Since late 2008, during the successive implementation of two rounds of the so-called "quantitative easing” (QE-1 and QE-2) the U.S. Federal Reserve System "injected" more than 2.3 trillion dollars into the economy. As a result, by the summer of 2010 stock market indexes and prices for commodities (except gold and silver) reached the pre-crisis level, and for some assets even slightly exceeded it. However, the attempt to flood the crisis with liquidity was not too successful: asset prices only went back to their old values, but there was much more money. Investors preferred to turn the almost gratuitous money they got into savings, to pay debts and maniacally invest in gold, inflating the already enormous speculative bubble. Confidence in the real sector of economy remained extremely low, consumption did not grow almost at all either and this was happening at minimum (in fact, even negative) interest rates.
This is why it is not surprising that the Fed has refused to run QE-3, since this mechanism has clearly proved to be ineffective. Investors’ reaction to the closure of the gratuitous source of money was also quite predictable - they fled the market at a pace of a sprinter, this time even gold could not resist it. Only the U.S. dollar has survived and gained strength – on the backdrop of recession in the U.S. economy, actual failure of "quantitative easing" and a loud chorus of various alarmists, who predict the death of this only world reserve currency for decades.
The faith of investors into the dollar is not irrational and is not an act of desperation, it is dictated by relatively simple and quite logical considerations, which, however, it is not customary to discuss in a respectable business community without the risk of being accused of conspiracism. But since rumors about the death of the "unsecured" dollar were once again strongly refuted by the market the above mentioned considerations deserve to be treated in more detail.
No one can deny the obvious fact that the real production is based on what is called commodities in the stock-exchange parlance - hydrocarbons, copper, iron, aluminum, nickel, zinc, etc. World prices for commodities are denominated in U.S. dollars – this is a prize of the actual winner in the Second World War. It is this fact that makes the dollar a true reserve currency – without the dollar exchange trade in raw materials would simply be impossible. In turn, the nomination of world prices for commodities in dollars makes the currency indefinitely sustainable, since its security is not the U.S. GDP or any U.S. assets, but all the raw materials mined on the planet. This assumption leads to the following simple conclusions, on which, in fact, the faith in the dollar is based:
- The Federal Reserve System may "print" as many dollars, as it wishes, since they are always secured;
- The amount of the U.S. debt, which is, of course, nominated in dollars, may grow to infinity;
- Exchange trade in commodities for U.S. dollars will continue as long as the American military machine is able to suppress any violation of this order.
It stands to reason that dollar "printing" is not an end in itself - periodic pumping the economy with liquidity is a forced remedy to eliminate problems of payment defaults, "bad" loans, and excessive debts; in other words, it is in fact a means to reduce the entropy which is inevitably accumulating due to the functioning of the global economic machinery. But the task of the regulator to bring the economy out of crisis will not be finally resolved until the "injected" liquidity would not increase consumption and be invested into the real sector – without this growth is impossible.
So, at this stage the regulator is facing a paradoxical task: the liquidity stemming from the QE-1 and QE-2 should be "poured" into the real economy, or, which is the same, the regulator is to make investors put their money into "blue chips" and commodities in a situation where there are no objective conditions for such investments, since even the gratuitous money almost did not stimulate consumption. Meanwhile, the total volume of injection is such that stock indexes are to rise by 15% - 20% from the pre-crisis levels, while the Brent price is to reach a high of $150 - $170 per barrel. The rejection of QE-3 does not leave any doubts about the method chosen to solve the stated task. This is war.
In order to drastically increase prices for commodities, and after that the capitalization of mining companies, which will be followed by all the others, you need to quickly and significantly limit the supply of commodities to the market. This can be done by launching several large-scale armed conflicts in Africa, apparently designed as "color revolutions" or civil wars. Strictly speaking, this process has already unfolded in North Africa and soon it is to be spread to the south. After Libya, Algeria, Sudan, Tunisia, and Egypt there will come the turn of Angola, Nigeria, DRC, and Zimbabwe.
Today, there is hardly anyone to doubt the true authorship of the notorious "Arab spring" as well as the fact that the capacities of US AFRICOM and US CYBERCOM have been exhausted by this kind of a warm-up. Destruction of the mining industry in West and Central Africa is guaranteed to provide the required rise in prices for hydrocarbons and metals, while at the same time this will reset the Chinese investments in the region to zero. All the necessary conditions for "revolutionary actions of the oppressed working people" here are abundant, including centuries-old tribal strife, the leaders sitting in the presidential chairs for several decades, the highest level of corruption and criminality, a huge number of weapons owned by population, and aggressive, numerous, for the most part disadvantaged and radically-minded youth.
The stock market failure triggered by the rejection of QE-3 and further fueled by the problems in the European Union (Greek default), as well as a noticeable deceleration of the Chinese economy (last September, more than 50 Chinese companies refused from the previously declared IPOs) cannot but affect the state of the diamond market. You may argue about whether it will fall to the level of late 2008, or it will sink even lower or, on the contrary, it will stay a little higher – it is of no importance. What is important is that the recovery, as in 2009, will be associated with a significant limitation of supply of raw materials. Only this time not by the will of the leading diamond mining companies, but in the result of a political crisis along the Libyan scenario "suddenly" occurred in Angola, Congo, Zimbabwe, and possibly also in Tanzania and South Africa.
In this regard, it would be pertinent to note the extremely timely exit of the Leviev Group from the Catoca Project, as well as the recent statement by the leader of the youth wing of the ruling African National Congress in South Africa calling to overthrow the government of Botswana, to nationalize mines and unleash terror against the white population. The history of the ANC’s advent to power in South Africa is well known, and there is no doubt about who is actually controlling these "fighters against apartheid." Election of the ANC party leadership is to be held in 2012 and it is possible that oldster Jacob Zuma will be removed by young radicals. In this case, a threat to Botswana's diamond industry, the largest diamond producer in the world, will be a long-term driver pushing prices for rough diamonds ever higher.
Luckily for diamond miners, Angola, DRC and Zimbabwe are among the most likely targets for US AFRICOM and US CYBERCOM as the most prominent footholds of Chinese expansion in Africa. Of course, a large-scale armed conflict unleashed in those countries potentially threatens to increase illegal diamond traffic, but taking into account the capabilities of the organizer, there is a hope that this negative phenomenon will be dealt with in a much better way than it was done by the infantile Kimberley Process.
Inspired by the "Arab spring" the proud tribes of West and Central Africa and the revolutionary youth of the ANC should be as quick as possible to aspire to the ideals of freedom and democracy, pushing Exxon Mobil out to the cold Arctic shelf and prodding the pesky Chinese to Eastern Siberia. That is the only possible anti-crisis solution leaving the role of a world reserve currency to the U.S. dollar.
Sergei Goryainov, Rough&Polished
