Dollar Scarcity

I don't often link to hedge fund types, but Hugh Hendry has a good explanation (at about 2:20) of what I believe will be a significant economic story going into 2010. A worldwide shortage of dollars because of deleveraging, and developing nations being squeezed out of the capital market by massive US government bond offerings.



link to chart

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Update : Some of what was done at the G20 was about alleviating the severity of this dollar crunch.

The CIA in Yugoslavia

No tinfoil here. Jovica Stanisic, the top Serbian spy chief during the break up of Yugoslavia, was an attache for the CIA. He was directing ethnic cleansing squads at the same time he was passing on information.

Yugoslavia was the last major stumbling block to the introduction of Western capital, influence and property relations into Eastern Europe, after the USSR fell. How the West sought to 'manage' its break up is hard to pinpoint, but Stanisic was most likely part of that. Destroy the country, but don't let thing get too out of control.

Not doubt similar things have gone on in Iraq and Afghanistan, as well as any number of sectarian disputes festering around the world which destabilize adversaries of the United States.

April 1991: Stanisic and others in Serbian intelligence allegedly oversee establishment of "special units," paramilitary groups later accused of atrocities against Bosnians and Croats.

1991: Special units allegedly "committed crimes in and attacked and took control of towns and villages" in Serb autonomous regions in Croatia.

1992: First meeting with CIA; begins clandestine cooperation with agency; turns over blueprints of bunkers built by Serb companies in Iraq.

March 1992 to 1995: Special units allegedly "committed crimes in and attacked and took control of towns and villages in the municipalities of Bijeljina, Bosanski Samac, Doboj, Sanski Most, Zvornik." Simultaneously, Stanisic cooperates with CIA, providing information on Milosevic regime and conveying communications from the U.S. to his boss.

CIA in Yugoslavia

Some Recent Articles of Interest

Soros on the G20 meeting and the possibility of world economic depression:

He was not optimistic about the G20 meeting, saying the odds were that it would fail because there were so many differences of opinion. The price could be years of economic devastation worse than the Great Depression. “It is really a make-or-break occasion.”

It would be a disaster if the meeting were allowed to turn into a talking shop, he said. “It’s not enough to state general principles. You’ve got to come up with practical measures that are going to provide protection to the developing world, periphery countries, against a storm that originated from the centre, against a calamity that is not of their own making.”

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The future of the dollar, and reserve currencies:

The U.S. will probably block China’s push for a global reserve currency, seeking to protect the status of the dollar as it finances a record budget deficit, two former International Monetary Fund economists said.

“Why should the U.S. give up its reserve currency position, which enables it to borrow easily?” said Hua Ercheng, chief economist in Beijing at state-owned China Construction Bank Corp., adding that the U.S. government has veto power in the IMF. “They won’t allow any other currency to compete for the dollar’s dominant position,” according to Wang Tao, head of China research at UBS AG...

A proposal for an additional allocation of SDRs (IMF Special Drawing Rights Currency) was approved in September 1997 by the IMF’s Board of Governors. The allocation would double outstanding SDRs to 42.8 billion ($64 billion). While 131 members with 77.7 percent of the voting power have accepted, the U.S. has yet to approve the proposal, which needs 85 percent backing. The U.S. has 16.75 percent of total IMF votes.

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And, only about 300 to 500 billion of China's reserves are liquid:

China's foreign exchange reserves could become dangerously illiquid if the yuan depreciated and hot money began pouring out of China, a report from a Ministry-backed research institute said....

The report, which was being circulated to policymakers, advised that the remaining disposable funds be used to help Chinese companies go abroad or invested in resources.

New BEA Data on Corporate Profits

New data out shows the historic collapse of the financial sector during this recession. Domestic financial profits declined 75 % through Quarter 4 of 2008, since the cyclical peak in U.S. corporate profits through Quarter 3 of 2006.

Domestic financial profits are at Real levels not seen since the late 1980's.

Meanwhile, Rest of the World profits continue to steam ahead, though they tend to crest later than other sectors, in most recessions.

Date	2001, Q.3	2006, Q.3	2008, Q.4
Total U.S. Corporate Profits	865.3	1816.6	1277.6
Domestic Financial Profits	274.7	484	123.7
Domestic Nonfinancial Profits	413.1	1056.5	753.9
Rest of the World Profits	177.5	276.1	400.0
(All in 2008 Dollars)
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CPI	177.7	203.4	213.1
CPI/2008 Mean (Multiply with Nominal Value)	1.21	1.06	1.01

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Annual Change in U.S. Corporate Profits Since 1950


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This chart illustrates the financial sector collapse.


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Numbers are in Billions
Source BLS, BEA 6.16 A-D

It's Not Just the Republicans

An article some are loving for its supposed bluntness, really isn't all that blunt. Here is its description of 90's era deregulation, aka - "The Big Takeover"

In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities.

There's a little problem. Clinton signed the Glass-Steagall Act, and its final version was passed 90-8 and 362-57 in the two chambers of Congress. It was supported and shaped by Rob Rubin, (Secretary of Treasury 1995-1999) and Larry Summers (Secretary of the Treasury 1999-2001). Larry Summers is still around as one of Obama's chief economic advisors.

By not mentioning both parties role in deregulation, this article distorts history in a very factual way. Deregulation was not just thought up by a bunch of goulish Republicans. There were plenty of goulish Democrats on board, as well.

Excess Capacity in the Global Automotive Industry

China announces plans to restructure its auto industry:

China said Saturday it wanted to boost its auto industry by reducing the number of companies in the sector through mergers and promoting two or three carmakers to become the dominant players.

"Big Three" North American capacity utilization could fall below 50 % during 2009.

In Europe :

The European commission reckons the European industry is­ saddled with 20% over-capacity that needs to be stripped out in time for the recovery.

More on China, from the Wall Street Journal :

China also has auto-sector concerns. The country has the capacity to produce about 12 million automobiles a year, but only 9.37 million were sold in 2008. The government's plan encourages mergers among auto makers but doesn't call for reducing capacity and is intended to consolidate the positions of major firms, according to an industry executive briefed on its contents.

Sounds like a roundabout way of saying they are going to liquidate excess capacity, despite the public claim otherwise.

The automotive industry is a major source of employment for the working class, more so than a source of profits for capital. That's why the massive and long-standing excess capacity in the industry presents a quandary. No government wants to throw too many people out of work, if they want to stay in power. But it is not a profitable industry for capital.

Capitalism and Regionalism, In the News

As I wrote yesterday, there is a fundamental contradiction between capitalism, and nationally or regionally oriented power structures. Capitalism pushes for expansion and growth, while nations, and their like, have the desire to preserve local power bases in the face of international competition.

Today's New York Times article "Rapid Declines in Manufacturing Spread Global Anxiety" has a section which exemplifies this :

India’s manufacturing sector, which accounts for about 16 percent of G.D.P., recently recorded its first quarterly production decline in more than a decade.

Since last April, handicraft exports have fallen by 55 percent to $1.35 billion, and textile makers estimate they have slashed half a million jobs. Banks, meanwhile, are restructuring loans for diamond makers and polishers.

And despite tax cuts and a $64 million stimulus package announced in February, Indian textile makers are pushing for more government help.

“We’re competing with countries like Bangladesh, where wages are lower,” said Rakesh Vaid, the chairman of Usha Fabs, a Delhi textile manufacturer. “We’re competing with China where the currency is well managed, and Vietnam where the industry is getting strong support from the government.”

The first stage in this economic contraction was a rush to protectionism, by all countries, seeking to preserve themselves. If the crisis continues, there will be all manner of political, economic and military tensions between different countries and regions.

Capitalism and Regionalism

The dynamics of capitalism are contradictory with those of nation states, as well as currency unions, and other regionally based economic structures. Capitalism's dynamic is international, and pushes towards growth, profit, and greater productivity regardless of territory. Nation states, and their like, are insular, and have power structures that seek internal preferences against international competition. Nations based on capitalist relations seek to expand their markets, while preserving their internal power structures against competitors.

These contradictions were masked for a generation by the dominance of the U.S. economy. They are now partially masked by the dominance of the U.S. military. The dollar has essentially served as a world currency since the end of World War II and Bretton Woods. It is the overwhelming choice as a reserve currency and placeholder for assets, and serves as a stabilizer of international relations, under an U.S. umbrella, for these reasons. As Luo Ping, of the China Banking Regulatory Commission, recently said, "We hate you guys .. but there is nothing much we can do." Additionally, the U.S. has absorbed much of the world's excess export capacity, even while becoming a debtor nation, on the the strength of its reserve currency status. Without dollar hegemony, a capitalist world in economic retraction would plunge into territorial and trade disputes similar to the European colonial era. Those disputes culminated in World War 1 and World War 2. The same could also be said of a decline in U.S. military dominance, and its promise of an umbrella of deterrence - for states in East Asia, as an example.

With the decline of U.S. economic dominance, there are calls to set up a world currency, or basket of currencies. This idea will ultimately fail, because each nation state, or currency region, has its own agenda regarding trade. For instance, China devalues its currency to maintain export growth. How will that play if it joins a basket of currencies ? This is but one example. Loathing for dollar hegemony is what unites the leadership of many countries. Take that away, and there is no basis for long-term cooperation.

Because of this, and the dominance of the U.S. military, it seems to me that the hollow shell of Bretton Woods will continue to limp along. I suspect this is the reason the U.S. government feels it can buy its own debt, as announced recently. The rest of the world's leadership is still too unorganized, and conflicted, to mount sustained opposition to the dollar's status, or to United States' political leadership in world affairs.

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Related Post : Capitalism and Regionalism In the News

Corporate Profits and Recessions

In a capitalistic system, simplistically speaking, there is not going to be much hiring going on without corporate profits. Looking at their trends is a good way to forecast recessions and recoveries. The last four major recessions were all proceeded by drops in corporate profits, from different sectors of the economy.



Real corporate profits fell 17 % in the '73-'75 recession, 35 % through the late 70's to early 80's, 9 % a decade later, and 20 % during the late 90's through 2001. As of the BEA's last data, rather out of date now (through 3rd quarter 2008), profits had already fallen 16 % from their peak in the 3rd quarter of 2006. The severity of the decline should be even more striking once 4th quarter data is out.

As for the Great Depression, profits fell over 100 % from 1929-1333, and 29 % from 1929-1930, the earliest years available.

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Stats
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Some Data on U.S. Corporate Profits

The BEA groups U.S. Corporate profits into three large categories: Domestic Nonfinancial, Domestic Financial, and Rest of the World - the later measuring U.S. corporate operations overseas. In looking at these groupings, one can see the long-term decline in the Domestic Nonfinancial sector, as a source of profit. Meanwhile, the Domestic Financial sector gained in importance, especially accelerating with the deregulation of the 1980's. This continued until the stock market bubble ended around the turn of the century. There has been a steady increase in the importance of profits from overseas, with a big explosion occurring in the Bush II era. 'Rest of the World' moved ahead of 'Domestic Financial' in 2008, and now represents 25 % of the profits for U.S. based companies.

This trend is a bad one for the future of the U.S. middle class. Part of the reason the labor movement was able to achieve certain gains, is because its industries were indispensable to U.S. capital as a source of profit. With the Domestic Nonfinancial sector trending lower, and now at around 50 % of U.S. corporate profits, this indispensability is less absolute. The result will be ever more emboldened attacks against the safety nets and labor gains that have historically protected and developed the U.S. middle class. The ruthlessness with which the right-wing has advocated for the bankruptcy of the domestic car industry, is one example of this.
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Source : Bureau of Economic Analysis
National Income and Product Accounts Table
Corporate Profits by Industry 6.16 A-D

Leisure Time

"Most people assume that the members of the Shoshone band worked ceaselessly in an unremitting search for sustenance. Such a dramatic picture might appear confirmed by an erroneous theory almost everyone recalls from schooldays: A high culture emerges only when the people have the leisure to build pyramids or to create art. The fact is that high civilization is hectic, and that primitive hunters and collectors of wild food, like the Shoshone, are among the most leisured people on earth."

- Peter Farb, 1968

While perhaps a little dated in its terminology, this quote does point to some unspoken assumptions about leisure time in our society. People claim to want it, yet they also don't want to be seen as "lazy". And there are larger questions, such as, what is the point of life ? To work and consume ? Or is that the treadmill people find themselves on ? It seems modern economists are all working from the same set of unexamined assumptions about the meaning of human existence. That consumption, and growth through private profit, lead implacably toward a better tomorrow. It's fairly widely accepted that there was, and is, more leisure time in hunter-gatherer societies. Perhaps this was why Marx pointed to them as examples of "primitive communism", hoping that "true" communism could combine the best of all worlds.

As the U.S. sends a Destroyer, China 'Worries'

Tensions between the two countries continue to simmer.

The U.S. sends a destroyer escort :

A potential conflict is brewing in the South China Sea after the United States dispatched heavily armed American destroyers to the scene of a naval standoff between the US and China at the weekend.

The US has decided to provide heavily armed destroyers to escort US surveillance ships operating in the South China Sea, a US official said on Thursday. "Right now they are going to escort these types of ships for the foreseeable future," the defense official, speaking on condition of anonymity, said.

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China 'worries' about the dollar:

In forthright remarks on the intertwined nature of US and Chinese finances, Wen (Jiabao) told a news conference he was "worried" about Beijing's holdings of American government debt..."We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried." In rare comments on another country's financial health, he added: "I'd like to take this opportunity here to implore the United States ... to honor its words, stay a credible nation and ensure the safety of Chinese assets."

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More on the destroyer:

On Friday Chinese navy officers warned the dispatch of US destroyers was an inappropriate response, state media said Friday.

A press report quoted unnamed Chinese navy sources as saying the deployment signalled a US intention to "keep on pressing" Beijing in the South China Sea.

"The timing and the extent (of the deployment) have gone beyond what you could call proportionate," one navy officer was quoted saying by the China Daily.

A case of political poker, with each side holding cards. But this is the real world, and barring either country collapsing, the long-term trajectory of this relationship points to economic, and then military, warfare.