Sovereign Debt The New Ponzi Finance?

``I have no sympathy for Madoff. But the fact is his alleged Ponzi scheme was only slightly more outrageous than the 'legal' scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds, which Moody's or Standard & Poor's rate AAA, and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn't a pyramid scheme, what is?" Thomas Friedman, The Great Unraveling

As we have earlier exhorted, navigating the rough waters of 2009 markets will be challenging. It is because conventional analysis would have to be sidelined in exchange for the reading of political actions into the pricing system of the marketplace. The traditional scrutiny of earnings and GDP growth will have to pave way for the fundamentally altering risk reward environment motions of political preferences and the unforeseen reactions that such directives may engender.

As PIMCO’s Mohamed El-Erian recently wrote, ``Where does this leave investors? As my colleague Paul McCulley likes to say, only a thin line separates courage from stupidity. Investors should position their portfolios predominantly under the umbrella of government support rather than outside it; they should follow government actions rather than pre-empt them; and they should focus primarily on the senior parts of the capital structure.”

For starters, we understand that governments around the world will jointly be conducting monetary and fiscal programs to arrest the destructive impact of debt deflation and its aftermath. For instance in terms of fiscal measures, some of the reported expenditures earmarked for stimulus programs are (IIF.com): Japan $105 billion or 2% of GDP, European Union $254 billion (1.5% of GDP), Australia $7.4 billion (1% of GDP), China $586 billion (8.9% of GDP), India $4 billion (1.5% of GDP), South Korea $11.3 billion (1.1% of GDP), Chile $2 billion or (1.5% of GDP) and Mexico $5.8 bullion (.8% of GDP). Overall an estimated $3 trillion could be sourced from the markets this year three times that of 2008 (Financial Times).

Yet despite these immense allocations from the fiscal side, yield spreads in benchmark sovereigns of most OECD economies have been dramatically falling to reflect a “flight to safety” (see figure 1).

Figure 1: IIF.com: 10 Year Bonds

And this is not just reflected in nominal yields but likewise in real yields (or inflation adjusted). This means that based on market price signals from today’s bond market, interest rates of major economies are expected to remain low despite the proposed surge of issuance of government bank debt instruments.

To consider, bond yields play a very significant role in the economy as they signify ``an important transmission mechanism through which an easing in monetary policy affects the broader economy” to quote the Institute of International Finance (IIF), the world’s only global association of international financial institutions with some 375 members in 70 countries. Big segments of consumer credit are being benchmarked to these instruments. As the IIF further points out, `As low rates permeate down the yield curve, so they help support activity affected by longer-term rates”. For example, the US mortgage market used to be highly correlated or had been benchmarked from the 10 year bond yields until the emergence of this crisis.

While it is true that today’s bond market “flight to safety” boom favors government’s activities of providing cheaply funded fiscal programs, it is unlikely that the prevailing conditions could be sustained over the long term. As a caveat since we are not in the business of market timing, booms can last until it can’t.

Why? As we have previously stated, the fundamental problem is one of debt overload. Most of the major economies have absorbed far too much debt more than it can afford to sustain. And the subsequent debt deflation preceding the inflationary boom comes with the feedback loop dynamics of regressing and shriveling collateral values, funding or liquidity constraints and a paucity of capital.

With over $30 trillion of stock market capitalization vaporized in 2008, additional enormous losses in other markets (see 2008 Trivia: Lobby, Bailouts and Losses) and most importantly, losses in the financial institutions have now tallied over $1 trillion see figure 2.

Figure 2: IIF: Losses and Capital Raised

According to IIF (bold highlight mine), ``Reported and potential losses have put pressure on bank capital, despite the fact that banks and other financial institutions have raised $930 billion of capital, more than a third of which represents government’s stakes. As a defensive response, banks have conserved their capital and liquidity to be in a position to absorb potential losses, thus reinforcing counterparty risk aversion in drying up interbank transactions. Investors have also pushed banks to raise their capital, not only as measured by their Tier 1 ratio but also the equity/asset ratio. Essentially, until asset markets settle down so that investors can form a clear assessment of potential losses, more capital injection including by governments will not be sufficient to stabilize the banking system.”

As noted by IIF, the mounting losses in asset values as reflected in the financial system losses will likely impel the industry to remain on the defensive by trying to remediate balance sheet impairments than to provide “normalized” business activities or rekindling risk activities. This essentially relegates the burden of providing support of collateral asset values, liquidity constraints and capital provision to the government which ironically depends on taxpayers, or borrowing capacity or the printing press. As clearly manifested in figure 2, the US government have substantially been replacing the private sector as purveyors of such capital.

Yet, in a recessionary environment, which technically means decreasing economic output but factually translates to the market clearing of malinvestments caused by previous inflationary policies, surviving private businesses will likely be safeguarding assets and also be conservative or scrimp on expansion plans while households will likely exercise austerity. Thus, the ability to save should essentially reflect the ability to refinance or reinvest.

But governments aren’t interested about savings. In fact governments are afraid of savings or the so-called misguided popular Keynesian concept of the “paradox of savings” or “paradox of thrift”. What is good for the individual is extrapolated to be bad for the economy, as we discussed in Consumer Deflation: The New Fashion. A weakening economy is always projected on the prism of the slackening of demand which necessitates government’s role to assimilate on such shortcomings. Thus, governments everywhere expect to takeover the role of “inflating” their national economy billed to the taxpayers of the next generation. It is a concept which relies on the principle of SOMETHING for NOTHING based on the virtue of consumption over production. (Why do you think central banks are adopting Zero Interest Rate-ZIRP regimes?)

Proof? From the incoming President Obama [CNNMoney], ``What's required for the economy right now [is] to put more money into the pockets of ordinary Americans who are more insecure about their jobs, who are continuing to see rising costs in an area like health care, who are struggling to make ends meet." Where does one source funding “to put money into the pockets of the masses”?

But if history should serve as guide, the performance of a command driven economy almost always underperforms and produces more dependence on inflationary actions which exacerbates the entire vicious process of inflation-deflation (boom-bust), market-socialism cycles.

As Ludwig von Mises presciently wrote (bold emphasis mine), ``“The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.”

This is unfortunately true today. As for our politicians and their lackeys, this addiction to spend using taxpayer’s resources, which is construed as an inexhaustible pool, is unsustainable. But like the recent real estate boom bust conditions, unsustainable [boom] trends can’t last, as the popular Herb Stein quote goes, ``If something cannot go on forever it will stop.”

Predicated on the surge of government rescue programs, the IIF views the onrush of government issuance and today’s market pricing as brewing pressure of destabilizing imbalances (bold highlight mine), `` It is hard to reconcile this bond market pricing with economic policies (both monetary and fiscal) designed to stimulate recovery. The inference, of course, is that G10 bond markets have become distorted by extreme conditions under which end investors and financial institutions are desperate for the apparent security offered by government bonds. As a result something of a bubble has developed in these debt markets. The problem with this flight to “quality”, however, is that G10 government bond yields are thus liable to upward correction at some point, either because of credit or inflation concerns (or a bit of both). This implies considerable downside price risk, which could be a new source of financial sector volatility at some point in the future.”

Nonetheless, the basic problem lies squarely with the patent building up of the mismatches between the supply side-availability and accessibility of capital-with the government’s demand for it.

Hence, if global economies recover and risk appetite regains ample groundswell then the safehaven pricing for treasuries will severely be reversed, as money flows will be redirected towards risk assets.

On the other hand, if the leverage absorbed and produced by the governments can’t be sustained or paid for by the revenues generated by the economy or its lack of ability to pay gets reinforced, then the sovereign risks of a credit default could become a reality.

This reminds us of Mr. William Gross’ outlook who recently discoursed about some of the intrinsic Ponzi structures in the US economy, `` Municipalities with begging bowls now extended for over a trillion of Federal taxpayer dollars, based their budgets and their own handouts on the perpetual rise in home prices, the inevitable upward slope of sales taxes, and the never-ending increase in employment and personal income taxes. To add injury to insult, they conveniently “balanced” their books with a host of accounting tricks that Bernie Madoff could never have come up with in his wildest imagination. Now, with cash flow insufficient to meet current outflows, they are proving my point that we have met Mr. Ponzi and he is us – all of us: auto companies that siphoned sales dollars to make labor peace instead of research and design expenditures; hedge funds that preposterously billed investors for 2% and 20% of nothing; a President and politicians who thought they could fight a phony war for free and distract the nation’s attention from $40 trillion of future social security and health care liabilities. Ponzi, Ponzi, Ponzi.”

Yes, sovereign debt has now assumed the new role of Hyman Minsky’s Ponzi financing.

Fundamentals of Credit Default Risks

So the credit default risks from sovereign debt emanates primarily from the debt issuance far outnumbering the pool of available capital, especially in a world where external trade has been shrinking and collateral has been losing value.

Another, any signs of the reemergence of inflation or of a global economic recovery may result to a stampede out of a one sided trade.

Furthermore, government debt will be competing with the private sector debt on a global scale for funding or capital raising, which is likely to lead to a “crowding out” effect. The crowding out effect as defined by wikipedia.org is ``when the government expands its borrowing to finance increased expenditure, or cuts taxes (i.e. is engaged in deficit spending), crowding out private sector investment by way of higher interest rates.”

Of course, the “crowding out” phenomenon will only happen once the mechanism of the present global flow of funds diminishes. (We don’t believe that it will reverse because under a US dollar standard system, deficits are the inherent characteristic of the currency reserve economy.) Yet such phenomenon will likely occur as a result of governments working to strengthen their domestic economies, by utilizing their savings and or forex surpluses at home than by undertaking the previous global “vendor financing scheme”.

The crowding out effect, which gives priority to domestic government consumption than to private investment, therefore stifles economic growth. Therefore a world which engages in “nationalist” oriented policies would likely see repressed economic growth.

In addition, if the US Federal Reserve makes good of its threats to close the arbitrage gaps along the yield curve of US treasuries, by manipulating (buying) the long end, which is meant to reduce the incentives for the US banks to hold reserves and compel them to normalize operations (as we discussed in 2009: The Year of Surprises?), then such actions could possibly function as a window for the forex surplus rich major trading partners to “gracefully” exit US treasuries, while at the same time massively expand the balance sheet of the US Federal Reserve (possibly beyond the capacity for its citizenry to finance) and or serve as the bubble “blow-off” which could reintroduce substantial volatility back into the financial markets.

Remember, any drastic upsurge in the interest rates, as indicated by the activities in the US treasuries, will only serve to undo any incremental gains accrued from the recent activities.

Moreover, given the ginormous leverage built into the financial system, a sudden increase in US interest rates will mean higher cost of financing for the US government or for those institutions and virtually the economy on a lifeline which could further undermine its economic recovery path.

As we have earlier said, 2009 could likely be an exciting year, simply because government policy actions risks creating an environment where financial and economic conditions could swing from one extreme end to the other.

Philippines Secures Funding Requirements; Return Of The Bond Vigilantes?

At the onset of 2009, so far there have been a few signs of troubles evident in the global bond markets.

If there is anything paramount, I should salute or commend the Philippine Central Bank, the Bangko Sentral ng Pilipinas (BSP), for their intrepid and swift actions as the “first mover” in tapping of the debt markets in the region, amidst a jittery backdrop.

You probably have read how the Philippines secured $1.5 billion in what was to be a remarkable FOUR times oversubscribed issuance (Businessworld) under a highly apprehensive atmosphere.

This comes even as the government’s budget deficit has reportedly increased to Php 102 billion from Php 75 billion which incorporates the Php 300 billion stimulus package (AFP). While a foreign institution have made a call to sell the Peso based on perils of “exploding” fiscal position, our view is that currency valuations are always relative, if paired with the conventional US dollar, fiscal cost of the latter will likely balloon more than the Philippines.

Anyway, the Philippines haven’t reportedly overpaid, in terms of high interest rates, in enticing investors though.

Besides, analyzing the buying composition of the deal gives us some clues of the potential flow of funds or source of future investments for Philippine assets.

According to the Finance Asia (bold emphasis mine),

``The 10-year bonds were priced at 99.158, which gives investors a yield of 8.5% – equivalent to a spread of 599.9bp over US Treasuries and 20bp over the implied 10-year curve. Investors paid a very tight new-issue concession of just 23-24bp, which compares very favourably with similarly sized 10-year offers by Brazil and Colombia on Tuesday, and a $2 billion 10-year offer by Mexico in December, all of which paid premiums of between 40bp and 50bp.

``This is partly explained by the strong Asian sponsorship of Philippine deals – 41% of the issue was picked up by regional investors, with 38% going to the US and 21% to Europe – because many of the region's investors are not heavily influenced by the premiums paid in international markets…

``In total, the lead banks – Credit Suisse, Deutsche Bank and HSBC – took $5.8 billion of orders from 281 investors. Funds dominated demand for the bonds, accounting for 58% of the orders, followed by: banks (20%); pension funds, insurers and government institutions (16%); and retail and corporates (6%).”

As you can see aside from the remarkable huge bid-to-cover spreads albeit slower than last year (Finance Asia), Asian buyers which may have comprised of regional financial institutions had been the primary buyers, although a significant chunk of the regional demand could have also been rooted from local institutions.

The point is Philippine bond deal may have reflected some improvement in investor’s sentiment, as we have seen positive uptake of emerging market issuance in Turkey for $1 billion, Brazil for $1 billion and Colombia for $1 billion (Financial Times) or even in France and Spain for a combined € 11.4 billion (guardian) or Austria € 3 billion and Ireland € 6 billion (Financial Times), this despite the seeming outlier or the poorly supported German bond auction which initially targeted € 6 billion but received only 87% bid for an issuance of € 5.24 billion (Financial Times). Incidentally, the dismal result of the German bond offering came almost a day ahead of the Philippine tender, which has shown little influence to the deal’s outcome.

Besides, despite the highly anxious global financial market conditions, the success of the Philippine bond deal could have indicated of the improving liquidity conditions in the region or locally, aside from the surprisingly strong appetite for its securities from the financially and economically besieged Anglo Saxon economies.

As for the demand from Western markets, perhaps the closing of year end related tax portfolio rebalancing (see Phisix: The Fantasy Of The 2008 "Window Dressing" Year End Rally) could have likewise enhanced the reception of Philippine bonds.

Additional interesting insights from the recent offerings:

One, the yields were significantly higher than the previous, for the Philippines 6.5% in January 2008 while 8.5% for last week. Austria and Ireland were likewise “forced to pay higher yields than existing bonds to issue debt”. This gives credence to our belief that funding cost will climb over time, especially as governments actualize their purported programs.

Finally, while the drab results of the German bond auction could be construed as a market anomaly, on the obverse side, it could likewise signal an incipient crack in the bond auction markets as ‘bond vigilantes’ stage a reawakening.

Bond vigilantes, by the way, are fixed income investors who, according to the illustrious Forbes analyst James Grant, “took a pledge: Never again would they be the dupes of a central bank. They would henceforth sell at the first sign of inflation.”

Thus, the latest offering secures the Philippines and the other early birds, who availed of the seemingly improved market sentiment and conditions, the trouble of a probable “buyers strike” or the return of the bond vigilantes possibly anytime within the year.

Government Guarantees And the US Dollar Standard

``At some point, it will become necessary to guarantee failing pension plans, income, Medicare payments, mortgage payments, bank deposits, student loans, commercial paper, insurance policies, jobs, unemployment payments, old age payments, and much else, all at the same time. People will question the worth of shifting massive resources from one set of pockets to another set of pockets. They will see that the government guarantees nothing. It recycles resources it extracts from us back to us. This realization will mark the sunset of belief in federal guarantees.”-Professor Michael Rozeff, The Sunset of Federal Government Guarantees

One of the main objections to the risks of sovereign credit default is the purported faith on government guarantees.

Such belief is representative of unremitting and inexorable dependence in governments as drivers of the economic and financial prosperity. Yet bereft of the lessons of history and the basic principles of economics, never have these people realized that governments EVERYWHERE through the years and through their coercive police and military powers almost always change the rules in the middle of the game, or in accordance to leader’s whims or to fungible political priorities or imposed policies with short term noble sounding relief programs at the expense of negative long term costs or protected a few interest groups in the “name of the patriotism” or have robbed people of their property rights through unjust distributive inflationary policies.

In short, despite the repeated failures to achieve major societal goals, people have come to believe government guarantees mean something.

Yet believing in governments as solution to society’s upliftment could be fatal. What people haven’t realized is that guarantees require real capital or real resources for it to be dependable. Running huge deficits and paying them off with printing press money which can’t be backed by real capital means government guarantees “are not worth the paper they’re printed on” to quote Professor Michael Rozeff.

As we pointed out in It’s a Banking Meltdown More Than A Stock Market Collapse!, Iceland for instance, just last year used to be among the world’s wealthiest economies with a per capita income which was the 6^th highest. As the recent crisis unfolded, the Icelandic government guaranteed the deposits of its financial system and nationalized its overleveraged major banks in the hope to apply the magic wonders of the government wand. Unfortunately, due to the lack of real capital, the country of 320,000 went bankrupt.

Iceland’s banking system which operated like a national hedge fund during the heydays will be paying a pretty stiff price for its misadventures and policy blunders, according to Economist (bold emphasis mine), ``Gross government debt is forecast by the IMF to increase from 29% of GDP at the end of 2007 to 109% of GDP in 2009. Apart from the widening deficit, the increase in debt will result from three main causes: first, the recapitalisation of the failed commercial banks now under public ownership will cost around Ikr385bn, or 25% of GDP; second, the costs of recapitalising the Central Bank will be close to 10% of GDP; and third, meeting the extensive obligations of the failed banks (that is, compensating depositors and other creditors) will cost around 47% of GDP. A sizeable portion of this should, however, be recovered over the coming years as the banks' assets are sold. Nevertheless, there will a large debt-servicing burden on the central government that will have to be met by extensive cuts in government spending or through higher taxes.” Ouch.

The lesson here is that paper guarantees from any government may not even be worth anything unless they are backed by real resources or real capital. The same applies with the US dollar, the world’s preeminent currency backed by full faith and credit by the US government.

The belief that the US dollar is insuperable and is unlikely to seriously suffer from negative repercussions from its accrued reckless and imprudent past and present policies could signify as perilous complacency.

The fact that the recent crisis has its epicenter in the US and has rattled the foundations of the global banking system aside from disrupting the world trade financing have prompted some governments to explore alternative means of conducting trade outside the US dollar system such as:

1. The recent case of rice for oil barter between Thailand and Iran (see Signs of Transitioning Financial Order? The Emergence of Barter and Bilateral Based Currency Based Trading?),

2. Mounting talks about the resurrection of a modern form of Bretton Woods Standard (as previously discussed in Bretton Woods II: Asia Weighing In Too? and in Bretton Woods II: Bringing Back Gold To Our Financial Architecture?),

3. Utilization of a new payment system which uses local currency for trade as in Brazil and Argentina’s Local Currency Payment system. China and Russia has likewise been reportedly mulling to engage in a similar domestic currency based bilateral trade and

4. A pilot form of regional currency standard such as China’s recent proposal to expand the use of its currency as a medium of trade for China, Hong Kong Macau and ASEAN countries (BBC)

So aside from policy induced fundamental deterioration, all these exogenous events serve as ample evidence of the growing vulnerability of the US government guaranteed US dollar standard system.

Mike Hewitt of Dollardaze.org has made a splendid study on currencies where he observes that some 173 currencies are in circulation in the world today.

Yet not all of the existing currencies are widely used or circulated. Mr. Hewitt gives some examples as the “unofficial banknotes of the crown dependencies (Isle of Man and the Balliwicks of Jersey and Guernsey).”

Importantly Mr. Hewitt provides us some very important facts from today paper currency regime (all bold highlights mine):

-The median age for all existing currencies in circulation is only 39 years and at least one, the Zimbabwe dollar, is in the throes of hyperinflation.

-Excluding the early paper currencies of medieval China (and India, Japan and Persia) as well as the majority of paper currencies that existed in China until 1935, there are 612 currencies no longer in circulation. The median age for these currencies is only seventeen years.

Figure 3: DollarDaze.org: Fates of Currencies

-Both war and hyperinflation have each been responsible for the demise of 145 currencies. The Second World War saw at least 80 currencies vanish as nations were conquered and liberated.

-Second only to war, hyperinflation is the greatest calamity to strike a nation. This devastating process has destroyed currencies in the United States, France, Germany, and many others.

As one can observe, paper currencies tend to be generally short lived. Importantly, the fact that war and hyperinflation have been the main proximate factors which has caused most of the world’s currencies to disintegrate depicts that both are related.

To quote Ludwig von Mises in Nation State and Economy,

``One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.”

Markets and Inequality: What Goes Up Must Come Down?

In our October’s Spreading the Wealth? Market IS Doing It! we averred that falling markets have been reducing the net worth of the richest. This has possibly been closing much of the controversial “inequality” gap.

We’ve got some interesting charts from the Economist….

Fabulous "inflationary" driven booms almost equal horrendous "deflationary" bust.

According to the Economist, ``INVESTORS are told that the value of their shares may go down as well as up. Rarely, however, do they plummet as far as they did in 2008. The total return of the S&P 500 index fell by nearly 40% last year, the second-worst performance by America's stockmarket since 1825, according to calculations by Value Square, a Belgian asset-management firm. Comparisons to the Depression are clear: only in 1931 and 1937 were there similarly abysmal losses. The firm looked at various predecessors of the S&P 500 from 1923 onwards, and for earlier years took data from a working paper by Yale Management School on the returns of companies listed on the New York Stock Exchange. Since 1825, 129 years saw rising returns, whereas 55 suffered falls—four of them in this century.”

And since stock market exposure is highest with those from the upper income strata….

Courtesy of Investment Company Institute

Apparently falling markets hurt them more, where according to the Economist,

``Over a third of American millionaire households said they lost at least 30% of their net worth since September, according to a new report by Spectrem Group, a financial consultancy. Property, mutual funds, shares and annuities took the biggest knocks. Unsurprisingly, financial advisors are under more scrutiny, with satisfaction levels falling from 60% earlier in the year to 40%. A majority of the wealthy say they may not be able to support their lifestyles and nearly 20% will delay retirement.”

Liberals must be enjoying these…

Black Swan Problem: Not All Markets Are Down in 2008!

As we noted in our November post Black Swan Problem: Not All Markets Are Down!, hasty generalizations won’t do any good. Despite the recent squall in the global financial markets there are still some countries that have managed to end up in green or have not fallen below the 20% threshold which technically delineates what is known as a bear market.

Bespoke Invest provides the annual performance of stock markets of 84 countries in 2008…

According to Bespoke, ``32 of the 84 countries were down more than 50% in 2008, while just three countries finished in the green -- Ghana, Tunisia, and Ecuador. Iceland was down by far the most, losing nearly all of its value at with a decline of 94.43%. Of the G-7 countries, the UK did the best with a loss of 31.33%, followed by Canada (-35%), and the US (-38.5%). With a decline of 48.4%, Italy was the weakest of the G-7 countries. At the start of 2008, the decoupling trade was all the rage, as emerging markets such as Brazil, Russia, India, and China (BRIC) were supposed to hang in there much better due to continued growth prospects. When all was said and done though, of the BRIC countries, only Brazil did better than any of the G-7 countries, while India, China, and Russia were all down more than 50%.”

Some added observations:

-Including the 3 ‘advancers’, there are 9 national benchmarks that have not fallen below the bear market threshold of 20% in losses. Of course this is based on domestic currency metrics and is likely to smaller when adjusted for US Dollars.

Said differently, the 9 benchmarks have decoupled from most of the global markets.

As we earlier quoted, ``No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion," wrote philosopher David Hume in his Treatise on Human Nature, which is a rephrase of the black swan problem posed by John Stuart Mill [Nassim Nicolas Taleb: Fooled By Randomness p.117]

Thus, decoupling then a myth? (Decoupling for us is a semantic argument; our point is in a world of globalization which is another word for more integration, the greater interconnectedness of markets and economies are likely to reflect more “synchronization”, but integration won’t be perfect. Besides, it our suspicion that forcible liquidations due to debt deflation have been the unseen knot responsible for the near simultaneous reaction of markets.)

-Asian Markets have been significantly hit compared to its European counterparts or even the source of the troubles…the US.

To consider it has been the US and Europe suffering from a combined debt deflation, economic slowdown and balance sheet impairments.

Courtesy of ADB’s December Asian Bond Monitor

Meanwhile Asia’s link has been through mainly through trade, liquidity and capital flows. Thus, it is my hunch that Asian markets could outperform as previously discussed 2009: Asian Markets Could OUTPERFORM

Will Previous Crisis Serve As Deserving Guidepost For Today’s Crisis?

At a social affair, last night, an acquaintance brought up the issue of how long this crisis could possibly last. [As usual this analyst stammered.]

Fortunately a study by Harvard’s Ken Rogoff and Carmen Reinhart over previous episodes of financial/banking, real estate crisis should give some clue. (Hat tip: John Maudlin)

Although it is best to be reminded that in reading history, things are always obvious after the fact. And that conditions that have led to the crisis may be “deterministic” to quote Nassim Taleb, whose conditions which have led to such may not be always be identified or observed.

So for those groping for an answer, here are some points or bullets from the Rogoff-Reinhart study (all quotes and charts from Rogoff-Reinhart study:

On the real estate bust:

-The cumulative decline in real housing prices from peak to trough averages 35.5 percent.

-The most severe real housing price declines were experienced by Finland, the Philippines, Colombia and Hong Kong. Their crashes were 50 to 60 percent, measured from peak to trough.

-The housing price decline experienced by the United States to date during the current episode (almost 28 percent according to the Case–Shiller index) is already more than twice that registered in the U.S. during the Great Depression

-Notably, the duration of housing price declines is quite long-lived, averaging roughly six years (with Japan 17 years!)

On the Effect to Equities:

-the equity price declines that accompany banking crises are far steeper than are housing price declines, if somewhat shorter lived.

-The average historical decline in equity prices is 55.9 percent, with the downturn phase of the cycle lasting 3.4 years

See below…On Unemployment:

-On average, unemployment rises for almost five years, with an increase in the unemployment rate of about 7 percentage points. While none of the postwar episodes rivals the rise in unemployment of over 20 percentage points experienced by the United States during the Great Depression, the employment consequences of financial crises are nevertheless strikingly large in many cases.

-when it comes to banking crises, the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. While there are well-known data issues in comparing unemployment rates across countries, the relatively poor performance in advanced countries suggests the possibility that greater (downward) wage flexibility in emerging markets may help cushion employment during periods of severe economic distress.

-The gaps in the social safety net in emerging market economies, when compared to industrial ones, presumably also make workers more anxious to avoid becoming unemployed.

On GDP:

-The average magnitude of the decline, at 9.3 percent, is stunning.

-post– World War II period, the declines in real GDP are smaller for advanced economies than for emerging market economies. A probable explanation for the more severe contractions in emerging market economies is that they are prone to abrupt reversals in the availability of foreign credit. When foreign capital comes to a “sudden stop,” to use the phrase coined by Guillermo Calvo, Alejandro Izquierdo, and Rudy Loo-Kung (2006), economic activity heads into a tailspin.

-Compared to unemployment, the cycle from peak to trough in GDP is much shorter, only two years.

-the recessions surrounding financial crises have to be considered unusually long compared to normal recessions that typically last less than a year.

On debt buildup

-same buildup in government debt has been a defining characteristic of the aftermath of banking crises for over a century. We look at percentage increase in debt, rather than debt-to-GDP, because sometimes steep output drops would complicate interpretation of debt–GDP ratios.

-the characteristic huge buildups in government debt are driven mainly by sharp falloffs in tax revenue and, in many cases, big surges in government spending to fight the recession.

-The much ballyhooed bank bailout costs are, in several cases, only a relatively minor contributor to post–financial crisis debt burdens.

Their conclusion:

``An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years, respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

``How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime. Some central banks have already shown an aggressiveness to act that was notably absent in the 1930s, or in the latter-day Japanese experience. On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors. A few years back many people would have said that improvements in financial engineering had done much to tame the business cycle and limit the risk of financial contagion.

``Since the onset of the current crisis, asset prices have tumbled in the United States and elsewhere along the tracks lain down by historical precedent. The analysis of the post-crisis outcomes in this paper for unemployment, output and government debt provide sobering benchmark numbers for how the crisis will continue to unfold. Indeed, these historical comparisons were based on episodes that, with the notable exception of the Great Depression in the United States, were individual or regional in nature. The global nature of the crisis will make it far more difficult for many countries to grow their way out through higher exports, or to smooth the consumption effects through foreign borrowing. In such circumstances, the recent lull in sovereign defaults is likely to come to an end. As Reinhart and Rogoff (2008b) highlight, defaults in emerging market economies tend to rise sharply when many countries are simultaneously experiencing domestic banking crises.”

Our observations:

-present crisis in the US isn’t just about a real estate crisis but a combination of both real estate and banking crisis since the real estate industry depended on Wall Street to fuel its bubble. This risks extending the duration of the economic slump! The previous averaged about 6 years (Rogoff-Reinhart) where today the US housing bust is only 3 years old!

-the US centric crisis hasn’t been just about real estate bubble bust and bank recapitalization issues but also about falling tax revenues and state deficits and importantly household balance sheet impairments. So it is going to be difficult to make precise assessment using past data.

-for the Philippines today, the decline of 56% squares with “the average historical decline in equity prices is 55.9 percent”. But since we did not suffer from a banking crisis but got unduly affected by the chain process of global forcible selling, “the downturn phase of the cycle lasting 3.4 years” has got to be lower.

-Rogoff-Reinhart: “the declines in real GDP are smaller for advanced economies than for emerging market economies. A probable explanation for the more severe contractions in emerging market economies is that they are prone to abrupt reversals in the availability of foreign credit.”

Previous crisis lumped as one was either “regional or individual” as rightly noted by the authors. Today’s crisis is global (also rightly pointed out). But the important difference is where the crisis emanated from.

Although the apparent fallout dynamics identified by the Rogoff-Reinhart study had been present in today’s crisis even when the epicenter had been in the US, it is because present dynamics has yet been exhibiting the privilege of the US dollar as the world' currency reserve.

But this seems to be changing, for the new year, a news report says that China is offering its neighbors to trade directly in their currency,

from BBC, ``China has said it is to allow some trade with its neighbours to be settled with its currency, the yuan. The pilot scheme was announced in a package of measures designed to help exporters hit by the global downturn…Officials did not say when the trial scheme would start. When it does, the yuan could be used to settle trade between parts of eastern China (Guangdong and the Yangtze River delta) and the territories of Hong Kong and Macau, and between south-west China (Guangxi and Yunnan) and the Asean group of countries (Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam).”

In short, “abrupt reversals in the availability of foreign credit” could happen on a different context. As the common Wall Street precept says, ``Past performance may not guarantee future outcome."

-Very interesting commentary from Rogoff-Reinhart: ``The gaps in the social safety net in emerging market economies, when compared to industrial ones, presumably also make workers more anxious to avoid becoming unemployed.”

Could the welfare “mentality” of developed economies have contributed to the unemployment predicament, compared to “gap filled” or “less safety nets” in emerging markets? Or put differently, has free markets contributed to better employment recovery for EM during the past crisis?

Here we are reminded of Ludwig von Mises in Human Action, ``The policies advocated by the welfare school remove the incentive to saving on the part of private citizens. On the one hand, the measures directed toward a curtailment of big incomes and fortunes seriously reduce or destroy entirely the wealthier peoples power to save. On the other hand, the sums which people with moderate incomes previously contributed to capital accumulation are manipulated in such a way as to channel them into the lines of consumption.”

-Rogoff-Reinhart: “The much ballyhooed bank bailout costs are, in several cases, only a relatively minor contributor to post–financial crisis debt burdens.”

We can see now why Mr. Rogoff had been calling for inflating the value of debts away (see Kenneth Rogoff: Inflate Our Debts Away!). He believes that bailout costs would have a “minor” impact on the economy going forward, but his conclusions were premised upon comparisons made during the past crisis when they had been “individual or regional” in nature, whereas today’s crisis is global.

Thus, it is a wonder just how valid his thesis will be.

2009: The Year of Surprises?

``A profound restructuring of global capital has become unavoidable. Such a process is quite different from a recession in the traditional sense. In contrast to a sharp and typically short-lived recession, when, after the rupture, business as usual can go on, the restructuring of a distorted capital structure will require time to play out. Rebalancing the distorted capital structure of an economy requires enduring nitty-gritty entrepreneurial piecemeal work. This can only be done under the guidance of the discovery process of competition, as it is inherent in the workings of the price system of the unhampered market.”-Antony Mueller, founder of Continental Economics Institute, What's Behind the Financial Market Crisis?

2009 will surely be an exciting year.

How can it not be?

After markets got beaten black and blue in 2008, the world in terms of government policy actions have been responding in an unprecendented breadth and scale, using up all possible and known tools, to prevent the financial meltdown or debt deflation from filtering or spreading to the real economy on a global dimension.

Given the alarmist response of policymakers, fear appears to have given way to outright panic. This suggests that at worst, we could be at risk of walking the tightrope between a depression and a collapse of the world’s monetary standard. At best, this could signal a monumental shift to a new financial and economic world order.

Undue Panic? First, global central bankers of major economies have collectively been lowering rates at a frenzied pace. A few economies like such as the US Federal Reserve Bank, Bank of Japan and Swiss National Bank have now embarked on a Zero Interest Rate Policy (ZIRP) regime. Others are expected to play catch up.

Next, the same authorities have been taking up the manifold role of last resorts as lender, guarantor, liquidity provider, market maker, financiers and investor, all within the doctrinal confines of the monetarist approach led by the illustrious late Milton Friedman.

Third, global policymakers have been doing a John Maynard Keynes in adopting massive fiscal stimulus programs. This seems to be the largest D-Day like operations to ever take hold where national economies would be coughing up trillions of dollars to replace “lost” aggregate demand with government spending.

Meanwhile, some central bankers have now been resorting to the crudest of all central banking tools; the printing press. Under the technical label of “Quantitative Easing” some central banks would be intervening directly in the marketplace mostly bypassing the commercial banking system-by providing loans directly to end users or by buying assets directly (mostly bonds to possibly even stocks) with the goal to reduce interest rate gap arbitrage, buoy asset prices and forcibly pry open the banking system to “normalize” lending or by intervening in the currency market with the tacit goal of “depreciating” the currency-without sterilizing or mopping these up.

Essentially today’s primary practitioner of the printing press, a signature approach of Zimbabwe’s central bank governor Dr. Gideon Gono will in essence be given a boost, as central bankers of major economies will likewise be utilizing these as the NUCLEAR option.

Politics and Inflation As Drivers, Overcapacity Balderdash

As anyone should notice, to gloss over the political dimension as drivers of markets and of economies in 2009, when governments have arbitrarily bestowed upon themselves the divine privilege of administering life or death to which industries or companies it would deem as qualified or otherwise, would be a monumental mistake!

For instance, in the US, given the approval of General Motors’ financing affiliate, the GMAC, to upgrade its status into a bank holding company, which essentially grants license for it to access government loans, has used this extraordinary privilege to aggressively launch a market pricing offensive (how about predatory pricing?) by offering 0% financing to the public at the expense of other automakers as Ford, Toyota or others that have not availed of government loans and rescues programs. In short, the competitive edge seems shifting in favor of those closest to Washington.

And it is no wonder why political lobbying has now transformed as the de facto booming Industry in the US and elsewhere as governments rediscover their clout in the economic horizon.

And it would be no different when applied to any country, such as the Philippines which has slated to undertake its own P 300 billion stimulus program for 2009 (abs-cbn). Political pandering will mean beneficiaries of such inflationary policies would get a boost over and at the expense of the rest. It would be a heyday for politicos, cronies, the bureaucracy and those affiliated with them.

Altogether, a few trillions of US dollars will be earmarked to “stimulate” national economies around the world.

And this “political variable as determinant of economic and market output” will not be confined to the premises of domestic politics but one of geopolitics too.

Policies implemented by one country could have economic and political repercussions which could force a policy response elsewhere. For example, fearing the loss of its domestic automakers industry as consequence to the recent bailout extended by the US to its domestic auto industry, Canada had been compelled to match with its own bailout program.

The obvious risk from the rampaging streak of overregulation and excessive market intervention is to raise the level of protectionist sentiment at a time when global economies appear fragile and reeling from the deleterious contagion impact of the financial meltdown.

Moreover, the general deterioration of the economic landscape could also translate to a snowballing of public security risks. Growing societal discontent could translate to rising incidences of public disturbances or social upheavals. For example, this financial crisis has claimed its first victim in the Belgian government which had its third leader for 2008.

Then there have been emerging incidences of global financial crisis instigated rioting in Greece, Russia and in China.

In other words, increasing signs of political instability at home is likely to induce policies that are “nationally” oriented than from a “global” perspective.

Thus, experts advocating for the “great rebalancing” of the global balance of payments asymmetries are like operating in the field of dreams- inapplicable under the realities of the US dollar standard system, (see The Myth of the Great Rebalancing), aside from the ongoing dynamics in the geopolitical sphere.

Aside, such “noble intentions that don’t square with reality arguments” seem to justify Black Swan Guru Nassim Taleb’s denunciation of the economic industry’s ‘intelligent nonsense’, this time for playing up the pious hype of using “exporting overcapacity” as rationale for compelling policymakers to be seek globally oriented interventions to correct current account imbalances.

A lucid example to debunk such theories comes from empirical evidence accounted for by a report in the New York Times, ``Through August, steel production was actually up slightly for the year. The decline came slowly at first, and then with a rush in November and December. By late December, output was down to 1.02 million tons a week from 2.1 million tons on Aug. 30, the American Iron and Steel Institute reported. The price of a ton of steel is also down by half since late summer.

``“We are making our steel at four mills instead of six,” said John Armstrong, a spokesman for the United States Steel Corporation, adding that two mills were recently idled and the four still operating are running at less than full capacity…

``Foreign producers no longer have an advantage over the refurbished American companies. Indeed, imports, which represent about 30 percent of all steel sales in the United States, also are hurting as customers disappear.” (underscore mine)

The point is unless the economic agents driving the supposed "overcapacity" is the government itself, the reality is that if private businesses can't get enough orders or not enough demand, then they simply will have to reduce output or suffer accrued losses, or at worst, fold up as in the account of the US Steel industry’s woes. Even when supported with indirect incentives as “exports subsidies, subsidized financing, import tariffs or currency devaluation”, if demand falls enough to render businesses unviable then the supply side will need to adjust.

It isn’t overcapacity as the problem but excess supply. Yet falling prices around the world seems to account for the market clearing adjustment process of such surpluses.

Moreover, excess capacity in a world of scarcity is a misnomer. We simply don’t have enough of anything. And that’s why a pricing system exists for goods or services. And that’s why poverty still exists. Excess capacity thrives only in a relative sense, and is mainly due to government interventions designed to prop up certain industries.

Finally, geopolitical tensions have likewise been apparently increasing, possibly aggravated by the present global financial and economic conditions. Some recent examples include:

-The mounting tensions between India and Pakistan. Following the terrorist attack in Mumbai India, which India has pinned the responsibility to Pakistan, the latter’s reaction had been a remobilization of troops along the Indian border. This raises the risk of another outbreak of military conflict from which the belligerent South Asian neighbors had suffered 3 wars over the past 70 years (1947-48, 1965 and 1971).

-Russia’s arbitrary shut down of gas supplies to Ukraine came amidst an acute financial crisis in the region. Russia supplies 25% of Europe’s energy requirement with about 80% of natural gas imports coursed through Ukraine. Given the recent military victory of Russia over Georgia, Russia’s exploits could be deemed as another attempt to reassert geopolitical control over the crisis stricken Eastern Europe (Ukraine recently secured $16.4 billion in loans from the IMF). On the other hand, given Russia’s domestic crisis, the Ukraine gas supply episode may be construed as an attempt to deflect the public’s attention towards regional concerns. Nonetheless, an acrimonious environment could again raise the specter of another war conflagration.

-The recent spate of bombing by Israel of the Hamas controlled Gaza strip and its possible escalation have also added to geopolitical jitters.

Political Motives Allude To INFLATION As Resolution To Ongoing Debt Deflation

Over $30 trillion of market capitalization have vanished last year as a result of the 2008 meltdown while write downs from financial firms have been estimated to have topped $1 trillion (IHT). With $8.6 trillion of US taxpayer money pledged to guarantee and support the financial system, possibly plus another $1 trillion for the inaugural stimulus package for incoming US President Barack Obama many have been optimistic about a quick turnaround in the US economy.

For us, it is highly unlikely that a “normalized” credit recovery would happen the same way as it did in the recent past.

In a credit cycle the relationship of lending and collateral values becomes a self-reinforcing feedback loop. In a boom phase, increases in lending prompts for higher collateral values which fosters even more lending or gains beget even more gains, until such trends tips over to the inflection point. And when debt deflation ensues, the decrease in lending prompts for a similar reduction in collateral values which further impels for a decline in lending activities, thus, losses fuel even more losses.

This means that “normalization” should extrapolate to a “resurrection” of the previous 20-1, 30-1 or 50-1 leveraging seen in the securitization –derivatives market and the over $10 trillion shadow banking system! Unfortunately, with roughly 20% of US banking now owned by the US government, we won’t see the same degree of leverage, unless the US government and other governments will assume such a role.

Yet the US government has so far absorbed or cushioned much of the losses in collateral values but has been unable to push prices higher in order to spur the release of the huge stash of bank reserves in the system (see figure 1)

Figure 1: St. Louis Fed: Spike in Adjusted Monetary Base

Ironically too, while the US government has been trying to reignite the borrowing lending or credit cycle in the banking system with a gigantic infusion of funds into the system, calls for tighter regulation in the financial system is apparently offsetting all these efforts. In short, what the right hand is doing, the left hand is taking away.

For us, what seems most likely to occur is a back to basics lending template than a sudden reinvigoration of the credit system which is hardly going to successfully reverse the debt deflation process.

In addition, today’s housing and securitization bubble bust has been transforming the American psyche to a cash building deflation psychology (a.k.a. Keynesian term: slowing monetary velocity). In other words, US savings which has been nearly zero over the recent years will be improving as households and the financial sector repair their respective balance sheets. There would have to be an immense force strong enough to reverse such psychological trend.

This brings us to the basics: the fundamental problem of the US economy is simply having too much debt. Or debt levels more than the economy can afford, with most of these unsustainable liabilities tacked into the balance sheets of the financial industry and the US households. Today’s losses have reduced some of the imbalances but have not been enough to normalize credit flows with or without government interference. And the obvious solution is to bring debt levels down to where the economy can be able to sustain them.

Unfortunately given the severity of the situation the alternative solutions to the problem we could see are: Default, Debt forgiveness and or market based deflation or inflation.

As we have noted before default isn’t likely to be a favored option because it would entail a severe geopolitical backlash:

-The most probable response to the US government debt repudiation would be an outright collapse of the US dollar standard and the US banking system as every creditor nation would possibly disown or seize the US dollar and US dollar based assets when available.

-Protectionist walls will rise everywhere which would lead to the modern day great depression and possibly a world at war.

-given the US sensitivity to import dependence, the severance of trade will create extreme shortages in the economy.

On the other hand, market based debt deflation is representative of today’s meltdown.

Market based debt deflation seems an anathema to the existence of global central bankers, or seen alternatively, for debt deflation to succeed means the loss of justification for the existence of modern central banking. Thus, central bankers will likely exhaust all possible means to prevent deflation from succeeding with every available or known tool as we have been witnessing today.

Again this leaves us with two likely alternative paths:

In an inflation dependent economy (see Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?), structural economic growth requires the sustained acceleration of money and credit expansion similar to a pyramiding structure. This means that with the private sectors hands tied, only government can take its place by massively inflating the system from which they can implement through the banking system or outside the banking system (see Welcome To The Mises Moment)

In addition, the only possible way to reverse a deepening transition to a cash building deflation mindset is to debase the currency enough to incite people to seek an alternative “store of value” (as example see The Origin of Money and Today's Mackarel and Animal Farm Currencies).

Next, while the promulgated political incentives will be targeted to (hopefully) resuscitate the economy, the tacit incentives for authorities like US Federal Chair Ben Bernanke (and other central bankers who seem stooges for the Bernanke Doctrine) could be to erode the real value of existing liabilities echoing the calls of Harvard Professor and former IMF economist Ken Rogoff (see Kenneth Rogoff: Inflate Our Debts Away!) or simply to defeat inflation by all costs to validate Bernanke’s thesis as the “qualified” expert of the great depression (plain vanilla hubris).

Finally, central bankers have this notion that once they unleash the inflation genie out of the proverbial lamp, having to use it according to their desires, they can easily control, recapture and return it.

Yet the Federal Reserve could be overestimating their powers, according to Robert Higgs at the independent.org, ``So much potential new money is now impounded in the commercial banks’ holdings of excess reserves that it is difficult to see how the Fed will be able to stem the flood once the banks begin to transform those excess reserves into normal loans and investments. If the Fed attempts to sell enough government securities to soak up the growing money stock, it will drive down the prices of Treasury bonds and hence drive up their yield, increasing the government’s cost of borrowing to finance the huge budget deficits the government will be running because of its various bailout commitments and so-called stimulus programs. This scenario holds the potential for a complete monetary crackup.”

This implies that perhaps the risks that the markets or global economies could be faced with in 2009 will be tilted towards GREATER inflation if not HYPERINFLATION.

And for those who expect such a risk transition to be in a gradual phase, we just might get flummoxed. Let us take a clue from Murray Rothbard on 1923 Weimar Germany’s experience in his Mystery of Banking,

``When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price. The people will then clamor for the government to issue more money to catch up to the higher price. If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more—thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to “catch up” to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices “run away,” doing something like tripling every hour. Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and Phase III’s runaway psychology is as follows: “The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn’t money.” A frantic rush ensues to get rid of money at all costs and to buy anything else. In Germany, this was called a “flight into real values.” The demand for money falls precipitously almost to zero, and prices skyrocket upward virtually to infinity. The money collapses in a wild “crack-up boom.” (bold highlight mine, italics-Rothbard)

When governments decide that the risks to the real economy would require a dramatic reduction of debt levels then they may resort to massive devaluation which independently may lead to a currency war, hyperinflation, severance of the dollar links or dollar pegs, and a disorderly unraveling of the US dollar standard.

However, if global central bankers decide to resolve this problem collectively they may opt for “debt forgiveness” which may entail a reconfiguration of the world’s monetary architecture similar to one floated in yesterday’s Wall Street Journal Editorial over the seeming success of the Euro as a model, ``the lessons point to the eventual need for a single global currency. That may be a political leap too far. But the world could still harness the benefits of exchange-rate stability if its political and economic leaders began to discuss how better to coordinate monetary policy.” Not that we support such theme but our intention is to depict of the growing recognition of the cracks in the present monetary system by the mainstream.

Nonetheless, any new monetary architecture will effectively translate to a diminished role of the US dollar as the world’s currency reserve or the world’s economic and financial hegemon. So 2009 could be the advent for a new world order.