TraderStef: Global Currency Reset Implosion With A $250 Trillion Debt Bomb

TraderStef says don’t focus on the “when”, but rather prepare your finances ahead of time. Here’s TraderStef explaining what is coming down the pike…

by TraderStef of CrushTheStreet (connect withTraderStef via Twitter or at TraderStef’s website)

Are you tired of the boring 1988 Economist magazine cover art depicting a new world currency in 2018? Me too, so I gave it a slight overhaul with a golden (pun intended) halo of the sun and Earth in today’s headline graphic. Today is ground zero if you extrapolated the date engraved upon the future coin as prophetic. The truth of the matter is that currency and financial system resets occur over a period of time, then a D-Day eventually comes to pass upon the peasantry. The great financial crisis that transpired ten years ago was a financial system reset slow train wreck, and D-Day culminated over a weekend with the Lehman Brothers collapse decision at the NYFRB.

As a primer to the leading up of a potential reset, or a reset to avoid another salvage operation that does not fix underlying issues, consider reviewing Three (Four) Bankers of a Financial Armageddon Salvage Operation, published on Sep. 14. The reset topic came up at the end of my interview with Dr. Dave Janda this past weekend without much time to expound on it, so the following are my humble two cents. I do not know how or when it will come to fruition, but we can peek into the whys and roads that are building to facilitate it.

Here is a flow chart of sorts that lays out the backbone of our current financial order of core players, as I understand them to be. More entities can be added, but this synopsis serves the purpose. A portion of the following information incorporates insights covered by Kenneth Storey.

A large amount of press has surfaced about growing risks within the financial markets, despite efforts by several goldilocks power brokers to the contrary, and a few others included among the editorials in the link garden below to add color to the unfolding de-dollarization process.

The role of gold in a multicurrency reserve system – World Gold Council, Jul. 5

Ray Dalio Spells Out America’s Worst Nightmare… “The hedge fund titan warns the U.S. not to take its reserve currency for granted.” – Bloomberg, Sep. 12

BIS warns global economy risks crisis ‘relapse’… “There is little ‘medicine’ left to treat the patient a second time. ‘Things look rather fragile,’ BIS chief economist Claudio Borio told reporters in a conference call. The Basel-based BIS, considered the central bank for central banks, warned in its annual report that the recovery after the 2007-2008 global financial crisis had been ‘highly unbalanced’, with emerging economies especially facing mounting pressure… After years of ultra-accommodating monetary policy, the US Federal Reserve has begun hiking interest rates, while the European Central Bank (ECB) recently announced it would end its stimulus program at the end of this year. But amidst this normalization process, BIS noted a stark divergence between growth in the US market and the situation in emerging economies especially.” – The Business Times, Sep. 25

A Three-Way Train Wreck Is About to Derail the Markets… “Markets have been notably docile lately despite crises in Argentina, Turkey, Indonesia, Iran, China, Venezuela and elsewhere. Political crises related to Brexit and U.S. political dysfunction have not roiled global markets so far. The calm and low volatility are about to end. The China-Iran nexus in confrontation with the U.S. is the last straw.” – Jim Rickards at The Daily Reckoning, Oct. 1

Stan Druckenmiller sees ‘massive’ debt fuelling next financial crisis… “We tripled down on what caused the crisis. And we tripled down on it globally.” – Financial Review, Oct. 1

Chairman of the Economic and Development Review Committee at the OECD: Bad Financial Moon Rising… “In reality, all is not well beneath the surface. Should another financial crisis materialize, the subsequent recession might be even costlier than the last one, not least because policymakers will face unprecedented economic and political constraints in responding to it.” – Project Syndicate, Oct. 3

Trump’s Policies Will Displace the Dollar – Jeffrey Sachs, Sep. 3

World economy at risk of another financial crash, says IMF… “Debt levels are well above 2008 and failure to reform banking system could trigger crisis – ‘large challenges loom for global economy to prevent a second Great Depression’” – The Guardian, Oct. 3

World’s Most Important Bank Issues Urgent “Zombie Alert” – Nomi Prins at The Daily Reckoning, Oct. 3

The global economy not looking quite as rosy, IMF says…“International Monetary Fund cuts growth forecast for this year and next and said downside risks are now elevated” – MarketWatch, Oct. 9

Chinese currency set to explode internationally as IMF formally places it in the SDR’s basket of currencies… “The IMF had already announced the acceptance of the Yuan into their monetary reserves more than two years ago, but this week the currency became fully adopted and on equal par with the dollar, euro, pound, and yen… China has also been given sole authority to sell IMF (SDR) bonds, which when coupled with the fact that they are already the world’s largest banking entity means that transitioning the RMB into an international settlement currency is now just a mouse click away for Beijing…” – Shotgun Economics, Oct. 8

*TRUMP SAYS HE DOESN’T LIKE WHAT THE FED IS DOING – Oct. 9

Turkish President Erdogan calls on African countries to use local currencies for trade and businesses with Turkey – “dependence on USD dollar is becoming more of a burden instead of a convenience.” – China Xinhua News, Oct. 10

Jim O’Neill: Kingpin’ role of the dollar is ‘idiotically’ outsized – CNBC, Oct. 5

The following list of circumstances is priming the pump for a currency reset scenario. A majority have already taken place to some degree, are ongoing, or are in the process of surfacing and are not listed in any particular order, although some require another for implementation with reason.

√ Low-intensity conflicts proliferate into hot regional wars

√ The consolidation of and creation of currency blocks (i.e. EUR within the European Union)

√ U.S. drains the swamp and attempts are made to roll back the globalist agenda

√ U.S. demands the world fund its fair share of U.N., NATO, and war on terror expenses

√ U.S. reduces or eliminates aid to foreign countries and organizations

√ Diminishing role of the USD as a global reserve currency (2Q18 at 62%)

√ Fed initiates Quantitative Tightening (QT) w/o Quantitative Easing (QE) or increase of cash in circulation

√ Yuan and IMF SDRs increase in use as reserve currencies

√ Sanctions, tariffs, and trade wars escalate with some resolution

√ U.S. trade pacts renegotiated; trade balance must shrink to near zero and exports increase

√ E.U. and Japan begin QT w/o QE or increase of cash in circulation

√ U.S. citizens forced to purchase or convert existing retirement accounts to include U.S. Treasury Bonds

√ Countries implement currency controls as cash bleeds into alternative safe havens, such as gold

√ IMF increases SDR liquidity via a QE-like program

√ Global oil and gold to be priced in SDRs, USD, yuan

√ EURO dollars and petrodollars replaced by SDRs flow back to U.S., causing inflation

√ IMF adjusts SDR basket, with the yuan having a larger percentage leading to being on par

√ Massive U.S. military base closures overseas

A liquidity crisis beyond the central banks’ ability to subdue a total blowout could force an injection of SDRs by the IMF. A debt jubilee restructure of sovereign debts prior to a liquidity crisis would help ward off the worst of consequences but would take place anyways post-crisis to facilitate the restructuring of existing debt and monetary systems. A new world currency (backed by what as a guarantee?) and multi-reserve system will surface for international trade and settlements. The Federal Reserve would eventually liquidate, while a new U.S. Treasury notes system is implemented and a domestic USD backed by gold and/or silver could replace current Federal Reserve notes. No matter the outcome, an upward revaluation in the price of gold is highly likely.

Since the formation of the Federal Reserve and IRS in 1913, the USD has depreciated by a stunning 95%.

It is unlikely that the power brokers who formulated the Bretton Woods Agreement in 1944 following WWII expected the USD to dominate the global reserve forever, but it is difficult to ascertain a forward-looking mindset dominated by a Keynesian Economics theory. In the U.S. alone, monetary standards have shifted many times since 1770, with the Nixon Shock in 1971 as a standout that ended the ability to exchange USD for gold as set forth at Bretton Woods.

Because of U.S. fiscal and monetary mismanagement, the Bretton Woods financial system collapsed and was a key factor that influenced Europe to form a monetary union and launch of the euro in 1999. U.S. debt is currently over $21 trillion and growing daily, and it does not include $200+ trillion in unfunded liabilities. In 2011, Standard & Poor’s downgraded U.S. sovereign debt for the first time, from AAA to A, and the U.S. Treasury’s printing press continued unabated with a USD “exorbitant privilege” intact. Fast-forward to present day and financial pundits such as Jeffrey Sachs believe that “America’s monetary stewardship has stumbled badly over the years, and Trump’s misrule could hasten the end of the dollar’s predominance.”

The lack of sound fiscal and monetary policy telegraphs to the world that nothing has changed, with China and Russia taking the lead by diversifying their foreign reserves and taking decisive measures to reduce their dependence upon the USD hegemony. The USD still accounts for approximately 85% of all forex transactions, despite making up only 25% of the world economy.

Winds of change are blowing, and it would be foolish to focus on the when and whys for a global currency reset event. The global debt bomb is chiming in at $250 trillion and counting. It would be prudent to prepare your financial house ahead of time, rather than finding yourself in this casino situation with your capital crushed through inflation and devaluation and seeing access to safe haven assets are sparse and priced beyond your means when you need them the most while the house wins.

Casino (1995) – Money Scene

Plan Your Trade, Trade Your Plan

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Website: https://traderstef.wordpress.com

Turkey’s Financial Crisis Raises Questions About China’s Debt-driven Development Model

Financial injections by Qatar and possibly China may resolve Turkey’s immediate economic crisis, aggravated by a politics-driven trade war with the United States, but are unlikely to resolve the country’s structural problems, fuelled by President Recep Tayyip Erdogan’s counter intuitive interest rate theories.

The latest crisis in Turkey’s boom-bust economy raises questions about a development model in which countries like China and Turkey witness moves towards populist rule of one man who encourages massive borrowing to drive economic growth.

It’s a model minus the one-man rule that could be repeated in Pakistan as newly sworn-in prime minister Imran Khan, confronted with a financial crisis, decides whether to turn to the International Monetary Fund (IMF) or rely on China and Saudi Arabia for relief.

Pakistan, like Turkey, has over the years frequently knocked on the IMF’s doors, failing to have turned crisis into an opportunity for sustained restructuring and reform of the economy. Pakistan could in the next weeks be turning to the IMF for the 13th time, Turkey, another serial returnee, has been there 18 times.

In Turkey and China, the debt-driven approach sparked remarkable economic growth with living standards being significantly boosted and huge numbers of people being lifted out of poverty. Yet, both countries with Turkey more exposed, given its greater vulnerability to the swings and sensitivities of international financial markets, are witnessing the limitations of the approach.

So are, countries along China’s Belt and Road, including Pakistan, that leaped head over shoulder into the funding opportunities made available to them and now see themselves locked into debt traps that in the case of Sri Lanka and Djibouti have forced them to effectively turn over to China control of critical national infrastructure or like Laos that have become almost wholly dependent on China because it owns the bulk of their unsustainable debt.

The fact that China may be more prepared to deal with the downside of debt-driven development does little to make its model sustainable or for that matter one that other countries would want to emulate unabridged and has sent some like Malaysia and Myanmar scrambling to resolve or avert an economic crisis.

Malaysian Prime Minister Mahathir Mohamad is in China after suspending US$20 billion worth of Beijing-linked infrastructure contracts, including a high-speed rail line to Singapore, concluded by his predecessor, Najib Razak, who is fighting corruption charges.

World Markets Brace for Impact of Turkish Lira Crisis

Mr. Mahathir won elections in May on a campaign that asserted that Mr. Razak had ceded sovereignty to China by agreeing to Chinese investments that failed to benefit the country and threaten to drown it in debt.

Myanmar is negotiating a significant scaling back of a Chinese-funded port project on the Bay of Bengal from one that would cost US$ 7.3 billion to a more modest development that would cost US$1.3 billion in a bid to avoid shouldering an unsustainable debt.

Debt-driven growth could also prove to be a double-edged sword for China itself even if it is far less dependent than others on imports, does not run a chronic trade deficit, and doesn’t have to borrow heavily in dollars.

With more than half the increase in global debt over the past decade having been issued as domestic loans in China, China’s risk, said Ruchir Sharma, Morgan Stanley’s Chief Global Strategist and head of Emerging Markets Equity, is capital fleeing to benefit from higher interest rates abroad.

“Right now Chinese can earn the same interest rates in the United States for a lot less risk, so the motivation to flee is high, and will grow more intense as the Fed raises rates further,” Mr. Sharma said referring to the US Federal Reserve.

Mr. Erdogan has charged that the United States abetted by traitors and foreigners are waging economic warfare against Turkey, using a strong dollar as ”the bullets, cannonballs and missiles.”

Rejecting economic theory and wisdom, Mr. Erdogan has sought for years to fight an alleged ‘interest rate lobby’ that includes an ever-expanding number of financiers and foreign powers seeking to drive Turkish interest rates artificially high to damage the economy by insisting that low interest rates and borrowing costs would contain price hikes.

In doing so, he is harking back to an approach that was popular in Latin America in the 1960s and 1970s that may not be wholly wrong but similarly may also not be universally applicable.

The European Bank for Reconstruction and Development (EBRD) warned late last year that Turkey’s “gross external financing needs to cover the current account deficit and external debt repayments due within a year are estimated at around 25 per cent of GDP in 2017, leaving the country exposed to global liquidity conditions.”

With two international credit rating agencies reducing Turkish debt to junk status in the wake of Turkey’s economically fought disputes with the United States, the government risks its access to foreign credits being curtailed, which could force it to extract more money from ordinary Turks through increased taxes. That in turn would raise the spectre of recession.

“Turkey’s troubles are homegrown, and the economic war against it is a figment of Mr. Erdogan’s conspiratorial imagination. But he does have a point about the impact of a surging dollar, which has a long history of inflicting damage on developing nations,” Mr. Sharma said.

Nevertheless, as The Wall Street Journal concluded, the vulnerability of Turkey’s debt-driven growth  was such that it only took two tweets by US President Donald J. Trump announcing sanctions against two Turkish ministers and the doubling of some tariffs to accelerate the Turkish lira’s tailspin.

Mr. Erdogan may not immediately draw the same conclusion, but it is certainly one that is likely to serve as a cautionary note for countries that see debt, whether domestic or associated with China’s infrastructure-driven Belt and Road initiative, as a main driver of growth.

*

This article was originally published on the author’s blog site: The Turbulent World of Middle East Soccer.

Dr. James M. Dorsey is a senior fellow at the S. Rajaratnam School of International Studies, co-director of the University of Würzburg’s Institute for Fan Culture, and co-host of the New Books in Middle Eastern Studies podcast. James is the author of The Turbulent World of Middle East Soccer blog, a book with the same title and a co-authored volume, Comparative Political Transitions between Southeast Asia and the Middle East and North Africa as well as Shifting Sands, Essays on Sports and Politics in the Middle East and North Africa and just published China and the Middle East: Venturing into the Maelstrom

Featured image is from Daily Reckoning Australia.

The original source of this article is Global Research

Copyright © James M. Dorsey, Global Research, 2018

Amidst Turkish Crisis Indian Rupee Falls to All-time Low

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With the ongoing crisis involving Turkish lira, the Indian rupee fell to an all-time low on Tuesday. The Indian currency dropped to the level of 70.1 to the US dollar and ended at 69.93 at the end of the day, recording its largest one-day fall in five years.

Indian officials have attempted to downplay the severity of the crisis confronting the Indian economy and its currency. Economic Affairs Secretary Subhash Chander Garg told the media on Tuesday that there was “nothing at this stage to worry” about the fall of the rupee as it was due to “external factors.” He claimed that India had sufficient foreign exchange reserves to withstand the decline.

At the same time, Garg admitted that the country’s central bank, known as the Reserve Bank of India, was limited in what it could do to contain the fall. He said:

“As currencies of other economies are also depreciating, intervention by the Reserve Bank of India, by selling dollars in the country, will not help much at this stage for stabilising the rupee.”

Indian officials have been forced to admit their inability to control “external factors” on the country’s economy. According to Garg, the Reserve Bank of India (RBI) has spent about $US23 billion so far in this year in its attempt to stabilise the rupee.

The fall of the Indian rupee has been unfolding over several months, in response to moves by the US Federal Reserve to lift interest rates and end its “quantitative easing,” thus reversing the flow of relatively cheap dollar-denominated loans. The Indian currency has declined about 8 percent so far this year. Now, amidst the sharp fall of the Turkish lira, which underscores the far-reaching implications of an upward movement of the dollar as a result of the US Fed’s moves on so-called emerging markets, the decline of the Indian rupee is accelerating.

Pointing to the role of foreign investors in the fall of the rupee, B. Prasanna, group executive and head of ICICI Bank, said:

“The swift move [of the rupee] past 69 happened due to foreign portfolio investor (FPI) outflows and the need to hedge existing short dollar positions in the market, driven by global market sentiment rather than actual importer demand.”

The decline of Indian rupee is a part of global rush by investors away from so-called emerging markets. Radhika Rao, an economist at DBS Bank in Singapore, said:

“The fall in rupee was not in isolation, rather a part of the broader sell-down in emerging markets currencies.”

As a further indication of the growing economic crisis confronting the Indian elite, the country’s trade deficit rose to $18 billion last month, from $16.6 billion in June. The major factor was the increase in oil prices. India imports more than 80 percent of its crude-oil needs.

Some sections of Indian big business welcome a weaker rupee as a favourable factor for exports, arguing that it will make the country’s products competitively cheaper in the world market. Anand Mahindra, the executive chairman of the Mahindra Group, which has interests ranging from cars to construction equipment to insurance, tweeted:

“With this boost to India’s export competitiveness could we now convince global companies that it’s time to switch to India for world-scale, export-focused manufacturing?”

However, a weaker rupee will not favour all sections of Indian industries as argued by Mahindra. Those which rely on imported raw materials, component parts and machinery will face increases in their manufacturing costs in rupee terms.

Moreover, a weaker rupee could lead to higher inflation under conditions of increases in import bills of crude-oil, commodities, electronic items and engineering equipment. According to the Indian oil ministry, every rupee change in the exchange rate against the US dollar makes a change of 108.8 billion rupees ($1.58 billion) in the country’s crude-oil import bill, which reached $12.4 billion in July, 57.4 percent higher than a year ago.

While Indian officials boast the country’s foreign reserves are sufficient to push back against the downward pressures on the rupee, the current level of about $402 billion would not cover import costs for a year.

The global economic shocks will intensify the political crisis confronting the government of Prime Minister Narendra Modi. The Hindu supremacist Bharatiya Janatha Party (BJP) will face national elections next year. Its ability to allocate spending toward some cosmetic social policies, in an effort to retain support, is increasingly limited.

The higher inflation resulting from the depreciation of the rupee will intensify the already immense burden on the working people and rural poor in the form of increasing prices for fuel, food and other essential goods and services. It will lead to a further escalation of class struggle.

This year, significant sections of workers and the oppressed have engaged in strikes and mass protests over the attacks on their wages, jobs and working conditions, by both the national BJP government and administrations at state level. Bank employees throughout the country, public-sector bus workers in the southern state of Tamil Nadu, cab drivers attached to major taxi companies Uber and Ola, and farmers in western, eastern and northern India were among them.

Immense class antagonisms exist due to the poverty and widening social inequality caused by the pro-investor economic reforms carried out by successive governments since 1991. The top 1 percent of country’s population enjoys nearly a quarter of all income and owns 60 percent of the country’s total wealth, under conditions where about 70 percent of the population lives on less than $2 a day. Only a tiny minority of big bourgeoisie and privileged section of upper middle class has benefited from more than a quarter century of economic reforms in the expense of vast majority of workers and oppressed masses.

India’s social powder keg is on the verge of explosion under conditions where the main opposition Congress Party and the Stalinist parliamentary parties—the Communist Party of India (Marxist) or CPM and the Communist Party of India (CPI)—are discredited among the workers and oppressed masses due to their role in imposing pro-investor economic policies and associated austerity measures. These organisations will not be able to contain working-class resistance as they have in the past.

Collapsing Asian Currencies? Why is the Indian Rupee Depreciating?

The original source of this article is World Socialist Web Site

Copyright © Deepal Jayasekera, World Socialist Web Site, 2018

IMF Sounds The Alarm Over Junk Bonds

Ever since the start of 2018, an odd divergence has emerged in credit markets, where Investment Grade bonds have seen their spreads leak progressively wider, hitting levels not seen in 2 years, while the bid for higher yielding, and much more risky, junk bond debt has been seemingly relentless, with high yield spreads near all time lows.

To be sure, many reasons have been offered, with Bank of America suggesting that IG weakness is "due to supply pressures in an environment of reduced demand that began in March and extended through last week, plus the Italian situation, which is about systemic risks running through the global IG financial system." Meanwhile, it believes the strength in HY is mostly due to the lack of supply of higher yielding paper.

Whatever the suggested reasons, however, the underlying causes are two: an environment of artificially low interest rates created by central banks, and unyielding, pardon the pun, investor euphoria. In other words: a multi-year credit boom.

And while the Fed's "macroprudential regulation team" appears to have zero problems with what is going on in the world of junk bonds, the IMF has sounded the alarm on the troubling developments in junk bond land in particular, and capital markets in general.

In its The Chart of the Week, the IMF Blog shows the impact of a bad credit boom - one which the fund defines as followed by slower economic growth or even a recession - on economic growth in the years that follow. But first, it ask a basic question: what makes for a bad boom? The IMF's answer:

it is fueled by excessive optimism among investors. When the economy is doing well and everybody seems to be making money, some investors assume that the good times will never end. They take on more risk than they can reasonably expect to handle.

Ok, but how can one tell when risk-taking is getting out of hand? After all the Fed is notoriously bad at being unable to time just when to pull the punch bowl away, and instead lurches from one bubble boom-bust cycle, to another, greater one instead.  According to the IMF, one way to make the distinction is to look at the riskiness of credit allocation, adding that firms where debt expands faster become increasingly risky in relation to those with the slowest debt expansions, posing downside risks to growth down the road. This is obviously common sense.

The second method is more directly linked to the issue at hand, namely the glut in junk bonds. Here is the IMF on how to spot euphoric risk-taking:

Another method is to look at the bond market to see how much of the money companies and governments are borrowing consists of high-yield debt, also known as junk bonds. (These are bonds that offer higher yields to make up for the greater risk of default by the borrower.) The larger the proportion of high-yield debt, the higher the level of risk in the financial system.

Next, in calculating the impact of bad booms on growth, the IMF looked at data on debt issued by governments and non-financial companies in 25 advanced economies, and defined a boom as a period of faster-than-normal growth in credit relative to GDP. Finally, it looked at how much of the credit growth consisted of high-yield debt.

And, judging by the current conditions, the IMF found that the world effectively finds itself in just such a "bad boom" phase.

So what then? 

The IMF concluded that credit booms marked by a rising share of junk bonds were followed by lower economic growth over the following three to four years.

When the high yield share of debt rises by one standard deviation—a statistical measure of how much one number differs from the average in a set of numbers—GDP growth over the next three years is lower by 2 percentage points.

This is shown in the chart below which reveals that junk bond driven credit booms are followed by sharp economic slowdowns in the following "three to four years."

The IMF concludes that this result suggests that "when credit is growing quickly, policymakers should pay attention to how much of that growth is allocated to riskier firms, such as those that issue high-yield debt."  Well, not only is junk debt growing quickly, it has never been greater.

The IMF's solution on how to avoid a credit bust recession?

Steps to fix the problem may include higher capital requirements and other measures to restrain credit growth and tighten lending standards more broadly.

Needless to say, not only are no regulators actively seeking to restrain credit growth, but lending standards have never been easier, which is to be expected when none other than the ECB is actively buying corporate bonds.

Source: IMF

Fonte: qui