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Is Financial Crime a Systemic Risk

Is Financial Crime a Systemic Risk

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Published by Gold Silver Worlds
Hera Research explores the possible scenario's that will play out in this financial crisis based on excessive government debts. One of the scenario's is based on the loss in trust on the current financial system, leading to a total financial collapse (because the whole financial system and currencies in the first place are built upon nothing more than "trust" today).
Hera Research explores the possible scenario's that will play out in this financial crisis based on excessive government debts. One of the scenario's is based on the loss in trust on the current financial system, leading to a total financial collapse (because the whole financial system and currencies in the first place are built upon nothing more than "trust" today).

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Published by: Gold Silver Worlds on Oct 24, 2012
Copyright:Attribution Non-commercial


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Hera Research, LLC
7205 Martin Way East, Suite 72Olympia, WA 98516U.S.A.+1 (360) 339-8541 phone+1 (360) 339-8542 faxhttp://www.heraresearch.com/ 
IsFinancial CrimeA Systemic Risk?
By Ron HeraOctober23,2012©2012Hera Research, LLCFamedAustrianeconomist Ludwig von Mises wrote inhis seminal work, Human Action (originallypublished bythe Yale University Press in 1949)
, that “
There is no means of avoiding the final collapse of a boom brought about by credit expansion.The alternative is only whether the crisis should come sooneras the result of voluntary abandonment of further credit expansion, or later as a final and total catastropheof the currency system involved.
The collapse of a
historic credit bubbleoccurred in 2008.However,despite years offurther credit expansion,
afinal and total catastrophe
of theU.S. dollarsystemhas yetto occur.While an inflationary U.S. monetary policy has serious consequences, hyperinflation is not an immediateresult.There are three generalways in which the U.S. dollarsystemcould break down: (1) rejectionof the U.S. dollaras the world reserve currency,or(2)asan eventual consequence of U.S.federalgovernment insolvency and (3) a domestic failure of confidence. Of the three,U.S. federal governmentinsolvencyis the most serious because it would result in boththe loss of the U.S. dollar
’s world reserve
currency status and also in a failure of domestic confidence. However, a new threat to the U.S. dollar has
emerged which could trigger a hyperinflationary collapse before the U.S. federal government’s finances
become unworkable, e.g., when debt service begins to crowd out military and Social Security spending.Specifically, the perceived legitimacy of the U.S. financial system has not merely been tarnished byrecent scandals but is in danger of collapsing. The consequences of a domesticbreakdown of confidenceand trust in the U.S. financial system cannot be overstated.
World Reserve Currency Status
The most commonly citedchallenge to the U.S. dollarsystemrelates to itswaningstatus as the worldreserve currency.The BRIC countries(Brazil, Russia, India andChina), along with South Africa, nolonger use the U.S. dollar for trade settlement amongst one another.The Chinese haveinternationalizedthe renminbi (RMB), which is now usedintradesettlementwith the other BRIC countries, as well as withAustralia, Japan, the United Arab Emirates (UAE),Iran andvariousSouth AmericanandAfricancountries under bilateral agreements.
Iran, which is the world’s 4th largest oil exporter, has refused to
accept U.S. dollars in exchange for crude oil since 2009. While European countriesutilizetheeuro,South American countries have instituted a localcurrencypaymentsystem, theSistema de Pagamentosem Moeda Localor SML.At the same time, the IMF stands ready to settle international trade usingSpecial Drawing Rights (SDRs).However, local settlement at the regional level is largely irrelevant.At the global level, theimplicitcrude oilbacking of the U.S. dollarbytheOrganization of the PetroleumExporting Countries (OPEC) remains inplace and the U.S. military remains dominant. As long as OPECbacks the U.S. dollar, and as long as there is no viable challenger, the U.S. dollaris unlikely tobedeposed. The euro, for example,is a troubled currency andits future isquestionable.C
hina’s economic
ascent is likely to continue and the RMB can be redeemed for Chinese-manufactured goods. However,the Chinese economy is currently in a recession,the RMB is notafully international currency and
China’s military is not ready to take on t
he role of a global superpower.
©2012 Hera Research, LLC
2At present, nonationalcurrencystandsasa viable challenger for the position held by the U.S. dollar andthere is no consensus regarding its eventual replacement. However, discussion of the gold standard hasmoved fromthe fringes of the financial world into the mainstream. The price of gold has risen inresponse to widespread currency debasement, i.e., as a hedge against inflation.OPEC and many other countries could, potentially, fall backtogold if the U.S. dollar were no longerviable, i.e., if the prices of global commodities, and especially the price ofgold,were to riseat anaccelerating ratemeasured in U.S. dollars. China and Russia, for example, are significant buyers of goldand crude oilcan be purchased with gold instead ofU.S.dollars pursuant to bilateral agreements, if not onworld markets generally. An eventual return to the gold standard is possible but seemsunlikely in thenear term.Governments, banks and corporations around the world holdtrillions of U.S. dollarsalong withU.S.dollar denominated financial assets, such asU.S. stocks andU.S.Treasury bonds. Even countries hostileto the United States cannot benefit by refusing U.S. dollar transactions or by dumping U.S. Treasury bondholdings in the market.Ignoring the fact thatthe Federal Reserve and its Primary Dealers, together withotherWestern central banks,stand ready to intervene as needed to support the U.S. dollar, retaining themajority of the value of U.S. dollar holdingsisalwaysa superior alternative in theshort run, particularlyif the alternatives are economic sanctions, war,or, in the case o
the U.S. dollar’s
collapse, a100% loss.In other words, the tolerance of the world financial system and of the global economy for the U.S. zeropercent interest rate policy (ZIRP), ongoing U.S. Treasury bond market interventions, i.e., OperationTwist, and quantitative easing is far greater than is commonly believed.The U.S. dollar certainlywillbereplaced as the world reserve currency at some point in the future, butclaimsthat the U.S. dollaris indanger of imminentcollapse as a result of international rejectionareexaggerated.
©2012 Hera Research, LLC
U.S.FederalGovernment Debt and Unfunded Liabilities
Setting asidetheworld reserve currency status of the U.S. dollar,thelargestthreat lies in the risk of U.S.federalgovernment insolvency.Before the 2008 financial crisis, the U.S. federal government had reacheda point whereno combination of economic growth, tax increases or government budget cuts will allowitto pay back its public debt and also meet its unfunded liabilities.As a percentage of GDP,totalU.S. federal governmentdebtislarger than that of Spain and nearly aslargeasthatofPortugal andIreland.TheU.S.
federal government’s
budget deficit, whichstands at approximately 8.7% of U.S. GDP,is ashigh as that of Greece and higher thanthose of Spain,Portugal andItaly.

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