Almost a year ago LEAP/E2020 identified the second half of 2011 as a new critical point in time in the development of the global systemic crisis. Just like our February 2008 anticipation highlighted a major shock affecting the US economy in September 2008, our team confirms in this GEAB issue that all the conditions have now been met for the second half of 2011 to be the stage for the explosive fusion of two fundamental trends underlying the global systemic crisis, namely world geopolitical dislocation on the one hand and the global economic and financial crisis on the other.

In fact, for several months the world has experienced an almost unbroken succession of geopolitical, economic and financial shocks which, according to LEAP/E2020, constitute the warning signs of a major traumatic event that we analyze in this issue.

At the same time the international system has now passed the stage of structural weakening to enter a phase of complete decay where old alliances are breaking down, whilst new communities of interest are emerging very quickly.

Finally, any hope for significant and lasting global economic recovery has now evaporated (1) whilst the Western pillar’s indebtedness, especially the US, has reached a critical level unparalleled in modern history (2).

Comparative progression of the United States and China’s share of world GNP (2001-2016) (in purchasing power parity) - Source: IMF / MarketWatch, 04/2011

The catalyst for this explosive fusion will obviously be the international monetary system, or rather international monetary chaos which has been further exacerbated since the disaster that struck Japan last March and in front of the inability of the United States to face the requirement for an immediate and significant reduction of its huge deficits.

The end of QE2, the symbol of and factor in the explosive fusion now underway, represents the end of an era, that where the "US Dollar was the currency of the United States and the rest of the world’s problem": from July 2011, the US Dollar will openly become the main threat weighing on the rest of the world and the United States’ crucial problem (3).

Summer 2011 will confirm that the US Federal Reserve has lost its bet: the U.S. economy has, in fact, never left the "Very Great Depression" (4) which it entered in 2008 despite the trillions of dollars injected (5), as the vast majority of Americans are perfectly aware of (6). Unable to launch a QE3 (even unofficially through its Primary Dealers as it used to do until the world became too closely interested in the US Treasury Bond market), the Fed will helplessly watch interest rates rise, US government deficit costs explode, the world dive into an intensified economic recession, stock exchange collapse and the US dollar show erratic behavior, making short-term saw-tooth movements, depending on the influence of these events, before suddenly losing 30% of its value as we anticipated in the last issue (7).

At the same time Euroland, the BRICS and commodity producers will rapidly strengthen their cooperation while launching a final attempt to salvage the international institutions created by Bretton Woods and the world dominated by the US /UK duo. This will be the last since it is unrealistic to imagine Barack Obama, who has shown no major international stature so far, proving himself to be a statesman and thus take major political risks in a presidential election year.

Progression of the Shiller index of standard existing house prices in the USA (1890-2011) (in red: projection) - Source: R.J. Schiller / Steve Barry / Big Picture / New York Times, 01/2011

China has just announced that it is halting all diesel exports to try and stop a rise in fuel prices that recently caused a series of strikes by road hauliers (8). May the Asian countries that depended on these Chinese exports manage, just like Japan has done in the aftermath of last March’s disaster!

Russia has also stopped exporting certain oil products to limit domestic shortages and price increases (9), an export halt added to that on cereals imposed several months ago.

Across the Arab world, instability continues to prevail against the backdrop of the rising cost of basic food commodities (10), whilst questions over the extent of Saudi Arabia’s oil reserves and production capacity have resurfaced (11).

In the United States, any weather event out of the ordinary immediately causes the risk of shortages due to the lack of a security "buffer" in the US distribution system, except to call upon strategic stockpiles (12). Meanwhile, the population reduces its spending on food in order to fill the tanks of their cars at more than 4 dollars a gallon (13).

In Europe, the decline in social security and extreme austerity measures implemented in the United Kingdom, Greece, Portugal, Spain and Ireland, ... will cause an explosion in the number of poor.

Percentage of the male population employed within the seven major Western economies (1970-2009) - Source: The Economist / OECD, 04/2011

The EU has more or less surreptitiously just reinforced its customs arsenal to withstand Asian imports in particular. First, it has reviewed its whole paraphernalia of preferential tariffs to eliminate all emerging nations, China, India and Brazil first of all. Second, at the end of 2010, it discreetly passed legislation to facilitate the implementation of anti-dumping and safeguard measures, because now a simple majority is sufficient to pass such a proposal with the Commission, whilst previously a qualified majority was needed, often difficult to marshal (14).

Meanwhile, central banks continue to buy gold (15), announcing more or less clearly that they are diversifying their reserves (16) whilst they are taking increasingly inconsistent and dangerous steps, increasing interest rates to counter inflation in a context of weak economies or in recession to counter the influx of liquidity generated by the US Federal Reserve’s policies (17). To paraphrase the title of an article by Andy Xie, published in Caixin of 04/22/2011, "Rising inflation makes central bankers mad" (18).

And the US side is completely in dreamland: whilst the country has reached unsustainable levels of debt, the leaders in Washington have made this topic an election issue, as illustrated by the question of the Federal debt ceiling which will be reached on May 16 (19). Comparisons abound in the US and international financial press with the Clinton years where a similar problem had arisen without major consequences. Obviously a sizeable part of the US elite and financiers haven’t yet taken on board the fact that, unlike the 90s, the United States today is seen as the “sick man of the world” (20), in which any sign of weakness or serious inconsistency can trigger uncontrolled panic.

Crazy central bankers, world leaders without a roadmap, economies at risk, inflation rising, currencies in trouble, frenzied commodities, uncontrolled Western debt, unemployment at its highest, stressed societies ... there’s no doubt, the explosive fusion of all these events will really be the memorable event of the second half of 2011!

Chinese pay rises (2011/2010) - Source: Standard Chartered Bank / Getty, 05

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Notes:

(1) The Telegraph has put together an interesting list of 10 reasons proving that the world economy is plunging again.

(2) The chart below illustrates how, as we have recommended for over three years, the calculation of major economic indicators ex the dollar provides a view of the world which is very different from indicators calculated in dollars. Thus, whilst calculated in dollars, estimates of when the United States will be overtaken by China gives dates towards 2030, 2040 even 2050, the IMF culminates in 2016 (almost today) once they ignore this "standard" that changes size every day!

(3) A sign of the times, the Financial Times, which has specialized in "headlines" on the demise of the Euro for more than 18 months, published an article in its inside pages (more discreet) on 05/11/2011 entitled "The Dollar faces a much greater danger than the Euro". Whilst The Age and the Wall Street Journal of 04/23/2011 believe that the US economy is now in virtually the same situation as Greece’s.

(4) The clearest example of the continuation of this "Very Great Recession" as we called it 4 years ago, is that the real estate crisis is bigger than ever. Prices are now once again falling through the "floors" reached in 2009, plunging tens of millions of Americans into a tragic economic and financial situation. Even the most optimistic don’t see the fall stopping before 2012. However, as already explained in previous GEAB issues, real estate is the plank on which the estimate of the US economy’s current value is built. The continuing collapse of real estate prices is the continuation of the economic depression. Source: MarketWatch, 05/09/2011

(5) The economic analysts Fathom have calculated that the four major global central banks (the Fed, ECB, Bank of Japan and Bank of England) directly injected 5 trillion USD into the global economy during 2008-2010 (this does not include the recent massive, post-Japanese disaster injections, nor the whole range of guarantees that accompanied them). This represents nearly 10% of world GDP with the result that we all know: gigantic public debt, private debt that has not really decreased and economies which are hardly growing or are once again in recession. Source: Telegraph, 04/26/2011

(6) 80% of Americans believe that the economy is sick. Only 1% think that it’s going well (they must work on Wall Street). Source: CNNMoney, 05/09/2011

(7) The end of QE2 means that the US Treasury bond market has, in fact, no more buyers (because the Fed has bought the bulk of Treasury bonds issued since late 2010 (at least)); which, incidentally, makes a complete fantasy of current articles and analyses on US Treasury Bond purchases. It's the evidence of the real "illiquidity" of the Treasury bond market (whilst even its importance is dependent on its status as the most liquid market in the world) which will play the transfer role between QE2 and fall of the dollar, because this situation will lead to a sudden acceleration in participants exiting the T-Bond market, the principal asset denominated in dollars. The event will result in first, an increased need for U.S. dollars then, very quickly, an excess supply of dollars for sale. It is the timing of these two events that will determine the evolution of the US currency against other major currencies and gold during the second half of 2011.

(8) Source: BusinessInsider, 05/14/2011

(9) Source: France24, 04/28/2011

(10) Whilst on the subject, information that the founder of the former mercenary company, Blackwater, was hired by the UAE to build an army of mercenaries to protect the country from any external attack or internal upheaval, illustrates the increasing instability of the oil monarchies and the end of confidence in US protection. That said: to trust Western mercenaries is a great example of candour, or desperation. Source: New York Times, 05/14/2011

(11) Source: Le Monde, 04/25/2011

(12) Latest example, the present, historic Mississippi floodwaters. Source: Bloomberg, 05/13/2011

(13) Source: New York Times, 05/12/2011

(14) Source: Sidley, 02/28/2011

(15) And we understand them. In fact, when we hear Timothy Geithner, US Treasury Secretary, banging on that the US will never try to devalue the dollar to gain a trade advantage, the mind boggles. Everyone listens politely, adds up all the other reasons (including debt) why the United States are de facto engaged in this devaluation, and therefore buys gold, or diversifies their reserves out of the dollar. Thus the Russian, Mexican and Thai central banks... continue to buy gold. And Hong Kong (i.e. China) is launching a direct attack on the Comex Gold Futures monopoly by launching its own kilo gold contracts. Sources: MarketWatch, 04/26/2011; Bloomberg, 05/04/2011; Zerohedge, 05/08/2011

(16) China continues to quietly get rid of its US bonds and is even planning to diversify out of two-thirds of its dollar denominated assets, i.e. two trillion USD. Sources: CNS, 04/29/2011; Zerohedge, 04/24/2011

(17) In fact, despite all the chicanery over US unemployment figures, Ben Bernanke is forced to admit that it is necessary to continue to artificially prop up the US economy. However, whatever he says, with the end of the QE2 and no credible prospect for QE3, the US economy will find itself without major stimulus for the first time in three years, as Jeffrey Lacker, head of the Richmond Fed, confirms. The second half of the year will, therefore, be a direct test of the performance of a "zombie economy", with no external power source. Sources: Bloomberg, 05/05/2011; MarketWatch, 05/10/2011

(18) At least not all, because in Asia discussions are underway to expand and rapidly increase funding and joint support mechanisms to face a new shock comparable to that of September 2008. Like Euroland, Asia is increasingly decoupling from the pre-2008 US-centered financial system. And beyond financial arrangements, the entire region, led by China, is in the course of integration, including transport networks. Sources: Asahi Shimbun, 05/06/2011; ChinaDaily, 04/30/2011; Asahi Shimbun, 05/06/2011

(19) The US Treasury is also preparing itself for a deadlock on this question whilst the Republicans seem to want to use the issue until the 2012 election. No doubt the global financial system will have come to a decision before that date! Sources: Christian Science Monitor, 05/10/2011; Washington Post, 04/27/2011

(20) And it’s not media hype, like that of the assassination of bin Laden, that will change this situation much. In fact the incredible media kerfuffle that surrounded this episode shows that, even on its own privileged ground, communication, Washington know-how is a mere shadow of its former self. The only lasting result of the bin Laden operation is that the "conspiracy theories" are now debated live in mainstream media and the inconsistencies of the official versions of the story are blamed for feeding them.