iCharts Discussions

[ajayhkaul]

Its time to go back in time and see what 'austerity'measures can do to the rulers:

Romania's experience in the 1980s, as it's the only modern country to fully satisfy an otherwise onerous foreign debt burden without resorting to actual default, constructive default via inflation, or some type of debt restructuring. And as you'll see, the decision to do so turned out to be a fateful one for Romania's leader and his wife.

A leader's silent war on his people
Romania borrowed heavily throughout the 1970s to finance the modernization of its energy sector. Its goal was to become one of Europe's principal suppliers of secondary petroleum products. Unfortunately, the decision to pursue this course couldn't have come at a worse time, as the new capacity came on line just in time to see the price of oil triple after the Iranian revolution. Because the price of secondary oil products failed to rise proportionately, moreover, Romania proceeded to lose $25 on every ton of refined products it sold to the West. And by 1980, the country was posting a record $1.5 billion trade deficit -- a non-negligible amount for a country of Romania's size.

To avoid defaulting on its now-quaint $11 billion foreign debt, the country's Soviet-style leader Nicolae Ceausescu chose the path of austerity in 1982, initiating what came to be known as his "silent war" against the people.

His plan was to pay off Romania's debts in eight years by turning its aforementioned trade deficit into a trade surplus. Doing this, however, required two things. In the first case, the country had to minimize imports by reducing internal demand for them. And in the second case, it had to maximize exports of domestically produced goods such as energy and agricultural products. Ceausescu accomplished both by rationing basic amenities such as heating fuel in the winter and basic foodstuffs throughout the year.

Although these measures were ultimately successful -- Romania's foreign debts were paid off by 1989 -- the resulting carnage left many wondering whether it was worth it. In addition to a purported 15,000 deaths a year from freezing and malnutrition due to the rationing, Romania's economy collapsed into an economic malaise worse than that of the Great Depression. From peak to trough, its GDP began a staggering 67% descent in the latter years of Ceausescu's regime. And it didn't regain its 1988 high until 16 years later in 2004 -- a mere five years before it collapsed again in the midst of the Great Recession. Not to put too fine a point on it, but both Ceausescu and his wife were ultimately tried and executed for these transgressions.

The lessons of Romania's austerity
In light of Romania's experience, it should be no surprise that the governments of heavily indebted European countries are buckling under the pressure of the continent's debt crisis. Italy's fell last November when its elected prime minister was replaced by a nonelected technocrat known as Il Professore ("The Professor"). Greece's fell the same month when a similarly nonelected technocratic banker assumed the reins. And Romania's fell again earlier this month after its prime minister submitted his resignation, citing the need to "defuse political and social tension" over a new round of austerity cuts.

The lesson is that extreme austerity measures are simply not sustainable without an unelected autocratic leader who's willing and able to subjugate the will of his people in favor of creditors abroad. And it's for this reason possibly, most if not all of Europe's heavily indebted countries will eventually default in one form or another. Indeed, despite their assertions to the contrary, it's no longer a question of if, but rather when.

[rk_a2003]

[mrchan09]

Last two paragraphs from a chapter of: The Case Against the Global Economy - and for a turn toward the local.



Someone asked Gandhi, "What do you think of Western civilization?" He simply replied, "It would be a good idea." For Gandhi a machine civilization was no civilization. A society in which workers had to labour at a conveyor belt, in which animals were treated cruelly in factory farms, and in which economic activity necessarily lead to ecological devastation could not be conceived of as a civilization. Its citizens could only end up as neurotics, the natural world would inevitably be transformed into a desert, and its cities into concrete jungles. In other words, global industrial society, as opposed to society made up of largely autonomous communities committed to the principle of swadeshi, is unsustainable. Swadeshi for Gandhi was a sacred principle - as sacred for him as the principle of truth and nonviolence. Every morning and evening, Gandhi repeated his commitment to swadeshi in his prayers.

Unfortunately, within six months of independence, Gandhi was assassinated, and Nehru gained a free hand in shaping the economy of India. Nehru found Gandhian thinking too idealistic, too philosophical, too slow, and too spiritual. He gathered around him Western-educated bureaucrats, and the enterprise to which they were jointly committed made them the unwitting agents of economic colonization. They pressed ahead with the construction of large dams and big factories, which for them were the temples and cathedrals of the new India. The spirit of dedication, idealism, and self-sacrifice that had been paramount under the leadership of Gandhi was quickly replaced by a lust for power, privilege, comfort, and money. Nehru and his colleagues followed the opposite path to that of swadeshi, and since that time, the history of India has been the history of corruption and political intrigue at the highest level. The political colonization of India might have ended officially with independence in 1947, but her economic colonization continued unabated and at an even greater pace. She has been turned into a playground for global economic forces.

[ajayhkaul]

Now exploitation of resources in Africa has also started ....it is being rediscovered !

Iran's economy/resources are also inaccessible , so...? sanctions !

[vinay28]

here are two aspects in a recent McKinsey report

First : The global pool of financial assets, including shares and bonds and bank deposits, is $ 198 trillion, of which $ 41.5 tr. or 22% is in emerging markets. This is in 2010. By 2020 the global pool of financial assets would grow 87% to $ 371 trillion, but the pool of financial assets in emerging markets would grow 167% to $ 111 trillion, representing 30% of total assets. In other words, because of the higher growth rates of emerging economies, combined with higher savings rate in them, the stock of financial assets in emerging markets would grow much faster, nearly twice the rate, than in developed markets. So it is natural that the developed markets would allocate an increasing share of their assets to the emerging markets

Second : 'The Great Rebalancing' which talks of the need for companies in developed countries to look at innovation to win in low cost but high growth countries. It talks of two main trends. One is the declining dependency ratio in emerging markets, which is also called the demographic dividend. India is best suited to reap this, as a growing, young, population finds jobs, there are more people earning and a lower dependency to feed those who aren't. This leads to greater consumer spend, which drives the economy.

[ajayhkaul]

mrchan09 ... thank you for posting this important piece.

Vinay ...superbly explained the importance of demography and our current advantage .They k cycles will affect us also but that is still far in future 2030/2040 .

[amitkbaid1008]

Ajay

Just one simple question - What if any country refuse to pay foreign debt instead of paying it up at the cost of its citizens?

Just simply say - "नहीं देता उखाड़ लो जो उखाड़ना हो"

Do you think any country in today's era will start war for recovering debt?

[ajayhkaul]

[amitkbaid1008]

[ajayhkaul]

The graph below indicates that America’s per capita debt exceeds the per capita debt of the so-called PIIGS of the Eurozone, which has been declared an "economic disaster area" by the mainstream financial press.

So what does this say about the United States?
Well, it says, but for the forbearance of its foreign creditors, the United States is bankrupt.

Which means it’s just a matter of time before the rest of world calls in their IOU’s. Sure, there are financial and geopolitical intrigues that will probably delay the day of reckoning but, eventually, the inexorable laws of economics will force the U.S. government to retrench.


Economist Herb Stein: "When something cannot go on forever, it has a tendency to stop."

Washington borrows and spends too much money.

The solution is also rather simple: Stop borrowing and drastically cut spending. But this presents a difficult political problem. The Feds are now borrowing almost 40 cents for every dollar they’re spending.

Budget cuts of that size would require radical changes to government policies. Such "radicalism" doesn’t sit well with the "Washington Consensus" which presumes the U.S. government can borrow money forever and never have to pay it back except with elaborately decorated irredeemable slips of paper.

Washington’s fiscal recklessness stems from the fact that since President Nixon suspended the dollar’s convertibility (yes, it was supposed to be a temporary measure), there have been no institutional constraints on money creation.

We Can Always Print More
When the U.S. Treasury enters credit markets, it doesn’t have to compete with other borrowers for a finite supply of money because the Fed is always willing and able to purchase its bonds with money it creates out of thin air.

The Fed’s debt monetization props up the bond market which enables the U.S. government to spend more, which creates more debt. The only reason the U.S. government hasn’t yet defaulted outright is its debt obligations are denominated in its own currency which it can print virtually at will. In a moment of uncharacteristic clarity, former Federal Reserve Chairman Alan Greenspan admitted this to David Gregory on NBC’s Meet the Press, when he said, "…the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default."


This inflationary debt cycle has had a corrosive effect on the country, undermining its industrial base and creating an economy addicted to debt-financed consumption.

It also fostered a public entitlement culture that makes constructive monetary reform politically impossible. The mob demands their "bread and circuses" and has no patience for those few politicians preaching the Gospel of probity and sound money.

Foreign creditors are understandably uneasy with the current state of affairs in DC and several countries have taken measures to free themselves from the dollar’s shackles. Japan, China, Russia, India and Iran have all entered into partial bilateral trade agreements that exclude the U.S. currency as an intermediate.


These arrangements are the early signs of a decoupling of global trade from the dollar; something many sober analysts warned would happen if Washington didn’t get its fiscal house in order. Ironically, the U.S. has accelerated this process recently by imposing yet another round of economic sanctions on Iran which has driven it to forge closer monetary relations with neighboring countries.


The United States is sure to resist the rise of a full-fledged "Asian dollar exclusion zone" which portends a future economic war and power struggle with China, which is dependent on oil from the American-dominated Gulf States.

The vacuum created by the dollar’s demise will likely be filled by gold, which is why China and India have been building up their reserves of the yellow metal in recent years.

All things considered, it would be much easier and cheaper if the United States stopped imposing its worthless currency on the world and reverted to the gold standard. This would allow the global economy to correct for the huge imbalances created by decades of fiat money expansion, force governments worldwide to cut spending and balance their budgets, promote genuine free trade, and most importantly, avert a Third World War.

[vinay28]

amit, Arjentina did that 30 years ago and citibank had to write off 2B$ in those days

[ajayhkaul]

Way the cookie crumbles --- Read on and recall what the Russian predicted as quoted a few days ago in this thread.


Wyoming Prepping For Martial Law Scenario: Set to Explore Options for Standing Army and Alternative Currency

State representatives in Wyoming have advanced a “doomsday” bill that when passed will launch a study into what the state should do in the event of an economic collapse, martial law style scenario.

Wyoming House Bill 85 is essentially a state continuity of government plan that would study the impacts of the collapse of the dollar and the states ability to quickly set up an alternative currency.

The study would also look at a scenario where the federal government has no control over its people as well as the dangers of a Constitutional crisis happening in America and its impact on the state.


2012 STATE OF WYOMING 12LSO-0044

(i) Potential effects of the rapid decline of the United States dollar and the ability to quickly provide an alternative currency;

(ii) Potential effects of a situation in which the federal government has no effective power or authority over the people of the United States;

(iii) Potential effects of a constitutional crisis;

(iv) Coordination between the governor’s office, Wyoming national guard and any federal military in Wyoming;

(v) Potential effects of a disruption in food distribution;

(vi) Potential effects of a disruption in energy distribution.

An article in the Star-Tribune covered the bill but was quick to stress that it had no relation to any actual upcoming problems in the United Sates:

The task force would look at the feasibility of Wyoming issuing its own alternative currency, if needed. And House members approved an amendment Friday by state Rep. Kermit Brown, R-Laramie, to have the task force also examine conditions under which Wyoming would need to implement its own military draft, raise a standing army, and acquire strike aircraft and an aircraft carrier.

****
The bill’s sponsor, state Rep. David Miller, R-Riverton, has said he doesn’t anticipate any major crises hitting America anytime soon. But with the national debt exceeding $15 trillion and protest movements growing around the country, Miller said Wyoming — which has a comparatively good economy and sound state finances — needs to make sure it’s protected should any unexpected emergency hit the U.S.

Several House members spoke in favor of the legislation, saying there was no harm in preparing for the worst.

Considering the fact that the military and the Department of Homeland Security both already have extensive plans in the event of a martial law situation, (which involve rounding up American citizens and putting them in FEMA Camps) Wyoming is only taking a logical step in following their lead yet one can only hope their plans are much less totalitarian in nature.


Read the text of the bill here: http://e-lobbyist.com/gaits/text/575637

[ajayhkaul]

Quick Silver !

After a big run-up in prices earlier last week, gold and silver were hammered on February 29th after manipulative comments from Federal Reserve Chairman Ben Bernanke.

It should come as no surprise that Big Ben would run to the rescue of the gold and silver shorts, trying to stem the tide of higher metals prices...

“Helicopter Ben” made comments last week trying to insinuate diminished prospects for a third round of quantitative easing. This testimony is supposed to make us believe QE3 is a figment of people’s imaginations.

haven’t we heard this all before when we were told QE2 would never happen?

This move in silver last week was of particular note, and I think it sheds important insight on what to expect in the next run-up in metals prices...

Silver hit a five-month high at $37.21 an ounce after busting through tough resistance at $35.

This strong move is a precursor to what is coming in silver prices.

The bust-out move was attributed to a surge in “massive fund buying” and to “panic” short covering.

Some of the bullion banks with large concentrated short positions covered their short positions after the technical level of $35.50/oz was breached easily.

This is why Big Ben had to come to the rescue and use his scheduled Humphrey Hawkins testimony before Congress as a platform to keep the lid on silver for now.

Massive liquidity injections from QE3 and ultra-loose monetary policies make silver increasingly attractive for hedge funds, institutions, and investors — thus the need for Ben to say something to the contrary.

Silver is getting ready to make a very big move. You must keep in mind that silver remains more than 30% below its record nominal high 32 years ago in 1980 — and more than 75% below its inflation adjusted high of $140/oz in 1980.

[ajayhkaul]

".....Over the last few years, the China government has implemented new measures to make its currency—the yuan—an open currency to be used by investors globally.

Ten years ago, it was very difficult for even large investors to trade in the Chinese yuan. That is no longer the case today and the People’s Bank of China has given every indication that China wants the yuan to be considered on level with the U.S. dollar and the euro.

With that in mind, let’s look at China’s gold bullion reserves—gold bullion held by the central bank—when compared to both Europe and the U.S. Keep in mind that the People’s Bank of China has always referred to gold bullion—even against its own yuan—as the only true hard currency.

Gold (in tonnes) - at the end of 2011
European Central Banks (all 17 countries) 10,401.3
U.S. Federal Reserve 8,133.5
People’s Bank of China 1,054.1
Source: World Gold Council

As these numbers show, China is well behind when it comes to backing the yuan with the amount of gold that Europe and the U.S. can back their respective currencies with.

It is no coincidence that, when China implemented its most sweeping measures to make the yuan more open to the world in 2009, it simultaneously announced its most sweeping measures when it came to gold bullion.

In 2009, China ordered its miners to no longer export any gold bullion. China is the largest producer of gold bullion in the world; 350 tonnes per year. This 350 tonnes yearly is now making its way to the vault of the People’s Bank of China.

The issue with China is that it keeps its information to itself—something it will have to change if it wants the yuan to be taken seriously. When the country admitted that its gold bullion reserves went from roughly 600 tonnes in 2009 to 1,054.1 tonnes in 2011, the world was stunned. What a dramatic increase!

Of the roughly 2,800 tonnes of gold bullion supplied to the world in 2011 (source: World Gold Council), it is assumed that China is on the hunt for most of it, to back the yuan. How much is the People’s Bank of China buying?

Hong Kong is an open economy that reports all of its economic statistics. If Hong Kong is any indication of China’s desire to own gold bullion to back the yuan, then the buying binge is extreme.

In 2009, China purchased four tonnes of gold bullion from Hong Kong. In 2011, China purchased 46 tonnes of gold bullion from the small island nation (source: China Daily). That’s an 11-fold increase!

China wants enough gold reserves to back the yuan, in order for the yuan to be taken seriously on the world stage.

China is accumulating gold bullion as fast as it can. Last week, when gold bullion dropped $100.00, it jumped back up over $20.00 during trading in Asia. It would not surprise me in the least if the People’s Bank of China was one of those buyers, taking advantage of gold bullion’s sale price.

So if you want to sell your gold bullion and gold stocks because of the possible downside risk, remember there is a serious buyer with a lot of money and a currency to back it—the yuan—that would love to take your gold from you.::::"

[ajayhkaul]

On balancing the books ..... INDIA


"....Plan of disinvestment in PSUs has been the government's biggest failure in the 2011-12 fiscal. To top that oil prices have caused subsidy payouts to go through the roof. Funding needs for banks and failing PSUs are pertinent agenda. But raising taxes substantially could mean losing every chance of a comeback for the incumbent government. Hence the novel option that it is looking at is tapping black money stashed abroad. If news reports are to be believed, the Finance Ministry aims to achieve dual goals with the black money. One, bring it back to India. Two, invest it in long term infrastructure projects that are in dire shortage of funds. This certainly sounds better than offering amnesty schemes to those who have stashed black money abroad. But does it not amount to legal money laundering scheme for those who are guilty of parking illegal funds abroad? Moreover, should the government rely on such schemes to bail it out of poor fiscal planning and execution?...."


".....As the fiscal year 2011 comes to a close, the government is desperate to cover the fiscal deficit fiasco. We all know that its plan to cover it up with disinvestment has not gone well. It has now turned to the defence sector for an amount of Rs 40 bn to balance its books. The latter has been asked not to sign any new contracts till end of FY12. The trend is not new. The last decade has already seen defence surrendering cash worth Rs 450 bn to make up for the poor fiscal performance of the Government. And in the process, its procurement plans with long gestation periods have gone for a toss.

The Government's tendency to look for such quick fix solutions makes a mockery of the entire planning process...."

And the US .....

"....Money news reports that the famous TARP money that the US banks borrowed during the peak of the subprime crisis is being repaid to the Government with funds from the Government itself! "Forty percent of the 341 institutions that have exited TARP's biggest single initiative - the $205 billion Capital Purchase Program - simply refinanced their loans through a separate, $30 billion government program known as the Small Business Loan Fund," the article is believed to have said. This certainly makes the whole repayment thing a big mockery...."