Frank Biancheri to Guns & Butter

It is the third time that Frank Biancheri speaks to this American radio since the financial crisis hit - something that he and the GEAB team anticipated. While I may not agree 100% with everything Frank said during almost one hour of interview, most of it seems spot on. Below are some highlights from the show (these are not transcripts but notes I took while listening):

• The Greek crisis created by the the City media (FT in particular).
  
• False news on Greece made first pages in the Anglo media.
• The Euro is being tested to divert attention from real problems, especially in the UK.
• The real situation in the UK is being suppressed by the media (worst budget deficit since 1945).
• Bank bailout was absolutely necessary, but not in the way it was made
  
• Banks continue to be and operate as in 2008, nothing was changed or reformed.
• Bank bailout was a white check, and simply shifted debt to from financial institutions to states.
  
• Smaller economies (Greece, Dubai, etc) will find it much easier to re-finance themselves, because their budget needs are not that relevant in the grand financial scheme.
• Larger economies will have the greatest troubles to refinance their budgets, since

  they need much larger quantities of money that do not exist right now.
  

• In this sense, debt to GDP ratio is a poor measure of solvency in the present world situation.
  
• The US alone needs 5 Tera (T) dollars to refinance itself and that much money does not exist at present in the financial markets, because every one else needs refinancing (Europe, Japan, UK, etc).
  
• China is running a trade deficit and wont be available to refinance the West [OECD] as before.
• The Bank of England is already buying between 70% and 90% of the Gilts emitted by the UK government.
• The UK is the detonator for the US bomb, when later this year US financing needs will have a serious impact on interest rates.
• There is a risk of the US Fed failing as any regular bank during the winter of 2010/2011, due to it's toxic balance sheet.
• During the coming winter the present US federal politic fabric may be brought under strain.
  
• Deficits in Europe are not as problematic for two reasons:
  • Europeans are used to be taxed;
  
  
  • 70% of the economic activity takes place inside Europe.

• Next decade is a transition phase with the shift of world economical power away from Europe and the US to elsewhere. Though a serious war is not likely, conflicts like the one over Greece can take place, as these otherwise friendly nations fight for shrinking financial resources.
  
• In the EU it is assumed the future is unknown because the Union is a recent creation, thus Europeans understand they have to build it every day. In the US there's a subliminal assumption that all is good and things will simply turn out right.
  
• While Europe has shown able to adapt to circumstances, and finally created long needed mechanisms indispensable to its cohesion, the US remains a static state which will exacerbate the re-financing problems later in the year.
  

While I pretty much share Frank's "optimism" on the future of the EU politically, I'm not that certain things will be easier for us on economic side. Our dependence on foreign resources (especially energy) and the complacency of our leaders towards it (e.g. wasting money on CCS) makes very apprehensive towards our economic prediction over the coming decade. Oil, Coal and Natural Gas all have the potential for major scarcity episodes in the international market.

Jim Rickards to King World News

Jim Rickards is basically the Triffin's dilemma guy. He put the issue on the radar and seems to understand the resurrection of the SDR better than most of the usual Economy luminaries that get air time in the media. Jim is also a gold bull, possibly a bit too much for my taste; certainly, I'm bullish on gold too, but the vehemence and figures he employs may hint at some self interest on the matter (mid that when reading below). Anyway, his thoughts are always instructive, stimulating and in a perspective much wider than your usual TV econ comment. Highlights of the show (again these are not transcripts but notes I took):

• Gold outlook: 2000$/oz near term, 5000$/oz mid term
  
• Triffin's dilemma - a large country has to run a persistent trade deficit to provide liquidity for world trade. Eventually that trade deficit bankrupts the world currency issuer.
• A global currency, as the SDR, is an answer to Triffin's dilemma.
• But there's no real government oversight over the IMF as it exists today (basically controlled by the global financial establishment).
  
• Recent IMF meetings suggest the creation of a world currency from the SDR might happen sooner rather than later. World central bank? World treasury? World governance?
  
• Clearly the Euro is under attack, just like Soros attacked the Sterling in 1992. But back then he was probably the only investor in the world able to do so, because real money was needed.
  
• Today to attack a currency you don't need money, you can use synthetic shorts, that can take various forms (e.g CDS, naked shorts).
  
• While Europe makes a huge effort to pull 1 T€, a bank like Goldman Sachs can easily muster 10 T€ and short the euro.
  
• Real money isn't needed to create these synthetic shorts, it can be made with contracts (e.g. insurance) by "suckers" who may have difficulty even to find Europe in the map. Hedge fund managers become highly motivated to attack a currency and bring it apart because profits are huge.
  
• Central Banks are today put up against forces they never faced before.
  

There are two conclusions I take from this:

1. short selling will be made illegal/impossible by OECD governments at some point;


2. the attempt to create a world currency is probably inevitable.

In abstract, I think that ending with short selling - borrowing a stock or other paper instrument to sell it now and bought it back later - is a good thing, though I have no idea what consequences this may have today. I simply can't see what purpose this method may have in creating wealth/economic activity, more to the contrary, it looks like a wealth destruction mechanism. But it may simply short-sightedness from my part...

As to the world currency, while I never expected it to succeed in the long run - for the biophysical economy is at best stalled and at worst facing a multi-decade contraction - right now I see it struggling even in the short to mid term. As we are learning today with the Euro, currencies not only demand a political union, they demand monetary policy union (easy), debt union (not so easy) and budgetary union (hard).

In fact, the creation of a world currency may actually accelerate the termination of the present fiat monetary system. I hope not.

Previous logs:

A video on the future of the dollar (and money)

London G-20 meeting: the last chance?