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 Whistleblowers Need Protection


Reflections on world economy and more by Nick Rost van Tonningen of Canada

May 19, 2011

On the supply side of the UST market the US Treasury is pushing new paper out the door at an unprecedented rate. But on the demand side, among the world’s biggest holders of UST securities China has aggressively been seeking to convert US dollars in its FX reserves into other monetary, or ‘hard’, assets, Japan after the earthquake cum tsunami will more likely become a net seller, not a net buyer, the manager of the world’s biggest bond fund is broadcasting he has sold off his UST security holdings & is shorting the UST market, & the central banks of the developing world  (incl. China’s) are buying gold as fast as they can lay their hands on the stuff with dollars that traditionally would have been invested in UST securities. This raises two questions : who, other than the Fed, is going to buy the damned things, & how is the US going to fund its chronic, & now once again waxing, trade deficit.   

According to the New York Post growing numbers of industry players think Goldman CEO Lloyd Blankfein must step down to get the government off Goldman’s back & appease Washington (with tens, if not hundreds, of millions of dollars in his pocket as a booby price?) - in practical terms they may well be right but realistically this is akin to the occupants of a horse-drawn sled on the snow –covered Russian steppes in the olden days throwing pieces of meat over the side to distract, & slow down, a pursuing wolf pack. Sometimes that worked, but often it didn’t. The only real solution to getting Goldman, & the industry, back in Washington’s good graces would be for both to reform themselves from the top down, & right now that looks like a long shot. Jettisoning Blankfein is a mere Band-Aid solution.  

In 2008 IMF Managing Director Dominique Strauss-Kahn was involved in an “inappropriate relationship” with a subordinate (who later described him as “a man with a problem”) but got off  easy, merely being reprimanded by the IMF Board & having to write a letter of apology to his staff for an “incident concerning a staff member” (in part because, in the immediate aftermath of Lehman Brothers’ collapse & in the midst of the ensuing financial crisis, the Board had few options but to avoid triggering a change in the IMF’s Executive Suite).    

I am not a conspiracy aficionado; but I cannot help but think this latest controversy was a ‘set-up’ orchestrated by someone with an ulterior motive who expected, rightly as it turned out, that if the right kind of bait were trolled by him, he wouldn’t be able to resist the temptation (rumour has it that one young member of President Sarozy’s centre-right UMP party was twittering Strauss-Kahn’s arrest twenty minutes prior to him being taken off the Air France plane). While this removed from the French political scene a potential Socialist Party candidate in next year’s Presidential election that the polls said would have routed Sarkozy, his election chances now are said to have been further enhanced by the news his 43 year-old wife is pregnant.  

DSK, as many called him, had long had a less than savoury reputation where women were concerned, but always got away with it. For in France it never was a big issue & his No. 3 wife, Anne Sinclair told France’s weekly news magazine L’Express in an interview, when asked if it didn’t bother her that her husband had “a reputation as a seducer”, “No, I am actually rather proud of it! It’s important to seduce for a politician”. Like Conrad Black, having gotten away with dodgy behaviour in other jurisdictions, Strauss-Kahn made the same fatal mistake of thinking he could also get away with it in the US. Obviously a bad call & one that once again validates the concept of ‘hubris’ the great Greek tragedy writers introduced two-and-a-half millennia ago. 

He has since resigned. But this comes at a most inopportune time & could have far-reaching consequences. With storm clouds gathering over Europe’s financial system, & the possibility increasing daily of an unseemly political dogfight in the US over the budget & the debt ceiling, his resignation in a best case scenario means that one of the world’s key financial ‘firefighting’ institutions will be deprived of the benefit of his experience & network of contacts; and, no matter how well qualified his successor may be, he/she will need time to become equally effective. And in a worst case scenario his departure will be taken by the developing country ‘bloc’ as a Heaven-sent opportunity to end the post-WW II tradition whereby the Managing Director of the IMF is always a European & the President of the World Bank always an American, in which case the resultant jockeying for position could get messy at a critical point in global finance (& possibly accelerate the unhelpful trend in the US Congress & on the US Main Street towards isolationism). While press reports talk about there being a “consensus” his successor will once again be a European because he/she would be more familiar with its evolving debt cum banking crisis, it is equally, if not more, likely that those favouring a break in that tradition will argue, with considerable justification, that appointing someone other than a European would ensure that the IMF’s role in that situation will be based on facts & an objective assessment of what’s best for the system rather than on personal prejudices (& considering the mess the EU & the European-led IMF made of its first phase, they may well be right), which may enhance the validity of rumours of the Governor of the Bank of Canada becoming a possible compromise candidate to succeed Strauss-Kahn.   

Canada’s rail car manufacturer Bombardier Inc. recently won a $96MM contract to provide & maintain an automated monorail system for Saudi Arabia’s Jeddah International Airport from none other than ...........................................................the Saudi Binladin Group.  

Milan has traditionally been the stronghold of Silvio Berlusconi’s party. But the fact that now, for the first time in 15 years, that city’s Mayor after the recent municipal elections faces a second-round run-off election at the end of the month, suggests Italians are finally getting fed up with his histrionics. That’s the good news. But the bad news is that any political upheaval this may give rise to will lead to Italy, the EU’s third-largest economy with a GDP almost equal to that of Greece, Ireland, Portugal & Spain combined & a Debt-to-GDP of well over 100%, no longer being able to fly under the radar of the world’s investors & currency speculators. If so, that could further discombobulate a system that, no matter what soothing noises may emanate from some ‘experts’, already seems to have one foot in the grave & the other on a banana peel. 


No. 410 - May 19th,  2011 


  • In April it trimmed its holdings for the fifth month running , by US$9.2BN to US$1.14BN, while Japan, contrary to expectations in the post-earthquake cum tsunami era, boosted its holdings by US$17.6BN to US$907.9BN. Overall foreign holdings increased by US$4.9BN to US$$4.48BN. 

So on a net basis the nearly 200 countries in the world other than China & Japan, cut their holdings of UST securities during the month by US$3.5BN, i.e. 1.4%. One can only wonder about the vulnerability of the US when two countries, each with reasons to cease being a net buyer, account for 42% of its externally-held debt. Finally, net foreign purchases of US$4.9BN barely covered 10% of the US trade deficit for the month. 


(Bloomberg, Nicholas Larkin) 



  • The US Mint’s sales of American Eagle gold coins & South Africa-based Rand Refinery Ltd.’s sales of Krugerrands are the strongest they have been for some time, the American Precious Metals Exchange, an online bullion dealer, had its three best-ever sales weeks in April & May and expects to sales to double this year, and Switzerland’s UBS AG on May 9th had its second-best day for physical sales YTD & its sales to India, the world’s top bullion consumer, are up over 10% YoY. On the other hand, George Soros’ hedge fund during the First Quarter cut its gold ETF positions by 99+% to US$7MM). According to Ross Norman, CEO of London-based bullion brokerage Sharps Pixley, “What drives people toward physical metal, as opposed to an ETF or futures, is fundamental insecurity.”

The US Mint sold 62,000 American Eagle gold coins in the first week of May, 57% of its total April sales (& 701,000 American Eagle silver coins, slightly ahead of April’s 2.82MM monthly rate); if this rate of sales were to continue, the Mint’s May sales of gold coins could reach the 250,000 level, a rate second only to March 2009's 269,000. It attests to the strength of the demand for gold that the gold ETF market was as strong as it was in the First Quarter despite Soros’ (& other hedge funds’) sales. Investors buying coins & central banks buying gold has a fundamentally different market impact than purchases by hedge funds & ETF’s; for they are long-term holders rather than short-term profit chasers, and the precious metals they purchase are more or less permanently removed from the ‘float’ in the precious metals’ market. And while not a chartist, I can not help but be impressed by the fact that in the past two years the price of gold has bounced off its 150-day moving average line on no fewer than six occasions.   


(National Journal, Tim Fernholz) 

  • On May 16th the Treasury auctioned off its last legally permissible chunk of government debt, setting the stage for it to launch a series of “extraordinary” accounting measures to keep funding Washington’s US$125BN monthly deficit (until August 2nd).  While the market hadn’t expected the debt ceiling crisis to be solved by this date, this nevertheless shifted discussion of an US default somewhat from the possible to the probable. While on Friday May 13th Treasury Secretary Geithner sent a letter to Sen. Michael Bennet (D.-Col) warning of a double dip recession if investors were to lose confidence in the US’ creditworthiness, two days later House Speaker John Boehner (R.-Ohio) & Senate Minority Leader Sen. Mitch Mconnell R.- Ky) reiterated their demands for major budget reforms & spending cuts in exchange for a higher debt limit, & remained adamant in ruling out tax cuts. And, while the business community is united & experts worry about the failure to raise the debt limit, a Gallup poll found that 47% of interviewees believe their members of Congress should vote against, & only 19% that they should vote for, increasing the debt ceiling. 

The longer this nonsense continues, the greater the potential damage to the credibility of the US dollar, the Fed & the US Treasury (& the more it plays into the hands of those developing country governments who, after the onset of the last financial crisis, started saying ‘Why should we pay any attention whatsoever to people who want to tell us how to run our economy & our finances, when they don’t seem to be able to manage their own?’).  .      


  • In May the National Association of Homebuilders Sentiment Index remained at 16 rather than rising to 17 as expected. In April new housing starts were down 10.6% MoM to a 523,000 annual rate (vs. a market expectation of 568,000) after the March number was revised upward from 505,000 to 549,000. At this level the rate is down 23.9% YoY, with multifamily unit starts down 28.3% but single family homes only 5.1%.

It’s irrelevant if the reading is 16 or 17 when anything less than 50 - last seen in April 2006 - is deemed “poor”.         


  • The bank bailouts were rationalized on the grounds that they would enable employers to maintain their payrolls (which didn’t happen since both the banks & employers chose to “sit on” their cash rather than pass it on). And the latest Census Bureau data further discredits that notion. For they show that in the year after the Lehman collapse the number of employees making over US$2,000/week increased while the number of those making less than that declined by several million. Hiring, or keeping, more highly-paid staff is not the optimum way to cut payrolls. The country’s total payroll now exceeds its pre-recession level, while total employment remains very significantly lower.

Them that has, gets, & them that hasn’t doesn’t! This further evidences a polarization of American society that, left unchecked, will in due course lead to social unrest (the writer teaches at the University of Chicago).  


  • The President is expected to use the occasion of a major policy address on May 19th to deliver an update to his Cairo “new beginnings” speech two years ago, try & jumpstart the moribund Palestinian-Israeli peace talks, and create semblance of order in what has been a jumble of ad hoc responses to events in Tunisia, Egypt, Yemen, Bahrain & Syria, with White House spokesman Jay Carnie telling journalists this “is an opportunity not to be missed, in the President’s view.”  And after meeting with Jordan’s King Abdullah on May 17th, the first in a week-long series of diplomatic efforts he is planning to try & recast US policy in the region, he said “Despite the many changes - or perhaps because of the many changes - that are taking place in the region, it’s more vital than ever that both Israelis and Palestinians find their way back to the negotiating table and begin negotiating a process whereby they can create ... two states that are living side by side in peace and security.”


The President seems to have learnt something : his speech was deliberately timed to ‘front run’ next week’s address to Congress by Netanyahu the latter had arranged with the Republican Congressional leaders. On Friday, within 24 hours of making his speech, Obama will meet with Prime Minister Netanyahu at the White House. Prior to leaving for Washington, the latter made a hawkish speech in the Knesset in which he said he wouldn’t deal with a Palestinian unity government that included Hamas & basically told the Palestinians they’d better forget about their dream of having East Jerusalem as the capital of any future state (& then, as if to rub salt in the wound, his government authorized the building of 1,550 more housing units in the West Bank). Obama, in his speech formally endorsed the idea that negotiations for a peace treaty must be based on the 1967 borders (something which, although Israel has not denied it in the past, Netanyahu now sought to prevent in an angry last minute phone call to Secretary of State Hilary Clinton, saying this “indefensible” since it would leave major Israeli settlements “outside Israel” – thus once again acting like a teenager who, after killing his parents, seeks mercy because he is an orphan). But Obama also indicated little love for the new, Hamas-inclusive unity government idea & chastised the Palestinians for their push for statehood recognition by the UN (which he seemed to suggest the US would veto if it were to come before the Security Council). The Israeli reaction was wholly predictable : according to one Israeli official Obama doesn’t “understand the reality of the situation”. But one cannot help but wonder who doesn’t. For the ground shifting under the Israelis’ feet in ways, & at speeds, not imagined possible as recently as six months ago. The Arab Spring is changing the region’s power relationsships. With the Rafah border crossing point into Egypt now open, the blockade of Gaza is no longer effective. Support for Israel in the global community is slipping (to the point Netanyahu in his speech sought to appeal to President Obama to lean on his European allies to quit being so supportive of the Palestinian push for statehood). Israel has lost the once all but automatic support of Egypt & alienated Turkey, two key Muslim regimes in the region. The EU is losing patience with Israel’s intransigence vis a vis the Palestinians & increasingly less susceptible to appeals to its Holocaust guilt complex. The Palestinians are making headway gathering global support for their quest for statehood (which would turn the Israeli occupation of the West Bank from a debatable breach of international law into an indisputable one). Netanyahu’s divide & conquer policy vis a vis Fatah & Hamas has sprung a leak. And the switch in Palestinian tactics from terrorism to peaceful demonstrations will make harsh countermeasures more difficult to justify (which may well come to a head if the rumoured second “peace flotilla” to Gaza next month were to materialize, even though, with opening of the Rafah border crossing it would no longer be necessary). The questions now are whether Netanyahu can recast himself as a statesman who makes the best of a bad situation (& early indications are not encouraging) & whether Obama can stick to the idea that diplomacy sometimes requires seemingly undiplomatic behaviour, i.e. telling someone in no uncertain terms where to get off (while early indications are encouraging, it remains to be seen whether he on this occasion will display more sticktoitiveness than in the past).



  • Activists call the peaceful mass marches coordinated via Facebook, descending on Israeli border- & military posts, & daring Israeli soldiers to shoot, a new tactic to pressure Israel & gain world support for Palestinian statehood. The first such march, that sought to breach the Israeli borders with Syria, Lebanon, Jordan & Gaza on May 15th, led to the death of 15 Palestinians. Israeli officials seem at a loss how to deal with this new approach : on the one hand Defence Minister Ehud Barak acknowledged rather pragmatically that “The Palestinians’ transition from terrorism and suicide bombings to deliberately unarmed mass demonstrations is a transition that will present us with difficult challenges” while on the other retired general Yossi Peled, a former commander of Israeli troops on both the Lebanese & Syrian borders, rather dogmatically maintained that attempts at border breaches must be stopped at any cost - regardless of the political consequences - since they pose a direct challenge to Israel’s souvereignty.   

All it would take would be for a few ‘agents provocateurs’ despatched by the Mossad, the settlers and/or Palestinian hardliners firing a few shots to set the stage for a bloodbath. 


  • On Sunday May 15th thousands of demonstrators massed on Israel’s Northern border with Syria & Lebanon waving flags to mark the anniversary of the creation of the state of Israel ([which for the Palestinians is a national day of mourning known as “Nakba” (catastrophe)]. Police deployed on the Syrian side to stop them were overwhelmed as more & more of them arrived. Then to one bystander’s surprise they started running across the heavily-mined border zone towards a similarly unprepared Israeli border post, which prompted the few soldiers in it to open fire, killing four & wounding hundreds more. Meanwhile, residents of the nearby largest Druze town in the Golan Heights, many of whom still hold Syrian passports, had come out to welcome the aspiring border crossers.

Once your adversaries lose their fear of minefields, you have a real problem; for the barrier they  create is more psychological than real since, unless literally laid side by side, mine fields reduce, not eliminate, the numbers of those crossing it and, if there are large enough numbers of people on the other side willing to risk their lives, dangerous numbers will get through. 


  • According to the May 17th edition of the independent daily newspaper al-Shorouk he is “drafting a letter which will be broadcast on Egyptian and Arabic channels, apologizing on behalf of himself and his family for any offense caused to the people ... and for any behaviour which may have stemmed from false information passed on to him by his advisers.” It also said military sources had indicated that several Egyptian & Arab parties had suggested an amnesty for the 83 year-old, and that he was ready to hand over his assets in a bid to have the ruling Supreme Council of the Armed Forces “look into an amnesty”. This came the day after his wife, Suzanne Mubarak (who is only 70 & half Welsh) had pledged to turn over to the state two bank accounts & a luxury villa in Cairo.

While their ambition is to have such an amnesty extend to their two sons, Alaa & Gamal (the latter of which the couple had been grooming as his successor), the latter are cooling their heels in Cairo’s Tora prison, accused of corruption & unlikely to be part of any amnesty deal.     


  • As Chinese business interests met in Brasilia with Brazil’s Foreign- & Trade Ministers, China’s Commerce Minister Chen Deming announced on May 16th that his nation will increase its investment in Brazil. While he wouldn’t say by how much, in 2010 China dramatically ramped up it up to US$17BN, from US$300MM in 2009.

China is now Brazil’s biggest trading partner, having replaced the US two years ago. 


  • On May 16th a (relatively junior) official in the security department of the Saudi consulate in Karachi was waylaid, shot & killed in an upscale  neighbourhood by a couple of guys on motorbikes while on his way to work. This came less than a week after motor bike riders threw hand grenades at the building housing the consulate.

The Pakistan Taliban denied responsibility, saying “We support the action but we are not afraid. Had we done it, we would have claimed it.” There is likely more to this than meets the eye; for Saudi Arabia has long funded much of the Islamic extremist movement in that country. 



(The Guardian, L. Elliott) 

  • Poul Thomson told a conference in Athens on May 18th “The view that seems to be taking hold is that the government program (of economic & social) reform isn’t working ... The program will not remain on track without a determined reinvigoration of structural reforms. Unless we see this invigoration, I think the program will run off the track”. This caused the Euro to weaken. While Athens is committed to reduce its deficit to GDP ratio to 7.6% this year, the consensus is that it is more likely to end up being closer to 10%. 

On May 6th there was an ad hoc meeting of European Finance Ministers that concluded last year’s 110BN Euro aid package wasn’t working & that the terms of the EU’s 80BN share thereof would have to be eased further (after having earlier already cut the rate to 4% & extended its term from 3 to 7 ½ years). Since then IMF & EU officials have been in Athens to prepare the ground for a fresh dose of financial assistance to keep Greece from defaulting after it became evident it was having difficulty servicing its debt. But the facts speak for themselves : the country is now in the third year of a serious recession, its debt-to-GDP ratio has now risen to the 150% range, and according to the IMF Mission Chief “the tax burden is already very high” (& the Prime Minister’s faith in reducing tax evasion as a means of addressing that problem ain’t going to pay off in the short term & neither will the IMF’s preferred solution of privatizing government assets, even if it were politically feasible). The approach taken by the IMF & EU to date has been akin to a medical practice in a bygone era of “bleeding” seriously ill patients to make them better. So the EU is slowly but surely is backing its way into a restructuring of Greece’s debt. And this is going to be problematic & unsettling to the system;  for Beijing has already indicated it will object to having to take any hair cut on its Greek bond holdings, the German banks will be big time in the line of fire in any restructuring (with Angela Merkel at risk of being tarred & feathered, and run out of town on a rail, by German voters who see no reason why they should pay taxes & work until age 72, to enable the cosseted Greeks to retire as early as age 50), and last, but by no means least this could set a bad precedent for Ireland & now Portugal. It becomes more & more evident the Argentinas & Icelands of this world were right when they told foreign investors to get stuffed.  


(G&M, G. York) 

  • Julian Malema is the 30 year-old leader of the ruling ANC’s youth wing. He has been ridiculed by the media as a buffoon who failed Grades 8 & 9 and his highschool woodworking & math classes, and only got a high school diploma at age 21 (all of which he attributes to his involvement in activist politics which made him, at age 14, leader of the ANC youth branch in his home town). He has praised Zimbabwe’s farm seizures, called an opposition leader a “cockroach”, accused a British journalist of having “rubbish” in his pants & is mysteriously wealthy, owning two houses, driving Mercedes Benzes, wearing a US$34,000 watch, & favouring US$100 champagne & whiskey, all of which he rationalizes by saying “We are the elite that has been deliberately produced by the ANC as part of its policy to close the gap between whites and blacks in this country”).
  • Already wildly popular with an angry black youth resentful of black unemployment & white wealth, he boosted his standing with them further last year when he started singing a song at Youth League rallies that referred to Africaners as “dogs” who “rob” us, with a refrain of “Shoot the Boer, kill the farmer”. This prompted an Africaner rights group to take him to court (where he came & went accompanied by submachine-toting body guards) for hate speech & promoting discrimination; while initially successful, on appeal this backfired when its lawyers patronized black witnesses, incl. Mr. Malema (enabling him to make like a victim of racial persecution, forcing the ANC to support him & strengthening his position in it). He is now well-positioned to be a kingmaker at next year’s ANC convention that will decide whether Jacob Zuma will remain President after 2014 &, ahead of the forthcoming municipal elections, has helped to create one of the most racially-charged political climates since the death of apartheid. So, as one Johannesburg political writer, Deon de Lange, puts it “He knows how to feed on the disaffection at the grassroots of South African society ... For the ANC Malema has now become too big to fail ... Malema is firmly in the driving seat of the ANC’s campaign ... the joke’s on us.”

For two decades many deluded souls have expected South Africa to be the engine driving sub-Sahara Africa’s growth. And recently it was accorded the (wholly undeserved) honour of turning the BRIC country quartet into a BRICS quintet. This totally disregards the fact that since 1994 the country has vastly underperformed its potential, due to post-apartheid public expectations that even star administrators might have had difficulty meeting, while its three post-apartheid leaders were nothing of the kind (while this applies to Mandela as well, who was more of a visionary & an icon, he was a rock star in that respect compared to the two Presidents since).

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