When the leaders of this country along with the local top economic advisors say that this great nation of ours is immune to the global economic meltdown brought about by an international credit crunch, do you believe them? Or do you believe the volumes of foreign news from all around the world spelling out economic Armageddon in bold on their front pages?
Why don’t we look at this from a different aspect and try to understand who is saying why and when about what is actually happening and whose truth does one believe in. There are certain indicators that do not lie and gold is one of them.Gold is a metal commodity that is revered since God-Knows-When and it is traded around the world today as one of the most important physical element. One can own it and feel it in one’s hands. One can use it for coinage, jewellery or in electronics parts. Gold is also traded on the spot and futures markets globally and it was once used as a standard, being pegged by a nation’s currency. So, what is actually gold? What makes it so valuable? Why the human obsession?
The price of an item is driven by the supply and demand factors. When supply is low and demand is high, the price skyrockets. Alternately, when supply is a plentiful and demand is weak, the price bottoms out. This is an economic certainty. Gold however is different. It retains its intrinsic value regardless of whether the supply and demand is evident or otherwise. The only other commodity having such inherent characteristics is oil. That is why oil is also known as “black gold”. Herein lies the dilemma.
When Citicorp, the largest banking institution in the entire history of the world, is in dire straits and requiring a government bailout, one can say that the global economic shit has hit the fan, big time. Credit crunch. What the Hell is a credit crunch? Well, insofar as I know, it is the deprivation of credit and without credit (owing to whatever factors) there is no trade. A company that cannot do trading is a dormant company. A nation that cannot do trading becomes a banana republic. Hyperinflation sets in as the value of its currency becomes insignificant. Prices for everything (goods and services) shoot up and the overall value of a nation decreases. Savings and pension funds are devalued and all banking institutions take a massive wallop. Share prices will be non-indicative of its true value and will render a nation’s economy worthless.
So what has this to do with gold? Gold is traded in US Dollars (so is black gold). When the value of greenbacks depreciates against all currencies, gold would hereafter be traded at a lesser value than what it is actually worth. The price of gold (and black gold) will (one would think) henceforth rise to offset this devalued dollar. Well, this has not happened. The prices of gold and black gold have actually dropped, rather drastically too. Okay, one anomaly does not indicate a global economic meltdown.
Let us now look at the futures prices for gold. Gold futures for January and February 2009 are, mildly said, bleak. When a commodity’s spot price is higher than the following delivery month’s futures price, it means that the value of that particular commodity is dropping. No big deal as the value of gold has always automatically corrected itself. When the following month’s futures price is also higher than the next following month’s futures prices, the economists call it “backwardation”. In the entire history of the world, gold has never experienced a backwardation, until December 2008. In fact, gold futures have never experienced a fall in price (and worth) for more than one single trading day and certainly never ever trickled across the following delivery month. Now we are looking at a minimum of three months’ drop in prices (since the 1st of December). This means that the gold basis has turned negative. Anomaly number two. Same with black gold – anomaly number three.
What is exactly the gold basis? The gold basis is an incorruptible measure of trust in paper money. During the “Gold-Standard” Great Depression years of Roosevelt, the US Dollar was backed by physical gold. Not anymore since 1971 when it was allowed to float in the international trading markets. All currencies are now operated on a system called the “fiat money” which can be defined as “money that is intrinsically irredeemable and is primarily utilized only as a medium of exchange”, hence the gold basis as an indicative backing system for a currency’s actual worth.
When the gold basis turns negative, the confidence and trust accorded the value of currencies drop. Paradoxically, one US Dollar now is not worth one US Dollar of before. When this happens, hyperinflation sets in. A loaf of bread costing US 1 Dollar might cost US 10 Dollars now. Where does the additional US 9 Dollars come from? Credit, what credit? Remember that there is a credit crunch?
And then there are the paper gold traders and bullion banks. Gold can also be traded in paper form whereby the issuers guarantee the buyers ala traders ala investors, the value of gold on a piece of paper or in a “gold account”. In Malaysia, certain major banks offer such services. The government guarantees bank depositors their Ringgit but not investors. Likewise, the banks guarantee the value of the investment, not the worth. If ever the international bullion banks go bankrupt (either fraudulently or through the depreciation of the US Dollar against the value of gold), the investment will turn sour. This is quite possible if the price of gold continues to drop. In a backwardation scenario, spot gold traders will not continue to trade as gold producers stop production and go into hibernation. Futures gold traders holding these contracts will be wiped out as there can be no deliveries of this commodity and their contracts give them no right to physical gold anyway. Since there will be no legal trading of gold, all legal protection of the ownership of and trade in gold will be suspended indefinitely.
This is altogether only hypothetical but in reality quite feasible. How will it affect Malaysia? The Ringgit is also an irredeemable “fiat” currency and not backed by any physical form of gold, and irredeemable currency can last only as long as it is visibly capable of supporting the futures market(s) in gold. Without a futures market trading gold, “wherefore art thou, my Malaysian Ringgit?”
Yes, the southeastern nations of Asia (except Vietnam and Indonesia) are not directly affected by the depressing economic downturn as being experienced now in America and Europe. Part of the reasons why is due to our de-leveraged banking institutions and the high amount of foreign currencies currently being held by the respective governments here. Inadvertently though, the effects of the larger American and European markets will trickle down here and Malaysia will not be immune to it. This is because the Malaysian economy together with all the southeastern nations’ economies added together are not large enough to sustain this corner of the earth irrespective of the massive American and European markets. No matter what the government does here to try to stimulate the local economy, the greater effects from America and Europe will eclipse all attempts to divert this global economic tsunami away from our shores.
You can bet your last “irredeemable” ringgit on it. Better still; bet your last ringgit on the Indian economy because India is the only country left in the entire world enjoying a positive economic growth rate.
- Hakim Joe
Wednesday, 17 December 2008
Sunday, 14 December 2008
protect the majority...
Hindraf activists launch protest
KUALA LUMPUR, Dec 14 - About 20 Hindraf activists launched a protest fast on Sunday to demand the release of their leaders who have been imprisoned without trial for allegedly threatening racial stability.
The protesters began consuming only water outside a Hindu temple in Kuala Lumpur, but there was no consensus about how long they will continue the fast, said Mr S. Jayathas, a member of the Hindu Rights Action Force.
"We want the government to listen to us and look into our legitimate rights," Mr Jayathas said.
The group shot to prominence in November 2007 when it led tens of thousands of Indians in a rare street protest seeking an end to policies benefiting the Malay Muslim majority and to gain better opportunities for Indians, who form the bottom rung of Malaysia's social ladder.
The protest marks the first anniversary of the jailing of five of the group's leaders last December under a tough security law that allows indefinite detention without trial.
The government has also since banned the group, accusing it of inciting racial hatred.
Last year"s street rally was considered a watershed in the country's politics, emboldening Malaysians unhappy with the government and boosting opposition parties to spectacular gains in general elections in March.
Minority Indians and ethnic Chinese have recently become more vocal in speaking out against the government's decades-old policy that provide privileges in education, jobs and business to Malays, who comprise nearly two-thirds of Malaysia"s 27 million people. - AP
KUALA LUMPUR, Dec 14 - About 20 Hindraf activists launched a protest fast on Sunday to demand the release of their leaders who have been imprisoned without trial for allegedly threatening racial stability.
The protesters began consuming only water outside a Hindu temple in Kuala Lumpur, but there was no consensus about how long they will continue the fast, said Mr S. Jayathas, a member of the Hindu Rights Action Force.
"We want the government to listen to us and look into our legitimate rights," Mr Jayathas said.
The group shot to prominence in November 2007 when it led tens of thousands of Indians in a rare street protest seeking an end to policies benefiting the Malay Muslim majority and to gain better opportunities for Indians, who form the bottom rung of Malaysia's social ladder.
The protest marks the first anniversary of the jailing of five of the group's leaders last December under a tough security law that allows indefinite detention without trial.
The government has also since banned the group, accusing it of inciting racial hatred.
Last year"s street rally was considered a watershed in the country's politics, emboldening Malaysians unhappy with the government and boosting opposition parties to spectacular gains in general elections in March.
Minority Indians and ethnic Chinese have recently become more vocal in speaking out against the government's decades-old policy that provide privileges in education, jobs and business to Malays, who comprise nearly two-thirds of Malaysia"s 27 million people. - AP
Saturday, 13 December 2008
the making of a financial crisis ...
Explaining the Global Financial Crisis
as per report..
The US homeowner loses a Faustian bargain
What are the roots of the global financial crisis, and why has it produced a sudden and shocking collapse in American confidence and economic activity?
What has really gone wrong is that that entire model has collapsed along with the global financial institutions that hot-housed it. Not only has the ceiling come down on the US household sector, but the wreckage is blocking the exits.
It is that collapse of any exit strategies that is doing the damage. Simply to retain household debt-to-equity ratios at last year’s levels will now take a contraction of around 6.1 percent in nominal private consumption spending next year. To eliminate that debt/equity ratio would need a contraction of around 25 percent - the Depression Option.
Since the problem is not the ‘normal’ Austrian one of over-capacity and deflation, the normal road to recovery – supply-side reforms and industrial consolidation to build assets and labor productivity – is unlikely by itself to be sufficient. Full-scale recovery will await the re-invention of a financial system capable of reawakening a much-abused appetite for risk.
1. First, and this is the only piece of quantifiable good news this article contains, this is not a classic ‘Austrian’ crisis of overinvestment and deflation. Or at least it fits into that model at a level of generalization so broad and long as to be analytically disappointing. Nowhere in the developed world have we seen the sort of reckless overinvestment which, for example, we saw in the 1997-1998 Asian financial crisis. Nominal capital stock is growing around 3.4 percent in the US, around 5.3 percent in Europe, and 2.3 percent in Japan – hardly the stuff of bubbles. Similarly, private sector savings deficits are not running out of control. Even in the US, the private sector savings deficit is likely to be only around 1 percent of gross domestic product this year.
These are not the sort of ratios which precipitate financial crises. We expect the balance sheet of the financial system to be a mirror image of the balance sheet of the rest of the economy. But if that were the case, the problem would not possibly have escalated so catastrophically so quickly. In fact the balance sheet of the financial system no longer principally mirrors the balance sheet of the rest of the economy. Indeed, such is the size and opacity of off-balance sheet contingent liabilities, that we can say the balance sheet of financial institutions no longer even mirrors the balance sheet of the financial system.
There was a motive for this: the expiration of the 27-year bull market. And there was the opportunity: the increasingly gothic financial structures of the derivatives market which, at a huge cost, created any yield curve you liked.
That divorce between real economy and financial system balance sheets really is a problem. It explains why, unlike any other financial crises I’ve witnessed or even read about, the problem is not that the US financial system has run out of money – the strength of the currency and government bond markets show that quite clearly. It’s simply that the institutions that can use that money either no longer exist, or can no longer be safely guaranteed to exist by the end of the financial and economic crisis.
as per report..
The US homeowner loses a Faustian bargain
What are the roots of the global financial crisis, and why has it produced a sudden and shocking collapse in American confidence and economic activity?
What has really gone wrong is that that entire model has collapsed along with the global financial institutions that hot-housed it. Not only has the ceiling come down on the US household sector, but the wreckage is blocking the exits.
It is that collapse of any exit strategies that is doing the damage. Simply to retain household debt-to-equity ratios at last year’s levels will now take a contraction of around 6.1 percent in nominal private consumption spending next year. To eliminate that debt/equity ratio would need a contraction of around 25 percent - the Depression Option.
Since the problem is not the ‘normal’ Austrian one of over-capacity and deflation, the normal road to recovery – supply-side reforms and industrial consolidation to build assets and labor productivity – is unlikely by itself to be sufficient. Full-scale recovery will await the re-invention of a financial system capable of reawakening a much-abused appetite for risk.
1. First, and this is the only piece of quantifiable good news this article contains, this is not a classic ‘Austrian’ crisis of overinvestment and deflation. Or at least it fits into that model at a level of generalization so broad and long as to be analytically disappointing. Nowhere in the developed world have we seen the sort of reckless overinvestment which, for example, we saw in the 1997-1998 Asian financial crisis. Nominal capital stock is growing around 3.4 percent in the US, around 5.3 percent in Europe, and 2.3 percent in Japan – hardly the stuff of bubbles. Similarly, private sector savings deficits are not running out of control. Even in the US, the private sector savings deficit is likely to be only around 1 percent of gross domestic product this year.
These are not the sort of ratios which precipitate financial crises. We expect the balance sheet of the financial system to be a mirror image of the balance sheet of the rest of the economy. But if that were the case, the problem would not possibly have escalated so catastrophically so quickly. In fact the balance sheet of the financial system no longer principally mirrors the balance sheet of the rest of the economy. Indeed, such is the size and opacity of off-balance sheet contingent liabilities, that we can say the balance sheet of financial institutions no longer even mirrors the balance sheet of the financial system.
There was a motive for this: the expiration of the 27-year bull market. And there was the opportunity: the increasingly gothic financial structures of the derivatives market which, at a huge cost, created any yield curve you liked.
That divorce between real economy and financial system balance sheets really is a problem. It explains why, unlike any other financial crises I’ve witnessed or even read about, the problem is not that the US financial system has run out of money – the strength of the currency and government bond markets show that quite clearly. It’s simply that the institutions that can use that money either no longer exist, or can no longer be safely guaranteed to exist by the end of the financial and economic crisis.
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