December 2006 - Dollar-Real Estate-Stock Markets: US consumer's insolvency, a catalyst of the impact phase of the global systemic crisis

The American mid-term elections have now passed and, only a week later, as announced by LEAP/E2020 in GEAB N°8 of last October 15, the “euphorisation” of US voters/consumers and world financial players seems to have already passed wit them. The development process of the global systemic crisis has resumed its course, artificially stopped last July due to the upcoming mid-term elections, as shown by the recent changes in the Dollar’s value and by the latest US economy indicators. In parallel, a series of topics which had curiously disappeared from the pages of financial media these last months is reappearing, such as the end of the “carry-trade” based on the Yen [1], increasing fears of the risk of implosion of the market for derivatives and “hedge funds” [2] and of course the uninterrupted fall of US real estate [3] with its procession of negative consequences on American growth[4] (all these developments generating from now on increasing reflection as to the health of the US banking sector, one depending more and more on unsound debt [5]). For the team of LEAP/E2020, all these trends, which mark the beginning of the impact phase of the global systemic crisis, have a common catalyst, and that is the insolvency of the US consumer in the framework of a generalized degradation of the quality of credit to all US financial and economic operators [6].





Chart 1 – US Household Debt


For more than five years the American consumer has been the “cash-cow” of US growth, contributing more than 70% to the resulting progression of the United States economy. Stimulated by the easy money policy promoted by the US Federal Reserve in order to avoid a catastrophic recession feared after the explosion of “internet bubble”, the US consumer rushed into a frenzy of purchases of consumer goods. Encouraged by banks and the whole US financial system, he exceeded his own financing capacities and plunged since 2004 into generalized debt [7] and into a situation not seen in the United States since the dip of the Great Depression post 1929, namely a negative saving rate [8].

The Federal Reserve, the Bush administration and the republican Congress, as well all the financial and banking sectors of the country then fed the fiction of a continuous and fast enrichment via the development of the “real estate bubble” which convinced the majority of the country’s middle class, including its least ‘well off’, to rush into a strategy of purchase, and often of speculation, in real estate [9]. In parallel, the very strong growth of real-estate prices made it possible for the financial sector to offer loans for household consumption, linked with the “value” of the real estate . Because of these operations relating to more than 2,500 billion dollars since 2004, these same lenders and other banks have in same time increased considerably their results, gaining the admiration of stock markets by their extraordinary success, whereas these same assessments were potentially seen to be depending more and more on the future evolution of the real estate market.



Chart 2 – Recent collapse of consumer credit linked to real estate (source Safehaven)


Indeed, the obvious risk of this strategy of the banking sector was due to the possibility of an inversion in real estate trends. In the event of a strong and sustained fall in the prices and volumes of the real estate market simultaneously on the whole of the US territory, the “magic circle” of individual enrichment and the collective growth would become an “infernal spiral” of personal debt and generalized recession. Indeed, households in debt would suddenly become insolvent because of the collapse in the price of the real estate guaranteeing their loans, while the whole of the banking sector would be found in a double trap with on one side an increasing share of the loans not refunded due to personal bankruptcy, and on the other a financial assessment quickly down-grading because of the depreciation of the value of the guaranteed loans (namely the real estate) [10].

For the LEAP/E2020 team, it is from now on time to remove the ‘conditional’ from this scenario. It is currently happening throughout all the United States and constitutes a catalyst of the impact phase of the global systemic crisis. The US consumer, i.e. the US middle class, basically becomes insolvent [11], victim of overwhelming debt, a negative rate of saving, the bursting of the real estate bubble, the rise of interest rates and the collapse of US growth. All these elements are dependent, and mutually reinforcing, to plunge the United States, starting from the end 2006, into an economic, social and political crisis without precedent [12].

Very concretely, this November issue of GEAB sounds two “LEAP/E2020 Alerts”:
- The first relating to banking and finance sectors which, by the way of “hedge funds” and “bad quality credit”, will be at the centre of the impact phase of the global systemic crisis;
- And the other, which again amplifies the Alert published in GEAB N°4, relating to European real estate, with as an illustration, an analysis of the market trends of the British and French real estate.


The GlobalEurope Anticipation Bulletin is the confidential monthly newsletter of European think-tank LEAP/Europe 2020 (available by subscription)


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Notes :
1. Source ”Dollar drops vs yen after Japanese central banker's comment on yen carry trade”, International Herald Tribune, 10/11/2006
2. Sources « ‘Panic selling’ hits derivatives markets », Financial Times, 05/11/2006; “Investors regroup as swaps panic hits”, The Australian/FT Business, 07/11/2006
3. Source : « National foreclosures increase 17% in the third quarter », RealtyTrac, 01/11/2006
4. Source “Negative numbers keep popping up in the data”, MarketWatch/DowJones, 12/11/2006
5. Source “Foreclosure : the buck stops where?”, Twincities.com, 22/10/2006
6. Source “US credit quality in 25-year retreat toward junk-S&P”, Reuters, 02/11/2006
7. Source “The valley of the shadow of debt”, From the wilderness, 11/08/2006
8. Source « US savings rate hits lowest level since 1933 », MSNBC, 30/01/2006
9. US consumers have thus obtained from the banking and financial sectors consumption loans linked with their real-estate amounting to 633 billion dollars in 2004 and 719 billion dollars in 2005. Source « End of the bubble bailouts », Forbes, 29/08/2006
10. This type of development knows similar examples in History. cf. « Restructuring the US economy – downward », Kurt Richebächer, FS0, 27/10/2006
11. The consumer thus becomes the « weak link » of the US economic and financial chain, after being its engine in the past five years. Source CFO/TheEconomist, 10/11/2006
12. In this field, a very interesting CNN series is worth the visit: « Broken Government ».
© Copyright Europe 2020

November 2006: beginning of the phase of impact of the global systemic crisis

Last May, in the Global Europe Anticipation Bulletin N°5, LEAP/E2020 had detailed the four phases of the global systemic crisis, indicating that the phase known as of acceleration would start in June and would be spread out over a period of a maximum six months at which stage, the explosive phase of the crisis, the “impact phase”, would start.

Following these last months developments and the central part played by the United States in the current global system, LEAP/E2020 announces in its October edition of GEAB (GlobalEurope Anticipation Bulletin N°8) that the phase of impact will begin in November 2006 and that this phase’s catalyst will be the mid-term elections of the United States Congress[1] which is the cross point of the main fracture lines of the current global system.

The phase of acceleration consisted of the generalized realization that the global system that we have been familiar with for several decades is changing radically and permanently as the following, now largely recognized, trends for the whole planet illustrate [2]: aggravation of the nuclear crises with North Korea and Iran, general lack of power of the United States on all major crises of these last months, including the Israeli-Palestinian conflict[3], civil war in Iraq and American stagnation up until at least 2010[4] , growing feeling of the defeat of the West to progress in Afghanistan [5], collapse of the United States real estate market[6], increasing volatility of the “hedge funds” system [7], starting recession of the US economy[8], aggravation of trade deficits and American payments[9], on-going weakening of the Dollar[10], increasing debt of American households[11].



Chart 1 - Federal Funds Rate - Red Squares Denote Periods when the Fed Funds
Rate was Higher than the Long Treasury. Source: NoSpinForecast

The phase of impact which succeeds the phase of acceleration constitutes a period when a series of brutal crises starts affecting by contamination the total system. This explosive phase of the crisis, which will last six months to one year, will affect directly and very strongly financial players and markets, the owners of investment schemes with fixed incomes in dollars, pension’s funds and the strategic relations between the United States on the one side, and Europe and Asia on the other.

According to our analyses, its impact will be much stronger in the financial sector than our forecasts of the first half of 2006 suggested, because the mobilization of this sector in the United States (together with its communication relays) in order to preserve the control of the Republican Party in the American Congress, led to “euphorise” the American public opinion and the immense majority of the players in this sector, enabling the leaders of this party to claim a good economic assessment (the only campaign topic at their disposal since summer 2006) [12]) . The using of this side of the global system for electoral ends thus prevented the majority of the players from correctly anticipating the ruptures to come and as such will considerably increase the explosive potential of the impact phase in this sector, since the operators will be caught “on the wrong foot”.

At the center of the « euphoria » process of US voters, one will find the business bank Goldman Sachs in particular. The latter, whose former president, Henry Paulson became the US Finance Minister a few months ago, is at the origin of a technical decision that led to an artificial collapse of oil rates in the past weeks. Indeed Goldman Sachs abruptly changed the composition of his GSCI indicator (Goldman Sachs Commodity Index), a reference on Chigaco’s raw materials market, thus compelling traders to sell more than 100 billion US dollars of “future” oil contracts between August and September 2006.



Chart 2 – Unleaded gas - Nymex - source AT-Bourse


Moreover, the prominent influence of this business bank (one that became the most important global « hedge funds ») is also present in the “Working Group on Financial Markets”, (often called « Plunge Protection Team »), created by the Executive Order 12631 [13], with the objective “to maintain the confidence of investors”, and which, under the direction of people named there by G. W. Bush, and headed by Henry Paulson, is in a position to activate all influential Wall Street or Chicago players.

In this October issue dedicated “The impact phase of the Global Systemic Crisis”, LEAP/E2020 analyzes the detail of this “euphoria” process of the players by breaking down the mechanisms used to convince American voters and world financial operators that the future is radiant, whereas all the objective indicators are sounding alarms [14] in terms of American growth, employment[15], inflation, strategic risks control, etc…

In addition, the LEAP/E2020 team tries to anticipate the development mode and the consequences of the impact phase on sectors or operators particularly exposed, such as the operators and financial markets, the owners of American investment funds with fixed incomes, the operators involved in real estate industry and in financing the real estate market and pension funds.



Chart 3 – Median sales price - Single family homes

LEAP/E2020 also attempted to anticipate the role of “hedge funds” in the explosive process of the impact phase, which will transform their “risks mutualisation” into a “risk systemic contagion”. On this subject, LEAP/E2020 sounds the alarm on the entire American financial sector and in particular on the main “hedge funds”, which investment banks such as Goldman Sachs or Lehman Brothers as well as the main American « primary dealers » authorised by the United States Federal Reserve have become.

According to the LEAP/E2020 team, the time has come when the motivations of the US Fed in stopping the M3 publication last March will be revealed ; and the consequences of this strategy will « catch on the wrong foot » who naively chose to share the general euphoria built up in the perspective of the US November election. From then on, as explained in GEAB N°8, a brand new story starts. That of the impact phase of the global systemic crisis.

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1. Cf analysis in GEAB N°7: “American legislative Elections - November 2006: Towards a politico-institutional blocking in Washington, with important political , economic, and commercial consequences”

2. Whereas in the first quarter of 2006, when LEAP/E2020 produced its first projections on the subject, the large majority of the players involved and public opinions worldwide were convinced of the opposite trends, and even denied that those which are obvious today could simply appear in the future.

3. Even the Israeli public opinion has become very critical towards the incapacity of the United States in the region, as explained in Gideon Levy’s article « The Mystery of America » , published in Haaretz, 09/10/2006

4. This is what the American leader of combined forces, General Peter J. Schoomaker, has just declared. Source CBS News, 11/10/2006

5. 89% of the Europeans probed via GlobalEurometre estimate that NATO is losing the war in Afghanistan.

6. On this subject, it is interesting to keep in mind the projection of the current President of the American Federal Reserve who declared one year ago that “there was no real estate bubble which could explode” (Washington Post source, 27/10/2005).

7. Even China has joined the voices worrying about the increasing risks caused by the out-of-control development of hedge funds. Source West Australian/Daily Telegraph, 29/09/2006

8. Read the note on US employment from the Center for Economic and Policy Research (CEPR, 06/10/2006)

9. Source Roubini Global Economics services, RGE, 12/10/2006

10. This issue of Global Europe Anticipation Bulletin explains in particular why the downward trend of the Dollar is currently temporarily stabilized because of the proximity of the American election

11. Beyond the continuously increasing personal debt since the saving rate continues to be negative, USA Today calculated that, by incorporating the national debt, each American household has now a debt of more than US$500,000. Source the USA Today, 24/05/2006

12. It is very useful to observe that the topics of G.W. Bush public interventions, as recorded by the Republican Party website, moved away from “the fight against terrorism” towards “the good health of the economy”. Source: Speech of September 2006, Speech of October 2006, Republican Party

13. Source: Federal Register, US National Files, 11/1998, Executive Order 12631/Working Group one Financial Markets

14. For example, the 9/10/2006 issue of Chicago Tribune titles its business page with the increasing recession risks. It is the case of a great number of American regional media which are very sensitive to the direct consequences of the real estate collapse.

15. Read the note on the US employment from the Center for Economic and Policy Research (CEPR, 06/10/2006)

Novembre 2006 : début de la phase d’impact de la crise systémique globale

En Mai dernier, dans le GlobalEurope Anticipation Bulletin N°5, LEAP/E2020 avait détaillé les quatre phases de la crise systémique globale, indiquant que la phase dite d’ « accélération » commencerait en Juin et s’étalerait sur une période de six mois maximum, moment où commencerait la phase explosive de la crise, dite « phase d’impact ».

Suite aux évolutions de ces derniers mois et du fait du rôle central joué par les Etats-Unis [1] dans le système global actuel, LEAP/E2020 est en mesure d’annoncer dans son numéro d’Octobre du GEAB (GlobalEurope Anticipation Bulletin N°8) que la phase d’impact va débuter courant Novembre 2006 et que le facteur catalyseur de ce changement de phase sera les élections de mi-mandat au Congrès des Etats-Unis qui se trouvent être le point nodal des principales lignes de fracture de l’actuel système global.

La phase d’accélération a consisté en la prise de conscience généralisée que le système global que nous connaissons depuis plusieurs décennies était en train de changer profondément et durablement comme l’illustrent les tendances suivantes désormais reconnues largement sur toute la planète [2]: aggravation des crises sur le nucléaire avec la Corée et l’Iran, impuissance générale des Etats-Unis sur toutes les crises majeures de ces derniers mois, y compris le conflit israélo-palestinien [3], guerre civile en Irak et enlisement américain dans ce pays au moins jusqu’en 2010 [4], sentiment croissant d’une défaite occidentale en cours en Afghanistan [5], effondrement de l’immobilier aux Etats-Unis [6], volatilité croissante du système des « hedge funds » [7], entrée en récession de l’économie US [8], aggravation des déficits commerciaux et des paiements américains [9], affaiblissement continu du Dollar [10], endettement croissant des ménages américains [11].



Figure 1 - Taux Réserve Fédérale US - Les points rouges indiquent les périodes lors desquelles
les taux courts étaient supérieurs aux taux longs comme actuellement. Source : NoSpinForecast

La phase d’impact qui succède à la phase d’accélération se caractérise quant à elle par le déclenchement d’une série de crises brutales affectant par contagion tout le système global. Cette phase explosive de la crise, qui durera de six mois à un an, affectera directement et très fortement les opérateurs et les marchés financiers, les possesseurs d’actifs à revenus fixes en dollars, les fonds de pensions et les relations stratégiques entre les Etats-Unis d’une part, et l’Europe et l’Asie.

Selon les analyses de LEAP/E2020, son impact sera beaucoup plus fort dans le secteur financier que ce que les prévisions laissaient penser au premier semestre 2006, car la mobilisation de ce même secteur aux Etats-Unis (et de ses relais de communication) pour préserver le contrôle du Parti Républicain sur le Congrès américain, a conduit à « euphoriser » l’opinion publique américaine et l’immense majorité des acteurs de ce secteur, afin que les dirigeants de ce même parti puisse prétendre à un bon bilan économique (seul thème de campagne à leur disposition depuis l’été 2006) [12]. Cette utilisation de tout un pan du système global à des fins électorales internes aux Etats-Unis a donc empêché la plupart des acteurs d’anticiper correctement les ruptures à venir et, va de ce fait, accroître considérablement le potentiel explosif de la phase d’impact dans ce secteur puisque les opérateurs y seront pris « à contre-pied ».

Au cœur de cette opération d’ « euphorisation » de l’électeur américain, on trouve en particulier la banque d’affaires Goldman Sachs. Cette dernière, dont l’ancien président, Henry Paulson est l’actuel ministre des finances américain, est ainsi à l’origine de la décision technique qui a provoqué artificiellement la chute des cours du pétrole ces dernières semaines, à savoir la modification de la part de l’essence dans la composition de son index GSCI (Goldman Sachs Commodity Index) qui fait référence sur le marché des matières premières de Chicago, et a conduit, en Août et Septembre 2006, les traders a devoir brutalement vendre 100 milliards de dollars US de « futures » pétroliers.



Figure 2 - Evolution Essence sans plomb - NYMEX - source AT-Bourse


Par ailleurs, on retrouve l’influence dominante de cette banque d’affaires, devenue le plus important hedge fund mondial, dans le « Groupe de travail sur les marchés financiers », (surnommé la « Plunge Protection Team »), créé par le décret présidentiel n°12631 [13], afin de « maintenir la confiance des investisseurs », et qui, sous la houlette de personnalités nommées par G.W. Bush, présidée par Henry Paulson, est en mesure d’activer l’ensemble des opérateurs influents sur les places de Wall Street ou Chicago.

LEAP/E2020 analyse ainsi, dans ce numéro spécial consacré à la « Phase d’Impact de la crise systémique globale », le détail du processus d’ «euphorisation » des acteurs en démontant les mécanismes utilisés pour convaincre électeurs américains et opérateurs financiers mondiaux que l’avenir est radieux alors que tous les indicateurs objectifs sonnent l’alarme [14]que ce soit en termes de croissance américaine, d’emploi [15], d’inflation, de maîtrise des risques stratégiques, etc…

Par ailleurs, l’équipe de LEAP/E2020 tente d’anticiper le mode de développement et les conséquences de la phase d’impact sur des secteurs ou opérateurs particulièrement exposés comme les opérateurs et marchés financiers, les possesseurs d’actifs américains à revenus fixes, les opérateurs impliqués dans l’industrie immobilière et de financement de l’immobilier et les fonds de pension.



Figure 3 - Prix de vente moyen - Maison individuelle monofamiliale


LEAP/E2020 s’est aussi attaché à anticiper le rôle des « hedge funds » dans le processus explosif de la phase d’impact, qui va transformer leur « mutualisation des risques » en une « contagion systémique du risque». A ce sujet, d’ailleurs, LEAP/E2020 lance une Alerte sur tout le secteur financier américain et en particulier sur les principaux « hedge funds » que sont devenus des banques d’affaires comme Goldman Sachs et les principaux « primary dealers » américains autorisés par la Réserve fédérale des Etats-Unis.

Pour l’équipe de LEAP/E2020, c’est maintenant que se révèlent publiquement les motifs qui ont poussé la Réserve fédérale US à arrêter la publication de la masse monétaire M3 en Mars dernier ; et les conséquences de cette stratégie vont prendre à contre-pieds tous ceux qui auront naïvement choisi de partager l’euphorie ambiante entretenue jusqu’à l’élection américaine de Novembre. Ensuite, comme l’explique la publication, c’est une toute autre histoire qui commence. Celle de la phase d’impact de la crise systémique globale.

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1. Cf. analyse dans le GEAB N°7 : « Elections législatives américaines – Novembre 2006 : Vers un blocage politico-institutionnel à Washington, avec d’importantes conséquences politiques, économiques et commerciales »

2. Alors qu’au premier trimestre 2006, quand LEAP/E2020 a produit ses premières anticipations sur le sujet, l’immense majorité des acteurs concernés et des opinions publiques dans le monde était convaincue des tendances inverses, voire niait que celles qui sont aujourd’hui évidentes puissent tout simplement apparaître dans l’avenir

3. Même l’opinion publique israélienne devient très critique sur l’impuissance des Etats-Unis dans la région comme le résume fort bien l’article « The Mystery of America » de Gideon Levy paru dans Haaretz du 09/10/2006

4. C’est ce que vient de déclarer le Chef d’état major inter-armées américain, le général Peter J. Schoomaker. Source CBS News, 11/10/2006

5. 89% des Européens sondés via le GlobalEuromètre estiment que l’OTAN est en train de perdre la guerre en Afghanistan

6. A ce sujet, il est intéressant de garder en mémoire la valeur anticipatrice des déclarations de l’actuel Président de la Réserve Fédérale américaine qui déclarait il y a un an qu’ « il n’y avait pas de bulle immobilière qui puisse exploser » (source Washington Post, 27/10/2005)

7. Ainsi, même la Chine se joint désormais aux voix s’inquiétant des risques croissants posés par le développement incontrôlé des « hedge funds ». Source West Australian / Daily Telegraph, 29/09/2006

8. Lire pour information la note sur l’emploi US du Center for Economic and Policy Research (CEPR, 06/10/2006).

9. Source Roubini Global Economics services, RGE, 12/10/2006

10. Ce numéro du Global Europe Anticipation Bulletin explique notamment pourquoi la tendance à la baisse du Dollar est actuellement temporairement stabilisée du fait de la proximité de l’élection américaine

11. Au-delà des dettes personnelles en accroissement incessant puisque le taux d’épargne continue à être négatif, USA Today a calculé qu’en y associant la dette publique, chaque ménage américain est désormais endetté à hauteur de plus de 500.000 US $. Source USA Today, 24/05/2006.

12. Il est ainsi très utile de remarquer que les interventions publiques du G.W. Bush, telles que référencées par le site du parti Républicain, ont vu leur thème central basculer intégralement de la lutte contre le terrorisme à la bonne santé de l’économie. Source : Discours de Septembre 2006, Discours d’Octobre 2006. Parti Républicain.

13. Source : Federal Register , US National Archives, 11/1998, Executive Order 12631 / Working Group on Financial Markets

14. Par exemple le Chicago Tribune du 9/10/2006 titre sa page « Affaires » sur l’accroissement des risques de récession. C’est le cas d’un grand nombre de médias américains régionaux très sensibles aux conséquences directes de l’effondrement de l’immobilier.

15. Lire pour information la note sur l’emploi US du Center for Economic and Policy Research (CEPR, 06/10/2006)




© Copyright Leap/Europe 2020

Global systemic crisis / the next 6 months of the global systemic crisis

Phase II : the 4 structural stages of the speeding up of the global systemic crisis

On the 15th of May 2006, in GEAB N°5, LEAP /E2020 announced that phase II of the global systemic crisis – the so called « acceleration phase » [1]- would start in June 2006 and that it would be characterised by a general awareness of the existence of such a global systemic crisis.
The strong and ongoing fall of all stock exchange indicators all over the planet in the past weeks clearly shows the start of this acceleration phase of the crisis [2] , which has now become obvious to all economical and financial players.
These players are now seeing their past reference points fading and their certitudes being smashed to pieces. However, for the LEAP/E2020 team, seeing the actual starting process of phase II of the global systemic crisis [3] explains its development. LEAP/E2020 has defined 4 structured stages within this phase II. These four stages could overlap and will spread out all along phase II for a 3 to 6 months period starting from June 2006. The way they will link with each other will determine the nature of Phase III, the so called “impact phase”.
LEAP/E2020 has decided to present two of the four stages in this public release, these will be analysed in detail and strategic and operational recommendations will be provided in our GlobalEurope Anticipation Bulletin N°6 to be released on June 15, 2006
[4]:

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Stage 1 – Fall of world stock exchanges and temporary liquidation of dollars
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Stage 2 – Awareness of the deadlock of US rates policy: towards stagflation or hyper-inflation
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Stage 3 – Accelerated flight away from the dollar and the end of its monopoly on energy
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Stage 4 – Emerging of consequences in the field of growth and employment

The entry process into phase II is thus constituted of a brutal and long-term fall of the world stock exchange indicators, which, as stressed already by LEAP/E2020, had started as soon as March 2006 with the crash of the Arab Gulf stock exchanges. It is important to keep in mind that a systemic crisis affecting such a complex and vast system as the global society at the beginning of 21st century proceeds in “waves”, in a nonlinear way. Thus it affects certain parts of the system before others, while suddenly appearing to reverse its impact on other components whereas they are simply transitions, during which the system reaches a new threshold of imbalance, preambling a new impact even more brutal.

Stage 1 - Fall of the world stock exchanges and provisional liquidation in Dollars

Stage 1 illustrates perfectly this phenomenon. The combined movements of the Dollar and of inflation during the last months have finally changed the attitudes of the financial market players, while dispelling two illusions which underlined market increases over the past few years: the solidity of the US Dollar and the strength of the American economy (or more exactly, the negligible character of its imbalances: uncontrolled deficits, consumption based on credit, the real estate bubble,…). The disappearance of these two illusions has thrust the stock exchange operators into an increasingly opaque and unknown environment, where only the developments in interest rates remain understandable and anticipable [5]. They thus now focus on this indicator and, in uncertainty, liquidate all assets whose relationship with this indicator might seem to be problematic or negative. This decision, cumulated with the consequences of the heavy losses undergone by the speculators in the emergent markets (stock exchange and monetary) [6], led to a sudden increased demand for US Dollars, the currency in which the large majority of the positions were expressed: either to fill the losses, or to escape from positions now considered dangerous. We are now witnessing a “technical” increase of the Dollar which does not result from a choice by investors, but which is an obligatory “transition stage” within the framework of a “risk-avoidance” process, which paradoxically the Dollar forms part of, and which can be seen in the long term decisions of the central banks of China, Sweden, the Gulf States or even Russia [7] to modify their reserves to the detriment of the Dollar and for the benefit of the Euro.


Stage 2 - Awareness of the deadlock in US rates policy: towards stagflation or hyper-inflation

The financial and stock exchange players are now focusing on a single indicator, the evolution of the interest rates fixed by the central banks, and in particular that of the American Federal Reserve. Indeed, because of the United States central role in the world financial system, they play the part of the catalyst of hopes and fears; and their financial authorities will, during this phase II, accelerate the crisis. The US government and Federal Reserve have indeed led their economy and the whole of the financial markets towards a total dead end. The return of inflation has led to an increase in interest rates everywhere in the world, and the loss of confidence in the real American economy (with the background, the general loss of confidence in the United States) imposes a dramatic choice between two solutions with painful consequences:

*
Solution 1 - towards stagflation: to raise of the US interest rate to fight against inflation and to preserve the credibility of the Dollar (since it is only the differential in the interest rate with the EU and Japan that now maintains its relative value), but to accelerate the collapse of the growth of the United States economy, by making the real estate bubble (which is already deflating quickly) explode, and by disrupting up household consumption (on which the essence of the US growth has rested for 5 years). Inflation, high interest rates and growth at half-mast, even recession, this is a well-known situation which prevailed during the Seventies: stagflation [8].


*
Solution 2 - towards hyperinflation: stability of the US interest rates (and thus a drop of their relative value compared to the EU and Japan) to try (without guarantee, given the current state of the US economy [9]) to maintain the American internal growth and cause a collapse of the Dollar whose value “only just holds” on this differential, leading to the brutal interruption of the financing by the rest of the world of the American deficit (commercial and public) and thus a total financial crisis. This decision of course leaves the space open to inflation by trying to privilege growth, but it opens a period of generalized loss of confidence which reinforces, with the collapse of the Dollar, a very strong inflationary pressure in the United States which could lead to hyperinflation [10].

LEAP/E2020 believes that the US Reserve Federal, whose shareholders are large banks [11], will choose Solution 1 because in the second case the Federal Reserve is itself marginalized and loses the possibility of using one of its main instruments of action (interest rates). In addition, the current president of the Federal Reserve is convinced that parallel to a rise of the interest rates, an additional contribution of liquidity [12] to the economy will make it possible for the latter to set out again on the path towards growth [13]

For the team of LEAP/E2020, neither of the two solutions open to the American authorities can cure the total systemic crisis, their choice will be in fact primordial in determining the form and the extent of phase III of the total systemic crisis, the phase known as “impact phase”. The rest of the world will indeed not be affected the same way if the American authorities choose solution 1 or solution 2.

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1. Anticipated to last 3 to 6 months starting June 2006 (cf http://www.europe2020.org/fr/section_global/120506.htm )

2. Foreseeable and anticipated for the readers of the GEAB (cf N°2 to N°5)

3. The generalized fall of the world stock exchange
4. In French version, and other languages on June 17

5. Stage 3 will illustrate the illusion also at play with this conviction.

6. Compared with the beginning of May 2006, the stock exchange’s losses go from 15% to 30% depending on the zones. In most emerging markets currencies, the loss reaches 10% to 20%, and in some of them (Turkey, Korea,…) has already lead to brutal rises of the interest rates.

7. Source Yahoo/Reuters 08/06/2006

8. Stagflation definition: see Wikipédia

9. The American government and the Federal Reserve can even decide, in electoral year, a fall in absolute value of the US rates in order to restart the economic machine already on the way to a recession.

10. Hyperinflation definition: Wikipedia source

11. The structure of the Unites States Federal Reserve is indeed rather antiquated. It resembles that of the European central banks before the 30’s. It was created in 1913 and is a de facto bank whose shareholders are private banks. The future American Finance Minister, Henry Paulson, is the former president of the Goldman Sachs bank which is itself an important shareholder of the Federal Reserve of the United States.

12. Source: Reserve Federal - November 2002 - Speech of Ben Bernanke

13. Stopping the publication of the M3 indicator (see GEAB February 2006 issue ) allows for the two operations to be done simultaneously without the second, the currency making, being easily detectable.

Les 4 étapes structurantes de la phase d’accélération de la crise systémique globale

Eléments d’analyse et décision pour les acteurs économiques et politiques

LEAP/E2020 a annoncé, le 15 Mai 2006 dans le GEAB N°5, que la phase II de la crise systémique globale, phase dite d’ « accélération » [1], commencerait au mois de Juin 2006 en étant caractérisée notamment par une prise de conscience désormais généralisée de l’existence de cette crise systémique globale. La chute forte et durable de tous les indices boursiers de la planète ces dernières semaines illustre parfaitement l’entrée dans cette période d’accélération de la crise [2] désormais évidente pour l’ensemble des acteurs économiques et financiers. Ces derniers voient soudain leurs « repères » se brouiller et leurs « certitudes » voler en éclat. Pourtant, pour l’équipe de LEAP/E2020, le processus même d’entrée dans cette phase II de la crise systémique globale [3] éclaire considérablement son déroulement. LEAP/E2020 a ainsi pu définir 4 étapes structurantes au sein de cette phase II. Ces quatre étapes pourront se chevaucher et s’étaleront donc tout au long de la phase II de la crise systémique globale sur une période de trois à six mois à partir de Juin 2006. Leur enchaînement déterminera fortement la nature de la phase III dite « phase d’impact ».
LEAP/E2020 a décidé de présenter deux de ces quatre étapes structurantes dans ce communiqué public, qui font par ailleurs l’objet d’analyses plus détaillées et de recommandations stratégiques et opérationnelles dans le GlobalEurope Anticipation Bulletin N°6 qui paraît le 15 Juin 2006 [4]:

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Etape 1 - Chute des bourses mondiales et la liquidation provisoire en Dollars
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Etape 2 - Prise de conscience de l’impasse de la politique des taux US : vers la stagflation ou l’hyper-inflation ?
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Etape 3 - Fuite accélérée hors du Dollar et la fin de son monopole sur l’énergie
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Etape 4 - Emergence des conséquences en terme de croissance et d’emploi

Le processus d’entrée dans la phase II est donc constitué par la chute brutale et durable des indices des bourses mondiales, dont LEAP/E2020 avait déjà souligné qu’il avait commencé dès le mois de Mars 2006 avec le krach des bourses du Golfe arabique. A cette occasion, il est important de garder à l’esprit qu’une crise systémique affectant un système aussi complexe et vaste que la société globalisée de ce début de XXI° siècle procède par « vagues », de manière non linéaire. Ainsi elle affecte certaines parties du système avant d’autres, tout en paraissant soudain renverser son impact sur d’autres composantes alors que ce sont simplement des transitions, pendant lesquels le système atteint un nouveau seuil de déséquilibre, préalable à un nouvel impact encore plus brutal.

Etape 1 - Chute des bourses mondiales et la liquidation provisoire en Dollars

L ‘étape 1 illustre d’ailleurs parfaitement ce phénomène. Les évolutions conjuguées du Dollar et de l’inflation au cours des derniers mois ont finalement modifié l’attitude des acteurs des marchés financiers en faisant disparaître deux illusions qui sous-tendaient le mouvement haussier des marchés ces dernières années : la solidité du Dollar US et la force de l’économie américaine (ou plus exactement, le caractère négligeable de ses déséquilibres : déficits non maîtrisés, consommation tirée par le crédit, bulle immobilière, …). La disparition de ces deux illusions a plongé les opérateurs boursiers dans un environnement de plus en plus opaque et inconnu, où seule l’évolution des taux d’intérêts paraît compréhensible et anticipable [5]. Ils se focalisent donc désormais sur cet indicateur et dans l’incertitude liquident toutes les positions dont la relation à cet indicateur leur semble problématique ou négative. Cette décision, cumulée avec les conséquences des lourdes pertes subies par les spéculateurs sur les marchés émergents (boursiers et monétaires) [6], entraîne une demande soudaine accrue de Dollars US, devise dans laquelle la grande majorité des positions étaient exprimées : soit pour combler les pertes, soit pour se dégager de positions jugées désormais dangereuses. On assiste ainsi à une remontée « technique » du Dollar qui ne résulte pas d’un choix des investisseurs, mais d’un « point de passage » obligatoire dans le cadre d’un processus de « fuite du risque », dont, le Dollar fait paradoxalement partie et que traduisent les décisions durables des banques centrales chinoise, suédoise, des Etats du Golfe ou encore russe [7] de modifier leurs réserves au détriment du Dollar et au profit de l’Euro.


Etape 2 -- Prise de conscience de l’impasse de la politique des taux US :
vers la stagflation ou l’hyper-inflation ?

Les acteurs financiers et boursiers ont ainsi désormais l’œil fixé sur le seul et unique indicateur constitué par l’évolution des taux d’intérêts fixés par les banques centrales et en particulier celui de la Réserve fédérale américaine. Ce sont en effet les Etats-Unis, du fait de leur rôle central dans le système financier mondial, qui jouent le rôle de catalyseur des espoirs et des craintes ; et dont les autorités financières vont, au cours de cette phase II, accélérer la crise. Le gouvernement et la Réserve fédérale US ont en effet conduit leur économie et l’ensemble des marchés financiers dans une impasse totale. Le retour de l’inflation entraîne en effet une remontée des taux d’intérêt partout dans le monde et la perte de confiance dans l’économie américaine réelle (sur fond de perte de confiance généralisée dans les Etats-Unis) impose désormais un choix dramatique entre deux solutions aux conséquences douloureuses :

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Solution 1 - vers la stagflation : hausse des taux d’intérêt US pour lutter contre l’inflation et préserver la crédibilité du Dollar (puisque seul le différentiel de taux d’intérêt avec l’UE ou le Japon maintient désormais sa valeur relative), mais accélérer l’effondrement de la croissance de l’économie des Etats-Unis, en faisant exploser la « bulle immobilière » déjà en train de se dégonfler rapidement et en cassant la consommation des ménages (sur laquelle repose l’essentiel de la croissance US depuis 5 ans). Inflation, taux d’intérêts élevés et croissance en berne, voire récession, on retrouve ainsi une situation bien connue qui a prévalu au cours des années 70 : la stagflation [8].


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Solution 2 – vers l’hyperinflation : stabilité des taux d’intérêts US (et donc baisse de leur valeur relative par rapport à l’UE et au Japon) pour essayer (sans garantie étant donné l’état actuel de l’économie US [9]) de maintenir la croissance intérieure américaine et provoquer un effondrement du Dollar dont la valeur ne « tient » plus qu’à ce différentiel, entraînant l’interruption brutale du financement par le reste du monde des déficits américains (commercial et public) et donc une crise financière globale. Cette décision bien entendu laisse le champ libre à l’inflation en tentant de privilégier la croissance mais ouvre une période de perte généralisée de confiance qui renforce, avec l’effondrement du Dollar, une très forte pression inflationniste aux Etats-Unis pouvant conduire à l’hyper-inflation [10].

LEAP/E2020 estime que la Reserve Fédérale US, dont les actionnaires sont des grandes banques [11], choisira la Solution 1 car dans le second cas la Réserve fédérale se trouve elle-même marginalisée perdant la possibilité d’utiliser l’un de ses principaux instruments d’action (les taux d’intérêt). Par ailleurs, l’actuel président de la Réserve fédérale est convaincu que parallèlement à une hausse des taux d’intérêt, un apport supplémentaire de liquidités [12] à l’économie permettra à cette dernière de repartir sur le chemin de la croissance [13]

Pour l’équipe de LEAP/E2020, aucune des deux solutions envisageables par les autorités américaines n’étant en mesure de remédier à la crise systémique globale, leur choix sera en fait essentiellement déterminant sur la forme et l’ampleur de la phase III de la crise systémique globale, phase dite d’ «impact ». Le reste du monde ne sera en effet pas affecté de la même manière selon que les autorités américaines choisissent la solution 1 ou la solution 2.

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1. Prévue pour durer de 3 à 6 mois à partir de Juin 2006 (cf. http://www.europe2020.org/fr/section_global/120506.htm )

2. Prévisible et anticipable pour les lecteurs du GEAB (cf. N°2 à N°5)

3. La chute généralisée des bourses mondiales

4. En version française et le 17 Juin dans les autres langues.

5. L’étape 3 va illustrer l’illusion que constitue également cette conviction.

6. Par rapport au début Mai 2006, les pertes des marchés boursiers s’étalent désormais entre 15% et 30% selon les zones. Et pour la plupart des devises des marchés émergents la perte atteint 10% à 20% et pour certains d’entre eux (Turquie, Corée, …) a déjà entraîné de brutales hausses des taux d’intérêt.

7. Source Yahoo/Reuters 08/06/2006

8. Définition stagflation : source Wikipédia

9. Le gouvernement américain et la Réserve fédérale peuvent même décider, en année électorale, une baisse en valeur absolue des taux US pour relancer une machine économique déjà sur le chemin de la récession.

10. Définition Hyperinflation : source Wikipedia

11. La structure de la Reserve fédérale des Etats-Unis est en effet assez archaïque. Elle ressemble à celle des banques centrales européennes d’avant les années 30. Elle a été créé en 1913 et est de facto une banque dont les actionnaires sont des banques privées. Ainsi, le futur Ministre des Finances américain, Henry Paulson, est l’ancien président de la banque Lehman Brothers qui est elle-même un actionnaire important de la Reserve fédérale des Etats-Unis

12.Source : Reserve Fédérale – Novembre 2002 – Discours de Ben Bernanke

13. La suppression de la publication de l’indicateur M3 (voir GEAB N°2 – Février 2006 ) permet notamment d’effectuer simultanément les deux opérations sans que la seconde, la création de monnaie, ne soit aisément décelable.

Euroland facing a Dollar plunge

The global systemic crisis will provide a serious test for Euroland and will determine whether the Euro is sustainable or not. The significant fall of the Dollar will automatically induce a strong upward pressure on the Euro against this currency, and against others linked to the Dollar (the Chinese currency namely). The situation will provoke an immediate and significant fall of the competitiveness of European companies exporting towards the Dollar zone, with a negative impact on European exportations, accompanied by an immediate aggravation of unemployment in the Euro zone.In this situation, some countries will be tempted to get away from the Euro in order to avoid difficulties. However this centrifugal force will be opposed by the level attraction of the one and only zone of monetary stability that Euroland will provide. If a conflict between these two opposite trends develops within Euroland, it will be even more perceptible in non-Euroland member EU-countries.

In this regard, Euroland leaders should be concerned with the need of new member-states (all of them future members of Euroland) of a solid anchorage. These countries will be the most exposed to instability and the situation will impose clear perspectives as well as efficient protection mechanisms for their currencies. In parallel, the case of the three ‘non-Euroland but EU-15 members’ – Denmark, Sweden and the UK – will soon emerge as these countries will be in a rather tricky situation. Denmark and Sweden will most probably express a desire to join Euroland which will not be opposed by public opinions. The British case is more complex because, as detailed previously in this issue, the UK is closely intermingled with the Dollar zone and their amount of assets in US Dollars is very superior to those of the rest of the EU (about a third of Europe). In this condition, and in the case of such a crisis, their economic and financial situation is difficult to anticipate, further than predict that their situation will be the trickiest of all European countries. The City has been playing for decades the role of Wall Street’s side-channel. A financial and monetary crisis affecting the Dollar would therefore be catastrophic for the London financial centre.

- a scenario of « anchorage » of the new Member states, going as far as considering their fast entry in Euroland in case of emergency; Italy was accepted while it did not comply (by far) to the requested criteria; there is no reason then why it would not be possible to integrate the 10 new Member-States to Euroland, if the situation imposed it.
- a scenario of fast negotiation-integration with Sweden and Denmark.
- and a more random scenario, analysing the possibilities regarding the United-Kingdom.
In the framework of such a crisis, UK’s entry in Euroland should be based on the definition of monetary, financial and economic fundamentals clearly compatible with the Euro zone, otherwise the UK would import in Euroland its Dollar-related instability. Euroland leaders should start today working on the elaboration of these indispensable conditions.

This work of anticipation highlights the fact that the Euroland governance will be the decisive element for the Euro zone to cross as safely as possible this severe world crisis. Today already, within the EuroGroup and the ECB, a work group should start to elaborate the above mentioned scenarios in order to avoid being taken by surprise when the crisis is released. The Euroland needs a real Plan B because the Europeans know that a Plan A solely is not enough.

In parallel, Euroland leaders should set up two instruments to gain partial control over the course of events:

1) A light, but politically visible and legitimate, institution of economic steering of Euroland - the Euroland Secretariat - totally distinct from EU institutions, even physically (neither Brussels, nor Luxembourg, nor Strasbourg), in order not to be affected by the current rejection of EU institutions. Its first objective would be to regain the Europeans’ confidence, and to show that their democratically elected « heads » are commanding… and that the “commands” are efficient. The Euroland Secretariat will be this instrument and it will enable to define the common economic, industrial and social answers to the negative effects of the crisis.

2) A legitimate and democratic political authority which can only be a « Euroland Summit » regularly held, one every four months, capable of orienting, piloting, reassuring and reacting rapidly.

Moreover Euroland leaders, politicians and central bankers, together with their Asian, Russian, oil-producing countries’ counterparts, should consider to design the strategy required to get out of the Dollar-era in good order.

Like for any human construction, it is when difficulties arise that will be measured the Euro’s capacity to keep up to its promises of stability and protection of the hundreds of million Europeans sharing or about to share it. Failure would be simply be the end of the EU project.

Copyright © LEAP/E2020 (Laboratoire Européen d’Anticipation Politique)

June 2006 : Beginning of phase 2 of the global systemic crisis: the phase of acceleration

Seven concrete consequences for economic and political players and decision-makers

Last February, LEAP/E2020 anticipated that a global systemic crisis was to be triggered at the end of March. Today, three months later, LEAP/E2020 can anticipate that the initial phase of this crisis is about to be finished and that, as soon as the beginning of June 2006, the crisis will enter a phase of acceleration. Before detailing the main features of this new phase (described in GEAB Nr5 ), LEAP/E2020 would like to clarify the 4 different phases of a global systemic crisis.



A global systemic crisis develops following a complex process where 4 phases can be distinguished, overlapping one another:

. in the first so-called “trigger” phase, a variety of until then un-related factors, start converging and interacting in a way that is perceptible mostly by careful observers and central players

. in the second “acceleration” phase, a large majority of players and observers suddenly become aware that a crisis is there and that it has already begun to affect a growing amount of the system's components

. in the third so-called “impact” phase, the system starts to transform radically (implosion and/or explosion) under the strain of cumulated factors, simultaneously affecting the whole system

. in the fourth and last “decanting” phase, the features of the new system born from the crisis begin to appear.



In the present situation, LEAP/E2020 estimates that the initial trigger-phase is about to finish and that, during June 2006, the world will enter a phase of acceleration of the crisis.

Indeed, in less than three months, many certainties as to the future were turned upside down (« inescapable » dollar-denomination, « return » to cheap oil, « peaceful » solution to the Iran/USA conflict, « sustainability » of the US real-estate bubble, US « domination » over two other key global players – China and Russia,…) and a great number of indicators now point at converging directions, all of them sources of unbalance for the current system (vertiginous rise in gold and precious metals prices, escalation of inflationary pressures, increase of the interest rates, EURUSD approaching 1.30, large amounts of central banks' reserves being switched to Euros, rise of Asian currencies, stock market and currency crises developing in various areas in the world, growing amounts of articles published in the international and national press using words such as « krach, crisis, collapse, risk, conflict, … » ).

According to LEAP/E2020, this « trigger-phase » can be seen as a « learning » phase for the system's players. Some of them properly anticipated the evolution and bet on a breakdown of dominant trends. While they still seemed marginal and irrational to the majority a few weeks ago, they now appear to have « won » when the majority has « lost » following the system's “normal” trends. This “lesson” conveys cumulative effects and soon considerably strengthens all breakdown tendencies, resulting in switching from trigger-phase to acceleration-phase. It also reinforces the conviction of the strategic players who got involved into breakdown policies (or who anticipated the breakdown), and weakens in a sustainable way all regulation capacities of the system now faced to a soon generalized crisis of confidence. Well, in the current system, one inherited from WWI and transformed by the fall of the Iron Curtain, whether it is in the financial, economic, monetary or strategic sector, everything relies on the trust granted by each of us to one central player (the US ) and to the different components of its might. The passage from phase 1 to phase 2 marks the collapse of this trust, sector by sector.

LEAP/E2020 therefore estimates that these sectoral losses of confidence will converge in the course of June 2006, and induce the acceleration of the crisis process. The acceleration should elapse over 3 to 6 months and convey seven concrete consequences:



1. accelerated collapse of the Dollar
2. internal social and political crisis in the US
3. Iran/USA/Israel military conflict
4. increased global inflation
5. stop of the process of trade and economic globalisation
6. accelerated emergence of new regional/continental « blocks »
7. rebalancing of world assets' comparative value.


The passage to phase 3 (so-called « impact-phase ») of the global systemic crisis process will occur when at least four of the previously mentioned factors will have taken place. Simultaneously, it is possible, during the acceleration-phase already, to distinguish some of the tendencies that will shape up the future global system, and therefore to start initiating the decisions and policies likely to prepare a post-crisis future.

These are the analyses developed by LEAP/E2020 in the 5th issue of its Confidential Letter, the GlobalEurope Anticipation Bulletin .