Sat, 20 Jul 2013 12:53 CDT
I don't mean to put a damper on the everyone's summer holidays, but the current heatwaves in the U.S. and Europe has me thinking back to numerous warnings issued during last summer's major drought and "record-breaking heatwave" in the U.S.
Analysts at Rabobank, a Netherlands-based bank specialising in food and agri-business financing, were crunching the numbers and predicted at the time that food prices, specifically meat prices, would soar in 2013 as a result of the U.S. drought.
Back in 2011, the New England Complex Systems Institute (NECSI), a research body of academics from Harvard and MIT, using data from the UN Food and Agriculture Organization's (FAO) Food Price Index, published a paper that correlated "outbreaks of unrest" in 2008 and 2011 with increases in food prices. They claimed to have identified the precise threshold for global food prices that leads to worldwide unrest: 210 points...
Yaneer Bar-Yam, president of NECSI and one of the paper's authors, said:
The aggregated FAO Food Price Index averaged 211.3 points in June this year, but more telling indicators might be their June 2013 Cereal Price Index, which averaged 236.5 points, and their Sugar Price Index, which averaged 242.6 points. Dairy prices are also riding above this 210 threshold, so when we consider that most people's diets are substantially based on sugar, cereals and dairy, followed by meats from cattle raised on grains, it seems pretty clear that we're very much in the danger zone.
In fact, the NESCI paper, 'The Food Crises and Political Instability in North Africa and the Middle East', went further and forecast the highest risk of global unrest for August 2013.
Compounded by speculators in the commodities markets "making a killing" on the food crisis, prices for staples like corn and wheat rose nearly 50% on international markets last summer. The Organisation for Economic Cooperation and Development (OECD) predicts that rising global food demand will "push up prices 10 to 40 percent over the coming decade" [that is, between 10 and 40 percent higher than their current highs].
Meanwhile the UN has warned that world grain reserves are so dangerously low that "severe weather in the U.S. or other food-exporting countries could trigger a major hunger crisis in 2013."
'Green guru' Lester Brown, president of D.C.-based think-tank, the Earth Policy Institute, says the climate is "no longer reliable" and that demands for food are growing so fast that a breakdown is inevitable:
Here's what Abdolreza Abbassian, a senior FAO economist, had to say about the global food crisis last year:
Yes, that means there's no room for unexpected events this year (2013).
China, normally the world's second largest surplus exporter of wheat, just this week announced that it will be importing wheat from the U.S. this year, following major crop failures resulting from the northern hemisphere's record-breaking cold, wet spring.
But the U.S. isn't faring any better, with the 2012 drought extending into this year and condemning the growing season before it even started. Far from producing "no unexpected events", 2013 is producing even wilder weather extremes than ever before.
Buckle up: we're in for a rocky ride...
Today’s AM fix was USD 1,326.75, EUR 1,007.10 and GBP 864.84 per ounce.
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Tara Clarke writes: or months now, we've been harping to our readers about why cybersecurity is one of the absolute best investments you can get involved with right now.
“The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world.” – Thailand Deputy Prime Minister Olarn Chaipravat in an interview with Bloomberg
“An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis.” — People’s Bank of China (2009)
It should go without saying that China and Russia have designs to end the U.S. Dollar hegemony free ride. This is fundamental to understand and will be a game changer. The impacts on the standard of living of these players will be profound and especially negative for the U.S. How and in what manner this plays out is the question. I strongly believe that the answer lies in two parts: letting the U.S. put a noose around its own neck and then at the appropriate time, kicking the chair out from under it.
The first part of the operation is now advanced and is described below. The second part involves China and Russia preparing its relative currencies to be accepted in lieu of dollars. It means making the yuan and ruble at least equal to, if not superior to, American dollars in world trade. As you can imagine, the U.S. — a country with a debt-to-GDP ratio approaching 110% — can ill afford this sort of challenge to its status as a reserve currency.
China has already advanced the Yuan as a principal exchange currency by incorporating a series of deal with other countries. Such arrangements are hardly mentioned by U.S. financial media, but they are going on constantly. So far, the People’s Bank of China (PBOC) has signed nearly 2 trillion yuan worth of currency-swap deals with 20 countries and regions, including Hong Kong. Here’s a breakdown of happenings:
- Earlier this month, the European Central Bank announced a large currency swap arrangement with China. 
- An Asian ”renminbi bloc” has been formed involving seven countries.
- Russia, Iran, Angola, Sudan and Venezuela have converted oil sales to China into the Chinese Yuan. Worldwide, we see more than 5 million barrels per day traded in Yuan rather than U.S. dollars.
- Thechinamoneyreport.com  on June 16 reported RMB-yen trade is growing strongly a year after launch.
- BBC News, April 9: “China and Australia in Currency Pact “
- BBC News, Feb. 22: “UK and China Poised for Currency Swap Deal “
- BBC News, March 26: “China and Brazil Sign $30bn Currency Swap Arrangement “
- Thechinamoneyreport.com  on June 4 reports that Singapore has launched a Yuan clearing service.
- Although ignored in the U.S., there has been increased chatter among foreign media about the RMB (aka Yuan) reaching safe-haven, reserve currency status, as Asia Today  reported on July 22.
I suggest that the kicking the chair out from USD hegemony involves at least partially backing the Yuan, and Ruble for that matter, with gold. China’s reserve assets were 30.2% of the world total at the end of last year. How much of this is already in gold?
China is secretive about the number, I think it’s because it had some catching up to do and it’s incorporating Sun Tzu-style principles, namely deception. The last time China revealed its gold reserve levels was in 2009 at 1,054 tonnes, which caught the market by surprise.
Another reference point is that China’s foreign exchange reserve increased from $2.2 trillion in 2009 to $3.4 trillion today. During that period, U.S. dollar reserves held by China fell from 69% to 54%. If only 10% of that $1.2 trillion increase went to gold, then let’s see … At an average price of $1,200, that would be nearly 3,000 tonnes, bringing China’s total gold holdings up to 4000 tonnes. Conventional wisdom would point to between 3,000 and 4,000 tonnes. The U.S. supposedly has 8,133 tonnes in its reserves. Russia has doubled its gold reserve in four years.
China’s mines produce an average of 350 tonnes per year. During the last four years, it has produced 1,400 tonnes. Certainly, its domestic production went toward its reserve. Production estimates for 2013 are 440 tonnes. It should be noted, however, that from 2002 to 2009 China had produced approximately 1800 metric tonnes of gold, which strongly suggests that its figure of 1,054 tonnes for 2009 is understated and deceptive, maybe by a factor of two to three times.
Between 2011 and 2012, imports into China via Hong Kong surged to a total of 950 tonnes. Some, but possibly the majority of this ended up in gold reserves. Furthermore, no one talks about “illegal” gold imports smuggled into China, which may add to the total.
This year, the gold grab has reached entirely new levels, no doubt just one of the “unintended consequences” of the gold short attack in the paper “market.” In the first five months of this year, China imported more than what it did for all of 2011, or 525 tonnes.
Another incredible number is the volume of ounces transferred out of the London bullion market (LBMA) in May. That month alone it increased to 28.2 million ounces. To put that in perspective: 28.2 million troy ounces translates into 877 metric tonnes of gold. The amount of physical gold delivered year to date on the Shanghai Gold Exchange is 1,198 tonnes. Again, it’s much more than one would expect of the appetite of institutions, banks and individuals. The “Chinese granny” investor story is overplayed and may be a bit of a decoy. Much of this are PBoC and their proxies.
In 2009, a Chinese state council adviser known simply as “Ji” said that a team of experts from Shanghai and Beijing had set up a task force to consider expanding China’s gold reserves. Ji was quoted as saying, “We suggested that China’s gold reserves should reach 6,000 tons in the next three to five years and perhaps 10,000 tons in eight to 10 years.”
The numbers I’ve cited are consistent with China easily reaching the Ji gold holding of 6,000 tonnes this year. The kind of withdrawal numbers being reported out of the LBMA, Comex and GLD (418 tonnes YTD) suggest that the PBOC through it’s proxy, the State Administration of Foreign Exchange (SAFE), is involved in a physical gold raid of such magnitude that the 6,000-tonne target has been left in the dust. The great gold sale has facilitated a push heading closer to 10,000 tonnes.
More importantly, as long as gold prices remain suppressed, China will continue to be a large-scale buyer. Perversely, if gold prices remain low, it will serve to accelerate the timeline for China to take down USD reserve currency hegemony. The U.S. can ill afford a China gold reserve buildup of 1,000 tonnes or more a year, let alone raid 2,000 tonnes and at cheap prices.
Meanwhile, China reportedly is progressing well on its ambitious plan to recast large gold bars into smaller, 1-kilogram bars on a massive scale. The big gold recast project points to the Chinese preparing for a new system of trade settlement. In the process, they are constructing a foundation for a new gold-supported monetary system that will give them advantages to their trade payments.
Finally, higher gold prices are necessary if the U.S. wants to curb China demand and prevent an emperor-wears-no-clothes scenario on the home front. You see, once yuan becomes a currency fully backed by gold, the next logical step will be not just domestic but international pressure on the U.S. and others, like Germany, to lift the iron curtain and reveal whether the gold they claim backs their currency really exists. Then get ready for all hell to break loose.
Jul 22, 2013 - 06:27 PM GMT
Ever wonder what Bernanke is saying? Well, it boils down to this: at the same time that Jimmy Carter says the US doesn't have a functioning democracy, Ben Bernanke says the US doesn't have a functioning economy.
Unfortunately, people understand what Carter says, though they may not agree with him, but they do not understand what Bernanke says, and that has nothing to do with agreeing with him or not. Moe likely it has something to do with the illusionary oracle qualities once attributed to his predecessor Alan Greenspan, whenever no-one had a clue what he was saying. In reality, Ben Bernanke will turn out to be the biggest scourge on American society since the same Alan Greenspan, but that's not how he's seen; instead, just like Greenspan, he's idolized. What's wrong with this picture is that Bernanke's words and actions are interpreted in the press exclusively by people who live in the part of society that stands to profit from them, let's call it "the financial world". That they are but a very small part of society easily gets lost in translation.
Greenspan was and still is mostly regarded as a miracle worker of super-human intelligence, even though he ran the US straight into the recession/depression/crisis we've now been witnessing since about the day when Bernanke took over the Fed, February 1 2006. Greenspan set the American economy firmly on the road to ruin through his support of the Glass-Steagall repeal and various tax-cuts, as well as his insistence that the newly blossoming derivatives trade needed little or no regulation. Certainly in hindsight, it should be obvious that Alan Greenspan served the interests of Wall Street, not Main Street.
All Ben Bernanke has done since succeeding the Oracle is continue where the former left off. Not that you would know it from the picture the media paint of him. Or the president, for that matter. Just about everyone agrees that he saved the US from something like a Great Recession II. In reality, what Bernanke has done over the past 6.5 years is being a prominent player in aiding and abetting Wall Street banks in hiding their losses through the violation of accounting standards, declaring them Too-Big-To-Fail, and then handing them trillions of dollars in public funds, most recently through QE programs, thus enabling them, the very same banks that would no longer exist without public funds, to once again play the casinos and come up with near record profits and bonuses.
This is the great little scheme that is presented to you through the media as "saving the US economy". It has done no such thing. It has been, and still is, enormously harmful to the economy. But as long as you continue to believe that what's good for Wall Street is also good for Main Street, the trick will continue to be played on you; Ben Bernanke is giving free money (well, actually, credit) away to those whose interests he represents, the banks, and taking it from those he doesn't, you. What Bernanke has saved is bankers' bonuses, not the economy. And if there is a direct correlation between the two, it's not the one you're being tempted to think it is. Which is how you should interpret Bernanke's insistence before Congress on July 17 that "We're very focused on Main Street": it may be true, but not in the way he wants you to believe it is.
Here's how Bernanke said the US doesn't have a functioning economy: by choosing to continue QE, he would reveal how weak the US financial system is. He already has, obviously, first by starting up QE in the first place, and again by his recent backpedaling on the conditions for tapering. The worst wet dream of the big banks is that they wouldn't get their black jack chips for free anymore, and they manage to convince everyone that the real economy would go down if they can no longer play. Regardless of the details: if it needs free money, the financial system can't stand on its own two legs.
By choosing to halt QE, on the other hand, Bernanke would reveal how weak the financial system is just as much. The slight rise in available credit that has allowed Americans to add yet more debt towards home and automobile purchases, giving the economy a fleetingly rosy glow in the process, would be over in a heartbeat. The banks would sit on their QE free excess reserve giveaways parked at the Fed even more than they already do. And then use it as security for more leveraged high-risk wagers. That's where the money is, not in consumer loans. Don't worry, says Ben, we'll keep interest rates low for the foreseeable future. Hossanah, sings the entire choir. But interest rates for whom? Only the big banks, that's for whom. Rates on the street, not so much: he has no control over those.
Here's an example of Bernanke's effect on Main Street: debt has been rising, not falling, since debt plunged the markets into that deep dark pit. A graph I picked up here at Zero Hedge:
Is the new and additional debt at least put to good use for American society? The answer is a resounding "no". Just take a look at the diminishing productivity of debt in the US. Which, as is evident from these two graphs, will soon turn into negative territory, if it isn't already there.
Here's another example of how Bernanke is killing Main Street, courtesy of Chris Turner at Zero Hedge:
The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them. Consult the chart below to see a historical relationship between total savings and amount of interest income earned on the savings.
Note that prior to 2001, as savings increased (blue line), interest income received increased (red line) proportionally. However, after 2001, the interest earned stopped increasing. The green line shows the effective interest paid on interest bearing accounts.
Scaling into the shaded area representing 1986 to present, the following chart depicts the actual Fed Funds rate determined by FOMC.
Let’s apply some thought experiments and make a couple calculations – what would happen if the FOMC were removed and the Fed Funds rate “floated?” Using average historical rates from the 1920’s for the 10 year note– the mean rate would sit around 5.82%. With a floating Fed Funds rate, banks would be competing for money and providing responsible savers with some interest income. Voila, a calculation is borne:
The final chart above makes a loud and clear statement toward the beneficiaries of the low interest rate environment.
"Very focused on Main Street" indeed. It's where (through QE) newly found and fangled bank profits come from. As per the very first - Change in Debt - graph, household debt has gone down (though that's largely due to falling real estate prices, in other words, a double edged coin), but so have savings. And not a little bit either. Americans lost $10.8 trillion. And counting.
So how does the Oracle 2.0 explain it all? From Bloomberg, July 10:
"Highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy," Bernanke said yesterday in response to a question after a speech in Cambridge, Massachusetts.
The numbers don't add up to that. If it's what's needed for the economy, that economy is in very bad shape, and has been for a long time despite the same highly accommodative monetary policy. If the economy is the goal, it makes no sense to keep going or even double down. What Bernanke's saying he's aiming for is not what's needed for the economy, but for the financial system.
........ the minutes showed many Fed officials wanted to see more signs employment is improving before backing a trim to bond purchases known as quantitative easing.
The fear of course is that the very moment they ease bond purchases, stock markets plummet and, with a short lag, unemployment will start rising again. Any positive effect of QE on employment is not backed up by numbers, other than people believing the illusion that it makes the economy better. But that's a fleeting illusion which depends on both their belief and continuing QE. Take either of the two away and you're holding an empty bag.
Bernanke said the central bank is trying to communicate its plans for two different policy tools. With bond purchases, the Fed is "trying to achieve a substantial improvement in the outlook for the labor market in the context of price stability. We’ve made progress on that but we still have further to go," he said.
The Fed wields another policy tool with its benchmark interest rate, which it reduced to close to zero in December 2008. Officials have said they won’t consider raising the main interest rate until the unemployment rate falls to 6.5 percent, as long as long-term inflation expectations don’t exceed 2.5 percent.
We're approaching nonsense territory here. We've already seen that years of low interest rates and bond purchases have not raised the velocity of money in the US economy. For the US economy and labor market, QE has been a total and unmitigated disaster, and a hugely expensive one to boot. For the financial system, though, it's been an unbelievable behemoth of a windfall.
Sure, unemployment has fallen a little, because most people still believe that a higher stock market is positive for the economy. But if it rises only if and when promises are issued for more and continuing free giveaways for the banking sector, that can then remain in accounts with the Fed and not get into the real economy, then a higher stock market is perhaps a symptom of an increasingly sick economy, not a healing one. It's like banks announcing great profits, that directly reflect nothing but those same giveaways. A profit would seem to indicate something has been sold for more than was paid for it, because of added value. That is obviously not the case here. Without free credit, there would be no "profits" in the banking sector.
"It may well be sometime after we hit 6.5 percent before rates reach any significant level," Bernanke said. "So again, the overall message is accommodation."
Well, no. If and when only, at best, one in every 7 dollars in QE has any influence on the real economy at all (the estimate is 86% is in banks' reserve accounts with the Fed), then QE is a failed policy. From the perspective of the economy, at least. For the banking sector, it's an entirely different story. People keep on thinking that what is good for the banking sector is good for the economy as a whole, but the recent graphs prove that this is not true. That should be end of story for QE, but Bernanke's oracle talk apparently still is too convincing; the general optimism bias trumps reality. Bernanke claims he's accommodating the economy, but he's not, he accommodates Wall Street.
The 59-year-old Fed chief said the FOMC may opt to hold interest rates near zero even after unemployment reaches 6.5 percent due to the possibility of low inflation.
And, apparently, he'll keep on accomodating Wall Street, even if enough waitressing, greeting and flipping jobs that don't pay enough to feed yourself let alone your family, but still count towards official jobs numbers, can be created to lower the unemployment rate to 6.5%. Why? Deflation. Or as he euphemistically calls it: low inflation. Bernanke paves the way for endless QE (breaking his own former promises, but he's leaving anyway). Why endless QE? Because without it, the US banking sector AND economy would collapse in a heartbeat. That's what it means when markets rise as fast as they do just because Bearded Ben announced what he did. It means there are no other prospects for profits. Or that the banks don't have to go looking for other prospects as long as the free stuff keeps flowing in.
Now, whatever powers one may think they do have, it should be clear that Bernanke and the Fed have no control over : 1) Treasury yields and 2) Velocity of money. As for the first, Ambrose Evans-Pritchard has some numbers:
After weeks of utter confusion, the result of Fed taper talk is clear enough. Long-term borrowing rates are much higher across the world regardless whether the underlying economies are in any fit condition to absorb this shock. The rise in 10-year sovereign yields by basis points has been: Japan (25), Germany (35), France (62), UK (63), Norway (63), Australia (66), Korea (66), Spain (70), US (70), Italy (74), Poland (120), Mexico (122), Turkey (131), Brazil (135), and Indonesia (170).
As you can see, the emerging market bloc has suffered the worst hit, especially those countries caught when the tide went out with big current account deficits – the CADs as they are called in the trade. Basically, the whole world has just suffered a credit shock, even as the global economy weakens and the IMF downgrades its forecasts. What a mess.
A rate rise of 70 basis points or more is nothing short of catastrophic for Italy, Spain, Portugal, all in the grip of nominal GDP contraction, and all at risk of surging debt ratios as the denominator effect does its worst. The ECB must take action immediately to offset this "passive" tightening.
Can the US deal with higher yields on 10-year Treasuries? Well, better than Spain and Italy, obviously, but when yields are higher than real GDP (nominal+inflation, perhaps some 2.5% combined today), debt continues to rise. Yields are there already. Add a little deflation and what will the Fed do? QE on steroids probably, a.k.a. more debt. As Ambrose put it:
What struck me about Bernanke's testimony was his comment that the Fed would have to monitor the risk of "outright deflation" closely. "If needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time", he said.
The US will be the least worst horse in the glue factory, but only by the grace of Europe, Japan and China doing even worse. That will not save it from a combination of rising yields and falling inflation and GDP growth, however. And that is a lethal combination.
No risk of deflation, you think? Ben Bernanke does:
Some sources of declining inflation "are likely to be transitory" and expectations for future price increases "have generally remained stable," he said in his prepared remarks. At the same time, "very low inflation poses risks to economic performance - for example, by raising the real cost of capital investment - and increases the risk of outright deflation." [..]
[..] Bernanke said in his testimony the Fed could keep buying bonds for longer if "financial conditions - which have tightened recently - were judged to be insufficiently accommodative to allow us to attain our mandated objectives." Responding to a question, he said the policy makers have succeeded in reducing market volatility that has greeted the Fed’s discussion of tapering. "Markets are beginning to understand our message, and the volatility has obviously moderated," he said.
Well, no. Volatility fell because of the promise of more free money. And that's all she wrote.
Policy makers have tried to assure investors that the Fed will hold down the benchmark interest rate after ending bond buying.
Well, no again. Chances are very real that when the Fed ends its bond buying, yields will rise so fast the Fed will lose control of the benchmark rate.
As for No. 2 above, the Velocity of Money, here's once again my favorite graph so far this year. It's so important in understanding the American economy today, one can't repeat it often enough:
Everyone in America who doesn't work on Wall Street should be very worried when stock markets go up as soon as Ben Bernanke suggests more free credit is available for the world's biggest banks, because everyone who doesn't work on Wall Street will end up paying for it. Instead, everybody's celebrating it. Still, all it is, is a clear and simple sign that the markets are not well. At all.
Americans should demand that Bernanke discuss how he intends to speed up the velocity of money. This should be his no. 1 priority, because without it there will be no recovery, but he doesn't even mention it.
Wall Street banks post huge profits again, and pay huge bonuses. Does that mean they're healthy? No, it doesn't. It only means that they can use excess reserves provided by Bernanke's QE to increase high-risk wagers. Take away QE and then you'll see how healthy they are. And it goes, of course, one step further: Banks can (and will if there's a profit in it) take the advantages provided by the QE excess reserves and use them to bet against exactly what Bernanke purports to aspire to for the real economy. And he'll play innocent, like he never could have seen that coming.
I'm not saying that Bernanke wouldn't like to help out Main Street as well, I'm just saying that it's not his priority, and that he'll gladly help out Wall Street at the cost of Main Street. And will gladly lie about it too.
Ben Bernanke has spent 6 years and change dragging America deeper into the debt swamp, and just about everyone thinks he's brilliant. He must be quite the magician indeed. But as Chris Turner says above: The good news [..] is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.
By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)
"It's hard to make the case that [US stocks are up 17% on a 2.5% earnings rise] based on fundamentals alone - it's money in motion," is how BofA's CIO Hans Olsen describes the unreality occurring in US asset markets currently. He noted in last week's interview with CNBC that Bernanke's experimentation has created asset-inflation "that would make the stock market bubble of 2000 look like a day at the beach. It's really quite remarkable." Critically, as many have noted, he notes "let the market start to price things based on fundamentals again rather than money printing. The sooner we get back to a market pricing, the more sustainable it becomes." What is ironic is that Olsen is overweight stocks in spite of all this - but like everyone else in the status quo - is hoping Bernanke keeps the house of cards from collapsing. Olsen appears to be among the very few career bankers willing to tell the truth - the fear being, of course (aswe showed here ) that it would mean their "skills" are completely meaningless.
'Aggressive tax avoidance'