August 18, 2011

Fed Arrives at the End of the 'Road to Nowhere' — $15 Trillion in U.S. Ghost Assets Will Go Up in Smoke in the Second Half of 2011

At a moment of historic weakness of the US economy -- of the Fed and the US debt market -- (in our opinion) represents the certainty of a sudden meltdown in the US debt bubble in the second half of 2011. The international system is in such a state of weakness and decay that any major shock could sweep it away in a new turmoil. The US debt market is in the course of reaching this stage and, of course, the US Dollar as well.

Global Systemic Crisis – Last Warning Before the Autumn 2011 Shock, When $15 Trillion of Financial Assets Go Up in Smoke

GlobalEurope Anticipation Bulletin, Public announcement GEAB N°56-Special Summer 2011
June 16, 2011

On December 15, 2010, in the GEAB N°50, LEAP/E2020 anticipated the explosion of Western government debt (1) in the second half of 2011. We were then describing a process that would start with the European government debt crisis and then set fire to the heart of the global financial system, namely US federal debt (2).

And here we are with this issue at the start of the second half of 2011, with a global economy in complete disarray (3), an increasingly unstable global monetary system (4) and financial centres in desperate straits (5), all this despite the thousands of billions of public money invested to avoid precisely this type of situation.

The insolvency of the global financial system, and of the Western financial system in the first place, returns again to the front of the stage after just over a year of political cosmetics aimed at burying this fundamental problem under truckloads of cash.

We estimated in 2009 that the world had about 30 trillion USD in ghost assets. Almost half went up in smoke in the six months between September 2008 and March 2009. For our team, it's now the other half’s turn, the 15 trillion USD of ghost assets remaining, purely and simply vanishing between July 2011 and January 2012. And this time, it will also involve government debt, unlike 2008/2009 where it was mostly private players who were affected.

To gauge the extent of the coming shock, it is worth knowing that even US banks are starting to reduce their use of US Treasury Bonds to guarantee their transactions for fear of the increasing risks weighing on US government debt (6).

For the financial world’s players, the Autumn 2011 shock will literally be the ground giving way beneath their feet, since it’s really the foundation of the global financial system, the US Treasury Bond, which will plunge sharply (7).

US Federal debt and forecasts (2000-2016) (in billions USD) - Sources: US Treasury/ Berruyer / GEAB, 06/2011
US Federal debt and forecasts (2000-2016) (in billions USD) - Sources: US Treasury/ Berruyer / GEAB, 06/2011
In this issue, we discuss the two most dangerous aspects of the Autumn 2011 shock, namely:
  • the detonating mechanism of European government debt
  • the explosion process of the US bomb in terms of government debts
At the same time, in the context of the acceleration of the rebalancing of global power relationships, we introduce the anticipation of a fundamental geopolitical process for the holding of a Euro-BRICS summit by 2014.

Finally, we focus our recommendations on the means of avoiding being part of the 15 trillion USD in ghost assets that will go up in smoke in the coming months, with a special mention for developments in real estate in Europe whose collapse we used to anticipate for 2015 will start in fact as early as 2012.

In the public announcement of this GEAB issue, we introduce a portion of the anticipation on the detonating mechanism of European government debt.

European Central Bank balance sheet holdings (red: asset backed securities / light blue: public sector bonds / green: bank bonds / dark blue: other corporate bonds / beige: other securities) - Sources: Spiegel / BCE, 05/2011
European Central Bank balance sheet holdings (red: asset backed securities / light blue: public sector bonds / green: bank bonds / dark blue: other corporate bonds / beige: other securities) - Sources: Spiegel / BCE, 05/2011
The detonating mechanism of European government debt
The Anglo-Saxon financial operators have played sorcerer's apprentice for the last year and a half and the first headlines in the Financial Times in December 2009 on the Greek crisis quickly became a so-called "Euro crisis". We will not dwell on the vicissitudes of this enormous chicanery with a news item (8) orchestrated from the City of London and Wall Street, as we have already devoted many pages to it in a number of GEAB issues throughout this period. Suffice it to say that eighteen months later the Euro is doing well while the dollar continues its downward spiral against major world currencies; and that all those who bet on the collapse of the Eurozone have lost a lot of money.

As we anticipated, the crisis favors the emergence of a new sovereign, Euroland, which now allows the Eurozone to be much better prepared than Japan, the United States or the United Kingdom (9) for the Autumn 2011 shock ... even if it ends up, quite reluctantly, playing the role of detonator.

The "bombardment" (since we must call things by their proper name) (10), interspersed with breaks of several weeks (11), to which Euroland has been subjected during all this time, in fact had three consecutive major effects, two of them far from the results expected by Wall Street and the City:
  1. At first (December 2009 - May 2010), it removed the European currency’s sense of invulnerability formed in 2007/2008, introducing doubts about its durability and more precisely putting the idea that the Euro was the natural alternative to the US dollar (or even its successor) into perspective.

  2. Then (June 2010 - March 2011), it conducted Euroland leaders to start work at "top speed" on all measures to safeguard, protect and strengthen the single currency (measures which should have been taken many years ago). In so doing it has revitalized European integration and reinstated the founding core at the head of the European project, thus marginalizing the United Kingdom in particular (12). At the same time it has boosted increasing support for the European currency from the BRICS, headed by China, which after a moment of hesitation became aware of two fundamental points: first Europeans were acting seriously to face up to the problem and secondly, given the Anglo-Saxon determination, the Euro was obviously an essential tool for any attempt to exit the "dollar world" (13).

  3. Finally, (April 2011 - September 2011), it is currently compelling the Eurozone to start reaching for the sacrosanct private investors to make them contribute to solving the Greek problem especially via “voluntary” repayment rescheduling (or any other form of cuts in expected profits) (14).
As one can imagine, if the first blow really was one of the objectives pursued by Wall Street and the City (besides the fact of turning attention away from the United Kingdom and United States’ massive problems), on the other hand, the other two had effects totally opposite to the desired outcome: to weaken the Euro and reduce its attractiveness worldwide.

Especially since a fourth series is gearing itself up which will see, by early 2012 (15), the launch of a Eurobond mechanism, enabling the sharing of a part of Euroland countries’ debt issuance (16), and the inevitable growing political pressure (17) to increase the share of the private contribution in this broad process of restructuring (18) the debt of the Eurozone’s peripheral countries (19).

Progression of Greek debt and its structure (in € Billions (red : expiring debt ; green : budget deficit ; violet : EU loans ; brown : IMF loans ; blue : other - Sources : Le Figaro / SG CIB, 05/2011
Progression of Greek debt and its structure (in € Billions (red : expiring debt ; green : budget deficit ; violet : EU loans ; brown : IMF loans ; blue : other - Sources : Le Figaro / SG CIB, 05/2011
And with this fourth series one enters the heart of the contagion process that will trigger the US federal debt bomb. Because, first, in creating a global media and financial environment ultra-sensitive to the issues of government indebtedness, Wall Street and the City have revealed the unsustainable size of US, British and Japanese government deficits (20). This has even forced the rating agencies, faithful watchdogs of the two financial centres, to engage in a mad race to downgrade countries’ ratings. It is for this reason that the United States now finds itself under the threat of a downgrade, as we had anticipated, even though it seemed unthinkable to most experts only a few months ago. At the same time, the United Kingdom, France, Japan... also find themselves in the rating agencies’ crosshairs (21).

Remember that these agencies have never forecast anything of importance (neither subprime, nor the global crisis, nor the Greek crisis, nor the Arab Spring, ...). If they downgrade willy nilly today it’s because they have been caught at their own game (22). It’s no longer possible to downgrade A without affecting B’s rating if B is no better off. The "assumptions" on the fact that it’s impossible for any particular state to default on its debt have not withstood three years of crisis: this is where Wall Street and the City have fallen into the trap which threatens all aspiring sorcerers’ apprentices. They have not seen it would be impossible for them to control the hysteria kept up over Greek debt.

So today it’s the US Congress, with the bitter debate on the debt ceiling and massive budget cuts, that the consequences of the misleading articles in recent months about Greece and the Eurozone enlarge. Once again, our team can only stress that if history has any sense, it’s certainly a sense of irony.

Industrial production in China (red) and India (green) (2006-2011) - Source: Marketwatch / Factset China / India Stats, 06/2011
Industrial production in China (red) and India (green) (2006-2011) - Source: Marketwatch / Factset China / India Stats, 06/2011

(1) Including the fact that private investors (especially banks) would be required to contribute to resolve the Greek debt problem.

(2) Without forgetting, of course, US local “muni” debts.

(3) The United States is falling back into recession. Europe is slowing as is China and India. The illusion of a global recovery is now truly over. It is precisely this very disturbing situation which explains why large companies hoard their cash: they don’t want to find themselves, like 2008/2009, dependent on banks which are short of liquidity themselves. According to LEAP/E2020, it’s worthwhile SMEs and individuals giving careful thought to this situation. Source: CNBC, 06/06/2011

(4) James Saft renowned columnist for Reuters and The New York Times, is even on the point of wishing "good luck to dollar hegemony". Source: Reuters, 05/19/2011

(5) The stock exchanges know that the "party" is over with the end of Quantitative Easing in the US and the return of the recession. And financial operators no longer know how to find profitable and not too risky investments.

(6) Source: CNBC/FT, 06/12/2011

(7) Even Saudi Arabia is now publicly concerned, with Prince AlWaleed referring to the "US debt bomb". Source: CNBC, 05/20/2011

(8) The latest example: the June 4th anti-austerity protest in Athens who had painstakingly assembled less than 1,000 protesters, while the Anglo-Saxon media again made headlines of this proof of rejection by the Greek population ... conjuring up thousands of demonstrators. Sources: Figaro, 06/05/2011; Financial Times, 06/05/2011; Washington Post, 06/06/2011

(9) The Telegraph of 06/07/2011 writes, for example, that since 1980 the UK spent £700 billion more than it earned. Much of that sum accounts for the 15 trillion USD in ghost assets which will disappear soon.

(10) We can see the exhaustion of the "end of the Euro" dialogue by the fact that Wall Street is now reduced to get Nouriel Roubini to intervene regularly to attempt to try to give credibility to this fairy story. Poor Roubini, whose forecasting work neither foresaw the global crisis, nor ever exceeded six months, finds himself reduced to having to foresee the "end of the Euro" in the next five years, or at least a fundamental reform of the Eurozone… potentially leading to increased European integration. We quote the author from his recent speech at a Singapore conference repeated in the Figaro of 06/14/2011. So if we summarize Nouriel Roubini’s prediction there would be an end to the Euro in 5 years, unless in fact the Euro is strengthened through the permanent establishment of a "new sovereign", Euroland. What forecasting! Beyond the effect of an eye-catching announcement, which consists of saying that within five years (an infinitely long time in a time of crisis, and Roubini spoke of much shorter maturity dates only a few months ago), one thing or the other can happen. Thank you Dr. Roubini! It's hard to try to forecast and to work for Wall Street at the same time. But indeed, you must take your part in the general (vain) attempt to convince Asians not sell dollar-denominated assets in favor of those in Euros.

(11) When the Anglo-Saxon experts and media really can’t invent anything more to justify keeping « the Euro crisis » as a headline.

(12) But also Sweden whose elite continue to live in the world after 1945, that in which they have been able to enrich themselves by taking advantage of the problems of the rest of the continent. As regards the United Kingdom, the City continues to try in vain to avoid going under the control of the European authorities as we see from this Telegraph article of 05/30/2011. The funniest in this article is the image chosen by the newspaper: a European flag in tatters. Yet it’s really the City which is losing its historic independence in favor of the EU and not the opposite. It is a glaring illustration of the inability to understand the events unfolding in Europe through the British media, even when it’s the Telegraph, otherwise excellent in terms of its coverage of the crisis.

(13) Hence their motivation to buy Euroland debt. Source: Reuters, 05/26/2011

(14) Sources: YahooActu, 06/13/2011; Deutsche Welle, 06/10/2011; Spiegel, 06/10/2011

(15) The crisis will not allow Euroland to wait for 2013, the projected date for revising the system adopted in May 2010, to resolve this discussion.

(16) Various options are being studied but most likely all organized around a system of dual tier government debt issuance: an issue carrying Euroland’s common signature (and, therefore, a very low interest rate) in respect of an amount up to a maximum percentage of each state’s GDP (40%, 50%, 60% ... it’s for Euroland leaders to choose); beyond this threshold, the issue is only guaranteed by the single signature of the State concerned, rapidly involving very high rates for the less serious students in the class.

(17) In this regard, it is regrettable that the international media are more interested in a few thousand Greek demonstrators (see further in this issue for a glaring example of the huge difference between the true numbers and those of the Anglo-Saxon media) supposed to embody the refusal of European austerity and Eurozone weakness rather than the Greeks’ actual expectations through this Greek intellectuals’ open letter which accuses not Euroland, but their own political and financial elite of being unable to respect their commitments and calling for the upgrading of the Greek politico-social system with that of the rest of Euroland. Source: L'Express, 06/09/2011

(18) As regards the word "restructuring", over which the articles or broadcasts of economists and financiers of all kinds rave at length, our team wishes to bring a clear and simple accuracy to it: it is obvious that part of the Greek debt belongs these 15 trillion USD ghost assets that will evaporate in the months to come. No matter the word used, "restructuring", "default"..., as we indicated in previous GEABs, Euroland will organize a process that will cause the least powerful or most exposed creditors to lose significantly on their Greek exposure. This is called a crisis, and it’s exactly what we are going through. And the "national interest" always works in the same way. But anyway, at this point, the problem will be moved to the United States, Japan and the United Kingdom and nobody will pay attention to the Greek case where the amounts are ridiculous in comparison: Greece, €300 billion; USA, 15 trillion dollars.

(19) And the upcoming review by the Karlsruhe Constitutional Court of Appeal against the European Stabilization Fund if it doesn’t call into question judgments already given, will increase the pressure in Germany that the private sector should have a stake in the solutions, that’s to say losses. Source: Spiegel, 06/13/2011

(20) A simple calculation allows us to measure the difference between the current Greek problem and the US crisis in the background: banks in particular will be forced to take a charge of between 10% and 20% of the cost of the Greek debt bailout, being between 30 and 60 billion €. That's what "excites" the rating agencies about European banks these days. The explosion of the US federal debt bomb will at least impose a cost of similar proportions on the banks and other institutional holders of this debt. Therefore, in this case we are talking about (which is a conservative estimate because the very nature of US Treasury Bonds use involves a larger private contribution) amounts between 1,5 and 3 trillion USD. This is consistent with our estimate of 15 trillion in ghost assets which will disappear in the coming quarters.

(21) Sources: Reuters, 06/08/2011; Le Monde, 06/11/2011; FoxNews, 05/30/2011

(22) And one of the consequences of this game is that the Europeans are preparing not only to severely regulate the rating agencies’ methods, but they will quite simply create competitors to Anglo-Saxon agencies, as the Chinese have already done whose Dagong agency believes that the United States has entered a process of defaulting on its debt. By losing the monopoly on measuring risk, Wall Street and the City will thus lose their ability to make or lose fortunes. Sources: CNBC, 06/02/2011; YahooNews, 06/10/2011

The Fed Faces a Serious Dilemma from Summer 2011: an Absolute Necessity for QE3, an Absolute Impossibility of QE3

GlobalEurope Anticipation Bulletin, Excerpt GEAB N°53
March 16, 2011

As noted previously, with the Quantitative Easing 2, against a background of growing distrust vis-à-vis the Dollar and the US economy, the Fed has become virtually the only buyer of US Treasury Bonds. Officially it is already buying 70% of new issues. The use of “undercover agents”, via the City of London and offshore financial centres, more than likely brings this share above 90%.

But the actual share of Treasury Bonds purchased by the Fed is not so important in itself because, according to LEAP/E2020 (1), it's been purchasing the majority of new US debt issues for years through its “primary dealers” and the numerous exotic channels offered by the financial world. What is important with the announcement of Quantitative Easing Policy since 2009 is the “unveiling” of a previously hidden reality... because it could be hidden.

Confidence in the US economy allowed the Fed to carry out “its little deals” with reality while no one cared or even (for most operators) imagined that such practices had been the norm for many years. The economy being, in the main, a matter of collective psychology, the importance now is that most players know that there is no one other than the Fed to purchase US Treasury Bonds.

The Japanese disaster greatly enhances this awareness because it will be impossible to convince anyone that Japan will continue buying US debt at a time when it must marshal all its financial resources to save the country.

Therefore, the Fed arrives at the end of the “road to nowhere” otherwise to a financial disaster (2). In fact, in three months, when QE2 officially ends, it must both lie and tell the truth on the same subject: claim that QE2 has worked, that the U.S. economy has relaunched, and that it therefore no longer needs to buy US Treasury Bonds, and simultaneously continue to buy 90% of these same Treasury Bonds since it is the only buyer in the market.

Yet in three years the psychology of financial markets has changed dramatically regarding sovereign debt in general and US debt in particular: the operators will carefully scrutinize the flow and draw their conclusions, as PIMCO has just done already by selling its Treasury Bond holdings.

The Fed faces a serious dilemma from summer 2011: an absolute necessity for QE3, an absolute impossibility of QE3
Let's summarize the situation in summer 2011 for US debt markets:
  • Munis (local authority debt) will continue to deteriorate to literally melt down at the start of the new US fiscal year (which starts in July) (4)
  • Private operators (like PIMCO) are selling, or at least, not buying US debt any more
  • Japan (the third largest holder of US Federal debt after the Fed and China) will have to sell its T-Bonds to finance its reconstruction (5)
  • Euroland is quietly making its exit from Anglo-Saxon financial markets (6) (with, as expected, a Euroland summit on March 11 which confirmed the continuation of its financial stability fund (7) and the assertion of Euroland control (8) on general EU progress (9)) and will thereby further reduce its stock of US debt (10)
  • China no longer wishes to increase its huge stock of US Federal debt
  • The Gulf oil states, led by Saudi Arabia, whose regimes are struggling to survive and who no longer believe in US protection, now have other priorities than to support the US Treasury Bond market (and they may even make it a weapon against Israel and Washington (11)).
Finally, to top it all, the US economy continues to sink into “double-dip-flation”. No one now believes US unemployment data, supposed to show an improvement in the labour market. Even the “mainstream” US media now condemns the unreal nature of the statistics in question. CNBC headline on 14/02/2011 was even “Why the unemployment rate has become a bad joke” (12). Property prices continue to collapse. The trade deficit has swollen again (13). And actual inflation (in the price of goods actually consumed by people) is rising sharply.

The least one can say is that this is a picture (14) that really is not conducive to “invest” in the debt of such an economy. And we remember that the rest of the world, having already rallied strongly to criticize the launch of QE2, just like, for that matter, a significant number of US policymakers (see GEAB N° 49, internal and external opposition to QE3 will extremely powerful.

Three US unemployment rates: two official (U-3 in red and U-6 in grey, and SGS alternate in blue (calculated according to official methodology of the 1990s) - Source: SGS, 04/02/2011
Three US unemployment rates: two official (U-3 in red and U-6 in grey, and SGS alternate in blue (calculated according to official methodology of the 1990s) - Source: SGS, 04/02/2011
Still, between the absolute need for QE3 and the absolute impossibility of QE3, reality will not be content with vacuum; something must happen in the second half of 2011 (15)!

Our team is convinced that it’s the moment when the dominant view of recent years that no major holder of US Treasury Bonds has an interest in selling them for fear of devaluing its own stock of US debt will run up against the principle of reality. Japan in its disastrous situation probably constitutes a “principle of reality” even more powerful than that of the Arab regimes of the Gulf that we have already identified in the previous GEAB issue.

In any event, ”two principles of reality” pushing in the same direction (16) at a moment of historic weakness of the US economy -- of the Fed and the US debt market -- (in our opinion) represent the certainty of a sudden meltdown in the US debt bubble in the second half of 2011 (17).

We explained last January that 2011 would be the worst year since 2006, the year of the beginning of our anticipation work on the global systemic crisis, mainly because the international system is in such a state of weakness and decay that any major shock could sweep it away in a new turmoil. The US debt market is in the course of reaching this stage and, of course, the US Dollar as well.


(1) See the 2006 and 2007 GEAB issues on this subject

(2) February 2011 was the biggest ever monthly Federal deficit ever recorded at 223 billion USD. Source: Zerohedge, 03/07/2011

(3) Entitlement spending includes social spending such as Medicaid, Medicare, Social Security. This scenario takes for granted in particular a sustainable economic recovery in the US.

(4) 44 States are facing cumulative deficits of more than 100 billion USD in 2012. Source: CBPP, 03/09/2011

(5) This option is beginning to be clearly seen in the US. Source: Los Angeles Times, 03/14/2011

(6) In this respect, the attitude of the three major Anglo-Saxon rating agencies is becoming a real travesty: downgrading Spain on the eve of the Euroland summit, refusing to touch Japan’s rating (in complete economic and financial chaos), but downgrading Portugal (for no other reason than a feeling over the country’s budgetary efforts). For that matter, market participants seem to have drawn the necessary consequences: the Euro didn’t even move one inch after the rating agency announcements. For our team, rather like the Financial Times a year ago with its manipulation around the Euro, these agencies have definitely lost all professional credibility to be nothing more than auxiliaries of Anglo-Saxon financial markets in full collapse. They will soon realize that nobody listens to them, which offers a vast market to new rating agencies wishing to work objectively ... a booming market for long term investors.

(7) As explained in previous GEABs, in acquiring its own financial infrastructure (funds, rules, procedures ...), the Euroland countries have very sharply reduced their dependence on external financial markets.

(8) Read the interesting article on this subject in Corriere della Serra which illustrates the younger generations’ massive support for Euroland and the Euro, without any nostalgia for Marks, Francs, Lira or Pesetas. Source : Presseurop, 03/04/2011

(9) Sources: Yahoonews, 03/15/2011; Deutsche Welle, 03/12/2011

(10) Euroland will in fact focus on the purchase of its own debt! And we will not even dwell on the total divergence of the perspective on interest rates between the ECB and the Fed. Source: CNBC, 03/03/2011

(11) See GEAB N°52

(12) Far from falling to 8.9%, the unemployment rate is above 20%. See chart above and the very interesting ShadowStats website. Moreover, it is helpful to read the article by Richard Benson, published in Safehaven of 16/02/2011, which very clearly explains the collapse of the US workforce. In addition, evidence of the unreality of official statistics, the Fed requires US banks to prepare for a stress-test including an official unemployment rate of 11% for first quarter of 2012 (who, according to LEAP/E2020 should place the real rate at 25%).Source : Zerohedge, 17/02/2011

(13) Source : CNBC, 10/03/2011

(14) We encourage you to browse the excellent report by Mary Meeker, entitled USA Inc., which presents the fundamentals of the US economy as a financial report on a business. If the Federal debt is a share of USA Inc.., in other words investors will tend to sell rather than buy.Source : KPCB, 02/2011

(15) Ben Bernanke must face up to the impossibility that he himself has helped to create. Source : Financial Sense, 03/03/2011

(16) Source: Bloomberg, 03/16/2011

(17) Under the Obama administration the Federal debt has increased by 3.5 trillion USD. Source: CBS, 02/23/2011

Systemic Global Crisis - 2011: The Ruthless Year, at the Crossroads of Three Roads of Global Chaos

GlobalEurope Anticipation Bulletin, Public announcement GEAB N°51
January 16, 2011

This GEAB issue marks the fifth anniversary of the publication of the Global Europe Anticipation Bulletin. In January 2006, on the occasion of the first issue, the LEAP/E2020 team indicated that a period of four to seven years was opening up which would be characterized by the “Fall of the Dollar Wall”, an event similar to the fall of the Berlin Wall which resulted, in the following years, in the collapse of the communist bloc then that of the USSR.

Today, in this GEAB issue, which presents our thirty-two anticipations for 2011, we believe that the coming year will be a pivotal year in the roll out of this process between 2010 and 2013. It will be, in any case, a ruthless year because it will mark the entry into the terminal phase of the world before the crisis (1).

Since September 2008, when the evidence of the global and systemic nature of the crisis became clear to all, the United States, and behind it the Western countries, were content with palliative measures that have merely hidden the undermining effects of the crisis on the foundations of the present-day international system. 2011 will, according to our team, mark the crucial moment when, on the one hand, these palliative measures see their anesthetic effect fade away whilst, in contrast, the consequences of systemic dislocation in recent years will dramatically surge to the forefront (2).

In summary, 2011 will be marked by a series of violent shocks that will explode the faulty safety devices put in place since 2008 (3) and will carry off, one by one, the “pillars” on which the “Dollar Wall” has rested for decades. Only the countries, communities, organizations and individuals which, over the last three years, have actually undertaken to learn the lessons from the current crisis to distance themselves as quickly as possible from the pre-crisis patterns, values and behavior will get through this year unscathed; the others will be carried away in the procession of monetary, financial, economic, social and political difficulties that 2011 holds.

Thus, as we believe that 2011 will, globally, be the most chaotic year since 2006, the date of the beginning of our work on the crisis, in this GEAB issue our team has focused on 32 anticipations for 2011, which also include a number of recommendations to deal with future shocks. Thus, this GEAB issue offers a kind of map forecasting financial, monetary, political, economic and social shocks for the next twelve months.

If our team believes that 2011 will be the worst year since 2006, the beginning of our anticipation work on the systemic crisis, it’s because it’s at the crossroads of three paths to global chaos. Absent fundamental treatment of the causes of the crisis, since 2008 the world has only gone back to take a better jump forward.

A bloodless international system
The first path that the crisis can take to cause world chaos is simply a violent and unpredictable shock. The dilapidated state of the international system is now so advanced that its cohesion is at the mercy of any large-scale disaster (4). Just look at the inability of the international community to effectively help Haiti over the past year (5), the United States to rebuild New Orleans for six years, the United Nations to resolve the problems in Darfur, Côte d'Ivoire for a decade, the United States to progress peace in the Middle East, NATO to beat the Taliban in Afghanistan, the Security Council to control the Korean and Iranian issues, the West to stabilize Lebanon, the G20 to end the global crisis be it financial, food, economic, social, monetary, ... to see that over the whole range of climatic and humanitarian disasters, like economic and social crises, the international system is now powerless.

In fact, since the mid-2000s at least, all the major global players, at their head of course the United States and its cortege of Western countries, do no more than give out information, or gesticulate. In reality, all bets are off: The crisis ball rolls and everyone holds their breath so it doesn’t fall on their square. But gradually the increasing risks and issues of the crisis have changed the casino’s roulette wheel into Russian roulette. For LEAP/E2020, the whole world has begun to play Russian roulette (6), or rather its 2011 version, “American Roulette” with five bullets in the barrel.

Monthly progression of the FAO food index (2010) and the price of principal foodstuffs (2009/2010) (base 100: averaged over 2002-2004) - Source: FAO/Crikey, 01/2011
Monthly progression of the FAO food index (2010) and the price of principal foodstuffs (2009/2010) (base 100: averaged over 2002-2004) - Source: FAO/Crikey, 01/2011
Soaring commodity prices (food, energy (7),...) should remind us of 2008 (8). It was indeed in the six months preceding Lehman Brothers and Wall Street’s collapse that the previous episode of sharp increases in commodity prices was set. And the actual causes are the same as before: a flight from financial and monetary assets in favour of “concrete” investments.

Last time the big players fled the mortgage market and everything that depended on it, as well as the U.S. Dollar; today they are fleeing all financial stocks, Treasury bonds (9) and other public debts. Therefore, we have to wait for a time between Spring and Autumn 2011 for the explosion of the quadruple bubble of Treasury bonds, public debt (10), bank balance sheets (11) and real estate (American, Chinese, British, Spanish,... and commercial (12)), all taking place against a backdrop of a heightened currency war (13).

The inflation induced by US, British and Japanese Quantitative Easing and similar stimulus measures of the Europeans and Chinese will be one of the destabilizing factors in 2011 (14). We will come back to this in more detail in this issue. But what is now clear with respect to what is happening in Tunisia (15), is that this global context, especially the rise in food and energy prices, now leads on to radical social and political shocks (16). The other reality that the Tunisian case reveals is the impotence of the French, Italian or American “godfathers” to prevent the collapse of a “friendly regime” (17).

Impotence of the major global geopolitical players
And this impotence of the major global geopolitical players is the other path that the crisis can use to produce world chaos in 2011. In effect, one can place the major G20 powers in two groups whose only point in common is that they are unable to influence events decisively.
  1. On one side we haves a moribund West with, on the one hand, the United States, for whom 2011 will show that its leadership is no more than fiction (see this issue) and which is trying to freeze the entire international system in its configuration of the early 2000s (18), and

  2. On the other hand we have Euroland, “sovereign” in the pipeline, which is currently mainly focused on adapting to its new environment (19) and new status as an emerging geopolitical entity (20), and which, therefore, has neither the energy nor the vision necessary to influence world events (21).

  3. And on the other side are the BRIC countries (with China and Russia in particular) who are, at the moment, proving to be incapable of taking control of all or part of the international system and whose only action is therefore limited to quietly undermine what remains of the foundations of the pre-crisis order (22).
Ultimately, impotence is widespread (23) at the international community level, increasing not only the risk of major shocks, but also the significance of the consequences of these shocks. The world of 2008 was taken by surprise by the violent impact of the crisis, but paradoxically the international system was better equipped to respond being organized around an undisputed leader (24).

In 2011, this is no longer the case: not only is there no undisputed leader, but the system is bloodless as we have seen above. And the situation is aggravated further by the fact that the societies of many countries in the world are on the verge of socio-economic break-up.

US petrol prices (2009-2011) - Source: GasBuddy, 01/2011
US petrol prices (2009-2011) - Source: GasBuddy, 01/2011
Societies on the edge of socio-economic break-up
This is particularly the case in the United States and Europe where three years of crisis are beginning to weigh very heavily on the socio-economic and therefore political balance.
  • US households, now insolvent in their tens of millions, oscillate between sustained poverty (25) and rage against the system.

  • European citizens, trapped between unemployment and the dismantling of the welfare state (26), are starting to refuse to pay the bills for financial and budget crises and are beginning to look for culprits (banks, the Euro, government political parties…).

  • But amongst the emerging powers too, the violent transition which constitutes the crisis is leading societies towards situations of break-up. In China, the need to control expanding financial bubbles is hampered by the desire to improve the lot of whole sectors of society such as the need for employment for tens of millions of casual workers. In Russia, the weakness of the social security system fits badly with the enrichment of the elite, just as in Algeria shaken by riots. In Turkey, Brazil and India, everywhere the rapid change these countries are seeing is triggering riots, protests and terrorist attacks.
For reasons that are sometimes contradictory, growth for some, penury for others -- across the globe our diverse societies tackle 2011 in a context of strong tensions and socio-economic break-up, which have the making of political time bombs.

It’s its position at the crossroads of three paths which thus makes 2011 a ruthless year. And ruthless it will be for the States (and local authorities) which have chosen not to draw hard conclusions from the three years of crisis which have gone before and / or who have contented themselves with cosmetic changes not altering their fundamental imbalances at all. It will also be so for businesses (and States (27)) who believed that the improvement in 2010 was a sign of a return to “normal” of the global economy. And finally it will be so for investors who have not understood that yesterday’s investments (securities, currencies,...) couldn’t be those of tomorrow (in any case for several years).

History is usually a “good girl”. She often gives a warning shot before sweeping away the past. This time, it gave the warning shot in 2008. We estimate that in 2011, it will do the sweeping. Only players who have undertaken, even painstakingly, even partially, to adapt to the new conditions generated by the crisis will be able to hang on; for the others, chaos is at the end of the road.


(1) Or of the world that we have known since 1945 to repeat our 2006 description.

(2) The recent decision by the US Department of Labor to extend the inclusion of the measure of long-term unemployment in the US employment statistics to five years instead of the maximum of two years until now, is a good indicator of the entry into a new stage of the crisis, a step that has seen the disappearance of the “practices” of the world before. As a matter of fact, the US government cites “the unprecedented rise” of long-term unemployment to justify this decision. Source: The Hill, 12/28/2010

(3) These measures (monetary, financial, economic, budgetary, strategic) are now closely linked. That’s why they will be carried away in a series of successive shocks.

(4) Source: The Independent, 01/13/2011

(5) It’s even worse because it was international aid that brought cholera to the island, causing thousands of deaths.

(6) Moreover Timothy Geithner, US Treasury Secretary, little known for his overactive imagination, has just indicated that “the US government could once again have to do exceptional things”, referring to the bank bailout in 2008. Source: MarketWatch, 01/13/2011

(7) Moreover, India and Iran are in the course of establishing a system of exchange “gold for oil” to try and avoid supply disruptions. Source: Times of India, 01/08/2011

(8) In January 2011 the FAO food price index (at 215) has just exceeded its previous record SET in May 2008 (at 214).

(9) Wall Street banks are currently unloading their US Treasury bonds as fast as possible (unseen since 2004). Their official explanation is “the remarkable improvement in the US economy which no longer requires us to seek refuge in Treasury Bonds”. Of course, you are free to believe it, like Bloomberg ’s journalist on 01/10/2011.

(10) Thus Euroland is already taking big steps forward along the path described in the GEAB N°50 with a discount in the case of refinancing the debts of a member state, whilst Japanese and US debt are now about to enter the storm. Sources: Bloomberg, 01/07/2011; Telegraph, 01/05/2011

(11) We believe that, in general, global banks’ balance sheets contain at least 50% ghost assets which in the coming year will require to be discounted by between 20% to 40% due to the return of the global recession combined with austerity, the rise in defaults on household, business, community and state loans, currency wars and a pickup in the fall of real estate prices. The American, European, Chinese, Japanese and others “stress-tests” can still continue to try and reassure markets with “Care Bears” scenarios except that this year it’s “Alien against Predator ” which is on the banks’ agenda. Source: Forbes, 01/12/2011

(12) Each of these real estate markets will fall sharply again in 2011 in the case of those which have already started falling in recent years, or in the case of China, which will begin its sharp deflation amid economic slowdown and monetary tightening.

(13) The Japanese economy is, moreover, one of the first victims of this currency war, with 76% of the CEOs of 110 major Japanese companies surveyed by Kyodo News now reported being pessimistic about Japanese growth in 2011 following the rise in the yen. Source: JapanTimes, 01/04/2011

(14) Here are several instructive examples put together by the excellent John Rubino. Source: DollarCollapse, 01/08/2011

(15) By way of reminder, in the GEAB N°48 we had classified Tunisia in the category of countries “with significant risks” in 2011.

(16) No doubt, moreover, that the Tunisian example is generating a round of reassessment amongst the rating agencies and the “experts in geopolitics”, who, as usual, didn’t see anything coming. The Tunisian case also illustrates the fact that it’s now the satellite countries of the West in general and the US in particular, who are on the way to shocks in 2011 and in the years to come. And it confirms what we regularly repeat: a crisis accelerates all the historical processes. The Ben Ali regime, twenty-three years old, collapsed in a few weeks. When political obsolescence is involved everything changes quickly. Now it's all the pro-Western Arab regimes which are obsolete in the light of events in Tunisia.

(17) No doubt this « Western godfather » paralysis will be carefully analyzed in Rabat, Cairo, Jeddah and Amman, for example.

(18) A configuration that was all the more favorable because it was without a counterweight to their influence.

(19) We will return in more detail in this GEAB issue, but seen from China we are not mistaken. Source: Xinhua, 01/02/2011

(20) Little by little Europeans are discovering that they are dependent on centres of power other than Washington. Beijing, Moscow, Brazilia, New Dehli,… Source: La Tribune, 01/05/2011; Libération, 12/24/2010; El Pais, 01/05/2011

(21) All Japan's energy is focused on its desperate attempt to resist the attraction of China. As for other Western countries, they are not able to significantly influence global trends.

(22) The US Dollar’s place in the global system is a part of these last foundations that the BRIC countries are actively eroding day after day.

(23) As regards deficit, the US case is textbook. Beyond the speeches, everything continues as before the crisis with a deficit swelling exponentially. However, even the IMF is now ringing the alarm. Source: Reuters, 01/08/2011

(24) Moreover, even Market Watch on 01/12/2011, echoing the Davos Forum, is concerned over the lack of international coordination, which is in itself a major risk to the global economy.

(25) Millions of Americans are discovering food banks for the first time in their lives, whilst in California, as in many other states, the education system is disintegrating fast. In Illinois, studies on the state deficit are now comparing it to the Titanic. 2010 broke the record for real estate foreclosures. Sources: Alternet, 12/27/2010; CNN, 01/08/2011; IGPA-Illinois, 01/2011; LADailyNews, 01/13/2011

(26) Ireland, which is facing, purely and simply, a reconstruction of its economy, is a good example of situations to come. But even Germany, with remarkable current economic results however can’t escape this development as shown by the funding crisis for cultural activities. Whilst in the United Kingdom, millions of retirees are seeing their incomes cut for the third year running. Sources : Irish Times, 12/31/2010; Deutsche Welle, 01/03/2011; Telegraph, 01/13/2011

(27) In this regard, US leaders confirm that they are rushing straight into the wall of public debt, failing to anticipate the problems. Indeed, the recent statement by Ben Bernanke, the Fed chairman, that the Fed will not help the States (30% fall in 2009 tax revenues according to the Washington Post on 01/05/2011) and the cities collapsing under their debts, just as Congress decides to stop issuing “Build America Bonds” which enabled States to avoid bankruptcy these last few years, shows a Washington blindness only equal to that which Washington demonstrated in 2007/2008 in the face of the mounting consequences of the “subprime” crisis. Sources: Bloomberg, 01/07/2011; WashingtonBlog, 01/13/2011

Jeudi 11 Août 2011

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