Wednesday, December 15, 2010

"Control"... a brittle, somewhat fictive thing when it concerns national interests.

The cycle of life continues...just as Cuba has been ruined by totalitarian rule via "freedome fighters", so to has China's idustrial output been appropriated by "communists".

Labels are useless when analyzing these societies. It is a simple matter of power and the means of production. It is a strange truth that China is much closer to the Bourgeoisie/proletariat dichotomy than the U.S., so I guess they follow their philsophical master in at least one respect...

from a Foreign Affairs article outlining some of the "challenges" the Paper Dragon faces:

Increased misappropriation of land, rising income inequality, and corruption are among the most contentious issues for Chinese society. China’s State Development Research Center estimates that from 1996 to 2006, officials and their business cronies illegally seized more than 4,000 square miles of land per year. In that time, 80 million peasants lost their homes. Yu Jianrong, a senior government researcher, has said that land issues represent one of the most serious political crises the CCP faces.
From 1996 to 2006, Chinese officials and their business cronies illegally seized more than 4,000 square miles of land per year. In that time, 80 million peasants lost their home.

China’s wealth gaps have also grown; according to Chinese media, the country’s GINI coefficient, a measure of income inequality, has risen to about 0.47. This level rivals those seen in Latin America, one of the most unequal regions in the world. The reality may be even worse than the data suggest. Wang Xiaolu, the deputy director of the National Economic Research Institute at the China Reform Foundation, estimates that every year about $1.3 trillion in income -- equivalent to 30 percent of China’s GDP -- goes unreported. More than 60 percent of the hidden income belongs to the wealthiest ten percent of China’s population, mostly CCP members and their families. The use of political power to secure inordinate wealth is a source of considerable resentment, and the wealthy are keenly aware of it. They now employ more than two million bodyguards, and the private security industry has grown into a $1.2 billion enterprise since it was established in 2002.

The Paper Dragon as beacon for the world

...infiltrating our "thought leaders". My comments in italics. This is a strange article that pines for a more "honest" approach to solving the U.S.'s internal problems. It then furnishes an example of a country that has experienced highly transitory success and suggests we follow suit. Hilarity ensues.

By Fareed Zakaria
Monday, December 13, 2010

This is the wrong time to raise taxes, say the politicians. The economy is fragile, say the economists. The recovery is halting, say the pundits. In a few years, they all affirm, we will need to get our fiscal house in order. Of course, just a few years ago, the economy was doing fine, and Washington decided it wasn't the moment to worry about the deficit. Instead, over the past decade, we cut taxes, added a massive entitlement program (prescription drugs for the elderly) and spent trillions on two wars. Somehow, no matter what the economic clock says, it's never time in Washington to cut spending or raise taxes. Call it mañana economics.

Hard to argue with this...
Procrastination economics

The best one can say about President Obama's compromise plan with Congress is that it will do some short-term good - at long-term cost. The only parts of the plan likely to have a significant effect in stimulating the economy are the extensions of unemployment insurance, cuts in payroll taxes and, perhaps, tax credits for businesses ("perhaps" because they are temporary and thus would only bring forward investments). To get these measures, worth about $250 billion, Obama agreed to an extension of the Bush tax cuts that will cost around $750 billion, and eventually much more since the tax cuts are now more likely to become permanent. It makes the original stimulus plan of 2009 look stunningly efficient.

The original stimulus plan was indeed inefficient. Tax cuts and organic growth via market forces allocate capital and investment much more efficiently than top-down governmental edict. Setting up the arithmetic here as a simple 750>250 is disengenuous.

The first act of the newly empowered Republican Party has been to add a trillion dollars to the deficit. Republicans have now fully embraced the Keynesian arguments that they routinely denounced. John Maynard Keynes argued that when private demand weakens, the government should pick up the slack. He advocated either of two paths: government spending or tax cuts. Republicans have simply chosen the latter course.

Spending cuts on the way?

So when will we get serious about our fiscal mess? In 2020 or 2030, when the needed spending cuts and tax hikes get much larger? If we cannot inflict a little pain now, who will impose a lot of pain later? Does anyone believe that Washington will one day develop the political courage it now lacks? And what if, while we are getting around to doing something, countries get nervous about lending us money and interest rates rise?

Once again, the popular delusion of "funding" being the issue leads to inaccurate conclusions with respect to the yield curve. And even if these causalities (foreign governments lend us "money") were true, can export reliant emerging economies withstand the attendent currency movements from these yield fluctuations?

I understand the politics of compromise and the politics of reelection, and this deal makes sense on both grounds. It doesn't make much sense for the long-term growth of the American economy. What Washington is trying to do is reignite the consumption bubble - hoping to get Americans to spend money and take out loans. This plan, presidential adviser Lawrence Summers tells us, will get the economy to "escape velocity." It's an intriguing theory. If Americans keep spending money, using their credit cards, and buying houses, this will trigger the next technological and economic revolution.

Take Mr. Summers's (aka, "the smartest guy in the room") advice at your peril.

China has a different theory of how to get long-term, sustained growth. The Chinese have doubled their spending on education - with stunning results - and continue to build the world's best infrastructure. Reuters reports that Beijing is contemplating a plan to invest $1.5 trillion over the next five years in seven crucial industries. The targeted sectors are alternative energy, biotechnology, new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, and energy-saving and environmentally friendly technologies. Somehow, housing and retail didn't make the list.

A model for sustained growth based on a corrupt totalitarian police state that has zero respect for international intellectual property "law"? Housing and retail don't make the list because the happiness of the plebs are an afterthought to the "Communists".

The basic problem in the U.S. economy is that for a generation now, we have been consuming more and saving and investing less. Consumption ranged from 60 to 65 percent of gross domestic product for decades; then it started moving up in the early 1980s, reaching 70 percent of GDP in 2001, where it has stayed ever since. More spending has not been triggered by rising incomes but entirely by an expansion of credit - the underlying cause of the crash of 2008. And yet our solution to our problems is to expand credit and consumption.

Since Savings equals investment, but does not equal spending, the phenomenae of consumption growing as a % of GDP is partially attributable to the importance of a knowledge, service intensive economy.

Of course, we don't have the money to pay for our new tax plan, so we will borrow it, in part from foreign central banks. While China spends its money to invest in long-term growth, it lends us cash so that we can give ourselves one more big tax break. Someone in Beijing must be smiling.

Here we go, we do not need to fund the deficit via foreign "money". Someone in Beijing must be very nervous...becuase if the export driven gravy train is halted or even slowed slightly, the entire edifice of economic driven "progress" in china goes the way of that emperor who wore no clothes.

Tuesday, December 14, 2010

A recurring theme...

...on this blog. This should not surprise readers here.

MEXICO CITY (Dow Jones)--The International Monetary Fund said Tuesday it plans to expand a precautionary credit line to Mexico to around $73 billion from $48 billion and extend the facility for another two years, at the request of Mexican authorities.

The IMF implemented the existing flexible credit line during the economic crisis in 2009, essentially raising Mexico's international reserves and offering a vote of confidence in the country's economic and fiscal situation.

Tuesday, IMF Managing Director Dominique Strauss-Kahn welcomed a request by Mexico's Foreign Exchange Commission, made up of Finance Ministry and Bank of Mexico officials, to expand and extend the credit line.

"We're not imposing conditionality, we're just recognizing that the government has the right policies in place," Strauss-Kahn said at an event. "Because you're doing well, we'll be happy to provide you--without asking anything else--this financial support that you may use, or not. I hope not."

The Protocol of change...

After observable events prove a theory or a process to be wholly incorrect and imprudent, at what point does a rational thinker change his/her protocol for understanding a given issue?

On a theoretical level, Moody's insistance that "ability to pay" comes from "ability to raise funds via taxes" is wrong. A sovereign issuer of currency does not need to collect its own currency in order to pay in that currency. Furthermore, external "funding" from other currencies that grant creditworthiness is a misnomer. We live in a fiat floating currency world and Moody's continues to think constrained by the manacles of gold.

On an experimental level, one need only look to Japan to note the inadequacies of Moody's approach to sovereign creditworthiness.

NEW YORK (Reuters) – Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.

The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.

Friday, December 10, 2010

Quote of the day

plus ca change...

"There will no longer be need for spheres of influence, for alliances, for balance of power, or any other of the special arrangements, through which, in the unhappy past, the nations strove to safeguard their security in order to promote their national interests"

Secretary of State Cordell Hull, 1943

War is not the only form of combat, and we are observing the mobilizations to effect the terms of trade for export depedent regimes versus developed consumer based society.

"Wealth" is not denominated in terra firma, and agrarian monopoly no longer guarantees power. No, the wars of today and the future are fought over terms of trade and the transport routes that lubricate them.

Wednesday, December 08, 2010

What will they say?

What will historians say of the EU experiment 50 years from now, especially given their handling of the current funding and credit crisis?

The below quote demonstrates the level of deception their leaders are willing to engage in...the remarks are even more astounding given the Fed's recent disclosure regarding its lending activities to Euro area banks during the worst of the crisis.

“The U.S. will lose its status as the superpower of the global financial system" Steinbrueck told the lower house of parliament in Berlin. "The long term consequences of the crisis are not yet clear. But one thing seems likely to me: the USA will lose its superpower status in the global financial system. The world financial system is becoming multipolar."

He went on to say, "Wall Street will never be the same again. A few days ago there were two Mohicans left remaining out of the investment banks. Now they no longer exist." The finance minister was referring to the sudden transformation of Goldman Sachs (nyse: GS - news - people ) and Morgan Stanley (nyse: MS - news - people ) into bank holding companies. "The world will never be the same as it was before the crisis. The whole world over we must adjust ourselves to lower rates of growth and--with a time lag--unfavorable developments on labor markets."

The center-left politician also said he felt there was no need for Germany or Europe as a whole to imitate the U.S. Treasury's way of dealing with the financial crisis because it is largely an "American problem."


As the great Martin Wolf said "its really, really, really difficult for public institutions to create intelligent policy".

So the main, primary, only focus for QE2 was the value of lowering yields thereby increasing economic acitivity and credit via the interest rate channel. I have long argued that this is not the case with QE, but nevermind that...just look at the effects.

Bond yields rising with each successive wave of QE announcement. And even more "curious", where is the broad based dollar strength that typically (that is, according to accepted economic doctrine) follows increases in yields?

Monday, December 06, 2010

Expanding the program...

...follow up to last post. He went on Television to sell the Fed to the public, nothing more. It had admittedly been a very rough few months for the Fed.

Federal Reserve Chairman Ben S. Bernanke said the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.

“We’re not very far from the level where the economy is not self-sustaining,” Bernanke said in an interview broadcast yesterday by CBS Corp.’s “60 Minutes” program. “It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting.”

Bernanke, in a rare appearance on a nationally broadcast news program, defended the Fed’s efforts to prop up a recovery so weak that only 39,000 jobs were created in November. The unemployment rate last month rose to 9.8 percent, the highest level since April, the Labor Department said on Dec. 3, three days after the Bernanke interview was taped. Republican lawmakers have said the Fed’s policy of “quantitative easing” may do little to help unemployment and may fuel inflation

Beyond the valley of QE

As expected, the Fed is unable to jettison economic canon. Thus, QE is still a method that it deems both effective and appropriate given current employment and inflation data. The market has thusly happily priced in further rounds of QE in the ardent hope that increasing financial asset prices rises all ships.

This is all fine and good until the markets fully understand that QE is simply an accounting exercise and causes no real economic growth in an of itself.

And so this parasitic relationship will go on a bit further, until either the host realizes the prognosis, or the parasite ceases to receive nourishment.

Wednesday, December 01, 2010

A good run...

...for more than half a century, Europe has experienced a uncharacteristically low incident of conflict, opting instead for a belief in "progress" via good governance.

Mean reversion is a terrible thing, especially when there is so far to fall.

Quote(s) of the day... light of the latest search for the economic holy grail:

"What happens at bottom is that a prejudice, a notion, an "inspiration", generally a desire of the heart sifted and made abstract, is defended by them with reasons sought after the event - they are one and all advocates who do not want to be regarded as such, and for the most part no better than cunning pleaders for their prejucies which they baptize as "truths"...this spectacle makes us smile, we who are fastidious and find no little amusement iin observing the subtle tricks of old moralists and moral preachers, not to speak of that hocus-pocus of mathematical form which, as if in iron, Spinoza encased and masked his philosophy - the love of his wisdom, to render that world fairly and squarlely, so as to strike terror into the heart of any assailant who should dare to glance at that invincible maiden and Pallas Athene - how much timidity and vulnerability this masquerade of a sick recluse betrays!- Nietzsche, Beyond Good and Evil

There are many discliplines that produce linear gains in knowledge. The obvious one is Physics, where theory is tested by events that ALWAYS and EVERYWHERE confirm the theory. The humanities obey categorically different generators. Simply dressing them up in math in order to legitimize and make them subject of serious study does not dilute the central fact that the humanities deals with humans, and humans do not always and everywhere obey ANY set rules save base survival.

So the attempt to penetrate the fog of human behavior, particularly in aggregate over cultures, regions, states, and continents, is doomed to fail. Throwing another 1000 economists at the "problem" misinterprets the question. I am reminded again of the sage words of Robert L. Bacon in his book "Secrets of Professional Turf Betting", a book about the sport of Horse Racing and betting:

"There is no danger of the public ever finding any key to the secret of winning. The crazy gambling urges and speculative hysteria that overcomes most players at the track makes that fact a certainty, but, if the public play ever did get wise to the facts of life, the principle of ever-changing cycles would move the form away from the public immediately"

We will always be assailed with attempts to transmogrify humans into bits that answer "yes" or "no" (the picture to this post is "Bit" from the movie "Tron") to attacks upon their consumption baskets and intertemporal budget constraints and savings desires, but what has all this "reserach" produced?

By Mark Whitehouse

Physicist Doyne Farmer thinks we should analyze the economy the way we do epidemics and traffic.

Psychoanalyst David Tuckett believes the key to markets' gyrations can be found in the works of Sigmund Freud.

Economist Roman Frydman thinks we can never forecast the economy with any accuracy.

Disparate as their ideas may seem, all three are grappling with a riddle that they hope will catalyze a revolution in economics: How can we understand a world that has proven far more complex than the most advanced economic models assumed?

The question is far from academic. For decades, most economists, including the world's most powerful central bankers, have supposed that people are rational enough, and the working of markets smooth enough, that the whole economy can be reduced to a handful of equations. They assemble the equations into mathematical models that attempt to mimic the behavior of the economy.

From Washington to Frankfurt to Tokyo, the models inform crucial decisions about everything from the right level of interest rates to how to regulate banks.

In the wake of a financial crisis and punishing recession that the models failed to capture, a growing number of economists are beginning to question the intellectual foundations on which the models are built. Researchers, some of whom spent years on the academic margins, are offering up a barrage of ideas
that they hope could form the building blocks of a new paradigm.

"We're in the 'let a thousand flowers bloom' stage," says Robert Johnson, president of the Institute for New Economic Thinking, launched last year with $50 million from financier George Soros, a big donor to liberal causes who has long been a vocal critic of mainstream economics. The institute so far has approved funding for more than 27 projects, including efforts by Messrs. Farmer
and Tuckett aimed at developing new ways to model the economy.

Some of academia's most authoritative figures say the new ideas are out of the mainstream for a good reason: They're still very far from producing a model that demonstrably improves on the status quo.

"I guess I'll wait until I see these models and what they can and cannot do," says Robert Lucas, an economist at the University of Chicago who won the Nobel Prize for his work on "rational expectations," the concept at the very heart of modern orthodoxy.

New York University's Mark Gertler, who with now-Federal Reserve Chairman Ben Bernanke did ground-breaking work in the 1980s on how financial troubles can trip up the economy, says economists already have many of the tools they need to fix the current models.

Tuesday, November 30, 2010

Peripheral angst

Italian spreads widening as I type this, the stop-gap measures propounded by the EU area are proving insufficient to a market innoculated against the cacophony of propaganda emitted from the ECB and official channels.

Put another way, the noise filter has been recalibrated, and a new standard of scrutiny and a more cynical view towards the EU's veracity is now THE theme going forward.

Thus, drastic measures such as QE and monetization follow. Recall these have vastly different effects where currency issuers are divorced from fiscal and taxation powers.

Sunday, November 28, 2010

Tomorrow's talking points...

...the EU area bailout, and Wikileaks.

The Germany Dispatches
Internal Source Kept US Informed of Merkel Coalition Negotiations


The US was kept abreast of German coalition negotiations as they took place. Here, Chancellor Merkel's Christian Democrats meet with Foreign Minister Westerwelle's Free Democrats in October 2009. Internal notes from the talks ended up in Washington not long later.

The 250,000 US State Department documents made public by WikiLeaks
reveal that the US has an extensive network of informants in Berlin
and was kept informed of coalition negotiations as Chancellor Merkel
was forming her current government. US officials, the cables show, are skeptical of several top German politicians.

The more than 250,000 secret documents from the US State Department
show just how critical the American diplomats were of the new German
government. In particular, the new Foreign Minister Guido Westerwelle, leader of the pro-business Free Democrats (FDP), is seen in a negative light. The secret reports describe him as incompetent, vain and critical of America. The US diplomats report that they face a challenge in dealing with a politician who is considered an "enigma," who has little foreign policy experience and "remains skeptical about the US." An embassy cable from Berlin from Sept. 22, 2009 describes Westerwelle as having an "exuberant personality." That is why he finds it difficult to take a backseat when it comes to any matters of dispute with Chancellor Angela Merkel," the cable says.

A fine mess.

The EU area "encourages" bond holders to maintain their exposure to EU-area debt, and issues new bonds via an EU mechanism WITH SENIORITY over previous bonds? I see the strategy to devalue the Euro, but the ramifications for bonds and further issuance is very troubling. This is a terra incognito for the EU with multiple guarantees on debt (in several SOVEREIGN COUNTRIES) without a corresponding fiscal capacity tanatmount to providing a municipal fire department with millions of dollars of new fire-fighting equipment in the midst of a raging fire engulfing an lare section of the city.

The EU area is once again betting its existance on forward GDP, and more specifically, manufacturing output and exports.

This, coupled with the Spiegel articles out tomorrow, does not exactly burnish the ECB's credibility.

So its all a fine mess, and I just have to chuckle at these efforts to hold this creaking old rollercoaster together, and burst out laughing at the people who wish to ride it.

Wednesday, November 24, 2010

Seeking the blameworthy...

Blame, blame, blame. It is a pity commentators don't take a more serious tac and investigate the incentive structures that FULLY explain this licentious, avaricious behavior.

Still, this article does relate some very useful nuggets:

One is the role of financial intermediaries, such as banks. Rather than seeking the most productive outlet for the money that depositors and investors entrust to them, they may follow trends and surf bubbles. These activities shift capital into projects that have little or no long-term value, such as speculative real-estate developments in the swamps of Florida. Rather than acting in their customers’ best interests, financial institutions may peddle opaque investment products, like collateralized debt obligations. Privy to superior information, banks can charge hefty fees and drive up their own profits at the expense of clients who are induced to take on risks they don’t fully understand—a form of rent seeking. “Mispricing gives incorrect signals for resource allocation, and, at worst, causes stock market booms and busts,” Woolley wrote in a recent paper. “Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction.”

Tuesday, November 23, 2010


...that would make a Keiretsu blush. United Europe has chained themselves to the Jolly Rodger.

Recursive Fed reaction functions... the latest Fed Minutes, the Fed mentions that it has revised its forecast of economic growth in ligth of "asset market developments...reflecting heightened expectations".

This is curious considering the Fed has willfully altered the asset mix with QE2 (which, once again, has no net effect and even if it did had an effect, this would be deflationary and diametrically opposed to the Fed's desired outcomes.). Put another way, moved the target to the place they shot the arrow, and now claim success

Monday, November 22, 2010

QE2 Red Shifting

The Dollar Index measuring the currency’s performance against those of six major trading partners has climbed as much as 5.1 percent from its low this year on Nov. 4. Futures traders have slashed bets for a decline in the dollar against the euro, yen, Australian dollar and Swiss franc, data from the Commodities Futures Trading Association in Washington show.

Leaders from Chinese Premier Wen Jiabao to John Boehner, the nominee to be the next speaker of the House of Representatives, have said Fed Chairman Bernanke’s plan to print money and buy $600 billion of U.S. government debt will cause instability and faster inflation. The $4 trillion-a-day currency market is signaling the Fed’s strategy is unlikely to debase the dollar as long as the economy continues to strengthen.

No net effect. Furthermore, the risk is tilted to the deflationary side (given the context of the current environment of banking malaise, etc.) since swapping interest bearing assets (bonds) with non-interest bearing assets (cash) removes current and future income streams from the economy.

In astronomical terms, whatever effect QE2 was supposed to have is Red-shifting at a large and increasing rate.


The blamestorming continues. There are elements of hypocracy on both sides (Ireland, for example, benefited massively from the Euro as their very business friendly tax structures meant FDI flooded into their banking system), but the root problem is, once again, that there is no such thing as a currency union without fiscal union. You simply must have monopoly currency issuing powers to make the system work.

The main elements of the story are that the banks’ problems are so
deep that they exceed the fiscal capacity of the State. We cannot
borrow enough money from the bond markets to sort them out and also
fund the exchequer deficit, so we have no choice but to turn to the
European Financial Stability Facility and the IMF.

While the later point is unfortunately true, the role of the ECB in
how we came to this sorry pass is worthy of some scrutiny. A more
critical analysis might conclude that its policies over the last two
years added greatly to our problems and ultimately its own. And it is the ECB’s problems as much as ours that brought things to a head last week.

One of the main differences between how the two-year-old crisis has
played out in Europe and America has been the refusal of the ECB to
allow any significant bank fail.

It is worth noting in this regard that Jean Claude Trichet rang Brian Lenihan over that fateful weekend in September 2008 to impress on him the importance of not letting any Irish bank fail. The obvious
inference was that the ECB would play its part.

Trichet was, of course, pushing at an open door given the other
factors at play in Ireland: profound regulatory failure combined with the inability of the administration or the banks to comprehend the scope of the problem.

But the fact remains that the Government could not have gone down the road it did without the support of the ECB. Frankfurt has provided the liquidity needed to make the National Asset Management Agency function and was committed to a similar facility for the winding up of Anglo.

Friday, November 19, 2010

Bernanke's gambit

The Full Statement Can Be Found Here.

My comments in italics where appropriate, this is an abridged version of the full statement.

The Federal Reserve's policy target for the federal funds rate has been near zero since December 2008, so another means of providing monetary accommodation has been necessary since that time. Accordingly, the FOMC purchased Treasury and agency-backed securities on a large scale from December 2008 through March 2010, a policy that appears to have been quite successful in helping to stabilize the economy and support the recovery during that period. Following up on this earlier success, the Committee announced this month that it would purchase additional Treasury securities. In taking that action, the Committee seeks to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation that would prove damaging to the recovery.

We will not be disuaded from QE2, regardless of the risks, to reneg on the policy measure now would be an admission of impotence for Fed policy, which is a categorical impossibility.

Although securities purchases are a different tool for conducting monetary policy than the more familiar approach of managing the overnight interest rate, the goals and transmission mechanisms are very similar. In particular, securities purchases by the central bank affect the economy primarily by lowering interest rates on securities of longer maturities, just as conventional monetary policy, by affecting the expected path of short-term rates, also influences longer-term rates. Lower longer-term rates in turn lead to more accommodative financial conditions, which support household and business spending. As I noted, the evidence suggests that asset purchases can be an effective tool; indeed, financial conditions eased notably in anticipation of the Federal Reserve's policy announcement.

We have altered the supply of relevent securities and their maturities, pray we don't alter it any further.

Incidentally, in my view, the use of the term "quantitative easing" to refer to the Federal Reserve's policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, on a wider range of assets.

Substitution effects...yes...stocks anyone?

This policy tool will be used in a manner that is measured and responsive to economic conditions. In particular, the Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives. Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate. In that regard, it bears emphasizing that the Federal Reserve has worked hard to ensure that it will not have any problems exiting from this program at the appropriate time. The Fed's power to pay interest on banks' reserves held at the Federal Reserve will allow it to manage short-term interest rates effectively and thus to tighten policy when needed, even if bank reserves remain high. Moreover, the Fed has invested considerable effort in developing tools that will allow it to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. If necessary, the Committee could also tighten policy by redeeming or selling securities.

Its all under control.

Third, countries that maintain undervalued currencies may themselves face important costs at the national level, including a reduced ability to use independent monetary policies to stabilize their economies and the risks associated with excessive or volatile capital inflows. The latter can be managed to some extent with a variety of tools, including various forms of capital controls, but such approaches can be difficult to implement or lead to microeconomic distortions. The high levels of reserves associated with currency undervaluation may also imply significant fiscal costs if the liabilities issued to sterilize reserves bear interest rates that exceed those on the reserve assets themselves. Perhaps most important, the ultimate purpose of economic growth is to deliver higher living standards at home; thus, eventually, the benefits of shifting productive resources to satisfying domestic needs must outweigh the development benefits of continued reliance on export-led growth.

China, we control the vertical. We control the horizontal. Do. Not. Defy. Us.

Thursday, November 18, 2010

Bernanke's speech...

...That will be featured all over tomorrow is a classic case of its kind in political diversion. I will comment more in time.

One source of these
tensions has been the bifurcated nature of the global economic
recovery: Some economies have fully recouped their losses while
others have lagged behind. But at a deeper level, the tensions
arise from the lack of an agreed-upon framework to ensure that
national policies take appropriate account of interdependencies
across countries and the interests of the international system
as a whole. Accordingly, the essential challenge for
policymakers around the world is to work together to achieve a
mutually beneficial outcome--namely, a robust global economic
expansion that is balanced, sustainable, and less prone to

Opening salvo...

...for the failed state south of the U.S.

Texas Gov. Rick Perry said the United States should consider deploying military forces into Mexico to stem the drug-related violence afflicting the border region.

Perry, the incoming chairman of the Republican Governors Association, told MSNBC on Thursday morning that while Mexico would “obviously” have to approve any American assistance, military might is needed to defeat the drug cartels that have stymied Mexican authorities. And he pegged decreased border violence as a prerequisite for any successful immigration reform push in Washington.

Wednesday, November 17, 2010

Newport Beach men...

...ponder coordination among G20 economies.

This rather downcast analysis of what possibly comes next should ring alarm bells in Washington and in other capitals. It is a call for intensifying international economic diplomacy with a view, first and foremost, to reaching rapid convergence on a common analysis of what ails the global economy. Without that, any other step can’t be productive.

Global economic cooperation has been weakened by a disappointing G-20 summit. But coordination is still the only way to secure the collaborative outcome that is so critical for the wellbeing of so many around the world.

“Uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated actions,” the G-20 statement said, adding that “uncoordinated policy actions will only lead to worse outcomes for all.”

Without common analysis and purpose, we will all find that a rather bland G-20 statement will, unfortunately, become very prescient.

Tuesday, November 16, 2010

Disengenuous outrage...

...the real reason for Democratic outrage at the recent SCOTUS decision in Citizens United v. Federal Election Commission, No. 08-205, is not for due to any theory of Justice. Rather, it tilts the balance of power among institutions, and among parties by putting corporations on equal footing with Unions.

Its beneficial to review this list of top donors.

Analogy of the day

The EU is currently experiencing late stages of "multiple organ failure". It is fascinating to see the similarities and more study is needed to bear fruit, if indeed any is to be had.

Inevitability's rubicon

The entire world now sees what was warned about here and in many other places. It is more destabilizing than any previous currency system, and holds as its lynchpin the collective guilt of Germany, which is quickly evaporating.

Nov. 16 (Bloomberg) -- Who's next? First Greece went bust.
Now Ireland is on the brink of a bailout from the European Union
and the International Monetary Fund.
When it happens, we'll hear plenty of soothing words about
how contagion has been stopped, the euro area has been put on a
firmer footing, and the single currency saved. There will be a
lot of grand rhetoric about the importance of the European
project. Stern condemnations of the speculators will ring out
across the continent.
Don't listen to a word of it. The euro has turned into a
bankruptcy machine. Once the markets have finished with Ireland,
they will simply move on to Portugal and Spain, and after that
to Italy and France.
There is a domino effect at work, and, with each rescue,
the fault lines within the euro grow wider and wider. This
process isn't going to stop until the euro is taken apart.
The Irish crisis is far more serious for the euro than the
Greek one. The only thing that can rescue the former Celtic
Tiger now is a clear and straightforward commitment from the
rest of the euro-area nations to salvage the country's economy.
No doubt that will be forthcoming. Tens of billions of euros
will be thrown at shoring up confidence in Ireland's finances.
But it is very hard for the single currency's remaining
supporters to explain why it has come to this. The Greeks
fiddled their way into the euro. They should never have been
allowed on board. And once inside, they should have been told to
reform fast or get out again.

Monday, November 15, 2010

QE2 Aftermath...

...indicates (according to Treasury yields) nothing has happened. The market appears resigned to admit that this asset swap has minimal impact on the economy, and there remains the danger that this damages the Fed's credibility as THE one stop shop for economic policy.

Friday, November 12, 2010

All eyes...

...on Eire and the EU summit for Next Tuesday.


Its everyman for himself and devil take the hindmost.

As we observe the tectonic shift from global concerns to more locally-driven pressures (in good economic times, politicians have the luxury of leisure time and can afford diversion into realms that are not their expertise or is a great strength of this country that in bad economic times, the very same politicians are compelled to focus their attention on their immediate constituents), tensions in trade predominate.

Bailouts are met with counter-bailouts, de-valuations (in whatever form is selected as most palatable) are met with counter-devaluations.

The real question is, as always, real economic assets.

This is why the U.S. will feel more pain, but will emerge from the current fog as sole hyper-power of the world.

Thursday, November 11, 2010

For comedic effect...

Dagong Global Credit Rating Co. Ltd., the only wholly Chinese-owed rating agency, cut its rating on U.S. debt to A from AA, citing the Federal Reserve’s move last week to initiate another round of asset buying, worth $600 billion. It also placed the U.S. sovereign credit rating on negative watch.

G-20 set to gather amid controversyAhead of Thursday's G-20 meeting, controversy has grown over the Fed's recent stimulus moves, which China and other nations have protested.
“The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar and the continuation and deepening of credit crisis in the U.S.,” Dagong said.

“Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government’s intention of debt repayment,” the agency said.

Dangerous precedent

Even with the austerity measures in place. Hopefully this precipitates the fall of the Euro area sooner than I expected.

Fears that Ireland could be forced into a Greek-style bailout by the
European Union or the International Monetary Fund swept through
financial markets today after the beleaguered country's borrowing
costs soared to levels seen as unsustainable by investors.

Long-term Irish interest rates surged to their highest levels since
the launch of the single currency amid growing evidence that repeated bouts of budget austerity have failed to convince international investors that the former Celtic Tiger economy can cope with the banking crisis caused by a boom-and-bust in its housing market.

Attempts by Patrick Honohan, the central bank governor, to reassure
investors by stressing that the Irish government was already planning the tough fiscal measures that the IMF would insist upon backfired, and helped push yields on 10-year Irish bonds up 61 basis points to

"Putting Ireland and the IMF in the same sentence can trigger
palpitations in the credit markets," said Gavan Nolan, a credit
analyst at Markit. "Speculation that the Irish government and the IMF have already reached an agreement was doing the rounds."

Paper Dragon printing paper...

the risks here were fairly straightforward. China stuck between the proverbial rock and hard place, and the is caught in intertemporal public unrest management mode.

Chinese inflation sped to a 25-month high in October and bank lending blew past expectations, highlighting the challenge faced by Beijing as it battles to keep a lid on price pressures.

The data left little doubt about why the central bank raised reserve
requirements this week and pointed to further tightening steps, from
rate rises to yuan appreciation, in coming months.

Markets have already moved to factor in tighter policy with five-year Chinese government bond yields rising sharply in expectations of a rate rise before the end of 2010.

However, while world markets swooned in October on fears that Chinese tightening would dent demand, evidence of the economy’s continued strength and a belief inflation might drive investors to hard assets provided a lift to commodity prices globally.

Wednesday, November 10, 2010

And yet...

...given weak economies in the G20, this behavior is entirely rational from a political/order standpoint. China in particular is perfectly content to let the U.S. devalue given the dollar currency peg currently in place.

Alan Greenspan, former chairman of the U.S. Federal Reserve, said the U.S. is pursuing a policy of weakening the dollar that risks increasing trade protectionism when combined with China’s effort to suppress the renminbi.

“The suppression of the renminbi and the recent weakening of the dollar are, of necessity, producing firming exchange rates in the rest of the world,” Greenspan wrote in a column in the Financial Times today.

The ratio of global exports to gross domestic product, which recovered following the financial crisis, was again slowing in the third quarter, Greenspan said. Protectionism would accelerate that slump, he said.

Saturday, November 06, 2010

Must Read

A beautiful article on Monetary systems and QE as non-events.

Becker on U.S./U.K. policies...

...from the Becker-Posner Blog:

Of course, perhaps other factors, such as the uncertainty about the business environment that Congress and the President created through their rhetoric, and also through their actual and proposed legislation, offset powerful effects of the fiscal stimulus itself in reducing unemployment. The unpleasant fact we economists have to face is that there is not strong evidence on the actual effects of governmental spending on employment and GDP. The usual claimed effects are generally based on predictions from highly imperfect theoretical models of the economy rather than from strong direct and clear evidence on the employment consequences of different fiscal stimuli.

How many Trillions must be "spent" (QE, and QE2 do not fall within the purview of "deficit spending" in my opinion and are mere asset swaps of differing maturities) in this experiment before a decision is made as to the efficacy of the measures?

P.J. O'Rourke... of my favorite humorists/humanists/writers mentions some themes in an interview:

P.J.: I think it’s very, very difficult to roll this back. The only thing that will cause us to roll back the continued intrusion of the political system into our personal lives seems to occur during a financial crisis. Basically, that’s the lesson of Margaret Thatcher, it’s probably the lesson of Reagan; it’s definitely the lesson of France and Spain right now.

What happens is that as political systems expand infinitely, they run up against the laws of math. They can’t get enough money to fund all this crap. And in the process of attempting to get enough money to fund all this crap they put the brakes on society, they put the brakes on economic expansion, they put the brakes on prosperity, so you wind up with a situation like Europe, where you’ve got high nominal unemployment, but huge structural unemployment. People aren’t even looking for jobs, or they’re doing bogus job-like things. You get slow growth and bad opportunities for small businesses.

I’ve actually had people say to me, “P.J., quit being a reformist, this thing has actually got to get much worse before it’ll get better.”

Supply squeeze...

...for Treasuries? Very interesting. Likely just post election pandering and positioning, but still, the debt ceiling is generally something viewed as a squisky moveable target that has not been taken seriously as a constraint.

Republicans are planning to demand major spending cuts next year before they would agree to raise the amount of federal debt that can be issued, setting up a clash between the Obama administration and a Congress stocked with lawmakers who campaigned as deficit hawks.

The U.S. can't accrue debt above a certain ceiling set by lawmakers. In the most extreme scenario, the government would default on certain debts if the cap doesn't move.

Republican lawmakers, including South Carolina Sen. Jim DeMint, and congressional aides have said major spending cuts are the primary demand they will make going into the discussions over whether to raise the limit.

It isn't clear whether the White House would agree to significant cuts so quickly, though, and Obama administration officials could try to portray the GOP as playing political games with the country's ability to borrow.

The U.S. currently has $13.7 trillion of debt outstanding, just shy of the $14.3 trillion limit Congress set in February. Barring big changes in federal spending, taxes or the economy, the government is expected to hit the ceiling by May, and administration officials have already said it will have to be raised by then.

Wednesday, November 03, 2010

The Dogs of War...

A disturbing trend I have noted here is the gall of some economic pundits and commentators in their attempts to categorize war as a "beneficial" development for a developed economy on the wane.

Ignoring the obvious normative questions involved with such utterances, to state with any sanity that the long term costs of war are less than the benefits gained requires a MUCH more nuanced, neigh Omnipotent perspective on the "totals" in the accounting ledger.

To merely state that war is good because of GDP figures during increased manufacturing output for the engines of war is sophistry, nothing more.

So readers beware of pundits downplaying the costs of war, especially in light of the recent problems in, once again and for all eternity it seems, the mid-east.

Musical chairs...

...With Nippon's MOF conducting similar monetary spec-ops, who benefits and who experiences detriment?

On your marks! Set! PURCHASE!

The European Central Bank bought Irish government bonds today,
according to two traders with knowledge of the transactions.

The ECB purchased short-dated maturities, said the traders, who asked
for anonymity because the deals are confidential. A central bank
spokesman declined to comment when contacted by telephone in

Oh, we could purchase ONLY 500 Billion...

...But that is what they are expecting!

For a monetary operation that yields no net benefit to the real economy ( and indeed basically nets out new issuance), and was considered anathema to Fed officials a mere three years ago, this type of expectations gamesmanship seems amateurish.

Very risky times ahead.

Tuesday, November 02, 2010

The paper dragon is printing paper... I have stated here previously, the dangers of cost-push inflation in China is making Yuan appreciation impossible to accomplish. Control is slipping away.

Though inflation exists in China, rarely will an official warn the public to expect it to continue.

A member of the Chinese National Development and Reform Commission recently spoke anonymously to domestic media, saying that further interest rate increases will not control inflation so the public must simply be resigned to it, according to Deutsche Welle.

Subsequently, many media outlets, including China's state-run Xinhua News Agency, reported numerous responses from Internet users. The public decried the NDRC’s warning as illogical.

A continuous political signal, intent on stability and the suppression of discontent, is being sent: Endure the inflation because there is no way out.

As Markus Taube, director of East Asian Studies at the University of Duisburg-Essen, explained to Deutsche Welle, stability requires that inflation be controlled; had there been no inflation at the end of 1988, the bloodshed during 1989 might have been avoided.

Since then, the Chinese regime has been alert to the threat inflation poses to stability, and is now admitting openly that interest rates cannot stop rising prices. Some bloggers are actively suspecting a replay of the “Jin Yuanjuan” era (a currency that lasted only 10 months and depreciated more than 20,000 times its face value) during the late 1940s.

Taube says that the simplest way to relieve inflation is to allow the renminbi to appreciate, avoiding international currency speculation, encouraging investment into China, and increasing both the circulation of currency and the pressure on inflation.

But the consequence is that currency appreciation will seriously affect export costs and lead to a chain reaction from the public—something the Chinese regime would rather avoid.

Friday, October 29, 2010

QE accomplishes nothing.

QE accomplishes nothing. The markets are wrong regarding its power or efficacy in achieving the goals the Fed thinks are within reach with simple asset swaps of differing maturities.

U.S. stocks may gain 10 percent should the Federal Reserve announce a program of asset purchases known as quantitative easing, and emerging-market shares will keep rising, according to hedge-fund manager Barton Biggs.

“The conventional wisdom is the markets are going to probably sell off,” Biggs, managing partner of New York-based Traxis Partners LLC, said in an interview today with Betty Liu on Bloomberg Television’s “In the Loop.” Investors may in fact get a “surprise” with “another 10 percent rally.”

The problem...

...with politically controlled (or governmental equity) is eloquently phrased by the head of the St. Louis Fed in as part of these remarks concerning the Systemic risk containment.

One of the most difficult features of systemic-risk identification is that the risk build-up occurs during relatively good economic times. It is more than an uphill battle to convince financial markets, policymakers, and the general public to adopt what may be unpopular, restrictive measures when all seems to be well. For example, the GSEs—Fannie Mae and Freddie Mac—repeatedly claimed that their risk-management systems were modern and sophisticated, more than enough to protect their shareholders and U.S. taxpayers from economic disaster. They were completely wrong. When policymakers, such as my predecessor Bill Poole, warned about the risks the GSEs were taking, only a few were willing to recommend that action be taken to protect the economy from the potential catastrophe. The FSOC will face similar problems. Can the interagency Council come to an agreement on a specific risk and an associated policy action when times are good?


From an article in the FT. My comments are italicized.

Capital controls are not a new policy measure, of course. Instead, they were used universally by members of the Organisation for Economic Co-operation and Development (with the exception of the US) and across the developing world after the second world war, and only fell out of favour with the shift toward neo-liberalism in the 1970s. Some of the capital controls of this period were downright draconian in contrast with current practice. Indeed, in South Korea, investors were required until the 1980s to secure government permission for holding foreign currency or exporting capital.

This of course depends on what your goals are, and this is a very selective use of history to justify the premise. Notice the U.S. did not practice this policy, as the people are ostensibly in control of the republic via the self correcting mechanism of free elections.

What was forgotten during the neo-liberal era is that many of these explicitly “anti-market” measures helped to promote rapid economic development by increasing financial stability. This is not to say that all controls were successful or that all measures taken to enforce them were appropriate. But that should not distract us from acknowledging their tremendous contributions to unprecedented economic growth and stability during the period.

Cart before the horse. Most of the countries in question did not have much capital to export, and the controls were simply political controls emplaced to prevent the flight of the wealthy few. Stability is the trade-off for freedom of movement and capital. Poltical risk will always and everywhere be a risk in such environments.

Those of us who have long advocated systematic financial reform look at current developments with excitement. Countries need the latitude to impose capital controls that meet their particular needs, and it is a relief to see that they are finally getting it after a long period of debilitating neoliberal ideology.

"Debilitating" in the sense that increased indvidual freedom is antithetical to monolithic governmental authority? This is, like most economic questions, about trade-offs. Who benefits, and who experiences detriment. This commentary leaves ramifications on individual freedom conspicuously absent, and simply assumes that the "good of the country" can be accurately defined, calibrated, and executed by govenmental edict.

Yet periods of transformation are also potentially dangerous, as countries search individually for solutions to problems of unemployment and insecurity that require collective action. There is therefore a pressing need today for a new international financial architecture that at once promotes national policy autonomy while ensuring that diverse national strategies cohere into mutually beneficial co-ordination. Let us hope that leaders of the Group of 20 economies begin a conversation along these lines at its upcoming meetings in Seoul, and then reach out to the developing world more broadly in a process of building a new international financial framework.

Yes, the solution to the current imbroglio is more collective action, more centralized decision making, and a more cohesive international financial architecture. Shumpeter described the process of creative destruction, but here the author has no self-correcting mechanism, steeped in human behavior, that would lend credibility to his belief that cooperation between governments in levying capital controls in an organized manner would engineer the outcomes desired.

IMF: currency forecaster

What "fundamentals" does the IMF think control the values of currency pairs?

The International Monetary Fund says the US dollar is overvalued on
currency markets, while the euro, yen and pound were in line with

"The real effective exchange rates of Japan, the euro area, and the UK all appear broadly in line with medium-term fundamentals, while the US dollar is on the strong side of fundamentals," the IMF said in a report to the Group of 20 economic powers on Thursday.

The IMF noted recent government interventions in the foreign-exchange market had contributed to the imbalance, which has sparked fears of "currency wars" to protect exports amid the global economic recovery.

"While advanced economies have generally avoided intervening in
currency markets, some have intervened more recently to limit rapid
appreciations, contributing to the abovementioned tension on this

The IMF reiterated its view that China's currency, the yuan, remained "substantially undervalued".

The IMF prepared the report for a G20 meeting of financial ministers
and central bank governors in South Korea on October 22-23, in
preparation for a G20 summit in mid-November.

Monday, October 25, 2010

Credibility...part II

Mishkin backing the Fed and its ability to guard against inflation and inflation expectations (expectations being the more important indicator for the Fed these days).

By establishing an inflation objective at this juncture the Fed can guard against both of these problems. Providing a firm anchor for long-run inflation expectations would make the threat of deflation less likely.
But a firm anchor would also give the Fed flexibility to respond to the weakness of the economy – because it would help ensure that any new moves to quantitative easing would not be misinterpreted as
signalling a shift in the central bank’s long-run inflation goal, making an upward surge in inflation expectations less likely too.

So the Fed will not abandon anchors in the future, and has never done such things in the past...this bespeaks to a credibility problem for Mr. Mishkin, one that is detailed in the new movie "Inside job" (you can see a clip with Mr. Mishkin here).

Not exactly the ringing endorsement Bernanke was hoping for.

Sunday, October 24, 2010


How long have we heard this and similar announcements?

Treasury Secretary Timothy F. Geithner expects China will allow the yuan to strengthen because officials there understand it’s in the interest both of domestic growth and global economic stability.

“They recognize it’s important to the world,” Geithner said in an interview on Oct. 23 with Bloomberg Television, after a meeting of finance ministers and central bankers in Gyeongju, South Korea. As China’s currency stance affects more countries, “China recognizes that, and I think we’re going to see them continue to move.”

Friday, October 22, 2010

Alarmist... ads depicting the U.S. as some sort of debtor nation owning its future production to creditor nations is nonsense, and exhibits a misunderstanding of the mechanics of modern fiat non-convertible currencies. The hyper-linked ad above is a good example of this. The Chinese do not "own" us. They hold Treasuries in an account at the Fed. These accounts gain regular coupon payments and a final payment of principal at maturity. This is all done through spreadsheet accounts at the Fed. They do NOT own future production, nor can they indenture us all into perpetual servitude.

If anything, the reverse is true. We have the goods the Chinese have produced. They have electronic accounts. Who has "won" in this arrangement? And, given your knowledge of the stability of Communist regimes, who is more likely to be gloating over the decline of a nation in 2030?

Thursday, October 21, 2010

Full employment...

...and price stability.

The dual mandate of the Fed has been oft-criticized for its "having its cake and eating it too" panglossian view.

The largest problem in my view is the time lags between the two mandates. Price stability is largely a mechanical problem that involves policy instruments entirely different from the more politically charged issue of full employment.

We are observing in real time the ramifications of these parallel lines.

The answer... the question "Why aren't the banks lending" was always going to be something like this.

Shoddy mortgage lending has led bankers into a two-front war, pitting them against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion.

While federal regulators and state attorneys general have focused on flawed foreclosures, a bigger threat may be the cost to buy back faulty loans that banks bundled into securities. JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. have set aside just $10 billion in reserves to cover future buybacks. Bank of America alone said this week that pending claims jumped 71 percent from a year ago to $12.9 billion of loans.

The Glue...

...that holds the world together is still the U.S. dollar, despite the various calls of foreign "creditors" growing wary of "supporting" U.S. assets.

Reality, as evidenced by the above graph, tells a much different story.

Wednesday, October 20, 2010

From the U.S. CRS...

...some comments on the failed state to our south.

Remittance inflows, which are largely from the United States, are Mexico's second-highest source of foreign currency after oil. Numerous analysts have noted that Mexico's potential to promote economic growth, increase productivity, and lower the poverty rate is very limited without implementing substantial structural reforms. President Calderón has proposed a number of reforms to address these challenges, including proposals to eliminate extreme poverty, overhaul public finances, privatize parts of the state oil company, adopt labor reforms, reform the telecommunications sector, and encourage political reforms. Most of these proposals, however, have deeply rooted political implications and have been strongly opposed by the major political parties in the Mexican Congress. There are some signs that the population may be pushing for change, but the prospects for passing any of the proposals will likely depend on the outcome of the 2012 presidential elections.

In my view, an impossible list.

That cracking sound... are hearing from the middle kingdom not your imagination.

14 cities put caps on purchases for residents and on housing loans

GUANGZHOU - Property sales have seen a sharp drop and there's been an increase in the number of cancellations of home orders in Chinese cities that have introduced regulations to limit purchases of property. [Property tycoons suffer decline in their wealth]

Dalian, in Liaoning province, is the latest to join in this move to control the rampant property market. On Tuesday, it suspended second-home purchases for families who are residents, while denying new home loans for migrant families who have not worked in the city for at least one year, said a local official.

At the same time, the amount of deposits for first and second home purchases has been raised.

Thirteen other cities now have similar loan caps and higher down payment to cool down the overheated property market.

In Guangzhou, only 308 apartments were traded online, on Monday, according to the Land Resources and House Management Bureau. This represented a big decrease for a single day.

And the average price was 8,600 yuan ($1,320) a square meter, the first time the price has dropped below 9,000 yuan a square meter in two years.

"The government will stop unreasonable home demand and limit speculation in the property market," housing management bureau officials have explained.

The city's new rules now require buyers to have a household registration, or hukou, and a marriage certificate to purchase an apartment.

Cheng Yun, of Guangdong Centraline Property Co Ltd, said most would-be property buyers have adopted a wait-and-see attitude. Cheng estimated that property prices in Guangzhou will fall at least 10 percent over the next few months.

The restrictions apply to both new and second-hand homes and those below the age of 18 cannot purchase a home by themselves.

Local property agents say that some people who had made a deposit on an apartment have begun to break the agreement because they're worried that prices will fall after the new limits take effect.

Tuesday, October 19, 2010

Cometh the hour...

Cometh the man...let us hope a leadership transition is imminent.

To this day commentators on the right and left attribute the arrest of inflation to the Volcker Fed’s austerity, but the greater truth is that the dollar is a political concept more than anything, and with markets well ahead of polls in terms of pricing in a Reagan victory, the dollar started to correct upward as it became apparent that a politician who understood the importance of a strong dollar would be elected the following November.

In concert with the dollar’s rise, other pro-growth policy changes started to heal an economy that establishment thinkers had left for dead. The old “new normal” was quickly discredited as a better policy mix bolstered the desires of the ambitious to produce.

On the regulation front, rules meant to block the natural evolution of commerce began to be rolled back during the Carter years, and continued under Reagan. This was essential in that far from stabilizing economic activity, regulations inhibit natural growth as businesses must become expert on dealing with rules, as opposed to growing the business itself.

In terms of income tax rates, we began the 1980s with a top tax rate of 70%, but by 1986 Reagan helped push the top rate down to 28%. Government spending is simply another form of taxation, and while Reagan never achieved the cuts he desired, spending as a percentage of the economy’s actual size declined.

Monday, October 18, 2010

Keynsian QE enthusiasts...

...Should reflect on this quote from the Bloomsbury man himself:

"We ar faced at every turn with the problems of Organic Unity, of Discreteness,
Of Discontinuity-the whole is not equal to the sum of the parts, comparisons of
Quantities fail us, small changes produce large effects, and the assumptions of
A uniform and homogenous continuum are not satisfied"

Sunday, October 17, 2010

Trichet finds the cool-aid delicious...

The Euro version of QE is even more ineffective than those manifestations from SCI's

Oct. 17 (Bloomberg) -- European Central Bank President Jean-Claude Trichet rebuffed Bundesbank President Axel Weber’s call to terminate the bond purchase program, saying the “overwhelming majority” of the bank’s 22-member Governing Council still backs the buys.

Asked in an interview with Italian newspaper La Stampa whether the program didn’t work and should be scrapped, he responded: “No! This is not the position of the Governing Council, with an overwhelming majority.”

Weber, who also sits on the ECB’s decision-making council, said on Oct. 13 that the bond-purchase program should be stopped. The remarks, the strongest from any ECB official advocating a removal of stimulus, came as governments and banks in Ireland, Portugal and Greece struggle to convince investors they can fix their budgets and balance sheets in the aftermath of this year’s sovereign debt crisis.

Saturday, October 16, 2010

Importing labor controls...

...the Paper Dragon way:

LUSAKA (AFP) – Managers at a Chinese-run Collum Coal Mine in Zambia shot and wounded 12 miners who were protesting against poor working conditions, police said on Saturday.

"The workers were protesting against the poor working conditions when managers using shotguns started to shoot aimlessly, not in the air, thereby wounding 12 workers," police spokesman Ndandula Siamana told AFP.

Before the Friday incident in the southern town of Sinazongwe, workers had constantly been complaining about poor working conditions at the mine.

Siamana said police were investigating the incident and no charges had been brought against the managers.

"It's possible that the managers feared that they might be attacked but we shall ensure that the culprits are brought to book," Siamana said.

The 12 workers are currently being treated at a local hospital for various gunshot wounds

What is obvious to some... a "dawning realization" to others.

“I believe the U.S. economy is best described as being in a bona fide liquidity trap,” Evans said to the Boston Fed’s 55th Economic Conference. “This belief is not a new development for me; instead it is a dawning realization.” In a liquidity trap, additions to the money supply fail to stimulate the economy.

Easing Steps

The bank president’s comments are among the strongest of any Fed official in favor of additional easing steps. With projections for unemployment to be at 8 percent and for inflation excluding food and energy to be at 1 percent by the end of 2012, “the Fed’s dual mandate misses are too large to shrug off,” Evans said.

He gave his support to a target for the path of the price level over a “reasonable period of time” that is communicated “regularly and often” to the public. Such a policy could complement large-scale asset purchases and a change to the Federal Open Market Committee’s statement to include a pledge to keep rates near zero for longer than “an extended period.”

Targeting a path for the price level would help the Fed push inflation higher “for a time,” Evans said. The central bank would need to state the terms for exiting the policy, he said.

“I’ll admit that my views on this are evolving,” Evans said in response to audience questions. “I think it could be conveyed credibly but there’s a lot of work to establish that and think through what the operational characteristics of this would be.”

R.I.P. Benoit Mandelbrot

Oh yes, he had many "character flaws", but don't we all? He was on the bleeding edge of financial research, and was one of the first to wade out into the ever-changing ocean of the markets and at least attempt to systemitize and conquer its fathoms. Anyone who gives us pause to look at the world in a different manner earns my admiration. He fit this criteria.

NYT eulogy.

Friday, October 15, 2010

Speaking of partial derivatives...

...and piling off my last post regarding that infernal phrase "all else being equal", Bernanke now chimes in about what is presumably the "official" stance the Fed assigns to the current imbroglio. It is most unfortunate that he is, was, and will continue to be wrong about the effects of assets swaps in the manifestation of QE bond purchases and its REAL effects on the REAL economy.

Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.

“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in the text of remarks given at a Boston Fed conference. He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”

He didn’t offer new details on how the Fed would undertake those strategies or give assurances the central bank will act at its Nov. 2-3 meeting.

Rays of hope... the Failed State. Private action has a much greater probability of making gains in peace and stability than a government that is basically in a state of industrial capture ("industry" of course being the illicit trade in drugs, an activity that gains its massive margins from the arbitrary decision by its major customer to make most narcotics "illegal".)

Every morning at 7 a.m., Mr. Treviño, high-ranking officers from the army and marines, plus officials from the federal police and attorney general's office, meet with a different municipality to discuss security and improve coordination.

"We realized when we arrived that there was no coordination between different levels of government," he says.

Among the problems: the state's different police forces all use different radio frequencies. They also have different emergency telephone numbers for citizens.

"This is like a merger and acquisition. We are doing the due diligence, and then we're going to proceed with the post-merger integration of all levels of government," says Mr. Treviño.

Another former Cemex employee involved in the drug war is Jorge Tello. A former head of Mexico's national intelligence agency as well as one of the chief architects of Mr. Calderon's anti-drug strategy, Mr. Tello is in charge of bolstering coordination between federal and state forces, particularly in the state of Nuevo Leon along the Texas border.

Mr. Tello didn't respond to requests for an interview.

Current Cemex employees are also getting involved. Mauricio Doehner, a young executive, now spends much of his time trying to revive a civic organization called Ccinlac, which brings together groups ranging from big business to local parent-teacher associations. In the mid-1970s, the organization was a powerful voice of civil society, but it has since faded into obscurity.


...Mr. Grant enjoys a very good reputation among just about everyone. However, I think the assumptions from which he builds his excellent logical structures are flawed.

Holders of U.S. Treasuries are not "creditors" in any common-sense use of that term. They have a right to an electronic transfer of numbers from the their accounts at the Treasury...nothing more. Complicating matters is what would happen if these holders sold, say, all of their Treasuries and the effect on their own domestic currencies. Once again, I remind you all that in the world of economics, there never, EVER, is a state of reality that "holds all other things equal".

Jim Grant: The World Is Abandoning the US Dollar
Thursday, 14 Oct 2010 01:01 PM Article Font Size
By: Forrest Jones

The United States has piled on so much debt that world is going to abandon the dollar, says Jim Grant, founder and editor of "Grant’s Interest Rate Observer."

“By the numbers, we are more encumbered now than we have ever collectively been,” Grant tells the Business Insider.

The United States debt has soared to the point where people can expect to see the dollar get the same reaction as in the 1970s, Grant tells the Business Insider. He said that European hoteliers in the Carter years would ask American tourists if they could pay in anything but greenbacks.

“The world has expressed preference for currencies not called the dollar. It’s happened,” he told the Business Insider.

Economists often grab headlines disagreeing with one another about the fate of the U.S. economy, with some experts such as Paul Krugman arguing for more stimulus to kick-start a recovery while others, such as Niall Ferguson, arguing debt is already out of hand.

For Grant, nobody knows what is going to happen.

“My perspective is that people in this business may be experts on up to what has happened up until this minute, but we and the cab driver are all equally ignorant about what will happen,” he says.

“Nobody knows anything.”

The only thing for sure is that the world will avoid the dollar.

If the world continues to invest in dollars given U.S. debt levels, cash injections and low interest rates, “they would be an unusual set of creditors.”

The dollar has fallen recently, including hitting a 15-year low against the yen after sluggish unemployment figures increased expectations that the government will inject cash into the economy, which weakens the currency.

Thursday, October 14, 2010

Facepalm... light of the previous post regarding the St. Louis Fed and its short research paper, we know get Rosengren spouting this:

“What additional quantitative easing would potentially do
is bring down the unemployment rate faster than it otherwise
would come down,” Rosengren said in a television interview with
CNBC today.

No bubble...

...nope, none at all. Bet the farm on Gold!

Fissures at the Fed?

I am astounded this paper was allowed to be published...not so much because its conclusion happens to be true, but that it dares to disagree with much of current economic canon belief. Is a truth-seeking compass finally percolating within the institutional structure of the Fed? I doubt it, but this is a very welcome development.

...reducing interest rates modestly from their already historically low levels is unlikely to stimulate aggregate demand: Little effect on aggregate demand implies a corresponding small effect on output
and, hence, employment.

Friday, October 08, 2010

The "Maestro"...

...stating the benefits of what amounts to the policy making equivalent of "Do as I say, Not as I Do". I applaud his resilience in the face of his irrelevence, but this advice would be disasterous for the country.

Former Federal Reserve Chairman Alan Greenspan said the U.S. fiscal deficit is “scary” and the federal government needs to cut spending on entitlements.

“We’re involved in a dangerous game,” Greenspan said yesterday at a foreign-exchange conference in New York sponsored by Bloomberg LP, the parent of Bloomberg News. “We’re increasing the debt held by the public at a pace that is closing” the gap between our debt and “any measure of borrowing capacity,” Greenspan said. “That cushion is growing very narrow.”

U.S. companies may be holding back on investment because of the rising federal deficit, which causes uncertainty about future tax policies, Greenspan said in an opinion article for the Financial Times this week. Weak investment by businesses in capital equipment and fixed assets has helped to crimp the U.S. economic recovery, he said.

“You need” austerity, said Greenspan, a paid speaker at the event. “We’re going to have to start to cut” from government entitlement programs, he said, adding that reducing the budget is better than raising taxes in closing the U.S. budget deficit. Still, Greenspan reiterated that he supports allowing tax cuts enacted under President George W. Bush to lapse at the end of 2010.

MBS, CLO, CDO, etc.

What a mess. It is truly astounding what can happen when revenues go geometric, and the more complicated the structuring instrument, the more potential for error and worse...which also applies to legislation.

In light of the Unemployment report...

...from this morning showing that, in terms of employment, governmental policy has failed miserably...

"TO ME our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in certainty, whether historical inevitability, grand diplomatic designs, or extreme views on economic policy. When developing policy with wide effects for an individual society, caution is needed because we cannot predict the consequences"
-Kenneth Arrow

In a report that Jared Bernstein and I issued during the transition, we estimated that by the end of 2010, a stimulus package like the Recovery Act would raise real GDP by about 3 1⁄2 percent and employment by about 31⁄2 million jobs, relative to what otherwise would have occurred. As the Council of Economic Advisers has documented in a series of reports to Congress, there is widespread agreement that the Act is broadly on track to meet these milestones…. What the (Recovery) Act hasn’t done is prevent unemployment from going above 8 percent, something else that Jared and I projected it would do. The reason that prediction was so far off is implicit in much of what I have been saying this afternoon. An estimate of what the economy will look like if a policy is adopted contains two components: a forecast of what would happen in the absence of the policy, and an estimate of the effect of the policy. As I’ve described, our estimates of the impact of the Recovery Act have proven quite accurate. But we, like virtually every other forecaster, failed to anticipate just how violent the recession would be in the absence of policy, and the degree to which the usual relationship between GDP and unemployment would break down
Christina Romer

Of course the markets have cheered this news as it spells inevitability for QE2, which comes as no surprise to readers here. However, to the extent that the market believes QE2 will be effective, it is wrong.

Throwing more and more money at the problem will only achieve similar results. This explains my allusions the the Khyber pass and the charge of the Light Brigade. The Fed and the Economic establishment is, once again, mistaken in its belief that asset swaps will stimulate the economy, and I once again sound my clarion call for the only effective measure of stimulus to create ORGANIC growth in aggregate demand; Tax Cuts.

It is a tragedy that so many lives are effected by policymakers whose first calculus when contemplating policy is the retainment and expansion of power. I am starting to think this is by design rather than ignorance or good intentions.

Thursday, October 07, 2010

What could possibly go wrong?

Gold will go up forever becuase of government profligacy and mismanagement, right? No less an authority than VIETNAM holds a sanguine view toward the metal.

Miner gives gold bulls the green light
By Jack Farchy and Javier Blas in London and Ben Bland in Hanoi

Published: October 7 2010 15:03 | Last updated: October 7 2010 15:03

Gold prices hit a fresh all-time high as AngloGold Ashanti, the world’s third biggest gold miner, said on Thursday it had wound up its hedge book months ahead of its original plan, sending a bullish signal to the market.

Earlier on Thursday, the Vietnamese central bank said it would consider lifting an effective ban on gold imports that has been in place since May 2008 – another positive sign for prices, since Vietnam is traditionally one of Asia’s largest gold consumers.

AngloGold announced last month that it would raise nearly $1.4bn in new capital in order to close its hedge book by early 2011, joining Barrick Gold, the world’s top gold miner, in putting an end to the legacy of forward sales which pre-dates the boom in gold prices.

Traders said AngloGold had been active in the market buying back its hedges in recent days, even as prices rose to successive nominal highs. Indeed, they pointed to the miner's buying as one of the factors driving prices, which have risen 3.5 per cent this week.


...Ireland and Portugal "in play", further stressing the ability of the EU system to function as normal. This talk of restoring "confidence" as some recursive panacea that will repair the underlying disfunctions and imbalances resulting from the previous decades credit binge is folly.

Tuesday, October 05, 2010

Stampede mode initiated...

...when Au is sub 700 within a year, yet more ephemeral causal inferences will be dusted off and plied for explanatory traction.

There will also be attendant outrage at what will be the obvious difference between owning physical gold and owning a financial claim to a trust or security deriving its value from traded gold prices.

Gold climbed to a record in New York as the dollar extended its decline, boosting demand for precious metals as alternative assets. Silver advanced to a 30-year high.

Gold reached $1,333.80 an ounce as the dollar dropped as much as 0.7 percent against a basket of six currencies. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. central bank may buy more debt to help the economy. The Bank of Japan today pledged to keep its benchmark interest rate at “virtually zero.” Since Sept. 14, gold has risen to a record 12 times.

“When governments are in the business of printing money, gold is going to do well,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “More quantitative easing is inevitable at this point for the U.S. The dollar is going to suffer, and gold is going to take out records along the way.”

Gold futures for December delivery rose $16.10, or 1.2 percent, to $1,332.90 at 9:29 a.m. on the Comex in New York. Before today, gold had gained 20 percent this year.

In London, gold for immediate delivery is up 21 percent this year and headed for a 10th consecutive annual gain, the longest winning streak since at least 1920. Bullion has outperformed global equities, Treasuries and many industrial metals, prompting record investment in gold-backed exchange- traded products.

Thursday, September 30, 2010

Quarterly Economic figures...

...Productivity and Gross Domestic Purchases being the notables in the latest Data from the U.S. Treasury.

Not for sovereigns...

From this article in Reuters.

"You can find a quick fix -- borrow some money and make this structural problem even worse, and then the next government comes in and you will have a debt crisis... there could be short-sightedness in borrowing," she said.

The principles will guide both borrowers and lenders, as a loan is a two-way contract and those providing the money must do their due diligence to ensure it can be paid and used correctly.

Who provides "money" to whom when sovereigns are concerned and covertibility to a commodity is not an issue? This conceptualization is misguided as sovereign states do not need to "get" money in order to spend the currency they themselves issue.

Iceland's president, Olafur Ragnar Grimsson, discussed his country's debt crisis at the Xiamen meeting and said that principles to avoid reckless lending and borrowing should be encouraged, UNCTAD said.

The project, funded in part by the Norwegian government, aims to create rules to prevent irresponsible lending to states and enable courts to test the legitimacy of debt when disputes arise.

It is realistic to finish revising the principles next year even though a lot of technical work remains to be done, and not all governments and institutions fully understand the detail of what has been proposed so far, Li said.

Pot. Kettle. Black.

Interesting opinion regarding release of information and calls of transparancy...

The International Monetary Fund criticized Wednesday the abuse of sovereign debt ratings, warning that credit rating agencies may wield undue influence with investors.

"Sovereigns should do more to provide relevant and timely information to CRAs (credit rating agencies) and other market participants to enable them to conduct their own independent credit analysis," the IMF said in a synopsis of a report entitled "The Uses and Abuses of Sovereign Credit Ratings."

The report, a chapter in the biannual Global Financial Stability Report due to be released in full next week, examines the roles of the top three CRAs: Fitch, Moody's and Standard & Poor's.

A key focus of the study was to determine whether they rate sovereign debt accurately.

The problem was a key factor in the Greek debt crisis earlier in the year, as agency downgrades helped to accelerate the country's descent to the brink of default.

Once a credit rating is lowered to a certain level -- "Ba1" and less for Moody's, "BB+" and less at rival S&P, for instance -- certain investors are required to sell a bond deemed "speculative," which automatically lowers its value.

Wednesday, September 29, 2010

Currency wars...

...a continuing series. This in light of China's "commitment" for "flexible" exchange rates.

(From FT's Alphaville)

Within a single week 25 nations have deliberately slashed the values
of their currencies. Nothing quite comparable with this has ever
happened before in the history of the world. This world monetary
earthquake will carry many lessons.

Henry Hazlitt 1948 wrote this in a book “From Bretton Woods to World
Inflation”, which predicted the inevitable collapse of this fixed
exchange rate mechanism. It was a compilation of his editorials from
both his time at the New York Times and Newsweek, which ridiculed the
prevailing economic Keynesian thinking to great effect. A brilliant
journalist, economists and liberal philosopher, this man intuitively
understood the pernicious nature of the Bretton Woods fixed exchange
rate arranged in 1944.

Which made us wonder, just how many countries have engaged in
interventionist currency policy in the last year alone?

Here, for a start, is our preliminary and very non-exhaustive list (in
which we count de facto intervention, suspected intervention and talk
of intervention — and include talk of quantitative easing among the

•Federal Reserve $ Dollar – via QE.
•Bank of England £ sterling – via QE.
•Japanese yen intervention.
•Taiwan dollar – suspected intervention.
•Argentinian peso intervention.
•Brazil real intervention fears.
•Russian ruble intervention.
•Australian dollar RBA intervention.
•SNB Swiss franc intervention.
•Poland’s NBP zloty intervention.
•Colombia’s peso intervention.
•Indonesian rupiah intervention.
•South Korean won intervention.
•Thai baht intervention fears.
•Ukrainian hryvnia intervention.
•Israeli shekel intervention.
•Chilean peso intervention fears.
•And Turkey has adjusted its reserve requirements in order to weaken the lira.

And also:

•Peruvian sol intervention.
•Phillipines peso suspected intervention.
•Romanian leu intervention.

Tuesday, September 28, 2010

Trial baloons... a hot-air baloon convention in Fed Land...

First, the set up and "intellectual justification" from the San Francisco branch of the Fed:
"Conventional wisdom holds that severe recessions are typically followed by rapid recoveries. But more than a year after the end of the most severe recession since 1947, the recovery is proceeding at a tepid pace. This is happening despite massive federal fiscal stimulus and extremely low interest rates. Forecasts derived from the Chicago and Philadelphia Fed business cycle indicators predict that real GDP growth through the first half of 2011 will remain at or below potential. When translated into a forecast for the labor market, our analysis suggests that the unemployment rate could rise anywhere from 0 to 0.5 percentage point during this period.

A sluggish recovery should perhaps be expected. The recent recession was preceded by a decade-long consumption and housing boom financed by an unsustainable run-up in household debt relative to income (see Lansing 2005). Current efforts to stimulate consumer spending with low interest rates may be less effective than in the past because households remain overleveraged (see Glick and Lansing 2009). In a comprehensive historical review of periods leading up to financial crises and their aftermath, Reinhart and Reinhart (2010) find that episodes of prosperity that are fueled by easy credit and rising debt are typically followed by lengthy periods of deleveraging characterized by subdued growth in GDP and employment.

David Lang is a research associate at the Federal Reserve Bank of San Francisco."

...then pinging the community about the execution of QE:

INSTEAD OF SHOCK AND AWE, is the Federal Reserve preparing surgical strikes to spur the economy?

An article on the Wall Street Journal's Web site late Monday afternoon said the Fed was considering a smaller, open-ended plan to buy Treasury securities, in contrast to the massive, $1.7 trillion securities purchase the central bank undertook beginning in March 2009.

But instead of the Fed setting an amount of securities it would buy, the story by Jon Hilsenrath said the central bank was studying announcing purchases in smaller increments and conditioned on the state of the economy.

It should be recalled that Hilsenrath broke the story during the summer that the Fed would consider replacing maturing mortgage-backed securities rather than letting them run off. As it happened, that approach was approved at the Aug. 10 meeting of the Federal Open Market Committee in order to prevent a passive tightening of monetary policy.

At last week's meeting, the FOMC pointedly said that inflation is currently "somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability." As a result, the panel added "it is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate."

That statement was widely inferred by market participants that the Fed could take further steps toward "quantitative easing"—the academic term for central bank securities purchases—at the next FOMC meeting on Nov. 2-3 (conveniently concluding the day after Election Day.)

A small-scale approach to purchasing, say, $100 billion or less per month, might bridge disagreements on the FOMC, some of whose members are reluctant to commit to a large-scale QE2 (as a second phase of quantitative easing is being dubbed) at this time.