Rule, Britannia, rule of law, and rule of insolvency

The nations, not so blest as thee,
Must, in their turns, to tyrants fall;
While thou shalt flourish great and free,
The dread and envy of them all.
"Rule, Britannia! rule the waves:
"Britons never will be slaves."
-- James Thomson

Martin Wolf has a nice piece on the Fed's currency war. However, some of his conclusion are at the very least debatable. Wolf writes,

Aggressive monetary policy by reserve-issuing advanced countries, particularly the US, is an element in both processes. The cries of pain now heard around the world, as markets push currencies up against the dollar, partly reflect the uneven impact of US policy. Still more, they reflect the stubborn unwillingness to accept the needed changes, with each capital recipient trying to deflect the unwanted adjustment elsewhere.

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

"The US must win" and " has infinite ammunition", states Mr. Wolf. Phew, whatever happened to the Brits? Note to America: loss of empire not need be accompanied by lost of dignity. Though you wouldn't understand that from the English. Remember Tony Blair and "New Labour", you'd be one of the few. His famous incessant pandering to our modern Millard Filmore, and then more infamously his being led by the leash into Iraq by W and Cheney. Oh Britannia!

The Brits are completely tied to the US at this point economically, so writing from London, Mr. Wolf's perspective is understandable. After all, what do the English have to offer the Chinese? Fish and chips? Debauched royalty as tourist attraction? If they want that, the Chinese can restore their own. While Europe, particularly the Germans must be sighing relief the Brits never got in the Euro, "Ve have Spain, Greece, and the Italians. Nein, Nein, Nein, Englanders!" To prove the point, Germany's central banker was here yesterday saying no more ECB purchases of dead beat governments' bonds.

I guess the biggest question is, has Mr. Wolf read Mr. Bernanke's book, though maybe even Mr. Bernanke hasn't read his own book. Ben's concluded revisionism of the currency turmoils of the late 1920s and 1930s, was the best thing would have been a coordinated devaluation of all currencies. However, by devaluing the global reserve standard--the dollar--Mr. Bernanke is causing the rise of almost every other currency, which is a funny kind of coordinated devaluation. Now what will be even funnier is its hard to see how the rise of a significant number of global currencies will not lead to further global contraction, and thus...wait for it... renewed fleeing to the dollar as a perceived safe haven. Just ask the Japanese how that works. Still, being the largest economy on the planet, America, as Mr. Wolf understands, can throw its weight around, but how it "wins", might not be as expected.

On the "homeland" front, the mortgage fraud fiasco grows. Understand this is an example of the deterioration of the rule of law in this country, particularly regarding the banks and Wall Street. It's been great fun with the bailouts and zero interests rates instigated by the banks' and Wall Street's massive fraud. No one went to jail. Each time the law is not upheld, leads only to more transgressions. Again, Yves Smith is doing bang-up job covering this and she was on it well before everyone, so read Yves.

Since we've replaced the rule of law with the rule of "markets", insolvency remains justices' great arbitrator. Chris Whalen gave an excellent report on the problems foreclosures will cause the banks, concluding,

The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.

Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.

The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007‐2009 period only means that this process is going to occur over next three to five years –whether we like it or not. The issue is recognizing existing losses ‐‐not if a loss occurred.

Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re‐creation of RFC‐type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.