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Every country has an industrial policy of some sort, ranging from active mercantilism to laissez-faire. Even no policy is a policy. But through its tax code, regulations, investments, and monetary activity each country shapes to a great degree the posture of its economy vis-à-vis the rest of the world.
For at least the last thirty years the industrial policy of the US has been to stimulate domestic consumption through encouraging and promoting the growth of the single owner housing industry. There are a number of domestic policy reasons for this, some of which Stiglitz highlights in the video below.
Other countries tend to not encourage domestic consumption, favoring an export policy to attract hard currencies. Since the US owned the world's reserve currency since the Bretton Woods agreement, it was to its advantage and even its obligation to engage in a debt based consumption.
These trends are playing out. One can only aggressively net export and engage in vendor financing through currency manipulation until their customers are rendered insolvent, and build houses and create debt until the financial system collapses and the balance sheets of the nation are in shambles.
Now the US, and by consequence the rest of the world, is engaged in a great reset, the establishment of a new international trade and financial exchange system.
One of the great unanswered questions is the role of the sovereign nation in this brave new world. Although they rarely mention it, economists have long known that unless it can control its own currency and trade environment, no nation can be truly sovereign in its fiscal, and thereby policy, decisions.
On a micro level we see this clearly in the Eurozone, where to a large extent Germany shapes the continent's trade and currency policies to support their export industries, certainly to the disadvantage of the consuming nations of the south.
So too, the trade regime and the gaming of the currency exchanges especially since the 1990's have placed the US in a difficult position. Can a nation choose to have a 'green' environmental domestic policy with reasonable healthcare for all, a democratic and educated people, while competing in a rigged system with a feudal country that cares not for the environment, the people in general, and for freedom?
This is why I have observed that the great story of this generation will be the reconsideration of the position of the individual and their relationship with the State. And one of the great variables in this discussion will be the resolution of the trade and monetary systems, since a modern person is by nature a transactional being. I consider the libertarian phenomenon a nostalgia for a past, of rugged individualism and ideal independence, that is utopian; it probably never really existed.
I am not presenting any answers here. What I am trying to highlight is the great macro trend that is driving the world at this time, which is the establishment of a new system to take the place of the crumbling grand agreement that served between the end of the Second World War and the end of the Cold War. The end of this global accord is marked roughly by the collapse of the former Soviet Union with the Asian currency crisis, and the entry of China into favored nation trade status with the rest of the world through the auspices of the US under Bill Clinton.
That is the backdrop, the great slate, the tablet if you will, on which history is being written.
Chart courtesy of CalculatedRisk
Elizabeth Warren on the election circuit in Massachusetts.
She left out any discussion of the financial bailouts, probably in the interest of simplicity and brevity. But she ought not to do so.
Thanks to DailyKos
There are high expectations ahead of the Fed's September announcement tomorrow afternoon.
Traders are betting the Fed will cap rates in Operation Twist. There are also even odds that the Fed will cut the rate it pays on bank reserves which it holds. The thinking is that it will give banks more incentive to lend. The downside is the view that if it becomes too close to zero, people will stop making markets in the shortest term Treasuries.
If they do lower this rate, I will view it as justification for the view I put forward over the past two years that the Fed interest payment on reserves acts as a bit of a drag on commercial activity by drawing funds out of the marketplace, in addition to being a tool for managing short rates around the zero bound.
Nice bounce in gold today, but notice it still has not broken the short term down trend. I expect that situation to be resolved one way or the other around 2:30 tomorrow afternoon. But that is the short term paper market. The broad sweep of the global physical market is another story altogether.
"...For what it is worth, this [leased central bank] gold goes right into an Asian vault and it is gone from the West permanently. This is having the effect of transferring Western solid assets over to the East, in size. This has the appearance of desperation because in the end this is really an attempt to save the too big to fail banks that are on the wrong side of a derivative play yet again. That is the reason this is being done.
Western central banks don’t really want that gold to disappear like that, they don’t want to sell that gold. They had to raise dollars in a hurry to pump liquidity into the system, but in the end, as I said, the gold is gone. In the old days the gold would be floating around the LBMA system, there would be a little bit of erosion, but today that gold is being sucked into the East.
This price action has had the effect of creating bearish sentiment, but meanwhile the physical buyers are just sitting there and constantly accumulating physical gold. There are massive orders for tonnage of gold, incredible amounts between $1,715 and $1,760. This has the effect of putting a physical floor under the price of gold. If they make a push to the $1,715 level that would be suicide in my opinion. There are simply too many massive orders for physical gold down to that level for that to be breached.
During this quarter this leased gold is supposed to be paid back, but how? As the central banks come to grips with the reality that the leased gold is gone, there may be a religious experience to the upside in gold and you will see the gold price break the $2,000 level."
London Trader: Massive Physical Floor Under Gold as Asia Buys What West Offers - KWN
This scenario tracks with my charts to an almost uncanny level. But let's see what happens. We still have to get past the FOMC monentary decision tomorrow and the Comex option expiration next week.
Stocks were rallying today, when fresh jitters about a Greek default caused the afternoon trade to turn south, finishing almost even to slightly in the red.
I suspect quite a bit of that selling was due to traders squaring up their positions ahead of the big Fed announcement tomorrow.
Expectations of some action from the Fed are high. Reassuring words alone will not sustain the equity markets. If the Fed does nothing we might see stocks sell off badly.
