Subscribe to the Full Investment Markets Overview Newsletter which contains the following additional commentaries:-  

• US economic data . . .

• Euro-Zone   . . .

• The UK . . .

• Out East   . . .

• The $US index  . . .

• Within the commodities complex  . . .

• Economic data due next week includes  . . .

• The price of Bitcoins experienced a whopping 80% decline over a three day period this week . . . .
   

• Charts:-
  1. Indices Weekly
  2. US Adv Retail Sales M on M vs Univ of Mich Consumer Conf’ce
  3. UK Trade Bal vs UK Trade Bal with EU 27
  4. China Exports Annualised vs Chinese Renminby Spot
  5. Gold Price

Table of 15 Indices, 11 columns of detailed information, for accurate analysis

Click  HERE to view Details of the full version of this Newsletter

which includes full text and detailed Charts for each section

While on that subject, allow me to tell you a bit more about how wonderful I am.  As I went through the Turbotax program, I was asked about earned interest.  I reviewed our vast holdings and found, amongst the vastness, we have a checking account that bears interest.  This is a good banking product for those of us who keep a large balance in our checking accounts.  Our average balance (I say “our” because it is a joint account so my wife shares in my vast holdings) was apparently so large that we earned interest amounting to 62 cents.  As an honest and patriotic taxpayer, I entered that amount into the Turbotax program and it was rounded up to $1.  It seems that Turbotax is not so sophisticated as to be specific, which artificially increased my reported income by 38 cents.  Consequently, Miss Sugar and I will be paying taxes on those 38 cents that we did not receive as income.

Those of you who are accountants, tax preparers, and other types of mathematicians are capable of understanding the effect of that inaccuracy upon my trophy wife, myself, and the national economy.

Those of you who lack the expertise to make these financial calculations need to follow along for your eyes to be opened to the magnitude of the travesty.  By treating 62 cents as if it is $1 is a 61% increase, (I think it is calculated: 38/62=61%, rounded off), meaning 61% of that reported income is phantom income.  I am paying taxes on 61% more interest than the bank paid.  If we all reported too much income, our nation would have a false sense of the assets of its people.

It adds up.  To paraphrase Everett Dirksen, 38 cents here, 38 cents there, and pretty soon we’re talking real money.

Miss Sugar and I are generous people.  As patriots, we are going to allow the I.R.S. to simply keep the change (or apply it to next year’s tax obligation).

My fellow Americans, ya’ll are welcome!

The Bread Machine Gunner Takes On Ben Ali’s Security Force…

(Note: This also appears at the Foreign Policy In Focus Website;

Part Two of the Series)

_______________

Faced with a deepening socio-economic crisis that has only intensified since the collapse of the Ben Ali government in January, 2011, it appears more than likely that Tunisia is about to enter into a major agreement with the International Monetary Fund – IMF – for a $1.78 Billion loan. As is almost always the case, the loan is conditionally based upon Tunisia fulfilling what the IMF calls structural adjustment criteria, a part of which has already been implemented – eliminating the subsidies on fuel which has increased their cost.

All this is being done in the classic IMF fashion – with as little public discussion as possible either with the Tunisian government – its Constituent Assembly – or with Civil Society, which have had no input whatsoever into the process. For an international organization that talks the talk about `transparency’ its long held traditions of secrecy, especially where it concerns granting sizable loans to semi-peripheral and peripheral countries, is much more the norm.

That said, in this new post-Ben Ali era, confused and directionless as it is economically and politically, one thing that the Tunisian people have won is their freedom of speech. As a result, alas, (for IMF, Tunisian Central Bank and Finance Ministry bureacrats) it has more difficult to hide the details and conditions for this loan as in the past. A growing number of Tunisia’s talented political and economic researchers have been able to break through the traditional wall of silence to unearth the details of the loan and press the Tunisian government to do what it really seems to want to avoid – engage in a public, wide scale discussion on the loan itself, and more basically, on the direction of the economy itself.

Many of the revelations about the loans have appeared in Arabic, French and English at the Tunisian alternative media website, Nawaat.org., which has broken key elements of the story to the Tunisian public, enough so that government has been pressed to publicly respond. It is precisely this kind of discussion which has been missing from the Tunisian public since the Ennahdha-led government came to power in the October, 2011 elections.

During the Ben Ali years in power (1987-2011), Tunisia was often cited as an IMF poster-child, ie – IMF structural adjustment might have caused `problems’ elsewhere – but in Tunisia, at least according to IMF publicity, it seemed to be working. This particular illusion was blown to bits so to speak by the emergence of the massive social movement that brought down the Ben Ali government. When the mask was ripped off, it turns out that not only had IMF structural adjustment policies had not helped Tunisia, but that they were a major contributor to the country’s socio-economic crisis. IMF statistics on Tunisia were if not entirely fabricated, way off.

The rosy picture the IMF painted of the Tunisian economy was more hype than truth. In fact the policies failed. How interesting and typical that within the IMF there has virtually been no self-criticism for how it contributed to Tunisia’s economic crisis, as if structural adjustment had nothing to do with Ben Ali’s collapse. Worse – the policies continue. The proposed loan follows closely in the footsteps of those that came before. There is no change in the country’s post Ben Ali’s economic policies from those that existed prior to his downfall.

If this hypothesis is accurate, and from everything I can tell it is, there are consequences. As the last uprising was essentially caused by Tunisia’s embracing of neo-liberal economic policies and nothing, or precisely little has changed. Another major crisis cannot be that far off.  History strongly suggests the relationship between neo-liberal economic policies and political repression `go together like a horse and carriage’ as the lines from an old song go.

Nor has Ben Ali’s extensive repressive apparatus been dismantled; it remains largely intact, for a while in cryonic suspension, but now coming back to life again. Having tasted the wine of freedom and empowerment - the fruit of unprecedented peaceful mass protest – it is unlikely that the Tunisian people will wait this time another quarter century before taking measures into their own hands once again. I do not write these words as some kind of `threat’, simply from my reading of history.

In any case, what follows is the first part of a three (or maybe four) part series. This first part looks at the Tunisia’s initial uneasy relationship with the IMF in the 1980s, Bourguiba’s resistance to the policies, Ben Ali’s embrace of structural adjustment. Part Two will examine the results of Ben Ali’s neo-liberal policies on Tunisia (1987-2011) and Part Three will take a peek at the current proposal, well on its way to be implemented. RJP)

Picking up the theme – the Bagette Revolution – January 2011 Tunisia’s Bagette Revolution

Tunisia’s Baguette Revolution

For `outsiders’ the photo seems admittedly a little odd: a man armed with a `baguette,’ [i] as if it were a machine gun and not simply baked flour, pointing it at a Tunisian security force down the street on Ave. Habib Bourguiba. But Tunisians of any age understand it. The photo is from early January 2011, just before a million person march on Tunis forced the five star kleptomaniacs, Tunisian President Zine Ben Ali and his wife Leila Trabelsi, from power.

The foreign media, including here in the USA, suggested that Tunisia’s January 2011 uprising was a `Twitter’ or `Facebook’ Revolution, but it was much more basic than that –about bread and roses ­– about pervasive economic stagnation, high unemployment, low wages and seething repression. At the time, no one was talking about whether women should wear veils or bare their tits, or thought the uprising was about trashing marabouts and trade union headquarters, desecrating Jewish cemeteries.

Taking their cue from the poor man[ii] facing down Ben Ali’s security apparatus, hundreds of Tunisians picked up their bagettes and took to the streets. Symbolizing the failure of the Ben Ali years, the bagette was also reminder of the Bread Riots of 1984 which shook the country to its foundations, leading to a full scale national revolt that very nearly brought down what was then the 18 year rule of the country’s first president, Habib Bourguiba.

Tunisia caught in the Global Crisis of the 1980s…

True, the 1984 Tunisian economy was in the doldrums, although the current fashion – to blame the slowdown on the Tunisian economic model of state capitalism, with its strong social contract – misses the point.[iii] The global economy had been in the doldrums for a decade hitting the commodity, low-end manufacturing sector in the semi-periphery and periphery with a special vengeance in the early 1980s. Tunisia was caught up in the storm. In particular, the European economy, had gone through a decade of recession, high unemployment which, in turn, had a profound impact on Tunisia, as so much of the Tunisian economy was geared towards exporting to Europe (France and Italy in particular) and welcoming European tourists.

In the early 1980s, Tunisia’s economic situation deteriorated, the state’s tax base shrank. With some hesitation, the Bourguiba government was pressured to do what so many other Third World countries had to do at the same time: go begging to the IMF or World Bank for a loan. This Bourguiba did, and the IMF, being accommodating, agreed to offer Tunisia a substantial loan. But there were conditions: the usual structural adjustment conditions which have done so much over the years to widen the gap between poor and rich countries, to undermine and destroy the economic potential of many of the Asian, African and Latin American countries that accepted the deal.

January 2011. The Bagette Revolution Spreads. By the way, the bread tastes great.

Bourguiba Agrees To End Bread Subsidies; The Nation Rises in Protest; Bourguiba Withdraws The Proposal

These conditions included cutting government spending, reducing or eliminating capital controls and protective tariffs, depreciating the dinar (Tunisia’s currency). Part of the deal necessitated the Tunisian government ending its subsidies on wheat and semolina (ingredients in bread). Caught in the vice, Bourguiba agreed.

The price of bread doubled overnight. The price increase triggered two weeks of angry nation-wide protest demonstrations. As they had done once before in 1981, the security forces and military  - led by then Interior Minister, Zine Ben Ali – crushed the bread riots. When it was all over, more than 80 Tunisians lay dead, hundreds wounded. Having not yet slipped into his soon approaching senility, Bourguiba had the presence of mind to reinstate the subsidies and fired the ministers responsible for encouraging the loan. The political situation stabilized, but the economic downward spiralm, caught in the global structural crisis, continued.

Such bread riots were not unique to Tunisia. They took place all over the Third World in the 1980s as the world’s poorer countries were forced to lift subsidies on food, medicine, education, to freeze public sector wages and benefits in exchange for World Bank/IMF loans.

For the next three years, until he was overthrown by his interior minister. Bourguiba resisted lifting subsidies. But in 1986, Tunisia ran short on foreign exchange. The crisis was triggered by plunging oil revenues (down 40%), declining tourism receipts, and a serious drought which badly affected the agricultural sector.  Bourguiba grudgingly agreed to an IMF loan that required lifting subsidies on bread.  With the 1984 bread riots (and a 1978 union initiated national strike) in the back of his mind, Bourguiba  permitted wages to simultaneously rise to compensate some for the higher bread prices. Again people took to the streets in protest, but not with the intensity of 1984. [iv]

January 2011, The Bagette Revolution – Bread and Roses…and maybe `Facebook’ and `Twitter’ too…

Enter Zine Ben Ali: `Our Man In Tunis’; Start of the Tunisian-IMF Love Affair

The government survived the crisis, although it was the beginning of the end of Bourguiba. Bourguiba’s successes were based upon a strong state participation in the economy, free public education, democratization of the role of women, and subsidies for basic food stuffs and fuel. As the tax base of the state eroded and the state fiscal crisis deepened, the social contract that Bourguiba had committed to for thirty years weakened and with it, the social base of his government narrowed.

Increased repression, especially against the country’s growing Islamicist movement (which itself was able to take advantage of the growing economic crisis) only narrowed Bourguiba’s support base that much further. On November 7, 1978, Habib Bourguiba was removed from power in a `palace coup’ on November. There was very little protest. Bourguiba was unceremoniously pushed aside with his former interior minister, the same man who had crushed the 1984 bread riots, Zine Ben Ali, took the helm.

In a matter of weeks, the new government’s attitude towards the World Bank and International Monetary Fund shifted from hostility and suspicion to a warm embrace. Using an old basketball trick – faking to the left, while moving with the speed of light to the right. At the beginning of his rule, Ben Ali promised openness and democracy. He gave Tunisia a quarter of a century of IMF structural adjustment and an increasingly repressive government, much crueler and all embracing than anything Bourguiba had constructed. He went far to de-construct much of the social edifice that Bourguiba had tried to build and would have done more had he had the opportunity. When finally chased from power in 2011, he left a country economically and socially polarized, half of the economy in the hands of the two ruling families (the Ben Alis and the Trabelsis), a repressive apparatus of more than 200,000 in a country of ten million, with an enormous debt burden. As is virtually universally acknowledged, much of Tunisia’s  economic and social decay of the Ben Ali years lays at the door step of the International Monetary Fund.

Even before consolidating his hold on power, as one of his first acts, Ben Ali gave Washington a call and opened negotiations with the IMF for exactly the kind of structural adjustment-based loan Bourguiba had resisted.

Thus wrote Canadian political scientist Michel Chossodovsky:

“Barely a few months following Ben Ali’s installment as the country’s president, a major agreement was signed with the IMF. An agreement had also been reached with Brussels pertaining to the establishment of a free trade regime with the EU. A massive privatization program under the supervision of the IMF-World Bank was also launched. With hourly wages on the order of €.75 an hour, Tunisia had also become a cheap labor haven for the European Union.”[v]

In retrospect, the implementation of Ben Ali’s economic program was a classic example of what later Naomi’s Klein would refer to as the `Shock Doctrine’ to the Tunisian realities. In the Ben Ali case, a political coup – that by the way included the promise of greater democracy – became the pretext for a far reaching economic restructuring of the economy. It included classic structural adjustment themes: reducing the state sector in the economy, lifting subsidies, `loosening’ the social contract, weakening the country’s education and healthcare system, keeping wages low, lifting capital controls, privatization of state resources, etc, etc – all the policies that have made IMF structural adjustment the antithesis of Third World development over the past thirty years. It all happened quickly before the Tunisian public understood the degree to which their lives were about to be changed.

It was not only that subsidies would be ended and much of the country’s state-owned economic structures be privatized, the country’s entire economic model that had existed since independence was dismantled in the process. The `old authoritarian’ economic model instituted by Bourguiba that included state involvement in the economy, a social contract that included subsidies on basic needs, free quality education and a somewhat protectionist approach to foreign investment and involvement in the country’s affairs, came unglued. In its place `a new authoritarian’ model based upon classic neo-liberal economic principles was immediately and aggressively implemented before the Tunisian people could fathom what was going on. [vi]

________________________

How to solve this problem then? Earlier currencies were bound to gold but that bond was cut decades ago. Getting gold from ore to an ingot requires materials, tools, labor and energy but gold ore is pretty rare and the goldmines are not available to anybody. Keeping this in mind why don’t we define the value of a Bitcoin?

What if one Bitcoin could manufacture one hundred zinc-plated steel buckets holding ten liters of clean drinkable water?

Think about it. It would mean that if clean water is not easy to obtain and is expensive, the bucket has to be manufactured with lower costs. Metal costs about the same all around the world so labor cost has to go down. Drinkable water is relatively easy to obtain in western countries so the same amount of work used to make a bucket yields more of Bitcoin. Dig a well in a dry country and you will prosper. Pollute your environment and you will suffer. Put your money into guns and warfare instead of (water purifying) technology and you suffer again.

Now this is just a quick idea, I haven’t thought much of pitfalls it could have. At least it should be protected from market and investor speculations and it is a step to true global currency not giving big banks centralized control of us.

Change is constant , everything else is variable. True it is. Its been what a decade , that we have seen a tremendous amount of changes in this world economy. Yes we have, especially after we were hit by the turmoil that began in 2007. Interestingly we not only saw the turmoil in the financial world , but we had a ripple effect of this on other areas. Fiscal deficits rose, imports and exports were hit, currencies started loosing their . It was hard to believe for me to see dollar hitting Rs38,Rs39. What more?

Every situation demands a change. This one too. I myself being into investment banking world thought about. Although i am just a pawn in this game of chess , but i think its our thought process that makes a lot of difference in this world. So i started thinking about it.

Cover (Photo credit: Wikipedia)

Now whats the most important thing for any company in this world ? Think about it . Its very obvious . Well the answer is its shareholders , investors. The key to remain stable or successful is to retain the confidence of the investors even if the water has reached the deck of your ship. This confidence will only can save your sinking ship. Well yes, didn’t we see many ships sinking. I don’t need to take names. .

So , i thought of a platform. A platform where investors could interact with each other. More of networking. It was all about being social on a individual investment. So, think of a facebook page where individual investors would have access to each other .  This would give an opportunity for investors to interact with each other. May be your company might end up attracting more investors. A competitive way to get your sinking ship back to sailing.

Let me think more on it.

Shwetal – An avid writer.

AUM

Related articles

• Crowdfunding: Say Hello to Your Next 10,000 Investors (staples.com)
• The Economist: Mrs Merkel and the Sinking Ship (englishblog.com)

The following article is translated from a text that appeared in

The present financial crisis, triggered in 2008 by the bankruptcy of Lehman Brothers, is not just the most recent in a series of financial disasters and stock market collapses that have impacted the economy since the 1980s – at the average rate of a major crisis every three years. It is also the deepest crisis in 30 years. Four years after Lehman’s demise, the crisis has taken on a different shape and its center of gravity has shifted. But it remains unsolved. It continues to weigh on the economy, and has so far prevented production from taking off. The productive sector, after registering somewhat better results in 2010 (though not good enough to send unemployment on a downward slope), is apparently going through a genuine global “recession” that started in August 2011. Government-sponsored international bodies like the World Trade Organization (WTO) are now describing the period we have just entered as the “The Big Recession,” in reference to the “The Great Depression” that came in the wake of the stock market crash of 1929.

In 2012, production continued to slow down. The number of unemployed continues to grow. And there are no indications of a turnaround, which suggests that the economy has not yet hit the “bottom” of the 21st century’s own “Great Depression.” In other words, there is worse to come.

This situation is further aggravated by the threat of a new and brutal financial crisis involving, this time around, the European Union.

We have more than once explained the cause of the economy’s “financialization” and its humongous proportions: it is big capital’s answer to the market’s general downturn that started in the early 1970s and has so far alternated periods of stagnation or limited growth with periods of clear setback.

The domination of finance over production is of course nothing new in the capitalist economy. A century ago, Lenin already considered that the power wielded by financial capital over the rest of the economy was one of the cornerstones of imperialism.

What has come to be known as the economy’s “financialization” is the tendency of big capital, confronted by the lack of creditworthy buyers on the market, to decrease productive investments and devote an ever bigger share of profits to financial investments. As time goes by, the “financial industry” becomes cancer-like, permanently inventing new, more sophisticated and more speculative financial “products.”

One of the indications of the shift from a period of growth – or “economic boom” – to a period of crisis is the falling rate of profit. For the bourgeoisie, it is also the most preoccupying aspect of any crisis. Big capital’s policy, in reaction to the downturn of the early 1970s, consisted of trying to maintain the rate of profit by aggravating exploitation – in other words, increasing the capital owners’ returns at the expense of the total labor force. The policy of the owners of big capital was a success because they waged a genuine war against the workers, freezing wages, increasing the workload, taking advantage of the fear of unemployment, cutting the budgets of basic public services (health, education, collective means of transport, etc.) and reducing social spending.

In six years, between 1982 and 1988, the share of wages in France’s national revenue went from 73.2% to 63.4%.

In the early 1990s, the capitalist class recovered the rate of profit it had enjoyed before the crisis. Their success was not due to renewed dynamism, nor to a growing creditworthy market, pulling after it new investment in production. The consequences of the return to a pre-crisis rate of profit did not result in an increase in productive investments, nor new jobs, nor a new economic cycle. More profits simply meant that more money was going to be injected into finance.

The growing complexity of the economy’s financialization has continuously increased since 1982, a year marked by an important recession. Inflation was reaching new highs and in order to hold it back, the states decided to switch from a policy based on the money machine to one based on indebtedness. Of course, the money spigots were never completely turned off, but instead of printing more currency to counterbalance their budget deficits, the states started borrowing money from the banks and, more generally, from international finance. The system thus created depended more and more on credit for its smooth functioning, that is, on increasing indebtedness. The states raised the cash they needed by selling Treasury bills, notes, bonds, etc. And this system was a big gift to the banks, which acted as the intermediaries between the needy states and the big owners of capital on the lookout for profitmaking opportunities.

A quick look at the growth of the United States’ public debt sheds a crude light on the recent evolution of the system [the following figures concern the federal government’s debt, not that of the individual states or local governments].

The United States’ public debt was 305 billion dollars in 1963 and 370 billion in 1970, just before the crisis that hit the international monetary system and the first oil shock (19731974) which marked the beginning of the crisis we are still living through. The U.S. national debt grew to 907 billion in 1980, 3.23 trillion in 1990, 5.67 trillion in 2000, reaching 10.02 trillion in 2008, at the beginning of the present financial crisis. At the end of 2010, after the state’s intervention to bail out the banking system, the U.S. national debt reached 15.15 trillion dollars – that is, roughly 100% of the country’s GDP.

U.S. private debt has also grown enormously.

The same can be said of every imperialist country. France’s public debt, for instance, has gone from 22% to 84% of the country’s GDP in twenty-odd years.

For three decades, states have had to rely more and more on the international market to face up to their commitments, raising money by offering, in exchange, fresh treasury or other bonds or securities, etc. But they must reimburse their debt at a given date and they have to pay the interest on these bonds.

The vicious circle is complete. Debt feeds debt. Creditors (banks, investment funds, insurance companies) face an overflow of money coming their way. The interest owed by borrowing states and governments is a growing share of their budgets.

The same can be said of companies’ indebtedness. With one major difference however: the debt floated by companies ensures the repartition of surplus value between industrial capital and financial capital. Let us keep in mind that investment funds and banks lend not only their own money but also the money of big industrial or commercial businesses.

As for the public debt, the state uses its exclusive prerogatives (as a tax collector for instance) to empty the citizens’ pockets, especially those of the working class, in order to feed financial capital. The racket which is thus organized by the state becomes a more and more indispensable addition to the amount of surplus value extorted through exploitation.

In order to justify the racket and to defend its austerity policies, each and every government blames the huge public debt, arguing that it’s up to the citizen to pay his/her share of the national debt that must not be left for his/her children or grandchildren to pay!

Government representatives who repeat this, parrot fashion, are less talkative when it comes to private debt. Those who are privately indebted are not pilloried day in, day out for threatening the global economy. But the fact is that those private debts – most of which belong to companies, banks and the better-off individuals – are three times the size of the public debt.

According to the Committee for the Abolition of Third World Debt, “the grand total of worldwide private debts is 117 trillion dollars, that is, almost three times the total amount of public debt (41 trillion)” [Source: McKinsey Global Institute’s report.]

These private debts could, tomorrow, cause a chain of business bankruptcies. They are as threatening for the global economy as is the public debt of this or that state. Let us keep in mind the consequences of Lehman’s bankruptcy!

In 2008, a few weeks after the demise of Lehman Brothers, we wrote a text on the crisis of capitalist economy for our yearly Congress. After examining the different explanations of the causes of this financial disaster, we wrote:

“Since the brutal aggravation of the financial crisis, on September 15, 2008, and the bankruptcy of Lehman Brothers, one of the pillars of Wall Street, a bunch of economists who can only ‘foresee’ past events blame deregulation, liberalism, globalization or a failure to supervise the financial system as the fundamental cause of the crisis. These aspects all played a role in the succession of events that eventually led to the present financial crisis and to the form it has assumed. However, none of them is the genuine cause of the crisis: capitalist economy simply CANNOT function without periodic crises.”

Commenting on the 19201921 crisis, Trotsky wrote: “So long as capitalism is not overthrown by the proletarian revolution, it will continue to live in cycles, swinging up and down. Crises and booms were inherent in capitalism at its very birth; they will accompany it to its grave…. In periods of rapid capitalist development, the crises are brief and superficial in character while, in periods of capitalist decline, the crises are of a prolonged character while the booms are fleeting, superficial and speculative.”

We went on to say, in 2008: “Imperialism emerged more than a century ago, with its trusts spreading their tentacles all over the world, increasing the complexity of economic activity. These developments have rendered the periodicity of economic cycles less predictable. They have multiplied the ways crises can occur and have worsened their damage, but they have not made them less avoidable. Crises constitute essential phases of capitalist reproduction. In fact, it is through crises that the market economy, the motor of which is blind competition, reestablishes the equilibrium between production and solvent demand, between the different sectors of the economy – notably that of the means of production and that of consumer goods – or between the different companies engaged in the successive phases of the production process. Crises express the fall in the rate of profit resulting from the saturation of the market. By destroying part of the capital engaged in production, by getting rid of the less profitable companies, crises create the conditions for launching a new cycle, in which the rate of profit begins to increase, investments start back up, and hiring begins.”

One of the consequences of the economy’s financialization is that it modifies and weakens this regulating role of crises.

Each time production was about to be hit by a recession, governments reacted by opening up the credit gates, by increasing the quantity of money, of debt certificates or of circulating credit. From rescue to rescue, the economy has now ended up with this hypertrophy of the financial sector. And it cannot escape from it.

We have always stressed the fact that, from the capitalist’s point of view, capital is always capital, whether it be industrial capital or financial capital. Big capitalist groups carry out financial activities as well as productive ones, very naturally….

Making a distinction between finance and the productive economy is impossible or even meaningless if one is trying to understand their role in the normal functioning of the system. But on the scale of the whole economy, the significance of financialization is that finance – a sector where no surplus-value is produced – takes a growing share of the wealth created by exploitation. Financialization is an expression of, as well as a cause of, the parasitic nature of finance.

The present financial crisis is an offshoot of the sub-prime real estate bubble which got under way in the early 2000s and blew up in 2007, causing Lehman’s bankruptcy in 2008 and threatening to transform itself into a general crash of the banking system.

The mechanism that threatened to destroy the banking system in 2008 may not have led to catastrophe then, but the same mechanism is installing itself today by banks that hold too many debts from states that are no longer able to reimburse them. In 2008, every banker knew that all of them held a huge quantity of securities that had become worthless because they were somehow linked to the U.S. real estate bubble. The bankers’ distrust of one another threatened to bring the exchanges between banks to a standstill, in other words, to completely clog the thousands of daily exchanges between banks which constitute the economy’s arteries and veins, its circulating system.

To avoid the predictable thrombosis, imperialist states agreed almost immediately to bail out the big banks and to buy back their “rotten” or “doubtful” securities. The states’ rapid intervention and the hundreds of billions of dollars and euros poured into the system prevented the looming global crash.

However, this injection of huge amounts of paper money carried inflation in its wake. This was a complete departure from the policies of the 1980s, when states slowed the printing of their own monies, looking instead to borrow money in the international financial markets. Since the alarm of 2008, all the states that can afford it do both. But not in the same way and not with the same consequences.

The end result is an increased state indebtedness and a growing distrust of the states’ capacity to pay back their debts. The crisis of public debt replaced the banking crisis, or rather, it was added to the banking crisis. As events have shown, this is how a vicious circle is built: distrust of a state then becomes distrust of that state’s banks.

Another consequence of the emergency measures that saved the banking system was the shift of the crisis’s center of gravity from the United States, where it originated, to Europe, or rather to the eurozone. The eurozone was plagued by a contradiction from the minute it was born: it may have a single currency but it never gave itself a single state, having today seventeen states with different, often contradictory interests. This unusual situation did not reveal all its explosive force until the present financial crisis got under way. But the roots of this situation go back much earlier.

The existence of a single currency did not put an end to the disparities between Europe’s richer countries, in other words, its imperialist countries, and its poorer countries.

In the beginning, the creation of the eurozone meant that the big banks of the richer countries invested disproportionately more of their capital in the not-so-well-off countries. At that time, the talk was about the benefits gained by countries like Spain, Portugal, Ireland, and to a lesser extent Greece, for having rallied around the euro.

A good deal of the capital which was being invested in these countries came under the guise of “aid” to the building of badly-needed infrastructures. However, the capital which left the richer part of Europe and emigrated to its poorer part was not aimed simply at financing the more or less useful projects. The owners of that capital also had speculation on their mind and were ready to play on the discrepancies (development, prices, etc.) between different countries. The 2008 financial crisis itself increased the phenomenon because in its early days, it brought about the transfer of huge amounts of liquidities. The bankers, looking for means to invest their extra liquidities, lent wherever they wanted, including to Greece, Portugal or Spain.

In Spain, the bulk of these transfers ended up in real estate. At the time, economists praised Spain’s high growth rate, without ever putting the figures in perspective or pointing out that most of the “growth” was in real estate. So, when the real estate bubble created by speculators finally burst, the spectacular growth rate of Spain came to a spectacular halt. The balanced budget of the Spanish state became unbalanced. The banks collapsed and the Spanish state tried and is still trying to bail them out, with the result that it is now itself covered with debt.

Ireland attracted capital for different reasons – one of them being its very ‘bank-friendly” tax policy. Portugal’s asset was the fact that the size of the infrastructure works to be financed by the European Union (EU) meant interesting profits. Greece may have been attractive as a potential borrower only because it was in dire need of making up for its own deficit.

Until 2010, banks were not very critical when they had to assess the overall trustworthiness of the states that borrowed from them. On the contrary, they were pushing the states to borrow money. In 2010, Greece and most Greek companies could still borrow money at the same rate as Germany. And so they did! At the end of 2010, the European banks’ exposure in Greece totaled 162 billion dollars (public and private debt). Some German banks and French banks thought they had found the pot of gold! But when distrust started to grow, the whole setup came tumbling down, and speculators began betting on a collapse of the Greek economy. All Greek assets, whether owned by Greek or foreign businessmen almost instantly lost a good deal of their value.

The transformation of the financial crisis into a sovereign debt crisis then sparked off the crisis of the euro. [A sovereign debt is one that is guaranteed by a state.] The important thing here is that the distrust that a state would not be able to reimburse what it had borrowed did not have the same consequences for countries like the United States and Great Britain, which have their own currency that they can manipulate at will; compared to an EU country, which cannot, theoretically, do the same thing.

The U.S. federal state can always pay its debts by printing more dollars. Things are different inside the European Union. According to EU treaties, the European Central Bank cannot finance the public deficit of a member state by churning out money. And each of the seventeen states, although belonging to the Union, is the only one responsible for its own debt and for the debts of the banks that are present on its territory.

Speculation seized on this flaw in the EU.

With the interest rates on bonds varying depending on the reputation of the borrowing state, “confidence gaps” formed the basis of a new type of speculation. The interest rate determines the price a state will have to pay to borrow money on the financial market, that is, from the dozen big banks and investment funds that dominate the market. Any lack of trust of a particular state means that the interest rate for that state’s bonds will go up, but then a high interest rate increases the general distrust, etc.

The financial markets found a new object of speculation without any limits: the variation in confidence toward the German state at the one pole, toward the Greek state at the other pole, and toward the 15 other states somewhere in between.

Trading on the exchange rates of currencies has always been one of the main fields for speculation. The conviction that one currency is losing its value faster than the next currency is an indication for the owners of capital that it is time to get rid of the currency which is losing part of its value to get one that is in a better shape. This type of speculation continues to be used on a daily basis in the global financial markets. Each multinational company carefully optimizes its portfolio, filling it with various currencies, outstanding debts and obligations. Within the framework of its own needs, it tries to keep a minimum amount of weak currencies and a maximum of solid ones .

In the case of the euro, this speculation takes on a special form. Of course, it is always possible to speculate on the euro itself, as opposed to the dollar, the pound, the Swiss franc or the Japanese yen. But the novelty of the eurozone is that there is a single euro, used in seventeen different countries, each with a different level of creditworthiness in the eyes of investors.

Instead of gambling on one currency against another, speculators gamble on the states’ reputations.

However, there is a strong cross-dependence between the states and the banks operating on their soil. In 2008, when the states re-capitalized the banks to save them, each state was expected to come to the rescue of its own banks. If the so-called Greek crisis posed so many problems to the leaders of the imperialist world, it was not out of pity for the Greek state. It was primarily due to the fact that the main banks operating on Greek territory were not Greek, but French or German banks or linked to them.

Now what is to be done if a given state is too weak to bail out its own banking sector? The successive European summits bear testimony to the governments’ desperate attempts to find a solution to the problem.

The aggravation of the sovereign debt crisis became a boomerang that worsened the banks’ positions.

The big French, German and other European banks that had speculated against Greece and its public debt had tons of Greek national bonds in their vaults – a situation which caused the other banks (mostly foreign banks that were less involved in these speculative maneuvers) to become wary. As a result, the same distrust as in 2008 started spreading in the banking system, threatening to transform itself into a crash.

The lack of confidence in the eurozone banks resulted in the capitalists who had entrusted their capital to those banks moving to take it back and invest it in safer banks. These banks now have problems borrowing the money they need from healthier banks.

Was it possible to stop the movement? Theoretically, there was, at the outset, a way out of this critical situation, namely, the mutualization of the debt. It would have involved a commitment by all eurozone states to bail out a state threatened with bankruptcy. But practically speaking, how do you get states to pay for another state’s debt, when their first and foremost preoccupation is to defend the petty interests of their national bourgeoisie?

The discussion showed that, not surprisingly, the most reticent state was the richest one, Germany – the one that would have paid the most for the debts of states in difficulty. The question of the mutualization of the debt was at the heart of the discussions that went on in European summits. It was not just a theoretical question and the haggling was for real. Who is going to pay? How much? And to whom? How is it possible to assess each state’s contribution to the EU’s solidarity fund? What counterpart is it possible to ask from the states that are on the receiving end?

In fact, the reaction of Europe’s leaders was the exact replica of what had been done by the American authorities, even if it involved ignoring once more the ground rules of the eurozone.

The United States is living through its third “Quantitative Easing Program” (QE3), which consists of the Federal Reserve’s printing more paper money to buy U.S. bonds from the banks, which gives them more liquidity and, at the same time, maintains artificially low interest rates on the U.S. debt.

Finally, after yet another round of summits, Europe’s leaders found a way of trampling over the eurozone’s rules without attracting too much attention. They told the ECB it could buy, from private banks which held them, the sovereign debts of the states that were financially shaky. They were thus killing two birds with one stone: they were ridding the banks of the least trustworthy securities still in their possession; and alleviating the pressure on the weaker states. But all of this is a way of feeding inflation.

They compelled the states which benefited from these loans to engage in a drastic austerity policy.

On September 6, 2012, the announcement that the ECB would buy back the sovereign debts of eurozone countries confronted with financial difficulties, without any limitations, marked a new stage in the unfolding of events. Every bank or investment fund that speculated on the Greek or Spanish debt was now assured that it could recover its initial capital. The financial markets immediately praised a decision which even Le Figaro (a French pro-establishment daily) criticized as “one of the most disastrous decisions in the monetary history of Europe,” because, it argued, that decision would fuel inflation.

But the ECB was only following in the steps of the U.S. Federal Reserve, with some delay. There was nothing unique about this decision.

This decision saved the banks that had speculated on the Greek or Spanish debts, and it calmed down the speculation on the interest rate differences between eurozone countries. But it’s not at all clear that it will save the euro itself. It may well not even put an end to the distrust between European banks. While underlining the efforts made by the ECB to “hold back” the crisis, a French monthly review (Alternatives économiques, special issue #94, October 2012) indicated that through longterm refinancing schemes, the ECB “had already lent almost one trillion euros to the banks between December 2011 and March 2012.” [That is, before the “open window” operation]. “Inside the eurozone, credit is once again difficult to get from the banks, which is particularly harmful for global activity since traditionally, in Europe, a major part of the economy is financed by the banks.”

Once again, the socalled solution to one of the phases of the crisis aggravated the economy’s financialization, creating the conditions for the next phase of the crisis.

Behind the jolts of the financial crisis, the crisis of the productive economy lingers on and becomes deeper and deeper. The global, yearly GDP is on a downward slope, even if the global retreat is produced through fleeting local variations. These variations allow blissfully optimistic commentators to write, without lying, that “last month, industrial production slightly improved in the UK” or “unemployment figures better than expected in the United States” or “Germany’s foreign trade is picking up.”

However, if the local situations vary greatly, the overall picture is quite clear. In 2012, for example, the eurozone’s GDP is lower even than it was in 2008.

More significant is the evolution of industrial production. According to Problèmes Economiques (a French monthly review), “in 2012, industrial production is smaller than in 2006, including in Germany.” The author of the article explains that “domestic demand is decreasing, especially concerning investments” and that “France’s industrial output has gone back 15 years.” [There was an 8% decrease between 2000 and 2011.]

Of course, the indexes of industrial production are hardly less abstract than the artificial figures for GDP. Nevertheless, these indexes show unambiguously a downward evolution, which is reflected even more starkly in the figures of layoffs, shutdowns and growing unemployment!

Another sign of the aggravation of the crisis is the drop in the prices of raw materials used by industry (iron ore, bauxite, nickel, etc.) Until recently, these raw materials were subject to speculation. Their prices went up not because they were more difficult to extract but because there were speculations on whether their selling price would continue to go up – or not.

A recent “dossier” published by Les Echos (a conservative business daily) under the title “Raw Materials: End of the Golden Age,” declared: “After ten years of almost uninterrupted price increases, ten years during which the prices of gold and copper were multiplied 7fold, some people are calling the markets themselves into question today. Since the beginning of the year, the evolution of the price of raw materials has been chaotic. This is even truer since the beginning of the second quarter and its plummeting prices.”

It’s another sign that big capital does not believe in a quick upswing of the industrial sector, not even in countries like China, which was said to be a raw materials-hungry competitor that would continue to pull prices upward.

The lower than expected profit margin examined by the Galois Report on French industry is probably another sign of the aggravation of the crisis. The notion of profit “margin” is an indirect approximation of the rate of profit. However, the present drop of the profit margin could well indicate that, after having restored the rate of profit during the 1990s, the bourgeoisie has to deal with a lower rate of profit today. That would be a clear indication that the crisis has become malignant.

The Galois Report and the urgent measures taken by the French government clearly show that for the capitalist class and their government, the money that is needed to compensate the bosses’ losses should come out of the workers’ pockets. This summed up what has been the bourgeoisie’s policy since the beginning of the crisis.

In any case, it must be underlined that whether or not there is a downward trend of corporate profit margins, the dividends paid by big companies, in other words, the “payout,” is not at all affected. The Galois Report itself admits, in a bottompage note, that “the money paid back by CAC40 companies to stockholders has roughly remained the same despite the high volatility of profits.” Because of the crisis, the gap between the share of the GDP that goes to the worker and the share that goes to capital owners is widening.

The year’s balance sheet thus shows a bigger than ever financial sphere and the prospect of a worse inflation.

For the exploited classes, the situation is already dramatic. On the one hand, the crisis of the productive economy continues, with unemployment on the rise and with workplaces shutting down. On the other hand, the financial crisis has meant austerity policies in countries like Greece or Spain, and, more generally speaking, in the poorer European countries. The crisis is also being aggravated in the imperialist countries of Europe and in the United States. As unemployment increases, the number of workers who live below the poverty line, although they have a more or less stable job, is increasing, even in countries like Germany, Sweden, or the United States.

Some bourgeois spokespersons – economists or politicians – emphasize the extent to which the crisis is aggravated by austerity policies. Reducing people’s consumption is a recipe for killing any hope of an upswing and the start of a new economic cycle. The ever bigger levies taken by finance stifle the capitalist economy and prevent any sort of recovery. Nonetheless, no one does anything – the interests involved are too powerful.

Reformist economists, that is, economists who dare criticize the way the capitalist economy has evolved over the last 30 years, think that this is due to domination by neo-liberal economists, the “market fundamentalists.” Those reformist economists dream of a return to policies that would allow the state to intervene and for “social solidarity” to express itself. As if the large-scale tendencies of economic development were controlled by ideas, by debates between this and that group of scholars instead of being decided by the interests of the dominant class. At best, economists are able to nicely formulate the demands of capitalists. But nothing is more utopian than to dream of an ideal capitalism, hinting at that of the 1950s and 1960s, when the activity of the banks were more or less regulated by the state, and when the state’s social programs maintained consumption at a certain level.

But this system was never an ideal society for the working class, and no reformist politician or party has ever come up with a “rewind” button that would allow history to go backwards.

Financialization spells disaster for the people and for the capitalist economy itself. But it did not come from outside the capitalist system, even less from some political decision.

Political decisions, deregulation, the free hand given to finance only accompany and facilitate the interests of big capital in a context of crisis. Aggravating the exploitation of the working class to compensate the limitations of the global market or increasing the role of credit and indebtedness in the economy are basic trends of today’s economic orientations, pushed forward by powerful class interests, even if these interests are filled with contradictions.

Today, there is no sign of a possible turnaround. The simple fact that these trends last means a worsening of the situation for the exploited classes. It is not a coincidence that the two objectives that are presented as capable of saving the country – including the two richest countries – are the need to pay back the country’s debts and competitiveness.

The first expresses the requirement of finance to increase the share of what it takes from production. The second indicates the will of big capital to increase the exploitation in order to increase global surplus value.

Even if there is no financial catastrophe leading to a general economic collapse, the coming period will be worse and worse for the exploited classes.

Most of the media and the politicians present competitiveness as “a great cause around which the whole of society should rally.” The bourgeoisie has always presented its own interests as those of society, from top to bottom. Today’s slogan is the umpteenth version of “What’s good for General Motors is good for the United States.”

The owners of capital are not content with enrolling the working class in their commercial global wars against their competitors. Its politicians try to lure workers into supporting their trade wars.

This cynicism is nothing new. What is missing in the picture is a proletariat that consciously speaks up and refuses this form of “sacred union.” Why should workers espouse the cause of a privileged class which, as time and the crisis go on, shows the extent of its failure and its incapacity to run the economy and society?

Besides, saying that the crisis should be fought against by improving “the nation’s competitive position” is completely stupid. The problems of the French economy are not limited to France’s territory or even to the borders of the European Union. They cannot be solved by increasing the competitiveness of “made in France” products by increasing exploitation of the workers. That might reinforce the French bourgeoisie and help them overtake their international competitors, but it cannot alleviate the crisis, because the crisis is a global crisis.

The United States may be preoccupied with the euro’s future today – but only because it knows that a collapse of the eurozone would bring about a genuine economic debacle which would necessarily bring down the U.S. economy….

While the various bourgeoisies are involved in a merciless war against one another, they are like gangsters tied to the same chain. If one sinks, the others drown also.

In the abstract, many of the measures put forward by economists who lament the excessive financialization of the economy are “realistic”; that is, they could be applied within the framework of capitalism. In fact, they are inspired by policies the bourgeoisie carried out in the past. These policies included various forms of banking regulations, a more or less active state intervention in the economy, a fuller policy of social benefits and/or protectionist measures.

Some of these measures could be accepted by the bourgeoisie today. But this doesn’t mean that the capitalist class could get rid of financialization, or even wants to – even if it is fully conscious of the catastrophic consequences of financialization. If the bourgeoisie were guided by reasoning, there would be no speculation, no financialization, no more competition and no more devastating commercial wars. The bourgeoisie is guided by its own interests and, in the case of financialization, by its very short-term interests.

As a class, the bourgeoisie is completely irresponsible toward society and incapable of controlling its own economy. Could the contradiction between its own financial interests and its interest in finding a new period of growth in production lead the bourgeoisie to revert to policies carried out in the past? No one can say that – certainly not unless there is a social cataclysm or a war. Let us not forget the panicky speeches on the need to regulate the banking system, when they thought, for a few weeks in 2008, that their system was being threatened! None of the speeches was put into effect.

Communist revolutionaries must oppose any proposals, even if they are made in “good faith,” coming from people who pretend to show the exploited a “way out” that stays within the framework of capitalism. As long as the crisis of capitalist economy will remain unsolved, the only preoccupation of the working class must be to defend, inch by inch, its conditions of existence, by standing for its own class interests opposed to those of the bourgeoisie. If unemployment were to disband the working class, if moral decay were to hit the main productive class of society, this would constitute a dramatic setback.

The interests of the working class and those of the bourgeoisie are totally irreconcilable, more than ever in this period of crisis. Workers must be aware that any serious struggle to defend their own vital interests would inevitably become an all-out confrontation challenging the bourgeoisie’s political and economic domination over society.

To fight for a demand as elementary in this time of crisis as “the prohibition of layoffs and the sharing out of work among everyone” already directly calls in question the power of the bosses over the companies and of the bourgeoisie over the whole society.

This simple sensible demand automatically brings up another one, linked to it, also based on an elementary need: the need for control over the companies by the workers and by the people in general, organized around that objective. Without such a control, the bosses, share-owners, bourgeois people have a thousand ways of demonstrating that it is not feasible, that going against the bosses’ right to lay off workers kills business.

On a more general level, that of the functioning of the economy as a whole, the bourgeoisie themselves or their political representatives periodically raise the question of control over the banks. However, the same people who find it difficult to get credits for their businesses and are victims of the weight of the big banks and of their appropriation, also have liquidities and must find a safe place to put them: they need their financial operations to be carried out secretly.

The control over the banks and over the companies is in the interest of the huge majority of society. However, only the working class will be able to impose this control through a powerful and above all a conscious struggle.

We are not yet in such a situation. But the task of communist revolutionaries is to anticipate that situation, even if the great majority of the working class, which is reduced today to defensive fights only, is not yet conscious. There can be no effective way for the working class to defend itself in this period of crisis unless the working class is conscious that the fight to defend itself must be transformed into a challenge of the power of the bourgeoisie and a struggle for the power of the working class.

The documents outlining what the EU-IMF Troika ‘bailout’ for Cyprus were leaked yesterday (EC Cyprus debt sustainability 110413 EC Cyprus Estimate of financing needs ESMT 110413).  These documents spell out the hell that faces the island of beautiful Aphrodite for the majority of its residents over the rest of this decade.  According to the EU Commission, real GDP will contract 8.9% this year and another 3.9% next year.  Domestic demand (spending on wage goods and investment) will fall 13.9% this year and 5.9% next year.  Investment, crucial to future growth, will drop a staggering 29.5% this year and another 12% next year.

After that, the EU Commission reckons economic growth will be restored at 1-2% a year.  But that’s not likely, given the huge collapse in investment envisaged and with the public sector being decimated (contracting consistently through the next five years at least).  The EU thinks that economic growth can be restored by 2015 although it demands that Cypriot government make fiscal austerity ‘savings’ on its budget equivalent to 8% of GDP over the next three years.  At the same time, Cyprus must sell €400m of its foreign exchange reserves and privatise state holdings equivalent to €1.4bn.  Indeed, of the €23bn that Cyprus needs to fund its government and the recapitalisation of the banks through to Q1 2016, Cyprus must find €13bn, while the EU-IMF contributes less at €10bn under draconian conditions.  So much for European solidarity and unity in a common purpose.

Even then, by 2016 the public debt ratio to GDP will rise from 86% last year to 126% in 2015 and will not get below 100% of GDP this decade, if ever.  So if the Troika’s aim is to get Cyprus back into ‘fiscal’ line after its banking profligacy, it cannot do it, whatever the hell Cypriots have to endure over the next seven years.  So it is very likely that if Cyprus stays in the Eurozone, it will require yet another bailout or even more austerity.

For a start, the EU assumes that the cost of recapitalising Cyprus’ bust banks will be €11.7bn, mostly paid for by Cyprus liquidating Laiko Bank and applying the ‘haircut’ to bank depositors over €100,000 and bondholders.  But what happens when the so-called ‘emergency’ capital controls are removed?  Will there be a huge outflow of deposits from the Bank of Cyprus and out of the island?  If so, then the refinancing costs of the Cypriot banks will rise again.  Either the ECB will have to allow the Central Bank of Cyprus to offer even more Emergency Lending Assistance, or the EU-IMF bailout will have to be increased.

Capital controls run against the whole principle of the Single Currency.  By restricting and blocking euros leaving the island, the government is reducing the ability of businesses to trade and for foreigners to invest (if they now want to!).  Some economists argue that this means that the Cypriot euro is not the same as a German euro.  That’s not so – yet.  Capital controls mean that there are just less Cypriot euros available – it’s a restriction on funds for business and living.  A Cypriot that visits Germany with a Cypriot euro (with its national face on one side) can still use it in Germany.  And the ECB is still funding Cypriot banks and thus creating more Cypriot euros that are on a one-to-one value with a German euro.  But if capital controls stay in place for any length of time, then Cypriot businesses may be forced to use IOUs and bills to fund transactions.  Then those IOUs will start to fall in value against the ‘scarce’ euro and a parallel currency will appear (Cypriot IOUs).  That’s something that has happened in many countries with a shortage of foreign currency.  But that cannot be officially recognised in Cyprus if the island is to stay in the Eurozone.

I have described how Cyprus got into the mess in previous posts (http://thenextrecession.wordpress.com/2013/03/20/cyprus-what-a-mess/) – mainly by the Cypriot elite allowing their island to become a haven for tax dodgers, particularly Russian oligarchs to stash their cash.  Also, the Cypriot bank leaders tried to make big profits by buying Greek government bonds, only to lose billions when the Troika imposed a haircut on their value in the last Greek bailout. And what did the Euro leaders, the bank regulators and the ECB do about this Icelandic-style banking greed emerging before their eyes? – nothing.

When the then governor of the central bank of Cyprus was asked about Cypriot bank exposure to Greek debt, Athanasios Orphanides replied: “With respect to the exposure of Cypriot banks to Greek debt, we have examined the situation and we have come to the conclusion that even though there is exposure in our banking system, that exposure is manageable because our banks are very well capitalized…even in the highly unlikely situation of imposing losses on the holdings of Greek debt, our banks would manage to weather that. To understand how well capitalised our banking system is, a comparison may be useful. Our banks already meet the stricter capital requirements that are being phased in under Basel III.” (Interview on Bank of International Settlements site April 2011, http://www.bis.org/review/r110805a.pdf?frames=0).  So much for Basel-3 regulation.

But it’s not just fat-cat investors or Russian oligarchs facing losses from the banking collapse and deposit haircuts under the deal with the Troika. Ordinary Cypriots who built up savings are the ones facing real disaster. Thousands of bank workers will see hundreds of millions in their pension funds kept as bank deposits disappear and thousands of jobs are to go. “Everybody here stands to lose a lot of money, the money you worked for your whole life,” said bank worker Marios Koullouros. “I’ve been working at Laiki for 27 years.”  The government asserted than pension funds in Laiki accounts wouldn’t be lost, but transferred to the Bank of Cyprus. Nonetheless, they could take a hit of as much as 60 percent of their value.

So would it be better to recognise this disaster as irreparable and opt for Cyprus to leave the euro?  Right-wing President Nicos Anastasiades is against Cyprus leaving the euro.  But the main opposition communist party has decided that it wants to pull out. A smaller opposition group wants to stay in the euro but kick out the troika – the European Commission, the European Central Bank and the IMF, a similar position to SYRIZA in Greece.

As usual, the ‘euro leavers’ fail to recognise that leaving would be a hellish nightmare too.  As even Reuters Breaking News pointed out, if Nicosia brought back the Cyprus pound, it would plummet in value by 50-60%.  Such a massive devaluation would savage the wealth of all ‘insured’ euro depositors in the banks – a much bigger haircut than is being applied to richer depositors now.  Devaluation would fuel inflation. Cyprus is a small open economy. All the oil is imported. Over 80 percent of the textiles, chemicals, electronics, machinery and automotive vehicles are imported too.   Cyprus also relies on cheap immigrant labour in its agricultural and tourism industries. Following a devaluation, their cost in local currency would rise.  All this would mean that any gain in competitiveness from a cheaper Cypriot pound would soon be eroded.

The island’s economy would suffer a further shock because it is running a current account deficit of somewhere around 5 percent of GDP. Given that Cyprus has limited access to hard currency reserves (indeed, it is selling off what it has), this deficit would have to vanish overnight. Imports would slump. But so would domestic production, given its reliance on imports.  In such a scenario, Nicosia would not be able to avoid defaulting on its debts. Following a 50 percent devaluation, these would be double their current value when expressed in local currency.

Of course, Nicosia could opt to default on its debts and refuse to repay. As I argued in previous posts (http://thenextrecession.wordpress.com/2013/03/25/cyprus-sold/), Cyprus could pay for the recapitalisation of its bust banks itself without having to take a Troika bailout.  There are at least €30bn in deposits held by tax-dodging foreign-based individuals and companies.  A 50% levy on foreign-based deposits plus the writing off of bank debt and the restructuring of the banks would raise €20bn, more than enough to sort out the banks and provide support for bank workers and others that may have a case of need.   And there is €2.5bn in bank bond debt held by foreign banks (including Greek) that could be written off.  That more than matches the funding requirements of the government even assuming it honours all its debts to foreign banks which hold most of Cypriot debt.  Residents of Cyprus could be exempted from any haircut.

If the four largest banks were restructured into one state-owned bank with any worthless assets siphoned off and sold, that would reduce the ultimate cost of any recapitalisation.  Bank staff could be guaranteed a job in the state-owned banking system or retraining on full pay for a new job.  Then a democratically-run banking system can be established, owned by the Cypriot people and garnering deposits from citizens and lending it back to residents and small businesses on the island.

Instead, this deal protects senior bank bond holders (other banks), threatens thousands of bank jobs, imposes severe fiscal austerity and a permanent depression in the Cypriot economy for the rest of this decade, at least.   The island of Aphrodite has no more than 1 million people and its main trade is with the rest of Euro bloc.  So it would need to build a campaign within Europe to fight the Troika measures and opt for an alternative based on using the resources of Cyprus (gas reserves) and all Europe in a plan for jobs, investment and growth based on commonly-owned banks and major industries.  So far, such a campaign looks very unlikely.

The above article first appeared at Michael’s excellent blog, thenextrecession, here.  He has written other pieces on Cyprus, which you can find there too.

You can download it in PDF form;

or in ePub form;

http://www.lulu.com/shop/eugenr-lowy/what-happens-to-the-world-economy-when-you-buy-this-book/ebook/product-20961869.html

As of November 2012, China has surpassed the US in becoming the world’s largest trading partner. It is the most important bilateral trading partner to 124 countries including Japan, the United States and Brazil[1]. China’s enormous growing economic power is no doubt highly beneficial to many of its trading partners that are making progress in economic recovery such as the US, and for growing developing nations like the Philippines, but simultaneously poses a destabilizing threat to regional trade blocs and territorial rights of China’s neighboring nations.

The global trend is becoming increasingly favorable to China over the US as historical American allies South Korea and Australia now consider China their most important bilateral trading partners. Jim O’Neill (chairman of Goldman Sachs’ asset management division) estimates that “by the end of the decade, many European countries will be doing more individual trade with China than with bilateral partners in Europe”[2]. The comment made on the future of European trade is already occurring in the Australasian region; China has already replaced Australia as New Zealand’s largest trading partner. “China is increasingly important to us,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “Commodities are their game. That’s another reason we’re hooked in to them.”[3]

Besides the commodity market, Chinese tourists are also the second biggest spenders in the country. Hotels now have Mandarin speakers at the front desk; offer congee for breakfast and provide an array of Chinese broadcasts on their TV. However, countries like New Zealand should be weary of the side effects that accompany such external economic boosts. When fears of a slowdown in China emerged last year, there occurred a simultaneous slump in confidence in New Zealand that saw economic growth slow to 0.2 percent in the second and third quarters of 2012. This economic influence is not limited to New Zealand but affects all 124 countries that see China as their largest trading partner, and their leaders should be aware that it gives China leverage in aspects of politics, as we will see in the case of Taiwan.

In Asia, trade is strategy. And it is through trade that China is able to move towards reclaiming its sovereignty over Taiwan. Taiwan’s Financial Supervisory Commission released a statement on April 1^st that “mainland China banks will be allowed to take a 10 percent stake in listed financial institutions, 15 percent in unlisted firms and as much as 20 percent of banking units of financial holding companies, compared with a previous 5 percent across-the-board cap”[4] which allows Chinese lenders to take substantial control over Taiwan’s financial institutions such as Sinopac. Taiwan banks benefit from partnerships with mainland lenders such as the Industrial & Commercial Bank of China Ltd., as they are in need of expansion outside Taiwan’s saturated market. Michael On, President of Beyond Asset Management Co., says “the deal is positive for Sinopac as there are too many banks in such a small market as Taiwan” and that “banks in Taiwan can expand in the China market through mutual investment with Chinese banks”[5] and foresees more cross-strait deals like this in the near future.The ICBC plans to buy 20 percent of Bank Sinopac in the first mainland investment in a Taiwan lender, a move that pushed the parent company’s share price up by as much as 7 percent, the biggest gain since August 2009.

President of China Xi Jinping has been taking a stance on promoting cross-strait ties, and said “it is the duty of the new CPC leadership to continue promoting the peaceful development of cross-strait ties and the peaceful reunification of the two sides of the Taiwan Strait”[6] after a meeting with the Kuomintang’s Honorary Chairman Lien Chan. Following this meeting in February, Taiwan banks began taking deposits and underwriting debt in Chinese Yuan, after the clearing agreement were signed last year. Further re-integration of Taiwan to the People’s Republic of China can be seen in the telecommunications industry as China has been campaigning for four years for a change in Taiwan’s rules to allow China Mobile Ltd. To purchase 12% of Far EasTone Telecommunications Co., on which Far EasTone Chairman said in January the loosening of rules is only “a matter of time.”[7] This signifies a move towards unified mode of communication and information exchange between China and Taiwan.

Strategic moves made to expand territorial reach as seen in the case of Taiwan is definitely not the first for China and more conspicuous battles have been fought under and over water. The highly scandalous incident of Senkaku/Diaoyu Islands brought attention to China’s international presence and caused stir over possible involvements of the United States as a protective ally of Japan who lacks a national army. Beijing’s maritime reach continues to grow, as nonmilitary Chinese agencies such as the Maritime Safety Administration, the Fisheries Law Enforcement Command, the State Oceanic Administration have become the unofficial hands and feet in Beijing’s operation to expand its territorial claims in surrounding Asian waters. Stephanie Kleine-Ahlbrandt, head of the think tank Beijing office of the International Crisis group, calls this move a “brilliant strategy” by China to “establish their control over an area without firing a single shot”[8] for the agencies deployed on the waters are technically civilian, it allows China to deny military involvement and avoid sanctions from international organizations.

However, The People’s Liberation Army’s navy always hovers in the background and grows increasingly hostile to those daring to interfere. Those threatened include US allies such as Japan and the Philippines. In February, Japan accused China’s navy of locking weapons-guiding radar onto Japanese naval forces[9] and previously in April of 2012, Chinese marine surveillance and fisheries command ships sailed into what is known as Scarborough Shoal, a disputed territory between China, Taiwan, and the Philippines, to prevent the Philippine navy from arresting Chinese fishermen accused of poaching protected species[10]. The Chinese vessels have not left and continue to patrol the area, in effect blocking Philippine fishermen from a lagoon they have been fishing for generations.

So what should the US do now? Three books commenting on the rise of China featured by the Council of Foreign Affairs show us a stance to be taken by the US, with various reasoning. Edward N. Luttwark, in his book The Rise of China vs. The Logic of Strategy claim that “China’s economic and military rise is producing a seemingly paradoxical decline in its diplomatic influence”[11] as we see China’s wary neighbors tightening relations with the US that are in turn, met by assertiveness from China spurring out of “great-state autism”[12]. The tightening of relations between the US and Asia is supported by Singapore Prime Minister Lee Hsien Loong, who urged that “the US must adopt a more active trade agenda with ASEAN (Association of Southeast Asian Nations)”[13] in response to China’s growing influence over American allies such as Philippines and Thailand. Lee adds, “China understands that its success depends on a stable international environment” but at the same time yearns for its “rightful place in the sun” which makes them “wary of any perceived attempt to conscribe its freedom of action,” and thus “strengthening strategic trust (between the United States and China) is critical.”[14]

Steve Chan on the other hand argues in Looking for Balance that because Asian governments, including China’s, feel the need for wealth to legitimize their rule, they are motivated to cooperate with each other. He argues through historical analysis that a peaceful shift in power from US to China is not unusual and quite possible. Chan asserts that through stable interdependence and strong multilateral institutions, states and nations will slowly grow out of protection by the US, and what needs to be examined is how it will handle its shifting position in Asia.

A survey is made by David Shambaugh in China Goes Global: The Partial Power on Beijing’s influence in the various fields of international relations – diplomatic, economic, military, and cultural – that shows growth but remain limited. China has global economic interests, evident from its wide reach in trade, but does not dominate any market; it boasts a large military but is unable to project force too far beyond its borders as no armed move has been made outside of its surrounding waters. Furthermore, China’s engagement with institutions of global governance has been made rather grudgingly, neither challenging nor contributing in significant ways, and internally, Chinese intellectuals stand divided over the direction of the nation.

What the US and the Western power should focus on is the smooth integration of China as a power-nation to the international system to promote global co-operation and prosperity. Despite the territorial disputes caused by China while testing out international waters, these issues are merely buffers to ward off the mass from internal disputes over domestic problems from corruption, poor standard of living to intense environmental pollution. China’s main goal has historically been to increase the wealth that they already own in their vast land of resources and labor. The difference between China and the US is the fact that the US upholds a global perspective and values that are shared not only by its neighboring countries but definitely its trading partners and even beyond that, to become a worldly influence. China, who has always had the tendency to be self-interested, upholds policies that are not appreciated by the international community. Thus, the United States, as a fellow powerhouse of vast size that boasts an economy twice as large as China’s, can offer guidance while monitoring their increasing supremacy in the Asian region.

The Manila-based lender said in its latest forecast that the uptick in China’s economy and “robust growth” in Southeast Asia would lead expansion in the region, which would be also boosted by strong domestic consumption.

The ADB estimated that the gross domestic product (GDP) for developing Asia, which covers 45 nations, was set to grow at 6.6 percent this year before edging up to 6.7 percent in 2014.

The region’s growth slowed to 6.1 percent last year — the lowest since 2009 when it saw 6.0 percent expansion.

“Developing Asia’s recovery phase remains vulnerable to shocks,” the bank said in its Asian Development Outlook report.

“Strong capital inflows could feed asset bubbles. Political discord surrounding fiscal debates in the United States, austerity fatigue in the euro area, and border disputes in Asia could jeopardise macroeconomic stability.”

The ADB said growth was expected across the region, with China’s GDP forecast to expand at 8.2 percent this year, up from 7.8 percent last year, on strong domestic demand and a better export performance.

South Asia’s growth would turn around after two years of softening, it said, with powerhouse India forecast to see its GDP rise from last year’s 5.0 percent to 6.0 percent this year.

“India has considerable potential, but its future performance relies on resolving contentious structural and policy issues that inhibit investment,” the bank said.

The stronger economic activity expected for this year however would spur renewed price pressure, with inflation expected to rise from 3.7 percent in 2012 to 4.0 percent this year and 4.2 percent next year.

“These pressures remain manageable for now, but will need to be monitored closely, especially as strong capital inflows raise the spectre of potential asset market bubbles,” the report said.

Southeast Asia would continue to shine on robust private consumption and increased intra-regional trade. Its GDP is set to expand at 5.4 percent this year.

An ambitious plan by the Association of Southeast Asian Nations regional bloc to create a common, barrier-free market by 2015 would encourage even higher growth and help to diversify its market, the ADB report noted.

Source: http://business.inquirer.net/115955/asian-economies-to-rebound-but-recovery-fragile-adb

Kuroda’s stated target is 2% inflation rate and a revival in the world’s third-biggest economy within a two year time frame, something that Japanese policy-makers haven’t achieved for 20 years. Whether he achieves it the future will tell but either way, he’s going for broke versus his contemporaries.

Subscribe to the Full Investment Markets Overview Newsletter which contains the following additional commentaries:-  

• US economic data . . .

• Euro-Zone   . . .

• The UK . . .

• Out East   . . .

• The $US index  . . .

• Within the commodities complex  . . .

• Economic data due next week includes  . . .

• Returning to those awful US employment statistics, . . . .
   

• Charts:-
  1. Priming the Pump (Central Banks ….)
  2. Indices Weekly
  3. US Labour Force Participation Rate vs US Unemployment rate
  4. Euro-Zone GDP vs Euro-Zone Retail Sales Y on Y
  5. Japan Tankan Mftcrg Sentiment vs Japan Retail Sales Y on Y
  6. Natural Gas Prices

Table of 15 Indices, 11 columns of detailed information, for accurate analysis

Click  HERE to view Details of the full version of this Newsletter

which includes full text and detailed Charts for each section

“A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.”

Considering the constant media reports on such austerity measures, let’s see how those claims hold up to the facts.

In the United Kingdom in 2011, the government spent £711 billion. The year after, spending decreased to £683bn to top £720bn in 2013; an overall increase of about 1.7 percent in the last three fiscal years. The German Bundesbank estimates it will spend €302 billion this year as compared to €307bn in 2012, when expenditures went up by nearly 9 percent relative to the year before. French government spending hit a record high in 2010, then fell slightly for about a year until mid-2011. It then picked back up again to the point where, in the fourth quarter of 2012, it once again came close to the 2010 record level. The Dutch government has been on a spending spree for three consecutive years, going from €244.7 billion in 2011 to €245.3bn in 2012 and an estimated €260.9bn this year. The latter figure stems from before the €3.7bn bank bailout of SNS Reaal, by the way.

Now let’s move on to the most troubled (PIIGS) countries in the eurozone. Surely these countries have had to make deep cuts to their budgets, right? Wrong. The Italian government so far has reduced spending by a mere 2.2% compared to 2010 levels. In Portugal government expenditure has diminished somewhat in the last three years, but not even by 10%. The Irish government has not been much more frugal either. Though government expenditures in Spain have been on the decline for about two years, so far less than 7% has been cut relative to early 2011.

So what about Greece, arguably the most troubled nation of them all? As detailed in my previous blog post, the bloated Greek government has been bailed out several times since May 2010 yet most people would probably be surprised to hear spending has gone down by less than 17% since. I guess it’s a start but €1bn in cuts on a total budget of nearly €9bn is really not all that impressive. .

Across the Atlantic, the situation in the United States is not much different. The so-called “draconian” cuts represented by the sequester didn’t even make a dent in the size of government as its spending simply increased by less than had previously been projected. In other words, the government grew at a less rapid rate than the power-hungry bureaucrats had hoped it would. But it still grew.

Some people might argue that the riots going on in places like Greece have made harsh across the board budget cuts impossible, as to propose such a thing would be political suicide. That may be true. However, the question here is not whether such measures could conceivably take place without (more) massive social unrest. The only point I am trying to make here is that, perhaps except for Greece (though even that is pushing it in my opinion), there simply are no draconian unprecedented cuts to government spending taking place in any of these countries by any stretch of the imagination. Nonetheless, reports about so-called austerity and its alleged consequences abound in the media, despite the fact that even the strictest budget cuts – the Greek ones – amount to less than one-fifth the original budget and many a government budget is actually growing in size.

Bloated governments and their spending by definition extract capital – wealth – from the private sector. It is important to note that in the private sector any and all economic activity is subject to the laws of the free market, i.e. success is rewarded and failure penalized by you and me in the form of corporate profit and loss. In the public (government) sector, on the other hand, the exact opposite tends to happen; the more a particular policy wreaks havoc on the economy, the bigger the excuse for the State to usurp more power in an attempt to correct the unintended consequences caused by its very own policies.

The only way to reverse this trend and unwind the massive clout of government policies on the global economy is to free up resources by letting them flow back into the private sector. In order for the world economy to find its way back to real sustained growth we need to first see serious cuts in the size of governments everywhere.

• First, de-carbonize the world economy we must achieve dramatic reductions in carbon use by increased technical efficiency, and by de-linking energy generation from carbon production, and energy use from economic growth.
• Second, commit the environmental movement to a path of justice and global equity: justice and equity are central to any transition to sustainability.
• Third, protect the biosphere: the conservation of nature is the pivot for wider change towards sustainability.

How do we do this? There is no magic bullet, but solutions include:
• Create an economy that can fit on a single planet: we must change the way we think about growth and prosperity, to achieve more with less. We need to use less carbon and other materials, create less waste, create more real wealth and quality of life.
• Rejuvenate the global environmental movement: the movement must help link together communities and organizations working out practical solutions to sustainability challenges, and ways to live with more happiness and lower energy and material consumption.
• Build an institutional architecture to bring about change: transition to sustainability depends on the collaborative and coherent actions of political and business leaders, governments (from city to nation), and an effective international environmental regime.

By Hal Lindsey 

Cyprus is a small island in the Mediterranean Sea. It lies just 200 miles off the coast of Israel. According to scripture, Barnabas hailed from Cyprus. It was there that Paul began his first missionary journey.

At various times, Cyprus has been in the news because it is claimed by both the Greeks and the Turks. In fact, the Turkish Cypriots live in the northern part of the island and the Greek Cypriots in the south. They even have a UN-supervised line of demarcation that separates the two.

In the last few years, large gas and oil reserves have been discovered off the coast of Cyprus. This has focused international attention on the tiny republic and caused a great deal of internal strife over the distribution of the new found revenues.

Recently, Cyprus has been in the news for quite another reason. One that will have repercussions that may one day be felt here in America.

As a nation, Cyprus, and more particularly its banking sector, have fallen on hard times. So hard, in fact, that without a bailout loan of many billions, the nation faces bankruptcy.

To make a long and painful story short, a group of money powers known as “The Troika,” which consists of the European Union, the European Central Bank, and the International Monetary Fund, agreed to help the island nation.

But, unlike their bailouts of other European nations like Spain or Greece, this time the Troika demanded more than a tightening of the belt or an increase in income tax revenues or the addition of a national value-added tax. This time, they demanded that Cyprus arbitrarily invade the bank accounts of ordinary citizens and confiscate 7 to 10% in order to help repay the debt.

Cyprus is as an offshore financial shelter for many Russians, like the Caymans for many Americans. Russian president Vladimir Putin was furious over the demand. He protested loudly and angrily. So did the Cypriots themselves.

In fact, their House of Representatives voted to reject the imposition of a tax on smaller accounts, but faced with impending default, acquiesced to a tax on larger accounts. Strangely, so did Putin. In fact, for some reason he agreed to keep his mouth shut when the dust settled and up to 60% of savings accounts in excess of 100,000 Euros was confiscated by the government.

To prevent a run on the banks that would collapse the system, the government abruptly closed Cyprus’s banks. What was supposed to be 24 hours turned into two weeks!

What if — without warning — you were told you couldn’t withdraw money from your bank for two weeks?

Can you think of any action the world powers could take that would send a greater chill through the world banking and financial sectors than arbitrary confiscation of private funds to pay debts run up by socialist politicians? And we’ve all seen what can happen when there are crises in the banking and financial markets!

Will that happen here? To paraphrase our nation’s founders, what Big Brother gives, Big Brother can take away! Unfortunately, it’s already happening, but through cleverly disguised “fees” and “account charges.” Even more subtly, the same thing is happening to us when the Federal Reserve System prints money backed by nothing and floods the markets. Every dollar printed causes the value of every dollar in your wallet to decrease. The Treasury agents might as well show up at your house and demand that you give them your wallet!

You may be asking yourself, “How does this concern me?” Well, even though the economy of Cyprus is smaller than the smallest state in our union, it’s conceivable that a collapse there could trigger other collapses in the Eurozone and spark a complete meltdown. If nothing else, the whole affair is undermining already shaky confidence in European banks and financial markets.

All it takes is a trigger, a lead domino to fall and start the whole chain collapsing. This crisis illustrates just how close we may be to the final meltdown that will open the door to the Antichrist.

President Obama’s recent trip to the Middle East proved to be nothing more than a PR tour comprised of photo-ops and displays of “feel good” statesmanship. He made some admirable pronouncements about the strength of the friendship between Israel and the United States. He also issued some stern warnings to Iran, but nothing we’ve not heard before.

Probably the most important incidents that occurred during the trip were largely ignored by the media. The President’s visit to a display of the Dead Sea Scrolls seemed to prompt an admission that the Jews’ ties to Israel extend into ancient history. This is something of a significant development for the President. He has previously seemed to believe that the Jews are in Israel as the world’s sympathetic response to the Holocaust.

Second, in a rather awkwardly contrived moment, the President apparently forced Prime Minister Netanyahu into issuing an apology of sorts to Turkish Prime Minister Erdogan for the Mavi Mamara incident during the 2010 Egyptian-Israeli blockade of Gaza. It caused the deaths of nine Turkish militants. But maybe some good will come of it if it eases tensions between the two former allies.

Finally, last week the Supreme Court held hearings on the constitutionality of two cases related to same-sex marriage. Proposition 8 is an amendment to California’s constitution, duly passed by its citizens, that restricts marriage to a man and a woman. The second is a federal statute overwhelmingly passed by both houses of Congress and signed into law by President Bill Clinton in 1996. It’s known as the Defense of Marriage Act, or DOMA. It effectively requires inter-state recognition of marriages only between a man and a woman. It also limits federal benefits only to opposite-sex marriages.

The factor that makes these two cases unique is that both governments who are charged with enforcing these laws — California and the federal government — refuse to defend them in court. And some of the justices on the highest court believe that the citizens themselves have no “standing” to defend them.

Though we probably won’t know the Court’s rulings for several months, this could be a watershed moment in our nation’s history. Obviously, if they strike down both of those laws, it will mean that same-sex marriage will be legal throughout the nation. But even if they decline to rule for “technical” reasons, and allow the current lower court ruling voiding Proposition 8 to stand, it will mean that every law passed by a majority of citizens of any state can be annulled simply by the elected officials refusing to defend them in court.

That means that we may be on the verge of a complete takeover of the legislative and electoral process by the US court system — and unscrupulous politicians. God help us if that happens.

I believe this issue — the obliteration of the divine institution of marriage between a man and a woman (which has been practiced by all civilizations for thousands of years) and the subsequent acceptance and celebration of same-sex marriage — may well be the issue that finally brings physical persecution to Christians in the United States. We are fast approaching the moment when we must decide to stand up and speak the truth of the Bible, and bear the consequences, or pointedly deny God’s Word and accept a concept that is, as Justice Alito noted, “newer than cell phones or the internet.”

Are you ready to stand up and be counted? I’ll begin that discussion this week and continue it in greater depth next week.

Don’t miss this week’s Report on TBN, Daystar, CPM Network, The Word Network, various local stations, www.hallindsey.com or www.hischannel.com. Check your local listings.

God Bless,

Hal Lindsey
mail: HLMM, P.O. Box 470470, Tulsa, OK 74147
email: comments@hallindsey.com
web: http://www.hallindsey.com

With the U.S. still recovering from an economic crisis, a current unemployment rate of 7.9 percent, and a weakening global economy there is much ambiguity in the future of the world’s economic stability. Bryson projects a realistically grounded and relatively reassuring economic forecast for 2013.

PowerPoint SlideShow: Global Economic Outlook 2013

In an era of fiscal constraint, Bryson predicts that the U. S. gross domestic product GDP faces a slow and steady growth with moderate accrual in exports and a gradual gain in imports. There is still significant uncertainty about the federal budget deficit, as well as the willingness of businesses and households to commit to major capital purchases. Small businesses are hesitant to commit to capital expenditures due to concerns as to how erratic tax and policy changes may affect sales and operating expenses.

Throughout the economic recovery, the individual’s real disposable income has been restricted and will continue to face constraints following more tax surges in 2013. Consumer confidence has been bruised yet improvements in the stock market have supported consumer spending despite real incomes remaining the same.

Bryson predicts that the global GDP will be average as long as there are no major imbalances in the world economies. In recent years, China has had an advantage in the business sector. Although China’s economy has been on the rise, they are not an overly leveraged economy. It is suggested that China’s economic growth will continue to strengthen somewhat however not as efficiently as it has in the last decade.  Growth in the Euro zone is projected to stay weak due to its recent recession. It is anticipated that over the next few years Europe will face a significant fiscal pressure. There is a correlation between the fiscal pinch and GDP growth. Currently weak growth has hindered improvements in government deficits. Favorably, in recent years, economies of highly indebted countries such as Germany, Greece, Ireland, Italy and Spain are in much less of a bind than they were in 2007.

Overall, Bryson concludes that there are some struggles that lay ahead. However, inevitably over time economies will stabilize. Unfortunately, some will brave a longer recovery than others.

Summarized by Rebecca Mozafaripour, International PR Major, UNC Charlotte

Yeah so tell me something I don’t know. The USA has a consumer led economy, about 70% is driven by consumer spending. So by definition the world economy is consumer spending driven. Put out that fire, splashdown …

Goldman Sachs macro analysts Noah Weisberger and Aleksandar Timcenko are out with a new presentation on the state of the global economy.

The title: “Slipping into slowdown.”

According to the data, it looks like the global recovery story may be on hold for now, and markets around the world are not sending encouraging signals.

And some of the most important positive themes are being called into question.

Still, concerns of a policy reversal by the Federal Reserve and excessive weakness in the Japanese yen could undermine the more export-reliant Asian economies and take the sheen off some currencies in the region.

The poll of 70 currency strategists and economists conducted over the past week showed all nine emerging Asian currencies were expected to appreciate in the next year, with the South Korean won expected to lead the pack with a 5 percent gain.

The Philippine peso, which recently got a boost after the country was upgraded to an investment-grade credit rating for the first time, is expected to gain around 4 percent, while the Indonesian rupiah, Chinese yuan and Thai baht are expected to rise around 1 percent.

The Thai baht has outperformed its peers in the first quarter of this year due to strong capital inflows into Thai equities, bonds and infrastructure projects. The won, on the other hand, has weakened over 4 percent in the same period as the South Korean economy sputters.

“What Asia has to contend with this year is the potential that the U.S. dollar may gain traction across the board,” said Emmanuel Ng, currency strategist at OCBC in Singapore.

“That is what we have seen in the first quarter. It’s going to be an interesting year because we have competing themes. Is it going to be a year of broad dollar strength or will factors like strong inflows and better growth drive these currencies?”

RESILIENT BUT SUB-PAR GROWTH 

Although most Asian economies are expected to easily outperform their rich world peers this year, growth rates are far below levels seen before the global financial crisis.

China and India are expected to grow 8.1 percent and 5.5 percent respectively this year, much lower than the close to double-digit growth rates seen in the past.

Yet, relatively higher growth and yields compared to developed economies have drawn global investors to the region, and analysts say that barring a major reversal in monetary policy in the developed world, that trend will likely continue.

Among the key concerns is when the US Federal Reserve will begin to signal an exit from its super-loose, money printing routine.

The Fed has pumped trillions of dollars into its economy to aid job creation and spur growth. With the unemployment rate dropping to 7.7 percent in February, the din among investors trying to time the Fed’s policy shift is growing louder.

When that happens, analysts say Asian currencies could depreciate across the board if exports from the region do not pick up significantly.

“The Fed’s exit strategy is something the markets are trying to sell to themselves. This year is probably the year when such talk is going to heighten,” said Ng.

“Unless there is a very strong conviction that China will bounce back and the export cycle will be very strong, it’s hard to say Asian currencies will detach and not be affected by the Fed’s exit from quantitative easing.”

YEN A CONCERN

The yen’s weakness, if it lasts, is another cause of concern among policymakers and investors in the region, particularly for South Korea, as it makes their exports less competitive.

The excessive yen weakness coupled with sharp appreciation in many export-oriented Asian currencies had given rise to fears of currency wars and competitive devaluations.

But with most currencies underperforming in the first few months of this year, analysts say those risks have taken a back seat for now.

Source: http://www.abs-cbnnews.com/business/04/04/13/peso-other-asian-currencies-rally-strong-inflows