Last Lap for Bretton Woods

[metalman]

Re: Last Lap for Bretton Woods

i agree, this is attractive in a reserve currency.



i didn't track it back to its source. i'm just saying it doesn't make sense irrespective of the source.


the original point [not mine] was that there was a deflationary cloud over the euro. my point is that such a cloud makes sovereign euro denominated bonds more, not less, attractive. and, mutatis mutandi, the ability of the u.s. to inflate makes its bonds less attractive. more broadly, there are different populations of purchasers. the dollar drops as foreign investors, and some domestic ones as well, head for the exits. the u.s. is experiencing capital flight, just like argentina did.

yeo. ej talks about capital flight under kapoom theory.

in the meantime institutions with domestic mandates and an inability to short seek what refuge they can by buying treasuries, spurning other debt instruments for fear of counterparty risk.

sorry, i dont get it.

unpacked, i was attempting to say that there is a huge potential for CHAOS and conflict. i am most skeptical that there can be a negotiated solution until well AFTER the shtf.

yep, kapoom theory again.

i expressed this poorly, but my point is that i am doubtful that our debt holders have much power over us. we will inflate away their claims. more acutely, there is the saying that if you owe the bank a million dollars, you have a problem. but if you owe the bank a hundred million dollars, the bank has a problem. or, if you prefer, the quote from john connally in the '70s, addressing our trade partners: "the dollar is our currency but your problem."

yep, kapoom again.

i slip into dark moods when i start worrying about the possible political fallout of the economic disaster that i see unfolding, and i think about the erosion of rights in the name of antiterrorism, the u.s. branded by a policy of torture, and so on. perhaps lukester, in his post above, is right-- we should look to italy, not germany, as an inspiration and guide in learning to enjoy life in the face of economic and political chaos. it provides a charming and attractive model.

the italians know how to live! great food. good looking folks. no offense to the germans but, uh, the italians have it!

i'm touched.

yes you are!

[GRG55]

Re: Last Lap for Bretton Woods

You're putting all the big holders on an equal footing. As far as causing trouble, they've all had an equal dis-incentive to do it until now - that doesn't have to hold into the future.

IMHO the petroleum producers could demand their pound of flesh from the US. If their reserves become worthless, they can demand something be done - China, India, Japan and Europe, maybe not.

They are getting it already in the form of military protection, so they don't tear each others throats out. Think that's an extreme view? Turn on the television and dial it to Iraq. Forget about the Humvees, pay attention to what the Iraqis are doing to each other...

(geez, that's starting to sound like metalman in tone. next time i'll do it without caps...)

[GRG55]

Re: Last Lap for Bretton Woods

the italians know how to live! great food. good looking folks. no offense to the germans but, uh, the italians have it!

Had occasion to use the Italian train system last year. Sat across from an Italian couple. Was enthusiastically describing my culinary experiences in Florence in the prior days. They told me that when it comes to preparing food "The French think they are professionals, and they aren't. The Italians think they are amateurs, and they aren't". Sez it all...

[bill]

Re: Last Lap for Bretton Woods

[Not dollars. Not dollars/euros/yen, either, for reasons discussed, but something else. A fourth currency.

A regional consolidation of currencies creating a fourth as Benn Steil http://www.cfr.org/bios/1637/benn_steil.htmldescribes?

]http://www.financialpost.com/story.h...94a91a6f4e&p=1

Since economic development outside the process of globalization is no longer possible, countries should abandon monetary nationalism. Governments should replace national currencies with the dollar or the euro or, in the case of Asia, collaborate to produce a new multinational currency over a comparably large and economically diversified area.

Or do you mean a global recognized new born currency and if so who would set policy B.I.S.?
http://www.bis.org/cgfs/index.htm

[donalds]

Re: Last Lap for Bretton Woods

Lets be clear about one thing. The glory years of US hegemony began with the end of WWII and the decline began with the Vietnam War. During 70's - 90's, financial crisis in that half of the world making up capitalism was frequent, while competition with the USSR was carried out in the context of a Cold War. The withering of US hegemony coincides with the expansion and integration of capitalism world-wide. The globalization of neo-liberal global economic integration (pushed most forcefully by the US), ironically now requires the slippage of US power - global power is now being fragmented and distributed.

Today, the decline of US global economic, geopolitical and military hegemony is on the fast track. The Bush admin. and the Iraq war and now the impending US recession (or should I say global recession) along with the financial credit crisis (with the US - not some developing country - as the epicenter of that crisis) has fast forwarded the process. What remains is what some now call a multipolar world. What this means is that competition between countries and blocs of countries or regions pose a real potential for resource conflicts/wars. China, in the meantime will likely experience even more severe problems than the US, providing the feedback loop with the US to drive the global recession into even deeper trenches.

In the end, the US will forever be downsized economically, geopolitically and militarily. It is this last factor that declines most slowly. Since the US remains the world's strongest military force, this will be its only means in an attempt to regain lost hegemony, which also will provide economic stimulus. Since military occupation is out of the question, all that remains is bombing, which in the end will prove futile.

In the process of US economic decline, citizens of the US will be forced to accept a significantly lower standard of living. In response, expect the pursuit of external scapegoats to coincide with the search for internal (domestic) scapegoats (e.g. like those lazy Mexicans stealing our jobs). Furthermore, the psychic adjustments required when the shopping experience no longer provides enjoyment will come swift and hard, providing heavy doses of anomie.

[BlackVoid]

Re: Last Lap for Bretton Woods

- that the US runaway public debt 'must' lead to totalitarian solutions? Italy had far better excuses for the past 30 years but never went down that road.

A possible explanation is that Italy is not a world class power. They cannot just do anything they want with all the trade with other EU countries.
On the other hand China, Russia and the USA can prety much do anything at home. Also the USA has a lot more debt than the official numbers.

BTW, I am undecided on this theory, just offering a possible explanation.

[EJ]

Re: Last Lap for Bretton Woods

A regional consolidation of currencies creating a fourth as Benn Steil http://www.cfr.org/bios/1637/benn_steil.htmldescribes?

]http://www.financialpost.com/story.h...94a91a6f4e&p=1



Or do you mean a global recognized new born currency and if so who would set policy B.I.S.?
http://www.bis.org/cgfs/index.htm

I have to say, you always come up with the most intriguing reference material.

To answer your question, no one can know exactly what we'll wind up with. So much depends on how acrimonious the negotiations become, and that depends on increased nationalism, and that depends on the depth of a future U.S.-centric global recession.

One thing is certain, that the current multi-polar global military power structure is inherently less balanced and stable than the bi-polar structure that emerged after WWII that allowed the U.S. to shape the international monetary system. It wasn't much of a negotiation at Bretton Woods; terms were more or less dictated. That will not be the case this time.

Back in 1990 I read the first piece I recall seeing that attempted to forecast the outcome of the post-Soviet multi-polar world in the article Why We Will Soon Miss The Cold War by John J. Mearsheimer (The Atlantic Monthly; August 1990).

There is something elementary about the geometry of power in international relations, and so its importance is easy to overlook. "Bipolarity" and "multipolarity" are ungainly but necessary coinages. The Cold War, with two superpowers serving to anchor rival alliances of clearly inferior powers, is our model of bipolarity. Europe in 1914, with France, Germany, Great Britain, Austria-Hungary, and Russia positioned as great powers, is our model of multipolarity.

Mearsheimer's gloomy forecast was that without Soviet power to balance U.S. power, European nations would soon be at each other's throats. Seventeen years later there's not much sign of that, in fact, the opposite; Mearsheimer didn't imagine the level of economic integration necessary to produce the euro, for example. But then again, except for minor recessions we've seen nothing but economic prosperity throughout the period, so European economic integration has never been tested. This is an inherent strength of the U.S., that Michigan can go into recession but their is no President of Michigan who has to defend the state's continued participation in the union that is throttling the state's economic prosperity with too high interest rates and insufficient fiscal and monetary stimulus.

Russia remains the wild card in the European union's future in the next period of economic and political stress.

Then, too, the Soviet withdrawal from Eastern Europe hardly guarantees a permanent exit. Indeed, the Russian presence in Eastern Europe has surged and ebbed repeatedly over the past few centuries. In a grave warning, a member of President Mikhail Gorbachev's negotiating team at the recent Washington summit said, "You have the same explosive mixture you had in Germany in the 1930s. The humiliation of a great power. Economic troubles. The rise of nationalism. You should not underestimate the danger."

Were a global recession to cause oil demand to fall dramatically, the impact on the Russian economy will be more profound than on China's. In the context of rising nationalism in Putin's Russia, President Mikhail Gorbachev's negotiating team member's warning may prove prophetic.

[GRG55]

United States Of Arabia?

Is this what happens when you can't borrow any more, and everyone holding US $ wants to turn them into something else, anything else, even a crippled up bank with a US stock listing?

(didn't Citi try this with Saudi Prince Al Waleed the LAST TIME they got into trouble?)

Citigroup to Raise $7.5 Billion From Abu Dhabi State
By Will McSheehy and Bradley Keoun
Nov. 27 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, will receive a $7.5 billion cash infusion from Abu Dhabi to replenish capital after record mortgage losses wiped out almost half its market value.
Citigroup rose 3.7 percent in early trading today following acting Chief Executive Officer Win Bischoff's statement late yesterday that funds from the state-owned Abu Dhabi Investment Authority will help ``strengthen our capital base.''

Abu Dhabi will buy securities that convert to stock and yield 11 percent a year, almost double the interest Citigroup offers bond investors, underscoring the New York-based company's need for cash. Fourth-quarter profit will be reduced by as much as $7 billion because of losses from subprime mortgages, which led to the departure of CEO Charles O. ``Chuck'' Prince III and a 46 percent slump in its stock this year.

``Clearly, Citi has a problem with capital adequacy after the subprime crisis,'' said Giyas Gokkent, head of research at National Bank of Abu Dhabi PJSC, Abu Dhabi's biggest bank by market value. ``ADIA has seen an opportunity to get cheaply into a blue-chip stock.''

With the purchase of a 4.9 percent stake, Abu Dhabi, the largest emirate in the United Arab Emirates and its capital, would rank as Citigroup's largest shareholder ahead of Los Angeles-based Capital Group Cos. and Saudi billionaire Prince Alwaleed bin Talal, data compiled by Bloomberg show.

Depleted Capital
The investment follows purchases by U.A.E. fund Dubai International Capital LLC in companies including London-based HSBC Holdings Plc, Europe's biggest bank by market value, and New York-based hedge fund Och-Ziff Capital Management LLC. In Abu Dhabi, state-backed Mubadala Development Co. agreed to buy 7.5 percent of Washington-based buyout firm Carlyle Group. ADIA also owns a stake in Leon Black's New York-based buyout firm, Apollo Management LP.

Citigroup Chairman Robert Rubin, who stepped in after Prince resigned, and Chief Financial Officer Gary Crittenden said on a conference call earlier this month that the bank expects to restore capital to targeted levels by the end of the second quarter without having to cut its $2.7 billion-a-quarter dividend.

Mortgage writedowns cut Citigroup's ``tier 1'' ratio, a metric used to assess banks' ability to weather loan losses, to 7.3 percent on Sept. 30. The figure, while above U.S. regulators' 6 percent threshold for a ``well-capitalized'' bank, was below the bank's 7.5 percent target.

`Bullish' View
The Citigroup equity units that ADIA will purchase can be swapped for as many as 235.6 million shares starting in 2010. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010, and Sept. 15, 2011. Citigroup fell to $29.80 in New York Stock Exchange composite trading yesterday, the lowest price in five years, and was at $31.85 in early trading before the market opened in New York.

``The structure of the deal suggests that Abu Dhabi is very bullish, effectively participating in the upside beyond $37.24, and sharing in the downside below $31.83,'' said George Nikas, who helps manage $1 billion at Deutsche Bank AG in Sydney.
Abu Dhabi will have ``no role in the management or governance of Citi, including no right to designate a member'' of the company's board, Citigroup said in its statement.

``This investment reflects our confidence in Citi's potential to build shareholder value,'' ADIA Managing Director Sheikh Ahmed bin Zayed a-Nahyan said in the Citigroup statement.

Cost of Capital
Mounting subprime losses have increased Citigroup's funding costs. The bank sold $4 billion of 10-year bonds on Nov. 14, paying annual interest of 6.125 percent. The securities were priced to yield 190 basis points more than Treasuries, up from 118 basis points, or 1.18 percentage points, in a similar sale three months earlier.

CIBC World Markets analyst Meredith Whitney said in a note to clients today that she still expects Citigroup to cut its dividend as mortgage losses increase.

Abu Dhabi officials met with Rubin in the emirate yesterday to discuss ``world stock markets and their impact on the performance of banks,'' the state-run WAM news agency reported on its Web site.
Abu Dhabi owns the world's fifth-biggest oil reserves. It channels oil surpluses to ADIA, which ranks as the world's biggest sovereign wealth fund with assets of $875 billion, according to July estimates by the London-based Economist Intelligence Unit. The authority will spend $40 billion this year to buy foreign assets, estimates Gokkent at the National Bank of Abu Dhabi.

Buying Assets
Gulf investors have spent about $70 billion on overseas acquisitions this year, almost double their spending in 2006, as oil prices soared 58 percent, data compiled by Bloomberg show. With oil above $90 a barrel, Gulf producers including Saudi Arabia and the U.A.E. earn more than $1.3 billion a day from their energy sales.

State-controlled Saudi Basic Industries Corp., the biggest chemicals company by market value, in May agreed to buy General Electric Co.'s plastic unit for $11.6 billion in a record acquisition for the Gulf. State-owned Dubai World in August agreed to invest as much as $5.1 billion in MGM Mirage, the second-largest casino company, to try to tap into the Las Vegas- based company's U.S. gaming and real estate earnings.

Gulf petrodollars don't always get the prize. Qatar on Nov. 5 said it abandoned a $21.9 billion bid for U.K. supermarket chain J Sainsbury Plc after its cost of funding jumped ``significantly'' since first making the bid July 18.

China's Purchases
China also has been increasing investments in the U.S. and Europe. Bear Stearns Cos., the fifth-biggest U.S. securities firm, agreed last month to sell a 6 percent stake to China's government-controlled Citic Securities Co. for about $1 billion. China Investment Corp., the nation's $200 billion sovereign wealth fund, paid $3 billion for a stake in New York-based private equity firm Blackstone Group LP in May. Barclays Plc, the U.K.'s third-biggest lender, agreed to sell 6.7 percent of itself to China Development Bank in July.

The state-owned Dubai International Financial Center, which bought 2.2 percent of Deutsche Bank AG in May, on Nov. 19 said it is seeking acquisitions in the U.S., where the falling dollar and a lending crisis are driving down the price of banks and property.

Citigroup is among tenants at the Dubai center, a business park being used to attract banks, insurers and asset managers to the Persian Gulf. Like neighbors Qatar and Bahrain, Dubai is bidding to plug the trading time gap between Europe and Asia and become the region's pre-eminent financial hub.

Oil Running Out
Qatar, like Abu Dhabi, is seeking to diversify its economy away from near-total reliance on energy earnings. Unlike Abu Dhabi, the oil wells of Dubai and Bahrain have almost run dry.

ADIA ``will bolster Citigroup's capital and competitiveness,'' U.S. Senator Charles E. Schumer said in a statement. The New York Democrat was among the lawmakers who criticized the Bush administration's decision last year to approve DP World Ltd.'s $6.8 billion acquisition of London-based Peninsular & Oriental Steam Navigation Co., a deal that gave the Dubai state-owned port company control of six U.S. terminals.

Schumer was among those who said Dubai ownership would jeopardize U.S. national security, arguing that two terrorists involved in the Sept. 11, 2001, attacks were from the U.A.E.

DP World agreed in December to sell the U.S. terminals, in cities including New York, Philadelphia, Baltimore and New Orleans, to American International Group Inc., the world's biggest insurer.

Prince Alwaleed, a nephew of Saudi King Abdullah, invested $590 million in Citigroup predecessor Citicorp in 1991 when the bank needed cash because of loan losses in Latin America and a collapse in U.S. property prices. Alwaleed now holds about $6 billion of Citigroup shares. The prince wasn't available for comment at his Riyadh office today.

[EJ]

Re: Last Lap for Bretton Woods

anti-anti-spin-
1. the euro has already become a reserve currency by default. nations of all political stripes all around the globe have chosen to move assets into that currency in spite of its lack of a politically cohesive home, its lack of a treasury, its lack of a centralized and standardized bond market, its overvaluation on purchasing power parity, and its inherently fractured and flawed economic basis in the eurozone. some currencies are born with reserve status, some attain reserve status, and some have reserve status thrust upon them. like it or not, the euro is already a reserve currency.

The euro is becoming a reserve currency by virtue of the dollar becoming less worthy of that status. Europeans worry that a single nation splitting from the euro zone will have an out-sized impact on the euro. The dollar doesn't face that risk but others. It's striking to me that Europeans I speak with are as critical of the euro as Americans are of the dollar. Perhaps the expression "familiarity breeds contempt" applies to currencies as well.

2. gave's argument, at least as stated above, makes no sense. the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion. a deflationary threat overhanging the eurozone should makes its bonds more valuable than ever.

You misunderstand either Louis or my description of his position, I'm not sure which.

He speaks of deflation not inflation risk. Clearly, the self-consistent points about the dollar and inflation discussed here for going on ten years is that there is zero monetary deflation risk in the U.S. economy owing to the ability and clearly stated and demonstrated willingness of the Fed to monetize debt. Louis' point is that without a central euro treasury institution, the ability to fight monetary deflation may be insufficient to produce monetary inflation when needed to prevent deflation. Your point is well taken that this institutional limitation may make euro denominated bonds themselves more interesting to own than U.S. treasury bills, that's is not the point that Louis is making.

3. the dispersion of power, of "cards in the hands" of the various players around the world, the lack of a central overarching power or authority to provide a natural and clearly acceptable alternative to the dollar centrality as a reserve means there will be no acceptable alternative. or at least there will be no alternative for several playings and reshufflings of the cards. the dollar will decline in both value and esteem, and nations as well as individuals will scramble for assets with which to replace it. when the ecb finally bends to the political will of southern eurozone leaders, and finds an excuse to cut rates and thus cheapen the euro, we will know we are in full beggar-thy-neighbor mode. protectionist legislation in the u.s. will be another step towards geopolitical turmoil.

This comment is consistent with our theories here.

4. we need not worry about the power of dollar bond holders. this will not be a replay of newfoundland. as long as the u.s. functions as a market for their goods, the dollar holders dare not precipitate a crisis. by the time the u.s. no longer functions as a market for their goods, the dollar holders will not be capable of precipitating a crisis, for the value of their dollars will have evaporated into an inflationary miasma.

The Newfoundland example is about the political impact of debt burdens under economic duress, both on the debtor and the creditor. Great Britain defaulted on its debt to the U.S., increasing U.S. economic hardship. Some historians connect the political repercussions of that default with the decision by the U.S. to delay entry into WWII. If we accept Dr. Hudson's statement that no nation in history has ever repaid its foreign debts, and I have no reason to question that assertion coming from an economic historian, the question we've been asking here since 1998 is what form the U.S. default on its foreign debts will take. We have long assumed currency depreciation and inflation, ala 1999 Ka-Poom Theory. But it is useful to consider other forms and their impact. Of course, no player in the system wants to cause a crisis, and that is also part of the thesis; no party can undertake change so only a crisis that develops for other reasons will be the forcing function for the dissolution of the current order. That crisis may already be in play, starting from the housing led U.S.-centric credit crisis and recession and spreading outward. Just reported by S&P is a 4.5% national decline in housing prices in Q3. That is a stunning rate of decline.

5. if this is a replay of the '30s we must ask which nation holds the place of germany - with its unbearable burden of war debts hindering its economic growth.

Russia. This time around, the risk is not war debts but dependency on oil demand for economic and political power, and international prestige. Let's hope Peak Cheap Oil holds up.

[jk]

Re: Last Lap for Bretton Woods

The euro is becoming a reserve currency by virtue of the dollar becoming less worthy of that status. Europeans worry that a single nation splitting from the euro zone will have an out-sized impact on the euro. The dollar doesn't face that risk but others. It's striking to me that Europeans I speak with are as critical of the euro as Americans are of the dollar. Perhaps the expression "familiarity breeds contempt" applies to currencies as well.

all the risks to the euro are domestic/european, while foreign support is overwhelming.

[touchring]

Re: Last Lap for Bretton Woods

Were a global recession to cause oil demand to fall dramatically, the impact on the Russian economy will be more profound than on China's. In the context of rising nationalism in Putin's Russia, President Mikhail Gorbachev's negotiating team member's warning may prove prophetic.

In such a scenario, wouldn't there be serious deflation as opposed to inflation?

[bart]

Re: Last Lap for Bretton Woods

Or do you mean a global recognized new born currency and if so who would set policy B.I.S.?
http://www.bis.org/cgfs/index.htm

Globalization and the NWO are alive and well.
The B.I.S. I.M.F. and World Bank were there at Bretton Woods, when the gold window was closed in 1971, and are very much still around. In the '70s, many folk characterized the I.M.F. as the engine of inflation.


"For more than a century, ideological extremists at either end of the political spectrum have seized upon well-publicized incidents to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure - one world, if you will. If that's the charge, I stand guilty, and I am proud of it."
-- David Rockefeller, Memoirs, 2002

[rj1]

Re: Last Lap for Bretton Woods

To answer your question, no one can know exactly what we'll wind up with. So much depends on how acrimonious the negotiations become, and that depends on increased nationalism, and that depends on the depth of a future U.S.-centric global recession.

Of course not. But that doesn't mean we can't speculate like we were sitting around a bar drinking and discussing it. ;)

One thing is certain, that the current multi-polar global military power structure is inherently less balanced and stable than the bi-polar structure that emerged after WWII that allowed the U.S. to shape the international monetary system. It wasn't much of a negotiation at Bretton Woods; terms were more or less dictated. That will not be the case this time.

To me, this is going to be the most interesting part of the future United States and how it acts. What's the U.S. and its population going to do when it realizes it's no longer the superpower? How's it going to act when it has to treat China for example as an equal? China is clearly rising in power and I think most people realize it, but very few common Americans or politicians in public would ever think they'll become our equal in economy, military, geopolitics the way the Soviet Union once was.

Whether we treat it with grace and acceptance the way the British did after their failure at Suez in the 1950s or deny it all the way down and refuse to accept truth is going to have a large determination in my view of how the world will turn out after all this crisis is done. I personally expect us to deny it and we're going to have an even greater reckoning.

Back in 1990 I read the first piece I recall seeing that attempted to forecast the outcome of the post-Soviet multi-polar world in the article Why We Will Soon Miss The Cold War by John J. Mearsheimer (The Atlantic Monthly; August 1990).

There is something elementary about the geometry of power in international relations, and so its importance is easy to overlook. "Bipolarity" and "multipolarity" are ungainly but necessary coinages. The Cold War, with two superpowers serving to anchor rival alliances of clearly inferior powers, is our model of bipolarity. Europe in 1914, with France, Germany, Great Britain, Austria-Hungary, and Russia positioned as great powers, is our model of multipolarity.

Mearsheimer's gloomy forecast was that without Soviet power to balance U.S. power, European nations would soon be at each other's throats. Seventeen years later there's not much sign of that, in fact, the opposite; Mearsheimer didn't imagine the level of economic integration necessary to produce the euro, for example. But then again, except for minor recessions we've seen nothing but economic prosperity throughout the period, so European economic integration has never been tested. This is an inherent strength of the U.S., that Michigan can go into recession but their is no President of Michigan who has to defend the state's continued participation in the union that is throttling the state's economic prosperity with too high interest rates and insufficient fiscal and monetary stimulus.

So who's the weakest kid on the European bloc whose politics and citizenry can provide the earliest insight to what will happen there? Spain?

Russia remains the wild card in the European union's future in the next period of economic and political stress.

Then, too, the Soviet withdrawal from Eastern Europe hardly guarantees a permanent exit. Indeed, the Russian presence in Eastern Europe has surged and ebbed repeatedly over the past few centuries. In a grave warning, a member of President Mikhail Gorbachev's negotiating team at the recent Washington summit said, "You have the same explosive mixture you had in Germany in the 1930s. The humiliation of a great power. Economic troubles. The rise of nationalism. You should not underestimate the danger."

Were a global recession to cause oil demand to fall dramatically, the impact on the Russian economy will be more profound than on China's. In the context of rising nationalism in Putin's Russia, President Mikhail Gorbachev's negotiating team member's warning may prove prophetic.

Russia is a kind of oddball in this whole situation. I would call them a #4 power in the world right now, behind the U.S., China, and the EU. They have a strategic alliance with China that is mixed, and they supply resources to the EU and are using it to their strategic benefit. The EU is trying to limit their influence through a kind of buffer region of sympathetic states in Ukraine and Georgia for example, not to mention the EU want missile defense. However, I severely question the long-term potential of the EU when the member countries are required to take a bullet.

We could be coming up on a kind of pre-World War I period, where powers draw battle lines and alliances for their strategic interests and no one trusts anyone else.

[metalman]

Re: Last Lap for Bretton Woods

In such a scenario, wouldn't there be serious deflation as opposed to inflation?

recall he's said elsewhere that if the dollar falls by 1/2 while demand falls by 1/3 still inflationary, and grg55 said somewhere that production can fall even faster than demand as projects get pulled.

[jk]

Re: the euro

2 more pieces on the euro:

1st a remark from bill fleckenstein:

"The euro is a flawed piece of paper, just not as over owned, nor as flawed as the dollar....someday it too will have problems, but that may be a while down the road."




2nd- here's ambrose evans-pritchard's latest

Are we primitive euro-haters?

Posted by Ambrose Evans-Pritchard on 27 Nov 2007 at 07:50


In answer to all those posts suggesting that we will use any piece of dirt to besmirch the euro, let me reply.

Politicians were told that the euro would lead to a crisis
It is true that a substantial army of British Eurosceptics kept insisting until the eve of E-day in January 1999 that the single currency would never get off the ground.
They then repeated their dire claims as the euro plummeted to 82 cents against the dollar, predicting a bond crisis.
Well, yes, but I was not among them, and nor were many of us diehard critics. The beauty of the internet (and often the curse, for journalists) is that you can check these things.
The article below was one that I wrote in late 1998, after a visit to Rome to talk to the Italian central bank and Treasury – since Italy was then viewed as the weakest link.
The euro will work - that's the problem
My point is – and always has been – that launching the euro was the easy part. The test would be 1) whether countries with vastly different structures, trade patterns, wage bargaining systems, debt structures, sensitivities to interest rates, productivity growth rates, and historic inflation rates would diverge so far over time that this would threaten the viability of the system.
2) Whether EMU could weather a bad storm without single treasury and debt union to back it up.
3) Whether the eurozone bloc had the “solidarity characteristic of a nation” (the Bundesbank’s term) required for it to endure through bad times.
As Jon Livesey and others have pointed out on my last blog, the euro-zone is not an “optimal currency area” – OCA in the jargon.
Since it has no central treasury, it cannot spread money from vibrant regions to depressed regions to cushion the blow.
These “fiscal transfers” happen automatically in the US through social security payments, federal assistance, etc (DC takes 20pc of GDP. Brussels takes just over 1pc, and it is banned from using it to smooth ups and downs) .
And since the euro-zone is a linguistic Babel, it lacks the migrant flows that act as a social safety valve. Yes, we all know that unemployed French youths come to London, and 500,000 Poles are in Britain, and that certainly helps.
But will a 38-year old German car worker pick up sticks and migrate to Spain to start a new working life in Valladolid. Not likely.
In fact, we know that there is less migration between regions within the borders of Germany, or France, or Spain, or Italy, that there is across the entire US.
There is a school of thought that the US is not an optimal currency area either, and that Americans would be richer if they had a New England dollar, a Southern dollar, a Prairie dollar, etc. Possibly.
But the US is so obviously a unified nation and democracy that the political benefits of a single Greenback vastly outweigh any quibbling points over efficiency.
Can this apply to Europe? Well, the original architects of EMU saw it as a means of forcing the pace towards a European proto-state – disregarding the advice of their own economists that a currency straddling the Latin and Germanic blocs could not work until they had brought their economic, commercial, and legal cultures into alignment – a task that takes decades.
The politicians were told that the euro would ultimately lead to a crisis. They did not care.
Indeed, they saw the uses of pushing events to a head – as Romano Prodi candidly admitted as Commission president -- hoping for a “beneficial crisis” that would then enable Brussels to push its agenda, taking over parts of fiscal policy and establishing the beginnings of a debt union.
The euro was to be the midwife of the federal state.
We will see about that. I suspect that it will be the midwife of disorder, leading to an existential crisis for the European system.
I don’t know when this will occur, but I suggest that Club Med’s loss of unit labour competitiveness against Germany since 1995 – 20pc for France, 30pc for Spain, and 40pc for Italy (Eurostat data) – has gone beyond the point of no return. We simply await a slow motion train-wreck.
It feels to me like the period from early 1991 to September 1992, when sterling and the lira were at last blown out of the ERM.
You could see that the structure was unsustainable.
You could see that Germany was overheating, while Britain was heading into a housing slump, and that Britain’s M3 money supply growth was slowing faster than it had between 1929 and 1931 – and that if had we not been rescued in time by George Soros, the British economy would have spiralled into depression. (Sweden hung on for another two months or so – with overnight interest rates at 500pc – and did in fact go into depression, with two major bank failures).
Yet the consensus kept pretending that nothing was wrong. You learn to distrust consensus.
Yes, I know: EMU is not the ERM. The political investment is much greater, the stakes much higher. But that means the fever will rise even higher before the bubonic boil is lanced.
So yes, I have been repeating – like a stuck record, perhaps – that this will all end badly. But only once the divergences have been stretched to snapping point. We are not there yet.
How it all unfolds will depend on countless different decisions by different players, above all Berlin and the Bundesbank.
If the German people are willing to tolerate a life of inflation at 4pc, 5pc, 6pc, and perhaps even threatening to rise beyond that – then the day of reckoning can be put off for a while.
But will they tolerate any such thing?

http://blogs.telegraph.co.uk/busines...nov07/euro.htm