Money system: meltdown by the end of 2009
1. Disappearance of the financial base (Dollars & Debts) all over the world
A very simple image illustrates the global insolvency characteristic of today’s global financial system: the financial base which banks, insurers and global financial institutions were resting upon, is collapsing in the same way as a city built on a huge fault would collapse, suddenly realizing that what was meant to be solid land intended to firmly support the city’s buildings is nothing but a thin crust of earth over a mixture of a void, toxic gas and unstable ballast. Of course the financial equivalent of this mixture is the highly volatile combination of US Dollars, USD-denominated assets and debts, produced in particular by the US, the UK and a number of developed and developing economies (1).
This situation is not at all addressed by any of the measures taken today against the crisis worldwide. US, EU, Japanese and Chinese leaders content themselves with injecting massive amounts of new liquidity in the form of Dollars, Euros, Yen or Yuan, and with trying to substitute public debts for toxic private ones, as if adding more gas and exchanging very unstable ballast for unstable ballast would prevent the city from collapsing. In fact, these massive injections of liquidity, especially in the US where the amounts involved are now beyond belief (close to USD 10,000-billion in one year), result in an even more rarified gas created by a continual depreciation of the value money; while the exponential increase of public debt is making public assets (T-Bonds in particular) as toxic as the private ones they are supposed to replace.
The fact remains that the consequence of this situation is an acceleration of the process of dislocation of the base which supported our world for decades and for the last twenty years in particular.
Click here to watch the chart: Estimated loss of UK Commercial Banks and Building Societies as % of UK GDP and public debt - Source Bridgewater - 02/2009
The more a country or a region depends on the US Dollar (2) (and/or on USD-denominated assets) and on the level of indebtedness of its economic players (households, companies, municipalities, states), the more the very fabric of its society will be dislocated starting in the fourth quarter of 2009; or, to be more precise, the more the process of dislocation will become obvious and speed up - in fact it is already well on its way in many cases, as we shall see when we examine the big global players further and in greater detail in this GEAB.
The symptoms are easy to identify: balance sheets less and less balanced, assets continuously losing value, public deficits exponentially growing, frozen public services, growing incapacity in addressing financial commitments of all sorts, multiplication of corporate bankruptcies, loss of confidence in paper money,… (3) . As Jean de la Fontaine said in his fable « The Animals Stricken with The Plague »: « All were attacked, although all did not die» (4). If indeed, according to LEAP/E2020, the US and the UK are the most severely affected, it is obvious that the rest of the world will also suffer from the very severe consequences of the collapse of our decades old financial base (5).
In the last edition of the GEAB (GEAB N°31), we estimated that the amount of « ghost-assets » which went up in smoke since 2006 exceeded USD 30,000-billion. To date, less than a third of this amount has been accounted for in the form of asset depreciation or in the form of public money injected to replace « private ghost-assets ». Contrary to what our leaders think (6), this last measure only results in replacing private ghost-assets by public ones (7). At this rate, the President and Congress of the United States (8) would have been wiser to call the three heroes of the film « Ghostbusters » to find a solution to the problem of ghost-assets than rely on the very questionable skills of the trio made up of the Fed’s Chairman Ben Bernanke, the new US Treasury Secretary Timothy Geithner and the White House head of economic advisers Lawrence Summers (9).
This process of the disappearance of the global financial base will result, at the end of 2009, in a speeding up of the process of power-, wealth-, influence- and living standard-reduction for a large number of major geopolitical players - but at varying speeds and in different proportions: the world is about to drastically shrink but not in the same way for everybody. This evolution will be a key component of the phase of global geopolitical dislocation, some sort of a sudden card reshuffling on a global scale. As we have highlighted many times, the big economic players, as much as many states or regions, will be concerned.
The table below clearly illustrates how large international banks shrank with the crisis to different extents. As we explained in a number of previous editions, the proportion of the financial sector in the economy of a country provides an indicator of how seriously this country will be affected by the crisis. The table below highlights some clear trends in this regard.
Click here to watch the chart: Compared market value of the world’s largest banks – In blue En bleu, as of Quarter 2007 / In green, as of 01/20/2009 - Source JPMorgan / Bloomberg (01/20/2009) http://www.leap2020.eu/photo/grande-1545386-2064784.jpg?ibox
2. Fragmentation of the interests of the global system’s big players and blocks
The second destructuring process contributing to the global geopolitical dislocation consists of an increasing fragmentation of the interests of the global system’s big players and blocks. The current debate on the dangers of a return to protectionism is both an indicator and a component of this process. Indeed protectionism is back, because the globalisation of the last two decades has come to a grinding halt. Global leaders’ speeches on this subject are pathetic insomuch as they keep repeating their opposition to any such return and their will to revive the Doha round of free trade negotiations (10); but in fact, they are doing the exact opposite, witness Obama’s “Buy-American” campaign (11), Gordon Brown’s competitive devaluation of the Pound Sterling, Nicolas Sarkozy’s aid to the French motor industry, Angela Merkel’s carefully “Germany” targeted stimulus plan, or Hu Jintao’s project of Chinese domestic demand stimulation.
Global leaders are becoming schizophrenic: their actions and their lanuguage diverge more and more. And this is the reason why LEAP/E2020 estimates that the last “launch” window available to initiate a credible alternative to the global geopolitical dislocation process is located between the upcoming April 2009 G20 Summit and this summer. Thereafter, the world’s leaders will no longer even keep up the pretense of having commonly held views. Their own political survival, within their own countries, will force them to concentrate on emergency short and medium term solutions. Unemployment will drastically rise among the myriads of international experts who used to be the kingpins of global free trade in past decades. However, as often the case with experts (who are in the end normal human beings), they will probably switch to a new type of ideology and start advocating the merits of protectionism or the wonders of regional integration, with no shame whatsoever. In fact, this tendency is already visible in most main financial and political media.
This fragmentation will follow a relatively simple scheme:
. the big exporting powers (China, Japan and Germany, as well as the EU altogether) currently striving to preserve their access to the remaining solvent markets, will have to take stock of the situation in mid-2009. If their efforts appear to be in vain or uncertain because global trade is freefalling (12), they will have no other choice than turn to their domestic markets if they are solvent enough (13), or else they will soon turn to regional strategies at the expense of existing multilateral agreements and rules. Neither the WTO nor the UN and its agencies will be able to do much about it insofar as these organisations get their sole power from the fact that at least a large part of their members agree on respecting the rules of the game. If, on the contrary, their members prefer to disregard the rules, these institutions are doomed to become powerless (14).
. this fragmentation, which in fact is nothing less than subsidiarity for the sake of the common interest (in other words, a general stampede), could unwind in a fractal manner. This means that each State - and inside each State, each region, province, federal state (insofar as they exist politically), will in turn be tempted to make a quick assessment of their vital interests and of how much it will cost them to continue to observe the decades old rules. Crises of historic dimension such as this global systemic crisis have a tendency to undermine the most « obvious » facts in terms of territorial integrity or political loyalty. Every organised group, equipped with some assets, tends to wonder if he might not be better off alone than inside a larger entity. We shall examine later the impact of this tendency on the United States and the European Union.
The first conflicts amongst « allies » are already shaping up under our noses. When French president Nicolas Sarkozy publicly denounces the inefficiency of the policy led by his British counterpart Gordon Brown (15) or when he casts doubt on the single European market’s ability to limit businesses’ relocation elsewhere, we are already at the stage described above. When Gordon Brown and a number of other British leaders call for job priority for British workers ahead of foreigners (including EU citizens), this is already a complete break from the agreed rules amongst EU partners (16). When the Chinese leaders vehemently criticize the current lack of alternatives for diversification out of US Dollars and T-Bonds, or when the Yuan (17) is the only currency to be criticised during the recent G7 Summit in Rome, these are again cases of fragmentation (18). When US President Obama’s administration prepares to launch a violent offensive against China in the field of human rights, energy and climate change, in a context of growing trade tensions, fragmentation of the global game is clearly speeding up (19). When Russian Prime Minister Vladimir Putin blames Washington and London for being at the heart of the current crisis (20), and when mute assent is the only reaction on the part of the majority of EU leaders (21), we get a hint of tomorrow’s fragmentation. When Temasek, Singapore’s Sovereign Fund, suddenly changes its leadership to redirect its investments away from British and US financial institutions, we understand that the fragmentation of the present system is gaining momentum (22).
A few more months at this pace and no one will care anymore about social conventions, and the process of global geopolitical dislocation will definitely be underway.
(1) Dubai is a perfect example of this image of a city built on soft ground (in this case, on sand) ; indeed, the Emirate is now experiencing a general price collapse of all the wonderful real estate investments made in the past few years. Source : Khaleej Times, 02/02/2009
(2) The Pound Sterling being just an annexe of the Dollar zone.
(3) As always, the weakest are also the first to suffer, as illustrated by Ukraine currently thrust into a very severe depressionary spiral. The western « godfathers » of the Orange Revolution are indeed short of capital. Source: Financial Times, 02/08/2009
(4) To discover or read again this strikingly timely fable: The Animals stricken with the plague.
(5) This is precisely the reason why LEAP/E2020 decided, as early as February 2006, to call this crisis a « global systemic crisis ».
(6) CNN echoes a number of interesting scientific experiments aimed at understanding why, within a given group, people tend to think in the same way. Their findings perfectly apply to the G7, G8 or G20, suggesting that it is very unlikely that we will see any bold and creative thought emerge from their gatherings. Source : CNN, 01/15/2009
(7) As a matter of fact, T-Bond purchasers make no mistake about it. Source: Telegraph, 02/08/2009
(8) Oil-producing countries from the Persian Gulf, who have already lost USD 2,500-billion in the crisis, would be wise to do the same. Source: BBC, 01/17/2009
(9) The following names could be added to the list – though in second place: Mervyn King, Gordon Brown and Alistair Darling; as well as all decision-makers from the countries whose economy greatly depends on the Dollar zone, or who massively invested in USD-denominated assets. See previous GEABs on this subject.
(10) It is interesting to notice that the weakest countries involved in globalization, such as the Philippines, are paying the high price of the system’s collapse. Source : Asia Times, 02/13/2009
(11) Source: RTE, 02/03/2009
(12) Source: MarketOracle, 01/15/2009
(13) I.e in particular, if it is big enough to absorb a significant part of their exports. Apart from the EU and China (part of it), this is not the case for any major exporting power.
(14) For instance, the IMF is begging for funds, without much success, to get ready to play its role as the crisis worsens. The “every man for himself” game has started. Source : Telegraph, 02/08/2009
(15) Source: La Dépêche, 02/06/2009
(16) Source: Times, 02/12/2009
(17) Which is the height of dishonesty knowing that the US Dollar is the main culprit in today’s monetary disorder.
(18) Some of these leaders in fact expressed themselves extremely vehemently when they mentioned their hatred of the US for putting them in this dramatic situation, dumping them with assets doomed to lose value. When a partner is in such a state of mind, he will not remain a constructive partner very long. Source: Financial Times, 02/11/2009
(19) Source: International Herald Tribune, 02/11/2009
(20) Source: Australian Business / Wall Street Journal, 01/29/2009
(21) As a matter of fact, the European leaders are careful not to make any comment on the EUR/USD exchange rate: they worry too much about the risk of a sudden drop in value of the US currency, driving the Euro towards peaks incompatible with the economic interests of the Euro zone. Source: MarketWatch, 02/09/2009
(22) Source: Telegraph, 02/06/2009