Fed Global Backlash Grows - December, 2010

Before the Second World War, there were at least four global currencies: the British Pound, the US Dollar, the French Frank and the German Mark and gold was still golden. After the Second World War, the global community was down to one currency - the almighty US Dollar and gold had become subservient to it.

American officials are increasingly finding out that being on top of the political/economic ladder can be a lowly place. And despite its wishes to the contrary, being on top comes with global obligations and global responsibilities. 20th century political circumstances transformed paper Dollar into an actual commodity, one that eventually became even more valuable than gold itself. This in fact worthless piece of paper held immense value and become the sole global reserve currency. Having its birth in Bretton Wood in 1944, brilliant machinations of the Anglo-American-Zionist global order to tie the global economy and financial institutions to the United States paid great dividends throughout the Cold War and well into the post-Soviet era. The US Dollar retains its power and value essentially through brute force and economic blackmail. The US Dollar became the global reserve currency simply because of geopolitical circumstances and Washingtonian machinations that encouraged/forced its utilization. Today, in light of the global economic crisis, the global community is essentially finding itself to be nothing more than a hostage to Washington and its few close allies. Nevertheless, more and more nations now are demanding that Washington, as the sole guardian of the primary reserve currency in the world today, begin acting more responsibly and meet its obligation to the global community.

More and more people are finally waking up and realizing that the global entity that was being heralded as the policemen of the world, or the beacon of freedom and democracy, has in fact become nothing but a utterly corrupt and evil system run by a handful of interconnected institutions and corporations that essentially seeks to enslave the world's masses and exploit its resources. The driving machine behind all this is the Federal Reserve, a private/independent institution living essentially like a parasite within the United States, its host, as it infects nations across the world. Only a few years ago, as Iraq found out, a nation that even talked about dropping the US Dollar from its international transactions could have triggered a violent response by Washington. It's a different world today. As Russian the Federation and China increase their global political and economic impact, Washington is increasingly finding itself in hot water as more and more nations begin following Russia's and China's example. In the days and weeks leading up to the G-20 summit in South Korea, global leaders were beginning to publicly complain about America's infamous Federal Reserve and the world's destructive reliance on its currency.

As expected, the G-20 summit did not go too well for Washington (see corresponding articles below this commentary). A chorus of nations has vociferously expressed their concerns and displeasure about the financial/economic system in question. And Germany, Russia and China (Eurasia's three most powerful political entities) have signaled that they are more-or-less beginning to employ independent economic and financial policies to protect themselves from the US Dollar, and Russia's Putin just recently publicly reaffirmed Moscow's desire to abandon the US Dollar. What we see going on today is an international currency war. As a countermeasure, Washington is desperately trying to manipulate its currency to undermine competing currencies. According to some financial experts, the weakening of the Euro was orchestrated in Wall Street with the primary intention of undermining the growing popularity of the Euro. Arguments that the Federal Reserve printed another 600 billion Dollars to bolster the ailing US economy (which in fact could be argued that it in the long term hurt the US) is irresponsible because the United States is expected as the sole owner of the global currency to take into consideration the concerns of other nations.

Needless to say, there is a real danger that this world war of sorts can evolve into a major international shooting war. Major international wars usually follow long periods of major economic downturns. Tensions are high in several strategic areas of the world. The Caucasus, the Middle East, Central Asia, the Korean peninsula and South America are powder kegs on the verge of explosion. Let's pray to God that the inevitable divorce that is to occur between the global community and the US Dollar goes down without nasty repercussions. Interestingly, the Wall Street Journal has been echoing some of my sentiments regarding this topic. The following are several news articles that have caught my attention recently.

Arevordi

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US Black Debt Hole: 'We want you all bankrupt!': http://www.youtube.com/user/RussiaToday#p/u/6/8P1fihT5B7o

'Fed's $500 billion boost to feed mega-banks':http://www.youtube.com/watch?v=Eiaz7ZZEy8Y

Putin ditches dollar, backs Euro on trip to Germany: http://www.youtube.com/watch?v=IvJEJEGzeU8

The Money Masters - How International Bankers Gained Control of America: http://video.google.com/videoplay?docid=-515319560256183936#

The Secret of Oz: http://www.youtube.com/watch?v=swkq2E8mswI

Money, Banking and the Federal Reserve: http://video.google.com/videoplay?docid=-466210540567002553

Ralph Nader: Corporate socialism runs US government: http://www.youtube.com/watch?v=zdAtGV6hVCk

'Fed's $500 billion boost to feed mega-banks':http://www.youtube.com/watch?v=Eiaz7ZZEy8Y

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Fed Global Backlash Grows

November, 2010

Global controversy mounted over the Federal Reserve's decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism. Evan Ramstad discusses preparations for Thursday's G-20 meeting, where controversy has grown over the Fed's recent stimulus moves, which China and other nations have protested. Also, Elizabeth Williamson discusses the race to finish a free-trade agreement between the U.S. and South Korea.

Mr. Obama returned fire in the growing confrontation over trade and currencies Monday in a joint news conference with Indian Prime Minister Manmohan Singh, taking the unusual step of publicly backing the Fed's decision to buy $600 billion in U.S. Treasury bonds—a move that has come under withering international criticism for weakening the U.S. dollar. The Fed is independent, and the White House by longstanding tradition has strained to avoid any appearance of collusion or conflict. Mr. Obama said the administration doesn't comment on particular actions of the U.S. central bank, before adding: "I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole."

The prospects of the Fed flooding the financial system with money helped drive gold above $1,400 an ounce on Monday. The precious metal, which investors often buy as protection against inflation, settled at a record $1,402.80 per troy ounce. Other assets, such as U.S. stocks and oil, drifted back slightly on Monday after getting a big boost from the Fed's announcement last week. The dollar fell against the yen, while rising against the euro as worries about Europe's debt problems returned. The G-20 summit that begins Wednesday night in Seoul is shaping up as a showdown between exporting powers, such as Germany and China, and nations such as the U.S. that are struggling to emerge from recession and high unemployment.

Ahead of the meeting, tensions have flared in particular between German and U.S. officials. U.S. Treasury Secretary Timothy Geithner has been pressing member nations to sign up for a framework that would set limits on countries' trade balances. Germany, which relies heavily on exports, has lectured Washington about its economic policies, which Berlin sees as profligate and damaging. Already, expectations are low for the meeting. The G-20 is struggling to agree on specific targets for Mr. Geithner's trade regime. It's also likely to leave unresolved other big questions, such as how to unwind failing international financial institutions, a task made urgent by the recent financial crisis. Mr. Geithner said he is "very confident" world leaders, including those from China, will agree on a new framework that could instead include warning indicators for when a country's trade balance is out of line.

Germany's criticism echoes that from other countries, including Brazil and Japan, which have complained about potential spillover from the Fed's action. Printing more dollars, or cutting U.S. interest rates, tends to weaken the dollar and makes U.S. exports more attractive. The accompanying rise in the value of other countries' currencies tends to damp their exports and can fuel inflation or asset bubbles, as emerging-market officials note. U.S. officials maintain the Fed's action is about stimulating domestic demand, and that a weaker dollar is a consequence, not an objective.

On Monday, China's Vice Finance Minister Zhu Guangyao said the U.S. isn't living up to its responsibility as an issuer of a global reserve currency. The Fed's move doesn't "take into account the effect of this excessive liquidity on emerging-market economies," he said. The top economic aide to Russian President Dmitry Medvedev said Russia will insist at the G-20 summit that the Fed consult with other countries ahead of major policy decisions. Luxembourg Prime Minister Jean-Claude Juncker, who is chairman of the euro-zone finance ministers, also weighed in on the Fed move, saying: "I don't think it's a good decision. You're fighting debt with more debt." Dissenting voices emerged in the U.S., too. Federal Reserve governor Ken Warsh, a top lieutenant of Federal Reserve Chairman Ben Bernanke, expressed deep skepticism about the Fed's action in an opinion piece in this newspaper. On Monday, Sarah Palin took aim at the Fed, calling on Mr. Bernanke to "cease and desist" on the bond-buying program. Ms. Palin said, "It's far from certain this will even work" and suggested the move would create an inflation problem.

Access thousands of business sources not available on the free web. Over the weekend, Mr. Bernanke said, "We see an economy which has a very high level of underutilization of resources and a relatively slow growth rate. The standard considerations suggest we should be using expansionary monetary policy, and that was the purpose of the action" taken last week. Underpinning the debate is a growing sense that the international currency system, which has been based on floating exchange rates for most players for more than 30 years, is wearing out. China's policy of keeping its currency artificially low has long caused tensions that have increased of late, as other countries try to export their economies back to health. Now critics are lumping the Fed's policy, known as quantitative easing, into the same category.

German Finance Minister Wolfgang Schäuble lashed out at U.S. pressure on Berlin to rein in the country's surging exports, telling Der Spiegel magazine, "The American growth model...is stuck in a deep crisis." He said, "It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar."

Observers said the blunt criticism of U.S. policy is in large part payback for a longstanding stance by Washington policy makers that the American economy should serve as a model for others. The heated rhetoric also stems from fears that the U.S. may be looking for a back-door way to set exchange-rate policy in a way that favors the U.S. In his first public comments since Mr. Schäuble's outburst, Mr. Obama seemed set to keep the heat on both Germany and China. "We can't continue to sustain a situation in which some countries are maintaining massive [trade] surpluses, others massive deficits, and there never is the kind of adjustments with respect to currency that would lead to a more balanced growth pattern."

Germany's trade surplus shot up to €16.8 billion ($23.37 billion) in September from €9 billion in August, Germany's federal statistics office reported Monday—larger than the €12 billion economists had expected. Mr. Obama enlisted an ally in Mr. Singh, an economist whose country is wielding increasing influence at the G-20. Responding to Mr. Schäuble's criticism of the Fed, the prime minister said, "Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity."

European Central Bank President Jean-Claude Trichet, after a regular meeting with other central-bank heads Monday, said: "Absolutely no participants mentioned that they were pursuing any kind of weak-currency policies." He said the Fed gave the committee a "very precise exposition" of its new policy, but said there was no judgment of, or vote on, its action.

Source: http://online.wsj.com/article/SB10001424052748703514904575602820114533804.html?mod=WSJ_World_LEFTSecondNews#printMode

The Search for a New Currency System

More than 60 years after the victors in World War II devised new rules for currencies at Bretton Woods, N.H., and more than 30 years after Richard Nixon blew up that regime, the search is on for a new way to manage the tensions that come from countries using their own national currencies. But there is more agreement on the shortcomings of the current regime, in which currencies trade relatively freely against each other, than on what should replace it. The arguments aren't new. They recall debates at Bretton Woods between Britain's John Maynard Keynes and the U.S.'s Harry Dexter White. Back then, the U.S. had a big trade surplus, Britain was a big borrower and global financial heavyweight and China was inconsequential. Today, the U.S. has the big trade deficit and is the big borrower, China has the big surplus and Britain is on the sidelines.

Since Fed Chairman Bernanke's remarks on quantitative easing in late August, major G-20 currencies have risen sharply against \the U.S. dollar—with one notable exception—the yuan. Percentage change in the number of U.S. dollars each currency buys. The latest spark for angst about global currencies was the Federal Reserve's decision to print $600 billion more to buy U.S. Treasurys. A byproduct of that decision is likely to be a weaker U.S. dollar. Despite Fed Chairman Ben Bernanke's efforts to explain that the move was intended to strengthen the U.S. economy to the benefit of all, he drew criticism from many quarters—including Monday from Republican Sarah Palin and the prime minister of Luxembourg. Posturing officials around the world in advance of this week's summit of leaders from the Group of 20 major economies in Seoul have added to the fireworks.

The president of the World Bank, Robert Zoellick, a veteran of both Bush administrations, jumped into the fray Monday with an eyebrow-raising op-ed piece in the Financial Times that suggested a back-to-the-future approach: Tying global currencies to gold. "The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods," he wrote. "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." While a return to the gold standard is unlikely—and, in the view of scholars who see the rigidities of the gold standard as a contributor to the Great Depression, unwise—the suggestion underscored widespread discomfort with today's arrangements.

At its root, the problem is that the use of the dollar for trade in everything from bonds to oil gives the currency an outsize role in the world economy, and makes the world economy sensitive to U.S. domestic monetary policy. As Nixon Treasury Secretary John Connally famously put it: "Our currency, your problem." The French, who chair the G-20 next year, have vowed to devise an alternative. "It's in everyone's interest that the U.S. continues to grow, but everyone is aware of their responsibilities and no one wants excessive volatility on currency markets," an official from the Élysée Palace told reporters recently. One solution, the French said, is to diversify global reserves away from the dollar and create a new "framework of coordination."

Back in 1969, amid tension between the dollar's peg to gold and what was—by the standards of the day—a large budget deficit, an alternative to the dollar was created. Known as Special Drawing Rights, and overseen by the International Monetary Fund, this dollar substitute plays little role outside official transactions. In 1971, President Nixon severed the dollar's tie to gold altogether, moving the world toward a regime in which markets, with occasional intervention from governments, set exchange rates in nearly every major economy—except China. While the U.S. isn't buying or selling dollars on foreign-exchange markets to influence the dollar's value, a dozen countries are intervening to depress currencies that already are undervalued, according to a new analysis by the Peterson Institute for International Economics in Washington. The countries, which the think tank says should be "censured" by the G-20, include China, Malaysia, Singapore, Switzerland and Taiwan. The institute says intervention by several of the countries—including Brazil, Indonesia, Israel, Japan, South Korea and Thailand—is justified because their currencies are overvalued.

Today's debate, and speculation that the U.S. has peaked as a world economic power, have led to predictions that the dollar inevitably will surrender its role as the world's reserve currency. So far, though, there doesn't appear to be a better alternative. Markets aren't confident that the euro will exist in a decade's time, markets for Japanese yen aren't nearly large enough or liquid enough, and the Chinese are hesitant to assume the hassles that accompany the use of a country's currency as a store of value and medium of exchange around the world. Barry Eichengreen, an economic historian at the University of California at Berkeley, argues that the world may end up with more than one full-fledged international currency. The old logic—that importers and exporters want a common unit of account and that both official and private investors will rely on the currency with the most liquid markets—is outdated, he says.

The notion that importers, exporters and bond traders all need to use the same currency "holds less weight in a world where everyone has a mobile phone that can compare currency values in real time," he says. The global economy is now so big "there is now room for deep and liquid markets in more than one currency." And then there's history. Before 1914, there were three international currencies: the British pound, the French franc, and the German mark.

Source: http://online.wsj.com/article/SB10001424052748703957804575602933358206118.html?mod=WSJ_World_LEFTSecondNews

China says G20 should monitor US Fed

China's state media has issued a new broadside at the US Federal Reserve's move to prime the US economy, suggesting the Group of 20 should monitor policy shifts by the US central bank. The Xinhua news agency said in a commentary the Fed was "risking the global recovery by following its own track for economic revival" by spending an extra $US600 billion ($A593.65 billion) buying Treasury bonds to stimulate the US economy. The comments were published just days ahead of two key summits this week - the G20 meeting in Seoul and the Asia-Pacific Economic Co-operation forum in Yokohama, Japan - that are expected to focus on rebalancing global trade.

"There is an urgent need for the G20 ... to set up a new mechanism that effectively monitors the issuer of the international reserve currency, especially when it is not able to carry out responsible currency policies," Xinhua said. "It is necessary for the issuer of the international reserve currency to report to and communicate with the G20 group before it makes major policy shifts." The commentary was the latest in a barrage of criticism from Chinese officials and state-run media of US policies, especially the Fed's so-called "quantitative easing". China and other emerging economies worry that much of the new US money will flood their financial markets, with players seeking higher non-dollar returns. The Xinhua commentary also called for deeper reforms in global financial institutions such as the International Monetary Fund, and greater representation for developing countries - a position long held by Beijing.

Source: http://www.tradingroom.com.au/apps/view_breaking_news_article.ac?page=/data/news_research/published/2010/11/313/catf_101109_201300_9600.html

Germany attacks US economic policy

Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington. Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a "deep crisis," he also warned over the weekend. His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week's US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through "quantitative easing".

On Friday, Mr Schäuble described US policy as "clueless". In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed "increase the insecurity in the world economy". " They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking." Mr Schäuble added: "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press." Germany's export success, he argued, was not based on "exchange rate tricks" but on increased competitiveness. "In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems -- German export surpluses are not part of them."

There was also "considerable doubt" as to whether pumping endless money into markets made sense, Mr Schäuble argued. "The US economy is not lacking liquidity." On the future of the eurozone, Mr Schäuble confirmed in the same interview that Berlin will push for a greater private investor involvement in future bail-outs. To ensure German taxpayers faced the smallest possible burden it was important to have the possibility of an orderly debt restructuring with the participation of private creditors, he said. Germany's proposals for a planned new rescue mechanism have run into resistance from the European Central Bank, which fears they will add to investor uncertainty at a crucial time for Europe's 12-year old monetary union. Mr Schäuble said the new mechanism would apply only to new eurozone debt but argued the European Union "was not founded to enrich financial investors".

Mr Schäuble envisaged a two-stage process in a future crisis. The EU would put in place the same sort of saving and rescue programme as imposed this year on Greece. In a first stage, the term structure of government debt could be extended. If that did not work, then in a second stage, private creditors would have to take a discount on their holdings. In return, the value of the remainder would be guaranteed, Mr Schäuble said.

Source: http://edition.cnn.com/2010/BUSINESS/11/07/germany.us.economic.policy.ft/index.html?hpt=T2

The World's Dollar Drug

For all the talk about the problems of Greece and their implications for the euro zone, there is another currency that presents equally profound problems: the U.S. dollar. The dollar is, as everyone knows, the world's reserve currency, and it widely seen as a boon and an anchor for the emerging global economic system. It is also the only thing standing between the United States and its own moment of reckoning, and that is not a good thing. The evolution of the dollar as the world's reserve currency tracked the emergence of the U.S. as a dominant power.

The Bretton Woods agreement of 1944 designated the dollar as the currency of last resort because the U.S. accounted for a significant percentage of world manufacturing and held much of the world's gold in Fort Knox and other depositories. The British at first demurred but were forced to accept the primacy of the greenback in 1946 when faced with a choice between bowing to the dollar or defaulting on their loans because the Americans would not lend to them otherwise.

Bretton Woods obligated participating countries to determine their exchange rates and the value of their currencies in relation to the dollar, with gold as the underpinning. Then, in 1971, President Richard Nixon ushered in the era of fiat currency when he announced that the U.S. government would no longer allow foreign nations to redeem their U.S. dollars for gold. The move came in response to rising inflation in the U.S. It also came in response to competitive pressures from Germany and Japan, which were beginning to undermine American manufacturing—a decline that has continued unabated since and can only be laid at China's door by a willful forgetting of the legacy of a host of lower-cost competitors over the past 40 years. By the early 1970s, the U.S. was importing heavily from new manufacturing centers outside America (though not yet running trade deficits) and being forced to redeem ever larger amounts of dollars for rapidly dwindling reserves of gold.

After 1971, currencies began to float against one another. This fiat system is what exists today, with notable outliers such as China, which continues to peg the value of its currency to the dollar. It does so primarily because when Beijing began to liberalize its economy in the early 1980s, the dollar was the most important avenue of access to the U.S., the world's most vital and dynamic economy.

Over the past decade, the relative position of the U.S. has shifted. It is no longer a creditor to the world but rather a large debtor. It is a net importer of manufactured goods—thought its manufacturing sector remains quite large even while employing fewer workers. Its national economy is the world's largest but is surpassed by the multinational euro-zone. And China's economy, while still perhaps not much more than a third the size of the U.S., is growing three to four times as rapidly and accumulating dollars at a torrid clip.

Yet the dollar remains the linchpin of the global system. The financial crisis brought global grumblings about the U.S. currency, about the toxicity of the U.S. financial system, and about the need and desire for an alternate global currency. The Chinese were vocal in their desire to find a new anchor, and the Europeans echoed the sentiment along with others. But words are easy. Even the Chinese, who have made moves toward pegging the yuan against a basket of currencies, still find that having tethered their system to the dollar they can't simply walk away because they would rather things were different.

The dollar's dominance has clear short-term benefits for the U.S. Unlike Greece or just about any other country, when the American federal government wants to take on additional debt it has the advantage of a world that must buy dollars. Because much of global trade is conducted in dollars, especially Chinese trade, governments and institutions throughout the world have little choice but to invest in U.S. assets. The U.S. government also has the ability to print that global reserve currency when dire straits demand it. That gives the U.S. considerable latitude to spend its way out of a crisis without confronting real structural challenges.

Greece is being forced to adopt more austere government fiscal policies, as are Latvia and many other smaller countries. Having to turn to global markets with cap in hand is a bitter pill but could force reforms that will eventually leave those economies in stellar shape. The U.S. has been able to forestall deep reforms because it has the dollar. But while the presence of the dollar keeps money flowing in and the system well-oiled, it no longer reflects the world's economic pecking order. For all the talk of currency manipulation by Beijing, it is equally true that China's peg to the dollar is currently propping up an otherwise shaky American economy. The Chinese have become the ultimate offshore bank for American capital, and there is no evidence they deploy it to less American benefit than Americans themselves do. The Chinese government invests conservatively in U.S. bonds, and spends heavily on a domestic economy that produces goods for American consumers.

The U.S. government uses its dollars—and the ability to print them and borrow them—poorly. Large amounts of debt fund consumption of goods and health care. While today's needs are important, without sufficient investment those dollars will dissipate. You'd lend someone money to open a business or invent a new energy source, but not for dinner and a movie. Yet because of the dollar, America tends to get the money it wants. And so the dollar as an anchor of the global system forestalls fiscal crisis in the U.S. while allowing for gradual decay of the American economy. This can go on for many years. The world needs a reserve currency to reduce costs and allow market players to assess value across different countries and economies. But that need for the dollar shouldn't be confused for American strength.

India continues to use English as a lingua franca, more than 60 years after the British departed, not because Britain remains a world empire but because India needs a common tongue and English was already in place. The dollar today serves the same purpose for the world. The ubiquity of the dollar allows Americans to believe that their country will automatically retain its rightful place as global economic leader. That's a dangerous dream, an economic opiate from which we would do well to wean ourselves.

Source: http://online.wsj.com/article/SB10001424052748704342604575222701291563876.html