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Part I Deflation Or Devalue


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On bond market deflation, financial default and currency devaluations

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Part I Deflation Or Devalue

  1. 1. Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze Limited It would be a dark time worldwide.The clock is ticking as the Economist would say... Every second, it seems, someone in the world takes onmore debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to TimesSquare in New York, where the American public shortfall is revealed. Our clock shows the global figurefor all (or almost all) government debts in dollar terms.Does it matter? After all, world governments owe the money to their own citizens, not to the Martians.But the rising total is important for two reasons. First, when debt rises faster than economic output (as ithas been doing in recent years), higher government debt implies more state interference in the economyand higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates arecurring popularity test for individual governments, rather as reality TV show contestants face a publicphone vote every week. Fail that vote, as the Greek government did in early 2010, and the country can beplunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscalcrisis, and the bigger the economic impact such crises will have. Choice between Deflation (contraction ) or Devaluation ;Reflation : As the world looks to “reflate” their economies, fiat currencies (dollar, euro etc) arebeing deliberately devalued by governments worldwide as a way to get out from massive debtburdens that were run up during “credit bubble” and continue at ever higher levels with“stimulus” plans. The U.S. very much wants and needs a weaker dollar and low interest rates asdeficits and unemployment continue to soar. Fiat currencies will likely continue to be aggressivelydevalued over the next decade.Take a Guess At the World’s Networth in bonds, currencies, debt, emerging markets, financialeducation, foreign investment, forex, government, international economy, money supply, networth, worldorder, world reserve currency.....The entire world officially owes itself more money than it canproduce in the form of equity assets. Of course, the calculation might be meaningless, since thenumbers are an aggregate of the nations involved, and it doesn’t make sense to imagine the worldnot being able to pay itself back.But it’s still a thought-provoking state of affairs.According to a recent report in the Financial Post on the precarious pressure-cooker that is thecurrent bond market, total world debt in the form of bonds is equivalent to about $82 trilliondollars USD. The number nearly tripled since 2001 (when it was only $33 trillion U.S.).2012 public/sovereign/govt.debt levels in Us Dollar from The EconomistIntelligence Unit ;
  2. 2. Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze LimitedCompare total debt with total assets: the total value of world equity markets amount to only $44 trilliondollars in USD equivalent. I’m not too sure what exactly this indicates, other than, perhaps, the amount ofinflation ready to leak into the global system. All these bonds are so much money “printed.” Most of itbelongs to the governments like Spain, Ireland, Greece and United States who are now also readyapparently to stand behind insolvent banks, as we all knowThe world thus has a negative net worth of about -$38 trillion measured in USD..asSovereign republics and democratically elected politicians bail out bankers who loanedmoney to non working people to buy houses and also non working non accountablegovernments and corporations to build those societies and the houses.. giving a newtwisted meaning to the old phrase, “ as safe as a house” . ;
  3. 3. Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze LimitedAs the Economist reports “ headlines are all about sovereign debt at the moment. But that is only part ofthe problem. Debt has risen across the economy, from consumers on credit cards, though industrialcompanies borrowing for expansion and financial companies using debt to buy risky assets.Theinteractive graphic above shows the overall debt levels for a wide range of countries, based on datasupplied by the McKinsey Global Institute.In theory there is no maximum level for debt relative to GDP, but Ireland and Iceland (not on thismap) found the limit in practice when they hit eight-to-ten times GDP. Total world Sovereign debtis about 46.4 trillion dollars basis 2012 with another 36 trillion private sector debt worldwide...........We<Economist> have also updated a sovereign debt table we published in February, ranking countries interms of their primary budget balance, debt-to-GDP ratios plus the relationship between the yield on theirdebt and economic growth (if the former is larger than the latter, the debt burden is getting steadilyworse). Spain has now taken over from Greece as the country in the worst position. Here’s the table:Shamik ;
  4. 4. Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze Limited 2011 Debt Bubble: We’re in a Dangerous New Phase – Here’s WhyA CNBC story reported, Christina Lagarde the boss of IMF is surely talking about revving up the globalprinting presses for more bailouts. “She warned that both advanced and emerging economies faced keyeconomic challenges, and that governments must ‘act now’ to stop further contagion. ‘Policymakersshould stand ready, as needed, to take more action to support the recovery, including throughunconventional measures,’ Lagarde said.”Meanwhile, the Germans are talking about letting countries like Greece go bankrupt. Another CNBCstory yesterday said, “Even senior figures in Merkel’s conservative Christian Democrats (CDU) areleaving open the possibility of default. ‘The way things are looking, you can no longer rule out a possibleGreek restructuring,’ CDU budget expert Norbert Barthle told Reuters, when asked about a default oreuro zone exit.”So which is it? Will it be bailout or default? Who knows, maybe a little of both before it is all over.“Wondering what is next for Europe? Don’t be. With Jurgen Stark, aka the last real hawk at the ECB,gone, here comes “the printing.” SocGen’s (Societe Generale) Dylan Grice explains. Suppose that Italy orSpain get caught up in the whirlwind like Greece, Ireland and Portugal, as threatened to happen lastmonth. Maybe the Italian political situation deteriorates, maybe Ireland defaults, maybe Greece will gorevolutionary, or maybe an ill-advised wayward comment from an influential European politician willspook markets and send them into renewed tailspin. We don’t know which of these will happen, if any.All we know is that these are some of the many plausible triggers for a further deterioration in this fragilesituation.”That “fragile situation” would mean a panic set off by an impending debt implosion, but SocGen’s Gricesays the powers will not allow it to happen. In the end, there will be a burst of money printing to stave offinsolvency that has already infected many European banks.Then, there is the absurd idea that Europe andAmerica, for that matter, can “grow” their way out of the trillions of dollars of debt the western world hasracked up. An Associated Press story on Friday said,“The argument put forth by (Tim) Geithner and others is that the best deficit-reducer is growth: When theeconomy is humming, it offsets spending and drives down both the size and the proportion of deficits.Rather than trying to scrimp their way back to prosperity, world economies need to spend money to makemoney.”The “spending” is code for printing money out of thin air, and “growth” is really code for inflation.It looks like European banks will need some cash long before they can “grow” their way out of thetremendous debt they are in. Just last week, Deutsche Bank CEO Josef Ackermann said, “It is an opensecret that numerous European banks would not survive having to revalue sovereign debt held on thebanking book at market levels.”There are twenty Federal Reserve primary dealers of Treasury debt around the planet. Do you think theFed will let a single one fail?Economist John Williams at says for the Federal Reserve “systemic failure is notan option.” The financial crisis in 2008 caused the Fed to dump $16 trillion into the worldShamik ;
  5. 5. Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze Limitedeconomy. Five trillion dollars was pumped into foreign banks alone to keep them afloat. In hislatest report, Williams said,“The U.S. and global financial markets remain extraordinarily volatile and unstable, with systemicinstabilities offering the potential, again, of systemic failure. Following the collapse of Lehman in 2008,the U.S. Treasury and the Federal Reserve committed to preventing a systemic collapse at any cost. Theycreated and spent, loaned or guaranteed whatever money was needed to forestall systemic failure, kickingthe proverbial can down the road. Most of the actions taken then and since, however, were stopgapmeasures; little was done to address the systemic and economic crises fundamentally. At present, thesystem has moved enough further along the road that the can likely will be kicked again. Now, though,the road ahead drops off a cliff, well within current kicking distance.”I think the “kicking distance” and the “cliff” are somewhere between now and early 2013.2012 and the US Dollar CollapseI came to the conclusion several years ago that it was just a matter of time before the world realizedthat the relative functionality of the U.S. dollar was about – to collapse – and that this timehappened to coincide with that fateful date all the prophecies are going crazy about – 2012!So Chris Laird goes on to say, in part:..” I find this coincidence remarkable because, were the USD toactually collapse, just think of the many economic and political disasters that would indeed unfold. TheU.S. economy would stop dead for a period of time and the rest of the world, hitherto dependent on theold industrial/consumer economic model, would have to find a new economic paradigm to plan theireconomies.A USD collapse means the entire structure of the world economy would collapse for a period of time,with a collapsed supply chain, among other things. The world would also go through cataclysmspolitically during that period. That usually leads to massive wars, starvation and mass homelessnessaround the world. Interesting. That’s the same stuff being prophesied in many of the numerous 2012prophecies of various major religions! That is quite the coincidence. The demise of the USD will collapsethe entire world economy and lead to collapsed policies, and then a massive world war “.Of course, some people cringe at an analyst such as myself talking about ‘religious bunkum prophecies’?How can I combine prophecies with analytical methods? Well, for one thing, I have a thinking paradigmwhere ‘if it works, it must be true, don’t leave out weird things in analysis, insisting only on somecalculation based prediction’. The trouble with being analytical all the time is that there are times, wherechaos enters the picture and everything changes. Chaos, by definition, is not predictable… ;
  6. 6. Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze LimitedWhat Would Happen in a USD Collapse? • The U.S. and Western economies would all face insolvency simultaneously, with the U.S. first in line. • The entire Western industrial/consumer/credit economy would fall apart so fast it would make your head spin. The supply chain would stop and stores would empty quickly. • The USD would fall over 50% in one week’s time and then temporarily stabilize before its final last gasp… • Worldwide currency panic would set in paralyzing what’s left of the world economy which means the ‘emerging markets’ would stop dead too. • China would have a revolution, or go into military mode, which would be even worse. • A one-world currency would be demanded and implemented. • Asia would fare fare horribly…If Western consumerism goes away, then the entire foundation of the Asia macro economy would instantly crash and stop cold. Do you remember what happened that fateful last quarter of 2008, after the Lehman debacle, and the world banking system almost collapsed en masse? Exports from China and Japan for example collapsed over 30%! Don’t think economic demand cannot stop on a dime, because we already had one very scary case of this in 2008. So, all the pundits aside, Asia would get killed too economically. The big question is, could they successfully adapt to a new economic paradigm before they have their own revolutions and a change of guard ?Shamik BhoseExecutive DirectorCommodity & Currency & Interest rate futures MarketsMicrosec Commerze ; www.commoditylive.inPhones 009133-30512100 / 30512139 -40Fax 009133 -30512020 ;