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The casino metaphor has been widely used as a part-description of the phenomenon of over-financialisation. It’s a handy pejorative tag but can it give us any real insights? This article pursues the metaphor to extremes so that we can file & forget/get back to the football or possibly graduate to next level thinking.
What is the Financialised Economy (FE) and how big is it?
The FE can be loosely described as ‘making money out of money’ as opposed to making money out of something; or ‘profiting without producing’ . Its primacy derives largely from two sources – the ability of the commercial banks to create credit out of thin air and then lend it and charge and retain interest; and their ability to direct the first use of capital created in this fashion to friends of the casino as opposed to investing it in real economy (RE) businesses. So the FE has the ability to create money and direct where it is used. Given those powers it is perhaps unsurprising that it chooses to feed itself before it feeds the RE. The FE’s key legitimate roles – in insurance and banking services – have morphed into a self-serving parasite. The tail is wagging the dog.
The FE’s power over the allocation of capital has been re-exposed, for those who were perhaps unaware of it, as we see the massive liquidity injected by the central banks via QE disappearing into the depths of bank balance sheets and inflated asset values leaving mid/small RE businesses gasping for liquidity.
By giving preferential access to any capital allocated to the RE to its big business buddies the FE enables those companies to take out better run smaller competitors via leveraged buy outs. By ‘investing’ in regulators and politicians via revolving doors and backhanders, it captures the legislative process and effectively writes its own rule book.
Five years after the 2008 crisis hit, as carefully catalogued by FinanceWatch , economies are more financialised than ever. If the politicians and regulators ever had any balls they have been amputated by the casino managers, under the anaesthesis of perceived self-interest. They have become the casino eunuchs. An apparent early consensus on the systemic problems of over financialisation has melted away into a misconceived search for ‘business as usual’.
Derivatives are one of the most popular games in the casino.
Over the counter derivatives, which are essentially bets on the performance of asset prices, stocks, indices or interest rates, have a nominal value (as of December 2012 ) of USD 632 trillion – 6% up from 2007 levels – and 9 times world GDP. If the world decided to stop living and buy back derivatives instead of food, energy, shelter and all the stuff we currently consume, it would take nine years to spend this amount.
OK – it’s a nominal value. Many observers believe (even hope) that its real value is a minute fraction of this, but the only way we will ever find out is if the derivative contracts unwind. That is, prompted presumably by some form of crisis, parties progressively withdraw from the contracts or fold. The regulators (and the FE itself of course) will do everything they can to prevent this from happening, including grinding the population into the dust via austerity, because while no-one knows who precisely holds the unwound risk, most will certainly belong to the FE’s top tier.
Many of these derivatives started life as sensible financial products. Businesses need to insure against an uncertain harvest, or hedge against uncertain currency movements. But only a small proportion of current holders now have an insurable risk. So whereas in the past you could say we insured against our own house burning down, now they bet on their neighbour’s house burning; whereas in the past we bet on our own life expectancy, they now bet on the deaths of others; whereas in the past we insured against currency losses we experienced in our own business transactions, now they bet on currency movements in general. What might be expected when there are incentives to burn your neighbour’s house down? Organisations have even purposely set up junk asset classes, had them AAA rated, sold them to outsiders and then bet on their failure.
Government & Politicians
Politics operates as a debating society in a rented corner of the casino. The rent is high but largely invisible to the populace. The debaters are themselves well off, at least in the U.S. they are .
Now the strange thing is that the government actually owns the casino, but they have forgotten this. For the last 40 years or so, they have asked the casino managers to issue all the chips. The government use the same chips to spend on public services, and require us all to pay taxes in those chips. Mostly they don’t have enough chips for all the services they provide, so they ask the casino managers for loans. The casino managers are happy with this, provided the government pay interest on the loan of chips. This hidden subsidy effectively funds the casino. It’s perverse because the government pays interest on money they could issue themselves debt-free.
It’s not entirely clear why the government thinks the casino managers are better at managing chips than they would be. Arguably the government is elected to carry out a programme and they should be the arbiters of the country’s strategic priorities, so there should be some strategic guidance over the way the chips are spent.
But the government is only here for five years, and the casino managers are here permanently. So perhaps they think it’s safer just to trust the casino managers to get on with it. When asked, the casino managers explain that they allocate chips according to ‘what the market needs’ and no-one quite understands why that doesn’t seem to include much real investment. In any case the government have forgotten that they could issue the chips themselves, and although prompted (e.g. ), have failed to show any interest in reclaiming that power. Occasionally they create a whole new batch of chips themselves (QE) – if they think the tables are quiet – but give them straight back to the casino managers. Maybe it’s too complicated for politicians. Many of them haven’t had proper jobs. There are a few civil servants who understand what’s happening, but most of them don’t want to rock the boat – they are here permanently too and have good pensions. They research for the debaters and have lunch with the casino managers. That keeps them quite busy enough, thank you.
The Real Economy
The Real Economy also operates from a corner of the casino. It’s hard to put an exact figure on it, but perhaps 3-5% of the overall floor space depending how you measure.
It’s a very important corner of the casino, but not for the reasons it should be. It should be important because it’s the place where food is grown, houses are built, energy for warmth and work is created and so on. But these precious things are taken for granted by the casino managers. They have always had enough chips to buy whatever they need – they issue them for God’s sake – and they think food, shelter and energy will always be available to them. Crucially though, they have also managed to financialise this remaining RE corner, and this ‘support’ is trotted out as a continuing justification for the FE’s central importance .
The RE corner has always included important social and cultural, non-GDP activities. The enormous real value of these activities is now being properly articulated and is spawning citizen-led initiatives (e.g. sharing economy approaches, basic unconditional income) but they are often presented as beggars who annoyingly keep petitioning for their ‘entitlements’ and generally clutter up this remote corner of the casino.
On the finance side, individuals and businesses are exploring ways of funding their future activity without going cap-in-hand to the casino managers. They are exploring peer-to-peer finance, crowdfunding, prepayment instruments and so on. What these initiatives have in common is the disintermediation of the casino. They provide ways for people to invest more directly and take more control over their savings and investments. Of course a new breed of intermediary is surfacing to broker and risk-insure these new models, and these new intermediaries can also be captured.
With transparency and short-circuit communication via social media though, there is definitely scope to do things differently. We must hope for progress because the casino managers have little interest in what’s going on outside.
The Planet – outside the casino
The planet outside is used by the casino in two ways – as a source of materials and as a dumping ground for waste.
The materials are not essential to the core FE which is all about making money out of money and needs nothing but ideas, a few arcane mathematical models to give spurious gravitas, and credulous or naive investors. But RE activity performs a valuable role for the casino managers – it provides them with an endless stream of innovative ways of using chips. The shale gas bonanza for example is apparently grounded in the real world need for energy, and is presented as such. Its significance to the FE is as another bubble based partly at least on land-lease ‘flipping’ .
Without an RE-related rationale/narrative, the FE might disappear up its own waste pipe as it re-invested/sliced-and-diced/marketised its own products to itself. So materials from outside the casino are important for the managers’ big corporate proxies in the RE.
FE-favoured RE activities also create lots of waste, some of which is toxic, and may eventually prove terminal, as it builds up. This fact is of little interest to the casino managers. There is a minor interest in waste-related financialised vehicles – carbon markets for example are a relatively new casino game – and in the slight impact on some of the FE’s RE-friends like big energy companies. But mostly the casino managers are too busy with their games and their chips. Occasionally a manager will wake up to the dangers and defect to the real world where they, somewhat perversely, carry more credibility because of their casino experience. A small minority of managers stay within the casino and try to gently modify its behaviour. This is portrayed as a healthy sign of openness; the casino is secure in the knowledge that their ways cannot easily be re-engineered.
Combating the casino’s influence
Essentially there would appear to be three possible lines of response for those who believe there should be more to life than casino capitalism. Marginalise, convert or destroy……
These approaches map on to the three ‘broad strategies of emancipatory transformation’ suggested by sociologist Erik Olin Wright  – interstitial, symbiotic and ruptural. I have a fourth suggestion/ variation of which more in a moment.
The challenge for interstitial initiatives is the sheer pervasiveness of the FE. There are few spaces left where the effects of the FE can be ignored. They may not be well understood, but whenever we pursue dreams, they pop up in front of us, usually as obstacles. Developments that are most heavily attacked by the FE establishment perhaps merit the most attention – community scale renewable energy, crypto currencies, co-ops, the sharing economy, and so on. The more these alternative directions are attacked as utopian or uneconomic the more we can be sure they offer promising interstitial opportunities.
Symbiotic opportunities may represent the triumph of hope over experience. Armed with the power of ideas, we back our ability to persuade policy makers and business leaders to change the game. The main challenges here are the arrogance of the powerful and the danger of being captured by supping with the devil. Vested interests generally feel secure enough that they don’t need to negotiate or even to spend brain power on listening and evaluating alternatives. If enough interest is manifested that symbiotic trial projects are begun, their champions can be captured by being made comfortable.
Ruptural alternatives come in a spectrum from those that would destroy business models to those that would destroy societies. They probably share the above analysis but differ in their degree of radicalism and disconnection from the main. The impact of FE-driven globalisation is beyond the scope of this article, save to note that its effects have unnecessarily radicalised whole populations making more measured responses more difficult to promote than they might have been.
The role of the internet and social media in progressing both interstitial and ruptural initiatives is significant. Most of the space to develop and assemble communities of interest and mission-partners is here, explaining why both are likely to experience increasingly determined attempts to capture.
The nature of one’s chosen response will be a matter of personal choice. We should not be judgemental of those who don’t have the will, energy or resourcefulness to play a more active role. We all suffer from our subservience to a dysfunctional system, some much more than others. The fourth response? Perhaps there’s some mileage in judo principles .
: http://rikowski.wordpress.com/2013/12/12/profiting-without-producing-how-finance-exploits-u s-all/
: “It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.” Art Berman quoted athttp://theautomaticearth.blogspot.ie/2011/07/july-8-2011-get-ready-for-north.html
Featured image: Luxor, Las Vegas. Author: David Marshall jr. Source: http://www.sxc.hu/browse.phtml?f=view&id=90604
The World Bank raised its global growth forecasts as the easing of austerity policies in advanced economies supports their recovery, boosting prospects for developing markets’ exports.
The Washington-based lender sees the world economy expanding 3.2 percent this year, compared with a June projection of 3 percent and up from 2.4 percent in 2013. The forecast for the richest nations was raised to 2.2 percent from 2 percent. Part of the increase reflects improvement in the 18-country euro area, with the U.S. ahead of developed peers, growing twice as fast as Japan.
The report by the institution that’s trying to eradicate extreme poverty by 2030 indicates a near-doubling of the growth in world trade this year from 2012, as developed economies lift export-reliant emerging nations. At the same time, the withdrawal of monetary stimulus in the U.S. may raise market interest rates, hurting poorer countries as investors return to assets such as Treasuries, according to the bank.
“This strengthening of output among high-income countries marks a significant shift from recent years when developing countriesalone pulled the global economy forward,” the bank said yesterday in its Global Economic Prospects report published twice a year. Import demand from the richest nations “should help compensate for the inevitable tightening of global financial conditions that will arise as monetary policy in high-income economies is normalized.”
The bank’s forecasts hinge on the orderly unwinding of Federal Reserve stimulus, which is starting this month with the trimming of monthly bond purchases to $75 billion from $85 billion. If investors react abruptly in coming months, as they did in May when the central bank mentioned the possibility of tapering, capital inflows to developing economies could drop again, according to the report.
“To date, the gradual withdrawal of quantitative easing has gone smoothly,” Andrew Burns, the report’s lead author, said in a statement. “If interest rates rise too rapidly, capital flows to developing countries could fall by 50 percent or more for several months — potentially provoking a crisis in some of the more vulnerable economies.”
The bank sees a global expansion of 3.4 percent in 2015, compared with 3.3 percent predicted in June.
In the U.S., where growth is seen accelerating to 2.8 percent this year, unchanged from the outlook in June, the recent budget compromise in Congress will ease spending cuts previously in place and boost confidence from households and businesses, the bank said.
The bank held its forecast this year for Japan at 1.4 percent, while cautioning that the reforms of the economy promised by the government “have disappointed thus far, raising doubts about whether the improvement in economic performance can be sustained over the medium to longer term.”
It raised its prediction for the euro region to 1.1 percent for this year from 0.9 percent in June as the monetary union comes out of it debt crisis, propelled by Germany and showing improvement in fragile economies including Spain and Italy.
“The euro area is where the U.S. was a year and a half or two years ago, where growth is starting to go positive but it’s still hesitant,” Burns, also the bank’s manager of global macroeconomics, said in a phone interview. “We’re not going to be totally convinced until this gathers a little more steam.”
The bank estimates that investors withdrew $64 billion from developing-country mutual funds between June and August, with the impact most pronounced on middle-income countries includingBrazil, India and Turkey. Not all economies were hit the same way, as China or Mexico were less affected because of stronger economic fundamentals, the bank said.
The 2014 forecast for developing markets was cut to 5.3 percent from 5.6 percent.
The bank lowered its forecast for China this year to 7.7 percent from 8 percent, saying the world’s second-largest economy is shifting “to slower but more sustainable consumption-led growth.”
It cut projections for Brazil to 2.4 percent from 4 percent, for Mexico to 3.4 percent from 3.9 percent and for India to 6.2 percent from 6.5 percent.
Growth in developing countries will accelerate “modestly” between 2013 an 2016, at a pace about 2.2 percentage points below that of the years preceding the global crisis, according to the bank’s report.
“The slower growth is not cause for concern,” according to the report. “More than two-thirds of the slowdown reflects a decline in the cyclical component of growth and less than one-third is due to slower potential growth.”
Still, not all countries are well placed to respond to capital outflows and higher interest rates, according to the bank, which urged policy makers to prepare now for such an outcome.
To contact the reporter on this story: Sandrine Rastello in Washington firstname.lastname@example.org
To contact the editor responsible for this story: Chris Wellisz at email@example.com
The New New Great Game: Geography, Energy, The Dollar and Gold (pdf link)
Sir Halford Mackinder’s 1904 speach in which he outlined his “Heartland Theory” was a founding moment for geo-politics. He argued that control of the Eurasian landmass (Europe, Asia and the Middle East), which contained the bulk of the world’s population and natural resources, was the major geo-political prize.
As time passed, energy (first crude oil then natural gas), became increasingly integral to this concept and its strategic significance cannot be overstated.
Remarkably, Mackinder’s theory has remained equally valid, if not more so, in the modern era – although key “pivot areas” for exercising control have evolved. In addition to Central Asia and Trans-Caucasus in Mackinder’s day, the oil producing nations of the Middle East took on increasing importance in the “New Great Game”.
The geo-political confrontation between the US on one hand and China (in increasingly close cooperation with Russia) on the other, is evolving rapidly. We see a “New New Great Game” (NNGG) emerging and have “tweaked” the Heartland Theory to include.
An additional geographic “pivot”, the South and East China Seas, due to their importance in terms of world trade, oil and gas reserves and numerous territorial claims.
A monetary “pivot”, the dollar-based system of world trade and its reserve status. China is taking the lead role in pushing ahead with its strategy of dismantling the dollar’s supremacy.
Geo-political tension in each of the pivot areas is escalating. For example Central Asia and Trans-Caucasus (Ukraine), Middle East (Iran) and South and East China Seas (Senkaku Islands). The rising powers, China and Russia, are adopting more aggressive geo-political tactics towards US/EU/NATO/Japanese interests. The more “dovish” US policy towards Iran, following the recent nuclear deal, is threatening to destabilise the decades-long status quo in diplomatic relations with Israel and Saudi Arabia.
Just about every aspect of the escalating geo-political tension has an energy element, either directly or indirectly. Viewed from a “Mackinderian” perspective, the strategic value of the energy sector is immense. It begs the question whether, after five years of underperformance, the equity market is under-pricing energy assets, including those deeply out-of-favour integrated oil and gas stocks? Probably, in our view.
We believe that the significance of the monetary pivot in the NNGG is under-estimated as China accelerates preparations to undermine the dollar’s role in world trade. The other aspect of China’s strategy is its diversification into “hard assets” and, as far as we can tell, China is attempting to “corner” the market for physical gold. Its strategic significance is lost on most Western investors. We present some insights into today’s gold market which might shock Western investors – similarities with the run-up to the major lows in the gold price more than a decade ago – and China’s understanding of modern gold market mechanics.
The threats to the existing US-centric order are substantial and the geo-political sands are shifting. The US will respond and has the largest economy and military (with vast ocean-going naval advantage), most powerful investment banks and deepest financial markets and significant (albeit declining) political/diplomatic influence. In terms of boxing metaphors, we wonder whether the Ali versus Foreman fight in Kinshasa in 1974 (knockout in the eighth) or the Leonard versus Hagler fight at Caesar’s Palace in 1987 (points victory where the argument as to who actually won continues) will be the parallel.
* * *
From an anonymous source prior to the major lows in the gold price more than a decade ago.
“Someone once said, ‘no one wants gold, that’s why the US$ price keeps falling.’ Many thinking ones laugh at such foolish chatter. They know that the price of gold is dropping precisely because ‘too many people are buying it’! Think now, if you are a person of ‘great worth’ is it not better for you to acquire gold over years, at better prices? If you are one of ‘small worth’, can you not follow in the footsteps of giants? The real money is selling ALL FORMS of paper gold and buying physical! Why? Because any form of paper gold is losing value much, much faster than metal. Some paper will disappear all together in a fire of epic proportions! The massive trading continues at LBMA, but something is now missing…We have reached production costs…The great mistake by the BIS was in underestimating the Asians. Some big traders said they would buy it all below $365+/- and they did. That’s what forced LBMA to go on a spree of paper selling! Now, it’s a mess.”
The gold price is approaching production cost again.
We have the physical versus paper demarcation again (most commentators are clueless on this – the paper market is still determining the screen price, but it will probably die once and for all this time around – the question is at what level?).
The Asians are being underestimated again when the price is declining (although not by the BIS – China is buying physical gold in unprecedented volumes – at least 70-75% of world mining production this year).
But accelerating developments in the monetary sphere is only one element of…
The “New New Great Game”
Mackinder’s “Heartland Theory”
The traditional “Great Game” obviously dates back to the geo-political rivalry between Great Britain and Russia for supremacy in the central Asian region during the nineteenth and early part of the last century. In his famous speech, “The Geographical Pivot of History”, to the Royal Geographical Society in 1904, Sir Halford Mackinder outlined his “Heartland Theory. ” According to Wikipedia.
“This is often considered a, if not the, founding moment of geo-politics…”
Briefly, this posited that the major geo-political prize is Eurasia (the “World Island”), i.e. the European, Asian and Middle Eastern land mass, which contained the bulk of the world’s population and its natural resources. Mackinder argued that control of the “pivot area“ of central Asia was the key to controlling Eurasia.
This is taken from his paper published in the April 1904 edition of the “The Geographical Journal.”
He also emphasised the important difference between sea power and land power. From Zurich-based ISN’s 2009 “Geopolitics and US Middle Eastern Policy: Mackinder and Brzezinski.”
“Mackinder’s theory was a counter-argument to notions that maritime supremacy was sufficient for a power such as Great Britain to safeguard its hegemony. He claimed that, with the emergence of new transportation routes [e.g. Trans-Siberian railway] and technology, a power that could control the centre (and the abundant resources) of the Eurasian landmass…would ultimately be able to attack the colonies of a sea power everywhere on the continent. “
The Trans-Siberian Railway.
In the wake of World War One, Mackinder argued the case for preventing a convergence of interests between Russia and new “pivot” states of Eastern Europe (Austria, Hungary, Czechoslovakia and Poland). This led to his famous dictum.
“Who rules East Europe commands the Heartland;
Who rules the Heartland commands the World Island;
Who rules the World Island commands the World.”
It’s important to emphasise that the pivot area does evolve/fluctuate with changes in geo-political reality. Indeed, Mackinder included the Baltic states in one of his revisions.
As the world industrialised and became increasingly dependent on crude oil (and later, natural gas), energy resources became ever more integral to the Great Game. With such a large proportion of the world’s oil and gas reserves found on the Eurasian land mass, this was easily accommodated within Mackinder’s theory.
The period just before World War One, with the British Navy’s switch from coal to oil and the adoption of the automobile, set the stage for this. Indeed, in 1913, the British government acquired a 51% controlling interest in the Anglo-Persian Oil Company, the forerunner of BP.
Remarkably, the validity of Mackinder’s theory has stood the test of time, even though most people are unfamiliar with it. The following quote is from the Reagan Administration’s “National Security Strategy of the United States” published in January 1988.
“The first historical dimension of our strategy is relatively simple, clear-cut, and immensely sensible. It is the conviction that the United States’ most basic national security interests would be endangered if a hostile state or group of states were to dominate the Eurasian land mass – that area of the globe often referred to as the world’s heartland.”
Right now, it’s obvious that US national security interests are threatened by a combination of China and Russia.
This was the influential globalist (and former National Security Advisor), Zbigniew Brzezinski, writing in his famous 1997 book, “The Grand Chessboard.”
“Ever since the continents started interacting politically some 500 years ago, Eurasia has been the centre of world power… For America, the chief geopolitical prize is Eurasia – and America’s global primacy is directly dependent on how long and how effectively its preponderance on the Eurasian continent is sustained.”
In the “New Great Game”, (NGG) of the modern era, the major rivalry is between US/NATO on one side and China, Russia, other members of the Shanghai Cooperation Organisation and the likes of Iran, on the other.
The “pivot states” in the NGG are.
- The key nations in Central Asia and the Trans-Caucasus: especially those with substantial energy resources and/or pipelines (e.g. Azerbaijan, Ukraine, Turkmenistan, Uzbekistan etc). Here is a chart showing the major gas pipelines
And the major oil pipelines:
- The major OPEC nations of the Middle East: here we borrow part of US geo-strategist, Nicholas Spykman’s, “Rimland” theory. Spykman, the “godfather of containment” was both a disciple and critic of Mackinder. He believed that the “Rimland”, European coast, Arabian-Middle Eastern desert and Asiatic Monsoon region was more important for controlling the Heartland.
This was Brzezinksi on the Central Asian Republics, or “Eurasian Balkans” as he terms them in his book. This was in 1997, when China’s economic and military might was still a distant prospect.
“They are of importance from the standpoint of security and historical ambitions to at least three of their most important and more powerful neighbours, namely Russia, Turkey and Iran, with China also signalling an increasing political interest in the region. But the Eurasian Balkans are infinitely more important as a potential economic prize; an enormous concentration of natural gas and oil reserves is located in the region, in addition to important minerals including gold.”
It’s a reminder of the strategic importance of energy and gold and puts the US-supported “Color revolutions” into sharper focus – Ukraine (Orange, 2004), Georgia (Rose, 2003) and Kyrgyzstan (Tulip, 2005).
Tweaking the Heartland Theory
We agree with the modern interpretation of the NGG, but we see TWO additional elements which make the current situation a “New New Great Game.”
… continue reading below (pdf link)
Investors from multi-billion dollar hedge funds to individuals buying as few as 10 properties have acquired more than 1 million homes across the U.S. in the past three years, transforming a mom-and-pop business into one of Wall Street’s hottest investments. As we noted here, Blackstone Group LP alone has acquired more than 40,000 properties in 14 cities to become the largest single-family landlord in the country. As Bloomberg notes, the new landlords are transforming the way Americans live and accumulate wealth. But while Wall Street is becoming America’s largest residential landlord, it appears China wants to get paid for commercial properties… and Detroit.
Chinese investors, the second-biggest overseas buyers of U.S. residential real estate, are building up portfolios of U.S. commercial property as they look for new avenues of diversification.
Chinese entities announced more than $5.89 billion in projects in January-October, nearly six times the $996 million for all of 2011 and 2012 combined, showed data from New York-based consultancy Rhodium Group.
“There is a lot of upside,” said Thilo Hanemann, Rhodium’s research director. “We are at the beginning of a structural increase of Chinese investment in U.S. commercial real estate.”
China’s push into U.S. property is underpinned by declining investment returns at home, a growing desire by wealthy individuals and developers to diversify their holdings overseas, and property companies looking to capitalize on offshore migration.
Chinese nationals bought more than $8.1 billion worth of real estate in the year ended March 31, representing 12 percent of the estimated $68.2 billion of domestic property purchased by overseas nationals
Not everyone is convinced that Chinese investment in the U.S. property market will continue uninterrupted. Other options for expansion include Europe, Australia and Singapore, which account for about two-thirds of offshore Chinese real estate investment, according to Jones Lang Lasalle.
Zhang Xin, the chief executive of SOHO China Ltd, who paid $700 million through her family trust to buy a stake in the General Motors Building in Manhattan, said that while the U.S. regulatory and legal environment remained attractive, valuations were getting expensive.
“I would not feel as comfortable today putting in money as I did a few years ago,” Zhang said.
So reform and liberalization in China sees hot money flowing not just into Bitcoin but now commercial property in America.
While Wall Street becoming America’s largest residential landlord, it appears China wants to get paid for commercial properties… and Detroit.
It is perhaps a testament to the ability of the oligarchy (that 1% which owns some 50% of all US assets) to distract and distort newsflow from what really matters, that a century after the creation of the Federal Reserve, the vast majority of Americans are still unfamiliar with the most important institution in the history of the US – an institution that unlike the government is not accountable to the people (if only as prescribed on a piece of rapidly amortizing paper), but merely to a few banker stakeholders as Bernanke’s actions over the past five years have demonstrated beyond any doubt. It is for their benefit that Jim Bruce’s groundbreaking movie “Money for Nothing” is a must see, although we would urge everyone else, including those frequent Zero Hedge readers well-versed in the inner workings of the Fed, to take the two hours and recall just who the real enemy of the people truly is.
A quick note on producer, director and writer Jim Bruce. While Jim has been a student of financial markets for over a decade, and began writing a newsletter in 2006 warning about the oncoming financial crisis, what is perhaps most notable is that it was his short trades in 2007 and 2008 that helped finance a significant portion of Money For Nothing’s budget.
However, most impressive is Bruce’s ability to bring together such a broad and insightful cast which includes both current and former Fed members, as well as some of the most outspoken Fed critics, among which:
- Paul Volcker
- Janet Yellen
- Alice Rivlin
- Alan Blinder
- Richard Fisher
- Thomas Hoenig
- Jeffrey Lacker
- Jim Grant
- Allan Meltzer
- Raghuram Rajan
- Charles Plosser
- Tony Boeckh
- Jeremy Grantham
- Todd Harrison
… and many others.
From the film’s official website:
MONEY FOR NOTHING is a feature-length documentary about the Federal Reserve – made by a Team of AFI, Sundance, and Academy Award winners – that seeks to unveil America’s central bank and its impact on our economy and our society.
Current and former top economists, financial historians, and investors and traders provide unprecedented access and take viewers behind the curtain to debate the future of the world’s most powerful financial institution.
Digging beneath the surface of the 2008 crisis, Money For Nothing is the first film to ask why so many facets of our financial system seemed to self-destruct at the same time. For many economists and senior Fed officials, the answer is clear: the same Fed that put out 2008’s raging financial fire actually helped light the match years before.
As the global financial system continues to falter, the Federal Reserve finds itself at a crossroads. The choices it makes will greatly influence the kind of world our children and grandchildren inherit. How can the Federal Reserve steer our nation toward a more sustainable path? How can the American people – who the Fed was created to serve – influence an institution whose inner workings they may not understand?
The key tenet underlying Money For Nothing is our belief that a more fully and accurately informed public will promote greater accountability and more effective policies from our central bank – no matter the conclusions any individual draws from the film.
Sadly this is where we differ, for it is Zero Hedge’s opinion that not only is it now far too late to promote any type of change at the top, but the best policy is to urge the Fed on in its ludicrous policies, in order to lead to the catastrophic culmination of 100 years of disastrous wealth-transfer policies, which unfortunately is the only possible way a cleansing systemic reset – one that would finally eradicate the scourge of central-planning – can be unleashed upon a broken and malfunctioning system in its final throes of status quo existence.
Then again, perhaps there is a chance.
Finally, as an added bonus, here are some thoughts from the creator and that supreme beneficiary of the Fed’s wealth transfer protocols, billionaire David Tepper, on how Ben Bernanke managed to,temporarily, circumvent Darwin’s laws and how it is not the fittest but the fattest that survive.
Of the 25 companies with the largest corporate profits in the world; banking, energy and technology firms are absolutely raking it in. Despite stagnating incomes, these companies made $567,856,000,000 in 2012 alone… here’s the subsidies, tax breaks, and offshoring that helped them do it…
Jim Rogers Cautions “Be Prepared, Be Worried, And Be Careful… This Is Going To End Badly” | Zero Hedge
“Eventually, the whole world is going to collapse,” Jim Rogers chides a disquieted CBC anchor as he explains the reality that, “we in the West have staggering debts. The United States is the largest debtor nation in the history of the world,” adding that “this is going to end badly.”
However, the co-founder of Soros’ Quantum fund is convinced that the commodity super-cycle is far from over, but driven by supply constraints (and cost increases) as opposed to demand from higher growth. The following interview provides more color on his commodity view as he re-iterates his bullish stance on Ag (with sugar a focus) and Natural Gas (some harsh natural realities coming), warning“don’t get too excited about fracking,” when he talks energy products.
Rogers, in his inimitable way, sums up the state iof euphoria that many markets find themselves in thus, “we are all floating around on a sea of artificial liquidity right now. This is not going to last.”
On the end of the commodity super-cycle:
“Commodities have pulled back, but I would remind you that in all bull markets there are periods of correction.
In 1987 – during the great bull market in stocks – stocks went down 40 to 80 per cent around the world; again in 1989, 1990, 1994, etc. Every time people said the bull market’s over, but it wasn’t. I think that’s what’s happening with commodities now.”
On the next crisis:
“2008 was so much worse than 2000 because the debt was so much higher, you wait until 2014 or 2015 when the next crisis hits…
debt has gone through the roof, the next one’s gonna be really bad“
His final words:
“Be prepared, be worried, and be careful“
In the most dramatic evidence yet that Britons are paying for the rising cost of living by raiding savings, Yahoo UK reports that households are pulling money out of their savings accounts at the fastest rate in modern record, according to Bank of England figures. Since the recent recession began, millions of workers have suffered repeated effective pay cuts as inflation has outstripped pay rises, and while consumer spending was one of the main contributors to the sharp rise in gross domestic product in the third quarter, “consumer strength usually reflects increased borrowing but this hasn’t been the key factor recently.”
In the year to October, the amount of cash in time deposits and cash ISAs fell by 4.7%, while the amount families have in their instant access current accounts or in their pockets rose by 11.2%. This inflationary shift of cash is the biggest since comparable records began in the 1970s.
In the past year, families have withdrawn £23bn from their long-term savings accounts to convert into cash and put into current accounts – the equivalent of around £900 for every household in the country.
It is the most dramatic evidence yet that Britons are paying for the rising cost of living by raiding their savings accounts.
According to economists, the shift of cash is the biggest since comparable records began in the 1970s, and reverses much of the sharp increase in saving that happened at the height of the recession.
On Thursday, the Chancellor’s Autumn Statement is expected to focus on measures to help households deal with the rising cost of living, including energy bills.
Since the recent recession began, millions of workers have suffered repeated effective pay cuts as inflation has outstripped pay rises.
Consumer spending was one of the main contributors to the sharp rise in gross domestic product in the third quarter, and a further strong increase is implied by the Bank’s money figures.
But while the figures suggest that the economy is strengthening, they will also be taken as further evidence that savers are being deterred from putting money aside by record low interest rates.
Some also suspect that with households still facing a significant squeeze as a result of higher living costs, many are having to dig into their savings in order to afford day-to-day items.
So the UK economy is surging and being lauded as evidence of QE’s efficacy but the reality is inflation is eating away at people’s wealth and hot money flows have caused the cost of living to rise dragging out the mainstay of future growth – savings – to meet consumption needs today. How long before government inflation data reflects this?
While one can make an argument that the central banks have now destroyed all traditional “cycles”, including the economic “virtuous cycle“, the business cycle and even the leverage cycle, the question remains how much longer can the Fed et al defy mean reversion and all laws of nature associated with it. That said, assuming the fake market environment we find ourselves in persists for at least another year, this is what the leverage cycle would look like assuming $10 trillion in global central bank assets were a pro forma new normal.
Keep a close eye on China: it is on the cusp between the end of the leverage cycle (where as we reported over the past two days, it has been pumping bank assets at the ridiculous pace of $3.5 trillion per year) and on the verge of having its debt bubble bursting. What happens then is unclear.
Some thoughts on the above graphic from SocGen:
For the first time post-crisis, we expect advanced economies in 2014 to see a marked increase in their contribution to global growth. Emerging economies have over the past few years offered a welcome support to global growth, but this relied in part on a build-up of credit that now needs to be paid down. The hope is for advanced economies to take over the baton from the emerging economies as the main driver of global growth. The US is now poised for sustainable recovery and in Japan hopes remain that Abenomics will work. The euro area, however, continues to lag. As such the growth relay from emerging to advanced is likely to prove a bumpy process. Commodity markets will sit at the heart of this dynamic – our strategists look for range-bound markets in 2014.
This new rotation of the global leverage cycle is an integral part of our monetary policy outlook, which we discuss in greater detail in the following sections. Several features are worth noting:
Time for emerging economies to deleverage: Post crisis, emerging economies adopted accommodative economic policies to offset the collapse in demand for their output. Providing a further boost, accommodative monetary policies in advanced economies drove significant financial flows into the region. Combined, these fuelled credit expansion. With the turn in the US interest rate cycle back in the spring, external financing conditions tightened. Moreover, in a number of emerging economies, policymakers have become increasingly concerned by a build-up in leverage; this is not just a story of level, but also one of speed. As seen from our leverage cycle, we believe the emerging economies have now moved to a phase of deleveraging. Our emerging market theme, however, is not just one of a cyclical downturn. As we have highlighted on several occasions, we believe potential growth is structurally slowing and no more so than in China.
China must tame excess capacity: With NFC debt at over 150% of GDP and significant excess capacity, China is ripe for deleveraging. Already in 2013, a notable feature of our forecast has been that the Chinese authorities would resist market pressure to ease monetary policy and further fuel the credit bubble. Nonetheless, shadow bank credit has continued to expand and, with that, problems of excess capacity. China’s challenge now is to deleverage and reform. The two in many ways go hand in hand and we discuss these issues in Boxes 5 and 14. It is worth nothing here that reform in China is tantamount to removing the 100% implicit state guarantee. And looking ahead, even state-backed companies could be allowed to fail. Herein resides also a potential trigger for the risk scenario of a hard landing, should such a company failure be poorly managed and spin out of control.
Japan’s corporate sector to cut savings to invest:Investment and savings are two sides of the same coin and to secure sustainable recovery in Japan, corporations need to reduce savings and invest. The BoJ’s monetary policy is already working through the currency channel and our expectation is to see a pick-up in corporate investment next. This is not just a function of monetary policy, but also the two remaining arrows of Abenomics, namely fiscal stimulus and structural reform. We see significant opportunities medium-term from reform as discussed in Box 13. Short-term, the BoJ is poised to deliver further stimulus and we look for additional asset purchases to be announced early in the new fiscal year (commencing April 1).
US credit cycle is turning: Credit channels have been repaired, household balance sheets deleveraged and excess housing stock unwound. Combined, these lay the foundations for sustainable recovery. In 2013, fiscal tightening exerted a headwind to growth, but this is now easing allowing GDP growth to accelerate to 2.9% in 2014. For the Fed, setting the right monetary policy during this transition will be challenging. A glance at our leverage cycle suggests that the challenge as recovery gains traction over time is to avoid a build-up of excess leverage. This is not an immediate concern to our minds. Although we forecast household credit expansion, our forecast for household income growth is higher, entailing some further reduction of the household debt-to-income ratio.
UK housing credit has been boosted by government measures: Supported by policy initiatives, UK housing is staging a recovery. This is highly dependent on mortgage loan conditions and the BoE will be keen to keep rates low. We expect the Bank to lower the unemployment rate threshold on its forward guidance from 7.0% to 6.5% (and reduce the NAIRU from 6.5% to 6.0%). The hope medium-term, is that this housing-driven recovery will eventually become broader based with stronger confidence, consumption, exports, corporate investment and lower unemployment. Much will depend, however, on euro area recovery as of 2015. Longer-term, a possible UK referendum on EU membership remains a point of uncertainty.
Euro area still facing headwinds: Individual euro area economies are in very different stages on the leverage cycle. Germany is the most advanced, followed by France, Italy and Spain. For several euro area economies, financial fragmentation and fiscal austerity remain serious headwinds. 2014 will see the arrival of a Single Supervisory Mechanism. As we discuss in Box 10, progress on a Single Supervisory Mechanism continues to disappoint and our base line remains for only a gradual repair of credit channels. Moreover, structural reforms are also not progressing at the desired pace, albeit with significant variation from country to country. The danger for the euro area is to become trapped in a lost decade of very low growth and low inflation. The ECB still has options. The real game changer opportunities, however, reside with governments to deliver quantum leaps on reform – at both the euro area and national levels. For now, progress remains disappointingly slow.
Summing up our view, 2014 will thus be the first year post crisis when advanced economies make an increased contribution to global GDP growth.
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