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LEAP 20/20: GEAB N°61, Global Systemic Crisis

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“LEAP 20/20: GEAB N°61, Global Systemic Crisis:
2012: The Year Of The Great Global Geopolitical Change”
by LEAP 20/20
“2012 will be the year of the great global geopolitical change: a phenomenon which will undoubtedly create serious difficulties for most of the planet but which will also allow the emergence of the geopolitical conditions conducive to an improvement in the situation in the years to come. Unlike previous years, 2012 will not be a “wasted” year, stuck in the “world of before the crisis”, through a lack of boldness, initiative and imagination on the part of world leaders or of peoples passivity since the beginning of the crisis.

We qualified 2011 as the “ruthless year” because it was going to shatter the illusions of all those who thought that the crisis was under control and that they would be able to go back to their “business as usual” as in the past. And 2011 was ruthless for many from political leaders, to the financial sector, for investors, for Western debts, for global growth, for the US economy and for the absence of governance in Europe. Those who believed themselves untouchable have discovered brutally that the crisis spared no one. And of course this trend will continue in 2012 because the crisis does not respect the Gregorian calendar.

The last “untouchables” are now going to experience the full brunt of the crisis first hand: the United States, United Kingdom, Dollar, T-Bonds, and Russian and Chinese leaders. But 2012 will also see, especially in its second half, the forces and players assert themselves who in 2013 will begin to rebuild a new international system, reflecting expectations and power struggles of the 21st century and no longer those of the middle of the 20th century. Therein, 2012 will be the year of the giant leap from the world of yesterday to the world of tomorrow. A year of transition, it will mix the worst and the best. But, in doing so, it will nevertheless be the first constructive year since 2006.

We present in this report 35 developments, including recommendations, which we anticipate will mark the year 2012: 20 themes on the increase and 15 themes declining. This list can help very readers to prepare for the coming year, reducing wasted time reading articles on subjects which are already secondary in terms of impact on the course of events, and rather taking the time to explore the topics which will be at the heart of developments to come and so not to be taken by surprise by the major developments of the year. For six years, with a success rate between 75% and 85%, this annual anticipation is therefore particularly helpful to decision makers in the coming twelve months.

Also in this issue, our team gives an in-depth analysis of the nature and consequences of a possible QE3 which the Federal Reserve might launch in 2012. Hoped for by some, feared by others, QE3 is generally presented as the ultimate weapon to save the US economy and financial system which, contrary to the dominant chatter of recent weeks, continues to deteriorate.

At the end of 2011, the US economic situation continued to deteriorate in spite of the attempts to hide it by the main media and rating agencies; collapsing bank profits, declining US consumption, continuing business closings and bankruptcies of retail networks, record unemployment data and growing funding problems within pensions, budget crisis of large public universities and continuing record fiscal deficits. Whether the FED starts QE3 or not, will no doubt be the major financial event of 2012 whose consequences will mark the world’s financial and monetary system definitely. QE3 will play a key role in the world’s geopolitical swing in 2012 because this year will see the last attempts of the world’s dominant powers before-the-crisis to maintain their global power, be it strategic, economic or financial. When we use the term “last”, we want to emphasize that after 2012 their power will be weakened too much to continue to maintain this privileged position. The recent downgrade of most of the countries of Euroland by S&P is a typical example of these last chance attempts: pushed by Wall Street and the City, because of their insatiable needs, the United States and the United Kingdom have arrived at the point of engaging in open financial war with their last allies, the Europeans.

This is geopolitical suicide because this attitude requires Euroland to integrate still more while dissociating itself from the United States and the United Kingdom; while the vast majority of the leaders and people of the Euro area have finally understood that there really was a transatlantic and cross-channel war being conducted against them. LEAP/E2020 presented this subject its “Europe 2012-2016″ expectations in GEAB N ° 62, which was released on February 15, 2012. With debt to GDP of 900% the UK is like an animal caught in a trap. On another agenda, the attempts to create a little “cold war” with China or setting a trap for Iran on the question of the free movement in the Strait of Hormuz arise from the same reflex.

The great change in 2012 will also be that of the people, because 2012 will be the year of the people’s anger. It is the year where they will enter massively on the stage of the global systemic crisis. 2011 will have been merely a “warm up lap” where pioneers have tested methods and strategies. In 2012, the people will assert themselves. They will do so in a pro-active manner because they will create the conditions for decisive political change via elections (as it will be in France with the eviction of Nicolas Sarkozy, or via massive demonstrations (United States, Arab world, United Kingdom, Russia). And they will also do it by generating fear in their leaders, the latter requiring a “pre-emptive” attitude to avoid a major political shock (as this will be the case in China or in several European countries). In both cases, whatever the elites of the country concerned think, this is a constructive phenomenon because nothing important or sustainable can emerge from this crisis if the people are not involved.

The great change of 2012 is also the accelerated collapse of the power of the western banks and financial institutions, a reality that we describe in this GEAB unlike the current populist discourse which forgets that the night sky that we look at is an image of a long-gone reality. The crisis is creating such an acceleration of history that many have not yet understood that the power of the banks which they worry about preserving is only that which they had before 2008. At the same time, we continue to see investor’s world wide flee stock markets and financial assets particularly in the US. And great swing will also witness finally the arrival of the maturity of the BRICS, who will start in 2012 to weigh heavily and pro-actively on international decisions. However, they are certainly one of the key players for the emergence of the world from the crisis; and a player who, contrary to the United States and the United Kingdom, knows that his interest is to assist the Euroland to cross this crisis.

With a Euroland stabilized with strong governance, the end of 2012 will thus present itself as the first opportunity to establish the foundations of a world whose roots wont bury themselves in the aftermath of World War II. Ironically, the Summit of the G-20 in Moscow in 2013, probably the first to be held outside the Western camp, will crystallize the promises of the second half of 2012.

USA 2012 – On the way towards the tragedy of QE3: Today US policy is confronted by the sovereign debt crisis of which it will be come the ultimate victim in 2012. The European detonator has truly ignited the 2012 American debt bomb, even if the western media desperately tries to make us believe the opposite. The massive selling of US Treasury Bills by the planets major central banks in the second half of 2011 illustrates this point perfectly.

We anticipate a solution to the European crisis will be found in the first half of 2012 while the United States, bogged down in a depression from which it can not exit, will face the consequences of the explosion of the Dollar/T-Bond bubbles in the second half of the year. Even in the absence of a solution to the European crisis, the general slow down in the world economy in 2011 marks the entry into the second phase of the systemic crisis, and the coming world recession will hasten the arrival of the sovereign debt crisis to the US debt markets.

2012 – 2013 will thus be fatal for the US Treasury. In an election year, the temptation of a QE3 will become irresistible, in spite of the fact that it’s condemned to failure. But it is the nature of history to offer this kind of dilemma: attempt QE3 and implode the dollar T-Bond duo, or not, and watch the US economic and financial system collapse. The tragedy of QE3 will be the most important monetary event of 2012. The US bought a “recovery” since 2009 but it was financed by printing money and calling on its financial markets and foreign investors. However, nothing managed to restart private credit financed growth since the autumn of 2008. The figures are damning: To increase US GDP by $581 billion over the last few years the US created $4.7 trillion of financial debt and $4.4 trillion of market debt. Thus the cost of $1 growth in GDP was $8 in added debt. The US is fighting a war in which it must kill more and more soldiers to gain less and less ground.

The fact that the FED is the major player in the recovery hasn’t changed since 2008 but the role they are playing has. At first their actions were to provide funding to the insolvent financial sector. Then they turned their balance sheet to reflation of the housing market through the purchase of the majority of GSE sponsored mortgages in the US. And now they are focused solely on the financing of the massive federal deficits which have been necessary to stave off the depression. Regularly the FED is the buyer of last resort each time a Treasury bond auction threatens to turn out badly. The FED also is now a purchaser in the secondary market for long term US debt, where any difficulty in the secondary market price would draw the US into a catastrophic scenario of higher interest rates.

The US economy and financial system need for QE3 is not a matter of opinion. The US is going through a depression, and the FED’s monetary policy and the Treasury’s budget deficits are counter-cyclical in nature. But a depression is not a simple end of a cycle; depressions are deep corrections of old structural dysfunctions. As QE3 is implemented in long dated bonds, then to shorter term bonds, the Fed will end up buying a major share of the Treasury bond issuance intended for the market which is usually sold to investors. But this policy will weaken the dollar as it risks discouraging investment and encouraging dis-investment by foreign bond holders, thus it will lead to a deterioration of US dollar exchange rates.

Thanks to the European debt crisis, the US markets currently benefit from investment by default from both US and overseas investors. But with the advent of QE3, the continuing massive purchase of Treasury debt by the FED will only lead to the deterioration in exchange rates. Monetization changes everything if it discourages overseas investors from continuing to invest in US financial assets. As money printing continues to cover the nation’s fiscal deficit, foreign investments will continue to decline, resulting in the disruption of the entire global financial system.

Real savings which historically provided the liquidity within the financial system will be crowded out and increasingly absorbed by the new Treasury bond issuance. The impacts of this will be a disruption in the flow of credit to the private sector. Continued FED monetization of the public debt will dry up the savings financial circuits essential to the financial system for money creation. In the end, the more QE3 impacts the markets, the more it will disrupts the private sector which it asphyxiates, and conversely the more sovereign debt it inflates, the greater risk in sovereign debt it creates, and thus the more monetization it must provide. This will lead directly to a crisis in US sovereign debt, and ultimately to the bankruptcy of the Federal state.

The more public debt is increased without a return of real growth, the more risks are created in the market for this debt. Further massive monetization will only lead to more Treasury bond sales by international investors in the secondary market. To avoid a financial system collapse, the FED will have to repurchase more and more bonds with corresponding impacts on dollar exchange rates. With a massive structural trade deficit, comprised of inelastic goods such as oil, the FED runs the risk of a dollar crash which will move in fast geometric progression with the resulting sudden inflation shock through the effect of higher import prices for oil, thus QE3 has the potential to create the sudden return of the depression which has only been stifled since its inception in 2008. After QE3 in 2012, there will be no more ramparts, no more walls and no further line of defense for either the dollar or T-bonds. The proverbial fat lady may not be singing just yet in the US, but she is certainly clearing her throat.

GEAB Anticipations for 2012:
• 2012 will witness the splitting of the world into three monetary zones: the dollar, Euro and Yuan.
• In the US, a 30% fall in the value of the dollar is likely while in Europe a 30% haircut on sovereign debt is also a real possibility. In the UK, a major fall in the value of sterling is assured. And in 2012, we will witness via hedge fund bankruptcies how the “cunning” on Wall Street join Jon Corzine and MF Global. Populated by a growing number of players who will have to take big losses, Wall Street and the City will become cut-throats in dealing with their too trusting clients. Even the big suckers will get plucked as the pirates are now plundering each other – 2012 will be rich in such incidents.
• In the US, whether its Obama or Romney isn’t of great importance, as they both have basically the same sponsors.
• The world’s central banks will continue their accumulation of gold to the detriment of the US dollar and T bond.
• Large private players and big companies will also join the bet on gold club.
• The US, UK and China will face recession and reflation. All countries which have misused Quantitative Easing will be affected; as well as those whose economy or currency is dependent upon them.
• 2012 will be characterized by a general rise in interest rates in all markets.
• 2012 will also be a year without growth for most of the planet. Euroland will be in recession. The US and the UK will realize they are in a depression.”

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