Financial Crisis: What's Going on?

And where are we going? Another financial roundup.

First:

The prospects of the Fed flooding the financial system with money helped drive gold above $1,400 an ounce on Monday. The precious metal, which investors often buy as protection against inflation, settled at a record $1,402.80 per troy ounce.

Other assets, such as U.S. stocks and oil, drifted back slightly on Monday after getting a big boost from the Fed's announcement last week. The dollar fell against the yen, while rising against the euro as worries about Europe's debt problems returned.

The G-20 summit that begins Wednesday night in Seoul is shaping up as a showdown between exporting powers, such as Germany and China, and nations such as the U.S. that are struggling to emerge from recession and high unemployment.

Ahead of the meeting, tensions have flared in particular between German and U.S. officials. U.S. Treasury Secretary Timothy Geithner has been pressing member nations to sign up for a framework that would set limits on countries' trade balances. Germany, which relies heavily on exports, has lectured Washington about its economic policies, which Berlin sees as profligate and damaging.

Already, expectations are low for the meeting. The G-20 is struggling to agree on specific targets for Mr. Geithner's trade regime. It's also likely to leave unresolved other big questions, such as how to unwind failing international financial institutions, a task made urgent by the recent financial crisis...

Who might those be? I haven't heard much along those lines of late.

On Monday, China's Vice Finance Minister Zhu Guangyao said the U.S. isn't living up to its responsibility as an issuer of a global reserve currency. The Fed's move doesn't "take into account the effect of this excessive liquidity on emerging-market economies," he said.

The top economic aide to Russian President Dmitry Medvedev said Russia will insist at the G-20 summit that the Fed consult with other countries ahead of major policy decisions.

Cause that's a good way to make Russia more popular with American citizens.

Underpinning the debate is a growing sense that the international currency system, which has been based on floating exchange rates for most players for more than 30 years, is wearing out. China's policy of keeping its currency artificially low has long caused tensions that have increased of late, as other countries try to export their economies back to health. Now critics are lumping the Fed's policy, known as quantitative easing, into the same category.

Second:

...The assault against Bernanke's easy money has reached such fever that President Obama felt it necessary to defend the $600 billion in new-money printing in a news conference in India.

Meanwhile, World Bank President Robert Zoellick has actually called for putting gold back into global money, in order to use it as an international reference point to measure market expectations over inflation or deflation.

The former Treasury and State Department official wants a successor to Bretton Woods...

Taking a bit of a shot at Bernanke's QE2, the Fed board member [Kevin Warsh] basically says: Look, you want better growth, reform the tax code and stop regulating. "The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies," he writes.

Third:

In an interview with SPIEGEL, German Finance Minister Wolfgang Schäuble, 68, criticizes US calls for Germany to reduce exports, outlines his plans for an insolvency framework for indebted European nations and the emphasizes the significance of the German-French axis for Europe...

SPIEGEL: All the same, the value of goods Germany sold to the United States exceeded imports from that country by almost €14 billion ($19.8 billion) last year. Can't you understand that the American treasury secretary is concerned about this?

Schäuble: No, because since we introduced the euro in Europe, the determining factor is no longer US trade with Germany, but US trade with the totality of countries in the euro zone. And in that respect the balance of trade tends to be even. So what's the problem? After all, we don't complain about the export successes of individual American states.

SPIEGEL: But the German economy benefits from the fact that German industry has focused primarily on foreign markets and wages have hardly gone up in years. The Americans see this as unfair.

Schäuble: The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses...

SPIEGEL: Last week, the US Federal Reserve Bank decided to flood the economy with $600 billion in new money. Will this stimulate the economy as hoped?

Schäuble: I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don't recognize the economic argument behind this measure.

SPIEGEL: The US wants to depress the value of the dollar in this way, so that it can sell its products abroad more easily. In light of the ailing US economy, isn't that a completely reasonable strategy?

Schäuble: No. The Fed's decisions bring more uncertainty to the global economy. They make it more difficult to achieve a reasonable balance between industrialized and emerging economies, and they undermine the US's credibility when it comes to fiscal policy. It's inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money...

...it's obvious that the global economy is in a tough situation. This is due to the enormous national debts many countries have taken on while fighting the crisis. Reducing these deficits is the primary objective, as the G-20 countries decided at their most recent summit in Toronto, where everyone, including the United States, agreed to cut their deficits by half by 2013. We should stick to these decisions, and if we do we will be able to curb unrest in the markets.

Much more there, especially on the most in debt eurozone countries.

Further:

In August, Boston University Professor Laurence Kotlikoff wrote an article in the Finance and Development Journal of the International Monetary Fund titled "U.S. Is Bankrupt and We Don't Even Know It."

In it he warned: "Let's get real. The U.S. is bankrupt. He estimated that "Based on the Congressional Budget Office's data ... a fiscal gap of $202 trillion (exists already), which is 15 times the official Treasury debt."

Last week, the Federal Reserve announced its intention to print another $600 billion plus to subsidize further the greatest Ponzi scheme in history called the U.S. Treasury market. What does it mean for ordinary Americans?...The government machine that turned a blind eye to the false classification of certain potentially toxic bank assets and their concealment either under deceptive labeling or offshore has little difficulty in adopting similar methods in incurring increasingly more debt. Indeed, false labeling has long been an official government ploy to dupe citizens into keeping quiet.

At the state level, the picture is smaller but similar and threatens national bailouts, with California alone in debt for $138 billion.

Meanwhile, with revenues falling, a $300 trillion exposure to derivatives and $1.5 trillion of their $10.6 trillion of home mortgages already in foreclosure, the banks are heading for a second serious crisis.

In short, many have followed the government's lead in helping to create a mountain of debt. Amazingly, despite the fact that the U.S. government defaults daily on the value of its currency debts, major pension, insurance and financial companies still view U.S. Treasury debt as "riskless."

This truly threatening picture promises serious problems ahead. But the Fed and government propose even more debt...

And finally:

...So far this year, thanks to California's unfriendly political environment, strict regulations and high taxes, 32 companies have announced they'll either expand elsewhere, move or shut down operations, according to the California Manufacturers & Technology Association.

For many, it's as simple as ABC — Anywhere But California. This is an issue near and dear to our hearts. Investor's Business Daily was founded in 1983 in Los Angeles — and for a quarter of a century has proudly called California its home.

But we too have been affected by the state's poisonous, anti-business political environment. With de facto one-party rule in the state since the 1960s and few signs of change anytime soon, our optimism about the state's future has begun to wane.

As a result, sad to say, much of IBD's future growth will happen at a new facility in Texas — where local and state authorities have bent over backwards to make us feel welcome.

California was once like Texas, but lost its way. Today, when comparisons are made, California is most often compared to Greece — another idyllic place with a sunny, Mediterranean climate on the verge of bankruptcy.

In the end, only the voters of California can change things. But on Tuesday, they opted for more of the same governance that will only make conditions worse.