Currency Watch: Global Currency Crisis developing

The recent rush for the $ has exposed a global currency crisis that seems to be gathering momentum.

So far we have seen Iceland bankrupted, South Korea facing a huge run on the Won, Argentina seizing private pensions, Hungary and Denmark raising rates and general deleveraging in emerging markets.

At the same time even the majors have taken a pounding. In the last 3 months against the $ the Euro has fallen 22%, the Pound 22%, the Aussie 38%, the Kiwi 29% and the Canadian 28%. The latter 3 suffering more because of their links to commodity markets which have also collapsed.Against the Yen just add another 10%.

Those falls are enormous.

The major factors here are:

- Credit issues.

- Current Account position.

- Commodities.

- Interest Rates.

If you have a large current account deficit and huge overseas borrowing (like Australia and New Zealand) then you will struggle given the problems with credit availability. At the same time lower currencies provide an opportunity to reduce those deficits. No more cheap imports for the Antipodeans.

This poses real problems for the US. Although the Yen is taking some of the slack with a major appreciation, a strong $ is hardly what the US are looking for at the moment given their huge current account problems. However we are entering into a situation where there are bigger issues at play.

A full scale unwind of the global currency net position would see surplus countries holding the upper hand. China with its vast $ reserves has plenty of options on the table. There is an interesting analysis on Naked Capitalism with some good links.

The most interesting proposal from Brad Setser at the CFR is for China (and other large $ holders) to diversify their $ holdings and buy assets from other deficit countries. Although its hard to see China doing this it makes sense as part of the eventual rebalancing of currencies and capital that must happen if we are not to see a huge race to the bottom in currency land.

This would help out the US in taking the heat over a resurgent $ and it would take the heat out of the impending meltdown of cross border capital flows. It may even help avert a potential meltdown in the Euro which grows closer by the day.

The era of running big deficits thanks to leveraged debt finance and derivative products is over. The November 15th War Council will certainly push to reform and regulate markets though that bolted years ago and the stable has burnt down.

Other suggestions proposed are:

- A return to a gold backed global currency. This is just fiat in a different form. It has some merit as a stable, hard store of value in which supply is reasonably easy to manage but it has already failed several times in recent memory.

- A commodity/energy back currency. The EBCU proposal by Richard Douthwaite still is a favourite of mine because it links natural resources, climate change and money together. It’s real unlike gold as it connects energy to money and energy is what we are concerned with, in terms of transforming it and using it in our daily lives.

Hopefully all of these approaches will be on the table when our financial “wizards” meet shortly.

In the meantime it will be a case of holding one’s breath and hoping for the best with possible intervention ahead.

At worst expect markets to close and capital controls to be applied.

Abandon ship: Investors Bailout in rush for $

Forget about government bailouts, now its investors that are bailing out. It’s a case of salvaging whatever is left of portfolios now. Hedge funds are unloading anything with liquidity and currencies are taking the strain,

The horrendous spike in LIBOR rates has seen a reverse run on the $. From global pariah to this week’s must have the $ has risen at a rate of knots in the last month against all currencies except the yen, which has been used to fund most of the speculative investment activity. The Aus$/Yen cross rate is down over 40% in 3 months. The Eur/$ rates has fallen 20%. Eur/yen around 25%. These are not emerging markets, these are the main conduits for global trade and when added to stock market moves of between 25-50% one is faced with the realisation that the whole global financial system is at risk.

I wrote recently that at some point global markets will need to be frozen. That may well happen as not just stocks but currencies go into complete meltdown making any form of economic activity almost pointless.

The recent wholesale and blanket guarantees of bank deposits and lending in many countries have just added to the general lack of confidence in the global financial system.

Added to this commodities have collapsed in price also as that speculative bubble is popped. Even gold, something one would consider in the current situation, has fallen, over 20% in the last few weeks.

Nothing makes much sense at the moment except that the unwinding of years of excess is both savage and yet unpredictable.

One can only hope that somehow the markets can stabilise but the lower it goes the worse it gets as the spiral of margin calls increases and investors seek to recoup whatever they can. It’s probably not the time to sell but at the moment cash is king.

And surprisingly the king of cash is the $…….for now.

Financial Permaculture: Think Global, Invest Local

These days I get asked by a lot of people where they should invest their money. It’s a good question given uncertain times. Not only are we experiencing a traditional recession but there are concerns about the actual financial system itself.

This in turn has led to a somewhat deeper examination of money itself: its construction, process and ultimately its value.

Personally I’ve been in cash for the last 18 months having sold out of commercial property investments. Now, as interest rates are cut heavily and our banking system is on its knees, cash doesn’t seem as appealing as an investment class.

What if rates continue to fall? What if new rules are introduced such as limits on withdrawals, foreign transfers, currency trading etc? What if interest is frozen, bonds converted to equity and so on.

Gold is often mentioned as something useful to hold. I’m not a big fan of it myself but it’s likely to be worth something at some point so does have some holding appeal.

What I’m most interested in at the moment is investing locally. This could mean sticking in a decent veggie patch (if you have the space, which fortunately in NZ we do). How about investing in renewable energy for the home, solar heating, a wind turbine, battery pack etc? Normally its a bit upfront payment but at least you know you’ll be getting a decent return in KwH rather than cash.

But also investing in local food systems, local infrastructure or local transport. These all appeal because they can provide a return, real or cash,  and they keep cash circulating locally, which keeps people employed and boosts confidence in the community.

It’s an opportunity for local councils to get involved as they are struggling to riase cash at the moment given the rush into government guaranteed bank deposits. Many people talk about sending money overseas as they are worried about the falling NZ$ or whatever your local currency is. I say be careful. If you can’t access your cash in person then you have a much higher risk profile. Foreign cash deposits can be the first items to be frozen when new rules are applied. If you are worried about currency risk you can always do a forward currency trade with your bank or hedge through an online fx company.

There are some useful websites about this including, of course, Financial Permaculture as well as Catherine Austin Fitts at Solari. If readers have any useful links or ideas on this please let me know.

Kiwibank: Its all ours

New Zealand is fortunate to have its own state backed (sort of) bank in Kiwibank. Promoted by Jim Anderton (who quietly understands the money system) it has come centre stage in the recent financial crisis.

With its NZ Post guarantee it had attracted huge funds from worried savers over the last 12 months. Now that all bank deposits have been guaranteed it is perhaps less attractive. Until today.

Winston Peters, the enfant terrible of NZ Politics, today proposed that Kiwibank handle all government business.

What a great idea. Why continue to pipe $4lbn odd in profits to the Australian banks?

Having domestic control of your monetary system is an absolute prerequisite for a properly functioning sovereign state.

Colonial invaders always replaced the local currency with theirs as soon as local administration was in place. Currency issuance is all about control.

If someone else is in charge of your money then you have limited control over the functioning of your economy.

I suggested in June 07 that the RB use the opportunity of the high NZ$ to buy as much foreign currency as possible whilst the market was hungry for NZ assets. Now with the NZ$ around 0.60 and our overseas borrowing binge fully exposed, the situation is less than favourable.

The lessons of Iceland show that sovereign control of the money supply is essential and as part of that a strong domestic banking system is a necessity.

New Order

Blue Monday

Just watching Bush, Sarko and some other bureaucrat from the EU announcing the coming of the new order or is it a new new order. Forget Black Monday its all Blue from here.

Actually they are right. Bretton Woods created US dominance in financial matters to go along with their dominance in military affairs. Whilst Keynes argued for a system of balanced trade the US saw an opportunity to sell the world US$ which they could print for nothing. The seignorage accruing to the US has been the backbone of their economy for 60 years and those holders of US$ and US paper must be wondering how they got sucked in so badly.

I enjoyed Sarkozy saying everyone would be part of developing a solution…..it’s amusing to watch Bush and Sarkozy together. The clash of cultures is stark and it will be interesting to see how this global summit develops and more importantly who gets to set the agenda.

One thing is for sure: leverage is history. The financial markets will shrink and exotic products will become a relic of a distant past. It will be back to basics like borrowing to create and produce rather than borrowing to invest in a synthetic financial product. The fall out from the contraction of the financial markets will be severe. Unemployment will rise not just in the financial industry itself but in all the industries that service it. Asset values will fall. How can property prices rise when the supply of money is contracting?

Of course the one issue I am looking to see on the table is who creates the supply of money: will it be banks once again creating loans deposits at will or will it be sovereign nations supplying money into the banking system to be lent out or supplying it direct to citizens as a basic income.

This is the crucial issue.

Will the sovereign right of Parliament be reasserted for the first time in over 300 years? No one remembers William of Orange but in 1685 his overthrow of the Stuarts, aided by European bankers, laid the foundations of modern banking.He gave away Parliament’s right to create money and placed it in the hands of the bankers.

Plus ca change.

But the time of change is upon us.

Nationalise money not banks

The flurry of raised hands for bank guarantees from central bankers and treasury ministers around the world fails to convince me we are out of fire. Certainly guaranteeing interbank lending is helpful as the pipes are well and truly frozen in that part of the monetary world.

The global banking system has now been underwritten, guaranteed and in some cases nationalised completely. There is no surprise in that course of action as it was all they could do. Whether they take stakes in, takeover or buy preferred stock makes no difference. Now they have bought some time we will have to wait and see how it pans out. The underlying problem remains the same though.

They have not addressed the difference between money and credit.

Money is what the sovereign authority issues. This carries no interest burden which is a future claim on goods and services yet to be produced i.e. drives the growth imperative.

Credit is what banks issue based on deposits and “other types of capital” that are in the bank. This carries interest. Credit makes up 97% of the money supply. Credit is treated as money although laws are very clear that only sovereign authorities can create money.

Confused?

There is a strong argument to say that bank credit is fraudulent money. I digress.

Instead of supporting the credit creation system we need to support the money creation system. It’s that simple. Let me be clear: banks do not lend out your deposits. They use your deposits as collateral on new loans.

Take Kiva, my favorite microfinance outfit: I deposit $25, find a borrower and lend them the money. My $25 is gone and i have to wait for it to be repaid. That is true lending. Think of it as investment.

Bank lending is garbage.

The answer is to nationalise the supply of money and remove the interest burden at the point of creation. I think this is likely to happen at some point as governments run into difficulties with their guarantee schemes.

We will need a new monetary authority who will issue new money into the economy and monitor the supply of money in the economy at any given time.

Only then will we be able to build a genuinely productive and healthy society and economy.