market crash, President Reagan assembled what later became known as “The Plunge Protection Team” (PPT) in order to prevent future fiscal crises by intervening directly in markets should there be panic selling.  This outfit included the U.S. Federal Reserve, Treasury and other critical entities tasked with carefully orchestrating interventions to provide ‘circuit breakers’ when mass frenzy threatens the financial system (which, on its own, questions the overall sustainability of said financial system).  Yet warranted concerns linger over the ‘graduated scale and scope’ of what this outfit, or its ancillaries among large banks, exchanges and increasingly, technologically complex high frequency trading tools, are committing, considering consistent, seemingly fortuitous reversals in direction for U.S. stock markets after aggressive corrections in recent years.

For many rote investors, traders, financial salespeople and certainly government bureaus tasked with reporting items like, well, the U.S. GDP, there is a collective shrugging of shoulders over the PPT’s proven or even potential actions, let alone the need for its existence in supposedly “free market” conditions.  If the PPT’s actions benefit them and the country’s economy overall, then what’s the point of referencing cerebral, ‘wonkish’ contradictions in economic theory?

Yet theory must, at some point, be reconciled with reality (especially if it’s an invalid theory...).  Meaning government interference in so-called “free markets”, as well as manipulating vital economic indicators such as unemployment, inflation and GDP numbers, eventually leads, ironically, to distortions in the economy which get increasingly harder to fix.  Vital, accurate asset price discovery becomes warped over time.  Contradictions between ‘free, open trade’ and said interventions (read: manipulations) result in the hoarding of commodities and other goods by those (I.E. foreign central, private and hybrid banks) who become aware of such ‘noble lies’ (to paraphrase Plato).

Ultimately, the very philosophical edifice underlying the economic and political system of a nation (the U.S. or U.K.) or system (“Market Fundamentalism”) is drawn into question, as are the capabilities of the so-called enlightened leadership backing them.  The same leadership which perennially preaches to the rest of the world to conform to its beliefs and practices.

Conclusion

The false reasoning over the government’s shifting of methodology over key economic metrics involved the seeking of ‘information-age efficiencies’ that were assumed to accompany the dawning of the Internet Age back in the mid-1990s.  Yet these ‘efficiencies’ resulted in the hollowing out of the US work force over the past two decades.  They also contributed to the reversal of rising wages, both factors of which are directly killing off the middle class that had been built up over the prior five decades.  Indeed, for the sake of critical transparency, this is partly where the value of history matters to economics and finance, which are fields in dire need of interdisciplinary salvaging from excessive, shaky mathematical assumptions regarding human behavior.

Subsequently, we have supposedly been in a “Recovery” since 2009, yet the Federal Reserve hasn’t been able to substantively raise interest rates to match what a traditional recovery has warranted in the past.  Instead, there have merely been micro-adjustments higher – ultimately to give short shrift to defending the increasingly risky US dollar – while Negative Interest Rate Policy (“NIRP”) is now even being considered, as it had been with futility in Japan and Europe - to try and resolve chronic lack of demand.  Much of these systemic dysfunctions can be owed to poor data reporting – or outright omitting – over decades.

# # # #

Pye Ian, Newsbud Senior Analyst & Commentator, is an independent economic and geopolitical researcher as well as a strategic planning and business development advisor.  His articles and analyses on international affairs, economic trends and cultural topics have been published in various mainstream and alternative press sources. Mr. Ian’s wider intellectual interests are reflected in his writings on the convergence of foreign affairs, political philosophy, history, global finance and energy policy. He has undergraduate degrees in economics and political science from the University of California and a Master’s degree in finance from Cambridge University. In addition to English, Mr. Ian has proficiency in Farsi.

 

Newsbud Exclusive- NATO’s Currency War against Turkey: Comparative Resistance & Solutions

Turkey is being attacked by Anglo-American finance as punishment for Ankara’s perceived noncompliance with NATO’s geostrategic goals.  Despite Turkey’s Justice and Development Party (AKP), under President and once Prime Minister Recep Tayyip Erdoğan, running a successfully growing emerging markets economy for nearly a decade and a half while enduring multiple scares, Turkey’s economy is now uniformly described as in dire straits by the collective London-New York banking juggernaut and its media tentacles.  Despite the West’s reasoning for why the nation’s currency – the lira – is plummeting, Turkey is enduring this imposed situation due to seasoned, disciplined internal defensive economic measures, plus its insistent relations with China, Russia and Iran.

For years, independent Turkey has been leaning excessively, in the eyes of the West, toward these interlinked Eurasian partner nations and their growing intercontinental economic, political and security corridor while trying to balance them against its western interests.  Yet, judging from acutely speculative attacks on the lira, plus an attempted coup in July 2016, as well as repeated terrorist attacks within its borders, it becomes clear yet again that Atlanticist nations do not tolerate sharing what they perceive as their strategically vital client states with any other major powers.

In the new year, the lira’s rout has been described as the worst in nearly a decade, with the Anglo-American banking sector putting the blame acutely on the Erdoğan government lowering interest rates, on security instability via terrorist attacks, and more widely on Ankara’s efforts to vertically integrate power in order to, ironically, reduce risks to Turkish stability.  Subsequently, the lira has apparently replaced the South African Rand as the “World’s Most Volatile Currency”.

Turkish President Erdoğan has notably stated that the lira’s troubles have mostly resulted from attacks against it from speculators and financial “terrorists” abroad.  Although these accusations have been criticized in the West as paranoid at best, and ineffective and harmful at worst, a sober viewing of the actors involved, and the history of such currency wars affecting other nations unpopular with Anglo-American economic power, reveals a viable pattern that vindicates Ankara’s honest, fearless sentiments.

Such are among the risks which currencies of sovereign states face in a world economy still dictated to by Dollar Hegemony.  Thankfully, and based on lucid awareness of global affairs as well as a learned sense of monetary history, Turkey’s AKP Government knows of and is acting on alternative currency valuation arrangements, which will provide needed defensive measures against foreign deployed currency wars as well as provide invaluable, overdue modelling for other nations who’ve faced, or will face, similar economic frontal attacks.

Reasons for Atlanticists hitting the lira?  Turkey has gradually been incentivized by both Russia and China, through means including certainly economic ones, to rely more on the rising Eastern hemisphere.  Turkey sees itself as a willing participant in China’s vast, multi-billion-dollar One Belt, One Road, and New Silk Road, projects.  The feeling is certainly mutual.  Turkey has also negotiated significant energy pipeline deals bilaterally with Russia.  The Turkstream natural gas pipeline, which is meant to replace the cancelled South Stream project, was first announced by Russian President Vladimir Putin in December 2014, making the timing of NATO’s turning against Erdoğan’s rule not coincidental.

Another reason for the West’s consternation with Ankara involves its assisting neighbor Iran with trade and currency relief in spite of US-initiated sanctions against Tehran.  For years, Turkey traded gold bullion for needed Iranian natural gas, a plan which not only avoided using US dollars, but also added to Iran’s capital resource base, provided hard currency for Iran to conduct transactions for goods, and most importantly essentially re-introduced gold as money into global finance.  Although this practice was small in volume compared to the much vaster global currency markets, let alone US Dollar Hegemony in general, it was nonetheless significant as an act of mutual defiance by Iran and Turkey, as well as a model for other nations to emulate against said hegemony.

Lastly, western finance’s tools have been used against other ‘misbehaving’ nations for decades.  These nations include Iran, Russia, Venezuela, Zimbabwe, Egypt and even western ‘allies’ India and the Philippines.[i]

Turkey’s Economy Doesn’t Warrant a Plummeting Currency

Despite the interlinked US/UK banking, press and credit rating agency-issued financial misinformation, Turkey’s overall economic condition doesn’t justify a plummeting currency.  The “total debt” picture in Turkey isn’t as precarious as it is painted to be, based on Turkey’s debt-to-GDP ratio beating those of many leading industrialized western nations, and the government’s current and intended steps toward managing private debt burdens.  Regardless, Ankara is painted as bordering on state collapse, fiscally-speaking, in banking circles.  President Erdoğan shrewdly derived that, essentially, the same enemies of Turkey are behind both kinds of recent attacks against his nation – false flag terror and economic ones.

Professor Kerem Alkin of Istanbul Medipol University, proclaimed recently that “[i]f the economy was truly in trouble, then not only the foreign exchange rates but also the CDS [Credit Default Swap] rates, the risk premiums of the Turkey's treasury stocks, should rise very rapidly [sic]."  Alkin also noted that Turkey’s national stock exchange had not dropped sharply, and “second hand market interest rates” of Turkish sovereign bonds had not increased “with maturities in two to 10 years [sic].”  The disconnect between these internally acute, closely followed indicators and said accusations from western analysts at the least invites further restrained scrutiny over the latter’s claims.

Plus, credibility-wise, it is worth noting that the large, US-based so-called “credit rating” agencies – Moody’s, Fitch (US/UK) and Standard & Poor’s (S&P) – are notoriously politicizedwhen need be’ (as the lead up to the 2008 Financial Crisis, for one, proved to be) and are routinely deployed for economic propaganda purposes, not the least instance of which involves Turkey today.

Existing and Proposed Solutions

In defending Turkey’s economy while preserving its independence, the Erdoğan government has already taken certain shrewd assertive steps, based in part on its recently challenging currency experiences and wider modern monetary history.  The Erdoğan government and the Central Bank of Turkey have responded with specific policy measures to protect the lira and fight general risks to Turkey’s finances in the current currency war climate.  Ankara should – and possibly will – consider other steps as well involving its rising eastern partnerships.  By reassuring Turkish citizens as to the sanctity of liras and gold versus foreign currencies, Erdoğan has been urging economic nationalism while labelling the reversion to dollars and other western currencies out of fear as “representative of imperial logic”, as the issuers of said currencies wish to “destroy” Turkey.  Lowering the central bank interest rates to urge growth – in defiance of demanded rate increases by UK/US finance – coupled with fiscal policy instruments for preventing forced increasing in exchange rates, should also help weather the storm.

One of Ankara’s most assertive responses to the currency war is the $8.8 billion Sovereign Wealth Fund (SWF) started in August 2016 – right after the failed coup attempt of July 15 – with only a $13 million endowment.  A clear manifestation of economic nationalism, the SWF retains consolidated state-owned assets and is meant to help orchestrate more favorable terms of financing than those resulting from the externally engineered perception of Turkey as harboring too many risks for attracting ‘smart money’ investment capital – a tainted image which said western credit agencies have fanned alongside forex speculators.  The SWF represents both a defensive move in protecting said assets and an offensive one in deploying productive Turkish state and corporate resources to access better terms of financing.  In essence, it is the Erdoğan government making a (very) educated bet on Turkey.  One wonders if the SWF resulted partly based upon the friendlier, innovative, collaborative urgings of China, Russia, Iran and Turkey’s other Eurasian partners, who continue to seek economic partnerships with Ankara.

Another of Turkey’s current defensive strategies involves targeting nefarious global foreign exchange speculating directly by reducing the maximum level of leverage on forex trading accounts while simultaneously raising the minimum deposit requirements for such trading activity.  These steps are meant to limit damages due to aggressive leverage – intentionally inflicted or otherwise – while sending reassuring signals of prudent capital controls to future investors and stakeholders.

Lastly, there is the impending result of the Turkish Constitutional Referendum, scheduled for April 16th 2017.  The government proposed said referendum in order to “grant Mr Erdoğan an executive presidency” [sic], per the FT, and potentially “giving him a huge economic lever to guide the development of the country” when combined with the strengths of the SWF, according to Global Source Partners Analyst Atilla Yesilada.  Deputy Prime Minister Şimşek expects much of the economic uncertainty facing Turkey “to disappear after [the] constitutional referendum in April” and a “strong reform agenda is realized” after its presumed passing.

Additionally, Erdoğan has offered eastern partners Russia, China and Iran the chance to partake in bilateral currency usage, where each nation trades with Turkey using only their respective national denominations.  This concept of ‘currency pairing’ is certainly not exclusive to Turkey’s relationships with said Eurasian powers, as Russia and Iran have been solidifying such an arrangement at the Moscow Exchange.

Despite enduring decades of sanctions and other economic duress from the US and its allies, Iran has survived and endured patiently.  In issues involving discipline, Iran has thrived, and now presents a formidable emerging market case study for growth.  Hence, Iran serves as an exemplar to Turkey in many ways, not least of which involve how to connect productively with the rising Eurasian powers, foremost China and Russia.[ii]

Per analyst Dmitry Bokarev, “China has been the reason why the Iranian economy even survived these difficult times [of sanctions].”  China’s ambitious New Silk Road (NSR) - or OBOR – project, is expected to eventually render Iran as immune to US or EU sanctions.  Naturally, Turkey can be expected to also benefit to a great extent from that ‘insurance policy’ from China, which will then be joined by Russia, Iran and the Turkish-speaking Central Asian nations.

Source:  merics.org

In fact, China, which now has its renminbi (or yuan) currency admitted into the IMF’s Special Drawing Rights (SDR) basket of currencies, could ultimately request that the over-leveraged US dollar lose its reserve currency status, especially as expected further deficit spending and debt issuance by Washington flirt with a formal Dollar Crisis.  Just the mere request would trigger economic shockwaves, and China retains the credibility to make it more than simply a request.  These ‘macro-factors’ are ones which Turks who doubt Erdoğan’s ‘monetary nationalism’ should be aware of.

Lastly, in addition to reducing dollar reserves at home, arranging currency pairings with allied countries and hoisting the Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB), China and Russia are also avidly pursuing their own independent rating agencies as well as an alternative to the SWIFT global monetary transfer system.  Such developments will grant Ankara further global monetary options for nurturing confidence in its economy.

As mentioned, President Erdoğan urged Turks to transfer their foreign currency holdings into liras and gold.  Why gold?  Because gold is money, and has been for millennia.  Also, because the Russian, Chinese and other nations’ central banks are stockpiling as much gold bullion as possible in order to preserve and strengthen economic sovereignty while crucially preparing a future re-linking of gold to oil pricing.  Erdoğan thus urged the height of monetary nationalism, and a platform that will be readily assisted by Turkey’s eastern partners in turnkey fashion.

Turkey, like Russia, China, Iran and India, is a rising gold importer and user.  Turkish citizens, commercial banks and the Turkish central bank retain gold.  The World Gold Council reveals that Turkey ranks as 14th highest in global central bank gold reserves, at 396.5 tonnes.  Yet per GoldCore, these numbers could be understated due to Turkish commercial banks being empowered by the central bank to hold privately held gold for their reserve requirements.

There is a clearly coordinated collective institutional effort to protect the nation’s gold while arming it for defensive insurance measures.  By 2014, gold had “become the top investment option amongst Turkish citizens, ahead of real estate”, while “lessening the financial stability risks” of the nation.

Upwards of between 3,500 and 5,000 tonnes of gold is held outside Turkey’s banking system, and the government has attempted to have people deposit them into said banks in order to cushion reserve requirements, strengthen foreign exchange positioning, allow for lira printing when necessary, reduce risks of a liquidity crisis (like the one Turkey experienced in 2000/2001), and match the similar actions of other prudent Eurasian nations seeking to interlink across the eventual transcontinental free trade zone.

Considering its sober, awareness and valuing of gold as a monetary asset, as well as certainly the amount of gold it produces, recycles and trades with, Turkey is well positioned between Europe, Asia and Africa, as a future solidified economic pillar to help provide tangible alternatives to the increasingly insolvent western fiat currency paradigm.

Lastly, considering how deeply undervalued gold is currently vis-à-vis US Treasuries and oil, there is a tectonic arbitrage opportunity which gold producing, valuing and trading nations like Turkey should take advantage of by working in increasing lockstep economically and thus geopolitically with Russia, China, Iran, India and other nations responding to the above-described unprecedented geo-economic opportunities.  By doing so, Turkey would not only defend acutely against currency wars heaved at it from the West, but would also climb aboard the right side of (impending) history.

Global Economic Stakes Are Massive for the West

In addition to the above, why else are Atlanticist nations, led by the US and UK, so persistent in targeting Turkey economically and politically?  Because the global economic stakes – and specifically, those the West faces acutely in global finance – are massive, nay, unprecedented.  London and Washington can thus ill afford to have an important NATO member and literal bridge to East, South and Southwest Asia (as well as, again, in various ways, to Africa), be lost to the core challengers to Dollar Hegemony, who smell blood in the water.  Especially considering the influential knock-on effects Turkey’s Eurasian shift would have on EU nations such as Germany, Greece, Italy and others who carry their own various qualms with EU, US and UK economic, monetary and political mismanagement.

Conclusion

Turkey is clearly not new to coups, currency attacks and other externally sourced interference into its internal affairs and sovereignty.  That said, this very old, proud and resilient nation has managed to consolidate past experiences into balancing both modern defensive and offensive arrangements, economically and politically speaking.  The recent fiscal attacks by transatlantic banking powers will be used as a global case study in how to deflect economic threats while providing catalysts for further Eurasian developmental integration and growth.

*For in-depth analysis of this article download the PDF attachment here.

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Pye Ian, Newsbud Senior Analyst & Commentator, is an independent economic and geopolitical researcher as well as a strategic planning and business development advisor.  His articles and analyses on international affairs, economic trends and cultural topics have been published in various mainstream and alternative press sources. Mr. Ian’s wider intellectual interests are reflected in his writings on the convergence of foreign affairs, political philosophy, history, global finance and energy policy. He has undergraduate degrees in economics and political science from the University of California and a Master’s degree in finance from Cambridge University. In addition to English, Mr. Ian has proficiency in Farsi.

[i] In our more detailed paper on this subject, we will review this sordid history as well as how such nations have sought to fortify their respective sovereignties while, in certain instances, fighting back.

[ii] Sir Richard Dalton, who served as UK Ambassador to Iran (2003 – 2006), views Iran