How Bankers Engineered the Global Financial Collapse 2008
-not quite finished with this article still working on it-
The crisis that began in the United States has adversely affect the whole world, although not at the same time but for all their complex global impact it is worth pointing out that from a historical point of view there is nothing mysterious about the various crises and their interconnections. For almost any serious student of financial and economic history, what has happened in the past few years as the world adjusts to deep imbalances is neither unprecedented nor should have even been unexpected. The global crisis is a financial crisis driven primarily by global trade and capital imbalances, and it has unfolded in almost a textbook fashion.
There is nonetheless a tendency, especially among Continental European policymakers and the nonspecialized Western media, to see the crisis as caused by either the systematic deregulation of the financial services industry or the use and abuse of derivatives. When this crisis is viewed, however, from a historical perspective it is almost impossible to agree with either of these claims. There have been after all many well-recorded financial crises in history, dating at least from the Roman real estate crisis of AD 33, which shared many if not most characteristics of the 2007 crisis. Earlier crises occurred among financial systems under very different regulatory regimes, some less constrained and others more constrained, and in which the use of derivatives was extremely limited or even nonexistent. It is hard to see why we would explain the current crisis in a way that could not also serve as an explanation for earlier crises. Perhaps it is just easier to focus on easily understandable deficiencies. As Hyman Minsky explained,
Once the sharp financial reaction occurs, institutional deficiencies will be evident. Thus, after a crisis, it will always be possible to construct plausible arguments by emphasizing the trigger events or institutional flaws that accidents, mistakes, or easily correctable shortcomings were responsible for the disaster.
Minsky went on to argue that these
plausible
arguments miss the point. Financial instability has to do with underlying monetary and balance sheet conditions, and when these conditions exist, any financial system will tend toward instability, in fact periods of financial stability, Minsky argued, will themselves change financial behavior in ways that cause destabilizing shifts and that increase the subsequent risk of crisis. Why do underlying monetary conditions become destabilizing? Charles Kindleberger suggested that there are many different sources of monetary shock, from gold discoveries, to financial innovation, to capital recycling, that can lead eventually to instability, but the classic explanation of the origins of crises in capitalist systems, one followed by Marxist as well as many non-Marxist economists, points to imbalances between production and consumption in the major economies as the primary source of financial crisis, called monetary instability by economists.
According to this view growing income inequality and wealth concentration leave household consumers unable to absorb all that is produced within the economy. One of the consequences is that as surplus savings (savings are simply the difference between total production and total consumption) grow to unsustainable levels, and because declining consumption undermines the rationale for investing in order to expand productive facilities, these excess capital savings (elitist wealth) are increasingly directed into speculative investments or are exported abroad.
Most economists, including Marxists, have tended to see these imbalances between production and consumption as occurring and getting resolved within a single country, but in fact imbalances in one country can force obverse imbalances in other countries through the trade account. In the late nineteenth century economists like the Englishman John Hobson and the American Charles Arthur Conant, both scandalously underrated by economists today, explained how the process works. Although neither was a Marxist, it is worth noticing that Hobson did heavily influence Lenin’s theory of imperialism.
Trade Imbalances and the Global Financial Crisis
The most common explanation for trade imbalances is
mercantilism.
Broadly speaking mercantilist countries put into place policies, including most commonly import restraints and export subsidies, aimed at generating a positive balance of trade in which the country exports more than it imports. The defense of mercantilism is that it permits the practitioner to generate net inflows of assets that can be accumulated for a number of purposes. The main justification, historically, seems to have been the ability to wage war. During the classic mercantilist age a positive balance of trade (exporting manufactured products more than importing them) resulted in the accumulation of gold and silver, and this hoard of treasure assured the monarch of the ability to hire soldiers and sailors, pay for armaments, and afford costly foreign engagements. Today, of course, countries are more likely to accumulate assets mainly in the form of foreign exchange reserves at the central bank or in the form of private ownership of foreign assets. The hoard of central bank reserves is driven not so much by military needs as by the need to defend the stability of the currency, maintain payments on foreign loans and obligations, and, most important, guarantee access to imported commodities in times of financial stress.
Trade imbalances, of course, don’t always lead to crisis. In any well-functioning global trading system there are always likely to be small and temporary imbalances in trade flows. In some cases, primarily in the case of countries in the midst of a long-term investment boom like the United States for much of the nineteenth century, trade imbalances can be sustainable and even persist for many years without necessarily leading to crisis. Even in the case of the United States in the nineteenth century, however, there were financial crises nearly every decade or so, some of which were linked to trade imbalances and others caused by the
frightful miscalculations
to which Charles Arthur Conant referred.
But even otherwise sustainable trade imbalances can lead to crisis when they create fragile national balance sheets. This can happen because trade flow imbalances, of course, require their obverse, capital flow imbalances and capital flows can be and often are structured in ways that are instable and lead to fragility in national balance sheets. Still, certain kinds of trade imbalances, driven primarily by high levels of investment in the trade deficit countries, need not be destabilizing. They can persist for many years, but eventually the system automatically adjusts when many years of productive investment begin to generate the rising production of goods and services and there is a reversal in these imbalances.
The reversal of the trade imbalances occurs as either the cause or the consequence of a reversal in capital flows. As I will explain later in this chapter, countries that repay foreign investment must run current account surpluses, just as countries that run current account surpluses must be net exporters of capital. In other cases, a country that runs trade deficits for many years not driven by surging domestic investment necessarily sees anyway a rise in foreign capital inflows (trade deficits must always be funded by foreign investment). In this case, however, the liabilities generated by the inflows are not associated with an increase in domestic asset growth, and so foreign obligations rise at an unsustainable pace.
At some point, perhaps after several years, domestic prices or the value of the trade deficit country’s currency should adjust downward to the point at which there is a reversal of the trade deficit. It is only by running a trade surplus that a country can return the capital inflow that it previously imported. So although trade imbalances can exist naturally, they eventually rebalance in an orderly way. But not all trade imbalances are natural. When imbalances that are not associated with a large increase in productive investment in the deficit country become large and persist for many years, it is almost always because policy distortions, or distortions in the institutional framework constraining or governing these trade flows, have prevented the adjustment from taking place. Large and persistent trade imbalances, in other words, are almost always caused by distortions in financial, industrial, or trade policies.
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| International Central Banking Trade, Debt, Currency Exchange Imbalances |
These distortions can prevent adjustments for many years, but large imbalances ultimately are unsustainable because the capital flows that finance the trade imbalances can be reversed only with a
reversal of the trade imbalances. Eventually these imbalances will adjust in spite of policy and institutional constraints, but in this case the adjustment is often violent and can come in the form of a financial crisis. In that sense there is nothing unique, unexpected, or even surprising about the recent global crisis. It was simply the necessary and chaotic adjustment after many years of policy distortions that forced large and persistent capital imbalances.
The main imbalances of recent years were the very large trade surpluses during the past decade of China, Germany, and Japan and the very large trade deficits of the United States and peripheral Europe. There are many precedents to the global crisis through which we are living. In fact many, if not most, of the global and regional crises that preceded it during the past two hundred years were driven by the same kinds of imbalances, most famously the global crisis in the 1930s and the so-called LDC (less developed countries) crisis in the 1980s.
So none of what is happening today is new, but what is often forgotten is that policies in the country or countries that first suffered from the crises usually the trade deficit countries have not always, and perhaps not even usually, caused the distortions. It is important to recognize that these imbalances had their roots in policy distortions in both the countries that ran large trade deficits and those that ran large trade surpluses. For the former, the large deficits led to unsustainable increases in debt and, ultimately, to the deleveraging process necessary to restore balance. It is this deleveraging process that is at the heart of the global financial crisis.
In the last few years of his life, John Maynard Keynes was much preoccupied with the question of balance in international trade. He was the leader of the British delegation to the United Nations Monetary and Financial Conference in 1944 that established the Bretton Woods system of international currency management.
He was the principal author of a proposal — the so-called Keynes Plan — for an International Clearing Union. The International Clearing Union (ICU) was one of the institutions proposed to be set up at the 1944 United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire by British economist John Maynard Keynes. Its aim was to have been regulation of currency exchange, a role eventually taken by the International Monetary Fund (IMF).
The International Clearing Union (ICU) would be a global bank whose job would be to regulate trade between nations. All international trade would be denominated in its own currency, the proposed bancor. The bancor was to have had a fixed exchange rate with national currencies, and would have been used to measure the balance of trade between nations. Every good exported would add bancors to a country's account, every good imported would subtract them. Each nation would be incentivized to keep their bancor balance close to zero. If a nation had too high a bancor surplus the ICU would take a percentage of that surplus and put it into the Clearing Union's Reserve Fund; this would encourage nations with surpluses to buy other nations' exports. Nations that imported more than they exported would have their currency depreciated against the bancor; encouraging other nations to buy their products, and making imports more expensive.
George Monbiot, a contemporary critic of the IMF, has argued that the ICU's proposed mechanisms would have given greater weight in decision-making to the less-developed countries, which were not then as heavily involved in international trade as they are now. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by 'creating' additional 'international money', and that debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part because American opinion was naturally reluctant to accept the principle of equality of treatment so novel in debtor-creditor relationships
.
His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious consequences. In the words of Geoffrey Crowther, then editor of The Economist, If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos.
These ideas were informed by events prior to the Great Depression when — in the opinion of Keynes and others — international lending, primarily by the U.S., exceeded the capacity of sound investment and so got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to the process of lending.
Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on balance in trade. For example, the second edition of the popular introductory textbook, An Outline of Money, devoted the last three of its ten chapters to questions of foreign exchange management and in particular the 'problem of balance'. However, in more recent years, since the end of the Bretton Woods system in 1971, with the increasing influence of Monetarist schools of thought in the 1980s, and particularly in the face of large sustained trade imbalances, these concerns — and particularly concerns about the destabilising effects of large trade surpluses — have largely disappeared from mainstream economics discourse and Keynes' insights have slipped from view. They are receiving some attention again in the wake of the Financial crisis of 2007–2010.
Since the outbreak of the financial crisis in 2008 Keynes's proposal has been revived: In a speech delivered in March 2009 entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China called Keynes's bancor approach farsighted
and proposed the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency as a response to the financial crisis of 2007–2010. He argued that a national currency was unsuitable as a global reserve currency because of the Triffin dilemma - the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. A similar analysis can be found in the Report of the United Nation's Experts on reforms of the international monetary and financial system
as well as in the IMF's study published on April 13, 2010. [source]
The crisis will not be truly over until the policies and institutional framework that led to the large trade imbalances have been sufficiently modified. And yet it seems that few aspects of the political and economic debate surrounding the resolution of the various crises are as confused as our understanding of the balance of payments mechanisms that govern trade and capital flows. As a result, much of the debate on what to do and how to avoid similar crises in the future is muddled and usually misses the point.
The dollar should be replaced with a global currency proposing the biggest overhaul of the world's monetary system since the Second World War. The United Nations Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises. It added that the present system, under which the dollar acts as the world's reserve currency, should be subject to a wholesale reconsideration.
Although a number of countries, including China and Russia, have suggested replacing the dollar as the world's reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion. In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.
The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment. Replacing the dollar with an artificial currency would solve some of the problems related to the potential of countries running large deficits and would help stability,
said Detlef Kotte, one of the report's authors. But you will also need a system of managed exchange rates. Countries should keep real exchange rates (adjusted for inflation) stable. Central banks would have to intervene and if not they would have to be told to do so by a multilateral institution such as the International Monetary Fund.
The proposals, included in UNCTAD's annual Trade and Development Report , amount to the most radical suggestions for redesigning the global monetary system. Although many economists have pointed out that the economic crisis owed more to the malfunctioning of the post-Bretton Woods system, until now no major institution, including the G20, has come up with an alternative.
UN wants new global currency to replace dollar Berlusconi Says Leaders May Close World's Markets
This, however, is not because we do not have adequate tools with which to understand the functioning of the global balance of payments. On the contrary, the basic economic principles underlying international trade and capital flows are fairly well understood, but they are at times so counter intuitive that even economists who should know better are seduced into saying things that make no sense. We know for example the relationship among savings, investment, and current account imbalances in any particular country, but we fail to apply this knowledge logically to the full range of policies and institutions that affect the components of the global trade and capital balances. We fail to think in terms of the overall system. In this book, it turns out, we will not need to learn any new economic theory.
What is new about this book is that in it I extend our basic knowledge of open economies and apply it to the global economy as a single closed system in order to show the many surprising ways policies and conditions are related. Japanese interest rates, Spanish real estate bubbles, American mortgage derivatives, and copper mining in Chile are all part of a single system in which distortions in any one part must have automatic consequences for all the others. Financiers in São Paulo earn substantially higher compensation than their peers in London in part because Chinese households receive an artificially low return on their deposits. There are huge tracts of empty homes outside of Dublin in part because of the overvaluation of East Germany’s currency after reunification.
The global system, in other words, is a system in which every part is affected by every other part through the capital and current accounts. For example, we often hear that the current account deficits of peripheral Europe and the United States have little to do with German or Chinese policies but are rather primarily the consequence of the very low savings rates in the deficit countries. It turns out that this widely repeated claim, which even has an attractive ring of old fashioned morality about it, is nearly meaningless, as I will show in chapters 2 and 3 of this book. Current account deficits are by definition equal to the gap between savings and investment, but they are rarely
caused
by too little savings except as a tautology. More important, the savings rate and savings level of any country are determined largely not by the thriftiness of its citizen but by policies at home and among trade partners. To say therefore that the crisis in Spain, for example, is caused by the spendthrift habits of Spanish citizens relative to the thriftiness and hard work of their German cousins is to misunderstand altogether the root causes of the European crisis and to replace an understanding of the formal working of the global trading system with cheap and empty moralizing. We will see why in chapter 6.
And yet these kinds of almost nonsensical claims appeal to many of us especially, it seems, if we are wealthy financiers, even if these distinctions are wrong. To the extent that they affect policy, unfortunately, they actually retard the global recovery. If we misunderstand the root causes of the global imbalances that led to the global crisis, then it is unlikely that we will choose optimal policies that will allow us to work our way out of the imbalances in the least painful way possible. On he contrary, as John Maynard Keynes so urgently argued nearly eighty years ago, we are likely to choose policies that maximize global unemployment and lead directly to trade conflict. This is almost certainly happening again as surplus countries insist that the bulk of the global adjustment take place in the form of austerity in the deficit countries. Deficit country austerity may indeed be part of the correct prescription, but if it is not more than fully matched with surplus-country reflation, it cannot possibly succeed without a sharp rise in global unemployment.
No one asked President Barack Obama directly about the elephant in the room on Wednesday. But he brought it up anyway, during a joint press conference with British Prime Minister Gordon Brown. In some ways, the world has become accustomed to the United States being a voracious consumer market and the engine that drives a lot of economic growth worldwide,
Obama said, hinting that this position may not be sustainable. We're going to have to take into account a whole host of factors that can increase our savings rate and start dealing with our long-term fiscal position as well as our current account deficits.
The comments were filled with economic jargon but pregnant with meaning. If there's going to be renewed growth, it can't just be the United States as the engine. Everybody is going to have to pick up the pace,
Obama went on to say that the world would have to shift away from the situation where other nations are only exporting and never importing
to a balance in how we approach these issues.
The words won't be making a heavy rotation on cable news. But they struck to the heart of an often ignored cause of the economic crisis now gripping the world. For weeks, world leaders have been blaming the crisis on the immediate villains: banks, investors and derivatives traders who took on more risk than they could handle. A regulatory structure that failed to notice the problems. A global consumer delusion that the bubble could expand forever. Largely left out, however, is the vital role that trade balances played in igniting the crisis in the first place. Since the late 1990s, the U.S. has been spending far more than it has earned, sending huge sums of capital overseas, a dynamic measured as the current account deficit. This giant pool of money,
as the radio program This American Life described it, did not stay in low-spending surplus countries like China or oil-producing states. Instead, much of it came back to the U.S. in the form of cheap credit. Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade,
explained Federal Reserve Chairman Ben Bernanke in a March 10 speech.
The glut of investment led to what economists call an underpricing of risk,
as lending standards were weakened and leverage grew. Economists now widely agree that the systemic sloshing about of capital was a recipe for disaster. Obama clearly signaled that the issue is on his radar, and that policy shifts may be coming. In practice, this means measures in the medium term that will encourage greater consumption and spending in developing nations like China, and more saving and less debt in the U.S. Although he was vague, Obama discussed what would amount to a reworking of the basic economic physics that governs our world. Obama met with Chinese President Hu Jintao, although the issue of imbalances was not raised directly by either man, according to a senior U.S. Administration official, the joint statement released by the two nations said both countries want to deal with the underlying causes. Obama underscored that once recovery is firmly established, the United States will act to cut the U.S. fiscal deficit in half and bring the deficit down to a level that is sustainable,
the statement reads. President Hu emphasized China's commitment to strengthen and improve macroeconomic control and expand domestic demand, particularly consumer demand, to ensure sustainable growth and ensure steady and relatively fast economic development.
In other words, China will spend more, and the U.S. will spend less.
Many economists are critical of the lack of specific policy solutions beyond these acknowledgements, saying the imbalances and the resulting distorting effects on currency exchange rates should have been a central agenda item at the G-20. Unless and until surplus countries recognize that this cannot continue, no durable escape from the crisis will be achieved,
Martin Wolf, wrote.
The G-20's Hidden Issue: A Global Trade Imbalance Finance reform is key for Russia's G20 presidency
We can see the consequences of our muddled thinking most strikingly in the European crisis. Thanks to a general inability to understand why the advent of the euro spelled trouble for much of peripheral Europe, the policies needed to save the euro are largely ignored. What is worse, only Germany can save the euro, but this will require a dramatic, and improbable, shift in Berlin’s understanding of the root causes of the crisis.
Saving the euro will not require that Berlin make funding more easily available for peripheral Europe, as too many policymakers believe. Nor will the euro be helped if foreign central banks, including China’s, buy more European government debt. The euro can survive only if Berlin reverses policies that forced German savings to grow at the expense of households, thus forcing down savings rates in peripheral Europe to dangerous levels and dooming the euro. German policymakers refuse to take the necessary steps because they refuse to pay the cost of the adjustment. It is not hard to understand why Germans are reluctant to take the necessary steps because these must lead to rising debt and slower growth in Germany, but it should also be clear that if Germany does not do so, there is no reason to expect a
solution
to the euro crisis. This is why the euro experiment will almost certainly fail and Germany will suffer anyway from rising debt and slowing growth. We will see why in chapter 6.
It is worth pointing out however that no matter how wrongheaded current policies are, Europe, like the rest of the world, will adjust from its trade imbalances one way or the other. It has no choice. But if Europe rebalances in a suboptimal way that is, without a policy reversal in Germany its rebalancing will ultimately become far more costly for Germany than a reversal of policies today, as I will explain in this book. We saw the same thing happen in the late 1920s, when the United States refused to reflate domestic demand sufficiently to rebalance global trade. When trade rebalanced anyway, as it always must, the United States was among those that suffered most.
As I see it there are three very large areas of confusion and muddled thinking when it comes to discussing trade and global imbalances. The first area has to do with the causes of significant trade imbalances. Although in a well managed global economy with few distortions and flexible financial systems there are always likely to be countries with current account surpluses and deficits, in fact it is worth repeating that very large persistent surpluses and deficits are almost always the result of
distorted policies in one or more countries.
In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening existing global currency controls, through the IMF. This would involve a gradual move away from the U.S. dollar as a reserve currency and towards the use of IMF special drawing rights (SDRs) as a global reserve currency. Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor which would have been a special international currency to be used instead of the dollar.
American economists such as Brad DeLong agreed that on almost every point where Keynes was overruled by the Americans during the Bretton Woods negotiations, he was later proved correct by events. Zhou's proposal attracted much international attention; in a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Zhou's suggestion or a similar change to the International Monetary System would be in the best interests in both the U.S. and the rest of the world. While Zhou's proposal has not yet been adopted, leaders meeting in April at the 2009 G-20 London summit agreed to allow 250 billion SDRs to be created by the IMF, to be distributed to all IMF members according to each country's voting rights.
On April 13, 2010, the Strategy, Policy and Review Department of the IMF published a comprehensive report examining these aforementioned problems as well as other world reserve currency considerations, recommending that the world adopt a global currency called the bancor
and that a global central bank be established to administer such a currency. In this report, the current issues with having a national global reserve currency are addressed. The merits, difficulties and effectiveness of establishing a multi-currency reserve system are weighed against that of the SDRs, or basket currency
strategy, and those of establishing this new global reserve currency
. A new multilateral framework and 'multi-polar system' for managing capital flows and NATIONAL DEBTS is also called for, but the IMF cautions that it prefers a gradual shift to this new framework, rather than a sudden change.
Triffin dilemma's Implication in 2008 meltdown
The astonishing accumulation of dollar reserves in the past decade was the consequence sometimes intended and sometimes unintended of a wide range of policies aimed at generating growth in those countries, and these are inextricably linked to the causes of the global crisis. It is important to understand that the savings rate is not an independent variable that can be altered at will. If it is to be altered in an orderly way, it can be done only with changes in the underlying policies both at home and abroad that led to excessively high or low savings rates in different countries. Otherwise the savings rate will ultimately adjust anyway, but it will do so in a disorderly way, with abrupt disruptions to international trade. In fact I will argue that excessive use of the U.S. dollar internationally actually forces up either American debt or American unemployment. For that reason it is actually in the best interest of the United States to place restrictions on the ability of foreign countries to hold U.S. dollar reserves. This will both benefit the American economy and stabilize the global economy. So what really explains the high German and Chinese savings rates and the low savings rates in the United States and peripheral Europe? In this book I argue that they are both caused by institutions and policy, whether these are policies and institutional frameworks in the deficit countries, policies and institutional frameworks in the surplus countries, or both. What’s more, political rhedoric that deficit countries become thriftier are not only useless in resolving the imbalances, they are likely to worsen the impact of the crisis.
[Excerpts from] The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy
Say goodbye to the world's reserve currency
China is fully intent on, little by little, chipping away at the dollar's reserve currency status until one day it no longer is, a slow but certain internationalization of the renminbi over the past two years. Australia appears to have come to the same conclusion, saying goodbye to the world's reserve currency
enabling direct convertibility of the Australian dollar into Chinese yuan (also called renminbi), without US Dollar intermediation. Beijing will engage many more trade partners in direct currency conversion, with Australia setting the precedent expect many more Asian countries (at first) to follow in Australia's footsteps. We are continuing these discussions, and also exploring other opportunities to work with China to support the internationalisation of the renminbi
Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives to the US Dollar appear, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future. London is racing against Paris and Zurich to become the center for yuan trading in Europe as China seeks to take its currency global. The Bank of England said it has the inside edge to be the first Group of Seven nation to sign a currency-swap agreement with the People’s Bank of China after a meeting last month. The deal may allow the U.K. central bank to supply as much as 400 billion yuan ($64 billion) to banks, matching Hong Kong’s swap arrangement, according to Gao Qi, a markets strategist at Royal Bank of Scotland Group Plc in Singapore. The center of the world’s $4 trillion-a-day market for foreign exchange trading is expanding ties with the second biggest economy after yuan denominated bond sales overseas surged 11-fold to 174 billion yuan since 2009 and trading in the currency more than tripled in London.
China started pushing for the greater use of the yuan outside the mainland in 2010. We are at the beginning of a massive journey,
Philippe Lintern, co-head of wholesale banking for Europe at Standard Chartered Plc, Britain’s second largest lender by market value after HSBC Holdings Plc, said This is probably the most exciting thing that will happen in my entire career. It is a revolution of financial markets.
The swaps would allow the Bank of England to supply yuan to importers and other users when there’s a shortage of the currency. Yuan-denominated bonds sold by companies, including McDonald’s Corp. and Caterpillar Inc. (CAT), rose to 174 billion yuan last year from 16 billion in 2009. Since China started a pilot program allowing the use of yuan to settle international transactions in 2009, the proportion of its trade conducted in yuan has increased to 9 percent from less than 1 percent, according to the People’s Bank of China. By 2015, a third of China’s cross-border trade will be settled in yuan, making the currency one of the three most used in global trading along with the dollar and euro. Britain accounts for about 46 percent of global currency trading, dwarfing the U.S. at 24 percent, France at 7 percent and Singapore at 3 percent. In the offshore yuan market, the U.K. made up 3 percent of the total transactions last year, the third-largest after Hong Kong, with a 73 percent share, and mainland China at 5.2 percent, with 2.6 percent for Singapore, 1.9 percent for the U.S. and 1.4 percent for France. While China is promoting a broader use of the yuan to match its rising status in the global economy, HSBC economists including Qu Hongbin estimated that it will take time for the yuan to become a dominant currency because the government doesn’t allow it to be freely traded. The People’s Bank of China limits the daily fluctuation of the yuan to 1 percent on either side of a reference rate set by the bank. While yuan transactions surged 171 percent in January from a year ago, the currency still accounts for less than 1 percent of global payments, compared with about 85 percent combined for the dollar, euro, pound and yen. Central-bank Governor Zhou Xiaochuan said at a conference in Beijing on Nov. 17 that the bank’s next step in overhauling the foreign-exchange system will focus on convertibility.
Outgoing Premier Wen Jiabao pledged to expand cross-border use of the yuan and encourage foreign investment. To become a global currency requires full convertibility,
the HSBC economists wrote in their report. Although this will be done gradually, Beijing policy makers are now more confident than ever about speeding up the process.
China has signed currency-swap contracts totaling 2.4 trillion yuan since December 2008 with 19 countries and regions, including Hong Kong, Australia, Turkey, Brazil and South Korea, according to data from the People’s Bank of China website. China is ready to discuss a bilateral currency swap with Taiwan, Yi Gang, a deputy governor at the PBOC, said at a briefing in Beijing today. The development of offshore yuan centers will be based on market needs and competition, he said. Perhaps there’s a first-mover advantage,
Gerard Lyons, the chief economic adviser to London Mayor Boris Johnson, said in a March 8 phone interview. It’s a case of recognizing how the world is changing and how London needs to position itself. The offshore Chinese currency market has the potential to be incredibly big.
Other financial centers are lining up to compete. Paris has all the conditions to become the renminbi offshore center of the euro zone,
Banque de France Governor Christian Noyer said in an October, according to a presentation by Paris Europlace, a financial industry association. It’s important for Switzerland to advance quickly in our efforts to establish its financial center as a Renminbi hub,
Sindy Schiegel Werner, a Basel-based spokeswoman for the Swiss Bankers Association, said on March 5.
In the U.S., the Chicago-based CME Group Inc. (CME), owner of the world’s biggest futures exchange, introduced offshore yuan futures on Feb. 25. The U.S. Treasury regularly discusses China’s financial sector with American companies, an official said on March 7, declining to be more specific. The City of London Corp., which oversees the U.K.’s main financial district, started a campaign in April to boost its share of yuan business, enlisting lenders including Barclays Plc, HSBC, Standard Chartered, Bank of China and China Construction China to discuss and promote that goal. HSBC sold yuan-denominated bonds in London that month, becoming the first company to issue Dim Sum notes outside of mainland China and Hong Kong, while the swap won’t influence the exchange rate directly, it will help to boost the confidence of companies trading the yuan By giving people more confidence that they’ll be able to settle trades, it encourages more participants to the market,
Vos said. Foreign-exchange swaps in deliverable yuan surged by 240 percent to an average $3.1 billion a day in London in the first half of 2012 from the same period of 2011, the City of London Corp. wrote in a statement on Jan. 31. Citigroup Inc. said Feb. 27 that it added yuan to its so called pooling service in London, a tool to manage cash flow and foreign-exchange costs by notionally offsetting cash balances without performing currency trades, in response to the growing internationalization
of the yuan, London has a natural fit,
Vos said. Foreign exchange happens in London - liquidity has a gravitational pull, and right now, London has that liquidity.
World Reserve Currency, Australia China Direct Currency Convertibility London Gains First-Mover Advantage in EU’s Yuan Race
Gordon Brown likes to blame Britain's woes on a global financial crisis compounded by disastrous misjudgments by bonus-hungry bankers. David Cameron points the finger at Brown, the man who presided over the debt binge, property bubble and subsequent collapse. He had policy choices that he did not exercise. So who is right? Financial Times's columnist Martin Wolf author of
Fixing Global Finance: How to Curb Financial Crises in the 21st Century
completed in the autumn of 2007 as the credit crunch was bursting, focuses on the build-up in the decades beforehand, arguing that national economies are essentially corks thrown around by economic waves beyond any individual country's control and until global finance is fixed, so it will stay. Wolf foresaw that the forces behind the great boom were unbearable. The United States was in the red abroad and running an unsustainable credit and property bubble at home, but that was because it was forced to be the world's spender and borrower of last resort. And in the summer and autumn of 2007, it was obvious that it could not go on much longer. The problem, as Wolf describes it, was and is that Asian countries and oil exporters refused to allow their exporting strength to be reflected in a rising exchange rate. They pegged their exchange rates against the dollar, ran up huge surpluses and recycled the cash they accumulated back to the US. Thus the poor lent their savings to the rich. The US could solve the problem by creating an American recession, thus stopping the Asians earning surpluses. Or it could use the money it was being lent at absurdly low interest rates to create a long boom.
It did the latter. As Wolf tells it, if any banking system is given more cash than there are orthodox lending opportunities, it will start to create some unorthodox ones. And this Wall Street did, hence sub-prime mortgages, securitisation and all the other weird financial instruments we have come to know. The American banking system could have been better regulated, but it was absorbing everything the world could throw at it. Wolf believes the US was the largely innocent victim of a global savings glut. But he excuses the Asians - in part. As he observes, financial deregulation has been associated with ever-deeper financial crises. He is for a liberal financial order, but he is clear eyed about the inevitable mistakes made by countries as they freed up their banking systems. His writing as the credit crunch has unfolded has become more critical of the financial system's inherent susceptibility to bouts of speculation, and now he even cites approvingly the ultra-Keynesian Hyman Minsky, an economist at the opposite end of the philosophic spectrum. There are the foundations of that thinking here. Wolf points out that there were only 38 financial crises between 1945 and 1971, when finance was closely regulated; between 1973 and 1997, there were 139. One table sets out the grim toll of lost GDP, as countries as disparate as Indonesia and Finland wrestled with the consequences of sucking in too much foreign cash. When it left, as confidence collapsed, countries endured recessions. After the Asian financial crisis in 1998, Asia took a collective decision. Never again would it run current-account deficits. Never would it accept inward flows of hot money. Instead, it would ship it to the US.
So when this capital came into the US it was invested largely in foreign currency reserves—very liquid assets—which were invested essentially in the US market. A lot of it went to buy the liabilities of Fanny Mae and Freddie Mac as it happens, which were part of this. They provided an extraordinary liquidity base for lending and also provided an environment of very low real interest rates which made it very attractive for people to create what I think of as “pseudo” high-yielding safe assets. Because of these background conditions, the very low interests, the flood of money availability, there began to be a series of housing bubbles across much of the developed world, and there was a very big one here. In the context of a housing bubble, not just in the US, but in the UK and Spain, you couldn't lose money borrowing for a house. And then that led to the final stage, the capstone of this combination, this housing bubble linked to these two phenomena. They started creating all these very clever securitized assets, very complicated assets, bundling together mortgages which seemed to provide safe, high-yielding assets, just what everybody wanted, they started selling them all over the world, about half of the US assets related to this bubble ended up all over the world. If you look in retrospect it seems to me pretty clear that it was this combination of events which by 2006, roughly the peak of the housing bubble, had primed the situation for disaster. And the disaster of course happened when house prices started to fall, when everything basically unwound, and they suddenly discovered they had all these bad assets.
Former Treasury Secretary Hank Paulson sheds significant light on the fact that the burgeoning U.S. trade deficit actually served as the fuel for massive capital inflows from foreign central banks that encouraged Wall Street to develop highly complicated, high risk investment instruments that resulted in the most severe economic downturn since the Great Depression. Before the Treasury position, Paulson was an investment banker at Goldman Sachs, one of the world's financial powerhouses. While there, he established the firm's relationship with the Chinese government and penetrated China's financial market, long the dream of Western business. In his memoir, "On The Brink: Inside the Race to Stop the Collapse of the Global Financial System", Paulson claims Russia and China waged economic warfare on the USA dumping capital inflows into the international economy causing the financial crisis. James Rickards, a top financial threat adviser to the Pentagon, CIA, and Director of National Intelligence, is warning that a currency war “economic pearl harbor” is approaching replaying the events Paulson claims triggered the 2008 financial collapse.
Trade Deficits and the Financial Crisis
The whole borrowing spree was based on the assumption that housing prices are always going to go up and when that gave away, the whole thing came tumbling down, the fact of course that there was simply so much credit. I mean household debt in the US and the UK doubled over 10 years to levels that have never been seen before. So you have a hugely over-indebted household sector, you have a hugely expanded financial sector with very little equity because no one thought it was needed because it was all safe and a lot of it was pinned against these complicated securities, based on the assumption that house prices could only rise. And lots of American economists, Bob Schiller here at Yale was an exception, but lots of economists I spoke to said that it was impossible for house prices to fall across the country, because they'd never fallen. It was a quite normal view, sensible people thought this. Of course it turned out they were utterly wrong. Of course we know in a late bubble phase, completely normal lending standards were lowered, and as a result a lot of people received houses, again not just in the US, but also in the UK, who really couldn't afford the loans, so once the housing prices fell, they were insolvent. About half of the securitized obligations, the CDOs, collateralized debt obligations, and the CDOs squared, these very complicated obligations had actually been sold abroad, a lot of them to European banks. The European banks were also looking for high-yielding safe assets and they ended up all over the world. Some European banks actually bought US subsidiaries which were actively engaged in household lending. The very big British-based bank HSBC, is an example of a European bank that had bought a US mortgage lender, but others just bought all of these securities, about half of them ended up abroad. So that was one reason why this became global almost at once, it became obvious that these assets were everywhere. One of the worst hit banks in the world by this was UBS, the Swiss bank which had a very active American subsidiary which was deeply involved in this, and ended up with an enormous exposure, which is why the Swiss government has had to rescue it. But that's only one thing. The second thing that you have to remember, and this point I stress quite frequently, is that the financial system of the world in the last ten to fifteen years did truly become global.
The big players of the world, the big financial institutions, particularly of the West, all operate globally. They all have American subsidiaries and European subsidiaries and they're all interconnected. Very closely interconnected, a significant crisis affecting an important class of assets, like housing-related securities, immediately becomes global because all the institutions have invested in them and all the institutions are dealing with all the others. So I don't think you can possibly imagine anymore a national financial crisis, it’s one of the most important lessons of the whole mess. Once the financial system is impaired, it doesn't lend anymore, of course it affects the rest of the economy nobody can borrow, businesses can't borrow, governments can't borrow, corporations, big, even the safest corporations can't borrow, so you then have a crisis in credit which affects, in fact, the entire world. The emerging economies are affected; consumers are affected, so they don't spend. And that’s of course why, in the last few months we've moved into a global recession, which some people think of as a depression simply because recently, the decline in GDP for some countries has been so very, very severe. Japan for example has, the last quarter as I understand it, has had a negative growth at an annualized rate of 10%. And similar things are being seen in other East Asian countries, in fact they’re particularly bad, China's growth in the last quarter was probably zero which for China is a depression. It is certainly worse than a conventional recession and unless it turns around fairly soon, it’s going to feel worse than anything since the 30's. And I think this is how we got here, it's a global system.
Wolf is tough on China's role in all of this and his book will be very unpopular with the Politburo and Chinese Communist party, which want to blame the hegemonic US for the crisis. China is the mercantilist in chief, riding an export boom. So averse were the Chinese to boosting consumption and imports that in 2007 they allowed savings to reach an astounding 60% of GDP. It was China's mountainous foreign-exchange reserves that fuelled the US boom. Wolf does not believe that the US could realistically have organised a recession to protect itself from Chinese money, nor does he believe that the Chinese would have liked it very much. The Chinese had choices, he argues, over how they organised their economic policy that they did not make. It is vital that they make different choices in future. China's mercantilism and high saving alike are a direct consequence of the country being run as an authoritarian state. It cannot develop the institutions that Wolf advocates, nor have lower savings and higher imports without threatening one-party rule. Fixing Global Finance is hard to read without feeling gloomy about our prospects. Wolf's prescriptions for reform include bolstering the close-to-irrelevant IMF by making it a genuinely world institution; encouraging emerging economies to believe that they do not need to peg their currencies and sterilise hot money by borrowing in multi-currency bonds; and managing the pattern of demand and exchange rates between the US and the rest of the world so that the US does not have to do so much of the work of generating global demand.
One of the basic issues is the high savings in China, and high indebtedness in the United States. Chinese growth should be 10% a year and China’s domestic expenditure should be 12% in order for this gap to be narrowed. Is this realistic? This is a huge question now, because it comes to the issue of how we
get out of this. I mean this is very scary where we are now, this is a very severe global recession, and we want to get out of it as quickly as possible. So, how do we do that? Well, we all recognize that we’re not doing a very good job that we have to fix the financial system, we have to recapitalize it or make it sound in some way. Governments are struggling with that, I would say no one has been fully successful yet, including, unfortunately, the United States, but nobody has. So that's one thing we have to do. We're going to have to help hugely over-indebted households, because there are lots of bankrupt people and we're going to have to fix that. But there's also this very big issue as you rightly say about the demand expansion in the world in the future.
If we assume there is no change in the surplus countries, US - UK are essentially the same, you've got a large current account deficit because the structure of your economy after many years of specialization, you don't have production of much tradable goods in particular, so once you get to full employment you tend to have a very large current account deficit— as excess demand. So the question you have to ask yourself is, what could generate excess demand in the United States on that scale again? Well it's not going to be the household sector which is very badly indebted and needs to save. It's very unlikely to be the corporate sector in this situation. So what's going to happen, it's clear what’s going to happen, is the US is going to run, to sustain demand, enormous fiscal deficit: 10%, perhaps even 12% of GDP, unimaginable numbers. Now, for a short period of time, of course the US can run deficits of that scale but it's very risky. You're going to pile up enormous amounts of fiscal debt. So to stop this from going on, either there has to be a huge pickup in domestic demand in the US going back to the bubbles, and I don't see how you could do that easily. This was I think the last big private sector bubble. Or the US external balance has to improve. It's a matter of definition. The US, the UK, and all these other countries are going to have to have better external balances.
Or somebody else. If we have dynamic growth in the world, we don't want to compete in a depression that would be “begging my neighbor” policy that used to be called. You want expanded demand in the rest of the world. Well, who are the best position to expand demand? Obviously countries with very strong balancer payment positions, with very strong current account surpluses and reserves: countries like Germany, Japan, and China. They don't expand demand relative to supply, then I think we have the danger of chronic excess capacity in the world, chronic deflationary pressure. In other words, the whole world starts looking like Japan in the 1990's: that's sort of my worry. Even with printing all the money, that is my worry of what might happen. The Japanese have printed money like mad and they still remain like this. So we do have to expand demand. Now understand completely, we take the case of China, which is simply the most important single country, that they can't change the structure of their economy, the structure of demand, overnight, except through a massive fiscal boost, which is what they're now doing, they're engaged in a huge investment program, and in the short-run that’s the right thing to do. In the long-run, however, it is right for the Chinese to try and absorb more of their production at home and rebalance their economy with more service production which would generate actually many more jobs. They have not done a good job of generating jobs recently, because their development path has been quite capital-intensive, much too much dependent on investment and household disposable income is only 40% of GDP which is why they're not benefitting fully. So what I suggested in the piece you mentioned which I produced as a blog during the World Economic Forum in Davos, is China should forget having a GDP target, instead of having an 8% growth GDP target, it should have a real domestic demand target. It should think of its policy in terms of generating real domestic demand, GDP will follow.
And I suggested, if you'd said they should try to grow real domestic demand at 12% a year for five years, that would solve the problem, it would help the world, and it would make the Chinese themselves better off. Now I recognize this is a huge challenge, but the first step to meeting the challenge is to define the problem and I think that's the right way to define the problem. I think there are similar difficulties in Japan: they have allowed domestic demand to languish for 19 years, since 1990, and they've got to fix that. Germany has a similar problem; there are a number of other smaller countries. If this problem is not fixed, I don't really see how we get out of this, at least in the near term, without these monstrous fiscal deficits in the US and the UK and a number of other developed countries as the source of demand. And that's going to be politically very difficult and ultimately I think unsustainable. So the thing that worries me most is not the clearing up of the financial mess, though that's a big issue, or even the clearing up of the over-indebtedness of the households, the thing that worries me most is as it were, where is the demand going to come from to sustain rapid growth in the world economy in the next ten years or so. And for that to happen, I don't think we can repeat a pattern in which we've been so dependent on excess demand from the households of a limited number of rich countries.
Especially since what we've seen in the United States that the tax credit, as stimulus for spending didn’t work. People are hanging onto their money because they want to retire their debt rather than go and splurge in the shopping mall. The same thing is happening, though, in China. Chinese city governments are giving out consumer coupons and people are trying to turn that into cash and hang onto them. I don't think the fact that people are saving a lot is so bad. Because people have to reduce their debts, I mean, it's quite reasonable and if we help them to do that without inflation then that's not such a bad thing. But there's no doubt in my mind, and there's been a huge, almost religious debate here in the United States, that in the short run, in these conditions, it makes most sense to expand the forms of spending by the government which are immediate. Some of that goes to people, I mean unemployment compensation, of course, you're going to need a lot more of that to sustain people's demand. In this country, giving money directly to state and local governments so they continue to employ teachers and firefighters and all the rest of it. So, there are things that you can do which will sustain spending and if necessary, under the present circumstances, the government can simply borrow from the central bank and there's no problem about inflation, to support this form of spending. So in the short run, that's I think what you want to do. If you provide tax cuts in the present conditions, I would expect most of it to be saved. I mean, that seems to me inevitable. That wouldn't be the worst thing, the way I put it, it just means that if that’s going to happen, the stimulus bill, the total deficit, has to be even bigger because you'll want to offset the fact that so much of it is going to be saved. That is, I think, an inevitable part of this story.
The second thing of course is that there’s so many dead banks still walking, how do you retire those banks and actually create the possibility of people getting credit from the banks at a reasonable rate? The first thing is to figure out what is really the problem. And the truth is, we are still disagreeing on this. There are some people, quite a lot of people, who would say that the very low prices of the assets that the banks are holding, which is what's driving their insolvency, is largely the result of panic. If people understood the true underlying value of these assets, they wouldn't be so cautious, they wouldn't be so frightened, the prices of these assets would rise and the banks would appear quite solvent. And those people are the people who suggest that the real job is to find some way of being able to market these toxic assets again. Mr Geihtner's plan is very much directed at that, though how it would work is quite obscure. There are other people, and I'm one of them, who say: assume the worst. It's very likely that the banks are insolvent because these assets are just bad. And certainly, the other people, the investors, think they're insolvent, so they have to be recapitalized. There has to be a recapitalization program. It's very very difficult to persuade the private sector to recapitalize institutions that have no idea what they're worth. And because they have no idea what their assets are worth, all their experiences so far have been very bad, so, unless you can find a real price for these assets, pretty soon it's going to be very difficult to get the private sector to recapitalize; and we're talking hundreds of billions, possibly even a trillion dollars or more, so enormous sums. So that means that they're essentially only two other ways of dealing with this. Both involve a sort of bankruptcy process. But the bankruptcy process can be done either by injecting government capital, you nationalize them, you take out the bad assets, and put them in a bad bank, you nationalize, you put in public capital, and you re-float the institutions. This is very much what the Swedes did in the early 1990's. There is a variant of that in which you leave the bad assets in the old bank where it sort of dies, and you create a good bank with the good assets, so a new institution. There's the question of whether you move assets into a good bank, or move assets into a bad bank, that’s a sort if a secondary question, it's quite interesting, but it’s a secondary question.
The alternative way of recapitalizing, is an absolutely standard bankruptcy process, but here for a lot of institutions simultaneously, and that would essentially be you put them into bankruptcy, you would eliminate the shareholders' equity because it's worthless, and you would transform some portion of the bonds held against the banks into equity. So the bond holders end up owning the bank. That's a very common bankruptcy process. And then again, you would have a recapitalized bank, and it would be off and free. Those are, it seems to me, essentially the alternative. At the moment, nobody around the world has been prepared to do either of these things on a suitable scale because it seems to me that nobody has been prepared to recognize how big the losses actually are. But people are prepared to accept large public subsidies to private institutions, I would call some of them even bribes to private institutions, which have been misused and in some cases, abused, but they are very unwilling to actually just say, well, we own it, because we are providing the risk capital. The reality, though, is that at the moment, the taxpayer is bearing the risk. It's clear. So whatever you call it, the risk capital is being provided by the taxpayer. My view is that if the taxpayer provides the risk capital then the taxpayer or his representative has to exercise managerial control, otherwise you will know that the private sector will exploit this, as indeed they clearly did in the last quarter of last year, when you look at these grotesque bonuses which were earned at loss-making institutions using, basically, government money.
The issue now is, reconstructing the global financial system so that it works better, so we don't have a crisis like this again, soon, and I discuss that in this book though I've had more ideas since then, and that we deal with this big domestic demand balance problem, the problems of capital flowing uphill, which I have been concerned about for many years. These are really even more important. Now, the big policymakers of the world, President Obama and others, and developing countries too, that's why the G20 has become so important. Countries like India and China are also involved. We have to construct, together, a system that works better in this respect. It's an incredible priority. If we do that, then I think we can keep globalization going, but if not, we may revert to the most terrible disaster which we saw in the 1930's. And it could get much worse than that, that's just pretty mild. But, it could get much worse if a year or two from now the world economy is still sinking and unemployment is over 10% and in China the economy is very weak and unemployment is very weak everywhere. Governments will become populist, and populist governments will become nationalist, and we could have terrible global conflicts. So this is very, very dangerous and we have to deal with it now, policymakers have to deal with it. If they deal with it quickly and urgently and cooperatively, very important, it's a global problem and we need global solutions, then I think we can get through this.
Why we're in the mess we are Fixing Global Finance: An Interview with Martin Wolf
Strauss-Kahn says the IMF warned the world about the collapse and about the American real estate bubble and its consequences, but politicians don't want to hear bad news.
When the crisis arrived in the fall of 2008, as predicted, it took the old world Europe, which always takes six months to make a decision too long to react. That was the time when the world was laying the foundation for a new order. If there was ever a literary coming-out party for elite intentions to create a one-world financial structure, it would seem to us to be this article. One hardly needs to read between the lines. Countries like China and India are becoming important, countries with rising markets that have long been stable and are clearly powerful. Whenever he is in China or other parts of Asia, says Strauss-Kahn, the leaders there tell him that they have written off Europe for now. What will become important, is the G-20, that coalition of the strongest economies, the center of power in a new world. The G-20 gave the IMF $850 billion euro ($620 billion) and the mission to solve the crisis. What followed, says, Strauss-Kahn, was the biggest global coordination ever.
IMF Article Predicts New World Order
Simple answer to what caused the the global financial collapse of 2008 is globalization. It was the
global imbalance
of trade and debt created by 50 years of Americans consuming imports with financial credit. The American consumer economy imported more than exporting bleeding national
income. We became the most indebted country in the history of the world buying goods and services from exporting countries. America was the great consumer of the global economy consuming what the worlds producing nations manufactured. That enormous consumption binge created the emerging economies and globalization itself.
This
consumer culture spending spree on credit enabled Americas high standard of living which came to an end in 2008 with the credit crunch and global financial collapse from massive imbalances in global trade, debt and currencies. The international economy is transitioning to a multilateral trading system leaving America stuck with the debt bill.
Another way to look at what caused the 2008 Financial collapse would be a historical perspective. What Oswald Grübel mentioned in the video of this article just before he said;
We Engineered the World Financial Crisis
, Oswald boasted:
We had quite a remarkable time in the last 15 yrs. when globalization really started, normally power is going where the money is going. The west and the industrialized world in the last 10 yrs. alone, we have created hundreds of millions of jobs in the developing nations by outsourcing cheap production and paying with money we deliberately devaluated as well. So we thought we might be on to a good thing here. We forced all the developing countries who produced all this wonderful stuff and took our money for it, to invest the profits into our treasury bonds so we can go on spending. That seems to be if you keep on going forever there, a good business proposition. Did power accumulate and how long and will it last? Can China grow at 8-10 percent forever? We were surprised it lasted as long as it did.
During the cold war with Russia the United States de-industrialized sending manufacturing industries abroad to allied countries. The strategy was to spread capitalism around the world to stop the
March of Communism
and create spheres of influence to
contain the State Capitalist economic system.
America, once the largest exporter of world production became the worlds great consumer following de-industrialization. Americans consumed goods and services created by "emerging economies" with credit cards, loans, home equity. Where did this money come from? The banks printed it into existence after replacing the international gold standard, with the
dollar standard in
1971, dubbed
Bretton Woods II.
Since America was the great consumer of the worlds products,
world trade was conducted in dollars. Nations were forced to export to the USA in order to get the dollars necessary to participate in trade, buy oil, or other raw materials not available in their country. This created massive demand for dollars that banks could continually print into existence driving global trade. The dollar became the
worlds reserve currency every trading nation struggled to stockpile.
This system of international trade was not in the best interest of manufacturing countries. In order for the system to continue they were forced to
"invest" their profits/savings back into America. They bought treasury bonds so the US government could fund it's budget deficits. Japan China and other trading partners have been recycling excess dollars into US real estate, debt, stocks, and natural resources. Buying up a country that's trading it's future for mass consumerism.
The producing countries were forced to either invest in USA's consumption habit or lose the US market their economies depended on. This system of usury on Americas part was unsustainable and collapsed in 2008.
Obama announced the end of Bretton Woods II in a G20 speech, then went mute on the subject. As Oswald Grübel rumbled,
We were surprised it lasted as long as it did.
The global economy has been moving towards
regionalization since the American based system collapsed. Emerging economies are organizing trade blocs and
military alliances rebalancing the flow of trade, distributing economic power to the east. They're the engine of growth driving the economic recovery expanding rapidly, while the former consumer countries are falling into economic stagnation and
debt crisis.
President of the Eurasia Group Ian Bremmer says the G20 collapsed because the 20 governments of the largest economies collapsed altering the international order into what he calls
G-ZERO globalization. A world order that is no longer dominated by the western NATO power block. That a
"Global Power Shift" is taking place and the next century will be the
century of Asia.
Beyond the Crash: Overcoming the First Crisis of Globalization - Gordon Brown
Gordon Brown admits he created UK banking collapse
£15 ooo ooo ooo ooo fraud exposed in uk house of lords
CFR: Global Imbalances and the Financial Crisis
Federal Reserve Officials Foresaw, Joked About Housing Bubble 2006
China Predicted Global Financial Collapse 2005
Who Predicted The Global Financial Crisis?
Those who Predicted the Economic Crisis now Giving New Warnings
The Fed Has Set Us Up For the Crash of 2013
Government Financial Crisis Inquiry: Banking Industry Created 2008 Collapse
The Warning: Regulator Brooksley Born
Prepare For Euro Collapse Says Bank of England
Crisis By Design - John Truman Wolfe
How does the Global Financial Crisis End?
Panel on the Global Economic Power Shift
Panel on how to Rebalance After the Crisis
