UK to follow Iceland

[insidejob]

This is a must-read warning.

LEAP/E2020 have been spot on about the economic crisis. They predicted the September crisis and had been predicting economic collapse since 2006.

They now say that Iceland followed the de-regulation agenda of the UK and US and that we will experience what they already have experienced.

http://www.globalresearch.ca/index.php?context=va&aid=10696
COLLAPSE OF US FINANCIAL SYSTEM: THE SETTING UP OF A "NEW DOLLAR"?
by Global Europe Anticipation Bulletin

Global Research, October 26, 2008
GEAB N°28

In this 28th edition of the GEAB, LEAP/E2020 has decided to launch a new global systemic crisis alert. Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to pay back its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.).

Of course such a bankruptcy will provoke some very negative outcome for all USD-denominated asset holders. According to our team, the period that will then begin should be conducive to the setting up of a « new Dollar » to remedy the problem of default and of induced massive capital drain from the US. The process will result from the following five factors studied in detail further in this GEAB:

• The recent upward trend of the US Dollar is a direct and temporary consequence of the collapse of stock markets

• Thanks to its recent "political baptism", the Euro becomes a credible "safe haven" value and therefore provides a "crisis" alternative to the US dollar

• The US public debt is now swelling uncontrollably

• The ongoing collapse of US real economy prevents from finding an alternative solution to the country's defaulting

• "Strong inflation or hyper-inflation in the US in 2009?", that is the only question.

Studying the case of Iceland can give an idea of the upcoming stages of the crisis. That is what our team has been doing ever since the beginning of 2006. This country indeed provides a good illustration of what the US and the UK should be expecting. It can be considered – and that is what most Icelandic people do today – that the collapse of Iceland's financial system came from the fact that it was disproportionate to the size of the country's economy.

(graph)
Inflation in Iceland - 2003-2008 - Source Central Bank of Iceland

Financially speaking, Iceland thought of itself as UK (1), in the same way as, financially speaking, UK thought of itself as the US and the US thought of themselves as the entire world. It is therefore quite useful to study the case of Iceland (2) in order to understand the course of events that London and Washington will follow in the next 12 months (3).

What we see today is a double historical phenomenon:

. on the one hand, since September 2008 (as anticipated in the February 2008 edition of the GEAB - N°22), the whole planet has become aware that a global systemic crisis is unfolding, characterised by the collapse of the US financial system and its contagion to the rest of the world.

. on the other hand, a growing number of global players are beginning to act on their own, in reaction to the ineffectiveness of the measures advocated or implemented by the US though they are the centre of this global financial system. What happened with this first Euroland (or Eurozone summit which took place on Sunday, October 12, 2008, and whose decisions, by their scope (close to 1,700-billion EUR) and their nature (4), resulted in a regain of confidence on financial markets from all over the world, is typical of the « post-September 2008 world ».

(Graph)
Map of deposit insurances in the EU - Source AFP - 10/09/2008

Indeed there is such a thing as a « post-September 2008 world ». According to our team, it is now clear that this past month will remain in the history books of the whole planet as the month when the global systemic crisis started; even if what is really at play is its decanting phase, the last of a series of four phases of the crisis described by LEAP/E2020 as early as June 2006 (5). As always when it comes to large human groups, the perception of change among the general public only occurs when change is already far on its way.

As a matter of fact, September 2008 is the month when the « financial detonator » of the global systemic crisis exploded. According to LEAP/E2020 indeed, this second semester 2008 is the time when « the world dives into the heart of the impact phase of the global systemic crisis » (6); which means for our researchers that, at the end of this semester, the world enters the « decanting phase » of the crisis, i.e. a phase when the outcome of the shock settles down. This phase is the longest (from 3 to 10 years, according to the country) and the one affecting the largest number of people and countries. It is also the phase when the components of new global equilibriums will start to appear, two of them being already described by LEAP/E2020 in this 28th edition of the GEAB in the graphic illustrations below (7).

Therefore, as we repeated it on and on since 2006, this crisis is far more important, in terms of impact and outcome, than the 1929 crisis. Historically, we are the very first players, witnesses and/or victims of a crisis affecting the whole planet, in a situation of unprecedented interdependence of countries (resulting from twenty years of globalisation) and people (the level of urbanization - and related dependence for all the basic needs – water, food, energy… - is also unprecedented). However, the 1929 experience and all its dreadful outcome, is still vivid enough in our collective memories to hope, if citizens are vigilant and leaders clear-sighted, that we will be spared from a « remake » leading to major conflagration(s).

Europe, Russia, China, Japan,... are certainly the collective players who can make sure that the unfolding implosion of today’s world power, i.e. the United States, does not drive the planet into a disaster. Indeed, except for Gorbachev’s USSR, empires have a tendency to strive in vain to reverse the course of History when they realize their might is escaping them. It then belongs to partner-powers to channel the process peacefully, as well as it belongs to the citizens and rulers of the concerned country to be clear-sighted and face the difficult times they are about to cross.

(graph)
Total borrowings of US Depository Institutions from the US Federal Reserve (01/08/1986 – 10/09/2008) - Source Federal Reserve Bank of St Louis

The « emergency repair » of international financial channels, achieved by the countries of the Eurozone at the beginning of this month of October 2008 (, should not hide three fundamental facts:

• The “repair” was necessary to curb the panic that threatened to squander the entire global financial system in just a few weeks, but what it heals temporarily is merely a symptom. It has just bought a bit of time, two to three months maximum, as the global recession and the collapse of the US economy (the table above shows the staggering increase of US banks’ borrowings from the Fed) will speed up and create new tensions in the economic, social and political fields, that must be anticipated and coped with as soon as next month (as soon as the “financial packages” have been implemented)

• The huge financial means allocated worldwide for « emergency rescues » of the global financial system, though they were necessary to put back in order the system of credit, are lost for the real economy when it is on the verge of facing a global recession

• The « emergency repair » results in further marginalization, and therefore weakening, for the United States, because it sets up processes that are contrary to those advocated by Washington for the allocation of the Hank Paulson’s and Ben Bernanke’s 700-billion USD TARP: bank recapitalisation by governments (a decision Hank Paulson has now come to follow) and interbank loan guarantees (in fact Euroland governments substitute to credit insurers, a mostly American industry at the centre of global finance since decades). These trends turn more and more decision-making relays and financial flows away from the United-States when because of the explosion of their public (9) and private debt they need them more than ever; not to mention pensions going up in smoke (10).

The last aspect shows how, in the coming months, solutions to the crisis and to its various sequences (financial, economic, social and political) will increasingly diverge: what is good for the rest of the world will not be good for the United States (11), and now, Euroland in the first place, the rest of the world seems determined to make its own choices.

The sudden shock that will result from the US defaulting in summer 2009 is partly due to this decoupling of decision-making processes of the world’s largest economies with regard to the US. It is predictable and can be dampened if global players start to anticipate it. As a matter of fact, it is one of the topics developed in this 28th edition of the GEAB: LEAP/E2020 hopes that the September shock has “educated” the world’s political, economic and financial policy-makers and made them understand that it is easier to act by anticipation than in a panic. It would be a pity if Euroland, Asia and oil-producing countries, as well as US citizens of course, discover one morning of summer 2009 that, after a long-week-end or bank-holiday in the US, their US T-Bonds and Dollars are only worth 10 percent of their value because a « new Dollar » has just been imposed (12).



Notes

(1) Iceland adopted 10 years ago all the principles of economic deregulation and « financieration » advocated and implemented in the US and UK. Reykjavik thus became some sort of a financial « Mini-Me » of London and Washington, in reference to the very Americano-British movie character Austin Powers. The three countries undertook to play the financial game of « the frog that wished to be as big as the ox », in reference to a fable by Jean de la Fontaine with a very unhappy end for the frog.

(2) Icelandic stocks collapsed 76 percent after a few days suspension designed to « avoid » a panic! Source: MarketWatch, 10/14/2008

(3) On this subject, let's spend a few lines on the amount of the “financial package” announced by London, i.e. 640-billion EUR including 64-billion EUR to recapitalize banks and a further 320-billion EUR pay back those same banks’ debt (source: Financial Times, 10/09/2008). With an economy in freefall to the image of the real-estate market, with a soaring inflation, with capital-based pensions going up in smoke and a currency at the lowest,… apart from increasing the public debt and weakening even more the Sterling pound, it is difficult to imagine how the plan can « rescue » British banks. Contrary to Eurozone banks, the British financial system, exactly like its US counterpart, is at the centre of the crisis, not a collateral victim. Gordon Brown may well compare himself to Churchill and Roosevelt together (Source: Telegraph, 10/14/2008), in his ignorance of History, he seems to forget that neither Churchill nor Roosevelt had already spent 10 years in their country's governments when each of them had to cope with their « big crisis » (that goes for the US and the Bush administration – Paulson and Bernanke included - who all come from the problem and are certainly not part of the solution). Not to mention the fact that Churchill and Roosevelt organised summits such as Yalta or Tehran leaving the French and the Germans waiting at the door, while today it is him who waits at the door of the Euroland summit.

(4) Source: L'Express, 10/13/2008

(5) Source: GEAB N°5, May 15, 2006

(6) Source: GEAB N°26, June 15, 2008

(7) LEAP/E2020 made a synthesis of its anticipations on the decanting phase of the crisis by means of a world map of the impact of the crisis based on the identification of 6 large groups of countries; and of an anticipatory schedule of the 4 financial, economic, social and political sequences over 2008-2013 for each of these regions.

( It is indeed the Eurozone which curbed the spiral of global panic. For weeks, the US and British initiatives followed one another without any effect. The eruption of a new collective player, the « Euroland summit », and the wide-ranging decisions it made, are a new and soothing phenomenon. It is for this very reason that Washington and London have systematically prevented such a summit from taking place ever since the Euro was launched, 6 years ago. A complete set of diplomatic gesticulation was required (preliminary meeting, pre-summit group photo,…) to make the British Prime Minister believe he was not set aside the process, when in fact there is no reason why he should take part in a Euroland Summit. In this edition of the GEAB, LEAP/E202020 comes back on the phenomenon and the long-term systemic consequences of this 1st Euroland Summit.

(9) The US financial rescue plan has already increased by 17,000 USD the debt owned by each US citizen. Source: CommodityOnline, 10/06/2008

(10) It is indeed 2,000-billion USD of capital-based pensions which evaporated in the past few weeks in the US. Source: USAToday, 10/08/2008

(11) At least in the short-term. Indeed our team is convinced that it is not bad at all for the American people in the medium- and long-term if the system currently prevailing in Washington and New-York is fundamentally reappraised. This system has thrust the country into dramatic problems among which dozens of millions of US citizens now struggle, as illustrated in this article by the New York Times dated 10/11/2008.

(12) Even if it will be a minor-scale measure compared to the prospect of a US bankruptcy, those who think that it is time to invest again on financial markets may find useful to learn that the New York Stock Exchange has recently reviewed all its circuit-breaker thresholds as a result of ratings collapse. Source : NYSE/Euronext, 09/30/2008
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http://www.europe2020.org/spip.php?article540&lang=en
GLOBAL SYSTEMIC CRISIS: Four big trends over the 2008-2013 period
Public announcement GEAB N°24 (April 16, 2008) -
16/04/2008

As we approach the climax of the global systemic crisis (which should be reached in the second half of 2008 according to LEAP/E2020), it becomes easier to grasp the big trends about to affect foreign exchange rates, global trade and regional dynamics over the next five years. Indeed some of the characteristics of the so-called “decanting” phase of the crisis [1] are beginning to emerge. In this 24th issue of the GEAB, LEAP/E2020 therefore decided to introduce its first anticipations on big trends between now and 2011/2013. These anticipations are of course meant for the use of private investors willing to enhance their mid-term visibility. They are also relevant for exporting companies and for the economic and financial authorities in need of a similar visibility to make their strategic decisions, at a time when all the landmarks and beliefs which used to found the global economy and finance in the past decades are collapsing altogether.

In the past weeks, the world’s economic and financial operators appeared utterly disoriented, while the institutions in charge of dealing with market regulation and of supervising global economic trends display sheer powerlessness.

In this 24th issue of the GEAB, we describe four trends particularly illustrative of the global systemic crisis’ impact phase as it is about to unveil between mid-2008 and 2011/2013. It is the first time that our team is able to provide some accurate indications (completed in the “Strategic recommendations” section, P. 17) about the next 3/5 year-period.

Global financial crisis – Savers and investors trapped into USD 10,000-billion worth of « ghost-assets »

USD-denominated asset crisis – End of 2008: The US Federal Reserve and its network of « Primary Dealers » fight for their institutional and financial survival

Foreign exchange crisis - Horizon 2011/2013: Sustainable changes in the hierarchy of foreign currencies

Global social crisis – From hunger riots worldwide to the 25 million unemployed of the Very Great US Depression

Each of these sector-based crises both illustrates the historic scope conveyed by the ongoing global systemic crisis, and indicates that we are just at the beginning of the phase of impact, indeed as protections disappear one after the other, the situation automatically gets worse. This is the specific “spiralling” process of development of the present global systemic crisis, described by LEAP/E2020 in the previous issues of the GEAB.

In this public announcement, LEAP/E2020 chose to present an excerpt of the first part on the global financial crisis: Savers and investors trapped into USD 10,000-billion worth of "ghost-assets"

Global financial crisis – Savers and investors trapped into USD 10,000-billion worth of « ghost-assets »
If your banker managed to convince you to invest in the USD 10,000-billion worth of ghost-assets currently haunting the financial planet, then you have most probably lost everything even if you do not know it yet [2].

And neither G7-finance ministers nor IMF governors (who met last April 11, 12 and 13) can do anything about it. All of them are totally helpless in the face of the ongoing crisis. With staff cuts and gold sales in order to fill its deficit, the IMF today embodies the sinking of all the institutions created after WWII to regulate the world economy. The outcome of the mid-April meeting clearly reveals how incapable of working together are the various players gathered within the IMF and its various branches: on the one hand, public institutions longing for greater supervision over banking activities in order to prevent further financial catastrophes; on the other hand, banks quite satisfied with pledges of better behaviour. The only tangible result is near-to-mid-term inaction: the current crisis will continue to worsen while debates will go on at the IMF. As a matter of fact, the very concept upon which the IMF is based is outdated.

In any event, according to our experts, the estimated USD 1,000-billion worth of assets lost in the current crisis is largely underestimated [3]. It is probably closer to 10,000-billion of USD [4] that are about to be lost over the coming two years [5]. In other words, several large international banks will be swallowed up in the maelstrom, and along with them many companies, too fragile or depending too much on the US consumer [6].


Chart N°1: Total credit market debt in the US (in billion USD) / Chart N°2: Total credit market debt outstanding/GDP ratio - Source TheChartStore
Indeed, LEAP/E2020 would like to insist once more on this aspect: the nature of the current financial problem is both very simple to define and extremely difficult to grasp properly. There are today approximately 10,000 billion of fictitious US dollars [7] circulating on the planet which large banks are now trying to get rid at any cost in order to limit their own losses [8]. But even at a reduced price, these assets remain dangerous traps because they are not worth anything and will not recover any value [9]. They are “ghost-assets” no longer capable of being “embodied” in real assets.

Most of these « ghost-assets » are made of US mortgage loans, US dollars, and more generally US dollar-denominated assets, as well as British Pound Sterling-denominated assets [10]. They were created from nothing in the financial euphoria of the past decade by the “sorcerers’ apprentice” of Wall Street, the City and the other major financial places of the world [11]. Remember! Those were the times when every one raved about the “miracle” of this new finance which permitted to create a “financial economy” 1,000 times worth the real economy [12]. Well, for some months now, the happy beneficiaries of these infinite virtual riches have been striving to find them some tangible incarnation [13]. But derivative markets altogether are either collapsing or giving birth to new bubbles always more fragile and transient: real estate, US T-bonds, stocks, food commodities,... these enormous virtual financial masses are spinning around the world at an increasing pace in search of some profitable investment, of some sustainable incarnation… in vain! This quest generates fast tectonic up and down movements (over a few weeks) of asset bubbles (knowing that in the past decades bubbles used to last a few years at least), causing a general rise in prices and bringing the world each day closer to the ultimate outcome: galloping inflation... at a time when fear of a collapse in the value of all assets (including the benchmark currency) is the only thing that prevails.

The « fabulous » reserves in US currency or T-bond of China, Japan, UK, etc… are part of this cohort of « ghost-assets », and for many years to come they shall continue to haunt bank balance sheets, investors’ losses and central bankers’ nightmares. The favourite shape collectively taken by these “ghost-assets”, when they can be embodied, is called inflation. Therefore, according to LEAP/E2020, real inflation (food and energy included) will reach a yearly 10 percent average in the US, starting in the second semester of 2008 [14]; it will go above 5 percent in Europe; and approach 20 percent in China. In developing countries, which depend a lot on the rate-variations of the US currency, inflation will surge as a result of different strains: energy, food, currency weakness… (complete article available in GEAB N°24 - on subscription)


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[1] According to the sequencing established by LEAP/E2020 as early as May 2006 in GEAB N°5. About our sequencing of the global systemic crisis, see also GEAB N°6 and N° 18.

[2] Cases of savers trapped by their own bank into « risk-free » investments are multiplying. Source: New York Times, 04/13/2008

[3] Sources: Bloomberg, 03/31/2008 & Turkish Daily News, 04/10/2008

[4] It is on purpose that LEAP/E2020 uses the « billion » as benchmark unit for the enormous amounts at stake on global markets. Indeed the word « trillion », overwhelmingly used in the financial media, does not mean the same thing according to the country. In the United States, United Kingdom and Brazil in particular, a « trillion » refers to one million million, 10 12 ; but elsewhere in the world, it refers to one million million million, 10 18. Source: Wikipedia. The current crisis could nearly find its explanation in an unfortunate misunderstanding: the rest of the world thought that Wall Street was trading “big trillions” (10 1 of USD-denominated assets when in fact it was “small trillions” (10 12 ), i.e. one million times less. A good enough reason to start a global systemic crisis! Ultimately, History is settling the question between defenders of the short scale and defenders of the long scale (source: Wikipedia), between those who see more billions in a trillion and those who see less of them.

[5] All those who are surprised by such an enormous figure may remember the first estimations of the subprime crisis-related losses: last summer 2007, only nine months ago, anticipated losses reached a maximum of USD 100 billion. Over less than a year, the “official” estimation was multiplied by 10. It is high time to understand once and for all that, in the coming period, worse is more likely than better, contrary to the rule that prevailed in the past ten years.

[6] The great victim of this crisis, as already explained by LEAP/E2020 in the previous issues of the GEAB.

[7] With 45,000 billion worth of CDS (Credit Default Swap - see GEAB N°19) losing value day after day, 10,000 billion only means a 25 percent drop in value. Therefore, according to LEAP/E2020, this estimation is extremely reasonable. As a matter of fact, Citigroup illustrates this situation with its recent sale of USD 12 billion of leveraged loans and bonds at an average price of 90 cents on the dollar, with a guarantee for the purchaser that Citibank will cover up to 20 percent of any further drop in the value of the loans (i.e. an anticipated drop reaching up to 70 cents on the dollar: already a 30 percent drop in the value of the financial assets of America’s largest bank). Knowing that, in the light of the past months, it is very unlikely that Citigroup was completely honest about the situation. For an increasing number of operators, these assets could be worth 10 to 30 cents on the dollar only in a few months; that is why derivative markets are frozen. Source: Reuters, 04/09/2008

[8] After Citigroup, Deutsche Bank and Goldman Sachs have also began selling off their dubious assets. Source: Reuters & MarketWatch/DowJones, 04/14/2008

[9] Worth reading: « Banks : Bleeding value and Hiding Desperation », Financial Sense, 03/24/2008

[10] In the past two years, on various occasions, LEAP/E2020 warned that the British currency would certainly collapse against the other main currencies (except the US dollar) and that the British economy, which depends completely on the US economy on the one hand and on international finance on the other hand, would be sucked up into the global systemic crisis affecting in particular those two components of the global economy. It is now obvious, even to the British authorities, that the British pound and economy are free falling. But it is only in the coming months that the negative impact of the collapsing British pound-denominated assets will combine with the negative impact of the collapsing US dollar-denominated assets. From Hong-Kong to Scandinavian countries (thus two times exposed), the shock will be hard.

[11] Worth reading: an interesting article by the Institutionnal Risk Analyst dated 04/14/2008 illustrates how « ghost assets » in fact pullulate inside financial institutions’ balance sheets.

[12] It is always enlightening to review the learned analyses produced by those institutions in charge of regulating the development of regional or global economies, such as this enthusiastic contribution published by the European Central Bank in 2005 about the evolution of financial markets by 2015. Source: ECB, 10/28/2005

[13] Senior officials from international accountancy institutes today acknowledge that bank off-balance sheet accounting rules (off-balance sheet assets accounted for a large part of the last decade’s financial growth) were « irretrievably broken ». This confession, quite surprising coming from high-level international accountants, indicates clearly that no one has the faintest idea what these assets are worth. Source: Financial Times, 04/09/2008

[14] Asia today exports its inflation towards the US. Source: New York Times, 04/08/2008
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