Seven Facets Coordinate to Bring World Crisis 05.19.06

Interconnected Crises Accelerate World Decline into Chaos

LEAP/E2020
Extract of the GlobalEurope Anticipation Bulletin N°2

The American and Iranian decisions that went into effect the week of March 20-26, 2006, will catalyse seven sectoral crises into a total crisis, affecting the whole planet in the political, economic, financial and probably military fields: loss of confidence in the Dollar, explosion of the US financial imbalances, oil crisis, end of the US leadership, distrust towards the Arab-Muslim world, inefficiency of global governance and uncertainties as to the European governance

The American and Iranian decisions that went into effect the week of March 20-26, 2006, will catalyse seven sectoral crises into a total crisis, affecting the whole planet in the political, economic, financial and probably military fields: loss of confidence in the Dollar, explosion of the US financial imbalances, oil crisis, end of the US leadership, distrust towards the Arab-Muslim world, inefficiency of global governance and uncertainties as to the European governance. Of course these crises are interconnected, even if the actors in each sector have a tendency to take into consideration their sectoral datas only; it is precisely this feature which increases the risk of acceleration of the course of History at the end of March 2006. In the present issue, the first two sectoral crises are detailed. The other ones will be presented in the following issues.

1. From a « loss of confidence » in the Dollar to an era of « distrust » towards the Dollar

With their decision to put an end to the publication of M3 and other indicators designed to measure the evolution of Dollar ownership worldwide, the US authorities initiated a policy of « hidden monetarisation » of the US debt. The Bush administration’s incapacity to handle the various deficits (budgetary, commercial) and the related debt, will result in a monetary creation of unequalled proportion, leading to a dilution of the American debt in an ocean of Dollars. The process has in fact already started: during the first three and a half months of the US fiscal year (beginning in October), the Federal Reserve has increased by 320 billion USD its stock of currency, that is 5 times more than it did over the same period last year.

M3 debt

America’s economy growing by an average of 1% in the fourth quarter of 2005, this significant increase of M3 can by no means reflect a growth of the real American wealth. It is therefore the result of a money creation leading to the “dilution” of the US debt.

Of course this phenomenon directly affects US Treasury Bond holders who will be changing their Bonds into « monkey currency ». In this regard, it might be useful to contemplate the following information[1]: the share of the US public debt (Treasury Bonds) owned by US banks fell down to 1.7% in 2004, while they owned 18% in 1982. In parallel, the share of this same debt owned by foreign investors went up from 17% in 1982 to 49%.

U.S. Debt

If the main governmental holders of US Treasury Bonds follow Voltaire’s famous advice « If you see a banker jump out of a window, follow him; there is surely money to be made! », the decisions that Chinese, Japanese and European central bankers will make are easy to anticipate. As regards oil-producing countries, obviously they have already anticipated the trend: one of the big financial « mysteries » of the year 2005 related to the fact that extra petro-dollars earned by them no longer returned to be invested in the US as used to be the case. The envisaged explanation is that they preferred to invest them in Asia, or Europe, or in their own region[2], in consideration of the increased risk of assets’ freezing in case of legal disagreement or problem. This situation once again illustrates another decisive factor of the approaching crisis: the generalised loss of confidence in the Dollar and in the US government; knowing that for a reserve currency like the Dollar, confidence is key. In fact we have already entered an era of « distrust towards the Dollar », resulting from the Bush administration’s loss of external (and now internal) credibility. A study conducted by the Pew Research Center on the image of the United States worldwide[3] confirmed that “there is no sign that the EU crisis has fuelled a desire for a closer trans-Atlantic partnership”. The study notices on the contrary that « most Europeans surveyed want to take a more independent approach from the U.S. on security and diplomatic affairs ».
This has a corrosive effect on the credibility of the Dollar: in addition to monetary, economic and financial problems, an increasing rejection of the United States is felt among public opinions, in particular those of the country’s historic European ally and the second holder of Treasury Bonds (over 500 billion USD in November 2005, after Japan owning 682 billion, and far ahead of China owning 250 billion)[4].

It is also the Europeans who own half of the credits priced in Dollars in the world (10,000 billion out of the 20,000 in total)[5]. This shows that the strings of a Dollar’s confidence crisis are not so much pulled from Asia. Like in the Iraq crisis where the Europeans thwarted Washington’s attempt to use the UN, it is in Europe too, especially in the case of a military strike on Iran, that a chain-reaction leading to a radical rejection of the US policy by public opinions could be triggered. The discovery that besides all the rest, the US are trying to pay their 10,000 billion USD of European credits in « monkey currency » is not likely to improve this feeling.

2. Explosion of the US financial imbalances

A lot has already been said and written on the explosion of the US budget and finance deficits. It should be reminded here that public deficits are superior to federal government’s deficits ‘per se’. On February 13, 2006, the US public debt, on the rise by more than 2 billion $ each day under the current pace, reached 8,205,376,724,587.34 $ according to the US Department of the Treasury[6], that is close to 28,000 $ per US citizen.

In order to finance their debt and more generally their deficits, the United States absorb close to 80% of the global savings[7]. This situation imposes on their economy (interest rate, productivity…) to remain significantly more attractive for international capitals than any other economy in the world (and that the confidence in their economy and in their currency remains strong). The control exerted by the US and their British relay (who are tied to the Dollar’s destiny given their amount of credits and assets labelled in this currency) over the international media, and in particular over the economic and financial press, certainly aims at perpetuating this situation, literally one of national security interest. And it is a significant fact that these very media neither mentioned the Iranian Oil Bourse nor the end of M3 publication. As shown in the Iraq crisis, but also in numerous scientific cases such as global climate warming, the Bush administration has a rather complex relationship to the truth, and many analysts now wonder about the reliability of US economic and financial statistics. Are we about to experience an “Enron” case of global magnitude? Is the world about to discover, like it did with the Soviet figures after the Fall of Iron Curtain, that US statistics were in fact phoney? It won’t be long before we know.

In any case, the current policy conducted by the US Federal Reserve, creating large amounts of Dollars, probably aims at preventing by all means the explosion of the « real estate bubble » [8] on which most of the American household consumption relies (by means of mortgage loans calculated on the basis of their house’s value).

It is true that at a time when the US saving rate has become negative for the first time since 1932 and 1933 (in the middle of the "Great Depression"), the Bush administration, in association with the new owner of the US Federal Reserve and a follower of this monetary approach, has no alternative in electoral times than flood the US market with liquidities in order to avoid serial individual bankruptcies, the collapse of household consumption and of the US economy on the latter is relying.

In terms of external trade imbalance, one recurring problem of the US these years has been that the Dollar’s fall never resulted in reversing the trend of a growing trade deficit. In addition to the high American household consumption and to the weak growth of other world economies (two arguments often given), LEAP/E2020 wonders whether the United States still produce any exportable goods (apart from movies and music). This is a key-question as its answer would enable to estimate the reality of US productivity profits; and to evaluate the feasibility of reducing the deficit by any other means than by significantly reducing American consumption (i.e. by a strong decrease in the US lining standard). The present issue is no place for an in-depth debate on these aspects, and LEAP/2020’s reply to that question is the following: apart from a few high-tech sectors and from the financial sector, the US hardly produces any exportable goods or services any more; the automobile sector, and the crisis affecting GM and Ford, provides a relevant example. To make things clear, the world no longer wants to buy US cars because they non longer correspond to its needs; and the productivity profits of the US car industry rely on a the sole domestic consumption. What is the real value of such profitability in a globalised economy? None, in our sense; it is just another phoney indicator. LEAP/E2020 therefore concludes to the fact that the US will not be able to avoid a significant decrease in their living standard if they want to absorb their deficits. This single perspective highlights the dimension of the crisis that is began to accelerate at the end of March.

Footnotes

[1] sources: Bond Market Association, Holders of Treasury Securities: Estimated Ownership of U.S. Public Debt Securities ; Dailykos.com
[2] source : The Economist, 10 Novembre 2005
[3] Pew Global Attitudes Project, July 2005,
[4] Source : ministère des Finances des Etats-Unis
[5] Source Banque des Règlements Internationaux, Table 9A, Consolidated Claims of Reporting Banks on Individual Countries
[6] Source : ministère des Finances des Etats-Unis
[7] Il faut noter que l’évolution à la hausse du Dollar en 2005 a été essentiellement nourrie par un différentiel de taux d’intérêts favorable au Dollar, et par la loi de rapatriement des avoirs américains à l’étranger (valable uniquement pour une année) qui a fait revenir plus de 200 milliards $ aux Etats-Unis au cours de l’année 2005 (source : CNNmoney.com)
[8] Cette “bulle immobilière” n’est d’ailleurs pas qu’américaine, même si elle a pris aux Etats-Unis des proportions sans précédents. Le Royaume-Uni est également très affecté par cette situation ainsi que nombre de marchés immobiliers mondiaux. Il semblerait que l’immobilier puisse d’ailleurs jouer un facteur de diffusion de la crise à l’image des sociétés Internet lors de l’explosition de la bulle du même nom. Selon The Economist (09/02/2006), la propriété résidentielle dans les économies développées a fait un bon de de 24.500 milliards Euros à plus de 55 milliards Euros en seulement 5 années. Seuls l’Allemagne et le Japon n’ont pas connu de hausses au cours de la décennie passée. Pour ceux qui prédisent une chute des prix en 2006 d’au moins 20% dans nombre de pays, c’est une bulle gigantesque qui va exploser, plus grande que celle des années 90, et deux fois la taille de la bulle de spéculation boursière des années 20.
[9] Source « The Independent »

 

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