The World Economy and its failure to fight the CRISES “MONSTER”

Today the governments like the Russian one and USA, which have together pumped in their economies over 90 billion $, are using “cheap money” as the Angela Merkel , the Chancellor of Germany said. She criticized greatly, USA and other countries, pumping in those “cheap money”,

which would result the repetition of the same mistakes and eventually again the same crises, as we are faced with today. In already five years, according to The Financial Times, we will be faced already again with the same „monster“. In addition, one may suggest that this tendency is right in the face of world economy, it seems, as one may suggest that this is the only policy among (fiscal and monetary ones), which will bring the crises to the end! In order to stabilize and stimulate the current economical situation of the UE, it was decided to inject 200 billion Euro. However financial analytics, as well as some politicians are sceptical about if all the EU countries would agree with the plan, or would not give their support.

US Economic Bailout Progress: A real progress or a failed attempt.

There were supporters as well as critics of the bailout package today. The House Financial Services Committee held a hearing to examine how the stabilization Act of 2008 is being implemented, as well as what progress has been made. Henry Paulson (Treasury Secretary) stresses out that the bulk of the U.S. banking industry is healthy" and outlined the steps the Federal Deposit Insurance Corp. is taking to strengthen small banks and to minimize foreclosures. ". In addition he mentioned that the package is “about restoring confidence”. However consumer spending fell, economic situation is not yet even getting close to be stable, and one of the problems, as I have mentioned before is confidence, what cant be bought in the short run through injection of money (e.g. Russia 6 bn $ and the currency still devaluated). There are also other watchers of the market, like Economist Alan Blinder, who was less optimistic and noted that the way in which the money were allocated in what he says is "sharp deviation from congressional intent."

US IN THE DARK !!! Is it "The End" Folks

The US government has encouraged a big surge in the country’s currency, which could help refinancing its financial sector. The outcome from that threatens the collapse not just of banks and companies within the country’s borders but entire countries world wide. For instance Russia is heavily effected, because the country operates within the open economy policy and feels the impact of the global financial crises. As the Russian President said: “In fact, we're paying for the blunders made by a number of countries, including the US, since the American market exerts a weighty influence on the international market”.

Back in September US have decided to shut down the investment banks, that provided with loans to the biggest professional investors. Its done due to the financial crises, which spread through banking, stocks and even into the currency markets. The outcome was the major sales from those investors and the settle of their trades. That led to a whirlwind of liquidation. Korean won, Turkish lira, Brazilian real, British pounds and commodities from oil and metals, all were sucked into the downdraft.
And we thought that maybe American authorities were trying to do their best to prop up asset prices. As the economic lights go out and the US administration is struggling in the dark, possibly it accidentally cut off the hand that feeds it.
On October 3 the $US 700 billion bailout of banks and their bad bets was signed. After that the U.S. Treasury Secretary Henry Paulson assured U.S. Congress it was the only way to avoid financial Armageddon. The stated aim was to support asset prices.
However on the 22nd September with less publicity, Morgan Stanley and Goldman Sachs gave up their investment bank status, which gave them an access to the „big bucks“ and allowed them to borrow and lend much more than traditional banking companies. That was just seven days after another investment bank, Lehman Brothers, filed for bankruptcy protection.
The US is in the need of its currency to be strong, due to the reason of it being a debtor nation, spending more than it earns and dependent on foreign loans. For instance Chinese are the ones financing the bailout of US Banks. Companies are certainly buying dollars in order to pay off their debts. Nevertheless none of this explains the role of the U.S. administration in driving down asset prices. It is certainly not the job of governments to support asset prices at a particular level , and also not to spend $US 700 billion buying them off their banking friends.

Maybe Paulson has seen the light at the end of the tunnel, however in that case maybe the U.S. taxpayers could have their $US 700 billion back please?

World Wide Oil Production C U T !!!

The Organization of Petroleum Exporting countries (OPEC) has decided to cut the production of oil by 1.5 million barrels a day at a meeting in Vienna. Which is an understandable reaction, because the prices have fallen more than 50% in compare to the peak of over 147 $/barrel in July. The chairman of the OPEC organization Chakib Khelil says that: ” it was a necessary measure and the stock market will only be helped by the move”. The decrease of oil prices and supply don’t effect the financial market, but the financial market effect the oil prices and supply. Specialists say that the optimal price per barrel would be between 70 and 90 $/barrel. In order for many exporting countries to be at a break even the oil price would have to be at the point not below 40 $/barrel, which means that most of the biggest oil exporting countries such as Bahrain, Oman, Qatar are still on the safe side. Recently now the oil dropped below 60 $/barrel. However when the OPEC approached a non-member oil exporting countries, such as Russia, to cut its production, and received the negative response from the Moscow. Most oil producing countries are on the safe side, except the Russia, because its 70$/barrel, which is a break even point !!!
OPEC includes Algeria, Angola, Venezuela, Indonesia, Iran, Iraq, Qatar, Kuwait, Libya, Nigeria, United Arab Emirates, Saudi Arabia and Ecuador. Sixty-seven per cent of the world’s known reserves of oil are located in these countries. At the previous session on the 10th of September the organization made the decision to cut production by 520,000 barrels a day. However it did not work, and the new reduction seems to be not so effective as the first try.

Related links:

Energy week sees focus on investment in gas production

Gas troika to become new player in energy

Gas exporters agree deal for OPEC-style alliance

Russia and the unfolding global recessionRussian

„GAS OPEC” OR GEOPOLITICAL WEAPON!!!

Such gas exporters as Russia, Iran and Qatar have agreed about forming a powerful OPEC-style group in order to export gas. This new consortium would control over 60 % of the global natural gas reserves in the world, which of course brings great fear to the West, that it could turn into monopoly and logically this cartel could lead to a higher prices. This news come after the meeting of the Chairman of Gazprom Alexey Miller, Iranian Oil Minister Gholam Hossein Nozari and the Qatar Energy Minister Abdullah Ben Hamad Al-Attiya.
These talks about the creation of such important and powerful alliance, will send shivers down the spines of EU and USA, the ones which heavily rely on imports. The potential members of the group would be considered such countries as Russia, Qatar, Iran, Venezuela and Algeria.
So as in one of my previous Bloggs, whether the Russia would become a part of EU or at least become a member of WTO, now with its possibility to become a member of “GAS OPEC” and its estimated reserves of around quarter of the global natural gas, Russia would have no need in neither EU membership or WTO one.

« GLOBALIZATIO VIRUS »

This crisis is destroying the confidence of not only the banking system, but also confidence in the economy as a whole, challenging and affirming the requirement to build a new system of values and evaluation of new fundamental bases of trust. All Governments have begun to "inject" money into the banking system (only in Russia pledged about 6 trillion rubles of public funds, these measures are adequate in many ways, except, in my opinion, for 175 billion rubles to support the stock market), which is indispensable, however not sufficient in order to return the confidence.

To succeed, in my view, it requires harmony on one hand from professional side, from technological point of view, and psychological part from the market participants on the other hand. If that is not happening, the money don’t reach the real sector, but «hang» in the banking system. World GDP is estimated at just over 30 trillion U.S. dollars. The volume of derivatives issued - 420 trillion U.S. dollars. The amount of money, which was announced to be directed by all the governments of the world for the banking system, amounts nearly 3 trillion U.S. dollars. It turns out that in a short period of 3-4 months, 10% of world GDP would be injected in the world economy!

The main question is how will the the value of money will change against the assets?

(On one hand, the amount for «real» world is just gigantic, but on the other hand to the virtual world is very small).

In the retail sector, consumer inflation will accelerate, the demand will likely fall and the demand for real-estate without mortgages will decline. Comrades from the government in Russia want to profit, making everything to devaluate and buy it cheaper. If you click on that “link” there is interview, concerning that matter, Russian version).

In my later blog I might expand the thought regarding it further more.

“The first crisis to change the financial system for e v e r”


In this Blog I would like to stress out my perspective on the ongoing financial crises and how the things currently really look like. The crisis is bottomless, meaning because it is - the first crisis in the history of globalization, which crashes the old systems. We now live in the world which is very dynamic, and that after the changes the financial system will exist under the new rules. The old financial system of Wall Street with its traditional rules ceased to exist. This is obvious. How will the new one look like? Right before our eyes the new rules are coming to life. However how much time it would take for them to form, no one knows.
Today the old traditional methods of regulation are not working. For instance in America for an entire past year, the financial authorities are trying to use monetary policies in order to manage the economy through changing and lowering refinancing rate. Earlier it worked, previously through lowering the rates, the stock market grew. Now the rates being decreased, however the stock market still crashing down, and now US is nationalizing, investing and spending.
My main point is that the virtual world of derivatives, which is estimated at several hundred trillion dollars, which is greater than the real money market, which is actually a huge amount of quasi-money, which for a long time did not impact on the situation in the world economy (only indirectly). And all the regulators of the world have looked pass it. When the liquidity problems commenced, the virtual world suddenly became real. The financial system, accustomed to the high level of quasi-money started to need them in reality. Now the compression is happening.
I try to explain what exactly I mean: imagine that you - the bank, me - the customer. I came to you in order to borrow 100 million at 10% per annual. I began building the plant, and you decide before the end of construction to issue derivative and sell it on the market by sharing part of the income from the interest. Then the derivative can still be split and resold several times. I got bankrupt and the plant is not built. However the derivative lives its own independent life, as real and valuable share, meaning that it turns out that derivatives became unsecured inflationary tool.
All this - mathematics, but the math must at some point end, so it did. And in some ways the current crisis is a crisis of confidence to liquidity, because the economics seem in order with the average growth of 3.5%, even though slower then projected before.

However the trust was lost. When the banking system is lacking trust, it is impossible to work, because it is not clear who is stable, who is unstable. Where once people were aware that here, for example, those monsters on Wall Street are forever, but now they do not exist anymore.
What we witness today is totally new crisis, which effects the global economy, which has never happened before. The crisis in a way is similar to the «great depression». Only then it was the crises of the single country, but now it has spread because of problems in America around the world. The world has become interrelated downhill crashing force.
The peculiarity of this crisis is that countries which have more developed stock markets and financial instruments, including derivatives, caught in a more difficult situation, for example, than Russia. But to say that we did not get affected by the global crisis, would be a very much wrong thing. In doing so, we have more opportunities not only to minimize the impact of the crisis, but also to make some expansion in the world markets. In the following blogs I might discuss the last point more closely.

700 Billion and “nice” surprise for tax payers

Where did bailout money come from, because 700 billion, is not peanuts. The chart below, by FED, shows the interesting relationship of the “outstanding Supplementary Financing Program Bills” and “Change in the Fed’s Balance Sheet”.
From Bank of America, again:

In other words, it seems like the FED are getting additional “700 billion” for the bailout, by borrowing for a long period of time. When the US government decides to bailout banks, car manufacturers, and those who took out mortgages on homes that they could not afford, where does that money come from? The money would also be coming from tax payers, that’s the thing. President Obama says that he will only raise taxes on those with incomes of over $150,000.00. I think in the beginning of his campaign he mentioned $200,000.00. Now that there are more corporations that need money that dollar amount is beginning to shrink.

Russia is on the breach of „bankruptcy“

Russian indices are following the footsteps of world market and there is nothing promising... V.V. Putin disagrees that there is any reason to worry and that financial, oil production and other institutions should stay on their original course. Of course FDI are decreasing if not going to disappear, Russian main stocks close down with red indices, and the new decision of the Russian prime minister that 26% each company will be paying from its yearly income per worker. All that I would not call nothing to worry, when the prices fall rapidly from over 100$/barrel soon as projected below 60$! Meaning Russia is on the edge of losing out on natural resources (which is 70% of the country`s income), banks cant provided loans, people are confused, the country might just have enough to survive!! Of course there was a big profit made with the incredible increase of the oil prices, however it might just be enough to stay on the “surface”

Russia in WTO and EU...?

Maybe in 2000 years!!! Especially in the light of the Gergian conflict, there are more and more protests form the West. Russia is being criticized for being an suppressor of the neighbouring country and using force, however thats only one side of the medal. Russia is trying hard in order to come closer to become the part of WTO, however everything is aginst this country. Maybe there is no need to become a part of one Allianz and instead creating its own one, like OPEC, but with different resources available in Russia, and then Rissia could have its own WTO........

World Wide Crises... Crack in the system or repetition of the same mistakes?

One of the worlds biggest financial enterprises are falling apart, like the Lehman Brothers, and there are talks regarding the same thing whcih might happen to the biggest insurance company in US AIG. As the ex-chief of the US Federal Reserve System characterised the current financial crises Alan Grinspen, that this event happens “once in 100 years” is true. However on the other hand looking back at the Asian Financial Crises it was the peoples expectations, government and banks decisions which made it happen. Sounds a bit like the beginning of the mortgage crises, in regards to peoples expectations and decision making. The US crises pulled down the Russian market, which collapsed after the world market collapse. In the 80s the managers in US from Sales and Loans agreed that what they were doing was highly risky, however in order to compete they had to go for it. Sounds also like the mistaken which led to the mortgage crises. Banks were sure that in case loans wont be paid back, they had government as the strongest security behind them……wrong! Even the fourth largest bank in US (Lehman) was not backed up. In my opinion it’s vicious circle of mistakes which comes from greed and race for money, which turns out to be the backbone of the 21st century problem. Short term gains made us blind, and incapable of forseeing the long term or “ripple effect” of our actions.

Now for the next couple of years banking industry will play safe and then liquidity will be redeemed, along with the old habit of going for a profit. The question is if it will be short term profit not focusing on what effect it will have or will we learn…?