Quantum Pranx

ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘trade war

Trigger Points, Black Swans, and other unpleasant realities

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by Giordano Bruno
Originally posted October 27, 2010

Neithercorp Press

AN AVALANCHE IS NOT AN “EVENT”, IT IS AN EPIC; A SERIES OF SMALLER EVENTS DRIFTING AND COMPACTING ONE AFTER ANOTHER until the contained potential energy reaches an apex, a point at which it can no longer be managed or inhibited. A single tremor, an inopportune echo, an unexpected shift in the winds, and the entire icy edifice, the product of countless layered storms, is sent crashing down the valley like a great and terrible hand.

In this way, avalanches in nature are quite similar to avalanches in economies; both events accumulate over the long span of seasons, and finally end in the bewildering flash of a single moment.

The problem that most people have today is being unable to tell the difference between a smaller storm in our economy, and an avalanche. Very few Americans have ever personally witnessed a financial collapse, and so, when confronted with an initiating event, like the stock market plunge of 2008, they have no point of reference with which to compare the experience. They misinterpret the crash as a finale. Untouched, they breathe a sigh of relief, unaware that this is merely the beginning of something much more complex and threatening.

So, without personal experience on our side to help us recognize a trigger point incident; the catalyst that brings down our meticulously constructed house of cards, how will we stand watch? Will we miss the danger parading right in front of our faces? Will we be caught completely off-guard?

The key in avoiding such a scenario is in identifying the primary pillars of our particular financial system, and tracking them carefully. Once we are able to cut through the haze of distractions and minor events promoted mostly by the mainstream media, and focus on that which is truly important, our ability to foresee danger greatly increases. But what are the crucial mainstays of our economy, and what kind of disastrous occurrence could possibly bring them tumbling down?

Mortgage Crisis Redux

The health of property markets is a vital indicator of the stability of almost any country, but most especially in the United States. The reason why the bust in mortgage values is so dangerous to our particular economy is because Americans allowed themselves to become completely dependent on debt in order to sustain their consumption. We have been surviving on mortgage loans and Visa cards for nearly two decades! The fantastical boost in stocks and retail during the late 90’s and early 2000’s was an illusion built on artificially low interest rates and easy credit. Of course, it doesn’t help that corporate interests outsourced most of our industrial foundation to the third world leaving us with an emaciated jobs market utterly reliant on the service sector. Many people were given few options besides taking loan after loan using homes they couldn’t afford in the first place as collateral.

Regardless, without the support of solid industry and innovation in a system to supply employment opportunities and create true wealth (not debt), we have only “derivatives” and toxic securities, worthless bits of paper representing liabilities that will never be repaid. Now that these contracts are known to be worthless, there is only one thing left to prop up the economy; fiat printing of the U.S. dollar.

Back in 2008, I called the bailout of Fannie Mae and Freddie Mac a “black hole” of debt which would siphon the last remaining vestiges of wealth from the American taxpayer, and this is exactly what has happened. Every quarter, MSM analysts claim the housing market has “bottomed” and is ready for a rebound, yet, every quarter the mortgage crisis gets just a little bit worse. It is now projected that Fannie and Freddie could end up costing taxpayers over $1 Trillion:

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Albert Edwards on Terminal Competitive Devaluation, the Nuclear Option, and how the Fed’s Policies may start an all out war

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by Tyler Durden
Posted originally September 21, 2010

THE RECENT INTERVENTION BY THE BANK OF JAPAN HAS QUICKLY BECOME THE MOST CONTENTIOUS decision in global economic circles, with many wondering now that the world economy is off on a course of radical currency devaluation, who will be next, and how far will this game continue? If Albert Edwards, whose latest piece rhetorically asks (and answers) “what do devaluation, high unemployment, inequality and food prices spell?  C-H-A-O-S” is correct, this could be the beginning of a rapid descent in which central banks around the world are all forced to use the nuclear option: ceaseless FX devaluation, but one coupled with an endless increase in the money supply a process which can only have one outcome – that predicted recently by Eric Sprott when he said that “we are now paying for the funeral of Keynesian theory.”

However, the biggest threat is that this most recent invocation of the nuclear option is coming at a time when the world is least prepared to handle it – social imbalances are at unprecedented levels, and if, as many predict, the price of key food products is about to surge (courtesy precisely of these failed central bank policies) to a point where the great unwashed end up on the wrong side of hungry, from there, to armed conflict, the line is very, very thin.

Edwards looks first at the immediate reasons that prompted Shirakawa to do what he did.
Since 2009 a cyclical recovery has been met with further yen appreciation which has been tolerated by the Japanese authorities. But with the leading indicators now topping out, yen strength is no longer tolerable (see chart above) – commentators who rightly point out that the real trade-weighted yen is not that strong have missed the point. It is the change in the currency as well as its level that helps determine export growth. A rise in an undervalued currency to a less undervalued level will still hit exports and can cause a recession.

The Japanese economy is decelerating. The PMI usually proves to be quite a good early warning of changes in the cyclical wind and it has begun to turn down decisively. (The current downturn may look moderate compared to 2008, but remember GDP contracted peak to trough by 8% during this period, one of the worst GDP declines of any industrialized nation.) The current downturn in the PMI is sufficiently bad to start ringing alarm bells – see chart below.

As expected, Japan is merely the beginning, however in a non-zero sum world of competitive currency devaluation. And because he is right, and fiat is all relative to itself, except to absolutes such as gold, those calling for a local peak in gold prices may want to reevaluate their assumptions.

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Trade Wars and Protectionism are not Free Trade

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Trade Wars and Protectionism are not Free Trade
Posted by Ron Paul (09-21-2009, 02:21 PM) filed under Foreign Policy
Two weeks ago, both the administration and the Fed announced with straight faces that the recession was over and the signs of economic recovery were clear.  Then last week, the president made a stunning decision that signals the administration’s determination to repeat the mistakes of the Great Depression.  Much like the Smoot-Hawley Tariffs that set off a global trade war and effectively doomed us to ten more years of economic misery, Obama’s decision to enact steep tariffs on Chinese imported tires could spark a trade war with the single most important trading partner we have.  Not only does China manufacture a whole host of products that end up on American store shelves, they are also still buying our Treasury debt.
One has to wonder why this course of action is being undertaken if the administration really believes its own statements about economic recovery.  Why are they still trying to fix something they have supposedly already fixed?  The most troubling thing is the rhetoric about free trade given to justify this.  The administration claims it is merely enforcing trade policies and that this is necessary for free trade.  This sort of double speak demonstrates a gross misunderstanding of free trade, economics and world history.  Yet these are the same people the country trusts to solve our problems.  This sort of thing should remove all doubt about the credibility of the decision makers in Washington.
The truth is this will hurt American consumers by driving up prices of tires and cars.  This will also complicate matters for our already crippled manufacturing and agricultural industries, if and when China retaliates against US made products.  Whatever jobs might be saved in the tire and steel industries here as a result of this protectionist measure will likely be lost in other American industries.  It is even doubtful that those jobs will be saved, as cheap tires can be obtained from other places like Mexico instead.  It is difficult to see any real winners among all the losers where trade wars are concerned.  If Unions think this is beneficial to them, they are being penny-wise and pound foolish.
Free trade with all and entangling alliances with none has always been the best policy in dealing with other countries on the world stage.  This is the policy of friendship, freedom and non-interventionism and yet people wrongly attack this philosophy as isolationist.  Nothing could be further from the truth.  Isolationism is putting up protectionist trade barriers, starting trade wars imposing provocative sanctions and one day finding out we have no one left to buy our products.  Isolationism is arming both sides of a conflict, only to discover that you’ve made two enemies instead of keeping two friends.  Isolationism is trying to police the world but creating more resentment than gratitude.   Isolationism is not understanding economics, or other cultures, but clumsily intervening anyway and creating major disasters out of minor problems.
The government should not be in the business of giving out favors to special interests or picking winners and losers in the market, yet this has been most of what has consumed politicians’ attention in Washington.  It has reached a fevered pitch lately and it needs to end if we are ever to regain a functional and prosperous economy.

by Ron Paul
Originally posted on Sept 21, 2009

TWO WEEKS AGO, BOTH THE ADMINISTRATION and the Fed announced with straight faces that the recession was over and the signs of economic recovery were clear. Then last week, the president made a stunning decision that signals the administration’s determination to repeat the mistakes of the Great Depression.

Much like the Smoot-Hawley Tariffs that set off a global trade war and effectively doomed us to ten more years of economic misery, Obama’s decision to enact steep tariffs on Chinese imported tires could spark a trade war with the single most important trading partner we have. Not only does China manufacture a whole host of products that end up on American store shelves, they are also still buying our Treasury debt.

One has to wonder why this course of action is being undertaken if the administration really believes its own statements about economic recovery. Why are they still trying to fix something they have supposedly already fixed? The most troubling thing is the rhetoric about free trade given to justify this. The administration claims it is merely enforcing trade policies and that this is necessary for free trade. This sort of double speak demonstrates a gross misunderstanding of free trade, economics and world history. Yet these are the same people the country trusts to solve our problems. This sort of thing should remove all doubt about the credibility of the decision makers in Washington.

Read the rest of this entry »

Written by aurick

22/09/2009 at 9:38 am