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Strong US Dollar
QE 4 in 2016
December 16, 2014 interview
Jim negotiated during the Russian financial crisis in 1998 on behalf of Long-Term Capital Management. He was the general counsel and lined up against fourteen bankers who were sponsored by the American Federal Reserve.
The global panic in 1998 started in Thailand, spread to Indonesia, and then to Korea. There was actually blood in the streets of Seoul and Jakarta — there were riots and people were killed.
Then it spread to Russia, when Jim had the Long-Term Capital event, and then Brazil, where the IMF built a fire wall.
This global panic now seems to be starting in the oil patch in Russia, but it may not end up there. It may come back to European banks.
The way the contagion works is that there’s a large amount of US dollar debt in Russia. Russia has a certain amount of US dollar reserves and gold reserves — enough to cover the sovereign debt but not enough to cover the corporate debt. It’s good enough to cover through 2015, but not beyond.
So how are they going to cover those corporate debts? They can earn some dollars, but there are sanctions on them so that’s hard. They may end up defaulting on their corporate debt.
Who owns the US dollar denominated Russian corporate debt?
The answer is European banks and U.S. investors. So those losses are going to come back to Europe and the United States.
When people owe you money and they say they have a problem, actually you’re the one with the problem.
STRONG US DOLLAR
It’s not just Russia with a problem, it’s also Turkey, Venezuela, Brazil and Mexico.
The bigger story is the stronger US dollar.
When gold, oil and the Russian ruble are going down, it’s really the US dollar going up.
This is really a strong dollar story.
QE 4 IN 2016
The problem with a strong dollar is that the Federal Reserve wants inflation. They’ve said they want 2% inflation, and privately that they wouldn’t mind 3%.
But a strong dollar is deflationary. How will they reconcile that? If they raise interest rates it will make the dollar even stronger and the deflation worse.
Jim can’t see the Fed raising interest rates next year. That would be a shot to the markets.
Then you may have a shock in US dollar/euro cross rates.
People expect Europe to ease and the US to tighten, but Jim thinks Europe won’t ease much and the US Fed won’t tighten.
The US will have QE 4 in 2016.
If the Fed raises rates, which Jim doesn’t expect, that would strengthen the dollar and increase deflation. The Fed says they want inflation. If they want to throw the economy into severe recession and have more deflation then they’ll raise interest rates.
There’s a little bit of flight to the US dollar right now.
China’s slowing down, Japan’s imploding and Europe’s in depression, so people want dollars. People buy stocks but that’s just another asset bubble all created by the Fed.
The bubble will eventually crash on it’s own, but the central bankers will try to keep the game going as long as they can. They’ll keep inflating the bubble.
Meanwhile, you have China and Russia stockpiling gold and trying to get out of the dollar.
Behind them is the IMF with SDRs, and that’s how they’ll re-liquify the world during the next panic.
This is a major potential collapse of the international monetary system. Not tomorrow, but in a year or a year and a half from now.
We live in a world of financial threats with the ruble. We live in a world of cyber threats with the stock market being shut down in 2013. And we live in a world of terrorist threats as we’ve seen in Sydney and Pakistan.
Here we see all three of them coming together — cyber, terrorist and financial all in this one Sony event.
Movies are one of the biggest US exports, so it’s another way to hurt the US economy.
This crisis with the ruble is very unlikely to cause problems for Putin. The Russian people are used to adversity and they’re much tougher than we are.
The Foreign Minister of Russia came out today and said it looks like a US financial attack, designed to achieve regime change. They’re basically saying that the US is threatening the Russian regime.
This won’t affect the Russian people but it could affect the US people’s 401Ks. This could come around in unexpected ways.
Putin is getting stronger.
This isn’t quite like Germany after World War I. Germany had debt in the form of reparations after World War I. Russia doesn’t have that much external sovereign debt. There is a lot of corporate debt, but Russia’s reserves are greater than their sovereign debt. So there’s not going to be a sovereign debt default.
Currency can go down, but it’s stocks and bonds and borrowers who get in trouble. There’s not going to be a sovereign default because their reserves are much greater than their sovereign debt.
Corporate debt is getting more expensive. People are in trouble if they borrowed in dollars but are paid in rubles. They may default.
But where are those stocks and bonds that are defaulted? They are in emerging markets and in American 401Ks. This is where the contagion comes in.
Back in 1997 and 1998, the last time Russia collapsed, it fell in Jim’s lap and that was an external dollar default. Russia did default on their sovereign debt then.
That’s not going to happen this time because they don’t have that much sovereign debt.
But watch out for the corporate debt.
And where is the corporate debt? It’s in emerging market funds, underwritten by Wall Street and sold to American 401Ks.
Hey, America, you want a financial war? Here it comes.
Interest rates may have to go higher in Russia.
Remember, in the United States they were 20% in 1980.
People confuse nominal interest rates and real interest rates. The rate may be 17%, but if inflation is 15% then the real rate is only 2%.
Putin probably won’t use this to make a land grab in the Ukraine — he’s got a pretty full plate right now. He’s going to hang on to Ukraine and they’re going to insist on autonomy.
Jim doesn’t defend this, but says that how the Russians are looking at it is that the United Kingdom gave autonomy to Scotland, and Canada gives autonomy to Quebec, so why not autonomy for Eastern Ukraine?
Americans are doing “mirror imaging” and thinking that the Russians are thinking the way they are. They’re not. They’re thinking like Russians. That’s how you play chess.
Wag the Dog (Drums of War and Back Room Banker Passes)
words and music Elaine Diane Taylor
© 2014 Intelligentsia Media Inc. All rights reserved.
from the album Preparing for the Fall available on CDBaby
Another Week on Wall Street
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
from the album Coins and Crowns available on iTunes