CHAOS-ONOMICS: Strangely Attracted to the Truth
May 9
chaos-onomics.com
The authority of the occupying power of the United States was very much diminished by this orgy of looting and destruction - Peter Galbraith, a former US ambassador who has spent the last three weeks in Iraq
In the game of international politics, which very often reminds one Bill Bennett of high stakes poker, wars can become magician's diversions, drawing public awareness away from the real source of tension. With President Bush having pronounced an end to the conflict, Iraq, like Afghanistan is swiftly fading from public awareness, whose attention span has usually proven quite limited. It has been my contention that the search for WMD and fears of Iraqi attacks on the US has, in effect, been a smokescreen obscuring the financial motivations, which if discussed candidly would likely erode public confidence in the monetary system, driving this conflict. Today, the conflict emerges in the venue of the United Nations as the US, Spain and Britain are expected to introduce a resolution ending the oil-for-food program and putting the US and Britain in more direct control of Iraqi oil export receipts. It's Showtime, as they say in the NBA.
Since inception in 1995, via passage of UN Security Council Resolution 986, the UN Oil-for Food program has provided a vehicle for Iraqi oil exports to be used in barter for approved imports. I use "barter" as at no time did Iraq truly control the moneys generated by oil exports, these being kept in UN administered bank accounts. US imports of, in the main, Iraqi petroleum products, according to the Census Dept, have climbed since 1996 from $0.00 to a high of $6,065B in 2000. In November of 2000, while the US was engaged in its election snafu, Saddam Hussein's request to denominate Iraqi oil receipts in Euros was put into effect and the clock started ticking on this conflict.
This is not to argue that the Iraq War was a total sham, rather that, absent these financial motivations, more diplomatic efforts would have been brought to bear, as has proven to be the case thus far in N Korea. In theory, the awesome power of the state will only be brought to bear if there is a sufficient convergence of interests, arguably generated when the elected representatives of the people cast their vote. Thus, in my view, the financial motivation not only of a couple billion $ (or Euro) annual revenue stream but also the precedent setting shift away from the US$ provided the final impetus, in the case of Iraq, to the plans of an American "benevolent hegemony" coming from certain quarters.
Let me dwell a moment on this notion of setting precedents as it is key to the view I currently hold. As Malaysian PM Mahathir's recent call to switch from the US$ to the Euro attests, once Pandora's box is opened, you can't close it. Russia, Iran and Indonesia have all expressed interest in making this shift which would lead to a dramatic recasting of global financial flows. No longer would the US be able to inflate with relative immunity.
Interestingly, while Britain and the US have been close allies in this conflict, ghosts of promises past still linger around PM Blair. Way back in the halcyon days of the Clinton administration when visions of a UN controlled world were the marching order of the day, Tony Blair held out hope of a swift British entry into EMU. Now, however, this move seems to be on, at least his back burner. However, some 300 economists, including Paul Volcker, the former head of the US central bank, Stanley Fischer, a former IMF managing director, and Nobel laureate Professor Robert Mundell, announced yesterday that; "With only days to go until the Government announces the results of [the] tests, it is clear that not only is the economic evidence overwhelmingly in favour of euro entry, so is the opinion of the economics profession." As you might imagine, British adoption of the Euro at this juncture might very well drive a stake in the heart of the US-British alliance, at least with respect to finance. Who knows, perhaps this is one motivating factor behind this rather rare event.
Turning away from the politics of the issue, let's examine certain economic effects of this issue. Today's graph present a simple model explaining some of the impetus to Gold rallies. In the three boxed areas on the graph, (from 1976-79, 1985-87 and now) the US$'s value within the exchange rate system, as measured by the y/y% change in the Federal Reserve's Nominal Broad $ Index, was falling while monetary inflation, as measured by y/y% changes in the monetary base, was rising. As you can see these periods marked the initial stages of a substantial rally in Gold. Should the foreign exchange rate value of the US$ continue to fall, should as would likely occur if US$ hegemony in oil transactions was ended, the Fed would find it's hand, in a sense, tied. Without rising demand for US$, a rising supply of them, all but guaranteed by the Fed's fears of deflation, will stoke inflation, and consequently demand for Gold.
==========
Greenspan's misplaced fears
Another day, another misplaced fear out of our esteemed, by some I would imagine, Fed Chairman. Was it only Tuesday that the Fed warned of the perils of deflation? Fear not, I say, with bond yields falling like a stone you too will be able to put your hard loaned money to good use, like in Soybean futures. This deflation the Fed sees continues to elude me but then again I don't look at the world through Greenspan's eyes which these days see exactly what they want to see, no more and no less.
Consider the following from the just released Fed minutes; "The U.S. trade deficit in goods and services narrowed substantially in January as the value of exports partially reversed a large December decline and the value of imports fell from elevated November and December levels." How exactly one looks at the US Trade situation with anything other than a sense of wonder that people still accept our wampum is beyond me, but not beyond the Fed, who applauds the one month decline to what would have been a record were it not for outlandishly high gaps in Nov and Dec.
Moving beyond this ability to ignore the $500B Gorilla, lets turn to today's misplaced fear found in this speech. Having raised my hopes with, " I do not wish to suggest, however, that I am entirely sanguine with respect to the risks associated with derivatives." He dashes them with his worry over a decline in market liquidity, "if a major dealer exited and other dealers were unwilling to fill the void, the liquidity of the market likely would be impaired."
Market liquidity! Is he nuts! We have 6 houses who do most of the derivatives business and 4 who hold the lion's share of the exposure. Imagine if there were 4 mutual funds owning a majority of the common stock in America. Would you be worried about a decline in liquidity if one of them closed up shop or would you be worried about the ability of those 4 houses to move any stock to any price they liked. We have the Fed throwing money at JPM and Citi financing their ability to trade any market, particularly with the proposed changes in commodity settlement for banks, with extreme leverage. And easy Al is worried about liquidity.
In a way this touches on yesterday's essay on intervention, which seemed to rub a few the wrong way judging by my emails. I didn't intend to imply that certain elements within the Fed and Treasury don't want to maneuver prices their way. My point was that the means by which they achieve their goals are a bit more subtle than constant official intervention. In a sense, they make use of the financial institutions like later Roman rulers made use of earlier Republican conventions, like wolves in sheep's clothing. Why does the Fed/Treasury need to intervene? They just keep buying JPM and Citi's bonds at ever more absurd prices, in the process financing their ability to put a stranglehold on many markets.
In one sense, Greenie may be giving us a heads up, one or more of these boys is likely to fall. Perhaps their death will come choking on a short Gold position in which case we might want to start calling pops like today Heimlich Rallies. |
