Tuesday, March 31, 2009

Strange analogy of the week...

The U.S. and China are locked in an "unhealthy embrace"...

April 1 (Bloomberg) -- Presidents Barack Obama and Hu Jintao meet for the first time today to discuss a global economic crisis each is trying to combat with policies that may further complicate U.S.-China relations.

As they meet ahead of a gathering in London with other leaders from the Group of 20 advanced and emerging economies, the two presidents are directing a combined $1.4 trillion of stimulus spending.

While their efforts will soften the impact of the global recession, analysts say U.S. spending to stimulate demand and China’s focus on investment in public works are likely to exacerbate the global imbalances that inflated asset bubbles and brought on the collapse of credit that helped trigger the current crisis.

The two countries remain locked in “an unhealthy embrace,” said Charles Freeman, a U.S. trade negotiator who is now at the Center for Strategic and International Studies in Washington. “How we ease that embrace so we can stay embraced but not choke ourselves to death in the process is going to be a serious thing that we deal with in the next decade.”

Obama’s $787 billion stimulus package runs up budget deficits to be financed by more Chinese purchases of U.S. debt. Such a prospect leaves Chinese Premier Wen Jiabao “worried” about the safety of China’s $740 billion holdings of U.S. Treasury securities, the world’s largest, he said March 13.

China’s Stimulus

Meanwhile, Hu’s 4 trillion yuan ($585.4 billion) stimulus plan doesn’t help build the domestic consumer demand that China needs to support its own industries and reduce its reliance on exports, says Ha Jiming, chief economist at China International Capital Corp. in Beijing.

The plan will “delay a rebalancing toward greater consumption-driven growth because about 75 percent of its spending is for infrastructure,” Ha says.

Unless the two countries break a cycle that requires China to continue lending so the U.S. can keep spending, “we’re headed to another major crisis, and it could be worse than this one,” Stephen Roach, Morgan Stanley’s Asia chairman in Hong Kong, said in an interview.

Obama administration officials say that, with the global economy forecast to shrink in 2009 for the first time in more than 60 years, this isn’t the time to address such issues.

G20 participants begin posturing...

...again, catering to local interests. The entire process is politicized and it does not appear anything substantial will be accomplished.

Which is fine...if only we could send 100 cases of Bourbon to the meetings and keep them inebriated for the rest of the year and let individuals pick up the pieces.

"President Sarkozy yesterday threatened to wreck the London summit if France’s demands for tougher financial regulation are not met.

France will not accept a G20 that produces a “false success with language that sounds good but contains no commitments”, his advisers said.

Asked if this meant a possible walk-out, Xavier Musca, Mr Sarkozy’s deputy chief of staff for economic affairs, said: “A basic rule with nuclear deterrence is that you do not say at what point you will use the weapon.”

The French threat dramatically raised the temperature hours before President Obama arrives in London today. If carried through, it would ruin a summit for which Mr Brown and Mr Obama have high ambitions, believing it vital to international recovery."

Monday, March 30, 2009

Problems in Austro-Hungary...nothing to see here...


Then again, its not as if the ratings agencies have had a great forecasting run...

G20: Your Leaders will save you

Raise your hand if you think these meetings (and their associated communiques) remind you of pre-war jockeying during the great depression.

The problem with global coordination is that politics (in republics, anyway) is inherently local and domestic.

It is also clear that some members of the G20 think it better to wait out the storm, pick up the pieces, and start afresh.

G20 communiqué steers clear of protectionism
By Guy Dinmore and Marco Pasqua in Rome
Published: March 29 2009 15:01 | Last updated: March 29 2009 20:34
Leaders of the world’s 20 leading and emerging economies meeting in London this week are set to reiterate a pledge to avoid protectionism and complete stalled global trade talks but offer little to those calling for more economic stimulus.

A 24-point draft of the G20 meeting’s final communiqué, obtained by the Financial Times, does not contain specific plans for a fiscal stimulus package, which had been resisted by European countries. It claims that the fiscal expansion already in process will increase global output by more than 2 percentage points and create more than 20m jobs.

Combined with increased resources for a reformed International Monetary Fund, the fiscal and banking support actions aim to enable the world economy to expand by the end of 2010. The draft left a blank space where a target for economic expansion could be inserted.

An official source said the text was unlikely to change substantially ahead of the April 2 summit, although there is still debate over certain figures.

Stating that a “global crisis requires a global solution”, the G20 leaders pledge: “We are determined to restore growth now, resist protectionism, and reform our markets and institutions for the future . . . We are determined to ensure that this crisis is not repeated.”

A second official source confirmed it was the latest G20 draft, but cautioned that it was still open to changes during more than two days of negotiations in London from today.

Describing it as a “UK Treasury trial balloon” he said some points were open to negotiation, including co-operation, stimulus packages and, above all, what he called problematic reforms of the IMF. China and Brazil might introduce changes, the source added.

Avoiding direct mention of capitalism, the leaders state their fundamental belief in “an open world economy based on market principles, effective regulation, and strong global institutions” to ensure “a sustainable globalisation with rising prosperity for all”.

Responding to inflationary warnings made by Germany and other countries, the G20 also say they are committed “to put in place exit strategies from the necessary expansionary policies, working together to avoid unintended impacts on others”.

The communiqué touches on other well-trodden themes from the previous G20 meeting, but breaks little new ground.

Concern for the stability of emerging economies is a central theme in the document. The summit agrees to increase resources available to the IMF, borrowing through the market if necessary. This would probably involve the use of the IMF’s own currency special drawing rights, a move for which China has pushed. A substantial increase in lending by multilateral development banks is agreed, including funding from export credit and investment agencies.

On currencies, G20 nations pledge to refrain from “competitive devaluation”.

Hedge funds will come under oversight of a stronger Financial Stability Forum, which has expanded to include all G20 members and been renamed the Financial Stability Board.

Non-co-operative tax havens will be put under unspecified sanctions and named in a document to be published at the summit.

Executive pay and bonuses should “reward actual performance, support sustainable growth and avoid excessive risk-taking”, according to principles already laid out by the FSF.

Responding to accusations of rising protectionism in national stimulus packages, the leaders reaffirm the commitment made in Washington last year not t raise new barriers to investment or trade, and not to create subsidies for exports. “We will not retreat into financial protectionism,” they say.

Saturday, March 28, 2009

Saudi Arabia...

Prince Nayef the next King?

I have reports that he is sympathetic to the fundamentalist cause. Wonderful.

RIYADH (AFP) — Saudi Arabia's Interior Minister Prince Nayef has been named second deputy premier, placing him just behind ailing Crown Prince Sultan in the political hierarchy, the state SPA news agency reported on Friday.
"His Royal Highness Prince Nayef bin Abdul Aziz has been appointed second deputy prime minister," it said in a one-sentence statement.
Prince Nayef, about 75, was elevated to the job that has been vacant since his half-brother King Abdullah ascended the throne in 2005 and his full brother Sultan became first deputy premier.

Bargaining Chips...

The below article still shows the ROW waiting with baited breath for the U.S. stance on international trade (PLEASE get your good citizens to start buying again Mr. President)

Who else guarantees world security? Is the epicenter of global finance? The technological breadbasket of the world?

The rest of the world should get used to the idea of U.S. unilateralism concerning trade. Our present Executive administration is presented with massive domestic pressure which is far more relevant than multi-party talks concerning international trade.

We hold the chips and still have not shown our hand...

WASHINGTON (MarketWatch) -- Leaders of the most economically important countries of the world have promised not to grab growth at the expense of their neighbors through trade wars, but such conflicts are on the rise around the globe.
Trade conflicts are "smoldering, like grassfires along the ground," said Gary Hufbauer, an analyst with the Peterson Institute for International Economics, a Washington think tank.
While the trade wars haven't yet erupted into a forest fire, enough dry tinder exists to worry analysts that the situation could get out of control.
"I don't know how much more pressure the system can take. If there is another downward spiral, there will be more pressure," said Claude Barfield, a trade expert with the American Enterprise Institute.
"I hope it won't get worse. A fragile truce seems to be holding," Barfield said.
Trade is likely to be a main topic at the April 2 meeting in London of the Group of 20, the largest developed and developing economies in the world. Last November, G20 leaders met in Washington as the economic crisis raged and issued a strong statement against protectionism.
The G20 'better come out with strong words or they'll be seen as giving up' on free trade.

-- Gary Hufbauer, Peterson Institute for International Economics

"We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty," the leaders said.
In the back of everyone's mind is the global wave of high tariffs and other trade barriers in the 1930's that helped the Great Depression spread worldwide. In the United States, passage of the Smoot-Hawley tariff is commonly viewed as having knocked the global economy down.
Although the dismal record of protectionism is received wisdom in economic circles, experts say that domestic pressure for help is putting elected politicians in a bind. Special interests have been able to make the case that they need subsidies and protection from foreign competition to survive the recession.
The World Trade Organization released a report this week that concludes there has been "significant slippage" among the richest nations in the world toward protectionism. At the moment, the auto, steel and footwear industries are getting the most help, the WTO said.

The Paper Dragon is getting restless...

Interesting article below. It confirms my suspicions that China is in far more trouble than it is officially letting on. It is still "growing" only according to its own dubious statistics that a decreasing number of market participants believe are accurate. The incentives are there to fudge the numbers and inject whatever capital is needed into favored zombie banks...without any transparency or knowledge by the rest of the world...especially its own citizens.

"A sharpening urgency" indeed.

SHANGHAI (AP) -- The only major economy still growing at a fast clip, China is being unusually forthright in challenging the U.S.-led global order ahead of an April 2 summit on the financial crisis.

In his second rebuke of U.S. leadership this past week, the central bank governor, Zhou Xiaochuan, said China's rapid response to the downturn -- including a 4 trillion yuan ($586 billion) stimulus package -- proved the superiority of its authoritarian, one-party political system.

"Facts speak volumes, and demonstrate that compared with other major economies, the Chinese government has taken prompt, decisive and effective policy measures, demonstrating its superior system advantage when it comes to making vital policy decisions," Zhou said in remarks posted on the People's Bank of China's Web site.

In the approach to the London summit of 20 leading economies, Zhou called on foreign governments to give their finance ministers and central bankers broad authority so that they can "act boldly and expeditiously without having to go through a lengthy or even painful approval process."

China has made its agenda clear: It wants a stable U.S. dollar, and has even advocated the creation of another global currency altogether. It is leery of protectionism. And it is demanding a larger say in how financial systems are regulated and rescued, while holding back on any promises for new rescue or stimulus measures of its own.

"So far, China has been playing a game set up by other powers. Now China wants to be part of the agenda or rules-setting," said Ding Xueliang, a China expert at Hong Kong's University of Science and Technology.

Whether Beijing has a workable alternative vision for the future of world finance remains to be seen.

But China's growing assertiveness also suggests a sharpening urgency over its vulnerability to the global financial meltdown.

Fearful of any moves that might weaken the dollar and imperil China's estimated $1 trillion in Treasuries and other U.S. government debt, Chinese Premier Wen Jiabao has urged the United States to remain "a credible nation." In other words, Beijing wants Washington to avoid spurring inflation with excessive government spending on bailouts and stimulus packages.

To keep the value of its own currency steady -- some say undervalued -- the Chinese government must recycle its huge trade surpluses. The biggest, most liquid option is U.S. Treasuries. But a weakening dollar saps the value of those investments.

The Chinese "are being hurt more than anyone else by the mismanagement of the dollar," said William Overholt, an expert with Harvard University's Kennedy School of Government.

Underscoring that grievance, earlier this week Zhou, the central bank governor, called for a new global currency to end the dollar's dominance in trade, foreign reserves and commodity pricing.

Friday, March 27, 2009

ECB sees deflation "unlikely"

There is the obvious credibility issue with that...

Gerrit Wiesmann in Frankfurt

Published: March 27 2009 12:09 | Last updated: March 27 2009 12:09

Manufacturers in the eurozone saw the flow of new orders plunge by a
third in January from the same month 2008, a record drop that signals
the 16-member currency bloc is in even deeper recession than it was
late last year.

Marking the biggest decline since records began in 1996, industrial
orders booked in the first month of 2009 were 34.1 per cent below
levels seen 12 months before. The European statistics office Eurostat
said the month-on-month decline hit 3.4 per cent.

“Plunging industrial orders in January reinforces fears that eurozone
GDP will contract in the first quarter 2009 by even more than the 1.5
per cent quarter-on-quarter drop seen in the fourth quarter of 2008,”
said Howard Archer, an economist at HIS Global Insight.

Hammered by slowdowns in domestic and foreign demand for their
products, eurozone manufacturers will be looking to the European
Central Bank to continue cutting interest rates when monetary policy
makers meet on Thursday.

The ECB has already reduced its main rate to a record low of 1.5 per
cent and policymakers have made clear that they see “room for
manoeuvre” in the cost of lending.

Most economists think this means the bank will cut its main rate by 25
or 50 basis points on 2 April, with ever-more gloomy economic data
increasing the chances of a the larger move.

Pressure on monetary-policy makers could also rise as fears emerge of
deflation, the persistent fall of prices – even if the ECB sees this
as unlikely.

Wednesday, March 25, 2009

Volker gets it right...

...regarding China's dollar currency reserves and dollar denominated assets.

As for China’s criticism of the U.S., Volcker was unsympathetic. “I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to appreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us.”


Effective Weapons...

...are not always guns and bombs.

Most of this is filler and cover for the politician uttering them...but the world had better get used to the U.S. as Realpolitik operative

"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market," said Topolanek.

Get used to it...its called Finance as foreign policy weapon and is no different from the armed forces in their traditional role of political weapon.

STRASBOURG, France (AP) -- A top European Union politician on Wednesday slammed U.S. plans to spend its way out of recession as "a way to hell."

Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, told the European Parliament that President Barack Obama's massive stimulus package and banking bailout "will undermine the stability of the global financial market."

A day after his government collapsed because of a parliamentary vote of no-confidence, Topolanek took the EU presidency on a collision course with Washington over how to deal with the global economic recession.

Most European leaders favor tighter financial regulation, while the U.S. has been pushing for larger economic stimulus plans.

Topolanek's comments are the strongest criticism so far from a European leader as the 27-nation bloc bristles from recent U.S. criticism that it is not spending enough to stimulate demand.

They also pave the way for a stormy summit next week in London between leaders of the Group of 20 industrialized countries.

The host of the summit, British Prime Minister Gordon Brown, praised Obama on Tuesday for his willingness to work with Europe on reforming the global economy in the run-up to the G-20 summit.

The United States plans to spend heavily to try and lift its economy out of recession with a $787 billion economic stimulus plan of tax rebates, health and welfare benefits, as well as extra energy and infrastructure spending.

To encourage banks to lend again, the government will also pump $1 trillion into the financial system by buying up treasury bonds and mortgage securities in an effort to clear some of the "toxic assets" -- devalued and untradeable assets -- from banks' balance sheets.

Topolanek bluntly said that "the United States did not take the right path.".

He slammed the U.S.' widening budget deficit and protectionist trade measures -- such as the "Buy America" -- and said that "all of these steps, these combinations and permanency is the way to hell."

"We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way," he said.

"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market," said Topolanek.

Obama insisted Tuesday that his massive budget proposal is moving the nation down the right path and will help the ailing economy grow again. "This budget is inseparable from this recovery," he said, "because it is what lays the foundation for a secure and lasting prosperity."

Obama also claimed early progress in his aggressive campaign to lead the United States out of its worst economic crisis in 70 years and declared that despite obstacles ahead, the U.S. is "moving in the right direction."

IMF to EM "take our money...please"

Article from the Financial Times below.

We will see if Emerging markets look at the IMF as less of a policy instrument for the U.S. in the aftermath of the G20. They are running into an old problem. Transparency is wonderful up to the point information can be used against you.

By Sarah O'Connor in Washington

Published: March 25 2009 02:00 | Last updated: March 25 2009 02:00

The IMF is to overhaul its lending facilities in an attempt to propel more money into emerging market countries and lessen the stigma attached to tapping the fund.

Spurred into action by growing strain in emerging markets and calls from the G20 for the fund to take a bigger role in the crisis, the IMF said on Tuesday it would bring in a new lending facility and modify the conditions and repayment structure for its other loans.

The new "flexible credit line" facility would act like an insurance policy: countries would sign up to the fund for a fee, but only choose to access money when they needed it. The IMF wants the facility to be largely preventative, encouraging countries to draw on its money early rather than waiting until a full-blown crisis drives them into the hands of the lender of last resort.

It is aimed at essentially strong and well-run emerging market economies suffering as exports drop and external financing dries up.

There has been deep reluctance among such countries, especially in Asia and Latin America, to turn to the IMF for help because of fears the news would spark market panic.

The IMF's last attempt to help these countries was soundly rebuffed. Its "short-term liquidity facility" (SLF) has failed to attract a single borrower since its launch last year, and is being shut down.

Senior officials say they have taken on board criticisms of the SLF, including that the money had to be drawn immediately, and paid back too quickly. Countries will have up to five years to repay the flexible credit line money and there will be no cap on how much they can borrow.

Unlike the IMF's more traditional loans, the money would not be drip-fed or attached to policy conditions. However, any country wishing to sign up would have to meet strict qualification criteria such as sustainable public debt, low and stable inflation, and a current account deficit that is not too high.

Officials say they have been consulting with emerging market countries about the plan, and have had "quite an enthusiastic response".

The IMF moved on Tuesday to tweak the way it charges interest on loans more broadly, and the conditions it attaches to them. It will get rid of "structural performance criteria", which were a rigid means of compelling borrower countries to reform.

It will also eliminate an administrative mechanism designed to induce early repayments, which will in effect lengthen grace periods and simplify repayment schedules.

The fund also made another push to expand its resources on Tuesday.

The US called last month for a tripling of its firepower, though some Europeans would prefer to see no more than a doubling. Japan has already provided the IMF with an additional $100bn (€73bn, £69bn), boosting the fund's lendable resources available to address the current crisis to about $350bn, and the European Union has committed €75bn ($102bn, £70bn).

The IMF said efforts were under way to drum up more commitments ahead of the G20 meeting in London next week.

Monday, March 23, 2009

Into the singularity...

When I was in High School I postulated that Quasars are the "exit points" for Black Holes. I clearly new nothing about advanced particle physics (which is still true), but it seemed a symmetrical way to explain what "happened" to all that matter flowing in...a bright shiny beacon created from so much inconceivable destructive power.

It is a strange function, with input and output unknown to mere mortals, and the forces expressed in numbers are...well...astronomical. Similar things can be said about the Treasury's plan to repair the credit markets.

I wrote in a previous post regarding the importance of the acronym "PPP", which stands for "Public-Private Partnership.

The Treasury plan has unveiled the largest PPP program ever, and "private" suitors are only too willing to play a game where the house appears determined to keep the value of gambling chips as high as possible.

This is a very interesting policy move by the Treasury and if executed will ensconce Washington as the only place that matters for finance. It will be a black hole where capital flows...and god only knows what comes out the other side.

But some can barely restrain their joy over Geithner's plan, and for very, very good reason.

The large players know this is as good as it gets...guaranteed liabilities, zero counter-party risk, little or zero basis risk, zero liquidity risk, zero (or rather more accurately, "low") political risk, zero morale or moral hazard risks, zero or low principal risk...

...and participation on the upside!

March 23 (Bloomberg) -- Laurence Fink said BlackRock Inc., the biggest publicly traded U.S. asset manager, will participate in the U.S. Treasury’s programs to purchase troubled securities from banks.

BlackRock will take part in programs outlined today by the Treasury that will purchase loans and set up funds to buy mortgage-backed securities, Fink, chief executive officer of New York-based BlackRock, said today in an interview.

“This is not a panacea; it is not a silver bullet,” Fink said. “But this will take some of the overhang out of the marketplace. It is incrementally a really good thing.”

Treasury Secretary Timothy Geithner said today that the government will finance as much as $1 trillion in purchases of devalued real-estate assets, using $75 billion to $100 billion of his department’s remaining bank-rescue funds. The Public- Private Investment Program will also rely on debt guarantees by the Federal Reserve and Federal Deposit Insurance Corp.

BlackRock, which manages about $1.3 trillion in assets, has received government contracts in the past year to oversee securities from insurer American International Group Inc. and debt formerly held by Bear Stearns Cos.

Bill Gross, co-chief investment officer for bond manager Pacific Investment Management Co., said his firm also would participate in the bailout programs.

BlackRock will raise money from investors such as pension funds and endowments for the new Treasury programs, Fink said. The company might consider creating mutual funds so that individual investors can also participate.

Fingercuffs, part deux...

A lapse into 1400s isolationism will occur prior to the U.S. abdicating (as I have said repeatedly here the greatest foreign policy victory in the history of known civilization) the role of the dollar.
China calls for new reserve currency to replace dollar

By Jamil Anderlini in Beijing

Published: March 23 2009 12:16 | Last updated: March 23 2009 14:22

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

The goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies,” Zhou Xiaochuan, governor of the People’s Bank of China, said in an essay posted in Chinese and English on the central bank’s website.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

Analysts said the proposal was a clear indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

For now, China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars and this is unlikely to change in the near future.

To replace the current system, Mr Zhou suggested expanding the role of Special Drawing Rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that system collapsed in the 1970s.

Thursday, March 19, 2009

Opening salvos...

A historic day for bonds and the dollars yesterday. Quantitative easing being bandied about by most folks as "the reason" for the dollar decline.

But what happens when QE becomes a competitive sport? Recall the Weimar Republic vs. The U.S. experience.

By Gabi Thesing

March 19 (Bloomberg) -- The European Central Bank is under increasing pressure to follow the U.S. Federal Reserve and start buying government or corporate debt to revive its economy, economists said.

The ECB’s inaction is “becoming untenable, with every major central bank in the world actively fighting deflation risks through the purchase of government debt,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc in London. “The pressure on the ECB to act sooner rather than later will not only come from other central banks in the world but also via the exchange rate.”

The euro yesterday rose the most against the dollar in almost nine years, surging more than four cents to $1.35, after the Fed said it will purchase as much as $300 billion of U.S. government bonds. While ECB President Jean-Claude Trichet argues his policy of loaning banks unlimited funds is sufficient for now, a stronger currency will squeeze European exporters already struggling with a collapse in global orders. That may push the 16-nation euro region deeper into recession.

“This is a form of monetary tightening that is difficult for the euro zone to countenance and the ECB will be frustrated that this has been thrust upon the currency union,” said Geoffrey Yu, an analyst at UBS Ltd. in London. “Some tough choices are necessary for the ECB as current monetary policy is no longer sustainable in a recessionary environment.”

Quantitative Easing

The ECB’s benchmark interest rate, at 1.5 percent, is the highest among the Group of Seven industrialized nations. The Fed and the Bank of Japan have lowered their key rates to close to zero and the Bank of England’s is at 0.5 percent. All three of those central banks have said they will purchase government bonds in an effort to reduce long-term interest rates and revive economic growth, a policy known as quantitative easing.

European government bonds surged today, pushing yields down by the most since at least 1999, in anticipation of the ECB embarking on a bond-purchasing program, said Juergen Michels, chief euro-area economist at Citigroup Inc in London.

The yield on the 10-year bund, Europe’s benchmark government security, fell as much as 22 basis points. It was 17 points lower at 3.05 percent by 8:33 a.m. in London.

“The markets expect that the ECB will be the next on the bloc,” Michels said. Still, “bond prices will come down again once the market realizes that nothing is imminent.”

Wednesday, March 18, 2009

What use is polarity...

...when there is no magnetism?

Our lawmakers should spend less time strumming the populism guitar and attempting to enforce some idea of "fairness" in light of "outrage" and more time examining the root causes that the incentive system in place effected upon economic agents who wish to maximize their self-benefit.

Congress is wandering dangerously close to the Executive and Judicial functions...but why should one argue or care about melting Bacon (Francis, that is) and Separation of Powers in addition to the manifold conflicts of interest involved? Because that is precisely what effected the incentives in the first place, with obvious results.

(ADDENDUM) The point of the above passage is that rules designed to limit the power of a single branch of our government should be given great deference. As I said, it is not the function of Congress to enforce or interpret the laws they have passed, nor should they even hint at the power to do so. And yet, they are lobbing criticism at people, businesses, and institutions that did the same thing. They are threatening private citizens with 90% tax rates (as Marshall said: The power to tax is the power to destroy) in order to negate contract. This is silly.

warning: Fantasy and Sci-Fi references ahead. Wikipedia may (should?) be needed:

The functions of rating agencies recombining into "business partner protocol" droids.

The functions of GSE's devolving into an untouchable Three-Legged Fighting Machine, wasting competitors in its path with its Wave Motion Gun of "full faith and credit"...until the more worldly affliction of avarice felled them.

The grand old traditional function of political parties liking campaign contributions, and intelligent corporate operatives exploiting knowledge gaps like a Romulan exploits the neutral zone. This is something that will not (indeed, should not!) change.

The regulatory agencies neglecting to pay attention to the various Heralds flying around our fair planet until Galactus assimilated 60 Billion dollars.

Reserve Banks only to happy to grant more Spice Melange to the Banking Guild.

Restitution should be an after-thought in this environment. Destroying the Death Star will not defeat the Galactic Empire...

Regulatory whack-a-mole

The Government should just concede at this point...this looks like Kasparov in his prime vs...me.

The same questions can be posed to all investment banks and their employees who received bonuses from 2008, including the laundry list of companies who received full value from AIG transactions.

How far can they push considering NYC's tax base?

March 18 (Bloomberg) -- Merrill Lynch & Co. employees who received $3.6 billion in bonuses in December may be publicly identified as part of New York Attorney General Andrew Cuomo’s probe of the company, a New York judge ruled.

New York Attorney State Supreme Court Justice Bernard Fried in Manhattan today rejected an argument by Charlotte, North Carolina-based Bank of America Corp. that compensation information was a trade secret. He also said employees can have no reasonable expectation of privacy in the information when they are free to share it.

“The Martin Act vests in the Attorney General the discretion to decide whether to keep the information that he gathers in the course of his investigation secret or public,” Fried wrote in a 16-page decision, referring to a New York securities law. Bank of America, he said, has no “privacy interest that undermines that statutory discretion.”

How accurate have these experts been...

...regarding China or other countries and markets?

Note the appeal to authority "highly respected...from prestigious" as applied to analysts who support the author's position.

"Prudent, forward-looking Chinese officials" describing those august cabinet members selflessly directing the economic policies of China.

(The FED's) "Short-sighted policies". How gracious.

Imagine all the conditions that must occur if the author's view is realized. Secret reserves, clandestine asset grabs, a dollar crisis if China does not buy Treasuries, etc.

The author has quite a sanguine view of China'a global position. Markets disagree.

China inoculates itself against dollar collapse
By W Joseph Stroupe
This article concludes a three-part report.

PART 1: Before the stampede
PART 2: The not-so-safe haven

There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.

There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.

The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.

One of the foremost experts who continues to research and track these matters is the highly respected Brad W Setser, a Fellow for Geoeconomics at the prestigious Council on Foreign Relations in New York. His work is providing significantly deeper insight into the size and composition of China's reserves and is affording the world a better view of that country's options in managing its reserves going forward and what the implications of those options might be.

Another expert whose ongoing work is also adding very important, deeper insight into such matters is the highly respected Rachel Ziemba, lead analyst on China and the oil exporting economies at the prestigious RGE Monitor, founded by Nouriel Roubini.

Drawing on the work of these two experts, let's examine the matter of the likely size and composition of China's forex reserves and its investment options going forward, and the probable implications of those options for the dollar.

The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.

As for the issue of the composition of these reserves and its total exposure to the dollar, the most recent Treasury International Capital (TIC) report by the US Treasury has China's holdings of Treasuries at $696 billion as of the end of 2008. However, Setser's research indicates China's total holdings of US Treasuries is likely to be more than that figure, since some of the purchases of Treasuries by the UK and Hong Kong should actually be attributed to China's central bank. China also holds US government-sponsored agency debt (Fannie Mae and Freddie Mac paper) and corporate bonds, but the recent TIC reports indicate its central bank has been steadily divesting itself of these assets in favor of short-dated Treasuries.

As for China's purchases of Treasuries over the most recent three months (October - December of 2008), note this statement from Setser: And over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.
Setser goes on to make the point that China's central bank is unquestionably divesting itself of the comparatively less-safe assets such as agency debt in favor of very short-dated Treasuries. The best estimates of the total exposure of China's central bank to dollar-denominated assets of all kinds is about 70%, or somewhere between $1.5 trillion and $1.7 trillion depending upon whether you use the $2.2 trillion figure or the $2.4 trillion figure for the total sum of China's reserves.

That uncomfortably high level of exposure to the dollar is what has been causing concern to flare in China most recently. A much more desirable figure, from China's standpoint, of its total exposure to the dollar would be 50% or less of its total reserves. A reserve composition of 50% dollars to 50% everything else is much safer because an excessive decline in the value of the dollar would tend to be offset by corresponding increases against the dollar in the value of the non-dollar assets comprising the rest of the reserves.

In order to get to that more desirable composition fairly quickly over the next several months, China would have to somehow divest itself of as much as $450 billion of its existing dollar-denominated assets, not purchase a significant amount of new dollar-denominated assets, and accomplish all this without triggering a global dollar panic. That's a very tall order indeed - but it is not by any means impossible. How so?

If we stand back to look at Setser's work from a distance, we see what appears to be a clear strategy on China's part that is potentially very compelling. The country has its official reserves, which it acknowledges now total about $1.95 trillion, and it also has its unofficial or secret reserves, which Setser estimates at about $450 billion at present.

Coincidentally (or perhaps not merely coincidentally) the secret reserves total about the same sum that China needs to divest itself of in order to reach the desired composition of its reserves noted in the previous paragraph - about $450 billion. At this point, recall the intriguing and potentially very important statement quoted earlier (see DOLLAR CRISIS IN THE MAKING, Part 2), a statement made by Fang Shangpu, deputy director of the State Administration of Foreign Exchange and reported by the Xinhua News Agency on February 18, 2009:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added]

China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
Is Fang Shangpu hinting that China has intentionally, as a deliberate strategy, divided its reserves into two general holdings, official and secret, and that SAFE (the State Administration of Foreign Exchange) has ensured that the composition of the official (government) holdings of the $1.95 trillion is such that its exposure to the dollar is not the roughly 70% assumed in the West, but rather something much closer to the desired target of 50%, while the secret reserves hold predominantly dollar-denominated assets?

If this is the case, then China could employ a number of schemes to clandestinely further reduce its total exposure to the dollar, using its secret reserves, all the while maintaining safety for the official reserves. Note Fang Shangpu's recent statement to the Wall Street Journal regarding how carefully, and with what foresight, China manages its reserve holdings:
"Since the subprime crisis evolved into the international financial crisis in September last year, we have executed the central authorities' plans to cope with the international financial crisis and launched the emergency response mechanism. We have closely followed developments, made timely adjustments to risk management, taken decisive and forward-looking measures to evaluate and remove risks ... "
Chinese officials have been painfully aware, for several years now, of the increasing risks of too great an exposure to the dollar. It simply isn't believable that their level of prudence and foresight in this regard was so low as to allow them to fail to formulate and execute strategies designed to limit that exposure to safer levels than is presently assumed in the West. But if China has indeed prudently and deliberately structured its official reserves (now totaling $1.95 trillion) to be much less exposed to the dollar than is assumed in the West, while off-loading the riskier, dollar-denominated assets into its secret reserves, how might it propose to use those secret reserves to further decrease its exposure to the dollar?

Conversion into resource reserves
Enter China's resource buys. Several Chinese experts have been saying that China needs to spend a significant portion of its dollar-denominated reserves on hard assets, thereby further reducing its exposure to the dollar. It certainly appears that China is embarking upon just such a strategy.

According to research by Rachel Ziemba of RGE Monitor, in the first two months of 2009 alone China has already confirmed such deals for hard assets worth a total of over $50 billion [2]. Clearly, China is just now opening its global strategy of pursuing such resource buys at a time when the prices of hard assets are extremely attractive and many more such buys are in the offing. This is made evident by the recent February 23, 2009 report by China Daily which stated the following:
As part of the National Energy Administration's three-year plan for the oil and gas industry, the government is considering setting up a fund to support firms in their pursuit of foreign mergers and acquisitions, the report said.

Ziemba, in response to questions e-mailed to her, also alerts us to watch for forthcoming details about the currencies employed in China's resource buys. If these deals are being transacted largely in dollars, then she notes that there will likely be no negative near-term effect upon the dollar's role as the world's reserve currency. But if they are arranged outside of the dollar, it might well serve to undermine the dollar's international role to some extent.

Obviously, with China's uncomfortably large present exposure to the dollar, it is in its interests to concentrate on converting much of the dollar-denominated portion of its secret reserves into resources reserves. In other words, China will undoubtedly spend dollars, whether directly or indirectly, to fund its resource buys. But it must do so in a largely opaque manner that leaves little, if any trace in official data such as the US Treasury's TIC report. It will also be likely to be a net buyer of Treasuries, though nowhere near its 2008 pace, or else refrain from selling significant amounts of Treasuries, while it clandestinely reduces its exposure to the dollar. Otherwise, its actions could spark a dollar panic.

It is most unlikely, therefore, that its actions in this regard will be sufficiently proved before it has already succeeded in accomplishing its goals. Furthermore, since resource prices are now very attractive, China will certainly expand and accelerate its resource buys while prices remain attractive, converting ever-larger sums of its dollar-denominated reserves into resource reserves.

If China averaged a conversion of only $35 billion per month from dollars into resources, it could convert the entire $450 billion in little more than 12 months' time. Hence, I predict that the next eight to 15 months will provide China with sufficient time to bring its total exposure to the dollar much more in line with its strategic goals.

What about the problem of dealing with any ongoing accumulation of dollars? A number of analysts note that China's trade surplus is worsening even in the global slowdown because, while China's exports are falling, its imports are falling much faster. However, Chinese officials have made clear that they will use their reserve holdings to bolster imports, and that measure should alleviate China's need to accumulate large sums of dollars and other currencies in order to keep the yuan stable.

China is extremely unlikely, therefore, to accumulate dollars at anywhere near the rate at which it did in 2008. China is also funding its domestic stimulus package designed to spur domestic consumption. All these measures denote a much wiser use of its huge reserves and a steadily decreasing focus on the dollar. All in all, China looks set to weather the storm quite well in spite of some significant hardships along the way...

...Obviously, if the US reaches the point where it fails to find sufficient buyers for its new flood of Treasuries, that will also become a perilous situation for the dollar and for the huge Treasuries bubble, which will almost certainly burst as global investors seek better stores of wealth in hard assets, following the lead of China's central bank.

Either way, the US is engaged in the implementation of extremely risky and potent inflationary, dollar-debasing policies, making a loss of global confidence in the dollar in the short to medium term a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time. That will make it extremely difficult for the US Federal Reserve to tighten monetary policy to fight off the inevitable and potent inflation that will result from today's shortsighted policies.

When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.

Prudent, forward-looking Chinese officials have clearly assessed the entire situation as one demanding careful but swift action to ensure that its huge reserves are not imperiled by what has obviously become an untenable global rush into an unstable and perilous dollar bubble.

Hence, China's central bank is enacting with a sense of urgency prudent measures, both explicit and clandestine, to significantly decrease exposure to the dollar. If the details of such measures should become sufficiently public and should attract undue global attention before China accomplishes its goals, a dollar panic might be triggered.

This risk, though perhaps not major, does exist nonetheless, and it is significantly increasing as China undertakes new measures that might attract undue and unwanted global attention. However, it is also likely that China will enjoy cover and gain breathing space to enact its prudent measures while much of the rest of the world continues to rush into the bubble.

Tuesday, March 17, 2009


Interesting to note that campaign contributions alone will not protect a firm from the full fury of congress.

Senate Banking Committee Chairman Chris Dodd (D-Conn.) on Monday night floated the idea of taxing American International Group (AIG: 0.95, 0.1699, 21.78%) bonus recipients so the government could recoup some or all of the $450 million the company is paying to employees in its financial products unit. Within hours, the idea spread to both houses of Congress, with lawmakers proposing an AIG bonus tax.

While the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to the bill. The provision, now called “the Dodd Amendment” by the Obama Administration provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” -- which exempts the very AIG bonuses Dodd and others are now seeking to tax.

Dodd’s original amendment did not include that exemption, and the Connecticut Senator denied inserting the provision.

Thursday, March 12, 2009

Capital requirements, anchors, and bailouts...

The insurance industry in a perfect (negative) storm...only port is the Government.

The Next Big Bailout Decision: Insurers


The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies' capital and erode investor confidence.

A dozen life insurers have pending applications for aid from the government's $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn't said whether insurers will be eligible for the program.

Life insurers have taken a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 all-time high. The Dow Jones Industrial Average has lost 21% year to date, off 51% since its October 2007 record.
[not secured]

Some of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc., which already received a capital injection from German insurer Allianz, are down 93% as of Wednesday's close from their 52-week high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines.

Some life insurers are faring better than others, and some of the nation's giants retain triple-A ratings, including Massachusetts Mutual Life Insurance Co., New York Life Insurance Co., Northwestern Mutual Life Insurance Co. and TIAA-CREF.

But as the economy buckles, analysts say many insurers face losses that can eat away at the capital cushions regulators require them to maintain.

Long-time experts say the industry is going through its most tumultuous period in recent memory. "It's a pretty scary scenario right now," said Pete Larson, an analyst at Gradient Analytics, a Scottsdale, Ariz., research group.

Life insurers have been taking a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 record high.

Ratings agencies and stock investors are growing concerned about how long the industry can avoid reckoning with the distressed assets on their books. Rating agencies Moody's Investors Service, Standard & Poor's and A.M. Best have cut the ratings of more than a dozen insurers in recent weeks.

The Bold and Decisive Trichet...

...doing more than "people think".

But the problem has gravitated toward dollar financing requirements. LIBOR and bond activity confirm this. Behind the curve once again.

March 12 (Bloomberg) -- European Central Bank President Jean-Claude Trichet’s new weapon to battle the recession is taking him closer than it seems to zero interest rates.

Trichet is allowing the ECB’s deposit rate, which lenders earn on overnight deposits with the central bank, to usurp the benchmark refinancing rate and become the main driver of short- term borrowing costs. At just 0.5 percent, the deposit rate matches the Bank of England’s key setting and is only a step away from the zero-to-0.25-percent range the Federal Reserve uses.

That is pushing interest rates for banks down, helping Trichet answer critics who accuse him of not doing enough as the euro-region economy sinks into its deepest recession since World War II. The deposit rate is “very, very low,” Trichet said three times in an hour at a press conference on March 5.

He “is implicitly admitting that the deposit rate has now become the key barometer of the ECB’s policy,” said Nick Kounis, chief European economist at Fortis in Amsterdam. “The ECB has become more and more comfortable in pointing that out, not least because it’s been accused of keeping interest rates too high.”

The euro overnight index average, or Eonia, fell to 0.85 percent yesterday after the ECB’s latest rate cuts took effect -- about 0.7 percentage point below the 1.5 percent benchmark rate. Overnight deposits dropped to 56.3 billion euros, the lowest amount since Oct. 8.

Unlimited Cash

The ECB’s decision to offer banks unlimited amounts of cash, announced on Oct. 8, has culminated in the deposit rate setting the new de facto cost of short-term money. The move removed the need for banks to borrow in the money market to meet their reserve requirements.

Banks have been reluctant to lend to each other since Lehman Brothers Holdings Inc. went bust on Sept. 15, preferring to stash excess money with the ECB instead of taking the risk.

As demand dried up, interbank-lending rates dropped toward the deposit rate. The Eonia rate averaged 106 basis points above the deposit rate in the seven years before the ECB started providing unlimited liquidity in October. Since then, the gap has shriveled and yesterday stood at just 35 basis points.

Unlimited cash “results in refinancing costs for banks well below the current benchmark interest rate,” ECB council member Axel Weber said on March 5. “We expect banks to pass this on to consumers and companies to stimulate the economy.”

Boost for Economy

The overnight Eonia rate “is a very important starting point for all market expectations,” said Julian Callow, chief European economist at Barclays Capital in London. “Any further reduction in Eonia expectations would lower Euribor rates and so be a considerable benefit for the real economy.”

The euro interbank offered rate, or Euribor, that banks say they charge each other for six-month loans dropped to a record low of 1.8 percent yesterday. Market rates of the same maturity traded at 2.08 percent in the U.K. and 1.93 percent in the U.S.

While Trichet hasn’t ruled out further rate cuts, officials are hesitant to go much lower. There is “no reason to see the refinancing rate below 1 percent,” Weber said on March 10. “I also see a problem with lowering the deposit rate to zero. I would prefer to leave it at 0.5 percent.”

That reticence may be linked to Japan’s experiment in the 1990s, when it lowered its key rate to zero to revive its economy in what became known as the “lost decade.”

Japan shows that keeping rates too low for too long “will cause interbank trading to run dry, despite the ECB’s efforts to revive it,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt.

‘Excessively Low’

Some ECB officials are concerned that too-low market rates will become counterproductive because they will sap banks’ returns and give them less incentive to trade with each other. That would undermine the ECB’s aim to revive interbank lending through its unlimited liquidity operations.

“If we had excessively low interest rates, why would banks start lending to each other?” ECB council member Yves Mersch asked March 10. “It would be much safer to put their excessive funds into the central bank rather than engage in the interbanking market.”

He is “driving home the point that the ECB is doing much more than people think.”

To contact the reporter on this story: Jana Randow in Basel at jrandow@bloomberg.net

Wednesday, March 11, 2009

Casting the wide net...

Low hanging fruit to pick. Geographic distance and multiple frauds at home gurantees this and much more to come.

By Ryan J. Donmoyer

March 11 (Bloomberg) -- Senate Finance Committee Chairman Max Baucus is circulating draft legislation that would double some penalties on Americans who use offshore bank accounts to evade taxes and give the Internal Revenue Service more tools to catch them.

The 15-page plan would stop short of more sweeping changes proposed March 2 by Michigan Senator Carl Levin that won support from President Barack Obama’s administration.

Baucus’s legislation would require foreign banks that let customers trade U.S. securities to report more detailed information about account holdings to the IRS. It would double to six years the amount of time the IRS may pursue back taxes in civil actions.

It also would require Americans to file with their tax returns a form disclosing the contents of foreign accounts containing more than $10,000. Taxpayers already must send the form to the Treasury Department.

Levin on March 2 proposed a dozen laws to stop what he said was a loss of $100 billion annually in U.S. taxes on income held in offshore accounts that isn’t reported on tax returns. The legislation won the backing of Treasury Secretary Timothy Geithner.

Lawmakers have been working on a legislative response as the U.S. Justice Department sues Swiss bank UBS AG to turn over the names of about 52,000 Americans with offshore accounts. UBS agreed to turn over about 250 names and is resisting providing the others, citing Swiss bank secrecy laws.

"Financing" current account deficits...with bonus rant

The Economist (the only weekly publication that I read...Businessweek and others contain far too much noise, advertisement, and duplicity) for all of its strengths continually fails to understand just how strange a non-convertible fiat currency system can be. Its "Economics Focus" article from the 2/28 issue is no exception. So I will get to this misnomer...but first, a small rant today:

/start epistemological rant

I say "strange" above because The Economist is clearly grounded in the Liberal Economic school of thought, but suffers from the age old affliction of "Buk Nawledzhe". That is, too much reliance on elegant and enveloping theories than the nitty gritty of how things actually work. If ontogeny REcapitulates phylogeny in economists, this is likely due to "physics envy". In physics, simple, elegant theories are much more likely to be true than massively complex systems. (Murray Gell-Mann has written extensively on this phenomenon and to this day, I have a habit of audibly mumbling "epicycles" to any theory that becomes too complex). Physicists can and do simplify massively complex systems with a few equations. They do find laws that are applicable everywhere. Like Newton said:

Nature obeys laws, and it is the business of natural philosophy (i.e. "science") to find them out"

Since most economists now days have plenty of mathematical training, this "faith" in simplicity and the belief of Economist-as-Archimedes just waiting to scream "Eureka!" is pervasive. Economists want to believe "the answer" is out there, but in the messy world of human action...well, lets end this rant with a quote by Turgenev:

Would to god your horizon may broaden every day! The people who bind themselves to systems are those are those who are unable to encompass the whole truth and try to catch it by the tail: a system is like a tail of truth, but truth is like a lizard, it leaves its tail in your fingers and runs away knowing full well that it will grow a new one in a twinkling

/end epistemological rant

So, after that rant, let's get to work on this idea that "Current Account Imbalances need to be financed".

The argument is as follows: "Since a current account deficit means, by definition that a country imports more than it exports, said country must be importing capital to finance this deficit". In this case, the United States, by running a current account deficit, is at risk of losing its financing"

my response?

1. Markets aggregate desires. A Capital Account surplus reflects a desire for foreign nations to net-save U.S. financial assets as it does reflect a U.S. desire net import what it wishes to consume.

2. The term "financing" is misleading. If the desire to save in a currency is lessened, the exchange rate adjusts accordingly and the current account adjusts with the usual lags.

3. Countries (or currency areas) that own their currency are not operationally constrained by "borrowing" to "get" their currency. "Financing" a short-fall in the current account via depleting foreign exchange reserves is misleading. See Australia.

Tuesday, March 10, 2009

The IMF chimes in prior to the London G20 Summit

The IMF priming for the G20...

The IMF warned on Tuesday the world was gripped by a ''Great
Recession'' that could throw millions back into poverty and spark
civil unrest, as the United States appealed for joint action by
nations against the crisis.

''The global financial crisis, that might now be called the great
recession, provides a sobering backdrop to our conference,'' IMF
Managing Director Dominique Strauss-Kahn told delegates at an
anti-crisis meeting in Tanzania.

''The IMF expects global growth to slow below zero this year, the
worst performance in most of our lifetimes,'' he said, urging wealthy
Western countries to maintain financial support for low-income

The IMF director also said there was now ''a real risk that millions
will be thrown back into poverty'' across the African continent and
that the economic crisis raised ''the threat of civil unrest, perhaps
even a war''.

The worldwide recession also raised fears in Europe of a sharp erosion
in public health as financially strapped patients are forced to defer

LIBOR spreads widening

...and the dollar strengthening against the Euro again.

Nah, no problems in the Euro area.

Monday, March 09, 2009

Claw-backs...Russian style.



THEY are larger-than-life figures at home and abroad, men who saw themselves as the Carnegies or Rockefellers of Russia. They are known as oligarchs, and they may soon be thrown into the dustbin of history by the economic crisis.

Brash, young and wealthy, those insiders of post-Soviet business who escaped nationalization — to say nothing of exile or prison — under Vladimir Putin went on to make ever greater fortunes in the commodity boom of recent years. But few businessmen anywhere have fallen as hard or as fast in recent months.

Many of Russia's richest men were highly leveraged going into the financial crisis and were unable to roll over loans from Western banks. The Kremlin bailed them out with short-term credits last year, not wanting the assets to fall into foreign hands. Those state loans will be coming due by the end of the year, on top of additional foreign loans.

The mountain of debt is so huge — the Central Bank calculates that corporations and banks in Russia must repay $128 billion this year alone — that many oligarchs will be unable to repay the loans, bankers say. Only a fraction of this debt, about $7 billion, is corporate bonds. The rest is bank loans to companies predominantly owned by the oligarchs or the state...

Thursday, March 05, 2009

Thank goodness for good financial journalism

Stocks slide as investors change mind
March 05, 2009
(AP) — Investors are having another change of heart and are selling stocks once again after a one-day burst of optimism fizzled.


The decline is caused by investors changing minds...this is wonderful in its vapidity.

Maximum fear...

...is maximum opportunity.

As I have said, after the 1st quarter, U.S. financial assets (although I am speaking directly to U.S. stocks) should stabilize.

All the same economists, analysts, pundits, etc. who extrapolated asset growth to infinity via the panglossian "great moderation" now do the same for doom and expect a Hobbesian version of the world of all against all.

What Rubbish. Behavior follows economics, yes, but this does not validate rhetorical arguments like "Well, after Weimar there was Hitler...so..." (see Godwin's Law for another look at this phenomenon)

On the liability side of this philosophical balance sheet lies politicians such as Mr. Frank, who now speaks of a Federal Agency to curtail "risk taking", whatever that entails.

Rate compression continues...

The ECB finally acts. Recall that only 2 months ago they somehow did not see the signs.

FRANKFURT (AP) -- The European Central Bank on Thursday cut its main interest rate by a half percentage point to 1.5 percent and hinted that further rate cuts were possible -- as well as a boost in the money supply to help the ailing euro-zone economy.

The rate cut by the Frankfurt-based bank followed a similar half-point reduction by the Bank of England, which took its benchmark rate to 0.5 percent.

Both banks are now at historic record lows and looking beyond interest rates for other ways to stimulate growth amid the world economic slowdown.

ECB President Jean-Claude Trichet said there was a "consensus" on the bank's governing council over the decision to cut and added that the bank could go farther, though he did not provide a clear sign another rate cut would be enacted next month.

Wednesday, March 04, 2009


The following quote by our Secretary of the Treasury is disconcerting. Note the use of language, the subtle use of the word "subsidize". Are tax breaks "subsidies" in a real economic sense? Why is this news? What is it attempting to convey to the American Public and for whose benefit? Why does the Treasury think unilaterally changing incentives will add to the country's general welfare?

I am becoming more and more cynical of this administration...

"We don't believe it makes sense to significantly subsidize the production and use of sources of energy (like oil and gas) that are dramatically going to add to our climate change (problem). We don't think that's good economic policy and we think changing those incentives is good for the country," Geithner told the Senate Finance Committee at a hearing on the White House's proposed budget for the 2010 spending year.


Nothing to see here...

...everything is OK in the Euro area. Almunia says so.

"By definition these kinds of things should not be explained in public"

And what "definition" would that be, Mr. Almunia?

Wonderful propaganda. Who knows how bad it really is across the pond, but the world has caught on that its worse than what the U.S. will experience.

UPDATE 3-Euro zone can bail out members if needed - Almunia
2009-03-03 17:39 (UTC)
By Jan Strupczewski and Marcin Grajewski

BRUSSELS, March 3 (Reuters) - The euro zone has a way of bailing out its members if they face a crisis before they have to seek IMF help, but this must remain confidential, European Monetary Affairs Commissioner Joaquin Almunia said on Tuesday.

Although no bailout possibility existed under European Union laws for euro zone countries, there was a solution that could be used, Almunia told a seminar.

'If a crisis emerges in one euro area country, there is a solution ... Before visiting the IMF, you can be sure there is a solution and you can be sure that it is not clever to talk in public about this solution,' he said.

'But this solution exists. Don't fear for this moment -- we are equipped intellectually, politically and economically to face this crisis scenario, but by definition these kinds of things should not be explained in public,' he said.

Speaking at a later event in the European Parliament, Almunia said the euro zone was probably experiencing the worst moments of the economic crisis in the current months.

'We are living in those months in the worst period of the crisis,' he said. 'I hope in few months we can consider the worst of the recession is behind us.'

German Finance Minister Peer Steinbrueck said in February that although EU rules said countries should not help each other within the currency area, all members of the bloc would have to help 'if it came to a serious situation'.

Tuesday, March 03, 2009

Public (investment) Health Announcement

Virus infecting (the computers of...) traders.


we now return to regularly scheduled S&P down day.

Guarantees on Security...

With all the guarantees of toxic assets being bandied about, a security guarantee from the world's premier provider of such services is not far behind.

Of course, our resources are finite and this will come at a cost of influence and increased political power. The Obama Doctrine (similar to the Monroe Doctrine and the financial Roosevelt corollary) is on its way. European business will be nationalized at the individual state level with obvious implications for the Euro and Maastricht.

China will be marginalized eventually, notwithstanding arguments such as "The reason China is healthy is because they have not experienced a banking failure" that make me want to re-examine epistemology 101...

Meanwhile, this leaves the U.S. relatively unencumbered, having dragged out the dirty laundry for all to see.


The U.S. Defense Department thinks Mexico's two most deadly drug cartels together have fielded more than 100,000 foot soldiers - an army that rivals Mexico's armed forces and threatens to turn the country into a narco-state.

"It's moving to crisis proportions," a senior U.S. defense official told The Washington Times. The official, who spoke on the condition that he not be named because of the sensitive nature of his work, said the cartels' "foot soldiers" are on a par with Mexico's army of about 130,000.

The disclosure underlines the enormity of the challenge Mexico and the United States face as they struggle to contain what is increasingly looking like a civil war or an insurgency along the U.S.-Mexico border. In the past year, about 7,000 people have died - more than 1,000 in January alone. The conflict has become increasingly brutal, with victims beheaded and bodies dissolved in vats of acid.

The death toll dwarfs that in Afghanistan, where about 200 fatalities, including 29 U.S. troops, were reported in the first two months of 2009. About 400 people, including 31 U.S. military personnel, died in Iraq during the same period.

The biggest and most violent combatants are the Sinaloa cartel, known by U.S. and Mexican federal law enforcement officials as the "Federation" or "Golden Triangle," and its main rival, "Los Zetas" or the Gulf Cartel, whose territory runs along the Laredo,Texas, borderlands.

The two cartels appear to be negotiating a truce or merger to defeat rivals and better withstand government pressure. U.S. officials say the consequences of such a pact would be grave.

PBGC about to get overrun...

No commentary necessary.

By David Evans

March 3 (Bloomberg) -- The Chicago Transit Authority
retirement plan had a $1.5 billion hole in its stash of assets
in 2007. At the height of a four-year bull market, it didn’t
have enough cash on hand to pay its retirees through 2013,
meaning it was underfunded to the tune of 62 percent.

The CTA, which manages the second-largest public transit
system in the U.S., had to hope for a huge contribution from the
Illinois state legislature. That wasn’t going to happen.

Then the authority found an answer.

“We’ve identified the problem and a solution,” said CTA
Chairman Carole Brown on April 16, 2007. The agency decided to
raise money from a bond sale.

A year later, it asked Illinois Auditor General William
Holland to research its plan. The state hired an actuary, did a
study and, on July 17, concluded that the sale of bonds would
most likely result in a loss of taxpayers’ money.

Thirteen days after that, the CTA ignored the warning and
issued $1.9 billion in bonds. Before the year ended, the pension
fund was paying out more to bondholders than it was earning on
its new influx of money. Instead of closing its funding gap, the
CTA was falling further behind.

Public pension funds across the U.S. are hiding the size of
a crisis that’s been looming for years. Retirement plans play
accounting games with numbers, giving the illusion that the
funds are healthy.

The paper alchemy gives governors and legislators the easy
choice to contribute too little or nothing to the funds, year
after year.

Monday, March 02, 2009

Go towards the light Trichet!!!!

Well, he "seems" to be getting it now...but who knows? This is the same man who clearly did not understand the Euro area suffers from greater institutional "viscosity" than the U.S. and should have seen the 2nd derivatives (the rate of change in the change) deteriorating in GDP growth and export data.

By Ambrose Evans-Pritchard
Last Updated: 8:16PM GMT 23 Feb 2009

"What has become increasingly clear since the intensification of the
crisis in mid-September is that strains in the financial sector are
spilling over into the real economy," he said. "This has set in motion
a process of negative feedback."

Mr Trichet said the bank was disturbed by signs of an fully-fledged
credit crunch as banks shut off lending to healthy borrowers. Credit
has contracted in absolute terms for the first time in recent weeks.

"There are indications that falling credit flows reflect tight
financing conditions associated with a phenomenon of deleveraging. If
such behaviour became widespread across the banking system, it would
undermine the raison d'etre of the system as a whole" he said.

The ECB has been caught off guard by the ferocity of the recession,
which is now ravaging Europe's steel, car, aeronautics and chemical
industries. The bank's hard line has led to criticisms from trade
unions and business leaders as the eurozone's economy contracted at an
annual rate of 6pc in the fourth quarter of 2008.

Mr Trichet's warning is a clear sign that the ECB will cut interest
rates below 2pc at its next meeting in March. It has stood aloof in
recent weeks as central banks worldwide tore up rulebooks and explored
extreme measures.


...will have to be taken in Africa soon. No doubt a significance U.S. presence will be there. My position is this will morph into a permanent encampment (read: Base) within the next 4 years.

Peace-keeping is a growth industry in the Dark Continent...and the United States will benefit massively from the incidental presence of plentiful natural resources. Debt and equity issuance can then begin largely unencumbered by massive political risk.

I have called this interest in the antipodes "The Obama Doctrine". Latin America will be included in this as well in terms of financial assistance.