These factors lead us, of course, to a question which is very easy to express, but to which the answer is complex: how much will it cost to borrow this money for which the competition has intensified?

For the last 18 months the central bankers have replied: « The crisis is a liquidity problem then this money mustn’t and besides, doesn’t, cost anything » … and everything will start up once more. However, these past few months, the recovery hasn’t happened (1), the banks continue to refrain from lending (2), unemployment persists in rising (3), US real estate hasn’t taken off again and stock exchanges have gone nowhere in the last six months (4)… despite an inflow of liquidity at zero cost which the world has never seen until now. States have begun to miss payments due, tax receipts collapse, the politics of austerity start to appear everywhere, and a number of central banks worry about inflation … and begin to raise their own interest rates, like Australia and Norway, or, in Sweden’s case (5), announce an increase in summer 2010… or use a variety of different tools (like compulsory bank reserves) like China (6).

Real M3 versus Nonfarm Payroll Employment (year on year % change) (in red: payrolls; in blue: real M3) –Sources: Matterhorn / BLS, 02/2010

However, the Fed, like the central banks of England, Japan, and Europe continue to let people think that they are a long way from wanting or able to raise rates. But do they really have a choice? LEAP/E2020 wrote nearly two years ago that the Fed had lost control of interest rates. We are still of the same opinion and would add that the Fed will have to suffer the impact of two developments between now and mid 2010:

. what the Chinese and European central banks decide to do

. having to confront the problem of the US economy’s domestic and international solvency.

If China, in order to avoid an inflationary explosion of the speculative bubble created by its policy of easy money these last 18 months, is obliged to continue tightening monetary policy (which our team believes will happen), all the Asian economies (including Japan) will be obliged to follow suit and will become the favourite destinations for world liquidity which all the big economic players need so much at the moment (7). The Eurozone, which didn’t gladly accept this « forced » reduction in the cost of money, will follow in Asia’s footsteps. The only solution left to the United States to avoid finding itself internationally bankrupt at a time when it needs to continually attract capital to finance all its deficits, is to continue the trend even if it doesn’t want to (accelerating monetization - whilst denying it - to try and counteract the negative domestic effect). Thus it will brutally discover that it no longer has the ability to control world developments.

The ongoing growth in T-bond purchases by the Fed cannot go on remaining hidden from the world and its citizens forever. Growing domestic political pressures over the Fed and its opaque activities (which is a new development in its very popular appearance) will require the US central bank to show increased prudence on this issue. Sell its debt or, more exactly, gain access to real liquidity (which it hasn’t printed itself and paid to financial and commercial partners) will become increasingly difficult … and increasingly expensive: whether Ben Bernanke wishes it or not.

In parallel, the increase in deficits of all kinds (households, businesses, banks, local authorities) domestically will increase political demands and the sums needed to finance the country, making it even more necessary to attract the rest of the world’s savings. This development, currently taking place, leaves little room for the intentions and opinions of US leaders. As in Britain’s case, the attempt to hide these events between now and November’s elections seems unlikely to us and we think that, from the second quarter, interest rate increases will become necessary, despite the decision makers wishing otherwise. In an economic environment characterised by a large number of businesses kept alive by free credit (8), this increase in interest rates will lead to a collapse of the zombie economy (see previous GEAB issues), a fatal fall of nearly 30% of the world economy.

Progression of household and business credit in France (2007-2009) (in light blue; households; in dark blue: businesses) – Sources: Les Echos / Cour des Comptes / Banque de France, 02/2010

---------
Notes:

(1) The case of the auto industry is a prime example. As expected, after being stimulated by government subsidies, the market has collapsed. The French market has suffered a heavy fall.
Source: Lachute-overblog, 02/11/2010

(2) Source: MarketWatch, 01/31/2010

(3) Source: Journal des Finances, 01/27/2010

(4) Two elements which make for the return of the US consumer who, for the present, has not come to the party.

(5) Source: SwedishWire, 02/11/2011

(6) Source: MarketWatch, 02/12/2010

(7) China continues to withdraw from US assets. Source: Telegraph, 02/10/2010

(8) Source: Itulip, 01/27/2010

Vendredi 2 Juillet 2010

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GEAB N°61 - Contents

- Published on January 16, 2012 -

Global systemic crisis - 2012: The year of the world’s great geopolitical swing
This GEAB issue makes it six years that the LEAP/ E2020 team have shared their anticipations with their subscribers and readers of their public briefing on the development of the global systemic crisis each month. And, for the first time, in the January issue which presents a summary of our anticipations for the year to come, our team anticipates a year which will not result solely in a worsening of the world crisis but which will also be characterized by the emergence of the first constructive elements of the “world after the crisis”… (page 2)
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USA 2012: on the way towards the tragedy of QE3
Today, US financial policy is confronted by the sovereign debt crisis of which it will be the ultimate victim in 2012. As LEAP/E2020 anticipated, the 2011 European debt detonator has truly ignited the 2012 American sovereign debt bomb, even if the media coverage desperately tries to make us believe the opposite. The massive sale of US Treasury Bills by the planet’s major central banks in the second half-year 2011 perfectly illustrates this situation incidentally… (page 7)
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ANTICIPATIONS 2012 - ‘20-UP AND 15-DOWN’, THIRTY FIVE KEY TRENDS FOR 2012
Up or Down? The United States' political paralysis; The City and Wall Street ; The rise in interest rates; The forfeiting of value to Wall Street and the City; The value of Chinese reserves; The Pound Sterling (and Gilts); Euroland as new European sovereign; The USA-China “little cold war”; Italy; The importance of the US Dollar in world trade transactions; Rating agencies; The “great European public borrowing” (GEPB); MerkHollMont; Ron Paul; The number, size and influence of Western banks; The continuation of gold’s return in the international monetary system; Recessflation; Sarkozy, Cameron, Netanyahu and Medvedev; The BRICS maturing as a pro-active world player; Turkey’s exit from the Western camp; The Tobin Eurotax; Secular and pro-Western forces in the Muslim world; Growth; The usefulness of the G20; Lawsuits against those managing banks and hedge funds; The splitting of the world monetary system into three zones: Dollar, Euro, Yuan; The widespread downgrade of Western public debt; Peoples' anger; The Euro crisis; The EU as the principal incarnation of Europe; QE3 as the ultimate weapon for saving the US economy; The US’ capacity for military intervention; The West as a community of relevance and values; Scottish independence; Le détroit d'Ormuz et un nouveau contexte de crise au Moyen-Orient ; L'indépendance de l'Ecosse; The Straits of Hormuz and a new context of the Middle East crisis (page 19) (page 19)
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The GlobalEurometre - Results & Analyses
We are seeing a strengthening in the majority considering that common European solutions to the crisis are more effective than national ones (80% in January versus 77% in December)… (page 33)
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