Geab Nr47 En

“To anticipate is to foresee in order to act”

ContentsSeptember 16, 2010

1- PerspectiveThe Global systemic crisis – Spring 2011: Welcome to the United States of Austerity / Towards a very serious breakdown of the world economic and financial systemAt the heart of the global systemic crisis since its inception, the United States is, in the coming months, going to demonstrate that it is, once again, in the process of leading the economy and global finances into the « heart of darkness » because it can’t get out of this « Very Great US Depression ». Thus, coming out of the political upheavals of the US elections next November, with growth once again negative, the world will have to face the « Very Serious Breakdown » of the global economic and financial system founded over 60 years ago on the absolute necessity of the US economy never being in a lasting recession… (page 2)

2- TelescopeFive key aspects of the USA’s entry into the austerity phase. The sequence of US social and political crises for the next ten yearsFrom November 2010, the elections will enable a start to be made in measuring the magnitude of change underway. For our team it will result in two events directly interacting: the paralysis of federal power regarding the economy and social affairs and a growing fixation with the debate on the country's deficits… (page 11). The irrelevance of the "inflation versus deflation" debate in the systemic crisisLEAP/E2020 has been saying for a long time that the inflation/deflation issue is more complex than the simple duel between two contradictory concepts, all the more so as, expressed in these terms, it looks more and more like a parochial squabble only of interest to the economists… (page 15). The true US GDP is 30% lower than official figuresIf the Greek authorities’ lie over the amount of the country’s debt and thus the debt/ GDP ratio was able to generate worldwide panic, imagine for one second the discovery that the GDP of the United States is actually 30% lower than the official figures… (page 17). The Fed isolated and lost in the face of an historic opportunityWhat happens when the renowned leader is obliged to face up to a major failure and he shows complete indecision on the actions to be taken? In any human group that systematically generates three events: the concern of the faithful, the ambition of the competitor/opponent and the distancing of the opportunist… (page 19). The direct consequences for Asia and Euroland: Successful accelerated decoupling or social chaosIn the next two GEAB issues we will cover Asia and Europe in more detail. But we can already anticipate the challenges for these two areas as the United States enters into the austerity phase… (page 21)

3- FocusAn extract from Franck Biancheri’s book called « World crisis: The path to the world after - France, Europe, the World in the 2010-2020 decade »The French version will be published on the 7th October 2010 by Editions Anticipolis (English, German, Spanish and Italian versions will be released by Editions Anticipolis in December 2010) (page 22)

Strategic and operational recommendations - Anticipating the consequences of entering the austerity phaseSavings, Gold, Stock exchanges, Currencies, … (page 26)

4- The GlobalEurometreResults & Analyses A very large majority estimate that the US will not be able to make savings through austerity measures in the coming months (81%)… (page 28)

5- Special subscribers’ announcementsPolitical Anticipation Academy, cycle 2010-2011A training for GEAB subscribers only. (page 30)

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1- Perspective

The Global systemic crisis – Spring 2011: Welcome to the United States of Austerity / Towards a very serious breakdown of the world economic and financial system

As anticipated by LEAP/E2020 last February in the GEAB No. 42, the second half of 2010 is really characterized by a sudden worsening of the crisis marked by the end of the illusion of recovery maintained by Western leaders1 and the thousands of billions swallowed up by the banks and the economic « stimulation » plans of no lasting effect. The coming months will reveal a simple, yet especially painful reality: the Western economy, and in particular that of the United States2, never really came out of recession3. The startling statistics recorded since summer 2009 have only been the short-lived consequences of a massive injection of liquidity into a system which had essentially become insolvent just like the US consumer4. At the heart of the global systemic crisis since its inception, the United States is, in the coming months, going to demonstrate that it is, once again, in the process of leading the economy and global finances into the « heart of darkness »5 because it can’t get out of this « Very Great US Depression6 ». Thus, coming out of the political upheavals of the US elections next November, with growth once again negative, the world will have to face the « Very Serious Breakdown » of the global economic and financial system founded over 60 years ago on the absolute necessity of the US economy never being in a lasting recession. Now the first half of 2011 will dictate that the US economy take an unprecedented dose of austerity plunging the planet into new financial, monetary, economic and social chaos7.

In this GEAB issue, our team therefore anticipates for the coming months, different aspects of this new development of the crisis, especially the nature of imposed austerity process which will affect the United States, the development of the accursed « inflation / deflation » argument, the actual progress of real US GDP, the strategy of central banks and the direct consequences for Asia and Euroland. As we do every month, we set out our strategic and operational recommendations. And, specially, this GEAB issue offers an excerpt from the new book by Franck Biancheri « The Global Crisis: The Path to the World After - France, Europe and World in the Decade 2010-2020 » : the French version will be published on 7 October next by Editions Anticipolis.

1 In this regard, in the next GEAB issue in October, our team will prepare, as it does each year, its country risk and economic outlook list for 2011. What is already clear to our researchers is that the end of 2010 will be marked by a sharp downward revision of all current forecasts (including already reduced forecasts for the United States). Source: Reuters, 09/09/20102 Sources: Bloomberg, 07/20/2010; Oftwominds, 07/15/2010; New York Times, 08/09/2010; CNBC, 08/12/20103 The chart below illustrates how growth is already collapsing. The CMI growth index has been one of the most reliable leading indicators in forecasting the changes in US GDP. And 92% of Americans believe the country is still in recession. Source: GlobalEconomicAnalysisBlogspot, 09/09/20104 As outlined by our team from the GEAB No. 9 of November 2006 onwards.5 To borrow the evocative title of Joseph Conrad’s excellent novel which especially inspired Francis Ford Coppola for his film Apocalypse Now.6 As LEAP/E2020 called the American economic crisis from April 2007 in the GEAB No. 14.7 Moreover, without even incorporating this anticipation in their analysis, even the OECD experts warn that global growth will suffer a setback between now and the end of 2010. Source: Marketwatch, 09/09/2010




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http://www.franck-biancheri.eu/

http://www.leap2020.eu/GEAB-N-42-Contents_a4295.html

http://www.marketwatch.com/story/oecd-global-slowdown-steeper-than-anticipated-2010-09-09

http://www.leap2020.eu/GEAB-in-April-2007-A-Chronicle-of-America-s-Very-Great-Depression-Two-growing-trends-A-historical-reversal-of-global_a5117.html

http://en.wikipedia.org/wiki/Apocalypse_Now

http://en.wikipedia.org/wiki/Heart_of_Darkness


http://globaleconomicanalysis.blogspot.com/2010/09/65-fear-double-dip-71-say-us-is.html

http://www.cnbc.com/id/38672589

http://www.nytimes.com/2010/08/10/opinion/10herbert.html?_r=1&hp

http://www.oftwominds.com/blogjuly10/housing-supply07-10.html?source=patrick.net

http://www.bloomberg.com/news/2010-07-20/payrolls-decline-in-27-u-s-states-signaling-broad-based-hiring-slowdown.html

http://www.reuters.com/article/idUSTRE6880KI20100909

Comparative progress of the CMI (red) and US GDP (green) growth indices (2005 – 2010) - Source: Dshort, 08/26/2010

The coming quarters will be particularly dangerous for the world economic and financial system. The Chairman of the Fed Ben Bernanke passed on the message as diplomatically as possible at the recent meeting of world central bankers at Jackson Hole, Wyoming: even though the policy to revive the US economy has failed, either the rest of the world continues to fund US deficits at a loss and hopes that at some point the bet will pay off, avoiding a collapse of the global system, or the United States will mone-tize its debt and turn all the Dollars and US Treasury Bonds held by the rest of the planet into funny mon-ey. Like any power at bay, the United States and is now forced to introduce the threat of pressure to get what it wants. Barely a year ago the rest of the World’s leaders and financial officials had volunteered to « refloat the USA ship ». However, today things have drastically changed since the noble assurance from Washington (the Fed’s, like that of the Obama administration’s) proved to be only pure arrogance based on the pretense of having understood the nature of the crisis and on the illusion of possessing the means of controlling it. However, US growth evaporates quarter after quarter8 and turns negative again from the end of 2010. Unemployment hasn’t stopped growing and between the stability shown in official figures and the exit, in six months, of more than two million Americans from the workplace (LEAP/E2020 believes that the real unemployment figure is now at least 20%9); the U.S. housing market remains depressed at historically low levels and will resume its fall from the fourth quarter 2010; last but not least, as one can easily imagine in these circumstances, the US consumer is and will be absent on a permanent basis since his insolvency continues and even gets worse10 for the one American in five without work. Behind these statistical factors hide three realities that will radically change the US and global political, economic and social landscape in future quarters as and when they dawn on the public consciousness.

8 The Wells Fargo / Gallup index of US SMEs continues to fall month after month. Source: Gallup, 08/02/20109 Even Wall Street continues to plan mass layoffs in the coming months. Source: Bloomberg, 09/07/201010 Even high earners are now affected by the problem of foreclosures. Source: USAToday, 07/29/2010




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29862


http://www.theaustralian.com.au/news/opinion/sun-could-set-suddenly-on-superpower-as-debt-bites/story-e6frg6zo-1225898187243

http://www.bloomberg.com/news/2010-09-07/wall-street-firms-will-cut-up-to-80-000-jobs-over-18-months-whitney-says.html

http://www.gallup.com/poll/141692/wells-fargo-gallup-small-business-index-hits-new-low-july.aspx

« United States – the double whammy: no equity, no jobs » - Correlation of falling property prices and unemployment trends state by state (2006-2009) - Source: FMI / OIT / OsloConference, 07/2010




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People’s anger will cripple Washington from November 2010

First of all, there is a very depressing widespread reality, a real trip « to the heart of darkness », which is that tens of millions of Americans (nearly sixty million now depend on food stamps) who no longer have a job, no longer have a house, no longer have any savings, are wondering how they will survive in the years to come11. The young12, retirees, African-Americans, workers, service employees13,… they constitute this mass of angry citizens who will speak violently next November and plunge Washington into a tragic political impasse. Supporters of the « Tea Party14 » and « new secessionist15 » movements... want to « break the Washington Machine » (and by extension that of Wall Street) without having feasible proposals to solve the country’s myriad problems16. The November 2010 elections will be the first opportunity for this « suffering America » to express itself on the crisis and its consequences. And, won back by the Republicans or even the extremists, these voters will help to further cripple the Obama administration and Congress (which will probably swing to the Republicans), only pushing the country into a tragic gridlock just when all the signals turn red again. This expression of widespread anger will in addition, from December onwards, collide with the release of the Deficit Commission report set up by President Obama, which will automatically place the issue of deficits at the heart of public debate at the beginning of 201117.

For example, we are already seeing a very specific expression of this widespread anger against Wall Street in that Americans have deserted the stock market18. Each month, an increasing number of « small investors » leave Wall Street and the financial markets19, today leaving more than 70% of transactions in the hands of major institutions and other « high frequency traders ». If one keeps in mind the traditional image that the stock exchange is today’s temple of modern capitalism, then we are witnessing a phenomenon of loss of faith comparable to people’s disaffection with official demonstrations experienced by the communist system before its fall.

11 To clarify this alarming social situation, it is worth reading the joint IMF / ILO report initiated by the Norwegian Government on « The challenges of growth, employment and social cohesion » in the context of the current crisis. Source: OsloConference, 07/22/201012 A very telling indicator showing the price that young Americans are paying because of the crisis.The number of summer jobs, a traditional feature of independence for young Americans for the following year, fell to its lowest level since 1948. Source: USAToday, 09/03/201013 These images of drastic cuts in police numbers in Auckland are emblematic of what is happening countrywide in terms of public services. Source: DailyMotion14 On this topic USAToday of 08/16/2010 had a very interesting portrait gallery of the « Tea Party » movement's supporters.15 See GEAB issue N°4516 The success of the « tea-partisan » gathering in Washington on 08/28/2010, organized by Glenn Beck, is an obvious example. Source: Washington Post, 08/29/201017 Source: New York Times, 08/31/201018 Stock exchanges have stalled or been declining for several quarters despite continuous attempts by the financial authorities to try to restore their shine ... and once again are approaching a violent spasm tied to « the Hindenburg Omen » or the anticipation of global economic and financial conditions. Source: Telegraph, 08/27/2010.19 Source: New York Times, 08/22/2010




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http://en.wikipedia.org/wiki/High-frequency_trading

http://www.nytimes.com/2010/08/22/business/22invest.html?_r=2&pagewanted=1&hp

http://www.telegraph.co.uk/finance/markets/7966529/Stock-markets-face-a-bloodbath-warns-SocGen-strategist-Albert-Edwards.html

http://en.wikipedia.org/wiki/Hindenburg_Omen

http://directorblue.blogspot.com/2010/02/president-obama-convenes-deficit.html

http://www.nytimes.com/2010/08/01/opinion/01sun1.html?pagewanted=1&hp

http://www.washingtonpost.com/wp-dyn/content/article/2010/08/27/AR2010082702359.html?hpid=opinionsbox1&sub=AR


http://www.usatoday.com/news/politics/2010-08-13-1Ateaparty12_CV_N.htm

http://www.dailymotion.com/video/xeloge_crise-la-police-d-oakland-dans-la-t_news

http://www.usatoday.com/money/economy/employment/2010-09-03-youth-unemployment_N.htm

http://www.osloconference2010.org/discussionpaper.pdf

The bulk of the U.S. economy now depends on public funding

There is also a dramatic economic reality: most of the United States economy is now directly dependent on the federal government and / or the Federal Reserve. Real estate, vehicle manufacturing, defence (and through defence, a large proportion of high tech industries), agriculture,... are sectors that can only sur-vive (and even then with great difficulty for some) because they are supported by federal grants and / or Fed support policies. In addition, a majority of states and large cities across the country are unable to stay in the black on their own and depend on Washington to do so20. Thus, if tomorrow the federal bud-get and the Fed are unable to maintain, or even increase, for the first one its already abysmal deficits, and for the other its balance sheet already crowded with ghost assets21, the major part of the economy and the country's social system will collapse like a house of cards22.

In terms of ghost assets, the two charts below perfectly illustrate the transfer of debt from private banks to the Fed, which has only made the US taxpayer liable for the debts of the major US banks... an abuse that particularly fuels the « frustration » of many fellow Americans. Here, Barack Obama was right to say to US bankers in March 2009 « my administration is the only thing between you and the pitchforks23 ». Among other things, that's what today makes him so unpopular in his country.

But if the prospect of a US economy as a « house of cards » was already clearly anticipated by our team with GEAB No. 2 in February 2006, it is only recently that the « mainstream » media is clearly beginning to recognize this fact. As always in cases of deep crisis, this awareness is a sign of a forthcoming change for the worse because it foreshadows an abrupt change in the behavior of many players24, particularly with regard to the famous « flight from risk » that traditionally leads the players to favour US government assets ... and which we believe will begin to reverse itself from the beginning of 2011.

20 Washington will find itself facing a stark reality in the coming months: cities and states rapidly foundering in austerity and the inability to repay their debts. Cities threaten to lay off 500,000 employees in the coming months. Source: ZeroHedge, 09/07/2010; CNNMoney, 07/28/201021 See GEAB N°24, April 200822 Thus, articles like the following were simply unimaginable in the media only a year ago: Le Figaro/Journal des Finances of 09/10/2010 wrote that the ECB was currently looking at the worst-case scenario, that is to say a flight of investors out of US assets; Reuters on 08/25/2010 was concerned about the next stage of the crisis and squarely detailed the US government debt bubble; the Telegraph of 07/30/2010 which described IMF recommendations for new economic stimulus spending in the United States as insanity; Bloomberg on 08/11/2010 denounced the bankruptcy of the United States; the head of the US military described the deficit as a threat to national security in ExecutiveGov of 08/27/2010, and to complete this list which is merely indicative, in the New York Times of 09/02/2010, advice (which has little chance of being heard and which disregards the new world in the making) from Robert Reich, Bill Clinton’s former Secretary of Labor, are entitled « How to end the Great Recession? » . The title begins to come close to the « Very Great Depression » of which LEAP/E2020 has spoken for nearly 4 years.23 Source: Politico, 04/03/200924 A glaring micro-economic example of the sudden changes in behaviour brought about by the crisis is provided by the drastic reduction in the use of credit cards by US consumers (56% used credit cards in 2009 against 87% in 2007) who were supposed to be totally « addicted » to credit cards. This development naturally has major macro-economic consequences for the US financial system and businesses. Source: USAToday, 09/11/2010




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http://www.usatoday.com/money/perfi/credit/2010-09-10-credit10_ST_N.htm

http://www.politico.com/news/stories/0409/20871.html

http://www.nytimes.com/2010/09/03/opinion/03reich.html

http://www.nytimes.com/2010/09/03/opinion/03reich.html

http://www.executivegov.com/2010/08/mullen-national-debt-is-a-security-threat/

http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html

http://blogs.telegraph.co.uk/finance/jeremywarner/100007079/imfs-mad-prescription-for-the-us-economy/

http://blogs.reuters.com/great-debate-uk/2010/08/25/waiting-for-the-other-shoe-to-drop/

http://www.jdf.com/indices/2010/09/10/02003-20100910ARTJDF00063-la-bce-reflechit-au-scenario-du-pire.php


http://money.cnn.com/2010/07/28/news/economy/city_job_cuts/index.htm

http://www.zerohedge.com/article/muni-bond-crisis-officially-here-harrisburg-drops-33-million-muni-payments?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+zerohedge/feed+(zero+hedge+-+on+a+long+enough+timeline,+the+survival+rate+for+everyone+drops+to+zero)

Chart 1: US domestic financial sector debtChart 2: Federal debt held by the Federal Reserve

Sources: St Louis Fed / US Federal Reserve / US Department of Treasury, 2010




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The Federal Reserve now knows that it is powerless

Finally, there is a financial and monetary effect that is particularly tragic since the players are aware of their unenviable situation: the U.S. Federal Reserve now knows that it is powerless. Despite the extraordinary efforts (zero interest rates, quantitative easing, huge support to the real estate mortgage market, massive support to banks, tripling its balance sheet, ...) that it carried out from September 2008, the U.S. economy will not restart. Fed leaders are finding they are only a part in the system, even if it is a vital part and, therefore, can do nothing against a problem that affects the very nature of the system, in this case, the US financial system, designed as the solvent heart of the global financial system since 1945. But the US consumer has become insolvent25, the consumer who, during the last thirty years, has gradually become the central economic player of this financial heart (with more than 70% of U.S. growth dependant on household spending). It is this insolvency of US households26 that has broken the Fed’s efforts.

Accustomed to the virtualism and thus to the possibility of manipulating the processes and dynamics of events, US central bankers believed that they could « mislead » households, once again giving them the illusion of wealth and thus pushing them to revive consumption and behind it the whole United States’ economic and financial machine. Until summer 2010, they did not believe in the systemic nature of the crisis or they did not understand that what was causing the problems was out of reach of the tools of a central bank, as powerful as it may be. Only in recent weeks have they discovered two pieces of evi-dence: their policies have failed and they have neither arms nor ammunition.

Hence the very depressed tone of the discussions at the central banks meeting in Jackson Hole, whence the lack of consensus on future action, whence the endless debates about the nature of the risks to be faced in the coming months (e.g. inflation or deflation, knowing that the system’s internal tools used to measure the economic consequences of these trends are no longer even relevant, as we analyse in this issue27), whence increasingly violent clashes between proponents of renewed growth via debt and follow-ers of deficit reduction... and whence Ben Bernanke’s speech full of veiled threats to his central banker colleagues: in ambiguous terms, he passed the following message: « We will try everything and anything to avoid an economic and financial collapse and you will continue to finance this « everything and any-thing », otherwise we let inflation loose and thus devalue the Dollar whilst US Treasury Bonds will no longer be worth much28. When a central banker expresses himself like a common cash extortionist, there is danger in the house29.

25 Even when they manage to find a job, it’s usually a job much less well paid than the previous one. Source: CNBC, 09/01/201026 Thus the foreclosure process is a reflection of an alarming phenomenon of a decline in the value of US households’ assets. Source: Foxnews, 08/23/201027 If the prospect of deflation is that which officially « spoiled the mood » of the central bankers’ meeting in Jackson Hole in late August 2010, it is actually growing doubts about the Fed's ability to select and implement appropriate measures to revive the US economy which makes the whole of the small world of central bankers so nervous. Sources: CNNMoney, 08/31/2010; FT, 09/10/201028 It should be noted here that in front of the growing reluctance of the rest of the world to buy US Treasury Bonds and GSE, the Fed has not only officially begun to buy them for its own account (or more unobtrusively via its « primary dealers ») but it has begun to organize the massive sale of federal debt to US individuals operators. In effect it must seem easier to manage the plundering of many dozens of million people more or less unaware of the economic and financial nuances than that of the major strategic players such as China, Japan, the Gulf oil countries... (see the chart in this issue).29 After explaining that the use of a moderately inflationary policy had been discussed but wasn’t on the agenda, Ben Bernanke said that however, if deflation risks grew, then the usefulness of some intervention methods could be reconsidered. Clearly, if nothing else works and if the other global players do not want to feed the US deficit machine, then debt monetization will be implemented on a large scale. At least, things are now clear. When LEAP/E2020 warned that it was the only option for the United States in the looming crisis it seemed outrageous. Today, it is the Fed Chairman himself who sets the tone. Source: US Federal Reserve, 08/27/2010




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http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm

http://www.ft.com/cms/s/0/c4b2009c-bcf3-11df-954b-00144feab49a.html

http://money.cnn.com/2010/08/31/news/economy/fed_minutes/index.htm

http://liveshots.blogs.foxnews.com/2010/08/23/foreclosure-study-shows-dramatic-value-drop/?test=latestnews


The response of the world’s major central banks will be unveiled in the next two quarters. Already the ECB has made it clear it thought that a new policy of stimulation through an increase in US deficits would be suicidal for the United States. Already China, whilst saying it would do nothing to rush things, spends its time selling US assets to buy Japanese ones (reflected in the historic level of the Yen / Dollar rate of exchange). As regards Japan, it is now forced to align itself simultaneously with Washington and Beijing ... which will probably cancel out all its financial and monetary policies. In future quarters the Fed, like the federal government, will find that when the United States is no longer synonymous with juicy profits and / or shared power, its ability to convince its partners declines quickly and heavily, especially when the latter question the relevance of the chosen policies30.

Index of mortgage applications (1990-2010) (4 week moving average) - Sources: Mortgage Bankers Association / Bloomberg / New York Times, 08/2010

The consequence of these three realities that are gradually making their presence felt in US and global consciousness will, therefore, for the LEAP/E2020 team, come to pass in Spring 2011 by the United States entering an era of austerity unprecedented since the country became the heart of the global economic and financial system. Federal political blockages in the context of an electorate sick and tired of Washington and Wall Street, heavy reliance on federal funding of the entire US economy and the Fed's impotence against a backdrop of growing international reluctance to finance US deficits will combine to push the country into austerity. An austerity that has, moreover, already begun to affect at least 20% of the population head-on, and which directly affects at least one in two Americans worried about joining the ranks of the homeless, those without work and other long-term unemployed. For these tens of millions of Americans austerity is here and it's called lasting impoverishment. What is going to come into play between now and Spring 2011 is, therefore, the shift into official speeches, budgetary policies and international awareness to the idea that the United States is no longer « the land of plenty », but « the land of few ». And beyond the domestic political choices, it is also the discovery of a new limitation for the country: the United States cannot afford a new stimulus31. Rather than a multidecade collapse like the Japanese situation, many decision makers will be tempted by shock therapy ... this same therapy that, with the IMF, the United States recommended to Latin American, Asian and Eastern European countries.

30 The failure of the mammoth measures to support the housing market is well illustrated by the chart below.31 We are even beginning to hear voices suggesting « copy Europe » like Jim Rogers and Doug Noland who publishes the excellent « Credit Bubble Bulletin ». Sources: CNBC, 08/31/2010; Prudent Bear, 07/30/2010




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http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10416


http://www.prudentbear.com/index.php/commentary/creditbubblebulletin

As a matter of fact, even the real US GDP will help make this « correction in perspective » on the state of the country, since in three years, US GDP has, de facto, fallen by 30% (if we subtract the increase in federal debt from the increase in GDP in the same period). We will come back to this in more detail in this issue but, beyond the statistical significance, this raises the question of the relevance and reliability of a whole array of statistics that are used to determine the ratios of US debt, average wealth... and for which the GDP is a key variable. Thus the United States’ 2009 ratio of public debt to GDP32 becomes 113% instead of the official figure of 83%33.

This is normally a good reason for the rating agencies, always so quick to see the straw in the eye of most countries in the world, to threaten the United States with a strong downside rerating if they not implement a comprehensive austerity plan as quickly as possible. But anyway, for LEAP/E2020, due to the internal and external conditions in the country described above, it is really in spring 2011 that the United States has an appointment with austerity, an appointment that the rest of the world will impose if it is paralyzed politically.

Until then, it is likely that the Fed will try a new series of « unconventional » measures ( a technical term meaning « desperate attempts ») to try and prevent arriving there because, at this stage, one thing is certain concerning the consequences of the United States entering a large-scale programme of austerity: that will be financial and monetary chaos in the markets accustomed for decades to the exact opposite, that’s to say, US waste; and an internal economic and social shock unparalleled since the 1930s34.

32 A ratio that the Financial Times and its US counterparts used extensively to try and break Euroland via Greece, Spain and Portugal.33 Source: US Government Spendings, 09/12/201034 As the historian Niall Ferguson points out in this article published on 07/29/2010 by The Australian, « the sun can suddenly set on a superpower when debt bites ». An historical reminder that columnist Thomas Friedman, though very patriotic, doesn’t refute, who emphasized that the sharp decline of American power was due to the economic crisis in the New York Times on 09/04/2010.




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http://www.nytimes.com/2010/09/05/opinion/05friedman.html?_r=2&hp

http://www.nytimes.com/2010/09/05/opinion/05friedman.html?_r=2&hp

http://www.theaustralian.com.au/news/opinion/sun-could-set-suddenly-on-superpower-as-debt-bites/story-e6frg6zo-1225898187243

http://www.usgovernmentspending.com/downchart_gs.php?year=2000_2010&view=1&expand=&units=p&fy=fy11&chart=H0-fed&bar=0&stack=1&size=m&title=US Federal Debt As Percent Of GDP&state=US&color=c&local=s

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Five key aspects of the USA’s entry into the austerity phase

The sequence of US social and political crises for the next ten years

As previously mentioned, entry of the United States into the austerity phase is caused by two sets of factors: some internal, specific to the United States, others linked to rapidly changing international conditions. Regarding internal factors, it is clear that the deficit issue becomes one of the central themes of US political debate after being studiously ignored for decades. The Keynesian Democrats may well expose Republican monetarist manipulation but that does not change the fact that this topic is emerging as one of central concern to voters. In economics as in politics, psychology plays a fundamental role and the current crisis has changed the attitude of a growing number of Americans in relation to the concept of debt: their own as well as that of their country’s. What was considered as evidence of modernity and « real American » behavior is being transformed into the opposite: outdated and anti-American behavior35. The link between public debate and individual behavior is made against the backdrop of the credit crisis and impoverishment of the middle classes. According to LEAP/E2020 it will shape US public debate for the next decade and generate a succession of social and political shocks because it is a matter of a genuine intellectual revolution compared to the norm of the last fifty years. And one can even consider this as an even more profound change because it marks the end of the myth of an America of unlimited riches36 and a consequently bright future37.

From November 2010, the elections will enable a start to be made in measuring the magnitude of change underway. For our team it will result in two events directly interacting: the paralysis of federal power regarding the economy and social affairs and a growing fixation with the debate on the country's deficits. This is dangerous because it will exacerbate both the awareness of a huge problem which has been ignored for too long (the issue of deficits) while preventing any significant action to resolve it (institutional paralysis).

35 Credit card use is collapsing. Source: BusinessWeek, 09/08/201036 As the Guardian wrote in this article of 08/15/2010, knowing that the end of a dream can quickly turn into a nightmare.37 In effect, changes in attitude are quick, numerous and fundamental: from cities that decide to remove the asphalt from the roads because they cannot pay for their repair and which once again become trails of the Far West, via the end of the passion for golf that leading to bankrupt courses, the withdrawal of toilet paper in some public services, the abandonment of pleasure boats the length of the U.S. coast, the end of public finance providing help for the disabled, for education, for the retired in many states and cities, the end of the car for 16 year old teenagers, universities on the brink of bankruptcy,... even the birth rate is falling. Sources: USAToday ; 08/03/2010; CNNMoney, 07/23/2010; USAToday, 08/26/2010; LJWorld, 09/08/2010; USAToday, 06/08/2010; USAToday, 07/28/2010; New York Times, 08/14/2010; Wall Street Journal, 07/17/2010; USAToday, 08/27/2010




11


http://www.usatoday.com/news/health/2010-08-27-birth-decline_N.htm

http://online.wsj.com/article/SB10001424052748704913304575370950363737746.html

http://www.nytimes.com/2010/08/15/opinion/15taylor.html?_r=1

http://content.usatoday.com/communities/driveon/post/2010/07/deferred-dream-fewer-teens-getting-their-first-car/1?loc=interstitialskip

http://www.usatoday.com/news/washington/2010-08-06-ada06_ST_N.htm

http://www2.ljworld.com/news/2010/sep/08/budget-cuts-mean-elimination-dental-benefits-thous/?kansas_legislature

http://www.usatoday.com/news/nation/2010-08-26-boats26_ST_N.htm

http://money.cnn.com/2010/07/22/news/economy/newark_budget_cuts/index.htm

http://www.usatoday.com/money/economy/2010-08-03-golf03_CV_N.htm

http://www.guardian.co.uk/world/2010/aug/15/jobless-millions-death-american-dream

http://www.businessweek.com/news/2010-09-08/cardholders-prefer-debit-as-credit-card-use-declines.html

Progress of long-term US unemployment (1990-2010) (overall unemployment figures in blue) - Source: BLS, 08/2010

Only from the November 2012 elections (so actually from 2013) will it be possible for Washington, according to LEAP/E2020, to start taking some difficult internal decisions. And yet this is the most optimistic option that assumes rational debate prevails, not questioning the foundations of the political, social and economic system of the country too much. But for our team at this stage, it is not the most likely option38. Indeed, behind the issue of US deficits hides, in fact, the maintaining in place or replacement of the groups who control the US political system: the richest families and the military-industrial complex, combined with their financial intermediaries, the banks, are indeed at the heart of huge deficits accumulated by the United States. The first group pay hardly any tax, the second « treat » themselves to wars at will and an oversized army, and the third manage it all and profit from the deficits that generate a manna of all kinds of financial activities.

38 Source: Washington Post, 08/12/2010




12


http://www.washingtonpost.com/wp-dyn/content/article/2010/08/11/AR2010081104746.html?hpid=opinionsbox1&sub=AR

It is this deeply political nature of US deficits, which creates this strange « front of anger » where one can find very close in their analyses « tea-parties » ultra-liberals, anti-tax and anti -Washington activists, on the one hand, and anti-capitalist activists who want a tax increase and the funding of a European style welfare state, on the other. For example, both groups can be found in their opposition to Obama’s healthcare reform (too much for some, too little for others), in their "hatred" of Wall Street (socializing losses for some, preventing socialization of profits for others), in their rejection of military adventures (waste of money for both)... From « lower-middle class whites » to minorities left to fend for themselves, these two groups can only continue to strengthen at the pace of the socio-economic carnage hitting the US middle classes39.

USA: Comparative annual development of nominal GDP (green), federal deficit (blue) and real GDP (red) (1995-2010) - Sources: US Treasury / Market Ticker, 08/2010

But imagining that the holders of US power (the favored classes, bankers, the large industrial and military complex) offer themselves meekly for an exercise in deficit reduction that would result in a sudden loss of their power and wealth would be totally naïve. For this reason the most likely development, according to our team, will be in the direction of a succession of social and political crises during the next decade. The crisis, its duration and its systemic nature prevents the current group of leaders to be able to continue exercising their power as they have done in the past, but the groups that want to change the US political system don’t have the means to force change. It is, then, a situation of imbalances that will prevail result-ing in the inevitable rise of mass « structural » - as economists say - unemployment, requiring either the establishment of broader-based social insurance coverage, or a sharp increase in the country’s internal security forces (to protect the ruling groups). This population « left to fend for itself » will increasingly fuel the social, religious or political (and secessionist) « crusades » that are beginning to throw up the dema-gogues and aspiring political leaders of all kinds. Within the US elite, the debate will intensify from 2011 on how best to « hold the country » without the wealth or its substitute, i.e. the easy credit of recent decades.

39 It is what LEAP/E2020 had anticipated from February 2009 in the GEAB N° 32 .




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Unlike the opportunities of three or four years ago, it now appears unlikely to our team that external mili-tary adventures would be adopted as a means of ending the crisis. Entry into the austerity phase is in-deed not conducive to new costly adventures that would only exacerbate internal tensions while generat-ing fierce external opposition... in the knowledge that the United States had become extremely dependent on the economic and financial goodwill of the rest of the world.

Willingly or not, the United States will now have to face immense contradictions and imbalances accumulated over five decades. And that will, of course, greatly increase their « country risk » profile and uncertainties about their growth, their taxation, their attractiveness, their ability to repay their debt...




14


The irrelevance of the "inflation versus deflation" debate in the systemic crisis

LEAP/E2020 has been saying for a long time that the inflation/deflation issue is more complex than the simple duel between two contradictory concepts, all the more so as, expressed in these terms, it looks more and more like a parochial squabble only of interest to the economists. These debates, as well as the statistics used (monetary aggregates, price indices, ...), become so disconnected from the reality of a world in crisis, that they lose all relevance and thereby contribute significantly to increasing decision makers’ confusion (governments or central banks). Our team has thus noted that since the beginning of 2010 the GlobalEurometre results for inflation produce fluctuating majorities which reverse themselves nearly every month, evidence that respondents have become unable to form a stable opinion on this index. And yet for LEAP/E2020, when results become absurd, it is not a sign that the respondents are going mad or that the facts fluctuate from month to month, but rather that the index is no longer relevant. A systemic crisis is characterized by fundamental changes in the process that one is trying to evaluate. It thus requires a radical adjustment of indicators as well as the tools of intervention.

We believe for instance that we have entered a period of an upward trend in prices for basic necessities40

and, on the contrary, a period of declining prices for most major asset classes. And, contrary to the infla-tion/deflation debate, this aspect is of direct interest for a large number of players. The measure of these changes, through price indices or the cost of living in particular, becomes less and less relevant unless two types of index are clearly decreed that are well separated instead of relying on blurred synthetic in-dices.

In addition, and we see it today on a large scale in the United States, for policy makers who want to influence the behavior of the economic players, the problem of rising prices is actually a problem concerning purchasing power. Thus, the stability of prices in one year can have the same effect as an increase if, at the same time, consumers’ wages and other income is falling. Once again we find a dual process that requires a careful discrimination and putting into perspective of movements to ascertain what ultimately will really determine the choices of the relevant economic player. Purchasing power seems, then, to be a more relevant indicator in this regard.

So, whilst Ben Bernanke and the Fed just rave on about inflation being contained in the United States, that does not prevent that, subject to a double reduction of earnings and capital and a credit crunch for households, resembling strong inflation: « If my income has decreased by 10% and prices have risen an average of 2%, my purchasing power has declined by 12%. And, therefore, I don’t spend anything, or at least much less, whatever anyone tells me about the rate of inflation. »

But, of course, whose purchasing power are we speaking of? the middle-classes’ or privileged classes’? There again, the US system of statistics comes up against its ideological limits. As long as it could claim that the middle class represented the stable and large heart of US society, general measuring would suffice. From the moment that the middle class falls behind, becomes fragmented and impoverished, all economic policy actions based on average measures is bound to fail because it targets a category of players that, de facto, no longer exists.This fact of life, of course, equally applies to other Western countries mired in crisis.

The long-running inflation/deflation debate is thus only one example of the blatant shortfall of the statisti-cal system in the event of systemic crisis.

40 And the pressure on foodstuff prices clearly reflects this. Source: Telegraph, 09/11/2010




15


http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/7996060/Food-inflation-to-hit-7-by-years-end.html

Percentage job losses in post WWII recessions, post 1945 (aligned at maximum job losses; current recession in red) - Source: CalculatedRisk, 08/2010

But beyond this social separation and by asset category, it is also necessary to see progress over time. The phase of low inflation or deflation, which seems to depress central bankers and worry the Fed so much, is only temporary. On the one hand, the BRICs, these rapidly emerging powers, are subjected to rising inflation that they will not fail to pass on to Western countries41; on the other hand, the United States, which is in a unique position within the global economic system, remains at the mercy of a badly managed « reflation » that will suddenly turn into hyperinflation in the case of a loss of confidence in the US Dollar.

For LEAP/E2020, loss of confidence in the ability of the US economy to quickly leave the crisis behind it, or even the fear that it falls back into recession in the coming months, can trigger this fatal double pro-cess for the U.S. Dollar: internal inflation « for remedial purposes42 », triggering a flight out of US Dollar denominated assets by the rest of the world. From the United States’ entry into the phase of austerity and given Ben Bernanke’s veiled threats to other central bankers43, the end of 2011 could prove to be con-ducive to such an uncontrolled chain of events. Indeed recent years have shown that, despite his very professorial style of speaking, Ben Bernanke (like his colleagues) has little control. As the US situation be-comes more complicated, there is no reason that the control of events by the Fed should improve; quite the contrary.

41 One should read the very interesting article on this subject by Andy Xie, published in the Caixin 08/16/2010.42 In an attempt to restart the U.S. economy and ease the growing burden of debt which is increasingly difficult to finance.43 See above.




16


http://english.caing.com/2010-08-16/100171139.html

The true US GDP is 30% lower than official figures

The United States’ entry into the austerity phase actually started at least two years ago. In fact, the crisis and its consequences in terms of a collapse in earnings and capital, as well as the drastic restriction of consumer credit, are only one step in the process of the impoverishment of the US middle classes which started nearly thirty years ago. Throughout the whole of this period, the frenzy of easy credit had the aim of hiding this impoverishment by compensating for a shortage of income with unlimited debt. The crisis having brought an abrupt end to this process, Washington (Government, Congress and the Fed together) has tried to make up for its disappearance by gigantic public debt. But, as we see on a daily basis, looking at the country’s economic and social development, this attempt has failed for the reasons discussed earlier in this issue of the GEAB. However, this attempt has a direct impact on US GDP that most economists and experts refuse to acknowledge because they would be a shock of such violence for global economic and financial stability that the so-called « Greek crisis » would look like a simple training exercise. If the Greek authorities’ lie over the amount of the country’s debt and thus the debt/ GDP ratio was able to generate worldwide panic, imagine for one second the discovery that the GDP of the United States is actually 30% lower than the official figures and, therefore, the ratio of public debt/ US GDP in 2009 was 113% and not 83%44 will cause (because for our team it is a reality that will become obvious during 2011). The difference is simply due to the fact that between 2007 and 2009, the United States took on board more than 4 trillion USD of extra debt for an increase of only just over 200 billion USD in three years45.

Net purchases of debt and US GSE securities and GSE (2007 - 2009) - Source: US Federal Reserve / Criseusa, 08/2010

44 In this context, it is not surprising that the global demand for gold continues to grow very rapidly, i.e. 36% in the second half of 2010. Source: MarketWatch, 08/25/201045 Source: US Government spendings




17


http://www.usgovernmentspending.com/downchart_gs.php?year=2000_2010&view=1&expand=&units=p&fy=fy11&chart=H0-fed&bar=0&stack=1&size=m&title=US Federal Debt As Percent Of GDP&state=US&color=c&local=s

http://www.marketwatch.com/story/demand-for-gold-rises-36-in-the-second-quarter-2010-08-25

But make no mistake! This huge additional public debt is only an attempt to substitute to a « missing » GDP due to the crisis and the end of consumer debt. One could also defend the idea that that this 30% has been nothing more than a fiction of GDP for at least one or two decades. But our problem is not what happened twenty years ago, but what will happen in the future. And the entry into the austerity phase of the systemic crisis introduces a fundamentally new factor, which is that it creates a general context which favours the unveiling of this reality: that US GDP is nothing more than a shadow of its former self46 and the figure used in economic and financial statistics is highly overvalued. With such an overvaluation, then almost all indicators are, to a large extent, false. The rate of the country's indebtedness, its share of the global economy, monetary ratios, the value of the Dollar (which is based on the size of the US economy) ... all these figures are largely incorrect. This may also explain (as for the « inflation / defla-tion » debate) why the economic and monetary policies implemented in the United States failed so miser-ably. Without any grassroots knowledge, no strategy can lead to success and, in this case, the view given by the map (indicators) is increasingly distorted47.

46 Another telling example: transactions in commercial real estate have plummeted 90% between 2007 and 2009 from 522 to 52 billion USD. Source: MyBudget360, 08/02/201047 To get an idea of what the famous "double-dip" in progress may look like, it is interesting to read this article by Douglas McIntye in 24/7WallSt of 08/13/2010




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http://247wallst.com/2010/08/13/what-the-double-dip-recession-will-look-like/

http://www.mybudget360.com/commerical-real-estate-collapse-90-percent-from-peak-next-taxpayer-bailout-4-times-size-of-credit-card-market/

The Fed isolated and lost in the face of an historic opportunity

What happens when the renowned leader is obliged to face up to a major failure and he shows complete indecision on the actions to be taken? In any human group that systematically generates three events: the concern of the faithful, the ambition of the competitor/opponent and the distancing of the opportunist. The US Federal Reserve finds itself plunged into exactly this situation. Its policies have failed and the debates inside and around it rage to determine what policies to adopt for the future. It appears obvious that it is completely lost. This is the problem when all the indicators are fudged and subsequently no one no longer knows to what they correspond48.

It probably begins to perceive its isolation through statements and actions of the ECB, the Chinese central bank... But within the U.S. itself, the consequences are becoming perceptible. The Fed’s enemies, those who seek its abolition, are increasing in power49 with the various movements of « angry Americans »: at the crossroads between the two worlds that they reject, Washington and Wall Street, the Fed is at the heart of this grassroots anger with the current system50. Opponents of its past policies are having the time of their life summoning it to do everything opposite (on that, they might not be disappointed!). As for the rest, the Obama administration, Congress and the banks are asking themselves what kind of Fed policies they can expect in the future.

What is certain is that if the Fed doesn’t retake control between now and the end of 2010, it will be completely disqualified from trying to regulate the United States’ entry into the austerity phase and that the latter will, therefore, take place in the worst conditions. Either the Fed tries to continue pretending that it has the means to revive the economy without travelling the « Austerity route » and we will see the emergence of a direct conflict between the Fed and the majority of its counterparts around the world51

who no longer believe in the idea of continuing to repeat the errors of the past so that they finally succeed; or it takes the bull by the horns and plays the tune of inevitable austerity, fully coming to terms with its unpopularity but at least doing something useful, that’s to say « landing the United States in the real world of the XXIst century ». This is an historic opportunity that will not present itself twice to the Fed. At this stage, we are rather pessimistic about the Fed’s ability to perceive and seize this opportunity.

48 For over two years LEAP/E2020 has highlighted the fact that by dint of fudging the numbers leaders would lose all track of reality.49 The growing impact of Ron Paul’s idea to finally carry out a comprehensive audit of US gold reserves (more than fifty years have passed since the last one) belongs to this category. Source: Kitco, 08/24/201050 Especially since it is the Fed which has organized, since the beginning of the crisis the repurchase by the Americans of their own debt, announcing a painful monetization for all Americans. See chart below.51 Again we repeat that neither Euroland nor China will subscribe to a new round of US stimulation. That leaves few realistic options that it could be implemented effectively.




19


http://www.kitco.com/reports/KitcoNews20100824DC.html

Net purchases and sales of US Treasury securities (2001 – 2010) - Sources: US treasury / Haver Analytics / NYT, 09/2010




20


The direct consequences for Asia and Euroland: Successful accelerated decoupling or social chaos

In the next two GEAB issues we will cover Asia and Europe in more detail. But we can already anticipate the challenges for these two areas as the United States enters into the austerity phase. For Asia and China, in the first place, it will be « the moment of truth ». So, in 2011, China and Asia will have to prove that they have become entities capable of guaranteeing at least their own growth without relying on the United States and thus leading to growth in all the BRIC countries and Euroland52 in the same breath. Indeed the United States’ arrival in austerity will result in a sharp drop in exports to the US and, therefore, require a greatly increased consumption inside China, inside Asia and with the BRIC countries53. Meanwhile Euroland’s entry into stagnation from the end of 201054 will face an intellectual challenge which consists of choosing to favour a new partnership with the BRIC countries55, or sink into economic difficulties along with the United States and the United Kingdom.

Asia, like Euroland, will face two parallel challenges concerning their relationship with the United States:. for Asians, it is a very clear challenge to disconnect their growth in exports to the United States56

. while for the Europeans in Euroland the challenge of disconnecting is rather an intellectual affair57 be-cause in practice they do not depend on exports to the USA.

As regards Euroland, economic stagnation will materialize at the end of 2010. The US austerity will, inevitably, affect exports from the zone58. And it will combine with the austerity implemented in Euroland, causing very intense social tensions especially if the systems of unemployment and welfare benefits are challenged without significant contributions from high earners. As a reminder, without equity, austerity in Europe will slip into socio-economic chaos, the example being the United Kingdom from next October59.

But in Asia also, social tensions may become a dominant theme from the end 2010/beginning 2011 if Asia proves incapable of replacing the US market for its exports: Beijing has just officially recognized for the first time that China has more than one hundred million unemployed to integrate into the labour market in the coming year60. This has the potential for significant social chaos, even for a heavily policed country. In the next GEAB we will be able to identify the trends that we believe will assert themselves in 2011 as re-gards these two regions.

52 China also continues to diversify its reserves into Euros, out of the dollar. Source: Bloomberg , 08/16/201053 This is indeed what China is already actively doing already. Source: Bloomberg, 08/02/201054 With German wages stagnating and the tax increases that France will have to implement, growth is not really on the agenda for the next semesters in Euroland. Sources: Le Monde, 09/08/2010 ; Libération, 09/09/201055 As a matter of fact, the EU is beginning to turn its diplomacy towards China. Source: EUObserver, 09/13/201056 Source: People's Daily, 08/13/2010; Bloomberg, 08/19/201057 As is often the case, it is useful to read the thoughts of William Pfaff on the subject of 07/13/2010.58 The myth of the German economy unaffected throughout the crisis will have lasted a little under a year because, from this autumn, the effect of stimulation plans having definitively evaporated, Germany and the Eurozone will find itself with no growth. This will not help Nicolas Sarkozy’s situation in France which is thus heading straight towards a regime crisis between now and the end of 2010, involving a series of socio-economic and state affairs crises. German leaders will, therefore, be on their own to organize Euroland these next semesters because the Parisian elite will be in complete political chaos 18 months from the presidential elections, with an outgoing president with no chance of reelection. Source: The Economist,, 09/09/2010 ; Le Parisien, 0/14/201059 Britain's trade unions have decided to attack the reforms which have been announced, which basically consist of budget cuts affecting all the country’s public services. The announcement of budget cuts in June 2010 helped ease the impending crisis for UK debt and the Pound sterling: this is the advantage enjoyed by Her Majesty’s Government unlike the Greek, Spanish, Portuguese governments... But now it is a matter of implementing what has been announced; the shock will be brutal. We should therefore expect a big return of the theme of Eurozone countries’ debt in the columns of the Financial Times and US financial media ... to better deflect attention from growing problems in both countries. However, in truth, Euroland is now far more resilient than six months ago. Sources: Telegraph, 08/16/2010; Le Monde, 09/13/2010; Independent, 09/10/2010; Spiegel, 08/09/201060 Source: Le Point, /10/2010




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http://www.lepoint.fr/monde/chomage-de-masse-en-chine-22-de-la-population-active-sans-emploi-10-09-2010-1234861_24.php

http://www.spiegel.de/international/business/0,1518,716108,00.html

http://www.independent.co.uk/news/business/news/trade-deficit-explodes-as-economy-heads-for-slowdown-2075345.html

http://www.lemonde.fr/europe/article/2010/09/13/grande-bretagne-les-syndicats-approuvent-des-greves-contre-l-austerite_1410628_3214.html

http://www.telegraph.co.uk/finance/markets/7948703/UK-Government-debt-rally-unlikely-to-last.html

http://www.leparisien.fr/politique/presidentielle-2012-villepin-cree-la-surprise-14-09-2010-1067306.php

http://www.economist.com/node/16990664?story_id=16990664

http://www.williampfaff.com/modules/news/article.php?storyid=474

http://www.bloomberg.com/news/2010-08-19/mcdonald-s-sells-yuan-bonds-in-hong-kong-first-issuance-by-foreign-firm.html

http://english.peopledaily.com.cn/90001/90778/90862/7104388.html

http://euobserver.com/9/30783/?rk=1

http://www.liberation.fr/politiques/01012289115-70-des-francais-s-attendent-a-une-hausse-des-impots-d-ici-2012

http://www.lemonde.fr/europe/article/2010/09/08/l-allemagne-pays-d-europe-ou-les-salaires-ont-le-moins-progresse-en-dix-ans_1408556_3214.html#xtor=AL-32280184

http://www.bloomberg.com/news/2010-08-01/new-silk-road-built-by-china-binds-asia-to-latin-america-with-global-trade.html

http://www.bloomberg.com/news/2010-08-15/china-favors-euros-over-dollars-as-bernanke-shifts-course-on-fed-stimulus.html

3- Focus

An extract from Franck Biancheri’s book called « World crisis: The path to the world after - France, Europe, the World in the 2010-2020 decade

The French version will be published on the 1st October 2010 by Editions Anticipolis(English, German, Spanish and Italian versions will be released by Editions Anticipolis from the 1st December 2010)

Click HERE to order

The first half of the decade marked essentially by global geopolitical dislocation

The crisis, because it wasn’t anticipated by the world’s leaders, is now developing at its own speed. In 2009 the financial efforts, unprecedented in history, of the United States, Europe, China, Japan and other countries have only allowed two things to happen: anaesthetize the populations of different countries to delay a violent political and social reaction; and save large financial institutions without reforming them. All this was done at the cost of an unsustainable State debt burden, the transformation of a very large part (around 30%) of the global economy into a " zombie economy " (that is to say surviving only through direct or indirect public financial support or even through the manipulation of accounting rules) and a growing distrust in Western public opinion vis-à-vis all the ruling classes, rightly suspected of only being the representatives of the most powerful financial interests. Along with these highly visible events, ultimately of short or medium term, the crisis reveals other secular trends profoundly changing the world order as we know it, in particular the resurfacing of Chinese and Indian power and the end of a Western-centered world. The coming decade will be the scene of the interaction of these two "speeds" of the crisis which, whilst being correlated of course, are not identical. Lasting trends can be seen, on the scale of a decade, as basic data, that is to say, as events for which we can prepare without really affecting their progress while the other events (lasting between 2-5 years on average) may instead be directly affected by human decisions (those of leaders and / or people).

The first part of the coming decade will be predominantly marked, on the one hand, by the growing emergence of lasting trends marking the end of Western-centrism and, on the other hand, by the consequences of the financial crisis and especially the responses to it in 2009; responses that led to State overindebtedness and, in particular, the overindebtedness of the United States, the mainstay of the global order in recent decades. With China the preferred vehicle of lasting trends in operation and the United States the country both at the heart of the financial crisis and its consequences61 we can say that it is Sino-US relations that will determine the pace and magnitude of the shocks that we will experience between now and the middle of the 2010-2020 period. At the same time the other players (new, old or reinvented powers62) will, of course, act and react in the coming years, either according to the evolution of the USA-China relationship and its consequences, or according to their own expectations for the world in the coming decades. It is very likely that this group only can give birth to the initiatives and most fertile ideas to prevent the second part of the decade turning into a descent into hell for most of the planet and allow, between now and 2020, a lasting new world order to start taking shape.

61 Surprising as it may seem I do not think that the United States is a central player in the currently emerging lasting trends. It will finally have been, globally, only a replacement for European power for the time that the latter went through its painful twentieth century metamorphosis from "European powers" to "European power". It is actually the Europeans, as the EU, which represent, next to China, India and Russia, one of the potential new powers of the XXIst century, only because it is an entity that did not exist in the world order until the 1990s. It took the fall of the Berlin Wall for the European community project to emerge from its experimental cocoon. We will return to this later in the book.62 We can put Russia, China, India and the EU in this latter category. In other forms, these powers were already bygone major historical players. While Brazil or South Africa, for example, are actually new players. Today, the United States itself is undoubtedly a former power.




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http://www.anticipolis.eu/en_commande.php


In light of what has happened since the actual beginning of the crisis, the USA-China duo has, in effect, little chance of avoiding a fruitless confrontation. Neither the Chinese leaders, nor the US elite, seem able to do anything but defend/promote their own vested interests. Their mutual conflict and its domestic consequences for both countries will also capture all their attention, leaving them little room to think about the world’s future. That said, there is no guarantee of course that the contributions of other players will be able to save the world some kind of zero sum game that would necessarily result in conflicts between blocs like the one that will soon prevail in the relationship between the USA and China. Besides, it is for this reason that there are properly two accounts of the future in this book. The main difference between them takes account of this factor, the divergences of induced evolution becoming increasingly apparent during the second half of the decade.

But do not anticipate (for once) the end of this book. First, let's look in more detail at the likely developments for the main geopolitical actors of the 2010-2020 decade as well as the general framework of their interplay.

These likely developments will be a chain of events that will lead to the breakdown of the current international system, particularly through the collapse and paralysis of the major international institutions and the strategic core of the global financial and monetary system and the beginning of a process of structural redevelopment of large global players like the United States, the EU, Russia, Asia and Latin America, ranging from the beginning of dismemberment for some and ongoing reorganization for others.

The rapid disintegration of the whole of the current international system

This process is already underway. The failure of the Copenhagen summit on global warming in late 2009 has highlighted several aspects of the rapid disintegration of the current international system: the ineffective politic of the UN, lack of a common Western position in a context of division between Americans and Europeans, blocking capacity of BRICs and China in particular, the obsolescence of Anglo-American approach to marketing mixing "politics of fear" and spinning news, indifferent public opinion in the face of the economic and social consequences of the crisis and the loss of credibility of public institutions and the media63.

THE UN

The UN is totally overwhelmed by the current crisis. Neither the Security Council nor the various special agencies seem to have the slightest ability to influence unfolding events and even less on the implementation of solutions. The absence of the UN on all key issues of current geopolitics (Korea, Iran, Middle East, etc.) attests to its rapid obliteration. Moreover, the alarmist attitude of the WHO over Swine fever has only contributed to increasing doubts in public opinion on even the credibility of the analyses published by these international agencies.

THE WTO

The WTO, as we mentioned earlier, only has authority insofar as its most influential members agree to ap-ply its rules and decisions. The trend that has currently asserted itself, behind the official rhetoric, is total-ly the opposite.

63 The contemporaneous fiasco of the so-called terrible Swine fever epidemic has only contributed to the growing conviction of the use of collective fear to promote hidden financial, political or security agendas.




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The United States, China, the EU (at least certain member states like France or the United Kingdom) seem reluctant to do anything else than let the attitude of « every man for himself » take hold in world trade. This same global trade is in freefall and its weakening, of course, negatively affects the WTO’s ability to influence. This final creation of the period of accelerated globalization that we have experienced over the last twenty years is in a deadlock. The Doha Round, its current major project, will not reach a successful conclusion, whatever one or the other officially says. The stalemate is gradually worsening each year due to lack of leadership to bring it to a successful conclusion and because the key players are hereinon turning to the rationale of regional integration and / or trading blocs. As a matter of fact, it is probably the WTO’s sole way out in this new decade: try to move from an institution based on States to one based on large regional commercial entities in order to prevent free trade areas from becoming trade blocs in direct conflict with one another, as it will happen if no regulation system is adopted at global scale.

THE OECDThe OECD, which basically has never been anything other than a kind of institutional think tank intended to promote the Western dominated agenda is absolutely not equipped to be anything other than a vague circle of proposals, totally lacking in the tools and human resources to act in a global crisis and even less on the reorganization of global governance that it involves. To do this, it would need a strong political legitimacy, considerable financial resources and particularly daring leaders, all of which are an antithesis to the venerable Château de la Muette64.

THE IMFThe IMF is not able, either, to have a significant impact on the crisis. In the best case, it can still play the role of "broom wagon" and provide emergency support to States on the verge of bankruptcy (it was the sole purpose of the G20 decision for a capital increase decided, ironically, by overindebted Western states). However, the increasing number of States affected as well as the size of their respective economies will pose a capacity problem. Finally, the IMF essentially remains the finance arm of the United States and its Western allies, with a decision structure that will no longer match the financial balance of power on our planet in the coming decade. The majority of the countries providing the largest global financial reserves are marginalized. In other words they will not provide any "gift" to the IMF without having any real influence on how their money would be used. We see here how much should have been done, at least ten years ago, to reform the IMF and adapt its decision-making structure to the world of the early XXIst century instead of letting it congeal in the post- Second World War world.

It is also very significant of the current international blockage that the reform of the IMF, giving the BRIC a seat which corresponds to their new economic size, has still not been implemented. Don’t give up anything as long as events don’t compel you to seems to be the watchword of Americans and Europeans. This is hardly surprising from Washington, even if it is a shortsighted view. For Europeans, it is absurd. Not being the masters of the game today, they have everything to gain by actively participating in the redefinition of the rules. But on this occasion, instead of proposing bold reform (reducing their votes, uniting it under one common European umbrella and in the same breath demanding a corresponding reduction in the US vote), they are on the defensive and seem to be those responsible for the lack of significant development, which is really the last straw since the first of these increasingly glaring inconsistencies of the IMF is the excessive influence of the United States. A rapid pace of change must also be imposed on the IMF. The new voting arrangements should become fully operational between now and 2013/2014 at the latest to eventually enable the IMF to act as a gyroscope, a stabilizer of the world economic and financial system of the second half of the decade. Otherwise, far from stabilizing anything, it will become another bone of contention, then clashes, between different global players, ultimately to end in having the least importance. It is, in fact, this institution which could give birth without too much difficulty, if the political will is there, to the future global benchmark reserve currency which will allow the dollar era to be left behind for good without suffering « widespread chaos ».

64 OECD headquarters in Paris




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THE G7 and THE G20The G7 (or G8) has only ever been an elitist club gathering around the United States and the major Western economies to give the appearance of a vague collegiate management of the world. Barack Obama has already signed its death certificate in 2009, a sign of the end of twenty years of Western planetary hegemony.

Then we come to the G20, the youngest in the series, which can claim the credit for finally combining the emerging powers of the XXIst century (China, India, Brazil, etc.) with the old powers of the XXth century. It is, for now, its only claim to fame because its first three summits (November 2008, April and September 2009) have, in fact, produced nothing tangible on basic problems such as the replacement of the US dollar as the international reserve currency. Our Western leaders, principally Gordon Brown and Nicolas Sarkozy, have entertained the gallery with their thundering declarations on tax havens and bankers’ bonuses. The most important tax havens (clustered round the City, like the Channel Islands and round Wall Street, such as Delaware) are not affected. As regards the others they sign "transparency" agreements with one another to have their names removed from the black or grey list. Bankers' bonuses have already been bypassed by a whole host of processes including payment for consulting services for deserving traders ...

The major weakness of the current G20 is that it remains fundamentally dominated by leaders coming from the world that is collapsing before our eyes. Nearly two-thirds of them belong to the Western bloc or are leaders who depend on it to stay in power. This situation is not really conducive to questioning the very foundations of this crisis that affects the functioning of the Western model of these last few decades. The EU, or rather the Eurozone, would be the only one able to tip the balance of power between the « world before » and « the world after » but for the moment, as its leaders are totally subservient to Washington, it blindly follows the United States and prevents any fundamental questioning within the G20. However, there is a simple option which enables Europeans to get global governance out of the impasse in which it currently finds itself, namely to actively participate in one of the upcoming BRIC summits of which the first was held in June 2009 at Yekaterinburg in Russia. The Western press has been remarkably discreet on an event nonetheless decisive on the world geopolitical landscape not so much for the decisions taken because there were none, but for the fact that it managed to take place despite fierce opposition from Washington who couldn’t even send an observer.

Indeed the loss of power in a group is measured by the inability of the leader to prevent the other members meeting and discussing things that do not favour him. Nobody doubts that if these four countries met, it was not to help the United States maintain its global influence or to extend the Dollar’s global reign. In any event, the mere proposal from the EU, the Eurozone, or even just France and Germany together, to participate in one of the BRIC summits between now and 2014 would constitute such a swing gauge of the world order that it would immediately become a factor for change in itself, a messenger of a new direction of world affairs. And it is really guidance that the world needs when all the familiar landmarks disappear. This step is inherently simple, but it can only be decided upon by skilled leaders65 with an historic vision of their responsibilities. In other words, it is unlikely we shall see such a thing happen with the current European leadership.

65 Because the pitfalls are numerous, especially in the EU where the UK will do everything to ensure that this initiative fails or is diluted in a « Western », « Transatlantic » context, which would deprive it of any added value to help transform global governance. Not to mention that it would especially make European participation in a BRIC summit impossible.




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Strategic and operational recommendations - Anticipating the consequences of entering the austerity phase

Once again, may we remind you that our advice is not for the purposes of short term speculation, not aiming to make more money, but rather to lose less (or even none at all) because in the midst of asystemic global crisis, it is the only realistic objective.

. Savings: The danger of products targeting Western middle classesOn a general basis, for over two years LEAP/E2020 has advised savers to be wary of investments whose profitability depended on states’ fiscal goodwill (such as life insurance for example, or the various « attractive » stock market investments offered by the banks). The entry into the austerity phase, in Europe and, likewise, soon in the United States, will result in a sweeping desire of states to grab all the money they can to fund the reduction of public deficits. Even the « solemn » promises not to increase taxes are only state lies: tax havens, indirect taxes, social charges, and finally direct taxation... all these taxes will increase in coming quarters. And this is particularly true for financial products targeting the middle class because they appear to be the most productive target and the least able to protect themselves against tax demands. They are the most profitable fiscally and will be treated as such in Europe as in the United States and Japan.On this occasion, we recommend especially not to invest in these products and to seriously consider disposing of them if possible to limit losses.At this stage, gold (and other precious metals) or real estate as a long term investment, or to live in it, seem more appropriate.

. Stock exchanges after stagnation will trade downwards againIn addition to the ongoing damage to the fiscal benefits of stock exchange investments, our team believes that stock exchanges will face a new period of downwards trading because they are going to have to simultaneously contend with the disappointment of the United States returning to recession (not priced in at current stock market levels which have remained stagnant for nearly a year despite the support provided by zero interest rate liquidity), a poor understanding of the consequences of austerity in Europe and, of course, a total unpreparedness for the consequences of upcoming austerity in the United States. The road leading to this US austerity will, in any case prove to be very turbulent and cause side effects whose interactions that our team does not pretend to understand as they are in the domain of « never been seen before »: foreign currencies, stocks, bonds, ... will, in the short-term, be affected suddenly and unpredictably by this event. No doubt that for professional speculators it is a promise of attractive risks but, because of this, it is an incentive to prudence and stock market abstinence for all others. The Asian stock markets of emerging nations have no reason to be saved from these developments.

. Gold: A haven with conditions attachedThe gold price continues to hit new highs, confirming our recommendation which we have been making for nearly three years. Therefore, we repeat that one must at all costs position oneself in physical gold (and not paper/gold certificates - see previous GEAB issues on this topic). At the same time we must closely monitor the two developments that can disrupt the gold market namely, on the one hand, the question of the true amount of United States’ gold reserves, a topic that should become more central as increasing Fed setbacks continue and with Washington paralysed post after 2010; and, on the other hand, the entry of the United States into a period of « official » austerity" could have unpredictable consequences on the gold market at this stage as well as others.




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. Currencies: A new storm on the horizonThe Euro has clearly started its ascent again versus the US dollar, far from the parity of 1€ to 1$ heralded by the international financial media last May. It will continue in the coming months because the United States’ fall back into recession will reinforce the general downward trend of the US currency. A reminder here on this subject that the US dollar is at historically low levels relative to Asian currencies and most of the currencies of the major emerging nations: its structural decline has not been interrupted by the « surreal episode of the Greek crisis ». The UK Pound will have a rendezvous with its crisis a little later than we thought, rather in October / November than in the middle of summer 2010 because the rating agencies and other international financial media were satisfied with the new government’s intentions. It is unlikely that it can do the same when the programme’s execution comes face to face with the economic, social and political realities of the country a few weeks from now, when departments will have to announce who and what will be affected by the deep budget cuts. But, as noted earlier in this issue, expect a return to the theme of the Euroland crisis at this very moment to try once again to hide the United Kingdom’s and United States’ difficulties. A reminder on this subject, London and New York completely dominate the world currency markets with respective shares of 36.7% and 18%, (Tokyo is only third with 6%)66. This privileged position does not prevent strong trends imposing themselves, but allows these two markets a great deal of space for tactical action to slow the process or muddy the waters for a few quarters. And to believe they wouldn’t do it would be naive. That said, the same trick doesn’t work more than once or twice. Bear that in mind!

66 Source: MarketWatch, 00/01/2010




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http://www.marketwatch.com/story/daily-currency-trading-turnover-hits-4-trillion-2010-09-01?dist=beforebell

4- The GlobalEurometre 67

September 2010 GlobalEurometre - RESULTS

GlobalEurometre 09-2010Yes%

No%

Don’t know

%1. Do you think that Eurozone economic governance will be established by the end of 2010?

18 (51)68 63 19

2. Do you feel that your country’s government is reflecting your people’s expectations regarding European construction? 2 97 (94) 1

3. Do you think that anti-democratic forces are on the rise in the European Union? 99 (52) 0 1

4. In the coming months, would you change your Euros for one of these currencies: US Dollar, Japanese Yen or British Pound? 3 96 (95) 1

5. In the coming months, would you change your Euros for gold? 40 51 (44) 96. Do you think that the European Central Bank will start increasing its main interest rate in the coming six months? 7 85 (58) 8

7. Do you think that inflation is back in your country? 49 46 (63) 58. Are you afraid of losing your job in the coming months due the global crisis? 21 66 (55) 13

9. Are you afraid of losing money in the coming months due to the global crisis? 80 (78) 18 2

10. Do you think that the US Dollar will collapse against all major world currencies in the coming months? 56 (54) 17 27

11. Do you think that the US can avoid implementing austerity measures in the coming months? 0 81 19

12. Do you think that Western public debts will trigger a new phase of the crisis in coming months? 81 (95) 12 7

13. Do you think that the UK is being engulfed into a simultaneous political, economical, budgetary and monetary crisis? 76 (97) 6 18

14. Do you see concrete signs of economic improvement in your country? 19 80 (87) 1

15. Are you afraid of social and political unrest in your country? 88 (59) 12 0

67 Each month, GEAB surveys a panel of 200 European pollsters68 In blue, last month’s result




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September 2010 GlobalEurometre - ANALYSIS

EU Governance: A majority believing that Eurozone economic governance of will not be put into place between now and the end of 2010 / A slight increase in the large gap between people's aspirations and EU leaders’ actions / A very strong rise in the majority believing that anti-democratic forces are gaining momentum in the EU / A surge in the majority now believing that the ECB will not increase its main interest rate in the next six months / A new reversal of the majority believing that inflation has returned to their country / Growth in the majority not fearing loss of employment because of the crisis / A stable majority fear losing money due the global systemic crisis / A slight drop in the vast majority noting an absence of improvement in the economic situation in their country / A very strong increase in the majority worried about social and political unrest in their countryWe are witnessing a reversal of the majority concerning the possible implementation of Eurozone economic governance between now and the end of 2010 : 63% now think that this will not happen versus 51% who thought otherwise last June. A probable sign of disappointment on this subject, the very large, traditionally discontented majority concerning the action of European governments compared to their people’s expectations has now reached its highest with 97% dissatisfied (against 94% in June). We are also seeing a near-doubling of the majority believing that anti-democratic forces are gaining strength in the EU (99% against 52% last June). Thus, we note the confirmation of our hypothesis of a reversal of the downward trend of this viewpoint, especially after the results of the Belgian and Dutch elections. There is now a very strong majority of respondents judging that the ECB will not increase its main interest rate in the next six months (85% against 58% in June). There is a new reversal of the majority regarding inflation: those who think it has returned are, once again, in a majority (49% against 53% in June, who thought that it hadn’t), but the issue remains undecided since 46% think the opposite. The pendulum effect of month on month inflation tells its own story: Europeans cannot decide whether or not inflation has returned... which would suggest that a phenomenon more complex than the price index is at work (see this subject in this issue).This month the fear of loss of employment has fallen again with 66% of respondents not worried (against 55% in June). The fear of losing money because of the continuing crisis, in contrast, remains at a high level since the proportion of people claiming to be worried over this issue remains at 80%. The recovery continues to remain invisible to the vast majority of Europeans, even if that majority has settled a little: 80% (against 87% in June) of respondents still do not see any sign of economic improvement. The majority worried over the possibility of political and social unrest in their country has also seen a very significant increase: those who fear such a development once again becoming a very large majority (88% against 59% in June).

EU/Rest of the world relations: No change in the big majority preferring to keep Euros rather than $ and ¥ and £ / Rise in the majority of Europeans do not want to convert their € into gold / No change in the majority expecting a US Dollar collapse in the coming months / A very large majority believe that the US cannot avoid adopting austerity measures in the coming months / A fall in the majority believing that public debt will trigger a new phase of the crisis / A decrease in the majority feeling that the UK is sinking into a widespread crisisAt 96% (against 95% in June), there is no change in the vast majority of Europeans who prefer the Euro to the US Dollar, Japanese Yen and British Pound and would not exchange their Euros for those currencies. This confidence in the Euro is also marked in its relationship to gold. Thus, there is now a majority of respondents preferring to keep their Euros rather than exchange it for gold (51% against 44% in June). With 56% of respondents (against 54% in June) expecting a collapse of the US Dollar in the coming months, there is a steadying of opinion about the fate of the U.S. Dollar. At the same time a very large majority estimate that the US will not be able to make savings through austerity measures in the coming months (81%). A similar percentage (down from June) hold the belief that Western debt will generate a new phase of the crisis. Finally, there is a decrease in the majority of respondents who believe that the United Kingdom is plunging into a widespread crisis (76% against 97% in June).




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5- Special announcements for our subscribers

Participate to the Political Anticipation Academy!Cycle 2010-2011

Paris-Amsterdam-Frankfurt

A training for GEAB subscribers onlyThere are 2 places left in the French seminars and 5 in the English ones!

Subscription deadline: October 15th, 2010

Since September 2009, LEAP has developed a training offer to Political Anticipation, the original method at the core of its analyses. After a pilot-year, the format has been defined as follows: 3 days of training along the year, designed for two groups from 10 to 20 people: one in French, the other in English.

PROMOTION 2010/2011 - "The consolidators"

The second series of training sessions will have two specificities compared to the pilot year:. it will be proposed in both French and English. it will take place in 3 different European cities.

The previsional calendar of this second series is the following:

Day 1: Paris, November 22 (French session) & November 24 (English session), 2010Detailed presentation of LEAP’s political anticipation method - Debates

Day 2: Amsterdam, February 07 (French session) & February 09 (English session), 2011Presentation of retro-anticipation drills (3-5 pages) by the participants - Teaching comments - Debates

Day 3: Francfort, May 23 (French session) & May 25 (English session), 2011Presentation of anticipation drills (3-5 pages) by the participants - Teaching comments - Debates

Only the participants who follow the 3 sessions and write the two requested anticipation drills, receive a Certificate at the end of the cycle.

IMPORTANT: The training sessions are for GEAB subscribers only (GlobalEurope Anticipation Bulletin), this publication of LEAP being a common basis essential to the training’s efficiency.

LEAP has decided to democratize its training offer – cost: 600 Euros for the three sessions (including participation to the three sessions and one lunch per session) / Travel, accommodation and other costs are for the participants.

Selection: by written application - numerus clausus.

People interested should contact Valérie Thibault: [email protected]




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