Posts tagged inflation

Jim Rickards: The Demise Of The U.S. Dollar (And Mutualy Assured Financial Destruction) Video

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Source: http://www.againstcronycapitalism.org

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Jim Rickards: The Demise Of The U.S. Dollar

(And Mutualy Assured Financial Destruction) Video

 

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It won’t happen tomorrow but slowly but surely the world is moving from dollars. The petrodollar system which has been key to the world economy over the last 40 years is eroding. More and more country to country deals are being done in currencies other than the dollar. The economic world as we have known it, after Bretton Woods in the Cold War Era, the post Cold War era, and the post 9-11 era is fundamentally shifting.  The dollar is not what it once was. It is no longer “almighty” and one should be prepared.

People have been predicting the death of the dollar for quite a while now, but many falsely believe that because hyperinflation hasn’t taken hold (there’s plenty of inflation though despite what we are told) we must be out of the woods. This would be a foolish assumption.

Since 2008 particularly I have watched the power of the dollar erode steadily. Countries are figuring out how to unwind their dollar positions without causing panic and killing the value of their dollar denominated assets. In order to unload dollar denominated assets and debt there has to be a willing buyer. Moving too quickly is suicide, but many “international actors” think not moving at all is also.

No one wants to get stuck holding the bag of dollars when things go south. But if things go bad (for the dollar) slowly the theory is an orderly less disruptive liquidation can occur. This will take, and has taken years. But it’s happening.

 

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Image credit: http://www.againstcronycapitalism.org


Nick Sorrentino
About Nick Sorrentino

Nick Sorrentino is the co-founder and editor of AgainstCronyCapitalism.org. A political and communications consultant with clients across the political spectrum, he lives just outside of Washington DC where he can keep an eye on Leviathan.

Peter Schiff ~ Meet “Lowflation”: Deflation’s Scary Pal

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Source: http://www.europac.net

By Peter Schiff

Friday, April 4, 2014

Meet “Lowflation”: Deflation’s Scary Pal

 

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital

In recent years a good part of the monetary debate has become a simple war of words, with much of the conflict focused on the definition for the word “inflation.” Whereas economists up until the 1960′s or 1970′s mostly defined inflation as an expansion of the money supply, the vast majority now see it as simply rising prices. Since then the “experts” have gone further and devised variations on the word “inflation” (such as “deflation,” “disinflation,” and “stagflation”). And while past central banking policy usually focused on “inflation fighting,” now bankers talk about “inflation ceilings” and more recently “inflation targets”.  The latest front in this campaign came this week when Bloomberg News unveiled a brand new word: “lowflation” which it defines as a situation where prices are rising, but not fast enough to offer the economic benefits that are apparently delivered by higher inflation. Although the article was printed on April Fool’s Day, sadly I do not believe it was meant as a joke.

Up until now, the inflation advocates have focused their arguments almost exclusively on the apparent dangers of “deflation,” which they define as falling prices. Despite reams of evidence that show how an economy can thrive when prices fall, there is now a nearly universal belief that deflation is an economic poison that works its mischief by convincing consumers to delay purchases. For example, in a scenario of 1% deflation, a consumer who wants a $1,000 refrigerator will postpone her purchase if she expects it will cost only $990 in a year. Presumably she will just make do with her old fridge, or simply refrain from buying perishable items for a year to lock in that $10 savings. If she expects the cost of the refrigerator to decline another 1% in the following year, the purchase will be again put off. If deflation persists indefinitely they argue that she will put off the purchase indefinitely, perhaps living exclusively on dried foods while waiting for refrigerator prices to hit zero.

Economists extrapolate this to conclude that deflation will destroy aggregate demand and force the economy into recession. Despite the absurdity of this argument (people actually tend to buy more when prices fall), at least there is a phantom bogeyman for which to conjure phony terror. Low inflation (below 2%) is even harder to demonize. Few have argued that it has the same demand killing dynamics as deflation, but many say that it should be avoided simply because it is too close to deflation. Given their feeling that even a brief bout of minor deflation could lead to a catastrophic negative spiral, they argue for a prudent buffer of 2% inflation or more. But the writer of the Bloomberg piece, the London-based Simon Kennedy, quotes people in high positions in the financial establishment who offer new arguments as to why “lowflation” (as he calls it) is a “threat” in and of itself. And although the article was primarily concerned with Europe, you can be sure that these arguments will be applied soon to the situation in the United States.

The piece correctly notes that those struggling with high debt tend to welcome high rates of inflation. The math is simple. By diminishing the value of money, inflation benefits borrowers at the expense of lenders. By repaying with money of lesser value, the borrowers partially default, even when paying in full. The biggest borrowers in Europe (and the United States for that matter) are heavily indebted governments and the overly leveraged financial sector. Should it come as a surprise that they are the leading advocates for inflation? The writer admits that higher inflation will help these interests manage their debt burdens and in the case of the financial sector, profit from the increased lending that low interest rates and quantitative easing encourage.

On the other side of the ledger are the consumers, the savers, and the retirees. These groups want lower prices and higher rates of interest on their accumulated capital. Such a combination will lead to higher living standards for those who have worked and saved for many years in order to enjoy the fruits of their efforts. But these types of people are simply not on the “must call” list for our best and brightest economic journalists. As a result, we only get one side of the story.

The article also points out that higher inflation gives businesses more flexibility to retain workers in periods of weak growth. The argument is that if sales revenue falls, companies will not be able to lower wages, and will instead resort to layoffs to maintain their profitability. However, this is only true in cases involving labor union contracts or minimum wage workers. In all other cases, business could reduce wages in lieu of layoffs. Plus, if prices for consumer goods are also falling, real wages may not even decline as a result of the cuts.

In circumstances where wages cannot be legally reduced, as is the case for unionized or minimum wage workers, layoffs are often the employer’s only option for keeping costs in line with revenue. However, inflation allows employers to do an end run around these obstacles. In an inflationary environment, rising prices compensate for falling sales. The added revenue allows employers to hold nominal wage costs steady, even when the raw amount of goods or services they sell declines. When inflation rages, higher skilled workers will often demand, and receive, pay raises. But low-skilled workers, who lack such leverage, are usually left holding the bag.

In other words, politicians can impose a high minimum wage to pander to voters, but then count on inflation to lower real labor costs, thereby limiting the unemployment that would otherwise result. So what the government openly gives with one hand, it secretly takes away with the other. Workers vote for politicians who promise higher wages, but those same politicians also create the inflation that negates the real value of the increase. But while government takes the credit for the former, it never assumes responsibility for the latter. The same analysis applies to labor unions. Based upon political protection offered by friendly officials, unions can secure unrealistic pay hikes for their members. But the same governments then work to reduce the real value of those increases to keep their employers in business.

Of course, what the Bloomberg writer was really arguing is that governments need inflation to bail themselves out of the policy mistakes they make to secure votes. But two wrongs never make a right. The correct policy would be to run balanced budgets rather than incur debts that can only be repaid with the help of inflation. On the labor front, the better policy would be to abolish the minimum wage and the special legal protections offered to labor unions, rather than papering over the adverse consequences of bad policies with inflation.

So be on the lookout for any more hand-wringing over the supposed dangers of lowflation. The noise will simply be an effort to convince you that what’s bad for you is actually good. And although it’s an audacious piece of propaganda to even attempt, the lack of critical awareness in the media gives it a fighting chance for success.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Order your copy of Peter Schiff’s latest book, How an Economy Grows and Why It Crashes.

Ben Bernanke Gets His Reward

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Source: https://mises.org

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Ben Bernanke Gets His Reward

 

6700“Bernanke Enjoys the ‘Fruits of the Free Market,’” or so we’re told in a Reuters headline from March 4 about the former Fed chairman’s 40-minute speech in Abu Dhabi for which he received, ahem, $250,000. In the Reuters author’s defense, he was only quoting a DC lobbyist who was defending the amount, and added, Bernanke “will personally experience supply and demand.”

Well, yes, it’s just supply and demand and all that. No big deal and if you don’t like it, you must have something against markets. Still, it would be nice (and a bigger deal) if these reporters would quote someone outside of the accepted intellectual class of the Boswash corridor so compromised by being among the primary beneficiaries of all the new money Chairman Ben and his comrades created, ex nihilo, when he wasn’t shooting baskets in the Marriner Eccles building. If they did, they might hear some healthy skepticism about these events in which top officials cash in on their “public service” via contacts with the very industries they benefited while in office.

George Stigler explained such paybacks in his capture theory of regulation for which he received (rightly) the Nobel Prize in Economics, although I’d say they are better explained by the phrase, “quid pro and here-you-go!”

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Figure 1: Speech honoraria immediately upon leaving term of office. From CNBC.

Less-beholden observers might pause during Bernanke’s victory lap and note that the dollar has lost almost 30 percent of its value since he joined the Fed in 2002, and that’s only if you accept the lowball metrics used in official CPI statistics. It is likely twice that amount if price inflation is measured in more traditional ways, including forgotten factors such as the full inflation for out-of-pocket expenses or the cost to maintain a constant cost of living. Americans of 1977 may have had to suffer through bad hair and disco music, but at least they didn’t suffer discrepancies between (a) what they experienced the value of the dollars in their pockets to be and (b) what the government said it was. We do.

Yet, today, the Establishment celebrates Bernanke for keeping the funds flowing to those parties it needs to remain in power. But while Paul Krugman wonders where the inflation is, I did some back-of-the-envelope calculations of Bernanke’s speech honorarium. Again using the CPI’s numbers, $250,000 today buys roughly what $193,000 bought in 2002, which would have purchased 603 ounces of gold at the time. Today, those 603 ounces of gold would be worth over $805,000.

The point isn’t that all Fed chairs should contract their post-retirement speeches in gold at the beginning of their term of service, although maybe they should. It’s that payoffs such as this reflect about what you’d expect when a currency receives monopoly protection and legal tender status, neither of which has anything to do with the free market. And notwithstanding the opinions of DC lobbyists, neither does Bernanke’s speech.

It followed the most reckless term of service of any central banker in U.S. history. He printed trillions of dollars to rescue a portion of Wall Street that could have internalized its post-crash losses and financed budget deficits that served to transfer capital to the fringes of military empire and out of reach of domestic workers. He “depression-mongered” the U.S. economy in September 2008 even though that market meltdown paled in comparison to those of 1987 and 2000-2001, thus setting the stage for Depression 2.0, and many billions in stimulus spending, bailouts, and other malinvestments.

Was all this simply an effort to test his faulty academic research of the 1930s? Perhaps partly. But remember that cartelizing factions on Wall Street created the Federal Reserve itself in 1913 for the cartelizing factions on Wall Street. Since those who receive the new money first benefit the most, it stands to reason that those interested parties would shower accolades and a share of the loot on Bernanke in the form of $6,250 per speech minute — and assume Mrs. Yellen is paying attention.

An amusing backdrop to the speech news is the continuing crises affecting Bitcoin and Mt. Gox, the fraudulent and now bankrupt Bitcoin exchange that appears to have lost deposits while itself engaged in fractional reserve banking, something only the protected class of modern banks are allowed to do. Understanding the uncertain future of both the dollar and the country’s power elite in the post 9/11 United States is key to understanding the rise of competing digital currencies (of which Bitcoin is just one). Their demand would never have been as strong had the dollar been inflated relatively less, and had market corrections been allowed relatively more, during the years of the so-called Great Moderation. It is safe to assume that establishment bankers are trying hard to use the Mt.Gox fiasco to demonize any movement toward peer-to-peer banking, which could easily have the effect of making banking as we know it go the way of the buggy whip industry in the nineteenth century.

If it does, one casualty just might be Bernanke’s future honoraria.

In a rational world, being paid $250,000 for this speech would cause many to wonder what is really going on. But such a world has not existed in banking since, perhaps, the 1830s. Until another one comes about, appreciate the irony that Bernanke is being paid in a fiat currency he himself helped devalue, and since his own successor at the Fed promises to continue operating in a Bernankean tradition, he will pay someone to diversify it, quickly, into real assets to protect its purchasing power.

Bernanke’s speech has little to do with supply and demand. It has more to do with being rewarded for extending the road down which we have been kicking the economy can. It’s a road that will eventually dead end.

 


 

About the Author

Christopher_WestleyChristopher Westley

Christopher Westley is an associated scholar at the Mises Institute. He teaches in the College of Commerce and Business Administration at Jacksonville State University. Send him mail. Twitter @DrChrisWestley 

 

 

Image credit: https://mises.org

Debt and Taxes

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Source: http://www.europac.net

By Peter Schiff

Debt and Taxes

 

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital

The red flags contained in the national and global headlines that have come out thus far in 2014 should have spooked investors and economic forecasters. Instead the markets have barely noticed. It seems that the majority opinion on Wall Street and Washington is that we have entered an era of good fortune made possible by the benevolent hand of the Federal Reserve. Ben Bernanke and now Janet Yellen have apparently removed all the economic rough edges that would normally draw blood. As a result of this monetary “baby-proofing,” a strong economy is no longer considered necessary for rising stock and real estate prices.

But unfortunately, everything has a price, even free money. Our current quest to push up asset prices at all costs will come back to bite all Americans squarely in the pocket book. Death and taxes have long been linked by a popular maxim. However, there also exists a similar link between debt and taxes. The debt we are now incurring in order to buttress current stock and real estate will inevitably lead to higher taxes down the road. However, don’t expect the taxes to arrive in their traditional garb. Instead, the stealth tax of inflation will be used to drain Americans of their hard earned purchasing power.

I explore this connection in great length in my latest report Taxed By Debt, available for free download at www.taxedbydebt.com. But diagnosing a problem is just half the battle. I also present investing strategies that I believe can help Americans avoid the traps that are now being laid so carefully.

The last few years have proven that there is no line Washington will not cross in order to keep bubbles from popping. Just 10 years ago many of the analysts now crowing about the perfect conditions would have been appalled by policies that have been implemented to create them. The Fed has held interest rates at zero for five consecutive years, it has purchased trillions of dollars of Treasury and mortgage-backed securities, and the Federal government has stimulated the economy through four consecutive trillion-dollar annual deficits. While these moves may once have been looked on as something shocking…now anything goes.

But the new monetary morality has nothing to do with virtue, and everything to do with necessity. It is no accident that the concept of “inflation” has experienced a dramatic makeover during the past few years. Traditionally, mainstream discussion treated inflation as a pestilence best vanquished by a strong economy and prudent bankers. Now it is widely seen as a pre-condition to economic health. Economists are making this bizarre argument not because it makes any sense, but because they have no other choice.

America is trying to borrow its way out of recession. We are creating debt now in order to push up prices and create the illusion of prosperity. To do this you must convince people that inflation is a good thing…even while they instinctively prefer low prices to high. But rising asset prices do little to help the underlying economy. That is why we have been stuck in what some economists are calling a “jobless recovery.” The real reason it’s jobless is because it’s not a real recovery!  So while the current booms in stocks and condominiums have been gifts to financial speculators and the corporate elite, average Americans can only watch from the sidewalks as the parade passes them by. That’s why sales of Mercedes and Maseratis are setting record highs while Fords and Chevrolets sit on showroom floors. Rising prices to do not create jobs, increase savings or expand production. Instead all we get is debt, which at some point in the future must be repaid.

As detailed in my special report, when President Obama took office at the end of 2008, the national debt was about $10 trillion. Just five years later it has surpassed a staggering $17.5 trillion. This raw increase is roughly equivalent to all the Federal debt accumulated from the birth of our republic to 2004! The defenders of this debt explosion tell us that the growth eventually sparked by this stimulus will allow the U.S. to repay comfortably. Talk about waiting for Godot. To actually repay, we will have few options. We can cut government spending, raise taxes, borrow, or print. But as we have seen so often in recent years, neither political party has the will to either increase taxes or decrease spending.

So if cutting and taxing are off the table, we can expect borrowing and printing. That is exactly what has been happening. In recent years, the Fed has bought approximately 60% of the debt issued by the Treasury. This has kept the bond market strong and interest rates extremely low. But a country can’t buy its own debt with impunity indefinitely. In fact the Fed, by winding down its QE program by the end of 2014, has threatened to bring the party to an end.

Although bond yields remain close to record low territory, thanks to continued QE buying, we have seen vividly in recent years how the markets react negatively to any hint of higher rates. That’s why any indication that the Fed will lift rates from zero can be enough to plunge the markets into the red. The biggest market reaction to Yellen’s press conference this week came when the Chairwoman seemed to fix early 2015 as the time in which rates could be lifted from zero. That possibility slapped the markets like a frigid polar wind.

Janet Yellen may talk about tightening someday, but she will continue to move the goalposts to avoid actually having to do so. (Or as she did this week, remove the goalposts altogether). As global investors finally realize that the Fed has no credible exit strategy from its zero interest policy, they will fashion their own exit strategy from U.S. obligations. Should this happen, interest rates will spike, the dollar will plunge, and inflation’s impact on consumer prices will be far more pronounced than it is today. This is when the inflation tax will take a much larger bite out of our savings and paychecks.  The debt that sustains us now will one day be our undoing.

But there are steps investors can take to help mitigate the damage, particularly by moving assets to those areas of the world that are not making the same mistakes that we are. In my new report, I describe many of these markets. Just because the majority of investors seem to be swallowing the snake oil being peddled doesn’t mean it’s wise to join the party. I urge you to download my report and decide for yourself.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Order your copy of Peter Schiff’s latest book, How an Economy Grows and Why It Crashes.

Peter Schiff: Gold Update, The Dollar Will Collapse First, Janet Yellen Wants More Inflation & More

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Peter Schiff: Gold Update, The Dollar Will Collapse First, Janet Yellen Wants More Inflation & More

 

2-17-2014 4-35-35 PM

 

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Published by Greg Hunter

http://usawatchdog.com/were-going-to-… – Peter Schiff, the CEO of Euro Pacific Precious Metals, says, “The messes get progressively bigger because the bubbles get progressively bigger. We have the biggest bubble ever blown right now because we have a simultaneous bubble in the stock market and the real estate market and the bond market. . . . The air is coming out of all of them. The Fed knows this bubble is too big to pop. That’s why the Fed is going to come back with an even bigger round of QE (money printing) than the last round. We’re going to be hit with a tsunami of inflation. . . . I think we’re going to be stuck with a lot of the money, which means it will bid up consumer prices right here in America. New Fed Chief Janet Yellen said she wants more inflation. Well, she’s going to get it.”

Schiff thinks the U. S. Dollar will be in trouble first and not Treasury Bonds. Why? Schiff says, “The dollar will go poof first. Remember, the Federal Reserve can buy up all those bonds to stop the prices from collapsing, but in order to do so, it has to print dollars. But, eventually, the dollar collapses because the world figures out the game. The Fed can print all the dollars they want, but they can’t force people to accept them. That is going to be the problem.” (There is much more in the video interview.)

Join Greg Hunter as he goes One-on-One with money manager Peter Schiff.

 

U.S. Government Says ‘No Inflation’ As Food Prices Soar

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U.S. Government Says ‘No Inflation’ As Food Prices Soar

 

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Top Adviser To The Chinese Government Calls For A “Global Currency” To Replace The U.S. Dollar

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Source: http://endoftheamericandream.com

By Michael Snyder

 

Top Adviser To The Chinese Government Calls For A “Global Currency” To Replace The U.S. Dollar

 

One-World-300x300The former chief economist at the World Bank, Justin Yifu Lin, is advising the Chinese government that the time has come for a single global currency.  Lin, who is also a professor at Peking University, says that the U.S. dollar “is the root cause of global financial and economic crises” and that moving to a “global super-currency” will bring much needed stability to the global financial system.  And considering how recklessly the Federal Reserve has been pumping money into the global financial system and how recklessly the U.S. government has been going into debt, it is hard to argue with his logic.  Why would anyone want to trust the United States to continue to run things after how badly we have abused our position?  The United States has greatly benefited from having the de facto reserve currency of the planet for the past several decades, but now that era is coming to an end.  In fact, the central bank of China has already announced that it will no longer be stockpiling more U.S. dollars.  The rest of the world is getting tired of playing our game.  Our debt is wildly out of control and we are creating money as if there was no tomorrow.  As the rest of the world starts moving away from the U.S. dollar, global power is going to shift even more to the East, and that is going to have very serious consequences for ordinary Americans.

Sadly, most Americans don’t even realize what is happening.  These comments by a top adviser to the Chinese government should have made front page news all over the nation.  I had to go to China Daily to find the following excerpt…

The World Bank’s former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.
 
“The dominance of the greenback is the root cause of global financial and economic crises,” Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. “The solution to this is to replace the national currency with a global currency.”
 
Lin, now a professor at Peking University and a leading adviser to the Chinese government, said expanding the basket of major reserve currencies — the dollar, the euro, the Japanese yen and pound sterling — will not address the consequences of a financial crisis. Internationalizing the Chinese currency is not the answer, either, he said.

And this is not the first time that we have heard these kinds of comments coming out of China.  For example, Xinhua News Agency called for a “de-Americanized world” back on October 14th…

“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

That particular news agency is controlled by the Chinese government, and if the Chinese government did not approve of that statement it never would have made it into the paper.

Then in November, the central bank of China announced that it is going to stop stockpiling U.S. dollars.

Most Americans don’t want to hear this, but what we are witnessing is a massive shift in global power.  China is catching up to us in a multitude of ways, and they are getting tired of playing second fiddle to the United States.  In fact, China is already surpassing the U.S. in a number of key areas…

-China accounts for more global trade than anyone else in the world.

-China imports more oil from Saudi Arabia than anyone else in the world.

-China imports more oil overall than anyone else in the world.

-It is now being projected that Chinese GDP will surpass U.S. GDP in 2017.

When the rest of the world quits using U.S. dollars to trade with one another and quits lending our dollars back to us at ultra-low interest rates, things are going to start changing very rapidly.

In a previous article, I discussed why having the reserve currency of the world is so important to the United States…

The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars.
 
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary.  For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this.  This has created tremendous demand for U.S. government debt and has helped keep interest rates super low.  So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates.
 
And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system.  For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.
 
Our entire way of life in the United States depends upon this game continuing.  We must have the rest of the world use our currency and loan it back to us at ultra low interest rates.  At this point we have painted ourselves into a corner by accumulating so much debt.  We simply cannot afford to have rates rise significantly.

As the rest of the globe moves away from the dollar, demand for the dollar is going to go down and that is going to cause a lot of inflation – especially for imported goods.  So the days of piling lots of cheap plastic stuff made in China into your shopping carts is coming to an end.

And as the rest of the globe moves away from U.S. debt, interest rates are going to go much higher than they are today.  Eventually, the U.S. government will be paying out more than a trillion dollars a year just in interest on the national debt and all loans throughout our entire financial system will have higher interest rates.  This is going to cause economic activity to slow down dramatically.

On the global economic stage, China is playing checkers and we are playing chess, and we are getting dangerously close to checkmate.

Meanwhile, China is also rapidly catching up to us militarily.

At a time when U.S. military spending is actually decreasing, China is spending money on the military aggressively.

In 2014, Chinese military spending will rise to $148 billion, which represents an increase of 6 percent over 2013.

The balance of power is shifting right in front of our eyes.

For example, at one time the U.S. Navy reigned supreme and the Chinese Navy was a joke.

But now that is rapidly changing.  The following is from an article posted on military.com

The Chinese navy has 77 surface combatants, more than 60 submarines, 55 amphibious ships and about 85 missile-equipped small ships, according to the report first published by the U.S. Naval Institute. The report explains that more than 50 naval ships were “laid down, launched or commissioned” in 2013 and a similar number is planned for 2014.

Of particular concern is the growth of the Chinese submarine fleet.  The Chinese now have submarine launched ballistic missiles with a maximum range of about 4,000 miles…

ONI raised concerns about China’s fast-growing submarine force, to include the Jin-class ballistic nuclear submarines, which will likely commence deterrent patrols in 2014, according to the report. The expected operational deployment of the Jin SSBN “would mark China’s first credible at-sea-second-strike nuclear capability,” the report states.
 
The submarine would fire the JL-2 submarine launched ballistic missile, which has a range of 4,000 nautical miles and would “enable the Jin to strike Hawaii, Alaska and possibly western portions of CONUS [continental United States] from East Asian waters,” ONI assessed.

In addition, China is also working on “hypersonic glide vehicles” that can travel “at speeds of up to Mach 10 or 7,680 miles an hour”.  The following is an excerpt from a recent Washington Free Beacon article…

The Washington Free Beacon first disclosed China’s Jan. 9 flight test of a hypersonic glide vehicle that the Pentagon has called the WU-14.
 
The experimental weapon is a new strategic strike capability China’s military is developing that is designed to defeat U.S. missile defenses. China could use the vehicle for both nuclear and conventional precision strikes on targets, including aircraft carriers at sea.
 
U.S. officials said that, while the glide vehicle test was not an intelligence surprise, it showed China is moving much more rapidly than in the past in efforts to research, develop, and test advanced weaponry.

The world is changing, and the United States is not the only superpower anymore.  China is thriving and Russia is also on the rise.  Five years from now, the world is going to look far, far different than it does today.

Sadly, most Americans do not care about these things at all.  Most of them are much more concerned about the latest celebrity scandal or about what Justin Bieber has been doing.

In the end, most Americans will have no idea what is happening until it is far too late to do anything about it.

This article first appeared here at the The American Dream.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 

 

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What Is Supply-Side Economics?

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Source: http://www.paulcraigroberts.org

By Dr. Paul Craig Roberts

What Is Supply-Side Economics?

 

Supply-side economics is an innovation in macroeconomic theory and policy. It rose to prominence in congressional policy discussions in the late 1970s in response to worsening Phillips Curve trade-offs between inflation and unemployment. The postwar Keynesian demand management policy had broken down. The attempts to stimulate employment brought higher rates of inflation, and attempts to curtail inflation resulted in higher rates of unemployment.

In other words, the Phillips curve (named after economist A. W. Phillips) trade-offs between inflation and unemployment were worsening. Each additional job created had to be paid for with a higher rate of inflation, and each reduction in inflation had to be paid for with a higher rate of unemployment.

The Phillips curve met its nemesis in stagflation, a new term that entered economics in the late 1970s. Milton Friedman summed up the demise of the Phillips curve with his article, “More Inflation, More Unemployment.”

The appearance of stagflation–simultaneous inflation and unemployment–was a serious problem for Congress, as I pointed out in the late 1970s in an article in The Public Interest, “The Breakdown of the Keynesian Model.” Simultaneous inflation and unemployment meant that the federal budget would soon be out of control. In those days Congress actually worried about such an outcome.

The Keynesian economic establishment could offer Congress no solution other than an “incomes policy.” An incomes policy was wage and price controls. Inflation would be controlled by suppressing wages and prices, while expansionary monetary and fiscal policies boosted aggregate demand to raise employment. Even Congress understood that aggregate demand could not rise if wages were suppressed.

Congress looked for a different solution, and I, being on the scene as a member of the congressional staff, gave them the solution. In Keynesian economics monetary and fiscal policies only affect aggregate demand. If these policies were expansionary, aggregate demand increases, thus boosting employment and inflation. If these policies were restrictive, inflation and employment would fall with consumer spending. The fault in Keynesian theory and policy was the assumption that fiscal policy had no impact on aggregate supply.

I was able to explain to members of Congress, both Democrats and Republicans who were concerned about stagflation, that some forms of fiscal policy directly increase or decrease aggregate supply. High tax rates mean that leisure is cheap in terms of forgone current earnings–thus there is less labor supply–and current consumption is cheap in terms of foregone future income streams–thus less savings for investments. Keynesian demand management had run into trouble, because the high tax rates on income reduced the response of supply to demand stimulus. Thus, prices rose instead of output.

The solution, I said, was to reduce the marginal income tax rates across the board. This would increase the responsiveness of supply to demand and cure stagflation.

Both political parties listened. In the House it was the Republicans who took the lead–Jack Kemp and Marjorie Holt. In the Senate, Republicans Orrin Hatch and Bill Roth stepped forward. However, in the Senate the lead was taken by Democrats, especially Russell Long, chairman of the Senate Finance Committee, Lloyd Bentsen, chairman of the Joint Economic Committee of Congress, and my Georgia Tech fraternity brother, Sam Nunn.

As a result of Rep. Jack Kemp being the first congressional spokesman for a supply-side policy and President Reagan’s adoption of the policy, supply-side economics is associated with Republicans. However, Republicans almost lost the issue to Democrats. The first official government endorsement of supply-side economics was in the late 1970s by the Joint Economic Committee of Congress under the chairmanship of Democratic Senator Lloyd Bentsen of Texas.

The Joint Economic Committee under Senator Bentsen’s leadership put out Annual Reports two years in a row calling for a supply-side policy. As the presidential election approached that put Ronald Reagan in the White House, the majority Democrats in the Senate had a meeting to decide whether to pass the supply-side tax rate reductions prior to the presidential election, thus pulling the rug out from under Reagan on his main plank. The Senate Democrats were inclined to move forward with the tax rate reductions, but the Senate Majority Leader convinced them that it would look like an endorsement of Reagan over their own party’s candidate (Jimmy Carter). The Senate Majority Leader said that immediately after the election, the Democrats would take control of the issue and pass the marginal tax rate reductions. The great surprise of the election was that the Democrats lost control of the Senate.

There was more opposition to Reagan’s tax bill from Republicans than from Democrats. Republicans believed that budget deficits ranked with the Soviet threat and were more willing to raise taxes than to reduce them. The Republican opposition was so strong that I had a hard time getting the tax bill out of the Reagan administration so that Congress could vote on it. In those days the great bogyman for Republicans was budget deficits, and deficits were what Treasury’s projections showed. Although the Treasury was, for the most part, committed to the President’s policy and believed that some part of the lost revenues from marginal tax rate reduction would be recovered, which is also what Keynesians believed, the Treasury’s revenue forecast was based on the traditional static revenue model that every dollar of tax cut would lose a dollar of revenue.

OMB director David Stockman and his economist Larry Kudlow covered up the revenue loss by assuming a higher rate of inflation. In those days the income tax was not indexed for inflation. Nominal income gains pushed taxpayers into higher tax brackets. The higher was inflation, the higher was nominal GDP and tax revenues. In order to raise the revenue forecast, Stockman only needed to raise the inflation forecast.

Senate Democrats complained to me that they were willing to cooperate with Reagan on the tax bill, but were being cut out. Sam Nunn, who had got “Reaganomics” passed in the Senate before Reagan was elected, only to have it nixed by President Carter, told me that no one in the Reagan administration had ever spoken to him or sought his support.

The White House chief of staff, James Baker, wanted a Republican “victory,” and proceeded to pick a fight with the Democrats who were willing to support President Reagan’s policy. I told Jim Baker that he was making a strategic mistake. By cutting out the Democrats, he was setting the policy up for criticism that would create the perception of failure. I told him that Stockman had hidden the deficit by over-estimating inflation, a ploy that contradicted the logic of our policy. If our policy was correct, inflation would be less than Stockman’s forecast. The tax revenues would not materialize, and the Democrats, cut out of the action, would seize on the deficits and pay the White House back for cutting them out of any credit for the new policy. (My prediction came true. Democrats, inured to deficits by decades of Keynesian demand management, suddenly became as rabid about budget deficits as Republicans.)

If I had known then just how corrupt politics was, I would have thought twice before warning Baker that the hidden deficits would be used to discredit the policy even if the policy cured stagflation. Baker was allied with George Herbert Walker Bush, Reagan’s VP, and the fight was on from day one for the succession to Reagan. Kemp was in the forefront, because he was identified with Reagan’s economic policy, and Bush had called it “voodoo economics.” If Baker could make Reagan’s policy appear to be successful only because Bush had moderated it, all the better for VP Bush’s claim to the succession.

Tip O’Neill, the Democratic Speaker of the House, offered an alternative supply-side tax rate reduction to the administration’s bill. Speaker O’Neill’s bill had a smaller reduction in marginal tax rates on personal income, but had a superior pro-growth tax reduction on the business side. The House Democrats’ bill offered expensing of business investment.

The Reagan administration was too fearful to propose expensing (immediate write-offs) of business investment, and here was the leading Democrat in the nation offering it to them. I told Jim Baker to jump on it, to work out a compromise with O’Neill on the size of the personal tax rate reductions and to give the Democrats equal credit for the policy. That, I told Baker, would ensure the policy’s acceptance and success.

For political reasons Baker was more committed to giving Reagan a “victory” over Democrats than he was to the success of the policy. Baker wanted a headline. I wanted a policy. From Baker’s standpoint, if Democrats for political reasons turned against the policy, they would help to create welcome roadblocks to Jack Kemp’s challenge to George H.W. Bush for the succession.

Reagan’s version of supply-side economics carried the day over Tip O’Neill’s version. Deputy Assistant Treasury Secretary Steve Entin prepared a graph comparing the Reagan and O’Neill tax rate reductions. The Democrats’ tax cut was initially larger, but Reagan’s was better over time. That let Reagan go on national TV, point to the graph and say, “the Democrats have the best bill–if you only expect to live one more year.”

The history and explanation of supply-side economics are in my book, The Supply-Side Revolution (Harvard University Press, 1984). Books published by Harvard are peer-reviewed, which means that publication depends on a go-ahead from outside experts. A book that was “voodoo economics” or simply said that “tax cuts pay for themselves” or that “trickle-down economics works by giving the rich money to spend and some of it will trickle-down to help the poor” will not clear peer review.

Thirty five to forty years after supply-side economics made its appearance in policy debates the vast majority of Americans, including apparently some economists and public intellectuals, have no idea what it is. For example, on February 1, 2014, Information Clearing House posted Bill Moyers interview of David Simon, “America as a Horror Show.” This important interview gets fouled in its opening lines when Simon declares: “Supply-side economics has been shown to be bankrupt as an intellectual concept. Not only untrue, but the opposite has occurred.”

Supply-side economics was not relevant to the interview. Yet off the bat Simon destroys the credibility of his interview. Supply-side economics cured stagflation exactly as supply-side economists said it would do. That was its only claim. I know. As Assistant Secretary of the Treasury for Economic Policy, I was in charge.

In 2013 The Supply-Side Revolution, which Harvard has kept in print for three decades, was published in China in the Chinese language. Why would a leading Chinese publisher translate and publish a 30 year old book about a subject that “has been shown to be bankrupt as an intellectual concept?” Why would Chinese economists request a publisher to translate and publish a book about a discredited and useless subject?

Why does Simon, a reporter who was on the Baltimore Sun’s city desk covering crime during the Reagan administration, think that he knows anything about supply-side economics?

How can America save itself when its public intellectuals have no idea what they are talking about?

As I am associated with supply-side economics and the Reagan administration, the coterie of Reagan haters will write in to the many sites that post my column with sarcastic comments denouncing me for “again defending Reagan.” I am not defending anyone. I am merely stating the facts. Anyone can find the facts. All they have to do is to look. But many had rather shoot off their mouths and demonstrate their ignorance. They can’t stand the thought of having one less reason for hating Reagan.

As I am an interested party, let’s turn to a non-interested one, Paul A. Samuelson, “the father of modern economics.” Samuelson was the doyen of Keynesian economics, America’s greatest 20th century economist, and the first American economist to win the Nobel prize. If anyone was harmed by supply-side economics, it was Keynesian economists’ human capital. Yet in the 12th edition of his famous textbook published in 1985, Samuelson shows how supply-side policy can cause aggregate supply to increase or decrease, a first for economics textbooks. Samuelson validates supply-side economics in principle and says that its policy impact varies from “modest” to “substantial,” depending on circumstances. He also says that in Britain, “the supply side policies appear to have had an unexpectedly large impact, improving both inflation and productivity more than many observers expected.”

Is the “foremost academic economist of the 20th century” (New York Times) another trickle-down, voodoo kook like me and Ronald Reagan?

I met Samuelson in his MIT office when I gave the annual State of the Economy address to the combined economic faculties and graduate students of Harvard and MIT sometime in the 1980s. Samuelson had an open mind and could absorb new thinking. At the conclusion of my address, I received a standing ovation. No one in the large liberal audience of professors and graduate students said I was a voodoo economist or an agent for the rich. I have debated in public forums Keynesian economists who are Nobel prize winners, such as James Tobin and Larry Klein. They were always respectful. At a meeting of the Eastern Economics Association, Tobin acknowledged that I was correct.

Supply-side economics dealt with the problem of its time–stagflation. Supply-side economics has no cure for an economy decimated by jobs offshoring and financial deregulation. The problems of today are different. I have made this clear in my book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West.

The George W. Bush tax cuts have nothing to do with supply-side economics. The Bush tax cuts were nothing but a greedy grab, but they are not a signifiant cause of today’s inequality. The main causes of the unacceptable inequality of income and wealth in the US today are financial deregulation and the dismantling of the ladders of upward mobility by the offshoring of manufacturing and tradable professional service jobs. The wages and salaries denied to Americans are transformed into corporate profits, mega-million dollar executive bonuses, and capital gains for shareholders. Financial deregulation unleashed massive debt leverage of bank depositors’ accounts, backed up with Federal Reserve bailouts of the banksters’ uncovered gambling bets. Neither tax increases nor reductions can compensate for these extraordinary mistakes.

Intelligent people over the centuries have stressed that failure to understand the past endangers the present and the future. Across the American political spectrum policymakers, economists, media, commentators, and the public are ignorant of the past and in denial about the present. Those trying to inform are few and far between, and they are constantly under attack from the very people they are endeavoring to inform. What is the point of the effort to inform? Is it merely “sound and fury, signifying nothing”?

NOTE:
Some claim that stagflation was caused by the OPEC oil embargo in 1973, not by the interaction of demand management with high marginal tax rates. The claim is incorrect. By 1971 high US inflation had already wrecked the Bretton Woods fixed exchange rate system.

US inflation forced President Nixon to close the gold window in 1971. Under the Bretton Woods fixed exchange rate system, the currencies of countries were fixed to the dollar, and the dollar was fixed at $35 per ounce of gold. Foreign central banks could redeem dollars for gold. Gold redemption was regarded as a constraint on US money supply growth.

By 1971 the rate of US inflation was 6 percent. The US gold stock had fallen substantially from its 1960 level. Alarmed by countries redeeming their dollar holdings for gold, the Nixon administration closed the gold window and ended the conversion of dollars into gold.

Economists ascribe the monetary inflation that predated the 1973 oil embargo by many years to the Federal Reserve’s accommodation of President Johnson’s “guns and butter” fiscal policy in the 1960s (VIetnam War + Great Society programs).

A common mistake is to claim that oil producers can cause inflation by raising oil prices. Higher oil prices can cause higher costs of production and less output but cannot cause a rise in the general level of prices. In the absence of monetary inflation, higher costs in some areas divert purchasing power from other areas. Costs rise and output falls, but there is no rise in the general price level.

Economists understand that inflation is a monetary phenomenon. For there to be a rise
in the overall level of prices, either the supply of money or the rate at which money turns over (velocity) must rise. Generally, a rise in the velocity of money is a response to rising prices as the willingness to hold depreciating currency declines.

In countries with significant imports, declines in the exchange value of the currency can boost domestic inflation with rising import prices, but generally declines in currency exchange values are caused by domestic monetary inflation. However, a country with a dominant currency can manipulate the exchange values of currencies of smaller economies or impose sanctions which reduce the value of the targeted country’s currency. In a system of flexible exchange rates, international capital flows in and out of countries can destabilize the economies.

 

Reprinted with permission from www.paulcraigroberts.org


 

About Dr. Paul Craig Roberts

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.

 

How Central Banks Cause Income Inequality

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Source: https://mises.org

By

How Central Banks Cause Income Inequality

 

6653The gap between the rich and poor continues to grow. The wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent. This is a striking change from the 1950s and 1960s when their share of all incomes was slightly over 10 percent. A study by Emmanuel Saez found that between 2009 and 2012 the real incomes of the top 1 percent jumped 31.4 percent. The richest 10 percent now receive 50.5 percent of all incomes, the largest share since data was first recorded in 1917. The wealthiest are becoming disproportionally wealthier at an ever increasing rate.

Most of the literature on income inequalities is written by professors from the sociology departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the minimum wage, and, everyone’s favorite scapegoat, the growing importance of China.

Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and justified while the other is the exact opposite.

In a capitalist economy, prices and profit play a critical role in ensuring resources are allocated where they are most needed and used to produce goods and services that best meets society’s needs. When Apple took the risk of producing the iPad, many commentators expected it to flop. Its success brought profits while at the same time sent a signal to all other producers that society wanted more of this product. The profits were a reward for the risks taken. It is the profit motive that has given us a multitude of new products and an ever-increasing standard of living. Yet, profits and income inequalities go hand in hand. We cannot have one without the other, and if we try to eliminate one, we will eliminate, or significantly reduce, the other. Income inequalities are an integral outcome of the profit-and-loss characteristic of capitalism; they cannot be divorced.

Prime Minister Margaret Thatcher understood this inseparability well. She once said it is better to have large income inequalities and have everyone near the top of the ladder, than have little income differences and have everyone closer to the bottom of the ladder.

Yet, the middle class has been sinking toward poverty: that is not climbing the ladder. Over the period between 1979 and 2007, incomes for the middle 60 percent increased less than 40 percent while inflation was 186 percent. According to the Saez study, the remaining 99 percent saw their real incomes increase a mere .4 percent between 2009 and 2012. However, this does not come close to recovering the loss of 11.6 percent suffered between 2007 and 2009, the largest two-year decline since the Great Depression. When adjusted for inflation, low-wage workers are actually making less now than they did 50 years ago.

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.

Janet Yellen recently said “I am hopeful that … inflation will move back toward our longer-run goal of 2 percent, demonstrating her commitment to an institutionalized policy of theft and wealth redistribution.” The European central bank is no better. Its LTRO strategy was to give longer term loans to banks on dodgy collateral to buy government bonds which they promptly turned around and deposited with the central bank for more cheap loans for more government bonds. This has nothing to do with liquidity and everything to do with boosting bank profits. Yet, every euro the central bank creates is a tax on everyone that uses the euro. It is a tax on cash balances. It is taking from the working man to give to the rich European bankers. This is clearly a back door monetization of the debt with the banking sector acting as a middle man and taking a nice juicy cut. The same logic applies to the redistribution created by paying interest on reserves to U.S. banks.

Concerned with income inequalities, President Obama and democrats have suggested even higher taxes on the rich and boosting the minimum wage. They are wrongly focusing on the results instead of the causes of income inequalities. If they succeed, they will be throwing the baby out with the bathwater. If they are serious about reducing income inequalities, they should focus on its main cause, the central bank.

In 1923, Germany returned to its pre-war currency and the gold standard with essentially no gold. It did it by pledging never to print again. We should do the same.

 


About the Author

Frank Hollenbeck

Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. 

 

Image credit: https://mises.org

 

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?

 

Hyperinflation-300x300This time, the Federal Reserve has created a truly global problem.  A big chunk of the trillions of dollars that it pumped into the financial system over the past several years has flowed into emerging markets.  But now that the Fed has decided to begin “the taper”, investors see it as a sign to pull the “hot money” out of emerging markets as rapidly as possible.  This is causing currencies to collapse and interest rates to soar all over the planet.  Argentina, Turkey, South Africa, Ukraine, Chile, Indonesia, Venezuela, India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far.  In fact, last week emerging market currencies experienced the biggest decline that we have seen since the financial crisis of 2008.  And all of this chaos in emerging markets is seriously spooking Wall Street as well.  The Dow has fallen nearly 500 points over the last two trading sessions alone.  If the Federal Reserve opts to taper even more in the coming days, this currency crisis could rapidly turn into a complete and total currency collapse.

A lot of Americans have always assumed that the U.S. dollar would be the first currency to collapse when the next great financial crisis happens.  But actually, right now just the opposite is happening and it is causing chaos all over the planet.

For instance, just check out what is happening in Turkey according to a recent report in the New York Times

Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.
 
On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”
 
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”

As inflation escalates and interest rates soar in these countries, ordinary citizens are going to feel the squeeze.  Just having enough money to purchase the basics is going to become more difficult.

And this is not just limited to a few countries.  What we are watching right now is truly a global phenomenon

“You’ve had a massive selloff in these emerging-market currencies,” Nick Xanders, a London-based equity strategist at BTIG Ltd., said by telephone. “Ruble, rupee, real, rand: they’ve all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way.”

So why is this happening?  Well, there are a number of factors involved of course.  However, as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis.  A recent USA Today article described how the Fed helped create this massive bubble in the emerging markets…

Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.
 
But now that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock.
 
“Emerging markets need the hot money but capital is exiting now,” says Koesterich. “What you have is people saying, ‘I don’t want to own emerging markets.’”

What we are potentially facing is the bursting of a financial bubble on a global scale.  Just check out what Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say…

If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years. In South Africa, the rand is at the weakest since 2008. The currencies are also weak in Brazil and Mexico. But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela.
 
I’m mentioning these countries individually just to stress that this situation is extremely serious. It is also on a massive scale. In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.

And many smaller nations are being deeply affected already as well.

For example, most Americans cannot even find Liberia on a map, but right now the actions of our Federal Reserve have pushed the currency of that small nation to the verge of collapse

Liberia’s finance minister warned against panic today after being summoned to parliament to explain a crash in the value of Liberia’s currency against the US dollar.
 
“Let’s be careful about what we say about the economy. Inflation, ladies and gentlemen, is not out of control,” Amara Konneh told lawmakers, while adding that the government was “concerned” about the trend.

Closer to home, the Mexican peso tumbled quite a bit last week and is now beginning to show significant weakness.  If Mexico experiences a currency collapse, that would be a huge blow to the U.S. economy.

Like I said, this is something that is happening on a global scale.

If this continues, we will eventually see looting, violence, blackouts, shortages of basic supplies, and runs on the banks in emerging markets all over the planet just like we are already witnessing in Argentina and Venezuela.

Hopefully something can be done to stop this from happening.  But once a bubble starts to burst, it is really difficult to try to hold it together.

Meanwhile, I find it to be very “interesting” that last week we witnessed the largest withdrawal from JPMorgan’s gold vault ever recorded.

Was someone anticipating something?

Once again, hopefully this crisis will be contained shortly.  But if the Fed announces that it has decided to taper some more, that is going to be a signal to investors that they should race for the exits and the crisis in the emerging markets will get a whole lot worse.

And if you listen carefully, global officials are telling us that is precisely what we should expect.  For example, consider the following statement from the finance minister of Mexico

“We expected this year to be a volatile year for EM as the Fed tapers,” Mexican Finance Minister Luis Videgaray said, adding that volatility “will happen throughout the year as tapering goes on”.

Yes indeed – it is looking like this is going to be a very volatile year.

I hope that you are ready for what is coming next.

Wheelbarrow-of-Money-425x335

This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 


Image credit: http://theeconomiccollapseblog.com
 
 

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