Can you say ....... I-N-F-L-A-T-I-O-N ......... ?
re: Message 21012331
Rising Rates...Ramping Inflation.
whodathunkit ?
We are now approaching a real potential tipping point crisis for the USD.
Greenspan knows what raising rates to required levels is going to do to the USD and the Bond Market.
Fannie Mae Cracking...fissures appearing all over the Mortgage Market.
The Tsunami of all potential Rogue Wave Events - a Derivatives Crisis has seemlingly been forgotten.
Here's a nice little reality check update on where we now find ourselves in LTCMx10 Deja vu all over again-land:
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The following is Hon. Mario Lettieri's speech to the Italian Chamber of Deputies on March 14.
The Derivatives Bubble:
However, one year later, not only do we find confirmation of what we had written and what I presented in my first intervention, but unfortunately, we must also observe that the systemic financial crisis is producing shocks on the markets in an increasingly significant and negative manner, with increasingly serious and uncontrollable consequences, at a level which clearly goes beyond that of Italy.
The gap between the real economy and the economy based on financial speculation is of an almost inconceivable magnitude.
The leading market of course, is London, which is almost twice as large as the American market.
The BIS declared that it was quite worried because the speculative funds, the so-called hedge funds, have an increasing importance in these operations, to the point that 43% of all contracts do not involve a bank, but rather a hedge fund or insurance company as one of the counterparties. And this is a worrying fact, since banks, although they can be criticized and need to be more transparent, do offer a minimum level of guarantees, unlike these funds.
Consider what has happened with certain large banks; for example, Morgan Chase alone, has increased its derivatives exposure by about $10,000 billion, almost the size of U.S. GDP.
The total value of derivatives exposure is thus larger than world GDP:
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We are faced with a situation in which, if there were crises that could lead to a crash, the situation would cause a global financial breakdown, with devastating effects on the economy, wealth, and life of many countries.
The most recent report available from the BIS, on derivatives at the end of December 2004, brings the total of contracts open at the end of June to over $220,000 billion: an enormous, scary amount, which highlights an increase of $50,000 billion more in 12 months!
It is definitely important to emphasize that, at the end of June 2001, according to the official BIS reports, OTC derivatives were $100,000 billion. Thus, in three years, there has been an increase of $120,000 billion, equal to three times world GDP.
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Here's an interesting take on Greenspan's present nightmare:
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gold-eagle.com
Where will the Fed find shelter after the tornado of runaway inflation has struck?
The seriousness of the problem cannot be overstated. A steep rise in interest rates at this juncture would be the horror of horrors.
Normally higher interest rates would strengthen the value of the currency as they attracted foreign investors. Not this time.
Apart from the problem of pricking all the bubbles in the economy starting with the housing bubble, and ballooning the budget deficit into outer space, there is an even larger and more immediate problem. And that is the effect that steeply rising interest rates have on the value of bonds, widely held at home and abroad. The effect is inevitable and instantaneous. Higher interest rates make bond values collapse.
You have to be very clear in your mind about this, so I spell it out. The dollar losing value on the foreign exchanges because of the trade gap is one thing.
Dollar-bonds losing value due to higher interest rates is another thing. Nevertheless it is entirely possible, and right now appears highly probable, that the two losses will be inflicted simultaneously.
Losses on bonds will compound the loss on the dollar. The compounded loss shall exceed the critical mass of bearable losses, and will trigger a chain reaction of further losses.
The confidence in the dollar will be fatally and irreparably shaken, domestically as well as internationally.
How likely is that to happen? In my opinion not very likely. The Fed must have a contingency plan to prevent a steep rise in interest rates. Krugman has convinced us that the money-managers at the Fed have got rid of their last scruples, if they ever had any. Paraphrasing him, if you really believe that runaway inflation is now a global threat, you should also believe that only policies lying outside of the realm what is conventionally regarded as responsible will contain that threat. One irresponsible monetary policy deserves another.
The contingency plan to prevent a steep rise in interest rates will have to involve a conspiracy between the Fed and the Bank of Japan to punish speculators short-selling the dollar and dollar bonds.
** (see below)There is nothing else left in the Fed's bag of tricks but the check-kiting scheme with the Bank of Japan that could hold back the forces of monetary destruction waiting in the wings. Never mind that it is "conventionally regarded" as irresponsible. Never mind that it is illegal. Never mind that it is criminal.
Nothing else will defer the day of reckoning.
March 21, 2005
Antal E. Fekete
Professor Emeritus
Memorial University of Newfoundland
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*** There is another "tool" available to Greenspan to prick the various "bubbles" and to apply the brakes to an overinflated & overliquified economy.
...and that "tool" is - CRUDE OIL
Rarely do the path's of Geopolitical and Economic Policy cross.
Today they have.
CRUDE OIL has arrived at the crossroads of Geopolitical & Economic opportunity.
Significantly higher Crude Oil Prices will cool the US Economy without creating irreversible systemic cracks in the Bond Market.
Ramping Crude Oil & Gasoline Prices can be used to "prick" vs "collapse" the Housing Bubble...of whose soft vs. hard landing is of significant importantce; given the newfound Wealth Effect that American's are enjoying in thier inflated Home Valuations which has had a rather obvious leveraged impact upon Consumer Sentiment & thus Spending.
China is at a dangerous internal economic and geopolitical crossroads.
Crude Oil is presently fueling it's construction...it can also be used to fuel it's Economic and Political destruction.
When those 2 paths cross...the result is highly predictable.
The NeoCon Geopolitical agenda & US Economic Policy can now be served by the same master.... Oil. |
