midtowng's blog

The End of Bretton Woods II

The world of economics is every moving, ever changing. What was true 65 years ago, or even 38 years ago, is no longer true today. The world has moved on.

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century.
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments.

The Bretton Woods system was created during the final days of WWII and we still live with its legacy today. However, it has morphed into something very different since then.

The next bubble to burst

"Find the trend whose premise is false, and bet against it."
- George Soros

It didn't used to be this way. Back in the days of Bretton Woods, and a gold-backed currency, the financial markets were relatively stable. If you wanted to make money you had to do it over a long period of time.
In the post-Bretton Woods era, and especially in the last decade, market bubbles and crashes happen every few years. An investor with a keen eye and an open mind can spot golden investment opportunities, or at least avoid the fallout from the bubble bust.

We are about to see the bursting of the next bubble...and its going to be a doozy.

Wall Street's Culture of Corruption

Now that the largest Ponzi Scheme in history has blown up, and the victims are tallied, questions are finally being asked about Bernard Madoff that should have been asked a long time ago. Like "who was minding the store?"

The answers aren't pretty.

For instance, yesterday it was revealed that Madoff's daughter was married to the SEC compliance examiner, Eric Swanson.

Swanson was at the commission in 2003 when the agency was examining the madoff firm. More importantly, he was also part of the SEC team that was conducting the actual inquiry into the firm.

Even worse, the SEC was warned repeatedly as far back as 1999, that Madoff was running a Ponzi scheme.

The definition of insanity

“The definition of insanity is doing the same thing over and over again and expecting different results.”
- Albert Einstein

America didn't arrive at our current predicament by chance. We got here by repeatedly applying the same solution to the same problem, over and over again, while ignoring the fact that it never worked. This has been true for decades, through both Republican and Democratic Administrations.

It makes a person wonder if the root cause has more to do with corruption than with ideology.

Example #1)
In December 1982, Reagan signed into the law the Garn-St Germain Depository Institutions Act. It was the culmination of four years of deregulation of the S&L Industry that began under the Carter Administration. Thus began a financial disaster.
What many people aren't aware of is how Wall Street profited from this, and caused it.

How could they have let this happen?

The financial markets have collapsed. The real estate market has collapsed. The auto industry is collapsing. We are already in the longest and deepest recession in nearly 30 years, and there is no end in sight. The entire world is suffering financial turmoil at least as bad as America, if not worse.

Something this big didn't fall from the sky unexpectedly. There were plenty of people who predicted it.
Hell, even I predicted it three years ago and I have little formal training in economics.

There is plenty of evidence to suggest that the political and financial leaders knew that something like this was coming, and yet no one did anything to prevent it. It's concrete proof of a complete failure of leadership across the globe, but especially in America.
It's also evidence of a more systemic problem in our society.

The Decline and Fall of the Dollar Empire

The Japanese made an unusual suggestion the other day that was largely ignored in the American press.

Japanese economists, increasingly concerned that the United States might seek to pay its enormous and growing debt obligations in a weakened US dollar, are looking to the possibility of US Treasuries being issued in yen.
As the yen strengthens, the effective value of debt held in dollars will decline, a fate that yen-denominated Treasuries would escape.

This idea isn't new. President Carter issued bonds denominated in German Marks and Swiss Francs when the dollar's value was in doubt during the high inflation of the late 70's. Now there are new questions being raised about the dollar, but this time the concern isn't inflation - its default.

Two signs that something is seriously wrong

Every once in a while in the world of economics an economic indicator will suddenly go crazy. One day the charts all look normal and easy to understand. The next day it suddenly launches into an entirely different world.

What a massive swing in the index means is always open to interpretation (a whole industry exists to analyze these movements), and no one is certain if they are correct until years afterward. Sometimes what it means is more obvious than the why, but the 'why' is ultimately more important.

The Next Bubble: $2 Trillion In Federal Borrowing

"[Obama] will inherit an economy that is in recession and ... is likely to get worse before it gets better."
- Stuart Hoffman, chief economist for PNC Financial Services

The whole world is focused on America's presidential election, but people have forgotten that the next president is going to inherit the mess that the current president has left.

I guess it wasn't contained after all

Remember just 17 months ago when Fed Chief Ben Bernanke told us not to worry about housing?

The subprime mess is grave but largely contained, said Federal Reserve Chairman Ben Bernanke Thursday

Just one month before that Treasury Secretary Paulson said:
"I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained. All the signs I look at" show "the housing market is at or near the bottom."

The biggest laugher of all, was Bernanke's prediction two months later, when he said:
"Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems."

Those guys are such kidders.

A Global Emerging Market Crisis

At some point over the last few years, many of us have considered moving our retirement savings overseas in order to avoid the financial calamity now sweeping the nation.
Almost without exception that strategy turned into a major loser. Amazingly when you consider the collateral damage on Wall Street, just about every market in the world has done worse than America's this year.

And just when you didn't think it couldn't get any worse, the global financial crisis appears to be mutating from a credit crunch to a more serious global currency crisis.

Iceland's financial system and currency suffered a complete collapse last week. A default on sovereign debt now seems imminent.
The question on the minds of everyone on Wall Street is: who's next?