davelj, I think your post is great too. Thanks. I read the article I’m about to paste this morning and it seems to go with what you are saying, beginning in the middle paragraphs. I am not that smart so I am not sure. Just a layman trying to piece it together. I read somewhere that the bubble was a grand pump and dump scheme and the “shitty assets” are just a by product like tech stocks of the NASDAQ bubble…again …too dumb to finish the conversation on that point. So, I like to go around saying this is the robber Barron episode of our times but I am too dumb to say why or why it can’t be that.
Anyway,I think 4-plex and maybe some others would like to read the article.
Basel, Switzerland — The Bank for International Settlements (BIS) released their 75th Annual Report on June 27 to commemorate its founding in 1930. Most countries today have a central bank which is a private corporation that handles its monetary system. Bi-monthly, central bank ministers from 40 countries meet at the BIS to review ways “to promote the co-operation of central banks and to provide additional facilities for international financial operations.” Once a year the world’s central bankers meet in Basel to take a closer look at the status of the world’s central banking system. Besides the annual review, this year’s Report considered the need for “new mechanisms” to keep the financial system more in balance.
The BIS report highlighted the uneven global expansion that they see. While world output expanded by 5% in 2004, the highest rate in nearly thirty years, they said its growth showed a new uneven economic expansion. Although the United States is an engine of growth, they noted the key Asian economies as being at the second pole of global dynamism, while slower growth can be seen in other larger advanced economies. The U.S. and China accounted for nearly 50% of the world’s increase in global output with the global economy growing at 4% in 2005, in spite of oil prices which are projected to remain high for a prolonged period of time.
The BIS is at the apex of the global financial system. It was birthed in 1944 when the International Monetary Fund and the World Bank were set up. Should we dare to mention that its founders were Harry Dexter White who worked in the Treasury Department and who was a communist spy along with John Maynard Keynes, a Fabian socialist? Keynesian economics is at the heart of the reason for all levels of government being broke.
In 1971, President Richard M. Nixon took the dollar off the gold standard, which forced all the other countries of the world to follow suit, thus changing the global monetary system from one of fixed currencies to one of floating currencies. When a currency is no longer backed by gold it is then possible to play all kinds of games with its value. By buying or selling a large quantity of one particular currency, an economically powerful individual or bank can literally move the market in their favor by buying low and selling high.
The new patterns of booms and busts which the BIS refer to are not only man-made, as a result of the floating currency, but the highs and lows have been exacerbated by the fact that the barriers between the nation-states are gone. The ability to buy and sell currency on a global basis was seen in the Asian Crisis. For the country’s that refused to open their markets to the World Trade Financial Services Agreement, their currencies were crashed.
Furthermore, the highs and lows of a country’s stock market is a result of the respective central bank buying and selling that country’s treasury bills. For example, when the Federal Reserve adds money to our banking system, interest rates drop and the stock market rises. Since the NASDAQ crash, interest rates in the U.S. have fallen to 45 year lows, stimulating both the prices of real estate to historic highs and the stock market.
The BIS Annual Report cited three such cycles of highs and lows. The first began in the 1970’s when the dollar was taken off the gold standard. Mr. White said that the change in the gold standard with very important in world affairs. The second cycle began in the mid-1980s, ending in a property bust; and the current cycle began in the mid-1990s. All Americans should be concerned about this report for the world’s bankers are signaling the end of the third cycle which can only end with higher interest rates as money is taken out of the market. Will we have another property bust as seen in the mid-1980s or will we have a repeat of the Nasdaq?
Interestingly enough, the BIS cites household debt being at historic highs. In a way they created it. Of course buyers would seize the opportunity to trade up their home for a bigger one since they can afford more because of lower interest rates. As a result, Spain, the U.K., France, the U.S. and the Nordic countries have had huge increases in property values with household debt-to-income ratios at unprecedented highs.
Furthermore, household saving is not evident in the U.S. to the same extent that it is in the Asian countries. World national savings rose to 25% of Gross Domestic Product or about 1% point more than the annual average for the current decade. This was due to higher savings habits in the developed world and in particular, China, where savings rose to 48%. High debt-to-income ratios and low savings in the U.S. do not bode well for Americans.
The BIS Annual Report notated some “disturbing patterns of uneven growth worldwide.” While the U.S. and China accounted for half of the world’s growth, the Euro area and Japan have much slower growth. They write that the prospect of reducing America’s fiscal deficit is not encouraging. Citing concerns over disinflation, the BIS stressed the need for interest rates to rise in order to slow consumer spending. The Bank’s Economic Advisor, William White, explained, “The time has come for a measured withdrawal of the stimulus that has been put into the [economic] system.” What Mr. White is saying is that it is time for the Fed to withdraw money from the banking system that created low interest rates and corresponding high property values and a high stock market. With the Federal Reserves ninth interest rate increase, we can see the stated direction of the economic cycle.
Lastly, the Report stated that the “underlying issue seems to be that we no longer have a system that somehow forces countries to alter their domestic absorption and associated exchange rates so as to reduce external imbalances in an orderly way.” It should be noted that with a floating exchange rate, there are no ways for any kind of adjustment like there was under the gold standard. The BIS recommends what several academics have suggested by way of establishing a single international currency or perhaps moving to regional currency blocks such as the dollar, euro and renimbi/yen. (This is the first time I have seen renimbi and yen tied together. What it indicates is that the Chinese renimbi appears to be overtaking the yen.) A year ago U.S. Federal Reserve Chairman, Dr. Paul Volcker said, “A new mechanism was needed for the world financial system” and that “in a globalized world, we should have an international currency.”
In a world of floating currencies ruled by the rich and powerful, we will always have external imbalances thus creating an evolving system of global economic imbalances which leads to feudalism. Global feudalism is created as the rich and powerful continually skim off the top of the world’s economic imbalances so as to even it out—for them!
