How did you get here ?
Now, currencies go up and currencies go down, following the natural path of inflows and outflows of cash observed among intermingled world economies, creating via these equilibriums terms of the tokens of trade and the valuation of resulting liabilities for the debtors in these equilibriums and assets for creditor nations. But we noted 15 months ago a heightened sense of angst among the mainstream business press, a less convincing tone to their cheerleading of this financial capitalism in which they've so much invested, and we note it today in even greater measure.
And with reason.
The US has been running current account deficits on the order of 4-6% per year the past decade. For each dollar of good and services sold by the US economy, roughly five cents of consumption has been financed from abroad. For every twenty bags of cheetohs eaten in front of a right-wing blogger's computer screen, another bag was spotted him by the People's Bank of China, in exchange for, among other things, a serious chunk of IOUs. That's a serious shitload of cheetohs your lot have been eating in the dark in front of your computer terminals
And those IOUs are coming due. The global markets are positioning themselves to serve a series of margin calls on the US economy. What comes next is anyone's guess, but what appears clear, both from the actions of the US central bank, and from its government, is that the ruling US political and economic elite are about as capable of reform as the Brezhnevian holdouts in Gorbachev's Soviet Union.
Argentina, here we come.
The fact is, the United States has evolved, fiscally, economically, and financially, into one big Argentina. Its central banker prints money by the hundreds of billions, in just the past week printing $400 billions, first $200 bn to prop up a sagging US stock market and help out his portfolio manager buddies who need to produce good Q1 numbers to get bonuses big enough to pay for their multi-million dollar yachts. $200 billion buys about 5,000 yachts at $40M each, and my sources tell me that this basically covers Tribeca. Then, less than a week later, Mr Bernanke prints off another $200 billion to make sure his buddies at Bear Stearns keep their Maseratis and avoid SEC reporting of their shenanigans, not only avoiding the failure of the bank but also some untoward Enron-style investigations in the aftermath. $30 billion of the total specifically earmarked for JP Morgan for them to help cover the crimes at Bear. It's a tough slog for most working Americans, but if you're in a suit and you have Ben's ear, you are probably making out ok.
3% of US GDP, printed by the Bernanke Federal Reserve, injected into the economy, in less than one week, to pay for Bear Stearns executives' Maseratis, and Wall Street portfolio managers' $40 million custom yachts.
Wall Street Gang Bang.
Ok, how exactly is this stacking up, who's got who's back, and why? In short, who among your political elite is sucking whom, while you get fucked, and how does the piper providing the soundtrack get paid?
Well, we know that Ben Bernanke, like most wealthy people in America, is looking out for number one, and he knows who's going to "butter his bread," as they say in America, when he "resigns to spend more time with his family". The same backs who he is busy covering (while not scratching) now, ones covered by Marks and Spencer suits in lower Manhattan. That much is simple, money speaks for money and the devil for his own.
But what's that sound track the piper is piping in? Is it Ross Perot's sound of sucking, money out of your wallet and into those of executives on the Street? Or is it the basic sounds from a tacky American porn film, filled with as many fake tits and penile enlargements as a new suburban development which, like mushrooms on a log, sprung up with all that easy money Ben's busy covering today, filled with all the same fake charm and neighborly goodness. Probably some combination of the two?
Fainter still, but definitely discernable, is the sound of one hand scratching another's back, from the Fed to Wall Street and all the money conduits in between.
But how do you get fucked in all of this? And to the Americans in the audience, lets be clear what's going on here, you are about to get fucked, really fucked. This is somewhat complicated and I know most of you didn't get this in school, especially those who went to business school to learn how to be cheerleaders for Anglo-American capitalism, so bear with me.
News you can use: A short discussion of monetary theory and how it fucks you today.
Helicopter Ben is printing money today. He's basically just printing dollars. Ink's in the injection cartridge, the press is rolling, and Ben Franklins are rolling off the cylinder and into bags loaded into proverbial electronic trucks being shipped to Wall Street at this very instant. No corresponding wealth is being created from this money today. Nor is he printing money to finance future generation of wealth. He's not printing money to lend it to your neighbor to build a successful business which generates a tax base, pays its workers well and respects their rights. He's printing money to cover for prior destruction of wealth, that his buddies in Washington and on Wall Street colluded to pull off.
And, for lefties here, forgive me if I ask your indulgence, as a committed socialist, to trust me on this one, but one of the few things the vile Milton Friedman got right in his life (and in fact got the Nobel in Economics for) is this: when you print money and do not generate credible wealth, you pay for this via a tax called inflation.
Now, if you must have a market economy, a little inflation can be a good thing. As long as it accompanies extension of credit which in turn creates equitably distributed wealth and jobs, it's a good thing. When it accompanies credit to generate wealth used to finance $40M yachts, it's less good. But when inflation is no longer the grease to create wealth, but rather, as today, the whiskey to forget about past sins behind the alter at the moneychanger's temple, there's only one way to pay the piper. And that's by paying him more than you had to before.
Typically, this is done by increasing the interest rate you are required to pay the piper tomorrow for the tune he or she is playing for you today.
Think of it this way: your mortgage rate today might be at 6%. Two years from now (and this is a very plausible situation) it might be 12%. Hell, it might even be more than that for a while, significantly more, ask any Argentine about the past decade.
No problem, you say? Well, good for you, you get to sit tight in your house, you don't have to move, you have a secure job, and the value of your house, source of wealth for the vast majority of the American middle class, is of no matter to you.
But if you are really worrying about your net worth, you might have to sell your house, you might be near retirement and planning on a move to a condo or smaller home somewhere warmer, things virtually all of us sooner or later think about, this is of concern to you. Because a home's value, like that of a long bond, is simply a function of its yield, expressed in market rates for long term mortgages. In other words, your house is only worth the monthly payment that the sort of person who might be interested in buying it can afford. After all, markets are a signal of value, even in our Socialist worker's paradise where Cheney gets an unheated cell in the Wyoming re-education camp gulag, even if we must vigorously seek to minimize and manage the deleterious effects of their fluctuations.
And how does this work in mathematical terms? Let's examine. Let's say you own a home, which today, after taking a bit of a drop in value, you can sell for $250K to someone who has the credit and documentable income profile (a dwindling class in America, alas) to qualify for a 6% loan.
Now, imagine mortgage rates at 12%, which is a conservative estimate of where they might need to be to stabilise the US Dollar in the aftermath of the crisis upon which we are now embarking. (Ask your parents about mortgage rates in the late `70's or early `80's for American-style details.)
Given the afforded monthly payment that a 12% mortgage rate implies, your asset is now worth $145K, or 40% less than what it is worth today. Same mortgage payment on a fully financed asset, $1,500, that`s what a home buyer making a bit more than the median household income can afford.
Imagine that - you thought you were doing good at 60% loan to val, and next thing you know it, you too, like all those crazy people flipping McMansions in Rancho Cucamonga, are tits up and underwater on your house.
Make no mistake, you are being fucked, and a rough estimate of the fucked-itude might be to estimate the current value of your assets and multiply by 0.4. That's $4,000 on every $10,000 you have in net worth, and Ben Bernanke is taking it from you and giving it to his buddies on Wall Street so they can make their yacht and Maserati payments.
Where do the Democrats figure into this unfolding crisis
While Wall Street sure knows who's buttering their toast, what Americans of limited means do not know is who is looking out for them , and unfortunately, the answer is virtually no one. The Republicans are the party of Wealth, so these actions are of a pair with their policy goals and priorities.
And certainly not the Democrats, unfortunately. Given the magnitude of the unfolding financial crisis, it is truly disheartening to see the Presidential candidates effectively silent on the subject. But even worse than that, exhibit A in the Democrats failing to protect working Americans, all the while pretending to be of an opposition party: Powerful Democratic chairman of the U.S. congressional Joint Economic Committee Senator Charles Schumer. Here's what he had to say yesterday when Bernanke fired up his vacuum cleaner to clean out your pockets and dump them on Wall Street:
WASHINGTON (Reuters) - The chairman of the U.S. congressional Joint Economic Committee on Monday endorsed the actions of the Federal Reserve to broker JPMorgan Chase's purchase of Bear Stearns to fend off what he said was "the closest thing to a bank panic since the Great Depression."
"The Fed's move was smart, timely and threads the needle just the right way. There is no moral hazard argument here against this action," Sen. Charles Schumer, a New York Democrat, said in a statement. "This was a totally necessary move to prevent these serious problems from spreading, and to avert a possible meltdown of the financial system."
Moral hazard is the concept that investors might take greater risks on the belief that government policy will protect them from suffering losses...
Schumer also sits on the Senate Banking Committee, which has jurisdiction over issues involving the financial services sector. He said regulation of investment banks is something that needs to be considered.
"Our financial markets have evolved so that we now have three types of entities: We have banks and they are pretty well regulated. (!!!) We have investment banks, which were not regulated very much; and now we have hedge funds," the lawmaker said in a separate interview on CNBC...
Later on a call with reporters, Schumer said it was hard to believe that major complicated credit instruments that affect the health of the financial system are opaque and unregulated.
(That last phrase the Senator from New York makes is truly Bushesque in its disingenuousness. Schumer of course forgets that the last Democratic President signed into law the repeal of Glass-Steagall act which hitherto had largely provided the regulatory framework whose absence Schumer now bemoans. And he has reason to forget: he voted for that repeal.)
With friends like Democratic Senator Schumer, a working man doesn't need enemies. For those of you who wondered what the hell Nader was talking about when he said there was essentially no difference, where it counted, between Democrats and Republicans, it was precisely this. It might be a good idea to stop blaming the Naders of our political spectrum, who may be megalomaniacs but are on our side, and start seeing the real enemies also include folks like Charles Schumer, who may look like pragmatic politicians on our side, but are really fucking us.
Back to Astor Piazzolla's Buenos Aires
Today, economic policy makers are deep into disaster planning scenarios. That's why Helicopter Ben is printing money to help his wealthy friends. We are well past talking about tipping points. And Argentina in the 1990's tells us a thing or two about tipping points in a more or less stable geopolitical environment.
Back then, everyone knew Argentina's position in the '90's was unsustainable. Damn near every issue of the Economist talked about it. Mendoza state was printing money (essentially issuing debt) to pay its public service workers. The country ran twin deficits, just like America, public and trade. The public deficits were in the 2% of GDP range, less than America of course, but then, the Argentine peso was hardly a reserve currency anymore, so there was no effective zero-interest financing available to it either. And the trade deficit was, like America's, pretty structural as well, for the most part in the 3-5% of gdp range throughout the 90's, again roughly half that run in America today. And masked, like America, by offsetting capital inflows, as it sold off (mostly public) assets to foreigners, like the IMF told it to do, to fund its spending spree without getting the wealthy to pay their taxes.
And, just like America, the federal public deficit seen at first glance masked even deeper structural flaws - its states were also running up debt, as is the case in the US (witness California's recent bonding in order pay essentially operating expenses which, being denominated in USD, were backed by the US Central Bank, not terribly dissimilar to the situation of Mendoza state issuing its own currency).
Such imbalances are accidents waiting to happen, and like the situation in the US, there were many, in particular American and Spanish banks, who had an interest in making sure that when the accident came to pass, it happened in an orderly fashion in a manner which protected their assets, all the while reserving for losses on those assets. Accordingly, Banco Santander and Banco Bilbao Vizcaya both foresaw the risk (that is what risk managers do) and, when the boom finally got lowered, when the Argentine Peso lost 40% of its value overnight, exposing the banks collectively to approximately EUR 1.5 billion in losses in nominal terms, their reserves were sufficiently large as to not even warrant an analyst downgrade. Such was not, of course, the case for a large segment of the Argentine population, and when they started going hungry, they began to riot, bringing down the government.
When the whip comes down
America is no Argentina. For one thing, its economy is far bigger and, well at least historically, is far more diversified. For another, America still has a lot of interest-free creditors, though their willingness to so remain lessens with each passing Bernanke action. The inherent advantage of the faith and credit of a government whose central bank issues the world's premier reserve currency is not an advantage to be treated lightly, but treat it lightly America's political elite have done for the past two decades.
It's still probably likely that America's economic standing will observe a long, gradual, secular decline, and its currency will continue to weaken, in fits and starts. Working Americans, with no real protections from the inflationary effects of all this, and no safety net other than the ruling class ideology of "personal responsibility for rubes, subsidies for me," will suffer every bit as much as working Argentines earlier this decade, despite the far greater wealth which surrounds them. The tent cities are already growing, in metro Los Anegeles and beyond.
And a serious run on the dollar is not out of the question. Major issues with inflation are now pretty much a given, and eventually, as stated before, this situation will need to be dealt with via draconian measures, namely double digit interest rates and, if America's wealthy can't come to pay their fair share, a gradual bankrupting of the treasury.
The reasons for this are multiple. First, US twin deficits are not only unsustainable, they are, in nominal terms, roughly double those in Argentina. Second, lenders to America have already signaled their unwillingness to continue to throw good money after bad simply to maintain the value of their existing USD-denominated holdings. Third, like in Argentina's case, foreign banks have already begun the write-down of US assets in earnest; that the boom will fall is now only a matter of time, the losses having already been priced into expectations, it is as if the boom has already taken place, after all. Recall that $1.5 billions were enough to cover foreign bank exposure to losses in Argentina, prompting the IMF to pull the plug on Buenos Aires, sending Argentina into a depressionary spiral. Possible exposure to US losses? Bloomberg's latest tally is well over 100 times that.
Unsurprisingly, the dollar tumbles against the Euro. But the real pain hits when the same things happen with the renminbi and the yen. And then what? The US produces less and less stuff, so it's not like it can export itself out of this. Again, like Argentina, when the boom falls, it will be painful to average citizens. And I think we all remember what happened in Argentina: middle class soup kitchens, homelessness, hunger.
Of course, the good news is that only after such a crisis and misery befalling Argentina's middle class was real reform possible, and poverty rates are falling, economic growth robust, and the neo-liberal orthodoxy has been chucked away like the cheap, ill-fitting suit it always was.
But is Amerika capable of reforming like Argentina?
In any event, one thing is clear. The US economy has nowhere to go but down. It has already begun. All bubbles come to an end, credit bubbles especially. And while it is impossible to predict day the bubble definitively bursts, it is also impossible to avoid the fact that one day it will. And when it does, Americans, middle-class on up, be forced to live within their means. The middle class will suffer greatly. The rich will simply be less rich. And the poor, well, they've been suffering under one-party neo-liberalism for the better part of three decades, so there's nothing left to lose for many among their ranks. The day will come, and probably sooner than later - that much is easy to predict - and in you are in the US with assets there now, you're going to notice it much more than you do already.
Unpredictable is what follows, both in terms of global economic impact, and internal political impact in the US.
Unfortunately, it's doubtful America has the ideological wherewithal to actually push proper reforms to remedy the structural situation its economy finds itself in, hamstrung by extremist neo-liberal ideology. This is because that orthodoxy is practised by the only two political parties in that country, resulting in a one-party neo-liberal state for all matters fiscal and economic. And without a voice for economic and fiscal alternatives, with the virtual absence of a credible opposition, with press organs controlled by the same interests which fund both political parties, it is simply hard to imagine a proper case being given wide berth, and even made, for the sorts of economic reforms Argentina put in place after its collapse. Reforms which have put Argentina back on the road to shared prosperity, long road though it be.
Nobody's crying for America these days
Saint Barack Obama may have put folks on notice that over-vociferous criticism of Amerika is uncool, but the fact is, if you live outside of Amerika, the sorts of commentaries to which, when voiced by his close friend, he objects, enjoy wide currency outside its borders. Folks may not have all cried at Evita, hell I hated it, but most did cry for Argentina when it went broke. Given the arrogance of the United States on the global stage over the past fifteen years, it's doubtful anyone will be crying for America. You're going to be on your own to sort out this mess, I'm afraid.
When the boom falls on the US economy (and in truth, its not a matter of if, it's a matter of when, how, and how severely), it is likely that the currency will inexorably forfeit its role as premier reserve currency. It may happen as it did to Sterling - over a long period of time. Or it may, somewhat less probably, happen via a shock or two.
Will the Euro take its place? In my opinion, probably not. Rather, what will begin to emerge will be more multilaterally-managed reserves, much like the modern multinational corporation manages currency risk. This involves baskets of currencies on reserve, in direct proportion to the currency inflows and outflows forecast in the future with ones' major trading partners. And, given that the EU is the leading trader in the world, the Euro will be a major reserve currency. But so will Chinese yuan, Japanese yen, a less-weighted US dollar, and perhaps Indian rupees as well. The Euro may get a favorable bias in your typical central banker's allocation model, much like Swiss francs get today, on the basis of its historically tight monetary policy (and whether this is a good thing or not is a topic for a different discussion). But given the increasingly multilateral nature of trade, it is likely that the days of massively preferential terms of reserve for one currency or the other are going to be over, probably sooner rather than later.