USA-Dollar-Iran / Confirmation of Global Systemic Crisis end of March 2006
Written by LEAP/E2020
Friday, 17 March 2006
Nine indicators prove that the crisis is unfolding: Nine indicators developed in this month’s GlobalEurope Anticipation Bulletin N°3, which I coordinated, out of which 5 are presented in this public communication, enable LEAP/E2020 to confirm the beginning of a global systemic crisis by the end of March 2006. The recent international trends that particularly affect the international financial system, and the preoccupying trends in the US, namely as concerns the reliability of statistics on the US economy[1], have brought our research team to conclude that this global systemic crisis is already unfolding.
M3[1] is really the decisive indicator… As illustrated by most of the 5 indicators developed in the present communication, the last weeks have confirmed how decisive is the US Federal Reserve’s decision to stop to publish M3[2] on March 23, 2006. LEAP/E2020 is now convinced that this decision anticipates a period of acceleration of money-printing by the US, concealed behind public declarations of inflation handling, that will result in the collapse of the US Dollar and in the monetarisation of the US debt (public and private), which a growing number of US experts now estimate that it will never be reimbursed[3] considering its gigantic amount in constant growth (the US public debt now represents more than 8,000[4] billions dollars, i.e. about 4 times the federal budget in 2006[5]). According to the very conservative Heritage Foundation, if we take in consideration the consequences on the budget of recent decisions made by the Bush Administration regarding health and pensions, the real debt is of 42,000 billions dollars, i.e. 18 times this year’s federal budget, and 3 ½ times the US GDP in 2005[6].
… as well as Iran Thus confirming the catalyst role of the opening of an Oil Bourse priced in Euros by Iran (recent Iranian allegations[7] suggest that in case of an aggravation of the crisis, the Iranian authorities could simply decide to proceed to their international transactions in euros, thus following the example provided by Syria[8] which decided a few weeks ago to adopt this policy) and/or that of a US and/or Israeli attack on Iran – probably a « surprise-attack » not supported by the UN Security Council[9] -, the scope of the reaction to the publication of last month’s LEAP/E2020 Alert has revealed a deeply-rooted anxiety among a significant part of the actors of the financial system, individual actors mostly. This impact was particularly important in the US from where comments reached us mainly focused on the question of M3, the real-estate bubble, US deficits and the reliability of figures on the US economic performance. These reactions have led LEAP/E2020 to concentrate this second communication on these aspects of the global systemic crisis, all the more since a number of very preoccupying facts appeared in the last weeks.
The real-estate bubble starts collapsing … Some of the predictions made by LEAP/E2020 already became true such as the collapse of the real-estate bubble in the US (for the first time in 5 years, new-home sales slid 5% in January 2006 compared to January 2005; and the stock of homes for sale languishes up to 6 months, a figure never reached since 1988[10]). The end of the real-estate bubble will progressively affect the consumption of US households, one highly depending on their growing debt due to mortgage loans calculated on the basis of their home’s value[11]. In parallel, the slow-down in the housing-related sector will directly affect employment, knowing that this sector alone has been providing 40% of private job creations these 5 last years in the US.
… currencies of emerging countries are really the first ones to be affected by the unfolding crisis… During the week of February 20, 2006, Iceland’s Krona was downgraded by a credit rating agency calling the country’s credit deficit unsustainable. The National currency instantly plummeted 10%, causing emerging market currencies such as the Brazilian, South African, Mexican and Indonesian currencies[12], to decline due to the speculative positions taken by operators acting on those markets. During the week of March 6, 2006, it was the turn of Central and Eastern European currencies[13] to plummet as a result of excessive deficits and of the implementation of new policies (increased interest rates and/or removal of liquidities) by the European and Japanese central banks. Finally, since March 14th 2006, Arabic stock markets are crashing down[14], including of course in Saudi Arabia and the Emirates (with a loss of already more than 15% and local experts predicting final losses up to 50% or 60%).
… and the crisis of confidence in the US economy really plays a key-role in the release of the global crisis Among the aspects suggesting that the crisis is already beginning, there is the scope of the impact of LEAP/E2020’s February 2006 Alert itself, which indicates a high level of worry worldwide. According to LEAP/E2020, the international financial system, and in particular its dollar-base[15], now mostly rely on two interconnected pillars: on the one hand, the trust actors put in the system itself; and on the other hand, the statistics describing the systems’ trends. Regarding the second pillar, the impact of the LEAP/E2020 Alert is a significant indicator itself worth the analysis[16]: with dozens of millions of page views, hundreds of thousands of individual visitors on www.europe2020.org , spontaneous translations of the paper in some twenty languages, being posted on hundreds of websites, medias and blogs worldwide, and the popularity of the analysis in the US themselves, all these elements reflect a growing worry about the system’s trends. This element is indeed an integral part of the global systemic crisis given that psychological factors, such as confidence, have become central in the system.
Five out of nine indicators suggesting an acceleration of the process of crisis These are five out of the nine indicators proving, according to LEAP/E2020, that the system crisis is unfolding: 1. the US government operates in technical default since mid-February 2006, the debt ceiling authorized by the Congress has been reached since then. Since this date, the US government has suspended sales of the « State and Local Government series (SLGS) non-marketable Treasury Securities » designed to enable the printing of Treasury Bonds[17]. According to US Treasury Secretary John Snow, if by mid-March, the Congress has not voted a rise of the statutory debt ceiling by 800 billion dollars (i.e. 10% of the current ceiling of 8,200 billion dollars, which was already raised twice in the last 3 years), the technical default will become very problematic. 2. Unexpected resignation of the Fed’s vice chairman, Roger Ferguson, in charge of crisis management, one week after the publication of our Alert while he had 8 years left to serve[18]. Roger Ferguson had won high marks for his handling of the Fed’s initial response to the Sept. 11, 2001 attacks, which occured while Greenspan was in Europe. His opposition to the strategic choices made by new Fed’s chairman, was notorious. 3. Bank of China’s decision to allow investors to buy and sell gold using their USDin order to diversify its holdings, today mostly in USD[19]. 4. Continued increase of US public and trade deficits in 2006 (respectively $119 billion in February et $68,5 billion in January) showing that current trends are not handled: on the contrary the drift accelerates. The deficit of the monthly budget review is the highest ever recorded. Washington no longer tries to mention improvements, but prefers to explain that these deficits do not mean anything because “the economy has changed”. This type of explanation was used too on the eve of the collapse of the « Internet » bubble, referring to the « new economy ».[20] For information, along these last five years, the US borrowed more money from the rest of the world that they did in their cumulated history going from 1776 to 2000[21]. 5. Growing doubts in the US themselves on the reliability of US economic statistics[22], leading to counter-analyses showing that in the last three years, the US GDP is in fact decreasing and not increasing[23], and that the real inflation today rates between 6 and 12% (with direct consequences of course on the real profitability of the various types of investments).
Three different measures of the consumer price index: in blue, the method used under the Clinton-presidency, in orange, the method used by the Bush administration, and in yellow, the method currently elaborated by US authorities.
Anticipation is therefore really required in order to limit the damage A systemic crisis expands like a tsunami progressing through an ocean and hitting different coasts at different moments. When the wave hits a coast, the tsunami has been formed already long ago. An early information is clearly the only way to take some safety measures. In any event, considering the nine indicators developed in GEAB 3, it is now clear for LEAP/E2020 that the crisis is entering its release phase.
Considering the significance and the convergence of the trends confirming the anticipated systemic crisis, only trends as powerful could reverse the evolution described by LEAP/E2020. Until today, LEAP/E2020 was not able to identify the smallest of such reverse trends. Contrary to what some may say, « crises happen even when they are not of collective interest » (WWI or the 1929 crack already proved that). The Iran crisis, the Irak civil war, or the deterioration of US deficits prove that our international leaders have no hand over the events. It is vain to hope that they will in the last minute appear as « deux ex machina » and solve problems that they contributed to develop in the last decades. Lastly, in case a crisis occurs, and contrary to what happened in the last decades, the Dollar will not act as reserve currency anymore due to the fact that the loss of confidence in the US and in their currency (including for the Americans themselves) is precisely one of the characteristics of this new crisis.
Apart from the analyses detailed in its monthly bulletin, LEAP/E2020 would like to give two clear advices to the readers of this public communication: - during the unfolding of a global systemic crisis, the main strategy to adopt consists in diversifying as much as possible one’s holdings, because given the unpredictability of the unfolding, only a diversification can limit the loss. It is important to bear in mind the following aspect: in a context of general crisis, the aim is no longer to gain more but to avoid losing too much. - as regards currencies, LEAP/E2020 noticed that its strategic analyses and advices concerning the Euro were largely read and commented at the highest level of the Eurozone governance system. This reinforces our feeling that Euroland will be in the coming months the only monetary area capable of resisting to a Dollar crisis. Decision-makers have grown aware in the proper timing of the measures to take on D-Day.
[7] Source AFP, Vienna – March 9, 2006: Iran "will not use the oil weapon for the time being because we are not seeking confrontation with other countries. But if the situation changes, we will be compelled to change our attitude and policy », declared Javad Vaïdi, vice chairman of the Supreme national security council, in an addresse to AFP.
[9] Russia and China confirm their opposition to economic sanctions as well of course as to any military action against Iran (source AP/Nouvel Observateur, 13/03/2006). The CDU/SPD coalition in power in Berlin would explode in case Berlin would support a military operation against Tehran. In France, the public opinion being overwhelmingly against such intervention, the government would in the end be compelled to clear itself from this option, being in no position to take part unless running the risk of a major political crisis in the country. Time therefore plays in favour of Tehran which maintains its oil and monetary (euro) threat.
[15] International rating agency Standard & Poor’s, has just informed that 2006 conveyed a serious risk of collapse of the dollar-value compared to European currencies. Source Standard & Poor’s European Economist Forecast 2006
[16] A few factual information may help to take the full measure of this impact over a month - an impact which was a surprise for our team itself: . europe202.org rocketed to the top 1000,000 worldwide websites ranked by Alexa.com since the publication of the Alert . over 10 million page-views on europe2020.org (source Alexa.com ) . similar traffics recorded on newropeans-magazine.org, a website which published at an early stage the LEAP/E2020 Alert paper (source Alexa.com) . free translations of the Alert available from the net in more than 20 languages (including Russia, Arabic, Chinese…) . posting of the Alert in English or French on hundreds of websites and blogs . over 4,000 susbcription to the free Europe 2020 newsletter, of which about one half came from the US . comments (80% positive ones), 2/3 of which came from the financial community or from private investors, including major investment banks.
[20] Between 2002 and 2005, the estimation of the net wealth of US households increased by 13,000 billion dollars, i.e. by 33% over three years, a figure surpassing by far the 11,000 billion USD increase previous record of this same wealth between 1997 and 1999… i.e. on the eve of the collapse of the Internet bubble – Source : US Federal Reserve – Z1
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