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Tuesday, December 30, 2008

The End (of the Year) Is Nigh

The New Year is barreling toward us like a runaway bus. Today's Must-Read: "The Collapse of Financial Globalization"

Brad Setzer's writing style is a bit dry, but his charts are eye-popping and he makes his point like a silver bullet to the brain: "private capital inflows to the US and private capital outflows from the US have fallen sharply." As in, fallen-off-a-cliff sharply.

So then, what is propping up U.S. Treasuries and the U.S. Dollar? America's livin' large lifestyle is largely supported by China and Japan (because they want to sell us stuff). The other big lender is Saudi Arabia, which also has an advantageous financial arrangement with the U.S.

If and when China, Japan and Saudi Arabia are no longer able to support the continued growth of US deficit financing, the dollar and the bonds will decrease in value. And that fall could come with avalanche-like suddenness.

So why do they continue to prop us up? Self-interest (we are their best customer) and a healthy dose of fear ... fear of what will happen when they no longer continue to provide us with unlimited credit.

This is why the world has not developed a sound replacement for the mighty greenback ... yet. It is because if they do, it will trigger a collapse of their dollar reserves and throw a wrench in their export driven economies,. And the scale of that derailment will likely be much worse than anything we can imagine.

I'm not going to say much more, other than check out Brad's nifty charts and analysis.

After you read that, start preparing for the coming storm: Potentially, we could see hyperinflation, if the U.S. dollar is revealed to be a Ponzi scheme worse than anything Bernard Madoff could have come up with. And remember, the shift from deflation (which we are in now) to hyperinflation (a collapse of the dollar) could be stunningly swift. Going back to my avalanche analogy, you never know what will set off an avalanche, but it's usually something very small in proportion to the outcome.

Can we avoid this fate? Sure we can. Nothing is written in stone. Strong political leadership -- combined with a great deal of luck -- could make a difference. Do you feel lucky?

Here is some other news worth reading ...

China Said to Allow 500,000 Tons of Corn Exports as Harvest Set for Record China, the world’s second-biggest corn grower, will allow 500,000 metric tons of the grain to be exported next year, about 10 percent of levels seen in previous years, as the government seeks to ensure domestic supplies.

Japan's Economy May Shrink 12% This Quarter, Most Since '74, Barclays Says Japan's economy will probably shrink at an annual 12.1 percent pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said.

Gazprom, Once Mighty, Is Reeling
A year ago, Gazprom, the Russian natural gas monopoly, aspired to be the largest corporation in the world. Buoyed by high oil prices and political backing from the Kremlin, it had already achieved third place judging by market capitalization, behind Exxon Mobil and General Electric.
Today, Gazprom is deep in debt and negotiating a government bailout. Its market cap, the total value of all the company's shares, has fallen 76 percent since the beginning of the year. Instead of becoming the world's largest company, it has tumbled to 35th place. And while bailouts are increasingly common, none of Gazprom's big private sector competitors in the West is looking for one.

Bumpy Crop: Farming's Sudden Feasts and Famines

The world has been producing more grain than ever. Demand has grown faster than farmers could increase their production most years of this decade, helping to drain grain reserves. Unusually good weather in most of the world this year is refilling grains stocks once again. But the situation could easily change. Some economists worry that the world will consume more grain than it produces by 2010, particularly if oil prices recover enough to make the production of ethanol from corn more profitable again.

Are Modern Recessions Different?

“Since WWII, recessions have lasted 10 months on average. We hear that a lot. Our current recession started in December 2007. Even though this go-around seems worse [than] usual, that's still a little cause for optimism ... This recession has more in common with the pre-WWII era ... recessions last an average 18 months. If this logic is right, then we're not due for sunnier skies until mid-2009.”

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