Why the IMF Meetings Failed - And the Coming Capital Controls

ilene's picture

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chopper read's picture

Ilene, you chose to post a very informative and productive 'write-up'.  well done!  thank you very much!!

Itsalie's picture

Wolf the archtypical Keynesian (well he is brit afterall, no one is perfect)

"This is not going to happen. Nor would it be in China’s interest if it did. As a creditor, it would enjoy an increase in the real value of its claims on the US. But US deflation would threaten a world slump."

 

The japanese pensioners are quite happy with the price deflation: they get to stretch their savings even though JGB yield next to nothing. Had Japan experienced inflation the last 2 decades and with the demographic and structural problems in the economy, these old people would all have died of hunger or sold their homes long ago. Sure, with higher inflation, JGB yields might be higher than what it is today, but knowing how the central banks of the world are prone to always leave the punch bowl on the table too long, they most likely would have ended up with higher prices which are not compensated by higher interest rates on their savings (ie falling real purchasing power - just like Americans are experiencing now). An aging American population should not accept inflation as it is dictated to them by the elites of the world, like our friends Wolf and Krugman.

 

Keynesians cannot see any workable economic system besides inflation and printing - their primitive mathematical model cannot accept negative numbers (ie negative inflation), deflation is not part of their world view.

 

 

 

 

chopper read's picture

i find it fascinating that the world operates in a system where savers are never to be rewarded with lower prices, and the monetary base (through credit!) must grow exponentially to sustain itself.

 

what could go wrong?

Coldfire's picture

Happy talk about the Treasury Bill "standard" being sustainable is five kinds of delusional. It is in no nation's interest to hold or deal in a reserve "asset" that is being actively debased. Sheitner and Bermonkey are clowns. But it's five minutes to midnight. And as Lon Chaney observed, there's nothing funny about a clown in the moonlight.

Hot Shakedown's picture

One of the most informative pieces that I have ever seen. I plan to forward to someone that I know fairly well for their take. This person is a former CFR member and current insider with serveral publicly traded muti national companies.

John_Coltrane's picture

Great article!   Enjoyed it from start to finish.  The disconnect of the FIRE economy from the real economy is the central issue of the last 30 years with the pivot point being 1971 as mentioned.

It all comes down to: there's no free lunch though banksters love free money.  Reducing entropy (the purpose of life) requires energy and real work (just basic thermodynamics).

Goldenballs's picture

Quite simple the situation is becoming desperate because all they do fails.Or is the financial system going to heal itself ?

CustomersMan's picture

 

 

 

         CustomersMan:  Possible Solution

 

     U.S.A. Treasury offers all residential mortgage holders a one-time Auto-Refinancing Program,consisting of a 30 year 3% rate on their existing balance.

 

     This would require new paperwork which everyone would be expected to sign in order to get this rate, solving the problem of the old fraudulent documents.

 

      Special situations and problems could be handled separately, but again offer both sides in these cases, a 3% 30 year mortgage to settle their claims.

 

       This would immediately reduce everyone's monthly payments, put cash into the hands of homeowners who would likely spend a good portion of it, improve citizens balance sheets, stop the valuation slide, revive the job markets, improve the U.S. Treasury Tax Receipts, etc.,etc.

 

        A special series of 30 Year U.S. Treasury Bonds could be issued in a series of auctions to accomplish this, and investors from around the world would know what the money would be used for and what was securing the bonds.

 

               Is it a Plan? I think so.

 

        This would certainly be better that giving the TBTF Banks another few Trillion with which they most likely would use to consolidate their power.

 

          Look how they handled their last promise (when they strong-armed us for the first $700 Billion) and told us they would lend,lend,lend only to screw us in the end (pun intended).

espirit's picture

Since I worked hard, saved my money, and paid off my home, will there be some benefit that I can derive?

Couple of million at 3% would get me into retirement.

<sarc on>

RockyRacoon's picture

People who leave one word, disparaging replies:  Garbage.

Why don't you honor us with your brilliant insight.

Catullus's picture

Fine.  Turd flushing it is...

Let's start with the first question:

What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale, in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1% interest cost? This is the game that is being played today.

 

Price.  Price prevents one from doing this.  It's that number thingy that's like a calculation to signal to everyone the amount of "money" required to exchange for stuff.  And if the intent is to only buy up things to create a "capital gain", the question becomes, why would you do this? Wonderful, you've made more dollars.  But as the author points out, what prevents you from just creating $50 trilllion more?  Great.  You levered up to purchase something only to sell it later (purchase dollars later) to be gloriously stuck with dollars. Why not just hold onto your collateral and pretend like you have $100 trillion?

Then again...

Competitive nonappreciation’ sounds like ‘conspiratorial non-suicide.’ These countries simply are trying to protect their currencies from arbitrageurs and speculators flooding their financial markets with dollars, sweeping their currencies up and down to extract billions of dollars from their central banks.

I like the first sentence. Good times.  But if China is racing to purchase Treasury Bonds [sell dollars] to prevent the appreciation of their currency, then they're flooding the market back with the dollars acquired through a positive trade surplus.  How does selling your dollars prevent speculators from flooding your country with dollars? 

It's getting late. But this historian turned prognosticator on economics fails to see the very salient point about exchange rates, money, and price.   Namely that all prices are exchange rates.  It's the rate at which you exchange one thing for another whether it be in dollars, camels, or gold. 

In my opinion, the game here is to not be left holding the fiat bag at the end of the day.  This would be the finding the greater fool stage of any bubble.  Focusing on the exchange rates or trade balances or GDP/debt ratios is a fool's game.  I'll stick to the most important price right now: oz gold/spot barrel of oil... 16.8.

 

RockyRacoon's picture

Well, why didn't you say so!  That's all that was asked for -- a bit o' rebuttal.  

So, you have quibbles with a few points and that's great.  Now we know.  Your reply is appreciated and gives me some food for thought.

Goldenballs's picture

Garbage.Where,s the urgency in any of this,do these people realise they are literally playing with fire,if they don,t get it right and they may only have one chance the world will never be the same again.

Goldenballs's picture

The reason these meetings failed is because they are too busy looking after themselves to care.

Kreditanstalt's picture

Michael Hudson is usually an absolutely unrepentent, unreconstructed socialist-redistributionist statist (a mouthful!).   But here he states the situation clearly.  Beware, however, when he starts proffering 'solutions' to the mess...

 

liberal sodomy's picture

USDX slammed on tokyo open........again.

gwar5's picture

What's to stop them, you say?  I thought they've already done it.

The derivatives market is already > $600 Trillion. They've leveraged everything on the planet and found a way to float a dark market derivative currency.

Bob's picture

Wow.  Chilling.

End the Fed, Bitchez?

 

chet's picture

I posted this on Bruce's thread, but I'll repost here, because I thought this was a very good article on this same subject, and clearly written.

From economist Tim Duy on the end of the entire Bretton Woods system:

http://economistsview.typepad.com/timduy/2010/10/the-final-end-of-bretton-woods-2.html

doolittlegeorge's picture

I agree "this was not the usual gibberish."  I actually did understand this article.  Yet another "someone is heading for the trash can and puking" piece.

DJFUNK's picture

Well....there is only one possible end result to this kind of maddness.....war.

RockyRacoon's picture

I presume you mean a guns and bombs war.  The currency wars can be pretty devastating as well.  Destruction comes in many forms.

chopper read's picture

it seems likely that this calamity could usher in food shortages, and the battle over global resources could continue to get bloodier. 

idoubtit's picture

Wow.  Awesome article.  I learned something today.

Eternal Student's picture

Ditto on the appreciation of the article. And my thanks.

Assetman's picture

I wonder if China can get dibs on selling $800 billion of U.S.Treasuries to the Federal Reserve, since apparently, it's a willing buyer.

DosZap's picture

I do not understand why China doesn't use the funds (redeem the T's), and use the cash to buy Gold,Oil,Grain, etc,etc.

Something they want, need, and will show us who's boss real quick.

Hell, why not all 2.5 T's?.

They no longer need us, (as trading partners).........sell, and kick us to the curb.

doolittlegeorge's picture

they did do that.  now "we're out that stuff."  Suddenly "railroad stocks are soaring."  What the hell are they moving in those things?  Maybe it's joy riding time, now.

Assetman's picture

The Chinese still have plenty of Treasury debt on their hands.  They are seemingly avoiding new debt, though, in preference to incrementally picking up Yen-denomiated bonds.  Quite frankly, much of UST debt own by China is of shorter durations, and will likely mature in the near future, anyway.

I think the challenge with $800 billion of anything is to move it efficiently, and having a plan to for the assets you get in return.  In more practical terms, outright selling of $USD denominated assets will choke off export activity very quickly... and up to this point, the Chinese have not been willing to make that sacrifice.

I guess what I fail to understand is if the rest of the world is fed up with the Federal Reserve flooding the world with credit-- equivalent to glovbal financial terrorism-- why in the world do many of these countries so openly accept the $USD as the de-facto global reserve currency?  This is financial war on a global scale, and the U.S. might well be in the driver's seat and influence behaviors-- but they also appear to be quickly emerging to take the part of the world's villian.

Maybe those railroads are shipping dollar bills overseas. ;)

chopper read's picture

"why in the world do many of these countries so openly accept the $USD as the de-facto global reserve currency"?

 

because this currency used to be backed by the world's largest gold reserve and strongest economy.  now, neither is the case, and our central money planners are doing nothing to protect the fiat brand-name via interest rate raises, so we should see some seismic shifts coming very soon. 

espirit's picture

"why in the world do many of these countries so openly accept the $USD as the de-facto global reserve currency"?

Because it is the best scam they've got going, and too deep a hole to dig out of.

Every government has spent more than can be taken in by taxation, and now buys it's own debt in a shell game, or stiffs it's trade partners by currency devaluation. Everybody's wise to the game now, but wants to be last to show weakness.

Endgame soon.

chet's picture

Once we're all homeless, there will be lots more people "riding the rails."

ecuador mike's picture

If I'm not mistaken, Michael Hudson is of Mayan ancestry.

doolittlegeorge's picture

thank God, an American.  Or is it "meso-American"?  Maybe that's what Ben Bernanke really is...full on "meso-American" high priest.

CulturalEngineer's picture

Great well-researched post!

The U.S. banking and financial sector under the Rubin/Summers (et al) paradigm has done more to betray the ideals of this country and the Enlightenment than any external enemy.

If the world ends up with an Authoritarian future molded into some hi-tech feudalism... these will be the guys to thank!

Initiative is GOOD! Entrepreneurship is GOOD! Honest business is GOOD!

Predatory financialization and corporatist/government cronyism is BAD!

ATG's picture

Two legs bad.

Four legs good.

Two legs better.

williambanzai7's picture

I really can't think of any good reason why other countries, particularly Asian countries, should listen to anything American officials say.

We are so full of hypocritical bullshit it is incredible.

RockyRacoon's picture

It plays well in DC.  Nothing else matters.  Or at least that's what they think.

Dollar Bill Hiccup's picture

Apologies, posted this before but think it is rather relevant here.

Why America is going to win the global currency battle

By Martin Wolf

Published: October 12 2010 22:30 | Last updated: October 12 2010 22:30

Currencies dominated this year’s annual meetings of the International Monetary Fund. More precisely, two currencies did: the dollar and the renminbi, the former because it was deemed too weak and the latter because it was deemed too inflexible. But, behind the squabbles, lies a huge challenge: how best to manage the global economic adjustment.

In his foreword to the new World Economic Outlook, Olivier Blanchard, the IMF’s economic counsellor, states: “Achieving a ‘strong, balanced and sustained world recovery’ – to quote from the goal set in Pittsburgh by the G20 – was never going to be easy ... It requires two fundamental and difficult economic rebalancing acts.”

The first is internal rebalancing – a return to reliance on private demand in advanced countries and retrenchment of the fiscal deficits that opened in the crisis. The second is external rebalancing – greater reliance on net exports by the US and some other advanced countries and on domestic demand by some emerging countries, notably China. Unfortunately, concludes, Professor Blanchard, “these two rebalancing acts are taking place too slowly”.

We can consider this rebalancing on two dimensions. First, the erstwhile high-spending, high-deficit advanced countries need to de-leverage their private sectors on the journey to what Mohamed El-Erian of Pimco, the investment company, called “the new normal”, in his Per Jacobsson lecture. Second, the real exchange rates of economies with robust external positions, strong investment opportunities, or both, need to appreciate, while expansion of domestic demand offsets the consequent drag from net exports.

Aggressive monetary policy by reserve-issuing advanced countries, particularly the US, is an element in both processes. The cries of pain now heard around the world, as markets push currencies up against the dollar, partly reflect the uneven impact of US policy. Still more, they reflect the stubborn unwillingness to accept the needed changes, with each capital recipient trying to deflect the unwanted adjustment elsewhere.

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

If you wish to understand how aggressive US policy might become, read a recent speech by William Dudley, president of the Federal Reserve Bank of New York. He notes that “in recent quarters the pace of growth has been disappointing even relative to our modest expectations at the start of the year”. Behind this lies deleveraging by US households, in particular. So what can monetary policy do about it? His answer is that “very low interest rates can help smooth the adjustment process by supporting asset valuations, including making housing more affordable and by allowing some borrowers to reduce debt interest payments. Beyond this ... to the extent that monetary policy can ‘cut off the tail’ of the distribution of potential adverse economic outcomes ... it can help encourage those households and businesses with money to spend to do so”.

Above all, today’s low and falling inflation is potentially calamitous. At worst, the economy might succumb to debt-deflation. US yields and inflation are already following the path of Japan’s in the 1990s (see chart). The Fed wants to stop this trend. That is why another round of quantitative easing seems imminent.

In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).

Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

Naturally, one could imagine an opposite course. Indeed, China objects to the huge US fiscal deficits and unconventional monetary policies. China is also determined to keep inflation down at home and limit the appreciation of its currency. The implication of this policy is clear: adjustments in real exchange rates should occur via falling US domestic prices. China wants to impose a deflationary adjustment on the US, just as Germany is doing to Greece. This is not going to happen. Nor would it be in China’s interest if it did. As a creditor, it would enjoy an increase in the real value of its claims on the US. But US deflation would threaten a world slump.

Prof Blanchard is clearly right: the adjustments ahead are going to be very difficult; and they have also hardly begun. Instead of co-operation on adjustment of exchange rates and the external account, the US is seeking to impose its will, via the printing press. The US is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange controls (such as China), able to manage the adjustment better.

It would be far better for everybody to seek a co-operative outcome. Maybe the leaders of the group of 20 will even be able to use their “mutual assessment process” to achieve just that. Their November summit in Seoul is the opportunity. Of the need there can be no doubt. Of the will, the doubts are many. In the worst of the crisis, leaders hung together. Now, the Fed is about to hang them all separately.

 

chopper read's picture

In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.

 

the adjustments ahead are going to be very difficult; and they have also hardly begun.

 

...In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.

great post.  these bits say it all.  cheers. 


Buck Johnson's picture

Bill you are right but not really.  Yes they can win, win the battle but lose the war.  What do you think is happening right now in the US as we discuss this situation.  The states are going or have gone broke, both state and federal and private pensions are becoming insolvent, the baby boomers are retiring and their isn't enough younger workers to supply the tax revenue for much of the liabilities that are needed for them and for the rest (SS, Medicare/Medicaid etc. etc.).  There's alot more, but to solve the problem it's real easy to print/click money into existance and use it offshore.  When those dollars both physical and electronic gets back here, most of it is recycled into Treasuries or govt. bonds and it doesn't hit mainstreet.  But the few things that I wrote, if money was printed/clicked into existance to bailout all these programs or states etc. then it would cause inflation or really Hyperinflation because it would be felt right away on mainstreet.  That is why you can't just print money and take it to the store to buy grocieres, because if everybody is doing it then cost of goods and services would be going up exponentially.  But when it's done on the international level they can hide it off book and/or export the problem to other countries.

But even this can only last but so long, and eventually what will happen is you will get stagflation increasing in countries and essentially have little US of A's being formed economically and then Hyperstagflation.

chopper read's picture

right on.  or still, "hyperbiflation" with home and car prices continuing to fall from increasing unemployment while food and energy costs skyrocket. 

midtowng's picture

The dollar will be the last fiat currency standing under this system. But who says that this system will last much longer?

doolittlegeorge's picture

Good comment. the world has been "all on deflate the USA" for sometime.  They thought they had the victory in 2008 but then we elected a madman.  Some "were certain of USA defeat" but now are wondering "did we just really tick off the wrong guy here"?  That may include "the man we elected" himself.  It ain't easy "ticking off yourself"--more common that you think tho.

Rusty_Shackleford's picture

Fantastic article. 

Ignore it at your peril.

HitTheFan's picture

Hey, that's one hell of a piece of writing, thanks very much for posting it.