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The One-Sided Compromise – Guest Commentary By John Browne October 29, 2010

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The One-Sided Compromise

By: John Browne

Thursday, October 28, 2010

Last weekend, the G-20 finance ministers met in South Korea to find areas of agreement in preparation for the main G-20 gathering in November. The Chinese rebuffed renewed American pleas for them to revalue their yuan. They rejected Secretary Geithner’s suggestion of a four percent cap on current account surpluses. However, in return for accepting America’s continued dollar debasement, the Chinese did agree to “look into” a revaluation of the yuan and the management of trade surpluses. They also agreed to an international self-policing regime to curb currency manipulation. This ‘one-sided’ compromise was hailed in the Western media as a triumph for Mr. Geithner. The US stock markets and dollar rallied. All looked good for the election season in November.

Unfortunately, compromises are never one-sided; they are only construed as such. Though the reporting failed to emphasize it, Mr. Geithner actually agreed to a massive shift of monetary power in exchange for China’s empty concessions. The shareholdings and board composition of the huge and powerful International Monetary Fund (IMF) have now been shifted. China will now become the third largest shareholder of the IMF and the developing economies will get a six percent larger voting share. Two European states will lose their seats on the IMF’s board in favor of developing countries.

Meanwhile, China, supported by Russia, India, and even Brazil, continued to lobby hard for the US dollar’s privileged role as the international reserve currency to be replaced by a wide basket of currencies and gold. To this end, the IMF has recently been given additional “emergency” lending facilities. These could be used in a coming sovereign default crisis to ‘bail out’ Western countries, at which point they would be unable to resist global economic governance under the guise of the reformed IMF.

In short, Secretary Geithner’s “victory” at the G-20 was one only King Pyrrhus could love.

But the blame cannot be laid entirely with Mr. Geithner. The fact that he left the meeting at least saving a bit of face for his delegation is a monumental achievement, considering the dismal condition of the US economy.

Fed Chairman Bernanke appears desperate to flood the United States with another round of quantitative easing (QE-2). In a $13 trillion economy, a release of anything less than $1 trillion would not be seen as effective. Remember, the Fed already injected over $1 trillion after the credit crunch – and we are still in recession. How much will it take to right this listing ship?

When Geithner pledged to China a “gradual” debasement of the dollar, it is astonishing that they didn’t laugh him out of the room.

If he were to make good on his pledge and convince Bernanke to cut QE-2 to, say, $500 billion, the US GDP and stock markets would almost certainly begin to contract. This would threaten the banking system with a second crisis borne out of the ashes, or toxic assets, of the first.

For a frame of reference, the US home mortgage market is valued at some $10.6 trillion. Indeed, foreclosures and past-due loans amount already to some 14 percent of the market, or about $1.5 trillion. Of this staggering figure, the loans delinquent or in foreclosure to which the top three banks (Bank of America, Wells Fargo and JP Morgan) are exposed amount to more than $600 billion, an amount roughly equal to the original TARP bailout fund.

At the same time, thanks to falsely low interest rates, the banks’ net interest margins, or the difference between what they earn in loan interest and what they pay to their creditors, are being squeezed severely, while their non-interest earnings are falling, due to lower economic activity and the prohibitions contained in FinReg.

Finally, there is the murky question of how exposed the banks are to the massive derivatives market, a house of cards with a shaky foundation.

As we have described for several years, the US economy is virtually locked into a long arc of decline. There are no politically palatable solutions to this quandary. Until Americans are ready to take their lumps and accept a steep drop in their standard of living, the US government will have no leverage with the creditor nations and no ability to keep its promises. Therefore, we should celebrate when China even gives our Treasury Secretary an audience.

If China does manage to topple the US dollar from its perch as the international reserve currency, our economy will very likely move into free fall as decades of inflation come pouring back into the country. We will be forced to live within our means or face hyperinflation. Losing a few votes at the IMF is a small cost to delay this eventuality, but it also puts us one step closer to it.

John Browne is a Senior Market Strategist at Euro-Pacific Capital. He’s been a member of English Parliament, an advisor to Prime Minister Margaret Thatcher, and currently serves as Lead Panelist for The Mangru Report. You can view all of his commentaries by CLICKING HERE NOW.

The Mangru Moment on China Currency Manipulation – The Mangru Report Episode 21 October 27, 2010

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While Congress passes a new resolution to label China as a currency manipulator, Dan Mangru evaluates whether this is just political posturing or real policy.  China recently unpegged its currency (the yuan) from the U.S. dollar but has seen more pressure from the U.S. to allow it’s currency to appreciate so that U.S. manufactured goods would be cheaper to Chinese consumers.
During this Mangru Moment, Mangru also takes a hard look at whether the U.S. should fight it’s battles with China via the media, whether the U.S. should be focused on growing the Chinese market, and what’s ultimately best for America.

 

 

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New Poll: Who is the leader of the Tea Party? – CLICK HERE TO VOTE

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War On Your Dollar – Bernanke’s September Surprise – The Mangru Report on Fox Business – Episode 20 October 7, 2010

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Federal Reserve Chairman Ben Bernanke recently announced that the recovery was not as strong as originally thought, the U.S. did not have enough inflation, and that the Fed would increase it’s debt purchases & inject more money into the system.

Watch Dan Mangru, John Browne (Euro-Pacific Capital), Anthony Pulieri (United Bullion Group), and Michael Solomon (Author, Where Did My America Go?) discuss how the dollar is being devalued, how Bernanke has created the perfect storm for gold, why China is not buying U.S. debt, and whether there is too much hype and excitement in the gold market.

Links:
Worried About Your Wealth? – Read This TODAY

New Poll: Is the Tea Party Legitimate? – CLICK HERE TO VOTE

Download The Mangru Report App for your iPhone, iPad, or iPod Touch

Watch Steve Forbes, Peter Schiff, & More This Saturday And Sunday On Our Special Freedom Fest 2010 Episode July 26, 2010

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The wait is over.  This weekend, The Mangru Report will be airing its highly anticipated Freedom Fest 2010 episode.

You’ll be able to watch Dan Mangru’s exclusive one-on-one interviews with Steve Forbes, Chairman and CEO of Forbes Inc., and Peter Schiff, President of Euro-Pacific Capital and current U.S. Senate Candidate from Connecticut.

We will also feature expert panel commentary from:

Adrian Day, Adrian Day Asset Management
Jack Dzierwa, U.S. Global Investors
Lou Petrossi, Wealth Research Institute
Frank Trotter, Everbank

Taxation By Representation and War on Your Dollar – The Mangru Report – Episode 5 June 7, 2010

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Original Airdate: May 29, 2010. Broadcast on: Fox Business

Here’s a double dose of The Mangru Report Panel of Experts.  In these two installments you’ll listen to John Browne of Euro-Pacific Capital, Anthony Pulieri of United Bullion Group, and Florida Senate President Mike Haridopolos discuss whether the U.S. dollar could be replaced by gold as the world’s international currency, why China, Brazil, and Russia are pushing for a safer currency, and why Americans are justified in being angry that their taxpayer dollars went to a Greece bailout.

Florida Senator Mike Haridopolos, John Browne, and Anthony Pulieri on The U.S. Dollar’s World Reserve Currency Status June 3, 2010

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With countries around the world plotting to overtake the U.S. Dollar, and places like Abu Dhabi installing gold ATMs (ATMs that spit out gold bars instead of dollars), is the U.S. dollar on the ropes?  From Episode 5 of The Mangru Report on Fox Business, Florida Senate President Mike Haridopolos (www.senatormike.com), Anthony Pulieri (United Bullion Group), and John Browne (Euro-Pacific Capital) discuss the U.S. dollar’s future as the world’s reserve currency on this War on Your Dollar segment.