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by John Rubino on February 28, 2014 · 14 comments
Only in a world totally corrupted by easy money could the following two things be announced on the same day. First:
Yields on the euro area’s government bonds have never been lower as the potential for extended European Central Bank stimulus helps exorcise memories of the region’s sovereign debt crisis.
The bond-market rally is broad based, encompassing both core economies such asFrance and also peripheral markets including Greece, which was pushed to the brink of exiting the currency bloc during the region’s financial woes. Another of those nations, Portugal, took a step toward exiting an international bailout program today as it bought back bonds, while Italy, supported in the turmoil by ECB bond purchases, sold five-year notes at a record-low rate.
“Investors are starting to look at the non-core European bond markets as a viable investment alternative again,” said Jussi Hiljanen, head of fixed-income research at SEB AB inStockholm. “Further ECB actions have the potential to maintain the tightening bias on those spreads,” he said, referring to the yield gap between core nations and the periphery.
The average yield to maturity on euro-area bonds fell to a record 1.6343 percent yesterday, according to Bank of America Merrill Lynch indexes. It peaked at more than 6 percent in 2011, the data show.
Italy’s 10-year yield fell seven basis points to 3.47 percent after touching 3.46 percent, a level not seen since January 2006. Portugal’s 10-year yield dropped four basis points to 4.81 percent and touched 4.78 percent, the least since June 2010, while Ireland’s two-year note yield and Spain’s five-year rates dropped to records.
Then, at about the same time:
Eternal city warns it will go bust for the first time since it was destroyed by Nero
Matteo Renzi, the Italian prime minister, came under pressure on Thursday as the city of Rome was on the brink of bankruptcy after parliament threw out a bill that would have injected fresh funding.
Ignazio Marino, Rome mayor, said city services like public transport would come to a halt and that he would not be a “Nero” – the Roman emperor who, legend has it, strummed his lyre as the city burnt to the ground.
Marino said that Renzi, a centre-left leader and former mayor of Florence who was only confirmed by parliament this week, had promised to adopt urgent measures to help the Italian capital at a cabinet meeting on Friday.
The newly-elected mayor faces a budget deficit of 816 million euros ($1.1 billion) and the city could be placed under administration if he does not manage to close the gap with measures such as cutting public services.
“Rome has wasted money for decades. I don’t want to spend another euro that is not budgeted,” Marino said, following criticism from the Northern League opposition party which helped shoot down the bill for Rome in parliament.
The draft law would have included funding for Rome from the central government budget as a compensation for the extra costs it faces because of its role as the capital including tourism traffic and national demonstrations.
Other cash-strapped cities complained it was unfair. But Marino warned there could be dire consequences. “We’re not going to block the city but the city will come to a standstill. It will block itself if I do not have the tools for making budget decisions and right now I cannot allocate any money,” he told the SkyTG24 news channel.
Marino said that buses may have to stop running as soon as Sunday because he only had 10 percent of the money required to pay for fuel in March.
He added: “With the money that we have in the budget right now, I can do repairs on each road in Rome every 52 years. That’s not really maintenance.”
How is it that Italy is able to borrow money at low and falling rates – which indicates that borrowers are confident of its ability to pay its bills – while its major city, far more important to that country than New York or Los Angeles is to the US, slides into bankruptcy?
The answer is that Rome is irrelevant in comparison with two other facts. First, Europe is slipping into deflation, which generally leads to lower bond yields. Second, the European Central Bank is virtually guaranteed to respond to fact number one with quantitative easing on a vast scale.
So the bond markets, far from rallying on the expectation of a eurozone recovery, are rising in anticipation of the opposite: a new round of recession/deflation/instability that forces the abandonment of even the pretense of austerity and the adoption of aggressively easy money.
In this scenario, a Roman bankruptcy is actually a good thing because it pushes the ECB, Bundesbank, Bank of Italy and the other relevant monetary entities to stop dithering and start monetizing debt in earnest. Once it gets going, the goal of the program will be to refinance everyone’s debt at extremely low rates, push down the euro’s exchange rate versus the dollar, yen and yuan, and shift the currency war front from Europe to the rest of the world. The race to the bottom continues.
The rest of this series is available here.
Venezuela Devalues Bolivar By Another 44% For Some, Still 600% Higher Than Black Market Due To 50% Inflation | Zero Hedge
Less than a year ago, Venezuela shocked the world when it launched the “first nuke” in the ongoing currency wars (which despite having dropped off the front pages, have certainly not ended), by devaluing its currency, the Bolivar from 4.30 to the USD to 6.30, in the process crushing the profits of many companies that operate(d) in the TP-deprived socialist paradise (which as we reported earlier is about to experience food shortages).
Earlier today, Venezuela Oil Minister and Economy Vice President Rafael Ramirez announced on state television that the country just devalued the official Bolivar exchange rate again by another whopping 45%, for some.
Specifically, Venezuelans traveling abroad and airlines will use Sicad FX rate which was last 11.36 bolivars per dollar. Those spared from the most recent devaluation, for now, are students abroad, pensioners, retirees, consular and diplomatic services who will continue using 6.3 bolivars/USD rate. This follows comparable steps taken in late December, when the Bolivar was devalued by the same amount for any non-residents and tourists entering the nation, as the nation unrolled its centrally-planned currency regime in which the Bolivar is offered through a dollar-auction system called Sicad.
The WSJ reported at the time:
Venezuela earlier this year launched a dollar-auction system called Sicad where some importers and tourists could request hard currency at a rate weaker than the official exchange rate of 6.3 bolívares. The government never formally disclosed the exchange rate used in Sicad but local analysts and companies that have participated in the auctions say the rate is close to 12 bolívares per dollar.
Venezuela will increase usage of Sicad in 2014 and will deliver $5 billion into the local economy through the system, according to Mr. Ramirez.
Still, Wall Street analysts widely expect Venezuela to pull off a full-scale devaluation of its currency in the near-term, a move that would help the government shore up a its finances by capturing more in local-currency terms when it converts dollars earned through oil sales.
Indeed, the reason why today’s move is largely meaningless and purely optical, is because there is still an 85% differential between the official rate, and what one can get for a dollar on the black market.Which as the chart below shows is substantially higher, and at last check was 78.38 Bolivars per dollar. Said otherwise, the brand new official exchange rate, which will soon be implemented for everyone, is still 590% higher than the real clearing price of the currency on the black market.
Curious why the currency is crashing so fast? Perhaps ask the 50% (and rising) annual inflation in the socialist paradise.
WSJ chimes in again:
“This new tourist rate is not as compelling as the black market, but it does represent a step in the right direction,” Russ Dallen, a partner at Caracas Capital Markets, said in a note to clients.
“For my colleagues on Wall Street that come down to Venezuela, now supposedly when you use your U.S. credit cards for expenses, you will get billed at this 11.3 rate, not the 6.3 rate,” Mr. Dallen added.
Sadly, for a government seeking to refill its coffers with much needed dollars in order to avoid what soon may be starvation as food distributors don’t have dollars with which to pay their vendors, it will have to be far more generous in what it offers those who have the greenback, instead of continuing to encourage the use of the black market, where the money is simply hoarded by enterprising members of the population.
Oh, and for those confused, the reason why the Caracas stock exchange is the best performing stock market in the world in the past year…
… The answer is simple: follow the gray line showing the true “value” of the Bolivar.
Can We Avoid the “Thucydides Trap” with China?
Top economic advisers are forecasting war and unrest.
They give the following reasons for their forecast:
- Countries start wars to distract their populations from lousy economies
- Currency and trade wars end up turning into shooting wars
- The U.S. is still seeking to secure oil supplies, and the U.S. doesn’t like any country to leave the dollar standard
Additionally, the American policy of using the military to contain China’s growing economic influence – and of considering economic rivalry to be a basis for war – is creating a tinderbox.
As the New York Times noted in 2011:
For a superpower, dealing with the fast rise of a rich, brash competitor has always been an iffy thing.
Just ask … Thucydides, the Athenian historian whose tome on the Peloponnesian War has ruined many a college freshman’s weekend. The line they had to remember for the test was his conclusion: “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.”
So while no official would dare say so publicly as President Hu Jintao bounced from the White House to meetings with business leaders to factories in Chicago last week, his visit, from both sides’ points of view, was all about managing China’s rise and defusing the fears that it triggers. Both Mr. Hu and President Obama seemed desperate to avoid what Graham Allison of Harvard University has labeled “the Thucydides Trap” – that deadly combination of calculation and emotion that, over the years, can turn healthy rivalry into antagonism or worse.
Indeed, Allison writes:
The defining question about global order in the decades ahead will be: can China and the US escape Thucydides’s trap?
China is certainly aware of this potential dynamic for world war … and is eager to avoid it. As Xinuanoted last July:
Greek historian Thucydides described the situation between Athens and Sparta as a combination of “rise” and “fear,” which inevitably resulted in war about 2,400 years ago. Over the past 500 years, when a rising power has challenged a ruling power, war has often followed, reinforcing the concept of “The Thucydides Trap.”
In the 21st century, however, China and the U.S. could and must avoid falling into this trap, especially against the backdrop of ever-deepening economic globalization and interdependence.
“The Thucydides Trap” offers a worthy caution, but it is not a tragedy that can not be avoided.
The 21st century will not necessarily mark the rise of China alongside the fall of the U.S., rather, through joint efforts, the two sides can see the great rejuvenation of the Chinese nation, U.S. recovery and a developing world, simultaneously.
And the China Post made a similar point last June.
Obviously, the dispute between China and Japan over oil-rich islands – with the U.S. backing Japan – is a complicated one. Indeed, Japan is threatening to seize another 280 islands whose claim is disputed.
Given that China passed Japan as the world’s second biggest economy in 2010, Thucydides’s trap could very well apply to Japan’s fear and hatred of China’s economic growth.
And China’s threat to “take back” an island occupied by another close U.S. ally – the Philippines – could be another potential flashpoint in Chinese-U.S. relations.
It seems like the U.S. and China are drifting towards war over the long-term, as proxy disputes with Japan, the Philippines and other countries cannot remain cool forever without accident or incident.
Hopefully, cooler heads will prevail on all sides …
Dozens died in Sudanese protests against fuel price rises in September [Al Jazeera]
Sudan’s central bank has devalued the Sudanese pound by almost a quarter against the US dollar, the second such move in little over a year as the African country struggles with hard currency shortages.
Sudan’s economy has been in turmoil since South Sudan’s secession in 2011 took away of three-quarters of oil production.
Oil was the driver of the economy and source for dollars needed for food and other essential imports. Sudan produces too little to feed its around 32 million people.
Bidding prices for the Sudanese pound were stated as 5.6871 for one dollar, compared with 4.4 previously, central bank data on Reuters terminals showed on Monday. The official rate was nearer 3 Sudanese pounds to the dollar in 2011.
The central bank has been trying to bridge a ballooning gap with the black market rate where one dollar costs 7.8 Sudanese pounds as import firms struggle to get their hand on hard currency.
The black market rate has become the benchmark for banks and firms.
A central bank official, asking not to be named, said the rate had been already changed in September when the government cut fuel subsides. He did not elaborate.
The subsidy cuts led to mass protests, with dozens of people killed in the capital, Khartoum.
The secretive central bank tends not to announce devaluations, which are embarrassing for the government, which denies there is a shortage of hard currency.
Sudan has sought to offset the loss of southern oil reserves by boosting gold sales, which make up almost 70 percent of exports. But a recent sharp fall of the global gold prices means 2013 revenues will be well below last year’s $2.2 billion.
“The world is getting closer to that end game every day,” says Rickards, who just finished writing the sequel to his bestselling Currency Wars.
James Rickards, bestselling author and partner in Tangent Capital a merchant bank based in New York.
In the winter of 2009, lawyer, investment banker, and advisor on capital markets to the Director of National Intelligence and the Office of the Secretary of Defense, James Rickards took part in a secret war game sponsored by the Pentagon at the Applied Physics Laboratory (APL). The game’s objective was to simulate and explore the potential outcomes and effects of a global financial war. Two years later, Rickards published what would become a national bestseller, Currency Wars: The Making of the Next Global Crisis.
In Currency Wars, Rickards concluded that a dangerous global financial crisis was not only in the making, but that it was inevitable. Based on that financial war game inside a top-secret facility at the APL’s Warfare Analysis Laboratory, a historical analysis of international monetary policy in the twentieth century, as well as his assessment of the events leading to and adopted after the financial debacle of 2008, Rickards laid out the endgame that would result from the global financial chaos of the first currency war of this century; the collapse of the U.S. dollar and the eventual replacement of fiat money with a return to the gold standard.
“The world is getting closer to that end game every day,” warns Rickards, who just finished writing the sequel to Currency Wars, titled The Death of Money, The Coming Collapse of the International Monetary System.
Due out in bookstores next April 2014, The Death of Money picks up on the disturbing predictions outlined in Currency Wars and carries the analysis further into how the international monetary system might collapse and what new system will replace it.
The Death of Money, The Coming Collapse of the International Monetary System (Penguin Random House / April 8, 2014).
While Currency Wars “looked at global macroeconomics through the lens for foreign exchange rates including periods when exchange rates were pegged to gold and the more recent floating exchange rate period,”Rickards explains, “The Death of Money looks at the global macro economy more broadly considering not just exchange rates and the dollar, but also fiscal policy and the need for structural change in the U.S., China, Japan and Europe.” In addition, Rickards elaborates,“Currency Wars made extensive use of history to develop its main themes about the dollar and gold, The Death of Money relies less on history and more on dynamic analysis.”
Where some see a seemingly calm climate enveloping the global economy and financial markets eagerly embrace the U.S. Federal Reserve System’s zero interest rates and easing monetary policies, Rickards sees the prevalence of patterns that only confirm his forecast for an impending storm.
Rickards expects the Federal Reserve policies aimed at importing inflation into the United States “to offset the deflation that had arisen because of the ongoing depression and deleveraging” to continue well into 2015 and perhaps beyond. He also points to other developments that are aligning in favor of the increasingly demise of confidence in the dollar as the world’s reserve currency: “U.S. fiscal policy, stockpiling of gold by Russia and China, money printing by Japan and the UK, and the rise of regional groups such as the BRICS.”
According to Rickards, the inexorable character of the next global financial storm is essentially due to the fact that “the world is facing structural problems, but is trying to address them with cyclical solutions. A structural problem can only be solved with structural solutions including changes in fiscal policy, labor policy, regulation and the creation of a positive business climate. Monetary solutions of the kind being pursued are not an answer to the structural problems we face. Meanwhile, monetary solutions threaten to undermine confidence in paper money. The combination of unaddressed structural problems and reckless monetary policy will ultimately produce either extreme deflation, borderline hyperinflation, stagflation or a collapse of confidence in the dollar.”
I expect the Mexican economy to outperform the U.S. economy in the years ahead.
So how does the rest of the world currently fare up in Rickards’ analysis? Asked about Mexico, the United States’ second-largest trading partner, he explains:
“The Mexican and U.S. economies are closely linked because of NAFTA and immigration and that will continue to be the case, however, the U.S. will be less important to Mexico in the future and China will become more important. The U.S. should expect increasing inflation in the years ahead because of its reckless monetary policy. Mexico should be able to avoid the inflation because of its energy exports and relatively inexpensive labor. The result will be a gradual strengthening of the Mexican peso against the U.S. dollar, something that has already appeared. Mexico will be a major magnet for Chinese investment also. In short, I expect the Mexican economy to outperform the U.S. economy in the years ahead. Mexico will begin to delink to some extent from the U.S. and to link more closely with the rest of the world, especially Europe and China.”
The euro is the strongest major currency in the world and will be getting stronger.
Rickards is also bullish on the European Monetary Union, as he underlines that “the euro is the strongest major currency in the world and will be getting stronger.”
Yet some analysts today warn of the euro’s increased appreciation as a dangerous centripetal force to the euro zone’s integrity. Why does Rickards see the opposite?
“Most analysts do not understand the dynamics driving the Euro. They mistakenly assume that if growth is weak, unemployment is high and banks are insolvent that the currency must we weak also. This is not true. The strength of a currency is not driven by the current state of the economy. It is driven by interest rates and capital flows. Right now, Europe has high interest rates compared to the U.S. and Japan and it is receiving huge capital inflows from China.”
Will Germany go all in to preserve the European single currency?
“Germany benefits more from the Euro than any other country because it facilitates the purchase of German exports by its European trading partners. Citizens throughout Europe favor the Euro because it protects them from the devaluations they routinely experienced under their former currencies. No countries will leave the Euro. New members will be added every year. Germany will do whatever it takes to defend the Euro and the European Monetary System. Based on all of these developments, the Euro will get much stronger.”
What about Spain with its increased poverty levels, 2003 per capita income levels, a soon-to-reach 100% debt to GDP ratio and massive unemployment? Isn’t a strong currency the opposite of what the country needs?
“The difficulties Spain has faced for the past five years are part of a necessary structural adjustment to allow Spain to compete more effectively. Most of this adjustment is now complete and Spain is poised for good growth in the years ahead. Unit labor costs have declined more than 20% since 2008, which makes Spanish labor more competitive with the rest of the world. Unemployment is difficult, but it gives Spain a huge pool of untapped labor that is now available as new capital enters the country. Increased labor force participation from among the unemployed will allow the Spanish economy to grow much faster than its overall demographics would suggest. The Euro has given Spain a strong currency, which is extremely attractive to foreign investors. Ford and Peugeot have recently announced major new investments in Spain and more should be expected. Chinese capital is also eager to invest in Spanish infrastructure. Spain has successfully made structural adjustments and put its major problems behind it, unlike the United States where the structural problems have not been addressed and painful economic adjustments are yet to come.”
Agencies such as the Defense Department and the intelligence community are concerned about the future stability of the dollar.
Given the national security aspect to Rickards’ work and the mere threat on the dollar’s future stability, one would expect for the defense and intelligence community in the U.S. to pressure policy makers into taking action. Not the case, says Rickards:
“Various government agencies and private think tanks and corporations have continued to do war game type simulations of financial warfare and attacks on capital markets systems since the Pentagon financial war game in 2009. I have been an advisor to and a participant in many of these subsequent efforts. However, these national security community and private simulations have had very little impact on policy as pursued by the U.S. Treasury and the Federal Reserve. Agencies such as the Defense Department and the intelligence community are concerned about the future stability of the dollar, but the U.S. Treasury is far less concerned. This has created some tension between those who see the danger and cannot do much about it, and those who can affect dollar policy but do not see the danger.”
Ultimately, however, Rickards argues that if his predictions come true (and in his opinion it is only a matter of time), the collapse of the dollar would lead to a reset in the world’s monetary system whereby gold would regain its historic role as the standard unit of value. What happens after the end of fiat money would then depend on how each country is positioned in terms of its gold reserves.
Can the point of no return in the path to the death of money be averted?
“The point of no return may already have passed,” says Rickards, “but the consequences have not yet played out.”
In Rickards’ view, it’s a catch-22 situation from this point forward: “the Fed has painted itself into a corner. If they withdraw policy and reduce asset purchases, the economy will go into a recession with deflationary consequences. If the Fed does not withdraw policy, they will eventually undermine confidence in the dollar. Both outcomes are bad, but there are no good choices. This is the fruit of fifteen years of market manipulation by the Fed beginning with the Russian – LTCM crisis in 1998. The Fed will cause either deflation or inflation, but it cannot produce stable real economic growth.”
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