"If you want to continue to be the slaves of bankers, and pay the cost of your own slavery, then let bankers continue to create money and control credit," warned Sir Josiah Stamp, former chief of the Bank of England in 1927. Indeed, the world economy is now held hostage by an elite banking cartel, whose reckless pursuit of speculation and bloated profits, has precipitated a breakdown of the global financial system, and is plunging the world towards a "Great Depression."
The global economy will grind to a halt this year, the IMF predicts, after $ 30-trillion in market capitalization was erased from world stock markets since October 2007, in the wake of the worst banking crisis since the Great Depression of the 1930's. What began with the bursting of the US house price bubble, has so far, resulted in $1.2-trillion of losses and write-downs from toxic assets held by banks worldwide.
"Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth," the IMF warned, predicting that bank losses could eventually peak at $2.2-trillion, and hobble the world economy in the year ahead. "Downside risks continue to dominate, as the scale and scope of the current financial crisis has taken the global economy into uncharted waters, triggered by the collapse of bank credit and stock markets." the IMF said on January 28th.
Global trade collapsed by 45% in the fourth quarter from a year earlier, exposing the staggering depth of the global financial crisis. Speaking at Davos, Switzerland last week, Australian trade minister Simon Crean warned that falling global trade would compound the economic downturn. "If global trade is a multiplier in growth, it also has the potential to be a multiplier in reverse," he warned on Jan 31st.
The Baltic Cape-Size Index, which measures the cost of shipping coal, iron ore, and steel across the high-seas, is still languishing 90% below its record high of 19,200-points set in May 2007. Global bankers suspended issuing "letters of credit" that importers and exporters rely upon to finance overseas trade. Of the $14.5-trillion of cargo that is shipped across the high-seas each year, roughly 90% is financed with "letters of credit," issued by bankers, guaranteeing payment to the shipper, once shipments are delivered to the buyer. With banks cutting-off "letters of credit," the wheels of global shipping have ground to a halt.
Global growth this year will come to a "virtual standstill," warned Olivier Blanchard, the IMF's chief economist, on January 28th. "We need stronger policy on the financial front," he said. Leading the Group of Seven nations into contraction will be the UK-economy, projected to slide 2.8%, Japan's economy will shrink 2.6% and the Euro-zone will lose 2%, followed by the US-economy, which will contract 1.6 percent. China's economy will slow to 6.7% growth, after peaking at 12.7% in Q'2, 2007.
There are indications that US President Obama is heeding the IMF's message, and is ready to exert pressure on the largest US-banks, and over time, could exercise more day-to-day control and scrutiny over their lending practices. Obama will require American bankers receiving cash from the Treasury's bail out fund, to commit to minimum levels of lending and place caps on executive pay and bonuses.
Shifting the focus from paying bonuses to Wall Street bankers, to reviving the US housing market and consumer spending, is the first step for escaping the economic death spiral. Citigroup, under government pressure to increase its lending, says it will use $36.5-billion to issue mortgages, make credit card loans, and buy distressed assets in the tight credit markets in the coming months.
A reeling US-economy has also translated into severe pain for overseas markets. South Korea, the world's 13th largest economy, is among the most vulnerable to the global financial crisis. Although China is now Korea's largest trading partner, much of what China imports from Korea is re-exported to the global markets in the form of finished goods. Korea's exports to China plunged to $4.75-billion in December, or 35.4% lower from a year ago, despite a sharply weaker Korean-won. The last double-digit drop of exports was in 2002, amid the bursting of the dot.com bubble.
Korea's economy is a key bellwether of the global economy, since exports are equivalent to 52% of its gross domestic product. Preliminary reports indicate that exports continued to plunge in January, with shipments to the US declining 21.5%, exports to Europe plunging 47%, and sales to Latin America 36% lower than a year ago. Not surprisingly, Korea's GDP shrank 5.6% in the fourth quarter from the previous three months, the biggest drop since 1998.
Korea's industrial output plunged 9.6% in December, slipping for a sixth consecutive month, as Hyundai Motor, Hynix Semiconductor, and steelmaker Posco reduced output in January, to cope with sagging demand. Samsung Electronics, the world's largest maker of memory chips, liquid-crystal displays and televisions, reported its first ever quarterly loss. Exports of semiconductors plunged 47% in January from a year earlier, and automobiles declined 55-percent.
China's vast manufacturing sector, which employs tens of millions of workers and has functioned as the cheap labor workshop of the globe, also slowed dramatically as demand for its exports collapses in its major North American and European markets. About 20 million migrant workers, moving from villages to cities and factories have returned to the countryside, after losing their jobs because of the economic downturn. Beijing is warning that rising unemployment could fuel social unrest.
After growing at more than 10% a year for the past five-years, the Chinese economy's growth rate has fallen in every quarter since reaching an all-time high point of 12.7% in Q'2 of 2007. Growth rate slumped to 6.8% in Q'4 2008, which isn't fast enough to create jobs for this year's 7-million new entrants into the rural labor market, and would leave China with about 25-million jobless workers.
Still, China has internal resources - roughly $2-trillion in foreign currency reserves, to prevent a hard-landing for its economy, and has vowed to spend 4-trillion yuan on various infrastructure and social programs, over the next two-years, equal to 15% of its total economic output. Chinese premier, Wen Jiabao, said the goal of 8% growth this year, is "an attainable target through hard work. The harsh winter will be gone and spring is around the corner," he said.
When searching for a glimmer of optimism for the global economy these days, there is a small sigh of relief that China's Purchasing Managers' Index (PMI) rose to a reading of 42.2 in January from 41.2 in December, inching further away from the record low of 40.9 plumbed in November. The PMI is a snapshot of overall conditions in manufacturing industry, and still signals a sub-par growth rate that can ultimately lead to higher Chinese unemployment.
However, the index for new export orders from overseas jumped to 36.3 in January, up 28% from a low of 28.2 in November, a possible sign that the worst is behind China's export industry. If China is going to be the savior that pulls the global economy out of its death spiral, one early signal could be a sustained rally in the Shanghai stock index, above the December high at the 2,100-level. Copper traders in Shanghai are also tracking factory activity and stock market trends.
Russia's Putin Lashes out at Wall Street Barons
Last week, the world's most influential business executives and politicians converged in Davos, Switzerland, with most dangerous economic crisis since the 1930's dominating the discourse. One of the main attractions at the World Economic Forum in Davos, was Russian kingpin Vladimir Putin, whose political strength rests on the Kremlin's authoritarian control over the media, secret police, banks, and natural resource oligarchs, that has stifled any meaningful political opposition.
Putin scolded Western capitalists for dragging the global economy into a death spiral. "A year ago, American delegates emphasized the US economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. The entire economic growth system, where one regional center prints money without respite and consumes material wealth, while another regional center manufactures inexpensive goods and saves money printed by other governments, has suffered a major setback," Putin declared.
World leaders in Davos were informed of street riots and spreading discontent, and vowed to prevent the financial crisis from inflicting deeper damage and making global poverty worse. Last week, more than a million people took to the streets of French cities to protest, thousands marched in Russia, "Buy American" initiatives have sprung-up in the US-Congress, and thousands of British employees staged walkouts against the use of foreign contract workers.
So far, the biggest casualties of the global financial crisis are the Russian economy, currency, stock market, and the Kremlin's rapidly shrinking stash of FX reserves. The Russian Trading System Index, once the world's biggest stock market bubble, has collapsed, with a staggering 80% slide from its record high set in July of last year. Putin called the Western banking crisis a "perfect storm whose destructive powers were multiplied worldwide," but in a humble tone, called upon his economic rivals to work together to find an exit route from the death spiral.
Global bankers are retreating en-masse from the emerging world, including Russia, and private capital flows to emerging markets are expected to plunge to $165-billion this year, down from almost $1-trillion two-years ago.Foreign investors and Russian citizens withdrew at least $278 billion from Russian banks deposits, exchange traded bonds and stocks since August, shedding more than $1 trillion from the RTS Index.
Energy and metals make up 80% of Russia's exports,Deputy Prime Minister and Finance chief Alexei Kudrin said on Jan 30th, that Russia's export revenue could plunge by $200-billion in 2009, to roughly $269 billion. "It is the first time since 1982-1983 that the global economy will see demand for crude oil and energy products decline for two-years running," Kudrin said. However, unlike in the Euro-zone and the US-economy, Russia doesn't face a debilitating deflation risk, since falling demand in Russia will be counteracted by rising prices on imported goods due to the devaluation of the Russian rouble," Kudrin said.
The demise of Putin's empire is largely linked to the stunning collapse of crude oil, with Russia's Urals blend tumbling from as high as $140 /barrel in July, to as low as $32 /barrel in December. Surprisingly, the Kremlin has refused to join the OPEC cartel in cutting its oil output to support prices, or even siphoning off some of its oil supply into strategic tankers, to help reverse the bear market slide.
The sharp slide in crude oil prices has left Russia's rouble vulnerable to speculative attack by currency traders, and a 40% drop in budget revenues as the global economic crisis lays bare Russia's poorly diversified economy. Putin relied upon oil profits to steer Russia out of the 1998 currency-crisis, wiped-out the country's foreign debt, amassed nearly $600-billion in foreign currency reserves, and doubled average worker's incomes in six-years, during oil's boom years.
Russia's economy quickly became the world's seventh-largest. One year ago, on Feb 14, 2008, Putin boasted of Russia's economic transformation in his eight-years in power. "It will be quite easy for Russian banks to get through the liquidity crisis. We have restored the fundamental principles of Russian economy on an absolutely new market base, and we are surely changing into one of the economic leaders of the world. The stock index rose 20% in 2007," Putin declared.
But without a competitive manufacturing base as a balance, to Russia's dependence on energy, base metals, and other natural resources, Russia's economy is highly vulnerable to commodity price fluctuations. Russia has lost 6-million jobs since the global credit crunch began to bite, as industrial output went into free-fall.
Foreign inflows which hit $100-billion in 2007, and were responsible for 25% of the investments in Russia's capital markets, went into reverse after Putin's accusation in July that the coal and steel company Mechel MTL.n had engaged in price-fixing, knocking its shares 40% lower in a single-day. So was the continuing battle between Putin and the embattled Anglo-Russian oil producer TNK-BP, reminiscent of a Yukos-style asset grab and there was the August invasion of Georgia.
Urals crude oil, Russia's chief export blend, has slumped far below the $70 average required to balance Russia's budget this year. Declining oil prices and a deteriorating economy has invited speculators to short-sell the Russian rouble, and ordinary Russian citizens, mindful of the previous rouble devaluation in 1998, when the currency lost 70% of its purchasing power, are rushing to convert their rouble savings into US-dollars, Swiss francs, and Gold.
Russia holds the world's largest natural-gas reserves, the second largest coal reserves, and the eighth largest oil reserves, and in a crowning achievement of Russian Petro-power, Putin ordered the Russian rouble to be freely convertible into other foreign currencies. One-year ago, Dmitry Medvedev declared that he would push for Russian oil and gas to be traded in roubles. "We need to stimulate the switch to rouble payment for our commodities," Medvedev said, since a decline in the US-dollar's value had eroded the purchasing power of oil exporters.
But one-year later, it's the Russian rouble which has fallen to an all-time low against the US-dollar, despite efforts by the central bank to stem capital flight by hiking its repo rate to 13%, and selling $200-billion from its FX stash for roubles on the open market. By remaining committed to rouble convertibility, the Kremlin was forced to spend a third of its treasure chest, to defend its currency, which still lost a third of its value against the dollar since the invasion of Georgia last August.
Unable to restore confidence in the rouble, amid weak base metal and crude oil prices, Moscow has adopted a so-called dirty float that will allow the rouble to gyrate within a wide range of 26 to 41 to the dollar. The currency market is still allowed to determine the value of the rouble, but the central bank could intervene to enforce the trading band, rather than trying to influence it on a day-to-day basis.
By widening the trading band for the rouble, the Kremlin aims to conserve more of its badly depleted FX stash. Sergei Shvetsov, Russia's FX chief, said on Jan 27th, the central bank had spent $35 billion to support the rouble in January, but there were no interventions in the last week of the month, as the rouble found its own level of equilibrium, with Urals crude gyrating around $42 /barrel.
But should Urals crude tumble towards $30 amid a synchronized global depression, the rouble could tumble further towards 41 per US$, from around 36-roubles today. Shvetsov also expressed his backing for a freely floating currency, in order to have more leverage over inflation through adjusting interest rates, and to attract foreign capital, once commodity prices stabilize and begin to rebound.
The global capital and money markets operate in a vast web of interconnections that are sometimes difficult for traders to uncover. One of the outgrowths of the Russian rouble devaluation, and the collapse of the crude oil and Russian stock market, was a flight into safe-haven Swiss francs and Gold. The Swiss franc has gained 35% against the Russian rouble over the past three months, while the yellow metal has soared 65% to an all-time high of 33,000-roubles per ounce.
Swiss National Bank warns Currency Speculators
Gold hit all-time highs against most major foreign currencies in January, confounding conventional wisdom, with a background of plunging industrial commodities, and a global economy that is lurching towards a deflationary depression. Instead, gold's role as a hedge against excessive money printing by central bankers, and major currency devaluations, has attracted legions of investors worldwide.
"Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity," said Nicolas Copernicus, in 1525. Even the Swiss National Bank, with its reputation as a monetary hawk, has now declared war against currency traders who are bidding up the Swiss franc as a safe-haven against other depreciating paper currencies, such as the Russian rouble and weak Central European currencies.
The Swiss National Bank is ready utilize all the weapons in its arsenal, to prevent further appreciation of the Swiss franc against other currencies, especially against the Euro, said SNB deputy Philipp Hildebrand on Jan 21st. The SNB slashed its 3-month Libor target by 50-basis to 0.50% on Dec 11th, yet the Swiss franc has climbed 7% higher against the Euro, threatening to undermine Switzerland's export oriented economy. "The SNB could also buy government or corporate bonds to ease monetary conditions further," Hildebrand warned, even if rates reached zero.
"We have all options open and have no limits when intervening in financial markets should it become necessary," SNB member Thomas Jordan said on Dec 11th. "In general, a central bank can always increase the absolute amount of its own currency in circulation," Hildebrand added. "The SNB could sell Swiss francs against other currencies without limits. In an extreme case, it could commit itself to buying foreign currencies at a fixed rate," he warned.
In a world of currency devaluations and instability, zero-percent money market rates, and soon, massive central bank monetization of government bonds, gold has emerged as a safe-haven for preserving wealth. "The things that will destroy us are, politics without principle, pleasure without conscience, wealth without work, knowledge without character, business without morality, science without humanity, and worship without sacrifice," -- Mahatma Gandhi.
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