The Gathering Storm – Part 3

Mervyn King and President Obama are both talking today about the absolute necessity of collaboration and unity at the G20.  They fear that the unity of purpose they think ‘stabilized’ the financial world after the first round of collapses is disintegrating into angry recriminations which may lead to the word that dare not speak its name, ‘Protectionism’.

Of course they are right, that is exactly what is happening. Where I differ from Obama, King and the rest is that they think our former unity, under American leadership, achieved something desirable, whereas I think what our leaders did was ignoble, stupid and will prove to have been for the benefit of the few at disastrous cost to the many.

I also think King and Obama are whistling in the wind. The only reason to talk of unity is when you know you have none.

We are now well past the point where cooperation is even possible, never mind likely.  We will see none coming from the G20. A few windy phrases that will leave nothing but a vague smell behind them is all we will get.  Our leaders are not in charge of events, they are caught in them. And the stupidest part of it is that they were the ones who set in motion the events in whose grip they are now floundering. Our leaders have no ‘initiatives’. I sincerely wonder if they even really understand the nature of the predicament they, with their greed and stupidity, have put us in.

What a spectacle of ineptitude and vacuous pomposity they are. Japan is shocking in its slavish cringing stupidity. Like a starving monkey pressing the bar that once brought reward but has long since been disconnected. The monkey is too conditioned to learn. And so he presses his bar while he starves himself to death.

America has not yet realized that it no longer has the authority nor even the power to dictate to the world what we ‘must do’. So it is still telling the G20 that it wants an agreement on trade imbalances and expects the world will meekly comply. It is living in a bygone decade.  The complacency of America telling Germany off for being too successful an exporter and its people at fault for not consuming enough is pitiful.  Only exceeded in its painful ludicrousness by the half bluster, half pleading tone taken with China over its trade imbalance and currency ‘manipulations’.  Does the American aristocracy really think anyone, no matter how dim witted, is going to listen to America’s whining about currency manipulation after QEII?

Nations are not cooperating because each is now in the grip of domestic crisis.  Each must and will do what its domestic crisis dictates.  The internal emergencies and needs are the raw energy of the building storm.  Like opposing cold and hot currents in the atmosphere. they are driving at each other, catching at each other’s edges and turning each other around bending their course into a rising vortex.

America had to pump more money into the banks to justify the money it has already wasted on a doomed attempt to protect its aristocracy and to make a final lunge for export growth. Such is the extremity of its need and blind desire it chose to ignore the evident fact that its such actions would directly hurt its export competitors, Germany and Japan.  Of course why should it not try to outdo them?  But it is stupid to then turn around and appeal for cooperation and sacrifice for a greater good.

Germany for its part has pushed and insisted on harsh new constraints on what must happen to any EU member that fails to get its debts in order. In so doing it has helped pushed Ireland, Portugal and Greece closer to a another, new funding crisis.  But Germany did not cause Ireland’s crisis. The crisis was coming anyway and Germany’s actions are designed to insulate it and force Ireland to do what its politicians and financial grandees refused to do, to make the bond holders feel their part of the pain.

The actions Germany have taken have pushed Ireland in particular to the point where those who would buy its debt must now provide much greater levels of collateral up front making Irish debt almost impossible to sell.  The cost of insuring such debt is now at all time highs.  It has also forced Ireland to confront its bond holders.

Portugal is next with Spain waiting in the wings.

More broadly, Europe is managing to bring back to a healthy simmer, enough of a sense of peril about sovereign default, whether by design or by accident doesn’t matter,  that it is eroding the devaluation that cost the Fed half a trillion to buy.  The Fed must wish it had an Ireland or a Greece on its side.

China too is doing what it  must do. It must  restructure its economy from purely export to greater domestic demand. But it must retain as full a flow of income from exports as it can to pay for this re balancing. So it will not rein in its exports. America can huff and it can puff but China will not let America’s exports in to China nor its own currency out.

Of course China too is printing just as America is.  The differences are that China’s hot money is not pouring out to infect emerging markets the way the dollar has been and will. And Chinese printing is not quite as empty. For while China has printed, it has also been accompanied by injections of actual new wealth. In the form of land  So all the new currency is not chasing the same goods. The goods are expanding too.  But this doesn’t mean its sustainable or even stable.  because the amount of money is growing much faster than the goods/land.

Quickly after the G20, I expect to see China now making a flurry of bilateral trade deals with a range of countries. Deals which will be the beginning of cutting the dollar out of international trade.  People have talked about decoupling. Well here it comes. Just not the decoupling people were perhaps expecting.

America will then realize the extent of its fall.

The gathering storm is fuelled by each nation’s domestic needs which are all running counter to each other.  As they gather their energy and blow counter to each other, these cross running currents are twisting together and building in to what will, I believe, be a bigger storm than the one whose debris we are still sweeping up.