Thirteen questions and answers about the future developments of the global systemic crisis (3rd episode)

This series of questions and answers - which 2nd episode we now publish - was released in December 16, 2008 'GEAB N°30).

9. Do you think that deflation is right now the biggest threat to economies worldwide?
LEAP/E2020: No. We are seeing a transitory deflation of asset prices which skyrocketed for speculative reasons. But the amazing money creation, especially in the US which is printing money like never before, or the major use of debt to pay their way out of the crisis, again in the USA but also in UK, will result in a major inflation in these countries. The fall of both currencies (Dollar and Pound) will also trigger an imported inflation. The collapse of industrial output in the USA, correlated with an increase of import costs and a flooding of the US consumer by direct loans coming from the Fed, will fuel what could really become a first hyperinflation episode in US history.

10. Do you think that the Obama administration will be able to prevent the USA from sinking into what you called the ‘Very Great US Depression’?
LEAP/E2020: The new US administration is facing a task of historic proportion, but we are very afraid that Barak Obama and his team still belong to the 'old political class'. When looking at his team of economic advisers or officials, you can only observe that they all come from yesterday.
People like Laurence Summers (head of the future president’s economic advisers committee) or Robert Rubin (head of the future president’s economic crisis advising committee) have been directly responsible for the big Wall Street mess of the past decade. In 1999, they orchestrated the suppression of the Glass-Steagall act passed during the Great Depression in 1933, which prevented banks from mixing all kinds of activities (commercial banking, investment banking, insurances…). And it is precisely this situation which one more time generated the big financial crisis we are into.
Timothy Geithner, future Secretary of the Treasury and former head of the Federal Reserve Bank of New York and, the most important of all US Federal Reserve banks, is one of the three major decision-makers (together with Paulson and Bernanke) of the failed US financial interventions of the past year (Bear Stearns, Fannie and Freddie, Lehman Brothers, AIG, TARP, …). It seems that Barak Obama finds it wise to recruit people who have destroyed a house in order to rebuild it. Maybe he is right but, as far as LEAP/E2020 is concerned, we think that it is a perfect recipe for failure because these ‘new’ officials belong to an America which already failed.
Meanwhile, and that is crucial, as we explained in a the previous GEABs, because it is impossible to change a complex system without at least 20% of brand-new leaders, Obama and his team obviously only discovered the crisis at the same time as every single American citizen did, when it exploded mid-September 2008. The Obama team’s program is a classical 'democratic' one, to which they just intend to put more money to fight the crisis. Just think that Obama explained that his stimulus plan will create or preserve 2.5 million jobs (if it works)… with unemployment growing up at a pace of at least 500,000 jobs lost per month, it will not even be sufficient to compensate for job losses in the next 6 months. One is clearly far away from the required measures.
And when Barak Obama adds that in such a period of crisis, 'deficits don't matter', he just seems to ignore that those deficits are a key factor which triggered the current crisis. In a way, Obama seems to have the perfect solutions for a US which does not exist anymore.
Last but not least, LEAP/E2020 thinks that the clear indication that a US political leader will start dealing efficiently with the crisis in the USA will come when somebody will put clearly in the US public debate that without diminishing by 50% the US military spending in the next two years, there is no way out of the 'Very Great US Depression'. Not that the US military budget is the only problem to solve in this country, but it is a kind of strategic 'Gordian knot'. Without slicing it, there is no way for the US to elaborate its required new vision to get out of the depression.

11. In terms of currencies, beyond your anticipation of the Dollar resuming its collapse in the very next months, do you think that the UK Pound and the Swiss Franc are still currencies with an international status?
LEAP/E2020: For more than two years we have repeatedly warned against investing in British Pound as we anticipated that UK would be hit particularly hard by the crisis. It is obviously the case by now and the British Pound is obviously on its way out of reserve currencies. With a Pound now valued less than one Euro in exchange offices, the trend is set. A rapidly growing chorus of UK politicians and experts are now calling for the UK to join the Euro. So one way or the other, the British Pound will fall victim to the global systemic crisis.
The Swiss Franc is about to take the same direction as the Swiss Central Bank has no way out but to print large amounts of Swiss Francs in order to prevent Swiss banks to collapse.

12. Do you think that the CDS market is about to implode in the coming months? And what could be the consequences of such a phenomenon?
LEAP/E2020: The CDS market is already imploding. Lehman Brothers’ bankruptcy already generated huge numbers of CDS casualties worldwide. But until now the CDS crisis was limited to the intra-financial ‘bubble’. In the coming months, the global recession is going to multiply company defaults, including some which have been central to the CDS market, such as General Motors for instance. Then, the unbalances between the two sides of these ‘financial insurance instruments’ which CDS are, will plunge the whole CDS market into chaos. It will be interesting to look then at the attitude of the US government and the US Fed which have taken responsibilities for Fannie Mae, Freddie Mac, AIG, … all of them major players in the CDS market. They will get engulfed into another huge debt problem, accelerating the issue of US default.

13. Is there a ‘US Treasury Bonds Bubble” about to burst?
LEAP/E2020: Definitely. When people start investing money knowing that they will lose money, there is something suspicious going on. As announced by GEAB last month, this situation is now clearly established. Last week US 3 months Treasury Bonds had a negative yield. It means that one pays the US Treasury to accept its money! Looking at the situation of US deficits ballooning to historic records, the situation is more than surprising. LEAP/E2020 has indeed repeatedly explained that in times of crisis one should try to limit losses rather than increase gains but, in that case, diversification is a key component of any relevant strategy. Here we are seeing something like a ‘lemming behavior’ where everybody seems to buy US short term Treasury Bonds. It sounds very much like oil five months ago! And today, the major holders of Fannie Mae and Freddie Mac bonds are just dumping them in exchange of US T-Bonds (somehow at any cost because of their fears regarding Fannie and Freddie’s future). This last trend is going to end up soon. We therefore think that this bubble will not last after Winter.