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Global systemic crisis Alert - Summer 2009: The US government defaults on its debt
In this 28th edition of the GEAB, LEAP/E2020 has decided to launch a new global systemic crisis alert. Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to repay its creditors (holders of US Treasury Bonds, of Fanny Mae and Freddy Mac shares, etc.)… (page 2)

Summer 2009: The US government defaults on its debt
Five factors directly lead the United States to defaulting on their debt by summer 2009: The recent upward trend of the US Dollar is a direct and temporary consequence of the collapse of stock markets; With its recent « political baptism », the Euro becomes a credible « safe haven » value and therefore provides a « crisis » alternative to the US dollar; The US public debt now swells uncontrollably; The ongoing collapse of US real economy prevents from finding an alternative solution to the country's defaulting; « Strong inflation or hyper-inflation in the US in 2009? », that is the only question. (page 8)
End of 2008: The world enters the decanting phase of the global systemic crisis - Anticipations over 2008-2013 for six groups of countries experiencing very different evolutions

In this October edition of the GEAB (N°28), we therefore chose to establish the anticipatory calendar of the so-called « decanting phase », i.e. a phase along which the outcome of the crisis begins reshaping the global system. Our studies thus enabled us to make anticipations for the 2008-2013 period and for 6 groups of countries differently impacted by the 4 specific sequences of this phase: financial crisis, economic crisis, social crisis and political crisis… (page 16)
Eight strategic recommendations and operational advices in times of crisis
Stocks: going back there or not? Emerging countries : the selection begins; Iran, Venezuela, Oil ; Some tools to help you choose your banks; Risk or no risk; Currencies ; How to save one’s retirement plan? How to run a sovereign fund amidst the storm? (page 20)

The GlobalEurometre - Results & Analyses
As to what kind of response the EU should bring forward, the people surveyed nearly unanimously (95 percent) agree on a large-scale EU programme of infrastructure building/improving. (page 23)

Global systemic crisis / September 2008 - Phase of collapse of US real economy
- Public announcement GEAB N°22 (February 16, 2008) -

According to LEAP/E2020, the end of the third quarter of 2008 will be marked by a new tipping point in the unfolding of the global systemic crisis. At that time indeed, the cumulated impact of the various sequences of the crisis (see table below) will reach its maximum strength and affect decisively the very heart of the systems concerned, on the frontline of which the United States, epicentre of the current crisis. In the United States, this new tipping point will translate into a collapse of the real economy, final socio-economic stage of the serial bursting of the housing and financial bubbles (1) and of the pursuance of the US dollar fall. The collapse of US real economy means the virtual freeze of the American economic machinery: private and public bankruptcies in large numbers, companies and public services closing down massively (2),...

A revealing harbinger: from March 2008 onward, the US government will stop a service publishing its economic indicators due to budget restrictions (3). Those who read the GEAB N°2 (02/2006) and included Alert certainly keep in mind our anticipation which connected the upcoming fall of the US dollar with the US Fed’s decision to cease publishing the M3 indicator. This new decision is another clear sign that US leaders are now anticipating a very bleak economic outlook for their country.

Time perspective of the seven sequences of the impact phase of the global systemic crisis as anticipated since mid-2007 - Source LEAP/E2020, GEAB N°18 (10/2007)
In this 22nd issue of the GEAB, LEAP/E2020’s experts try in particular to anticipate very specifically what will come out of the collapse of the US real economy for the United States themselves and for the other regions of the world. Meanwhile our team presents five sets of strategic and operational recommendations helping to protect oneself from the upcoming deterioration of the global systemic crisis.

On the occasion of the second anniversary of the publication of our famous “Global systemic crisis Alert” which toured the world in February 2006 (4), LEAP/E2020 wishes to remind that we are now resolutely stepping into an era with no historical precedent. Our researchers insisted on that many times in the last two years: any comparison with the previous crises of our modern economy would be fallacious. It is neither a “remake” of the 1929 crisis nor a repetition of the 1970s oil crises or 1987 stock market crisis. It is truly a global systemic crisis, that is to say a crisis affecting the entire planet and questioning the very foundations of the international system upon which the world was organised in the last decades.

According to LEAP/E2020, it is also instructive to observe that, two years after the release of this « Alert » which at the time generated both the interest of millions of readers worldwide and the condescending irony of most « experts » and « managers » of the economic and financial spheres, everyone is now convinced that a crisis is truly happening, that it is really global, and for most people already that it could indeed be systemic. However, it is always a repeated astonishment for our team to see the degree of incapacity of these same experts and managers in understanding the specific nature of the phenomenon currently unfolding. According to them, this crisis would only be a usual crisis but bigger. As a matter of fact that’s how the financial media reflect the dominant interpretations of the ongoing crisis. According to our team, this approach is not only intellectually lazy (5), it is also morally guilty, because it has for a main consequence to prevent their readers (whether they are simple citizens, private investors or public or private organisation managers) from preparing for the upcoming shocks (6).

For this reason, in opposition to all what can be read in the mainstream media always eager to conceal the truth and serve the interests of those who rule them, LEAP/E2020 wishes to remind that it is first and foremost in the United States that the systemic crisis is taking an unprecedented shape (the « Very Great US Depression » as our team decided to call it in January 2007 (7)) because it is around this country, and this country alone, that the world got progressively organised after the second World War. The various issues of the GEAB extensively described this situation. In short, it appears to be useful to make clear that neither Europe nor Asia have a negative saving rate, a full-scale housing crisis throwing millions of citizens out of their homes, a free-falling currency, abysmal public and trade deficits, an economic recession and, on top of all this, a number of costly wars to finance.

Neither Asia nor Europe (or more precisely ‘nor the Eurozone’) will suffer the roughest, the most sustainable and the most negative impact of the ongoing crisis; but the United States will, as well as all the countries/economies strongly linked to the US (what our experts have decided to call “the American risk”) (8). A “decoupling” is indeed taking place between the US economy and the other large regions of the world. But “decoupling” does not mean “independence” and it is clear that, as anticipated by LEAP/E2020 for many months, Asia and Europe will be affected by the crisis. But « decoupling » entails that the evolution of the US economy and of the other large regions of the world are no longer synchronised, that Asia and Europe are now moving along courses no longer determined by the US economy.

The global systemic crisis is in fact the beginning of an economic « decoupling » between the US and the rest of the world, knowing that the non « decoupled » economies will be dragged down the US negative spiral.

US Self-Employment in a Steep Downturn - Source Bureau of Labor Statistics / Merril Lynch (shaded region represents period of US recession)
The cases of the housing (2006) and financial (2007) bubble-bursting are eloquent. Indeed, the large majority of operators (non-specialised in the concerned sector) discovered that « the party was over » a long time after the trend had reversed. During the entire reversal period (which usually lasts between 6 to 12 months at most), dominant stances kept repeating them that nothing was changing and that emerging worries had no reason to be; and later, that the problems would remain confined to the sector concerned and to the US only. All those who, in the US and elsewhere, listened to these arguments are bitterly regretful now that they are stuck with unmarketable houses (or about to be foreclosed) or now that they see the value of their assets crumble day after day (9).

Concerning stock markets, our team has anticipated since October 2007 that international stocks would plummet by 20 to 60 percent according to the region in the course of the year 2008. Today, we must re-evaluate our anticipations as we estimate that losses will be even greater than that. Indeed, on the one hand, stock markets have already lost between 10 and 20 percent since the beginning of the year (10), and, on the other hand, the collapse of the real economy in the US by the end of Summer 2008 will drag down all stock markets. According to LEAP/E2020, international stock markets will probably drop by 50 percent in average compared to 2007 (including in the emerging countries) (11).

This sort of re-evaluation is typical of the work of anticipation carried by LEAP/E2020. Month after month we try to distinguish which trends are growing and which are relenting in order to improve the accuracy of our evaluations. We do not strive to “be right” (12), not to “sell” or “promote” anything. We seek simply and without prejudice to describe in advance the consequences of the heavy trends at play in this 21st-century world, and to share with our readers what we think are the proper means to protect oneself from the most negative effects.

In this 22nd issue of the Global Europe Anticipation Bulletin, with the alert we sound about a collapse of US real economy from September 2008 onward, we are trying again to warn those concerned that this major event will generate many very severe socio-political troubles in the United States (13) whose economy is truly on a tumbling course (14), a situation extremely likely to entail very heavy consequences for the financial and monetary markets, and for the world’s economy. We have not yet reached the heart of the crisis. According to LEAP/E2020, we will be there in the second semester of 2008.

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Notes:

(1) A very instructive film was recently nominated at the Sundance Film Festival: I.O.U.S.A., directed by Patrick Creadon. As it follows the journey of David Walker.S._Comptroller_General, US Comptroller General (and therefore responsible for controlling federal public spending), during a series of conferences on the state of public expenditures throughout the country, this film shows the very direct impact of the current crisis on American citizens and the United States. The release of this film illustrates the fact that, in just a few months time, this crisis left the mere circles of experts and boardrooms of financial institutions to enter into the daily life of the US citizens.

(2) In the past few days, the complete collapse of Municipal bonds (or « Munis ») illustrates the fact that the crisis is spreading to all the sectors of the US society. This collapse will freeze all public investment projects scheduled by local authorities in the US. It is one of the first big victims of the implosion of « bonds insurers » announced by LEAP/E2020 in the GEAB N°19. It also demonstrates the fact that large banks are now incapable of playing their role of financers of the country’s economic activity. Sources: Financial Times, 02/13/2008 & Bloomberg, 02/14/2008

(3) Source: EconomicIndicators.Gov, Economics & Statistics Administration, US Department of Commerce

(4) See GEAB N°2, 02/15/2006

(5) The first reason that may prevent those « experts » to conceive the « unconceivable », is not a matter of intelligence but a « commercial » problem. Indeed it would compel them to review most of their intellectual principles (their work hypotheses) and their business base (their « clients » would not appreciate to learn that they were on the wrong track all these years).

(6) On this subject, it is worth noticing the very straightforward speech made by the head of the Bank of England, Mervyn King, who recently warned his fellow citizens that the current crisis would downgrade significantly their living standards. Unfortunately, no US leader, including among the Democrats, is able to produce such a speech, knowing that their fellow citizens are hit even harder than the British. Source: The Telegraph, 02/14/2008.

(7) See GEAB N°11, 01/15/2007.

(8) In this 22nd issue of the GEAB, the LEAP/E2020 team gives a set of recommendations helping investors to assess themselves the « American risk » of a country, sector or investment.

(9) The same goes for all those who chose to listen to similar arguments telling them, along the years 2006 and 2007, that it was impossible for the EURUSD exchange rate to go above 1.30, then 1.40, and now 1.50… while waiting 1.70 at the end of the year 2008.

(10) Only « dream merchants » can still imagine that stock markets could improve by the end of the year, while the crisis is speeding up.

(11) It is worth reminding that in January 2008, in just a month, global stock markets saw USD 5,200 billion-worth go up in smoke. Source: China Daily News, 02/10/2008

(12) Even if our anticipations undeniably proved to be right in the past two years concerning the global systemic crisis.

(13) See ‘Sequence 6 : 2nd quarter 2007 – 4th quarter 2009 : « Very Great Depression » in the US, social unrest and growing influence of the army on public management, GEAB N°18, 10/15/2007

(14) Predictions about the failure of dozens of US banks in the coming two years illustrate the scope of upcoming difficulties. Source: Reuters, 02/01/2008

Samedi 16 Février 2008

In the same category:
Why LEAP/E2020 maintain their anticipation of a 1.75 EURUSD exchange rate at the end of 2008 - 16/09/2008

Unemployment rate leaps to 14-year high of 6.5%
Market Watch
French trade deficit hits new record in September
Irish Times
Sharp rise in Indian investors’ suicides
Financial Times
2 more banks go belly-up
CNN Money
GM Says It May Run Out of Operating Cash This Year
Bloomberg
Down and Out in Beverly Hills: Rolexes, Picassos Hit Pawnshops
Bloomberg
IMF Urges Stimulus as Global Growth Marked Down Sharply
IMF
Hedge fund results seen going from bad to worse
Reuters
Bank of England cuts rate by 1.5%
The Independent
Continuing jobless claims hit 25-year high
Market Watch
UK interest rates slashed to 3%
BBC News
Death and Resurrection of the US Dollar
Global Research
ISM Services Index in U.S. Slumped to Record Low
Bloomberg
Russia to base missiles on EU border: Medvedev
France 24
Private Sector Cuts Jobs; Planned Layoffs Jump
CNBC

It's All About Evil - Series of Books

________________________________________
Why LEAP/E2020 maintain their anticipation of a 1.75 EURUSD exchange rate at the end of 2008
- Public announcement GEAB N°27 (September 16, 2008) -

Contrary to what the dollar’s staggering upturn against nearly all currencies since the beginning of July 2008 suggests, LEAP/E2020 sees no reason to modify its anticipation about the EURUSD exchange rate at the end of this year. On the contrary, the specific nature and conditions – as they are described in this 27th issue of the GEAB – of the wide-scale manipulation of the US currency index that the US Treasury Department has been operating since the last week of July 2008, with the active support of the US Federal Reserve’s « Primary Dealers » and the central banks of China and most probably of Japan and Europe, have convinced our researchers that, besides the fact that it was temporary, the upturn was in fact the sign that the collapse of the dollar system we have been living in since 1945 was gaining momentum.

Since the end of July 2008, many explanations have been provided to the fantastic rebound of the US currency against all leading currencies. These explanations were often focussed on the EURUSD exchange rate, which has obviously become the barometer of the end of the dollar era. Our researchers have carefully studied all these arguments and they came to the following simple conclusion: either they had no other basis than the expectations, interests or obsessions of those who formulated them (1), or all by themselves they were not sufficient to explain such general and sudden move of the US currency.

Hereafter our team analyses two of the three explanations developed in GEAB n°27.

1st explanation: « The whole world economy is now being hit by the crisis, provoking a rush towards quality »
It is certain that the majority of the world’s financial operators and investors only realised this summer that Europe, Asia and the emerging markets were also about to be hit by the crisis (« The world plunges into the heart of the global systemic crisis » was the main title of the GEAB’s June edition). They had made the mistake to believe in the announcements released by those countries claiming, as always, that all was for the best... until they noticed it was the contrary.
Of course the crisis has impacted most currencies, but they are not reacting simultaneously given the very different conditions between for instance the United Kingdom, the Eurozone, Japan and Australia. But, above all, in consideration of the obvious series of bad news coming from the United States (the nationalisation of Fanny Mae and Freddy Mac for instance will increase significantly the country’s already abysmal public debt), the US economy can really not be described as a “quality” safe haven, as Lehman Brothers bankruptcy has just illustrated again. As a matter of fact, as we will see in the rest of the explanation on the dollar manipulation, it is precisely for opposite reasons to « quality » that this operation was set up. In any event, the markets’ taking into account a new factor would not normally generate such linear, general, lengthy and uninterrupted process. The famous “invisible hand of the market” is less heavy and determining than that.
This first argument has therefore been considered very insufficient to explain the scope of the movements taking place since the end of July, and totally irrelevant to justify the duration and linearity of the process.

US debt corrected for inflation (in year 2000 dollars) - Source: US National Debt Clock
2nd explanation: « The US went into recession before the rest of world therefore they will come out of it sooner »
Out of politeness, we prefer not to name the reputable media which, all over the world, repeated this « argument »: so much absurdity is either deliberate lying or plain stupidity. What is certain for the vast majority of financial and economic players is that the US are obviously hit by a severe recession, with their financial system imploding because of the subprime crisis and consequences (2). What is probable for most of them now, is that Europe, Asia and the rest of the world will be affected at various levels and will experience some economic slowdown (LEAP/E2020 already wrote in detail the ongoing and upcoming evolution of this process and it is not the time now to come back on that). What is certain also for the majority of investors, is that besides the UK - and Spain to a lesser extent, no major country is affected by such manyfold crisis (real estate, finance, banking, economy, currency, military…) as the US, no one having the faintest idea of how and when it will end. In fact, this “argument” is based on the idea that the crisis currently affecting the US would be less bad – or not worse, to the maximum – than the crises affecting the rest of the world, and that it would not affect the country any more and any longer than it would affect the rest of the world. Those who claim this argument would also like us to believe that all economic and financial investors massively rushed to buy US dollars and to sell their other currencies, even on those days when the Dow Jones was losing 300 points because of very bad economic news! Apparently these global investors display a rather hectic behaviour: they believe in the US dollar but they are selling all their assets tied to the US economy! They are convinced that the US economy will improve sooner that the rest but they are getting rid of their shares of this economy in order to buy US dollars! This kind of behavioural derangement has no more to do with stupidity, it is madness... unless it is a desperate « retreat forward », and in this case the upward trend is ephemeral and some very serious problems are ahead for the US dollar and US dollar-denominated assets. As we will see later on, it is precisely on this phenomenon that the manipulation played. In any event, the “argument” according to which “the US would get out of the crisis sooner than the others because they got into it before” failed to convince our team.

Impact of recent financial crises on investment banks (Dark blue: duration; Light blue: severity) - Sources: Morgan Stanley / Oliver Wyman
In this issue of the GEAB (N°27), our team details the mecanisms at work in this large manipulation of the dollar index orchestrated by US and Chinese authorities. They also anticipate the disastrous outcome of this operation which contributed to accelerate the ongoing process of disintegration of the US and global financial system. Panic now reigns in Washington (and New York) as much as in Beijing, and the consequences over the next 12 months have become very predictable in the eyes our researchers. LEAP/E2020's operational advice and strategic recommendations are there to help protecting oneself against the impact of the crisis. A "direct hit" is blowing on the global financial system and it is therefore important to understand who will be the next resident in the White House at this crucial moment of US and global history, all the more since the name of this resident is no more a secret for our team as the result of the election has been programmed. It is in the next issue (GEAB N°28) that LEAP/E2020 will update their yearly anticipatory calendar of the global systemic crisis, and give their analysis of the situation concerning the Eurozone, Russia and Asia.

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Notes:

(1) In the field of currencies where speculation, history, nationalism and strategy are intermingled, obsessions are very common.

(2) Every week now, at least one bank, big or small, goes bankrupt. And the US government must assimilate whole segments of the financial economy, as in the case of Fanny Mae and Freddy Mac, and of Lehman Brothers.

Mardi 16 Septembre 2008
Five western countries will be particularly affected by the collapse of the capital-based pension system - 07/08/2008
Excerpt GEAB N°23 (March 2008) -

If you were a subscriber to the GEAB, you would have read what will follow as early as March 16, 2008:

In the case of hedge funds, at least was it only about the most “risky” investments! But pension funds did not expect at all that stock and housing assets would collapse the way they have in the past few months throughout the world. These categories of assets are losing between 30 and 70 percent of their value from 2007 to 2009, knowing that there is no alternative to financial markets for such big amounts. For instance, the 300 largest pension funds reached a cumulated value of 10,000 USD in September 2007 (1). If it is certain that commodities, energy, gold… prices are rising precisely because these pension funds are now desperately seeking profitable assets, nevertheless, collectively speaking, this quest is vain. The truth is simple: these funds are losing a lot of money (1,500 billion USD lost in January 2008 (2)) and they will lose a lot more in the months and years to come. We estimate that, despite the protection measures taken by these pension funds - when for instance they get rid of the most exposed investments, they will collectively lose at least another 3,000 billion USD in 2008 and their profits will drop down to 5 percent (inflation deducted) in the best case.

Meanwhile, dozens of millions of newly retired « baby-boomers » are beginning to call upon payback from these funds. According to our team, it is likely that, by the end of 2008, this crisis will be the dominant aspect of the current global financial crisis. It will also provoke a social crisis affecting pensioners, in particular in the US (45 percent of pension funds’ total assets in the world), in Japan (18 percent) and in various European countries depending heavily on capital-based pension systems, i.e. UK (7 percent), Sweden (1 percent), Denmark (1 percent) and above all, in the Eurozone, the Netherlands (6 percent of pension funds’ total assets in the world). Canada too, which represents 5 percent of these assets, will be affected (3). In the rest of the world, only accounting for 11 percent of these assets, pensioners will not be affected so much.

According to this list, pensioners in the US, Japan, UK, Netherlands and Canada, who counted on regular capital-based pension revenues, will find themselves in a difficult situation. At the end of 2008, as the global systemic crisis unfolds in the economic and financial sphere, LEAP/E2020 estimates that half of those pension funds will be confronted to a drastic decrease in their revenues and to a shrinking value of their capital. Regulators in the various concerned countries should rapidly take on this issue which is about to have dramatic consequences for millions of American, Japanese, Dutch and Canadian pensioners.

It's All About Evil - Series of Books
Notes:

(1) Source: Pension&Investments, 09/03/2007

(2) Source: Reuters, 01/30/2008

(3) Distribution of pension fund shares of global assets, provided by Watson&Wyatt.

SEQUENCE 2 – Stock market collapse in Asia and the US mainly: Between - 60% and -30% in two years according to the regions (4th quarter 2007 – 1st quarter 2009)- - 17/07/2008
- Excerpt GEAB N°18 (October 16, 2007) -

If you were a subscriber to the GEAB, you would have read what will follow as early as October 16, 2007:

US and Asian financial markets are breaking new records. The fact that these records in Wall Street, calculated in USD, are not enough to compensate the simultaneous loss of value of the US currency compared to the main other international currencies, does not seem to bother the analysts.

Comparative charts –US dollar index and Dow Jones index evolution (2000 – 2007) / Source: Stockcharts
Of course, speculation on emerging markets, Asia especially, is frantic these days. These markets are supposed to cross the US recession unhurt. Meanwhile, the US official statistics (jobs, inflation) come to the rescue of a Fed currently unable to lower its rates (unless by drowning the USD) and waiting to raise them in an attempt to prevent capitals to flow out of the US. Recession + free-falling USD + weak rates are certainly not a good combination to fund the gigantic public and private deficits.

Global equity market capitalization by world regions - June 2007 – Source: S&P/Citigroup Global Equity Index
Even though Wall Street resembles less and less to the stick market of a market economy, and more and more to the institution of a planified economy (1) with a proliferation of organisations and instruments designed to prevent it from collapsing (Plunge Protection Team, « Paulson » pool of US banks missioned to repurchase shares in case of severe fall), the LEAP/E2020 team believes that financial markets are about to experience a new historical drop in the next 18 months. Emerging markets will first collapse because they are bubbles where hedge funds try to find new sources of profit. As shown on the chart above they represent a very small share of global equity market capitalisation (around 10 percent) and therefore they are extremely sensitive to any shock, even minor ones, hitting global stock markets. Global economic slowdown, US recession, global financial crisis, geopolitical instability, the future of these markets in the next 18 months is predictable, with final losses probably going past 50 percent of their current value.

Concerning principal markets, downward trends are also at play for the same reasons. However, apart from the US, LEAP/E2020 anticipates that the drop will be more severe in Japan and UK because these economies are very dependent on the US market, and over-exposed to a drop in the value of US assets (cf. GEAB N°17). The size of the slump can reach 50 percent over 18 months.

Concerning the Eurozone, LEAP/E2020 estimates that it is less exposed to a number of factors previously mentioned, the size of its domestic market and its solvency (as opposed to the US market insolvency), as well as its advantageous position as exporter should enable it to contain the slump to 30 percent.

Concerning the United States, the evolution of Wall Street’s mechanisms is extremely puzzling. If normal market rules were at play, the main indicators should be down by 50 to 60 percent at the beginning of 2009. However, due to growing interventionism on the part of US authorities on US stock values (resulting from the bursting of the housing bubble and the ongoing crisis) and contingent on the political evolutions LEAP/E2020 anticipates could result from America’s “Very Great Depression”, it is more difficult to make a accurate forecast. Indeed the slump could be contained to 30 percent due to some intervention in the name of “national interest”, all the more since today’s financial crisis provides a good context for stock manipulations. For instance, for some days (see weeks) during the August shock, a majority of investors did not have the possibility to have any information on the exact value of their investments. The table below eloquently indicates the percentage of people who met this difficulty in Wall Street last August. It has been compiled from polls elaborated John J. Xenakis from Generational Dynamics.

Corporate bonds 62%
Commercial mortgage-backed securities 63%
High-yield bonds 65%
Mortgage-backed securities 66%
Leveraged loans 69%
Collateralized loan obligations 78%
Asset-back securities 82%
CDOs / Structured credit 83%

LEAP/E2020 Summer 2008 Alert – July-December 2008: The world plunges into the heart of the global systemic crisis - 16/06/2008
- Public announcement GEAB N°26 (Summer 2008 Special Edition - 31 pages!) -
On the occasion of this 26th – Summer 2008 Special – edition of the Global Europe Anticipation Bulletin, the LEAP/E2020 team has decided to launch an alert on the July-December 2008 period. Indeed, our team is now convinced that this period will consist for the whole world in a major plunge into the heart of the phase of impact of the global systemic crisis. The upcoming six months are in fact the core of the unfolding crisis. The troubles met in the past six months were mere harbingers.

US consumer confidence index (1978-05/2008) – Source: Briefing.com / Conference Board
In the next semester indeed, all the components of the crisis (financial, monetary, economic, strategic, social, political… ones) will converge at the height of their intensity (1). Avoiding to repeat a description of the various sequences already anticipated in the previous editions of the GEAB, our researchers have decided to describe the trends that will be at work in the world’s main regions in the next six months. Therefore they analyse eight fundamental processes that will mark the next semester and affect decisively the years 2009-2010, i.e.:

1. A Dollar in distress (EUR 1 = USD 1.75 at the end of 2008): Panic-fear of a US currency and economy collapse eats into the American collective psyche

2. Global financial system: An impossible requirement – placing Washington under international trusteeship – provokes the system’s break

3. European Union: The periphery sinks into the recession, the Eurozone only slows down

4. Asia: The « double whammy » inflation/export-collapse

5. Latin America: Difficulties increase but growth remains steady in most parts of the region, Mexico and Argentina in crisis

6. Arab world: Pro-Western regimes go adrift / 60 percent risk of socio-political explosion on Egypt-Morocco axis

7. Iran: 70 percent probability of an attack by October 2008 confirmed

8. Banks/Speculative bubbles: When bubbles collide

In parallel, LEAP/E2020 presents five strategic advices for the intention of central banks, governments and regulatory authorities, aimed at reducing and channelling the very bad consequences of the phase of impact of the crisis.

As to private investors, LEAP/E2020 develops in this 26th issue of the GEAB, a series of 8 operational advices for them to avoid committing fatal mistakes in the course of the next semester.

For this public announcement, LEAP/E2020 chose to present its anticipation on the upcoming break of the global financial system.

Global financial system: An impossible requirement – placing Washington under international trusteeship – provokes the system’s break

Who owns the US debt? – Source: Fincher
Washington’s decision to raise the bids for the return to a « strong Dollar », by compelling Ben Bernanke to intervene, bears the seeds of an acceleration of the global financial system’s breaking process (2).

Ben Bernanke is indeed the last wall before the largest US currency and asset owners become fully aware of the fact that Washington no longer has the means of its monetary policy. What used to be a deliberate policy of currency drop (when it was decided to stop publishing M3 in March 2006, as announced by LEAP/E2020) in order to reduce the country’s trade deficits and the real value (for themselves) of the their debt (labelled in Dollar), turned against its perpetrators entailing a major outflow (capital outflow, steadiness of trade deficits, soaring inflation...). The « Bernanke » card is the last « psychological » card Washington can play. The fact of using it proves that US leaders have reached the last limits of what they can do to hold back their partners into the system founded after 1945 and based on the US economy and currency (3).

In a few weeks time (after the next G8- and other organisations-meetings have taken place), when it will be confirmed that there is no way to stabilise the US currency (not to mention the eccentric idea of pushing it up) because the US economy is sinking always deeper into the recession and because the world is already filled with US Dollars no one knows what to do with, then the global financial system will burst out in various sub-systems trying to survive as much as they can before a new global financial equilibrium is found (4). As he is embarking on this road to nowhere, consciously or not, voluntarily or not, Ben Bernanke is signing the end of the current financial system. The return to a “strong Dollar” is a bit like the « liberation of Iraq » : wishful thinking turning into a nightmare.

The inverted pyramid of global liquidity - Sources: Bank of International Settlements / Independent Strategy
As a matter of fact, if Washington really intended to stabilise the Dollar or, more ambitiously, to push it up against the other currencies, there would only be one way (5), in two parts: raising significantly the Fed’s interest rates, and lowering drastically the pace of money printing. But if the government decided to implement this type of policy, the US economy (both real and financial) stops dead a few weeks after : the real estate market falls to zero by lack of affordable credit and as a result of soaring interests on Adjustable Rate Mortgage loans, consumption becomes negative (i.e. shrinks back each month), corporate failures multiply exponentially, Wall Street collapses under the burden of innumerable debts and succumbs to the instantaneous implosion of the CDS market due to counterparties default...

Such a series of events, sure to happen if Washington implements a voluntary policy of dollar-rescue, is probably unacceptable by the US authorities. Therefore, apart from talking – and further self-discrediting – they cannot do anything. The method used in the past decades is no longer available: no one will accept to buy large amounts of Dollars in order to rescue the US currency if some voluntary policy (like the one described previously) is not implemented by Washington. As they will not do it, the rest of the world will draw its own conclusions: everyman for himself, knowing that from mid-August onward, as Beijing is relieved from the constraint of the Olympic Games, a large number of “tough” options (6), put on the back burner until the Games, will resurface (7).

It's All About Evil - Series of Books
Notes:

(1) For a more detailed calendar of these trends, see GEAB N°18.

(2) The Bank of International Settlements is beginning to worry about a risk of global Great Depression. Source: Banking Times, 06/09/2008

(3) Source: Euro Pacific Capital, 05/23/2008

(4) On this subject, read in GEAB N°26 our advice to central banks, governments and regulatory authorities.

(5) We will disregard the other option consisting in bombing the ECB, the Bank of China and the Bank of Japan.

(6) Source: ContreInfo, 04/21/2008

(7) As Russia is becoming the largest oil-producer - before Saudi Arabia - in the world, the balance of power on the oil market is also changing a lot. Source: Times of India, 06/12/2008

European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst - 29/05/2008
- Excerpt GEAB N°20 (December 16, 2007) -

If you were a subscriber to the GEAB, you would have read what will follow as early as December 16, 2007:

Before anticipating into detail housing market evolutions in these three European regions, we would like to drag our readers’ attention to the fact that the evolution of the main international currencies directly influences some of these markets. For instance, a large part of real estate in Eastern Europe is financed upon bank loans in Swiss Francs; meanwhile in Israel (1), the characteristic of the estate market is a major move away from the US dollar towards the national currency, the Shekel. Well paradoxically, it is for the same reason that Israeli operators are getting away from the US dollar and that the housing bubble will burst in a number of Central and Eastern European countries in the coming months, and that reason is the general loss of confidence in the US currency and the consequences this has on the foreign exchange market.

Before describing the situation in new EU member-states, let’s examine the evolution of two Western European markets which LEAP/E2020 predicted were about to decline, i.e. Spain and UK.
Spain
In Spain, the situation is clearly catastrophic recording up to 50% drops in home starts over one year and inventories of unsold homes jumping from 16.4 to 24.5 months on a national scale (2). Compared to 2006, the collapse is even more perceptible as projections for 2008 anticipate about 300,000 home starts while they anticipated more than 900,000 in 2006, corresponding to a 70% drop.

The economic consequences of this collapse of the Spanish real estate market are desastrous. The entire estate and building industry is stricken (3). Spanish media are full of stories about estate agents not selling anything for months, or building companies whose work is frozen due to promotor insolvency. 75% of the 60,000 Spanish real estate agencies are expected to fail in 2008 (4).

If, as anticipated by LEAP/E2020, 2007 was the year when the real estate bubble burst in Spain, 2008 will be for sure the year when a major economic and financial crisis soars throughout the country. All the declarations repeated by the Central Bank of Spain and the country’s major banks on the fact that this crisis has nothing in common with the US subprime crisis, are nothing but the normal soothing stance delivered whenever serious crises are ahead (all the more when they occur in a context of global credit crunch). And international investors are not fooled as illustrated by the fact that BBVA (Spain’s second largest bank) was unable to sell more than a quarter of a EUR 6.6 billion emission of mortgage-backed securities. As second most indebted country in the world (behind the US, see GEAB N°17) and with banks who fuelled to the last limit the housing bubble now bursting, Spain is ready to step into a severe social and economic crisis in 2008, according to our researchers. The collapse of the real estate market will go on and the country’s economy is heading towards a recession, in a context of national banking crisis strengthened by the international situation. This will be a decisive test, a life size one, for the leaders of the Eurozone.

House prices in Spain (March 2006 – March 2007) – Source Spanish Ministry of Housing

United Kingdom
In the UK, the situation’s components are rather different though the direction is the same as in Spain. The British real estate market reversed in 2007 and the impact of the global financial crisis on the City (layoffs, end of super bonuses…) swept away the last factor that maintained under pressure the London and South-East markets. Today the City itself warns of 10% slump in British home prices in 2008 (5).

Difficulties to refinance millions-worth of adjustable-rate mortgages due to increased interest rates on the one hand (6) and to credit crunch on the other, provide another reason for the British real estate market to weaken when close to one third of the borrowers will probably be unable to refinance their mortgage (7) (and thus be compelled to sell or be seized) (8).

According to our team, in 2008, the British real estate market will keep on slumping, and the trend should accelerate in the middle of the year as the global financial crisis will intensify, thus hitting harder on the City.

House prices in UK – Source Halifax
Central and Eastern Europe
In Central and Eastern Europe, the situation is different because these economies are in a process of rapid development, having recently joined the EU and preparing to join the Euro within the next 3 to 4 years. And it is a matter of currencies that will drag some of these countries into housing bubble bursts in 2008.

Indeed, in the past years, Hungarian, Romanian, Bulgarian and Baltic banks specialised in foreign currency-denominated loans (Euros, Dollars and Swiss Francs) with a view to soften the effects of high national interest rates and unreliable national currencies. In various countries of the region, in particular Hungary (9), Romania (10) and Bulgaria (11), Swiss Franc-denominated mortgages proliferated due to particularly cheap Swiss interest rates (12). Such strategies can only be sustainable when the foreign exchange market is stable, namely exchange among the main currencies (Euro, Dollar and Swiss Franc in this case) as well as interest rates. But on both aspects, the end of the year 2007 (and our anticipations for 2008) show that it is not the case and that it will not be the case next year. Not to mention the return of inflation in Europe and the US, interest rates of the states owning the main international currencies will converge in 2008 (Switzerland included). As to the Swiss Franc, it will recover its status (and value) of blue chip currency, as always in times of great uncertainty.

The most astonishing thing is that new EU member-states (and behind them, the ECB in the end) failed to urge their banks to halt this type of denomination in Euros; indeed it is on the Euro that their economic and financial future is based, not on the Swiss Franc.

In any event, according to LEAP/E2020, this absurd situation will painfully end up for the concerned countries. The real estate market of a large part of the region will start slumping in 2008, after the past few year’s price spiralling. One more, as in the case of the other real estate bubbles worldwide, financiers’ “inventiveness” and the absence of control over central banks combine to create a crisis (13)… all the more saddening that a break took place mid-2007; unfortunately the dangerous practice was back at the end of 2007 (14).

It's All About Evil - Series of Books
Notes:

(1) For decades, the Israeli real estate market has been based on the US dollar as benchmark currency. US-Israel ties, the US dollar’s status of international reserve currency and the important flows (human and financial ones) between the two countries justified this situation until 2007. But 2007 saw the beginning of a major move out of the US dollar on the part of Israeli real estate operators (sale and rent). Strongly backed by the Central Bank of Israel, this evolution is so important that the amount of renting contracts labelled in US dollar fell from 85% in January 2007 to 68% in October 2007. This tendency drastically strengthened in the past few months and reall estate professionals now predict that all contracts will be labelled in Shekel by the end of 2008. Source: Jerusalem Post, 12/13/2007

(2) With peaks in certain regions such as Costa del Sol, where inventories rose from 19.3 to 35.9 months. Source: Invertia, 12/13/2007

(3) For instance, the brick industry has stopped by lack of clients as in the case of the Bailen Jaen company, which represents 30% of the Spanish market. Source: Cienladrillos, 12/06/2007.

(4) Source: El Nuevo Herald, 12/15/2007

(5) Source: The Independent, 12/09/2007

(6) The Bank of England recently lowered its interest rates but too late: massive credit restrictions entailed by the global “credit crunch” will cancel the effects.

(7) Source: International Herald Tribune, 12/11/2007

(8) Source: Telegraph, 12/06/2007

(9) Generally speaking, Hungary, together with Latvia as described by LEAP/E2020 in GEAB N°16, borrows without caring about the consequences, probably expecting the Eurozone to cope with the problem. Source: Rosemanblog, 10/11/2007

June/July 2008 – New tipping-point in the global systemic crisis: When the illusion that the crisis is under control fades away… - 16/05/2008
- Public announcement GEAB N°25 (May 16, 2008) -
Sorcerer’s apprentices are doomed to repeat the same mistakes on and on. In 2007, the authorities’ and large financial institutions’ attempt to conceal the subprime crisis (1) (which had already started hitting hard on the markets in February-March 2007) resulted in a severe and sustainable shock in summer 2007. Well, in the coming weeks we will experience a “remake” of the same scenario, i.e. a serious aggravation of the January-March 2008 financial crisis at the beginning of summer 2008.

In this 25th issue of the Global Europe Anticipation Bulletin, our team therefore decided to describe five of the seven trends currently at work and soon to result in this new tipping-point of the global systemic crisis (the last two trends – Europe and Asia - will be analysed in GEAB N°26):

Real estate: A bottomless pit
Global financial bubble: Inflation only is progressing
US economy: Recession settles down
US public deficits: The big return
Dollar: The rebound that does not exist
Europe: Decoupling confirmed – The heart of Euroland resists / UK enters recession
Asia: Severe slowdown ahead

We also formulate a complete series of strategic and operational recommendations aimed at preparing oneself to the upcoming Summer-2008 shock (on subscription.

In this public announcement, we also wish to explain in what way this new operation of « euphorisation » in fact will contribute to worsen the upcoming shock.

Indeed, despite all the signs indicating that the crisis is going on (bank losses and continued process of financial asset depreciation (2), proliferation of medium-size bank failures in the US in particular (3), increasing weakness of large insurance companies (4), steady collapse of housing prices (5), contamination to real economy and non-US economies (6), pursuance of the US currency fall (7), economic slowdown in Europe (8),...), financial authorities, large banks and the international media have undertaken to profess that the crisis was under control. Powerless as they are in real-life, these sorcerers’ apprentices have come to resort to a « psychological weapon » to curb the crisis. The global systemic crisis still has long to live, having nothing to do with this virtual reality where central bankers, private bankers and financial media seem to be operating. Of course large banks took advantage of today’s general “euphoria” and managed to share past and future (even greater (9)) losses by launching vast operations of recapitalisation (10).

US housing: a bottomless pit - Evolution of home prices in US 20 largest cities 01/2000-02/2008 - Source : S&P Case-Shiller
This time however, contrary to last year, operators are unwilling to be fooled. According to LEAP/E2020, this is a major psychological factor, one that will contribute to emphasize the impact of the crisis once the mirage of a crisis-under-control fades away at the beginning of this summer 2008.

Indeed, the global financial system, and in particular its US pillar, is currently staking its all (though our team is not so sure the system is fully aware of it). But the credibility of the Fed and of large banks is extremely low today (not mentioning political authorities’). Operators (whether they are individuals, simple savers or sovereign funds) are suspicious and beginning to wonder if they are not being manipulated. If, as our researchers believe, they realise in a few weeks that indeed they were being manipulated and that the crisis is far from being under control but on the contrary is reemerging even bigger, then real panic movements will swoop down upon financial markets. When it comes to mass-psychology, nothing is worse than the collective feeling of having been fooled on purpose.

Here is a simple illustration that will speak to all those of you who know that banks « hold » the vast masses of investors because of the confidence savers have in their capacity to manage their investments: imagine what would be the consequences of a sudden savers’ refusal to keep on letting banks manage their savings as they want, and their insisting upon switching their portfolio into less risky investments! Such a move could provoke a 20 percent drop on global financial places in just a few days. This nightmare probably haunts central banks in general, and the US Federal Reserve and the Bank of England in particular (whose economies are closely linked to stock market behaviours). Paradoxically, it is by refusing to face the direct consequences of the financial crisis that they are paving the way to an even greater shock.

Indeed, contrary to what they say (and maybe to what they really believe), there is no bottom to the pit that can stop the fall; or rather, there might be a bottom but its getting deeper day after day (11). Ironically, those who in the past years used to say that there was no limit to profit and benefit increases, are now trapped in a process where the bottom gets always deeper, where losses keep increasing endlessly as reference asset prices fall always lower, and where the only things that go always higher are energy and food prices. But isn’t irony one of the only identifiable features of History?

The tragic part is the billions of people now struggling to buy their food because of soaring inflation in food commodities; or the dozens of millions of people who bought houses in the US, UK or Spain these years and find themselves with endlessly devaluating assets; or the dozens of millions of employees, individual entrepreneurs and government staff about to lose their job.

US opinion on state of the nation’s economy (12/2006 – 04/2008) - Source: Washington Post/ABC News
« Was it so necessary to save « private Bear Stearns » at the price of such unprecedented financial leniency? » is the question each and everyone should be asking to financial experts. « How can we save the dozens of millions of unknown economic operators today stormed by the crisis? » will become the central question for all political, economic and financial decision-makers from this summer 2008 onward. In consideration of the virtual atmosphere according to which the manipulation of information is the utmost means of governance, our team tends to be rather pessimistic as to world leaders’ capacity in providing efficient responses to the second question. But in any event, it is this second question which is important because it still belongs to the future, even if time is running out.

In the next issue of the GEAB – the summer 2008 edition, our team will describe in detail the outlook for the second semester of 2008 in each great region of the planet; as well as the options available, region by region, sector by sector and category of asset by category of asset.

It's All About Evil - Series of Books
Notes:

(1) At that time, our team called this operation a « players’ euphoria ».

(2) Almost every day, an American, European or Asian bank announces billions of USD or EUR worth in new losses or profit reduction. In the past 5 weeks for instance: Citigroup (source: Bloomberg, 04/18/2008), UBS (source: New York Times, 05/07/2008), Crédit agricole (source: France24, 05/13/2008), HSBC (source: ICWales, 05/12/2008), Lehman Brothers (source: Financial Post, 04/17/2008), Deutsche Bank (source: International Herald Tribune, 04/29/2008), Mizuho Bank (source: India Times, 04/11/2008), Royal Bank of Scotland (source: Financial Week, 04/28/2008), etc... the complete list would be wearisome.

(3) Three bank failures already in the US in the past three months, not mentioning Bear Stearns’ bailout by JP Morgan on Fed money, and Countrywide whose providential bailer, Bank of America, is getting more and more reluctant to complete the operation. Sources: CNNMoney, 05/12/2008 & BusinessWeek, 05/06/2008.

(4) As anticipated by our team a few months ago, large insurance companies are beginning to acknowledge major losses due to the crisis. In the past few weeks, two large US insurers – AIG, the world’s leader, and State Street (close to bankruptcy) - kicked off the season. But they are only the first of a long series: like banks, insurance companies are trapped between asset depreciation and customer insolvency. Sources: CNNMoney, 05/09/2008 & DowJones/EfinancialNews, 05/08/2008.

(5) In the US, home prices fell by an average 7.7 percent in the first quarter of 2008, i.e. a 29-year record drop (since this index exists). In the UK, the government is worried that the market falls by 10 percent at least this year. Sources: Bloomberg, 05/13/2008 & Telegraph, 05/14/2008.

(6) On this topic, read Ambrose Evans-Pritchard’s very good paper in the Telegraph, 05/13/2008.

(7) In a press release dated 05/07/2008, the Federal Reserve of Atlanta stresses the fact that the US dollar reached a new historic low in April against all significant international currencies (not against the Euro only). Source : Federal Reserve Bank of Atlanta, 05/07/2008

(8) Source: European Commission, 04/28/2008

(9) As recently highlighted by David Rubinstein, head of the Carlyle Group. Source : Bloomberg, 12/05/2006

(10) Such as, for instance, Washington Mutual (source: La Tribune, 04/08/2008), Citigroup (source: BBC News, 04/29/2008), Royal Bank of Scotland (source: SkyNews, 04/22/2008) and many more like Société Générale, UBS, etc... or like those which were temporarily rescued by means of capital injections of sovereign funds. Of course, these operations must appear like as many opportunities not to miss… at least during a few months.

(11) The most striking example is provided by the US housing market whose prices keep falling while the economic recession deters potential buyers from taking advantage of falling prices, all the less since banks – which crumble under their stocks of foreclosed homes, keep reducing housing loans for potential buyers. This way, prices go down and down, bank assets lose value, household debt capacity reduces, housing-related spending – and a key sector in the US - slows down, tax revenues diminish, and potential buyers are compelled to wait. Thus the pit’s bottom gets always deeper under the feet of consumers, banks, and local, national and federal authorities. According to our team, this “downward” trend will continue until the end of 2009.

Vendredi 16 Mai 2008

In the same category:
Why LEAP/E2020 maintain their anticipation of a 1.75 EURUSD exchange rate at the end of 2008 - 16/09/2008
Five western countries will be particularly affected by the collapse of the capital-based pension system - 07/08/2008
SEQUENCE 2 – Stock market collapse in Asia and the US mainly: Between - 60% and -30% in two years according to the regions (4th quarter 2007 – 1st quarter 2009)- - 17/07/2008
LEAP/E2020 Summer 2008 Alert – July-December 2008: The world plunges into the heart of the global systemic crisis - 16/06/2008
European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst - 29/05/2008
The “Plunge Protection Team” or the diversion of an instrument of protection to the profit of a policy of manipulation - 23/04/2008
- Excerpt GEAB N°8 (October 16, 2006) -
If you were a subscriber to the GEAB, you would have read what will follows as early as October 16th, 2006:

In this context, a vast communication offensive has started. It uses the same logic as was used for the Iraqi situation before the 2004 presidential election: preventing voters from becoming aware of the extent of the disaster in progress by flooding them with fictitious news, by drowning “bad” objective news in a multitude of “good subjective news” (this is what an American economist called “the transformation of indicators into vindicators” (1)), by working out each week new explanations proving that the “positive” situation was sustainable,….

In fact, what we have seen for two months, and will see for another month, is a remarkable exercise of psychological war probably coordinated by the very secret “Working Group on Financial Markets” created by the Executive Order 12631 (2) established under Reagan (3) in March 1988, also called by the Washington Post (4), the “Plunge Protection Team”. This working group was created following the October 1987 stock exchange crisis with the objective “to promote the integrity, the effectiveness, the regularity and the competitiveness of the markets of the country, and to maintain the confidence of investors”.

This group does not produce any reports; has no public visibility and details neither the agenda, nor the composition of its meetings; is directed by the Finance Minister (Henry Paulson) and includes the president of the federal Reserve Ben S. Bernanke (former adviser of G.W. Bush, named to this position at the end of 2005) and the two presidents of the authorities monitoring the markets: the Securities and Exchange Commission, Christopher Cox (named to this position by G.W. Bush in 2005) and Reuben Jeffery III (also named by G.W. Bush to this position after having been its adviser), one of the directors of the CPA, American authority of transition in Iraq and also former member of Goldman Sachs, like H. Paulson.

We can see that the double influence of the Bush administration and the Goldman Sachs bank on this entity is total. This entity has the vocation of coordinating the actions of the main public and private American players (who are invited to participate in working groups) towards the objective of “healthy” American financial markets. Since the stopping of the publication of the M3 indicator at the end of March 2006, as well as many indicators previously allowing everyone to follow the developments of the flows of credits in dollars in the world, as well as the possible actions of the Fed and the American Treasury on the markets (5), this working group now has increased possibilities of action since they cannot be tracked down and, as indicated previously (cf notes 6), the “hedge funds” seem to be the first operators solicited to buy Dollars and to maintain its rate. For how long? and at what price? The answer will come in a few weeks after the elections.

Global systemic crisis: Four big trends over the 2008-2013 period - 16/04/2008
- Public announcement GEAB N°24 (April 16, 2008) -
As we approach the climax of the global systemic crisis (which should be reached in the second half of 2008 according to LEAP/E2020), it becomes easier to grasp the big trends about to affect foreign exchange rates, global trade and regional dynamics over the next five years. Indeed some of the characteristics of the so-called “decanting” phase of the crisis (1) are beginning to emerge. In this 24th issue of the GEAB, LEAP/E2020 therefore decided to introduce its first anticipations on big trends between now and 2011/2013. These anticipations are of course meant for the use of private investors willing to enhance their mid-term visibility. They are also relevant for exporting companies and for the economic and financial authorities in need of a similar visibility to make their strategic decisions, at a time when all the landmarks and beliefs which used to found the global economy and finance in the past decades are collapsing altogether.

In the past weeks, the world’s economic and financial operators appeared utterly disoriented, while the institutions in charge of dealing with market regulation and of supervising global economic trends display sheer powerlessness.

In this 24th issue of the GEAB, we describe four trends particularly illustrative of the global systemic crisis’ impact phase as it is about to unveil between mid-2008 and 2011/2013. It is the first time that our team is able to provide some accurate indications (completed in the “Strategic recommendations” section, P. 17) about the next 3/5 year-period.

Global financial crisis – Savers and investors trapped into USD 10,000-billion worth of « ghost-assets »

USD-denominated asset crisis – End of 2008: The US Federal Reserve and its network of « Primary Dealers » fight for their institutional and financial survival

Foreign exchange crisis - Horizon 2011/2013: Sustainable changes in the hierarchy of foreign currencies

Global social crisis – From hunger riots worldwide to the 25 million unemployed of the Very Great US Depression

Each of these sector-based crises both illustrates the historic scope conveyed by the ongoing global systemic crisis, and indicates that we are just at the beginning of the phase of impact, indeed as protections disappear one after the other, the situation automatically gets worse. This is the specific “spiralling” process of development of the present global systemic crisis, described by LEAP/E2020 in the previous issues of the GEAB.

In this public announcement, LEAP/E2020 chose to present an excerpt of the first part on the global financial crisis: Savers and investors trapped into USD 10,000-billion worth of "ghost-assets"

Global financial crisis – Savers and investors trapped into USD 10,000-billion worth of « ghost-assets »
If your banker managed to convince you to invest in the USD 10,000-billion worth of ghost-assets currently haunting the financial planet, then you have most probably lost everything even if you do not know it yet (2).

And neither G7-finance ministers nor IMF governors (who met last April 11, 12 and 13) can do anything about it. All of them are totally helpless in the face of the ongoing crisis. With staff cuts and gold sales in order to fill its deficit, the IMF today embodies the sinking of all the institutions created after WWII to regulate the world economy. The outcome of the mid-April meeting clearly reveals how incapable of working together are the various players gathered within the IMF and its various branches: on the one hand, public institutions longing for greater supervision over banking activities in order to prevent further financial catastrophes; on the other hand, banks quite satisfied with pledges of better behaviour. The only tangible result is near-to-mid-term inaction: the current crisis will continue to worsen while debates will go on at the IMF. As a matter of fact, the very concept upon which the IMF is based is outdated.

In any event, according to our experts, the estimated USD 1,000-billion worth of assets lost in the current crisis is largely underestimated (3). It is probably closer to 10,000-billion of USD (4) that are about to be lost over the coming two years (5). In other words, several large international banks will be swallowed up in the maelstrom, and along with them many companies, too fragile or depending too much on the US consumer (6).

Chart N°1: Total credit market debt in the US (in billion USD) / Chart N°2: Total credit market debt outstanding/GDP ratio - Source TheChartStore
Indeed, LEAP/E2020 would like to insist once more on this aspect: the nature of the current financial problem is both very simple to define and extremely difficult to grasp properly. There are today approximately 10,000 billion of fictitious US dollars (7) circulating on the planet which large banks are now trying to get rid at any cost in order to limit their own losses (8). But even at a reduced price, these assets remain dangerous traps because they are not worth anything and will not recover any value (9). They are “ghost-assets” no longer capable of being “embodied” in real assets.

Most of these « ghost-assets » are made of US mortgage loans, US dollars, and more generally US dollar-denominated assets, as well as British Pound Sterling-denominated assets (10). They were created from nothing in the financial euphoria of the past decade by the “sorcerers’ apprentice” of Wall Street, the City and the other major financial places of the world (11). Remember! Those were the times when every one raved about the “miracle” of this new finance which permitted to create a “financial economy” 1,000 times worth the real economy (12). Well, for some months now, the happy beneficiaries of these infinite virtual riches have been striving to find them some tangible incarnation (13). But derivative markets altogether are either collapsing or giving birth to new bubbles always more fragile and transient: real estate, US T-bonds, stocks, food commodities,... these enormous virtual financial masses are spinning around the world at an increasing pace in search of some profitable investment, of some sustainable incarnation… in vain! This quest generates fast tectonic up and down movements (over a few weeks) of asset bubbles (knowing that in the past decades bubbles used to last a few years at least), causing a general rise in prices and bringing the world each day closer to the ultimate outcome: galloping inflation... at a time when fear of a collapse in the value of all assets (including the benchmark currency) is the only thing that prevails.

The « fabulous » reserves in US currency or T-bond of China, Japan, UK, etc… are part of this cohort of « ghost-assets », and for many years to come they shall continue to haunt bank balance sheets, investors’ losses and central bankers’ nightmares. The favourite shape collectively taken by these “ghost-assets”, when they can be embodied, is called inflation. Therefore, according to LEAP/E2020, real inflation (food and energy included) will reach a yearly 10 percent average in the US, starting in the second semester of 2008 (14); it will go above 5 percent in Europe; and approach 20 percent in China. In developing countries, which depend a lot on the rate-variations of the US currency, inflation will surge as a result of different strains: energy, food, currency weakness… (complete article available in GEAB N°24 - on subscription

It's All About Evil - Series of Books
Notes:

(1) According to the sequencing established by LEAP/E2020 as early as May 2006 in GEAB N°5. About our sequencing of the global systemic crisis, see also GEAB N°6 and N° 18.

(2) Cases of savers trapped by their own bank into « risk-free » investments are multiplying. Source: New York Times, 04/13/2008

(3) Sources: Bloomberg, 03/31/2008 & Turkish Daily News, 04/10/2008

(4) It is on purpose that LEAP/E2020 uses the « billion » as benchmark unit for the enormous amounts at stake on global markets. Indeed the word « trillion », overwhelmingly used in the financial media, does not mean the same thing according to the country. In the United States, United Kingdom and Brazil in particular, a « trillion » refers to one million million, 10 to the power 12 ; but elsewhere in the world, it refers to one million million million, 10 to the power 18. Source: Wikipedia. The current crisis could nearly find its explanation in an unfortunate misunderstanding: the rest of the world thought that Wall Street was trading “big trillions” (1018) of USD-denominated assets when in fact it was “small trillions” (10 to the power 12 ), i.e. one million times less. A good enough reason to start a global systemic crisis! Ultimately, History is settling the question between defenders of the short scale and defenders of the long scale (source: Wikipedia, between those who see more billions in a trillion and those who see less of them.

(5) All those who are surprised by such an enormous figure may remember the first estimations of the subprime crisis-related losses: last summer 2007, only nine months ago, anticipated losses reached a maximum of USD 100 billion. Over less than a year, the “official” estimation was multiplied by 10. It is high time to understand once and for all that, in the coming period, worse is more likely than better, contrary to the rule that prevailed in the past ten years.

(6) The great victim of this crisis, as already explained by LEAP/E2020 in the previous issues of the GEAB.

(7) With 45,000 billion worth of CDS (Credit Default Swap - see GEAB N°19 losing value day after day, 10,000 billion only means a 25 percent drop in value. Therefore, according to LEAP/E2020, this estimation is extremely reasonable. As a matter of fact, Citigroup illustrates this situation with its recent sale of USD 12 billion of leveraged loans and bonds at an average price of 90 cents on the dollar, with a guarantee for the purchaser that Citibank will cover up to 20 percent of any further drop in the value of the loans (i.e. an anticipated drop reaching up to 70 cents on the dollar: already a 30 percent drop in the value of the financial assets of America’s largest bank). Knowing that, in the light of the past months, it is very unlikely that Citigroup was completely honest about the situation. For an increasing number of operators, these assets could be worth 10 to 30 cents on the dollar only in a few months; that is why derivative markets are frozen. Source: Reuters, 04/09/2008

(8) After Citigroup, Deutsche Bank and Goldman Sachs have also began selling off their dubious assets. Source: Reuters & MarketWatch/DowJones, 04/14/2008

(9) Worth reading: « Banks : Bleeding value and Hiding Desperation », Financial Sense, 03/24/2008

(10) In the past two years, on various occasions, LEAP/E2020 warned that the British currency would certainly collapse against the other main currencies (except the US dollar) and that the British economy, which depends completely on the US economy on the one hand and on international finance on the other hand, would be sucked up into the global systemic crisis affecting in particular those two components of the global economy. It is now obvious, even to the British authorities, that the British pound and economy are free falling. But it is only in the coming months that the negative impact of the collapsing British pound-denominated assets will combine with the negative impact of the collapsing US dollar-denominated assets. From Hong-Kong to Scandinavian countries (thus two times exposed), the shock will be hard.

(11) Worth reading: an interesting article by the Institutionnal Risk Analyst dated 04/14/2008 illustrates how « ghost assets » in fact pullulate inside financial institutions’ balance sheets.

(12) It is always enlightening to review the learned analyses produced by those institutions in charge of regulating the development of regional or global economies, such as this enthusiastic contribution published by the European Central Bank in 2005 about the evolution of financial markets by 2015. Source: ECB, 10/28/2005

(13) Senior officials from international accountancy institutes today acknowledge that bank off-balance sheet accounting rules (off-balance sheet assets accounted for a large part of the last decade’s financial growth) were « irretrievably broken ». This confession, quite surprising coming from high-level international accountants, indicates clearly that no one has the faintest idea what these assets are worth. Source: Financial Times, 04/09/2008

(14) Asia today exports its inflation towards the US. Source: New York Times, 04/08/2008

Mercredi 16 Avril 2008

In the same category:
Why LEAP/E2020 maintain their anticipation of a 1.75 EURUSD exchange rate at the end of 2008 - 16/09/2008
Five western countries will be particularly affected by the collapse of the capital-based pension system - 07/08/2008
SEQUENCE 2 – Stock market collapse in Asia and the US mainly: Between - 60% and -30% in two years according to the regions (4th quarter 2007 – 1st quarter 2009)- - 17/07/2008
LEAP/E2020 Summer 2008 Alert – July-December 2008: The world plunges into the heart of the global systemic crisis - 16/06/2008
European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst -
- Excerpt GEAB N°20 (December 16, 2007)-
If you were a subscriber to the GEAB, you would have read what will follows as early as December 16th, 2007:

Before describing the situation in new EU member-states, let’s examine the evolution of two Western European markets which LEAP/E2020 predicted were about to decline, i.e. Spain and UK.

Spain
In Spain, the situation is clearly catastrophic recording up to 50% drops in home starts over one year and inventories of unsold homes jumping from 16.4 to 24.5 months on a national scale (2). Compared to 2006, the collapse is even more perceptible as projections for 2008 anticipate about 300,000 home starts while they anticipated more than 900,000 in 2006, corresponding to a 70% drop.

House prices in Spain (March 2006 – March 2007) – Source Spanish Ministry of Housing
If, as anticipated by LEAP/E2020, 2007 was the year when the real estate bubble burst in Spain, 2008 will be for sure the year when a major economic and financial crisis soars throughout the country. All the declarations repeated by the Central Bank of Spain and the country’s major banks on the fact that this crisis has nothing in common with the US subprime crisis, are nothing but the normal soothing stance delivered whenever serious crises are ahead (all the more when they occur in a context of global credit crunch). And international investors are not fooled as illustrated by the fact that BBVA (Spain’s second largest bank) was unable to sell more than a quarter of a EUR 6.6 billion emission of mortgage-backed securities. As second most indebted country in the world (behind the US, see GEAB N°17) and with banks who fuelled to the last limit the housing bubble now bursting, Spain is ready to step into a severe social and economic crisis in 2008, according to our researchers. The collapse of the real estate market will go on and the country’s economy is heading towards a recession, in a context of national banking crisis strengthened by the international situation. This will be a decisive test, a life size one, for the leaders of the Eurozone.

United Kingdom

House prices in UK – Source Halifax
In the UK, the situation’s components are rather different though the direction is the same as in Spain. The British real estate market reversed in 2007 and the impact of the global financial crisis on the City (layoffs, end of super bonuses…) swept away the last factor that maintained under pressure the London and South-East markets. Today the City itself warns of 10% slump in British home prices in 2008 (5).

Central and Eastern Europe

Eastern Europe: Percentage of home loans in foreign currencies – June 2006 / Source BNP Paribas
In Central and Eastern Europe, the situation is different because these economies are in a process of rapid development, having recently joined the EU and preparing to join the Euro within the next 3 to 4 years. And it is a matter of currencies that will drag some of these countries into housing bubble bursts in 2008.

June/July 2008 – New tipping-point in the global systemic crisis: When the illusion that the crisis is under control fades away… - 16/05/2008
The “Plunge Protection Team” or the diversion of an instrument of protection to the profit of a policy of manipulation - 23/04/2008
European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst - 01/04/2008
Global systemic crisis – End of 2008: Pension funds go off the rails - 16/03/2008
How to survive with a euro worth 1,50 USD and an oil-barrel worth 150 USD? - 07/03/2008

European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst - 01/04/2008
Global systemic crisis – End of 2008: Pension funds go off the rails - 16/03/2008
How to survive with a euro worth 1,50 USD and an oil-barrel worth 150 USD? - 07/03/2008

The “Plunge Protection Team” or the diversion of an instrument of protection to the profit of a policy of manipulation - 23/04/2008
Global systemic crisis: Four big trends over the 2008-2013 period - 16/04/2008
European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst - 01/04/2008
Global systemic crisis – End of 2008: Pension funds go off the rails - 16/03/2008
- Excerpt GEAB N°23 (March 16, 2008) -
If you were a subscriber to the GEAB, you would have read what will follow as early as March 16, 2008:

According to LEAP/E2020, by the end of 2008, a formidable debacle will affect pension funds all over the world, endangering the entire system of capital-based pensions. This financial calamity will bear a particularly dramatic human dimension because it will come at the precise moment when the first wave of baby-boomers phase out of the labour force in the US, EU and Japan: pension fund revenues are collapsing at the very moment when they should be making their first large series of payments to pensioners. In this 23rd edition of the GEAB, our team anticipates the evolution of the upcoming pension fund crisis, details which countries are the most exposed (in particular in Europe) and provides a number of operational and strategic recommendations to face the situation.

Meanwhile, in the present issue (on subscription, LEAP/E2020 anticipates what the global systemic crisis (now obvious to everyone) will bring along in the next few months, as regards in particular to the negative side effects of the US Federal Reserve’s bank loans currently contributing to weaken even more the US financial system, and as regards also to bank exposure in the US and in the most exposed European countries. Simultaneously our team analyses the effect of today’s US economic and financial crisis on the probability and consequences of an attack on Iran by Israel and the US before the next US presidential election.

In any event, with the announcement of an emergency plan to save the US 5th largest private bank, Bear Stearns (1) (preluding to its being sold or its failing in the coming weeks), it turned out that a large financial institution indeed went bankrupt in the first quarter of 2008, as anticipated by our team in GEAB N°19 (2).

Meanwhile, the US dollar resumed plummeting against Euro, Yen, Yuan; gold soared over 1,000 USD per ounce, oil reached 110 USD per barrel, global stock markets lost 20 percent in three months, and the Fed’s most recent attempt to stop the financial crisis through a 200 billion USD bank loan plan has already proved to fail... the bases of the financial and economic order that prevailed in the last decades are collapsing under our eyes, at an increasing pace… all the signs of a systemic crisis are gathered (3).

The whole world is now aware that we are faced to a crisis of unprecedented scope and nature. This level of awareness enables our team to refine some of their anticipations. About currencies for instance, our team undertook to review their estimation of the value of the US dollar against the three other strategic currencies - Euro, Yen and Yuan. LEAP/E2020 now estimates that the EURUSD exchange rate will reach 1.75 at the end of 2008 (instead of the 1.70 estimation made in 2006); the USDYEN rate should fall down to 90 and the USDYUAN down to 6 (4).

US Dollar Index (benchmark currency basket (5)) on 03/14/2008 - Source FxStreet
Faced to the extent of the Very Great US Depression currently unfolding (6), LEAP/E2020 is glad that the US authorities took into consideration the numerous protests (7) and decided to maintain the publication of US economic indicators on the website EconomicIndicators.Gov. In such difficult times, it is important that statistical information on the US economy remains easily available to everyone. The money of a great number of private and public, individual and collective operators depends on this transparency.

In the same sense, the Federal Reserve of Atlanta distributes for free a DVD entitled « Crisis Preparedness: Reconnecting the Financial Lifeline » and designed to help operators of all kinds to anticipate a crisis and get prepared to it (8). In the perspective of a collapse of the real economy in the US (expected to happen in September 2008 according to LEAP/E2020’s anticipations (9)), these official advices take a special meaning. For instance, like we have been repeating for months, the DVD keeps saying that in the event of a severe crisis « Cash becomes king », whether the crisis is linked to a natural disaster or a human-made one, as shown by the fact that US insurers have already lost more money because of the subprime crisis than because of the Katrina hurricane, though the worse natural disaster in the history of the US (10).

Non-Borrowed reserves of US depository institutions (1950 – 02/2008) - Source Federal reserve of Saint Louis
To finish with, graphics such as the one above illustrate in a striking manner that the situation is infinitely worse that what the cleverest leader (and they are not many) can imagine. It shows that the US financial system, and that of a large part of the world, is lethally hurt. US banks have no more money; it is as simple and dramatic as that. Contagion will now enter a second phase of development, generating a new series of bank failures by this summer, as anticipated in GEAB N°20, entailing a dislocation of the global financial system in the second semester of 2008.

It's All About Evil - Series of Books
Notes:

(1) Source: Reuters, 03/14/2008

(2) In GEAB N°19 we said it would take place in February ; it is on March 14th that this first large US bank defaulted. We remind that from now on, according to our November 2007 anticipations, more US, EU and Asian banks will follow.

(3) As a matter of fact, this CNN/Money title is very lucid: « Issue N°1: America’s money ». Source: CNN/Money. That is indeed what it is all about: the pure and simple evaporation of thousands of billions of US Dollars illusively accumulated all those years on the accounts of financial institutions, companies, individuals and governments, scattered all over the world. That is exactly the problem detected in the first GEABs at the beginning of 2006.

(4) LEAP/E2020 wishes to stress the fact that in the case of a combined US/Israel attack on Iran this year, our US dollar index estimations for the end of 2008 presented in GEAB N°23 would be even worse. About the rumours suggesting that a concerted action of the central banks will put a stop to the plummeting of the US currency, they do not have any basis: a similar action can no longer be implemented because central banks now have diverging interests due to the decoupling of the world’s largest economic regions, as anticipated by LEAP/E2020 many months ago. The collapse of the US Dollar is the result of a US economy in recession and a related devaluation by 50 percent against the other big currencies.

(5) Dollar Index currencies: Euro, Yen, Canadian Dollar, British Pound, Swiss Franc and Swedish Crown. If the Chinese Yuan was added to this list, the US dollar index would fall even more dramatically.

(6) Some websites are even specialised on this subject, such as Depression2.TV whose sub-title is clear: « Surviving the second great depression ».

(7) Excerpt of the announcement posted in the website EconomicIndicators.gov : « ... ESA (Economics and Statistics Administration) initially planned to discontinue the service due to cost concerns but given the feedback ESA received, the decision has been made to continue the site and improve its functionality... ».

(8) Source: Banking Information, Federal Reserve Bank of Atlanta (to order the DVD, here is the direct link)
GEAB N°28 - Contents
- Published October 16, 2008 -
Global systemic crisis Alert - Summer 2009: The US government defaults on its debt
In this 28th edition of the GEAB, LEAP/E2020 has decided to launch a new global systemic crisis alert. Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to repay its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.)… (page 2)
Read public announcement
GEAB N°28 is available! Global systemic crisis Alert - Summer 2009: The US government defaults on its debt
- Public announcement GEAB N°28 (October 16, 2008) -
In this 28th edition of the GEAB, LEAP/E2020 has decided to launch a new global systemic crisis alert. Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to pay back its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.). Of course such a bankruptcy will provoke some very negative outcome for all USD-denominated asset holders. According to our team, the period that will then begin should be conducive to the setting up of a « new Dollar » to remedy the problem of default and of induced massive capital drain from the US. The process will result from the following five factors studied in detail further in this GEAB:

• The recent upward trend of the US Dollar is a direct and temporary consequence of the collapse of stock markets

• Thanks to its recent « political baptism », the Euro becomes a credible « safe haven » value and therefore provides a « crisis » alternative to the US dollar

• The US public debt is now swelling uncontrollably

• The ongoing collapse of US real economy prevents from finding an alternative solution to the country's defaulting

• « Strong inflation or hyper-inflation in the US in 2009? », that is the only question.

Studying the case of Iceland can give an idea of the upcoming stages of the crisis. That is what our team has been doing ever since the beginning of 2006. This country indeed provides a good illustration of what the US and the UK should be expecting. It can be considered – and that is what most Icelandic people do today – that the collapse of Iceland's financial system came from the fact that it was disproportionate to the size of the country's economy.

Inflation in Iceland - 2003-2008 - Source Central Bank of Iceland
Financially speaking, Iceland thought of itself as UK (1), in the same way as, financially speaking, UK thought of itself as the US and the US thought of themselves as the entire world. It is therefore quite useful to study the case of Iceland (2) in order to understand the course of events that London and Washington will follow in the next 12 months (3).

What we see today is a double historical phenomenon:

. on the one hand, since September 2008 (as anticipated in the February 2008 edition of the GEAB - N°22), the whole planet has become aware that a global systemic crisis is unfolding, characterised by the collapse of the US financial system and its contagion to the rest of the world.

. on the other hand, a growing number of global players are beginning to act on their own, in reaction to the ineffectiveness of the measures advocated or implemented by the US though they are the centre of this global financial system. What happened with this first Euroland (or Eurozone summit which took place on Sunday, October 12, 2008, and whose decisions, by their scope (close to 1,700-billion EUR) and their nature (4), resulted in a regain of confidence on financial markets from all over the world, is typical of the « post-September 2008 world ».

Map of deposit insurances in the EU - Source AFP - 10/09/2008
Indeed there is such a thing as a « post-September 2008 world ». According to our team, it is now clear that this past month will remain in the history books of the whole planet as the month when the global systemic crisis started; even if what is really at play is its decanting phase, the last of a series of four phases of the crisis described by LEAP/E2020 as early as June 2006 (5). As always when it comes to large human groups, the perception of change among the general public only occurs when change is already far on its way.

As a matter of fact, September 2008 is the month when the « financial detonator » of the global systemic crisis exploded. According to LEAP/E2020 indeed, this second semester 2008 is the time when « the world dives into the heart of the impact phase of the global systemic crisis » (6); which means for our researchers that, at the end of this semester, the world enters the « decanting phase » of the crisis, i.e. a phase when the outcome of the shock settles down. This phase is the longest (from 3 to 10 years, according to the country) and the one affecting the largest number of people and countries. It is also the phase when the components of new global equilibriums will start to appear, two of them being already described by LEAP/E2020 in this 28th edition of the GEAB in the graphic illustrations below (7).

Therefore, as we repeated it on and on since 2006, this crisis is far more important, in terms of impact and outcome, than the 1929 crisis. Historically, we are the very first players, witnesses and/or victims of a crisis affecting the whole planet, in a situation of unprecedented interdependence of countries (resulting from twenty years of globalisation) and people (the level of urbanization - and related dependence for all the basic needs – water, food, energy… - is also unprecedented). However, the 1929 experience and all its dreadful outcome, is still vivid enough in our collective memories to hope, if citizens are vigilant and leaders clear-sighted, that we will be spared from a « remake » leading to major conflagration(s).

Europe, Russia, China, Japan,... are certainly the collective players who can make sure that the unfolding implosion of today’s world power, i.e. the United States, does not drive the planet into a disaster. Indeed, except for Gorbachev’s USSR, empires have a tendency to strive in vain to reverse the course of History when they realize their might is escaping them. It then belongs to partner-powers to channel the process peacefully, as well as it belongs to the citizens and rulers of the concerned country to be clear-sighted and face the difficult times they are about to cross.

Total borrowings of US Depository Institutions from the US Federal Reserve (01/08/1986 – 10/09/2008) - Source Federal Reserve Bank of St Louis
The « emergency repair » of international financial channels, achieved by the countries of the Eurozone at the beginning of this month of October 2008 (8), should not hide three fundamental facts:

• The “repair” was necessary to curb the panic that threatened to squander the entire global financial system in just a few weeks, but what it heals temporarily is merely a symptom. It has just bought a bit of time, two to three months maximum, as the global recession and the collapse of the US economy (the table above shows the staggering increase of US banks’ borrowings from the Fed) will speed up and create new tensions in the economic, social and political fields, that must be anticipated and coped with as soon as next month (as soon as the “financial packages” have been implemented)

• The huge financial means allocated worldwide for « emergency rescues » of the global financial system, though they were necessary to put back in order the system of credit, are lost for the real economy when it is on the verge of facing a global recession

• The « emergency repair » results in further marginalization, and therefore weakening, for the United States, because it sets up processes that are contrary to those advocated by Washington for the allocation of the Hank Paulson’s and Ben Bernanke’s 700-billion USD TARP: bank recapitalisation by governments (a decision Hank Paulson has now come to follow) and interbank loan guarantees (in fact Euroland governments substitute to credit insurers, a mostly American industry at the centre of global finance since decades). These trends turn more and more decision-making relays and financial flows away from the United-States when because of the explosion of their public (9) and private debt they need them more than ever; not to mention pensions going up in smoke (10).

The last aspect shows how, in the coming months, solutions to the crisis and to its various sequences (financial, economic, social and political) will increasingly diverge: what is good for the rest of the world will not be good for the United States (11), and now, Euroland in the first place, the rest of the world seems determined to make its own choices.

The sudden shock that will result from the US defaulting in summer 2009 is partly due to this decoupling of decision-making processes of the world’s largest economies with regard to the US. It is predictable and can be dampened if global players start to anticipate it. As a matter of fact, it is one of the topics developed in this 28th edition of the GEAB: LEAP/E2020 hopes that the September shock has “educated” the world’s political, economic and financial policy-makers and made them understand that it is easier to act by anticipation than in a panic. It would be a pity if Euroland, Asia and oil-producing countries, as well as US citizens of course, discover one morning of summer 2009 that, after a long-week-end or bank-holiday in the US, their US T-Bonds and Dollars are only worth 10 percent of their value because a « new Dollar » has just been imposed (12).

It's All About Evil - Series of Books
Notes:

(1) Iceland adopted 10 years ago all the principles of economic deregulation and « financieration » advocated and implemented in the US and UK. Reykjavik thus became some sort of a financial « Mini-Me » of London and Washington, in reference to the very Americano-British movie character Austin Powers. The three countries undertook to play the financial game of « the frog that wished to be as big as the ox », in reference to a fable by Jean de la Fontaine with a very unhappy end for the frog.

(2) Icelandic stocks collapsed 76 percent after a few days suspension designed to « avoid » a panic! Source: MarketWatch, 10/14/2008

(3) On this subject, let's spend a few lines on the amount of the “financial package” announced by London, i.e. 640-billion EUR including 64-billion EUR to recapitalize banks and a further 320-billion EUR pay back those same banks’ debt (source: Financial Times, 10/09/2008). With an economy in freefall to the image of the real-estate market, with a soaring inflation, with capital-based pensions going up in smoke and a currency at the lowest,… apart from increasing the public debt and weakening even more the Sterling pound, it is difficult to imagine how the plan can « rescue » British banks. Contrary to Eurozone banks, the British financial system, exactly like its US counterpart, is at the centre of the crisis, not a collateral victim. Gordon Brown may well compare himself to Churchill and Roosevelt together (Source: Telegraph, 10/14/2008), in his ignorance of History, he seems to forget that neither Churchill nor Roosevelt had already spent 10 years in their country's governments when each of them had to cope with their « big crisis » (that goes for the US and the Bush administration – Paulson and Bernanke included - who all come from the problem and are certainly not part of the solution). Not to mention the fact that Churchill and Roosevelt organised summits such as Yalta or Tehran leaving the French and the Germans waiting at the door, while today it is him who waits at the door of the Euroland summit.

(4) Source: L'Express, 10/13/2008

(5) Source: GEAB N°5, May 15, 2006

(6) Source: GEAB N°26, June 15, 2008

(7) LEAP/E2020 made a synthesis of its anticipations on the decanting phase of the crisis by means of a world map of the impact of the crisis based on the identification of 6 large groups of countries; and of an anticipatory schedule of the 4 financial, economic, social and political sequences over 2008-2013 for each of these regions.

(8) It is indeed the Eurozone which curbed the spiral of global panic. For weeks, the US and British initiatives followed one another without any effect. The eruption of a new collective player, the « Euroland summit », and the wide-ranging decisions it made, are a new and soothing phenomenon. It is for this very reason that Washington and London have systematically prevented such a summit from taking place ever since the Euro was launched, 6 years ago. A complete set of diplomatic gesticulation was required (preliminary meeting, pre-summit group photo,…) to make the British Prime Minister believe he was not set aside the process, when in fact there is no reason why he should take part in a Euroland Summit. In this edition of the GEAB, LEAP/E202020 comes back on the phenomenon and the long-term systemic consequences of this 1st Euroland Summit.

(9) The US financial rescue plan has already increased by 17,000 USD the debt owned by each US citizen. Source: CommodityOnline, 10/06/2008

(10) It is indeed 2,000-billion USD of capital-based pensions which evaporated in the past few weeks in the US. Source: USAToday, 10/08/2008

(11) At least in the short-term. Indeed our team is convinced that it is not bad at all for the American people in the medium- and long-term if the system currently prevailing in Washington and New-York is fundamentally reappraised. This system has thrust the country into dramatic problems among which dozens of millions of US citizens now struggle, as illustrated in this article by the New York Times dated 10/11/2008.

(12) Even if it will be a minor-scale measure compared to the prospect of a US bankruptcy, those who think that it is time to invest again on financial markets may find useful to learn that the New York Stock Exchange has recently reviewed all its circuit-breaker thresholds as a result of ratings collapse. Source : NYSE/Euronext, 09/30/2008