Last
weekend, the G-20 finance ministers met in South Korea to find areas of agreement
in preparation for the main G-20 gathering in November. The Chinese rebuffed
renewed American pleas for them to revalue their yuan. They rejected
Secretary Geithner's suggestion of a four percent cap on current account
surpluses. However, in return for accepting America's continued dollar
debasement, the Chinese did agree to "look into" a revaluation of
the yuan and the management of trade surpluses. They also agreed to an
international self-policing regime to curb currency manipulation. This 'one-sided'
compromise was hailed in the Western media as a triumph for Mr. Geithner. The
US stock markets and dollar rallied. All looked good for the election season
in November.
Unfortunately,
compromises are never one-sided; they are only construed as such. Though the
reporting failed to emphasize it, Mr. Geithner actually agreed to a massive
shift of monetary power in exchange for China's empty concessions. The
shareholdings and board composition of the huge and powerful International
Monetary Fund (IMF) have now been shifted. China will now become the third
largest shareholder of the IMF and the developing economies will get a six
percent larger voting share. Two European states will lose their seats on the
IMF's board in favor of developing countries.
Meanwhile,
China, supported by Russia, India, and even Brazil, continued to lobby hard
for the US dollar's privileged role as the international reserve currency to
be replaced by a wide basket of currencies and gold. To this end, the IMF has
recently been given additional "emergency" lending facilities.
These could be used in a coming sovereign default crisis to 'bail out'
Western countries, at which point they would be unable to resist global
economic governance under the guise of the reformed IMF.
In
short, Secretary Geithner's "victory" at the G-20 was one only King
Pyrrhus could love.
But
the blame cannot be laid entirely with Mr. Geithner. The fact that he left
the meeting at least saving a bit of face for his delegation is a monumental
achievement, considering the dismal condition of the US economy.
Fed
Chairman Bernanke appears desperate to flood the United States economy with
another round of quantitative easing (QE-2). In a $13 trillion economy, a
release of anything less than $1 trillion would not be seen as effective.
Remember, the Fed already injected over $1 trillion after the credit crunch -
and we are still in recession. How much will it take to right this listing
ship?
When
Geithner pledged to China a "gradual" debasement of the dollar, it
is astonishing that they didn't laugh him out of the room.
If he
were to make good on his pledge and convince Bernanke to cut QE-2 to, say,
$500 billion, the US GDP and stock markets would almost certainly begin to
contract. This would threaten the banking system with a second crisis borne
out of the ashes, or toxic assets, of the first.
For a
frame of reference, the US home mortgage market is valued at some $10.6
trillion. Indeed, foreclosures and past-due loans amount already to some 14
percent of the market, or about $1.5 trillion. Of this staggering figure, the
loans delinquent or in foreclosure to which the top three banks (Bank of
America, Wells Fargo and JP Morgan) are exposed amount to more than $600
billion, an amount roughly equal to the original TARP bailout fund.
At the
same time, thanks to falsely low interest rates, the banks' net interest
margins, or the difference between what they earn in loan interest and
what they pay to their creditors, are being squeezed severely, while their
non-interest earnings are falling, due to lower economic activity and the
prohibitions contained in FinReg.
Finally,
there is the murky question of how exposed the banks are to the massive
derivatives market, a house of cards with a shaky foundation.
As we
have described for several years, the US economy is virtually locked into a
long arc of decline. There are no politically palatable solutions to this
quandary. Until Americans are ready to take their lumps and accept a steep
drop in their standard of living, the US government will have no leverage
with the creditor nations and no ability to keep its promises. Therefore, we
should celebrate when China even gives our Treasury Secretary an audience.
If
China does manage to topple the US dollar from its perch as the international
reserve currency, our economy will very likely move into free fall as decades
of inflation come pouring back into the country. We will be forced to live
within our means or face hyperinflation. Losing a few votes at the IMF is a
small cost to delay this eventuality, but it also puts us one step closer to
it.
John
Browne
Senior Market Strategist
Euro
Pacific Capital, Inc.
20271
Acacia Street, #200 Newport Beach, CA 92660
Toll-free:
888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
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Please note:
Opinions expressed are those of the writer.
John Browne is the
Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a
distinguished former member of Britain's Parliament who served on the
Treasury Select Committee, as Chairman of the Conservative Small Business
Committee, and as a close associate of then-Prime Minister Margaret Thatcher.
Among his many notable assignments, John served as a principal advisor to
Mrs. Thatcher's government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher
famously pronounced that Gorbachev was a man the West "could do business
with." A graduate of the Royal Military Academy Sandhurst, Britain's
version of West Point and retired British army major, John served as a pilot,
parachutist, and communications specialist in the elite Grenadiers of the
Royal Guard.
In addition to careers
in British politics and the military, John has a significant background,
spanning some 37 years, in finance and business. After graduating from the
Harvard Business School, John joined the New York firm of Morgan Stanley
& Co as an investment banker. He has also worked with such firms as
Barclays Bank and Citigroup. During his career he has served on the boards of
numerous banks and international corporations, with a special interest in
venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the
former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.
Copyright © 2008
Euro Pacific
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