Global Debt Crisis

Global Debt Crisis: Can a Collective Currency Devaluation Do the Trick?

Every country in the world, except for perhaps a handful, severely suffers from a growing debt crisis. Collectively, this is crippling the world economy and threatening the world with global instability following an imminent collapse of the international financial and economic systems. But if virtually all countries are in debt, who is lending? In fact, since almost all countries, or states, are in debt, that might be the solution to the problem.

Some brave economists and even politicians such as Brown and Sarkozy have made it clear that we need a new International Monetary System, a "New Bretton Woods" sort of agreement. That would probably solve things in the long-term. But still, what do we do with the existing debt crisis?

Let us assume that a country like the United States, with GDP of about $14 Trillion and a Public Debt roughly the same amount, "creates" or "prints" 12.5 percent of that amount annually for the next eight years, as to totally pay off its public debt problem. This generates some "fake" $1.75 Trillion a year, slightly more than the current US annual budget deficit. Usually, printing money this way would lead to significant inflation, U.S. consumer suffering and a severe devaluation of the American currency in addition to dissipation of the investors' trust into U.S. currency and economy, things which could probably spark off a global financial meltdown. But what if every other country agreed to more or less do the same process, and that newly created money does not find its way into the money markets in terms of additional liquidity or government spending, but instead is solely used to pay off the staggering debts?

The result may be that all major currencies would be devalued, but because they are all devalued, their relative value or exchange rate will be more or less the same, give or take a few points. If you think about it from a collective perspective, this idea may not be as crazy as it sounds at first.

So, if the G20 States, which together make up a sizeable portion of the global economy, and also where most of debtors and creditors come from; lending and borrowing institutions exist, signed up to such an arrangement within a larger effort to reinvent the international monetary and financial systems, followed by the rest of the world's states approving and repeating the same arrangement, could that solve the problem? Would that work as a global debt relief for everybody? A giant Paris Club to relieve the entire world from a deadly debt problem?

Of course the global economic and financial systems need to be totally redesigned. Yes, governments should stop spending beyond their means creating these monumental deficits. Yes, we need to shrink the speculative portion and reduce reliance on instruments creating virtual money, things which are poisoning existing systems.

We eventually have to even create a new accounting currency, be it ICU (International Currency Unit, or simply ECO), Bancor or SDR, which will work as an international bench mark currency to reduce the risks of relying on any one currency for reserves. But for now, the debt crisis seems urgently threatening yet highly ridiculous. After all, when everyone stands on their tiptoes, no one will ever seem taller.

First Published on HuffPost

http://www.huffingtonpost.com/wael-nawara/collective-currency-devaluation_b_926476.html

NAL Workshop in Jordan

NAL Workshop – Jordan

Global Economic Crisis

TV Interview

Toxic Assets

TOXIC ASSETS

In all of the US government measures to face the economic crisis, I have not seen an action taken against what seems to be the main reason standing behind the global meltdown; the Credit Default Swaps (CDS). Why haven't the US government or the Fed issued new regulations which would either remove or greatly diminish the size of the CDS market?

In my view, the CDS is a highly toxic instrument which was largely responsible for the global meltdown. The size of CDS market is 60+ trillion dollars while US total GDP is some 13 trillion dollars (20% of the CDS market). This means that any small drop in real-estate prices can result in huge losses in the CDS which largely back mortgages (toxic assets rising), a blow which the United States economy can not withstand or easily absorb because of the huge size of the CDS market. It is just too much exposure with unnecessarily enormous degree of risk. It is like someone who makes $100K a year yet goes to Vegas and gambles with $500K ! Huge leverage which is good if one wins, but is catastrophic when one eventually loses.

Perhaps CDS should only be traded on regulated exchanges directly involving the bond owners themselves as Soros had suggested? I am afraid that the US government is pumping money to only treat symptoms while the roots of the problem remain untackled.

Clapping with both the Visible and the Invisible Hands 1

The Market

and the

Splitting of "Self"

By

Wael Nawara

How did it all happen? What went wrong? Does the market no longer work?


I have some good news and I have some bad news. The good news is: yes. Markets work. The bad news is, our world is not a perfect world. At least, it is not perfect in the sense described in Economic Theory Books for the Invisible Hand to do all the work. This time, the Visible Hand must help the Invisible Hand do its thing.


Markets do not operate in vacuum. They do not operate in Wonderland. They operate in our imperfect world. If we want markets to work, we must realize how our real world differs from the perfect world of Perfect Market Theories.


“Self” Interest

In October 2008, Alan Greenspan said: “Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief”. OK. Let me spell it out. The problem lies in the word “self-interest”. The fact is, Market Theory is based on an assumption that both sellers and buyers will take decisions in their best interest. But since separation of management and ownership ages ago, the word “self” is no longer valid. There is no self. Who is to say which “self”? Is it the managers, workers, short-term owners (usually speculators and quick cap gain seekers) or long-term owners, those who really have the long-term “interests” of the “self” in mind, heart and pocket?


First, let us say that for the Market to work, we need laws, courts and enforcement to protect the idea of personal property or ownership. The market will not work if the concept of property is not there or is unprotected. To buy, is to obtain the title of ownership of the goods bought. So, we need a “regulator” in that area to start with. This means erecting a government to make laws, build courts, hire enforcement officers, or even agree on an arbitrary body elected to take these responsibilities if you are an anarchist.


Now, when a Loan Officer knowingly approves a loan to a borrower who will most likely default, does he commit a crime or not? He and his superiors who allow such practices, have compromised the long-term “interests” of the shareholders, the seller really, for now, the “real” owner of the money lent. When someone else introduces what is known as Teaser-Rates, where unqualified borrowers are lured into borrowing amounts they can never repay, by setting up a scheme of Introductory Payments which are significantly LOWER than Real payments to come, overtly promoting the business and covertly to delay the delinquency, or the discovery of default on such a loan, again, that should that person, his bosses and watchdogs all combined be locked up?


These officers and managers deliberately act AGAINST the best interests of their OWN employer, their own shareholders, for now, the real owners who pay their FAT salaries and bonuses hoping that such generous compensation will make those officers look after the owners “self” interests. They trust them to protect their assets. Such hope was proved false. Such trust was systemically ill-placed. Why? Because the more those officers lend, the more they make “temporary” profits of money which is not really theirs or even owned by their company. Everybody borrows from somebody else. And the leverage ratios are staggering. They can reach 1:100. Meaning that an intermediary could have debts of $100 million (in funds borrowed from real banks or yet some other intermediaries) and assets of $101 million (in toxic loans to unqualified mortgages). This company has an equity of only $1 million but is gambling with $100 million! Great! What makes things even better, they securitize their toxic assets yet with some third company which means they transfer the risk to another entity. And the other company transfers the risk to another. And so on. It is the perfect bubble. A perfect pyramid scheme of defrauding the real owners of the money, the simple depositors in real banks, of their hard-earned money.


A Pyramid Scheme?

El Rayan and El Saad of Egypt’s famous pyramid scheme of the 80’s are innocent kindergarten toddlers compared to these guys whom we can never really blame because we all knew and all watched. So, the loan officers and the CEOs get their FAT bonuses for these seemingly marvelous achievements. These achievements, however, are short-lived. Like all fraudulent schemes. Eventually they are exposed when the pay-back comes. Like all bubbles, they eventually burst. Into tears. Only someone else’s tears. So, have the officers and their superiors committed a crime? It depends. By the time the company, or the economy for that matter, collapses, those officers would have retired - or are happy to retire - and live comfortably on the ILLEGAL or semi-legal fortunes they had made by abusing the power given to them.


The Perfect Theory is based on one assumption. That a seller would always work to achieve his best economic interests. But what happened here is that the SELLER (who really owns the business) is different from the SELLER who represented him at the time of giving the loans or selling the merchandise. Both people (albeit being labeled as the seller) have Different Interests. This is a clear case of Conflict of Interests. Worse, the managers who set the Lending Policies inside the seller's organization have a different set of interests as well. Worst still. The Short-Term Investors who bought the stocks of the Sellers company, do NOT really care about the Long-Term interests of the Company. Because they make a quick buck of capital gains (speculation) and then they sell the stocks and go their way. Another set of conflicting interests. Worse still. Even the long-term owners, they do not really own the money which their employees had lent or even a fraction of it. Their highly leveraged company borrowed the money. They will not, in theory, suffer from the consequences because their toxic waste is securitized with some other company who in-turn transfers the risk to another company and so on. The chain is long, sophisticated, complicated and everyone is closing an eye or even two.


The money, at the end of a very long chain, truth be said, is owned by some poor guy who deposits his savings in a local bank. Or a group of guys who cut a piece of their salary and save it in a pension fund. Or some foreigner, Arab, Japanese or Korean High Net-worth Individual or Foreign Bank (and its depositors) who trusts Uncle Sam enough to buy treasury bills which are systemically used to cover an $11 trillion public budget deficit and rising and an enormous amount of US private consumer credit. Truth be said, everyone is accused of greed. Everyone, one way or another, knew, or at least felt that it was too good to be true. Well, guess what? It ain’t true.


Governance

Now, to prevent all these crimes and misdemeanors, regular police cannot go snooping around in the books and policy guideline papers of investment companies and banks. Hence a lucrative job of someone else is created. This is the SEC, Securities and Exchange Commission. Here the regulator’s job will be to install measures and policy guidelines to make sure that the practices of the management provide a balance between the interests of all stakeholders involved. These guidelines become amongst the Rules of INTERNAL GOVERNANCE of every investment company. But we still have a big PR job to try to rid the public of this blinding greed. Then figure out what to do with the United States of America who insists on providing unsustainable lifestyle to its lucky citizens on the expense of the rest of the world. By the way, the $11 trillion, these are just the public debt. Private US debt to foreign creditors is probably many times more than that.

Splitting of “Self”

The simple Conflict of Interests has arisen from complexities and sophistication, sometimes deliberate over-sophistication designed to boggle anyone who tries to trace the leakage. For instance, conflict of interest and the “splitting of the self” came when we separated Management from Ownership. A modern management MUST-DO. It came with these fancy derivatives which transfer risk and responsibility to someone else. It came when speculation became more lucrative, and therefore more important, than working the land, producing gadgets or waiting on tables, serving others, providing real value. Today, some argue that out of each $1, ninety four cents would come from virtual economy. Where no real value is added. Fiction money. This is when “the self was split”. It reminds me of “splitting the atom”. It unleashes such a great deal of uncontrollable power. And I am not just talking about heat, pressure or radiation. I meant the power to corrupt human conscience.


With freedom also comes responsibility.


With great power comes even greater responsibility.


Let us hope that those who have power and the liberty of using that power have actively operating conscience and an adequate sense of responsibility.

Sorious" Talk

"Sorious" Talk

George Soros Thinks that we

Are nowhere near the Bottom

By:

Wael Nawara

When someone like Soros talk about the financial crisis, the world has learned, from bitter experience, to listen. Soros predicted the global economic crisis several times before. In 1993, Soros predicted the collapse of the British Pound and made some 1 billion dollars in profit practically overnight as he had been backing his predictions with heavy investment in forward Forex contracts for a few weeks or months before the actual collapse happened. Amidst the current economic crisis, the 78-year-old still managed to make a profit of $1.1 billion last year alone and a total of $2.9 Billion since he came out of retirement back to managing his funds in 2007.

In the nineties, Mahathir, former prime minister of Malaysia, then blamed Soros for the Asian currency problems when all Soros had done was to discover, point out, aggressively exploit and profit from, serious structural flaws and loop-holes in the Asian markets.

Last year, Soros again predicted the collapse of the global financial system. In April 2008 he had a famous interview with Judy Woodruff where he predicted the coming crisis. He even wrote a book outlining the dangers of believing in misconceptions such as the total blind faith in market self-corrections. Soros was one of the few people to anticipate, prepare for and nake vast profits from the current economic collapse. In that book, The New Paradigm for Financial Markets, which came out many months before the collapse of Lehman Brothers in Sep 2008, Soros wrote that "we are in the midst of a financial crisis the likes of which we haven't seen since the Great Depression." In the book he put forward a general theory of "reflexivity", emphasizing how important misconceptions are in shaping history.

Soros believes that the world needs to recognize that the financial system, as it currently operates, is built on false premises. Market "fundamentalists" insist that markets are self-correcting; and Soros thinks this to be false because it's generally the intervention of the authorities that saves the markets when they get into trouble. Soros names only some of the crises which occurred since 1982 where the authorities had to intervene: the international banking crisis in 1982, the bankruptcy of Continental Illinois in 1984, and the failure of Long-Term Capital Management in 1998. Each time, the authorities bailed out the market, or helped companies to do so. But as "intervention" was seen as a "dirty" word for years, even decades, officials were reluctant to install or inact regulations necessary to curb unsafe practices carrying risks which are bigger than the system's capacity to bear. It is like driving at 150 mph, two feet behind a giant truck. The truck will eventually stop or slow down and you will just crash because you neglected to have a proper safety distance. But while the drive went by, everyone was high, intoxicated by speed, euphoria and adrenaline.

It was not just Soros who warned of the crisis to come. Several others including NYU economics professor Nouriel Roubini who predicted the collapse in Feb 2007 and even one Fed governor, Edward Gramlich, who warned of a coming crisis in subprime mortgages in a speech in 2004 and a book published in 2007. But the authorities didn't want to see it coming, possibly because it was not ideologically acceptable. For instance, Greenspan once spoke about the "irrational exuberance" of the market. This comment was not well-received and so he stopped talking about it. It is the regulators' job to stop an asset bubble from forming. They did not do that assuming that the market will correct itself. But by the time this happened, there was just too much water head behind the dam. The fall was painful and triggered a chain reaction which hit the banking system, the stock markets and the global economic system as a whole in a massive domino effect.

For instance the credit-default swaps had grown to make to a staggering $45 trillion market that was entirely unregulated according to Soros. This is more than five times the total of the US government bond market. Knowing that the US national debt has reached about 11 trillion dollars, allowing betting of $45 trillion dollars on house loan defaults is similar to someone gambling with five times the money that he owes to others! People like that are usually declared insane and locked up.

In addition to being a billionaire, a genius in the world of finance, investment and speculation, George Soros is a big-time philanthropist and a political activist! He was born in a Jewish family in Hungary in 1930. He is the founder of "Open Society Institute", a New York - based foundation which gives grants in several places around the world supporting open societies, education, media, reform and development. This foundation operates in Egypt through civil society partner organizations.

In 2007, Soros asserted that America should pressure Israel to negotiate with the Hamas-led unity government in the Palestinian territories regardless of whether Hamas recognizes the right of the Jewish state to exist. Soros went on to say that one reason America has not embraced this policy is because of the influence of the American Israel Public Affairs Committee (AIPAC). Democrats and Republicans were quick to denounce these "opinions" and deny his claims that AIPAC drives American foreign policy. Soros has been a generous supporter of the Democratic Party causes and campaigns. Soros wrote another book arguing that the entire idea of a "war on terror" is a misleading concept that has caused unprecedented decline in the political influence and military power of the United States.

Now the question is, what is going to happen in the coming G20 meeting? Will the "big boys" have enough courage and long-term focus to do what necessary to rebuild the global financial system on sound basis? And on the short term, what measures will be taken by governments and central banks to prevent the world from sliding into a total financial chaos? What is the future of the US Dollar as a global reserve currency? The dangers and the risks are clear and present calling for serious orchestrated actions between governments and central banks before things get much worse.

Sources:

http://www.reuters.com/article/newsOne/idUSTRE51K0A920090221

http://www.dailymail.co.uk/news/worldnews/article-1164771/Im-having-good-crisis-says-hedge-fund-manager-1billion-world-plunged-recession.html

http://www.winkydog.net/2009/03/26/george-soros-making-billions-financial-crisis/

http://www.nybooks.com/articles/21352

http://www.nysun.com/national/obama-rebuffs-soros/50846/