Wednesday, February 24, 2010

If you say so...

...a nice P.R. move that convinces no-one.

Feb. 24 (Bloomberg) -- A year after a widening budget gap made Mexico a laggard in emerging markets, the nation has “solid” finances that shield it from growing investor concern about countries’ ability to service debt, said Deputy Finance Minister Alejandro Werner.

Mexico “frontloaded” budget cuts and tax increases last year while other countries buoyed spending to pull their economies out of recession, Werner said. Mexico’s fiscal measures, aimed in part at limiting credit-rating downgrades, have its markets “behaving correctly” as other governments slip into a “world of sovereign stress,” he said.

“Under this international environment of fiscal laxity and fiscal doubts, our fiscal stance is very solid,” Werner said in an interview at Bloomberg headquarters in New York yesterday. “Looking at what’s going on in Europe today, it looks like a good move.”

Around and around we go...

The symbiotes continue to dislike one another, but the U.S. still has the upper hand. Cheap labor pools to ship inexpensive goods can be found on other continents.

Feb. 24 (Bloomberg) -- The Obama administration imposed preliminary duties averaging 12 percent on $382 million of steel pipe imports from China after companies including U.S. Steel Corp. complained of unfair subsidies.

Pipemakers are being subsidized by the Chinese government, the U.S. Commerce Department said in an e-mailed statement today. The tariffs are on pipes used in chemical, petrochemical and refinery plants, the department said.

U.S. Steel, the second-largest U.S. steelmaker, has been seeking dumping duties of 60 percent or more on Chinese steel pipe, and subsidy duties of 15 percent to 30 percent. Pittsburgh- based U.S. Steel was joined in the petition by the U.S. subsidiary of France’s Vallourec SA, the world’s second-largest maker of steel tubes for oil and gas production.

The U.S. imposed tariffs last year on $2.7 billion of a different type of steel pipe used in oil wells, the largest countervailing duty case filed against Chinese imports.

The Fed.

The monetary channel was broken on the downside, and will remain broken on the upside pressure in rates. Long rates will not move to the extent the Fed thinks they will, which is precisely what happened the last time the Fed began a similar upward march.

Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures. Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time.2

Most importantly, in October 2008 the Congress gave statutory authority to the Federal Reserve to pay interest on banks' holdings of reserve balances at Federal Reserve Banks. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.

The Federal Reserve has also been developing a number of additional tools to reduce the large quantity of reserves held by the banking system, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate paid on reserves and other short-term interest rates. Notably, our operational capacity for conducting reverse repurchase agreements, a tool that the Federal Reserve has historically used to absorb reserves from the banking system, is being expanded so that such transactions can be used to absorb large quantities of reserves. The Federal Reserve is also currently refining plans for a term deposit facility that could convert a portion of depository institutions' holdings of reserve balances into deposits that are less liquid and could not be used to meet reserve requirements. In addition, the FOMC has the option of redeeming or selling securities as a means of reducing outstanding bank reserves and applying monetary restraint. Of course, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments. I provided more discussion of these options and possible sequencing in a recent testimony.

Sensing a power vacuum...

...organized spirituality appeals for balance from what it terms a secular government.

"Despite a world abuzz with religious fervor," the task force says, "the U.S. government has been slow to respond effectively to situations where religion plays a global role." Those include the growing influence of Pentecostalism in Latin America, evangelical Christianity in Africa and religious minorities in the Far East.

U.S. officials have made efforts to address the God gap, especially in dealings with Islamic nations and groups. The CIA established an office of political Islam in the mid-1980s. Congress passed the International Religious Freedom Act in 1998 to make religious freedom a U.S. foreign policy priority. During the second Bush administration, the Defense Department rewrote the Army's counterinsurgency manual to take account of cultural factors, including religion.

The Obama administration has stepped up the government's outreach to a wider range of religious groups and individuals overseas, trying to connect with people beyond governments, said a senior administration official who spoke on the condition of anonymity.

The effort, he said, is more deliberate than in the past: "This issue has senior-level attention."

Begging for relevence...

A apecies facing the prospect of extinction lashes out at...everything.

WASHINGTON, Feb 23 (Reuters) - U.S. securities regulators are considering new short-sale restrictions with no exemptions for market makers, people familiar with the regulators' plans said on Tuesday.

The Securities and Exchange Commission is due to meet on Wednesday to vote on rules that would restrict short-selling in a company's stock if that stock fell by more than a certain percentage, such as 10 percent, the sources said.

The SEC is considering allowing legitimate hedging during the short-sale curb but no general exemption for market makers, the sources said.

The SEC was not immediately available for comment.

Short-sellers bet on a stock's decline. In a short-sale, an investor borrows stock and sells it in the hope that its price will drop. When it does, the seller profits by buying back the stock at the lower price and returning the borrowed shares.

Landing gear down...

Trying to land in stormy conditions requires a pilot with steely nerves and great experience. What's the probability the Chinese land perfectly here?

HONG KONG — China’s banking regulator has told commercial lenders to restrict new lending to the financing arms of local governments, a measure designed to pre-empt potential overheating in the country’s booming economy.

Hong Kong, meanwhile, announced plans to increase taxes on luxury-home purchases, an effort to cool red-hot property markets.

A flood of lending by China’s state-owned banks, combined with a giant government spending program, helped mainland China stave off the worst of the global economic crisis and expand its gross domestic product by 8.7 percent last year.

The credit binge had the side effect, however, of setting off a surge in property prices, as much of the readily available cash flowed into the stock markets and property. Land prices in mainland China, for example, doubled in 2009 on a nationwide basis, according to economists at Standard Chartered in Shanghai.

That has brought worries about a property bubble and concerns that some of the loans might ultimately go sour.

Economists are also increasingly worried that the overall economy may be overheating.

Charlie Munger...

...On the differences between "basicland" and "sorrowland". Today's news and editorials has been a relentless barrage of negativity.

In a previous post I espoused my admiration for Mr. Munger. He does not think like an economist or an academic. He thinks like a focused businessman and allocator of capital. His business has gotten so big that persuading people, ordinary and of the political ilk, is part of his business.

We should make things that other people want to buy...this of course will require shipping and logistics services. And Berkshire's 26.3 Billion purchase of Burlington will pay dividends if this happens. Our current emphasis on service exports does not use much railroad space...and imports are subject to tariff risk.

Thus, convincing the masses to make things is a nice hedge. Well played, Mr. Munger.

Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.

The world's foremost public Euroskeptic... addresses Eagle/Dragon symbiosis

Chinese leaders are deploying their reserves to try and pressure the US to stop haranguing China about its currency and trade policies, and to back off from interference in its domestic issues," said professor Eswar Prasad, ex-head of the IMF’s China division.

Stephen Jen from BlueGold Capital said Chine is probably moving out of bonds from many countries as it prepares for a likely 5pc revaluation of its currency in coming weeks. Other assets might prove better protection against an immediate loss on holdings

Use of China’s $2.4 trillion reserves to challenge US foreign policy is fraught with problems, not least because any damage to America will recoils immediately against China – which depends on the US market for its mercantilist growth strategy. Beijing cannot stop accumulating dollars unless it is willing to let the yuan ride, eroding the margins of its export industry. Some reserves can be parked in gold or even copper, but liquid commodity markets are not big enough to absorb the scale of Chinese surpluses.

China and America are locked together by fate. Any petulant action by either side involves a degree of `mutual assured destruction’. But sometimes in politics – as in life – emotion flies out of control.

The Bandwagon is getting crowded...cont.

This is getting tiresome...but the panic is not as palpable as they think as OTM currency options on Euro futures are not as inexpensive as they "should" be given an imminent Euro collapse.

During the relatively benign economic conditions that marked the first decade of the euro, fast growing economies such as Spain were able to enjoy the advantages of currency union, such as low interest rates
, but allowed their prices and costs to gradually rise, leaving their economies uncompetitive by comparison with nations such as Germany. Traditionally, that cumulative build-up of cost and price differences would be dealt with by devaluation of the currency, but membership of the euro removes that flexibility. Thus Ireland, Greece , Spain and others are undergoing what economists euphemistically call "internal devaluation", slashing wages and costs and, if necessary, allowing unemployment to climb to record highs. The problem raised by the Nobel prize-winning economist Joseph Stiglitz among others, is that those deflationary polices threaten to shrink their economies even more, triggering an even more urgent budget crisis as tax revenues collapse and unemployment payments rise.

A further issue undermining the markets' confidence in the ability of these governments to deliver is the absence of any kind of Treasury-style function in the eurozone, to complement the European Central Bank: Cross-border bailouts were made illegal by the Maastricht Treaty and that rule has been carried over to the current Lisbon Treaty.

At the last summit of European leaders in Brussels, President Nicolas Sarkozy revived French demands for "European economic governance" to deal permanently with budget crises, in effect a eurozone Treasury department, but Chancellor Angela Merkel of Germany only agreed to such a development provided it involved all 27 EU states, effectively neutralising the French proposal and insulating the German public finances from possible contamination. Distressed nations such as Greece will probably be left with little choice but to approach the IMF for assistance – a humiliating defeat for those ambitious for European political and economic integration.

The Bandwagon is getting crowded...cont.

Yes, we all knew this years ago.

Spiegel getting rabid:

There has never been this much uncertainty. No one knows whether the Greeks will manage to solve their problems, whether and how other countries will come to their aid, whether the crisis can be confined to Greece or whether it will spread like wildfire among the PIIGS -- and end up tearing apart the European currency union.

All of this translates into excellent opportunities for foreign currency traders and speculators. They can either bet on a decline of the euro or a bailout for the Greeks in the form of a rescue effort by other euro zone countries. In the first case, the price of Greek government bonds will hit rock bottom, and in the second case it will rise.

These are the kinds of conditions that make it possible to make a lot of money quickly -- but with devastating consequences, because speculators amplify trends and increase risks. If they bet on a Greek bankruptcy, it will become even more difficult, and expensive, to attract fresh capital. This could lead to a national bankruptcy or the feared conflagration -- or even the collapse of the euro.

Tuesday, February 23, 2010


Ah, but why then Mr. Greenspan has monetary policy and the Fed's actions done nothing to restore credit? All the "lessons" the MMTers thought they learned have now been put to the test and found wanting. And their response is the Khyber pass approach: more of the same. Its Cultish.

Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was "by far the greatest financial crisis, globally, ever" -- including the 1930s Great Depression, said Greenspan in an address to a Credit Union National Association conference.

"It's really an extraordinarily unbalanced system because we're dealing with small businesses who are doing badly, small banks in trouble, and of course there is an extraordinarily large proportion of the unemployed in this country who have been out of work for more than six months and many more than a year," said Greenspan, who headed the Fed from 1987 to 2006.

Latin America...

Brazil is just the start. Central America and the Andean region are the unforseen problems.

SAO PAULO (Dow Jones)--Brazil's real closed weaker Tuesday in reaction to unimpressive data in the U.S. and ongoing concerns that a European recovery has run out of steam because of Greece, Portugal and Spain's debt problems.

Right for the wrong reasons...

Greece is not a sovereign issuer. The UK is. Full comment.

"Greece would love to be able to devalue its way out of the crisis, but what really differentiates the two economies is the length of maturity of their respective outstanding sovereign debt. The UK's average maturity sits at well over 10 years, meaning it has far more wiggle room that Greece over refinancing."

The purpose of taxation... not to raise "revenue", but to moderate and control aggregate demand.

This chart is what I would like to see, deficit spending beginning to restore demand. However, there are several shoes to drop and stimulus spending is a terrible way to achieve deficit goals in this type of environment.

Intellectual Silos.

It is impossible, IMNSHO, to analyze economics events without reference to their greater context. Multidisciplinary, holistic approaches achieve greater understanding than myopic economic arguments. We saw some evidence of this affliction in the previous post about Munger and Krugman.

In that vein, the following take on China represents the widely accepted view on the "what if China sold U.S. debt" scenarios. It gets the foreign currency constraints. However, itt does not address the international security implications nor does it seek to understand the technical finance issues regarding capital levels and collateral obligations of the PRC.

Military studies, finance, economics, law, psychology, sociology, and science. (in the sense of a determination to gather data and do your homework.)

This excerpt is from the Brookings Institute.

Of course, China could sell off some of its enormous reserves of U.S. Treasury securities. It currently owns almost 10% of the total Treasury debt held by the public. This is slightly less than the percentage held by Japan and residents of Japan, but substantially more than the percentage held by any other country. I'm inclined to think a Chinese sell-off of U.S. Treasuries would on balance benefit the United States. One reason China has accumulated such large reserves is that it has sought to maintain a low value of its own currency, primarily to help maintain a competitive edge in export markets. This policy has helped make China one of the world's great exporters, but it has also hurt workers and producers in the United States and other countries. If the dollar fell in value compared with other currencies I think we would see a faster U.S. recovery, especially in manufacturing. A precipitous and disorderly fall in the dollar could take a terrible toll on worldwide confidence and hence on the economic recovery, but an orderly decline would spark revival in a number of U.S. industries.

I always thought...

Charlie Munger was more astute than his more famous avuncular partner.

From a recent speech:

Another example of not thinking through the consequences of the consequences is the standard reaction in economics to Ricardo’s law of comparative advantage giving benefit on both sides of trade. Ricardo came up with a wonderful, non-obvious explanation that was so powerful that people were charmed with it, and they still are, because it’s a very useful idea. Everybody in economics understands that comparative advantage is a big deal, when one considers first order advantages in trade from the Ricardo effect. But suppose you’ve got a very talented ethnic group, like the Chinese, and they’re very poor and backward, and you’re an advanced nation, and you create free trade with China, and it goes on for a long time.

Now let’s follow and second and third order consequences: You are more prosperous than you would have been if you hadn’t traded with China in terms of average well-being in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It’s obviously China. They’re absorbing all the modern technology of the world through this great facilitator in free trade, and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you’ve got a weak nation of backward peasants, a billion and a quarter of them, and in the end they’re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that’s a wonderful outcome for the former leading nation. He didn’t try to determine second order and higher order effects.

If you try and talk like this to an economics professor, and I’ve done this three times, they shrink in horror and offense because they don’t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second and third order consequences. The best answer I ever got on that subject – in three tries – was from George Schultz. He said, “Charlie, the way I figure it is if we stop trading with China, the other advanced nations will do it anyway, and we wouldn’t stop the ascent of China compared to us, and we’d lose the Ricardo-diagnosed advantages of trade.” Which is obviously correct. And I said, “Well George, you’ve just invented a new form of the tragedy of the commons. You’re locked in this system and you can’t fix it. You’re going to go to a tragic hell in a handbasket, if going to hell involves being once the great leader of the world and finally going to the shallows in terms of leadership.” And he said, “Charlie, I do not want to think about this.” I think he’s wise. He’s even older than I am, and maybe I should learn from him.


Here is what Krugman says about Ricaridan comparative advantage, and I challenge you to read this without laughing as it confirms what wise old Charlie Munger says in th above when referring to economists. It is amusing at which points semantics becomes a very, very important analytical tool for economists.

"...he (someone who dared question the "law" of comparative advantage) failed to understand the essential point of Ricardo's model (OK, its a model, not a law now), that gains from trade depend on comparative rather than absolute advantage. He is concerned that your country may turn out not to have anything it produces more efficiently than anyone else - that is, that you may not have an absolute advantage in anything. Yet why is that such a terrible thing?

The forest from the trees...


This passes for investment analysis.


Discussing emotions, political relations, and even gets around to the deficit.

Economists refuse to call the economic downturn that began in the last month of 2007 a "depression" because it is not as serious as the 1930s depression as measured by decline in GDP, unemployment rate, and deflation. That is absurd. It would be like refusing to call the Korean War a war because there were fewer casualties than in World War II. But, the root error of the economists is failing to consider the emotional consequences of an economic downturn and how those consequences in turn generate both direct economic effects and indirect economic effects via politics. Behavioral economists such as Robert Shiller do talk about the effects of emotion on economic behavior, but their focus thus far as has been on booms ("irrational exuberance") rather than on busts. Keynes--ignored until the current crisis--discussed the economic dimensions of busts perceptively, emphasizing the dampening effect of economic uncertainty on investment and consumption; and we have seen that in the present crisis. Private investment has fallen precipitously, and consumption has flattened because fearful consumers are allocating more of their income to savings than in earlier years.

In my assessment of Asian Land war...

...the highest probability goes to an invasion of North Korea by...China. Winning favor and international accolades by cleaning up its own neighborhood. Especially when its inhabitants have outlived their usefulness. Passing on the opportunity to be the "liberators" of North Korea before the Western World does it for them is a very tempting prospect.

It also holds the benefits of unanimous international support, real-time testing for conventional Chinese military logistics, and (given the inevitable outcome) sending a strong signal to the west (in addition to its trading partners) regarding its willingness and ability to control its interests.

Everything else in the region appears to be in (more or less) equilibrium.

Hugh Hendry...

...echoes many of the sentiments I have been saying here for years. As ascerbic and somewhat rude as he is when upbraiding interlocutors on T.V., I cannot help but admire this man. Full article is here.

Economics is a cruel master and in both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis. Never forget that in economics, first can become last.

The China bulls assure us that this time it is different. Yes, the banks are lending money at breakneck speed, but look at what they are doing with it! They suggest a new era reminiscent of Protestant Capitalism. They want us to believe the atheist Chinese are prepared to work harder and defer their gratification for longer.

Undoubtedly, China's state planners have favoured investment over consumption. High-speed rail networks, first-class infrastructure projects and the urban migration of 55 million people every year are common explanations for the ability of the nimble Chinese to overcome the frailties of this global economy. But can too much of a good thing be bad for you? The goal of economic policy, after all, is to maximise households' wellbeing and consumption. Unfortunately, unlike in most countries, China's share of consumption within its economy has fallen relentlessly, reaching 35pc of GDP in 2008. Something isn't right.

The ancient ethical system of Confucius is silent on the subject of modernisation. There is no proverb counselling that "wise men not invest in over-capacity". Perhaps there should be: in China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.

Exit strategies...

...from the IMF. This is the official "play book" of the Western World...and its presumptuous at best.

Exiting from Fiscal Support and Implementing Long-term Fiscal Consolidation

Noting that the most daunting task is to restore fiscal and debt sustainability, Directors generally agreed that a medium-term adjustment strategy aimed at ultimately reducing debt ratios to pre-crisis levels or below, depending on country circumstances, should be communicated early to reassure markets of policymakers’ commitment. Unwinding discretionary support is only a first step. The bulk of the adjustment will require more difficult reforms, largely on the expenditure side, to improve the structural primary balance on a sustained basis. Directors saw the crisis as an opportunity to advance the needed reforms, including in the areas of age-related entitlements and privatization. They stressed that institutional reforms and reforms with long-term effects on spending and revenues can be undertaken now, insofar as they do not compromise the economic recovery in the short run, and should be complemented by reforms that aim to promote potential growth.

Exiting from Monetary Policies

Directors considered that central banks have the tools to unwind monetary crisis intervention measures, although the methods and sequencing will vary with their circumstances. Central banks have employed a wide range of measures, in many cases unprecedented, resulting in historically low interest rates and substantial changes to their balance sheets. Directors broadly concurred that raising policy interest rates to safeguard price stability does not require the prior unwinding of unconventional measures. They highlighted the importance of preserving central bank independence as crisis measures are unwound, given the potential risk that fiscal adjustment could lead to pressure on some central banks to relax their commitment to price stability, undermining policy credibility.

Exiting from Financial Sector Intervention

Directors supported the view that, to maintain market confidence, financial sector support should be withdrawn gradually and flexibly, based on careful judgment that takes due regard of fiscal costs and moral hazard. This can be facilitated by built-in market incentives and by the judicious use of termination dates. To mitigate future risks, Directors emphasized the need for a new supervisory and regulatory framework, as well as more capital.

The Monetary channel...a continuing series...

This fully explains the hoarding of cash (that mainstream media states is "ready to be deployed") by public companies. Banks are "concerned" about their future financing prospects, tighten lending standards, which flows to companies who now must ape the banks and hoard cash to fund future operations and investment.

And then of course there is this (February then January figures):

Consumer confidence: 46.0 56.5

And Bloomberg has now recognized the deflation threat.

Dr. Frankenstein...

...warns the world about the Homonculus he set in motion:

Sen. Christopher Dodd (D., Conn.), who chairs the Senate Banking Committee, said in a letter released by his office that he was concerned about the potential effects of commercial real estate woes on the broader economy.

“I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy,” Dodd said in the letter to Federal Reserve Chairman Ben Bernanke.

Similar letters were sent to the Federal Deposit Insurance Corp. and Office of Thrift Supervision, among others.

They know something...

...we do not. Every authoritarian organization on the planet practices "information arbitrage". One of the central problems with China, however, is the utter lack of transparency the Western world has when evaluating its economic system and growth prospects.

It is precisely because of this secrecy, this "weak hand", that I assume the worst is occuring. And so the PRC must continue to tightly control any dissent lest control be lost.

And just as Against this backdrop of political stability and economic growth, the most credible interpretation of the government’s recent hard line is that the forces pushing its leaders towards greater liberalisation at home and sympathetic engagement with the West are weaker than had been hoped. Nor is there any sign that the next generation of leaders see their mission differently. As Russell Leigh Moses, a Beijing-based political analyst, puts it: “The argument in policy-making circles where reform is concerned is ‘how much more authoritarian should we be?’ not ‘how do we embark on Western-style democracy?’”

Tough though the recent sentences of activists have been, they are hardly out of keeping with the leadership’s approach to dissent in recent years. This has involved giving a bit of leeway to freethinking individuals, but occasionally punishing those seen as straying too far.

Life imitates...Science Fiction

House Ordos is a fictional empire in Herbert's "Dune" universe that obsesses about revenue generation for its elite minority.***

So I found this excerpt most amusing.

Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained in May 2009 that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that was in such good condition it had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported.

Real Estate or Soybeans?

Another example Chanos has cited is the city of Ordos, where party officials have built an entire new downtown on the windswept grasslands of Inner Mongolia, 25 kilometers (15 miles) outside the existing municipality of 1.5 million people.

Mark Mobius, meanwhile, is sticking with China. The executive chairman of Templeton Asset Management is encouraged that the government is pulling back some of its extraordinary economic support. “We see the government’s tightening of lending as a positive because it moderates the risk to some degree,” says Mobius, who oversees $34 billion. “This is a correction in an ongoing bull market.”

Chris Ruffle, who helps manage $19 billion for Edinburgh- based Martin Currie Ltd., also remains confident China will avoid a bust. “It’s not a highly leveraged situation,” says Ruffle, who works in Shanghai. “I was in Japan in the 1980s, and that was a bubble. Here in China, we are nowhere near that.”

Still, even Mobius says investors have to be wary. He got rid of an investment in a Chinese food company after discovering that it was using funds to buy apartments instead of to process soybeans.

***Incidentally, my brother has re-coded and modernized a popular PC game that introduced the Ordos, apparently in non-canonical form.

This will not be enough...

...5 Billion in FX reserves can disappear in a day when the gnomes are active...

Feb. 23 (Bloomberg) -- Venezuela’s central bank may inject more than $5 billion of dollar-denominated securities into the financial system this year to strengthen the bolivar in the unregulated foreign-exchange market, a government official said.

The government is seeking to push the currency to 5 per dollar from 6.55 and maintain it at those levels through 2013 -- a weaker rate than the 4.3 target President Hugo Chavez gave last month, said the official, who declined to be identified because he’s not authorized to speak publicly.

Dollar-asset sales of about $5 billion will likely be too little to meet demand in the unregulated market from Venezuelan companies and individuals who can’t get government authorization to buy U.S. currency at the official rates, said Asdrubal Oliveros, a director at Caracas-based Ecoanalitica. He estimated $12 billion may be needed to spur a rebound in the currency.

Stoking aggregate demand, Kakistocracy style...

Ineptitude. The Executive administration and Congress sing the chorus "the coast is clear, SPEND", while the FDIC says we should conserve income and save lest funds evaporate from the banking system for lending.

A silly relic from loanable funds theory tied to a gold standard which no longer applies in a fiat currency regime.

The Federal Deposit Insurance Corporation (FDIC) is calling upon consumers across the nation during America Saves Week to consider establishing a basic savings account or boosting existing savings. FDIC Chairman Sheila Bair said, “One fundamental lesson of the financial crisis is that savings can help families withstand sudden changes in their economic well being. Establishing a savings account in a federally insured institution is a great first step to build wealth and begin a savings habit that will last a lifetime.”

The personal savings rate rose to 4.6 percent in 2009 from 2.7 percent in 2008, according to the U.S. Department of Commerce. “I am pleased to see that people are saving more of their hard-earned money and building wealth. Having personal savings for an emergency fund or saving for a future expenditure, such as a college education, can make a big difference in avoiding other costly alternatives. I’ve always been a big advocate of a back-to-basics approach to financial services; it’s my hope that Americans’ increase in savings is the beginning of a long-term trend,” Bair said.

“Money saved by consumers also provides a stable source of funding for investments in the economy that benefit all Americans,” said Bair. “In fact, a country with robust savings generally has more capital to fund investments and support economic growth over the long-term.

The Monetary channel...a continuing series...

More vertical descent.

Prices, wages, property, financial assets drifting lower. And yet some EOTers still fear quadrillion percent inflation is the more pertinent risk.

Monday, February 22, 2010

End around

The establishment of international guidelines in order to protect future generations from adverse decisions based on some concept of "legitimacy".

I will be watching this very closely. Once again the set of rights invented by proponents of Global Warming actions and/or sanctions begins to shape shift and creep into other problems of an entirely different nature.

The mechanisms of U.S. Prohibition were nearly identical and the unintended consequences will be terrible.

GENEVA, Feb 22 (Reuters) - Reports that Greece used derivatives contracts with U.S. investment banks to mask the size of its debt highlight the need for guidelines defining the legitimacy of sovereign debt, a U.N. official said on Monday.

Yuefen Li, head of the Debt and Development Finance Branch at the United Nations Conference on Trade and Development (UNCTAD), said the reports that the previous Greek government had pledged future revenue streams [ID:nLDE61E1LC] raised questions of transparency.

Li heads a project to draw up international guidelines on whether sovereign debt is legitimate. [ID:nLDE61B185]

She told Reuters it was not possible to say whether the Greek transactions could be declared illegitimate under the future guidelines without knowing the full details of the deals and how they were handled under Greek law.

"Whether or not it can be declared illegitimate, you have to look at the legal aspects -- whether the government has gone through transparency, (whether) you inform your people, (whether) you go through the legal procedures, whether it's for the benefit of the people," Li said.

But she said pledging future income to meet current needs raised ethical problems, comparable with irresponsible economic growth that created long-lasting pollution.

"You cannot use the revenue for future generations to solve your immediate problems," she said.

Li said Greece was not the only country to engage in these kinds of transactions, but declined to name others.

The Greek case raised the question whether governments had the right to impose debt burdens on future generations that would have to be repaid when they were no longer in office, she said.

The Monetary channel...a continuing series...

Bernanke will be peppered with questions regarding mortgages, Fannie, Freddie, the FOMC, and the FHA. He will hopefully refer to the graph reproduced here.

He will also be questioned about QE, increased bank reserves, and monetary aggregates no doubt.

But the monetary channel is still broken.

Bernanke should be questioning the committee about their commitment in stoking aggregate demand and the only way to put more cash in people's pockets is tax decreases, deficit be damned. The current increase in national savings is on a smaller asset base, and tax decreases are a more efficient means of stoking real aggregate demand than monetary policy that relies on disintermediation when the disintermediators are hoarding cash due to unstable capital markets. The scale of our larger banks (the ones who benefited most from the TARP and bail-outs) is hurting lending supply and lending demand.

Stewards of Capital...

...par excellance. The Communist Party of China in action. Every town of 30,000 people needs a 1000 foot tower.

Full article here.

Communist Party officials there are building one of the world’s 30 tallest buildings, a 2.5 billion yuan, 328-meter (1,076-foot) tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards, Bloomberg Markets reports in its April issue...

...Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538-meter skyscraper that would today rank as the world’s second tallest. The only loftier building is the new Burj Khalifa in Dubai.

Foreign Policy

Comparing the Chinese to the Soviet Union has always been interesting, but the method they use to project power are very different.

Foreign Policy has gone down hill in recent years as a heavyweight, but then most publications have gone down similar paths.

This much chatter regarding China leaves me convinced that difficult times are imminent for the Paper Dragon. These issues were known in detail 5 years ago by, among others, the U.S Navy.

Undoubtedly, Chinese war planners see a future in which China will be able to defend itself offshore and its navy will operate beyond what is sometimes referred to as the "first island chain" (an imaginary line stretching from Japan, through Okinawa and Taiwan, and south to the Philippines and the South China Sea), eventually encompassing much of the Western Pacific up to the "second island chain" that runs from Japan southward past Guam to Australia. But whether Beijing envisions one day establishing overseas bases, or simply having the capability to project power globally when needed, is unclear.

Some wonder whether China and the United States are on a collision course. Kaplan raised the ominous possibility in the Atlantic that when the Chinese navy does push out into the Pacific, "it will very quickly encounter a U.S. Navy and Air Force unwilling to budge from the coastal shelf of the Asian mainland," resulting in a "replay of the decades-long Cold War, with a center of gravity not in the heart of Europe but, rather, among Pacific atolls." Unquestionably, there is deep strategic mistrust between the two countries. China's rapid economic growth, steady military modernization, and relentless nationalistic propaganda at home are shaping Chinese public expectations and limiting possibilities for compromise with other powers.

This does not make conflict inevitable, but it is cause for long-term concern and will shape U.S. efforts to avoid hostilities with China. Military-to-military contacts lag far behind the rest of the U.S.-China relationship. Taiwan is an obvious point of disagreement and the one place where the two powers could conceivably come into direct conflict. U.S. maritime surveillance activities inside China's exclusive economic zone are another contentious point. There is, however, a growing recognition that the United States and China should engage one another and seek to avoid a conflict that would almost certainly be destructive to both sides.

Catering to the populists...

Greek Tragicomedy getting even more absurd by accusing Fund Managers from "profiteering" by taking speculative positions on Greek debt.

What would the same people describe what Greece did in order to join the EU, and the subsequent benefits it retained?

ATHENS, Greece (Reuters)—Two Greek newspapers reported on Friday [Feb. 19] that the country's EYP intelligence service, investigating speculative attacks on Greece in money markets, had identified U.S. and British firms as aggressive sellers of Greek bonds.

The finance ministry said it would not confirm the reports, neither of which alleged that laws were broken. A government spokesman said EYP had not been asked to undertake such a probe.

"There is no such action, no such decision. Beyond that, of course we are doing our analysis, trying to determine where these speculative games originate," government spokesman George Petalotis told reporters.

The press reports, which follow criticism of speculative trading by senior politicians in Europe, may be part of efforts by officials to deter hedge funds and other institutions from conducting trades that worsen instability in Greek asset prices.

Greek bonds and stocks have been hammered since a socialist government elected in October revealed last year's budget deficit had ballooned to a projected 12.7% of gross domestic product, over four times the European Union's limit.

While much selling has been conducted by long-term investors alarmed by Greece's debt crisis, traders say shorter-term speculators have been involved; some have laid bets in the market for credit default swaps (CDS), used to hedge against the possibility of a Greek debt default.

"EYP has managed to unravel the strands of speculation entangling the country," the center-left To Vima newspaper reported on Friday, without quoting any sources. It said four asset management firms identified by Greek intelligence were London-based hedge fund manager Brevan Howard, and U.S.-based Moore Capital, Fidelity International and Paulson & Co., all alleged to have sold Greek bonds since December.

The instruments change...

...but the musical score remains the same.

(A more philosophical post)

Increased economic pressure across the globe is causing sovereigns to make difficult choices regarding long-term goals.

We also note that China has announced it will actively pursue maritime responsibilities in defending its trade routes, primarily in the Indian Ocean basin. This, combined with China becoming Saudi Arabia's largest oil customer has sent intellectuals into a tizzy regarding the long-term position of the United States.

Scenarios describing war and doom abound (most of this can be ascribed to the current Schadenfreude; bad news begets bad news). I have not been subtle with my own analysis of China's predicament (they will have enough office space coming on line from current construction projects to put every person in China into a 5x5 cubicle) and the health of their banks.

Some pundits have called the previous ten years the apex for the U.S. I respectfully disagree. Name another society that reinvented itself from mass consumer to mass producer to mass consumer and back again. The evolutionary corollary is victory goes not necessarily to the strong, but to the most adaptable and nimble in an evolutionary sense. China's cultural history shows its lack of political will to engage in far flung conflict, preferring instead to erect walls (literally and figuratively) and begin anew under another "perfect" theory of societal organization. They seem to have a cultural affinity for precision and perfection, whilst we here are used to change, to chaos, to conflict.

Perfection is unattainable by humans. Marx's perfect revolution was not the inevitable end to some Hegelian dialectical was only ever going to be a blip in history until the next perfect system was sold as a means to control a populace.

There is no other country capable or willing to secure borders, protect trade routes, and defeat any military that opposes them. If you have political capital (such as a "commitment" to human rights or subscribe to U.S. standards and rules, such as international community involvement, etc. This is also a tacit commitment to dilute sovereignity in favor of international institutions which are heavily influenced by the U.S. and Western definitions of "equality" and Western style rules), then the U.S. will happily assist you. If you do not have these things, purchase some Treasuries as a gesture of symbiosis.

A Euro corollary here in the U.S.

State governments DO have liquidity risks in an analogous way to EU members. Now, all that is needed is for the assets contained in the Sate systems to appreciate in value.

The definition of "essential" public services should also be examined.

The Trillion Dollar Gap: Underfunded State Retirement Systems and the
Road to Reform

$1 trillion. That’s the gap at the end of fiscal year 2008 between the
$2.35 trillion states had set aside to pay for employees’ retirement
benefits and the $3.35 trillion price tag of those promises.

Why does it matter? Because every dollar spent to reduce the unfunded
retirement liability cannot be used for education, public safety and
other needs. Ultimately, taxpayers could face higher taxes or cuts in
essential public services.

A new report from the Pew Center on the States, The Trillion Dollar
Gap: Underfunded State Retirement Systems and the Road to Reform,
shows why states must take strong action now—or taxpayers will suffer

To a significant degree, the $1 trillion reflects states’ own policy
choices and lack of discipline:

• failing to make annual payments for pension systems at the levels
recommended by their own actuaries;
• expanding benefits and offering cost-of-living increases without
fully considering their long-term price tag or determining how to pay
for them; and
• providing retiree health care without adequately funding it.

The world's foremost public Euroskeptic... still out of paradigm when comparing sovereign debt to conditions in the 1920s, but still has the basic refrain that is wreaking so much havoc in the EU area today: the amputation of fiscal policy from monetary policy for individual countries. I am of the opinion that centralizing monetary policy was a greater mistake than if the EU centralized fiscal policy first, but that was untenable politically at the signing of Maastricht.

By Ambrose Evans-Pritchard
Published: 6:31PM GMT 21 Feb 2010

The Left called for war damages for Axis occupation and accused German
banks of playing a "wretched game of profiteering at the expense of
the Greek people".

Mainstream New Democracy was no nicer. "How does Germany have the
cheek to attack us over our finances when it has still not paid
compensation for Greece's war victims? There are still Greeks weeping
for lost brothers," said ex-minister Margaritis Tzimas.

Interest rate cuts: Deflation harms everyone

This is deeply hurtful to Germany, a vibrant democracy that has played
its difficult part in Europe for 60 years with dignity. No country
could have done more to overcome its demons. It has paid the EU bill,
and paid again, rarely grumbling.

Yet a decade of monetary union has created such a wide and
self-perpetuating gap between North and South that everything in EU
affairs is poisoned. German-Greek relations are the worst in my

Nobel economist Paul Krugman said there is no point blaming any one
country for this "Euromess". "Europe's policy elite bears the
responsibility," he said. "It pushed hard for the single currency,
brushing off warnings that exactly this sort of thing might happen,
although even eurosceptics never imagined it would be this bad."
Actually, we did, Professor. Thanks anyway.

EMU is slowly suffocating boom-bust states trapped in debt deflation,
acting in the same perverse and destructive fashion as the Gold
Standard in the 1930s.

Gold rules were simple: surplus states loosened, deficit states
tightened. This preserved equilibrium. World War One shattered the
system. The US was not ready to take the guiding role from Britain.

The dollar was undervalued in the 1920s. America ran vast surpluses,
like China today. So did France, which re-pegged too low. Both drained
the world's bullion. Yet neither loosened: the Fed because Chicago
liquidationists ran amok; the Banque de France because its post-War
brush with hyperinflation was still fresh.

Adjustment fell entirely on deficit states such as Britain. They had
to tighten into the downturn, feeding debt deflation. Global demand
imploded on itself until the entire system collapsed. In the end, the
US and France were victims of their obduracy, but that was not clear
in 1930, or 1931, except to Keynes.

This is the story of Euroland. The North is in surplus, the South in
deficit. Germany's current account surplus was 6.4pc of GDP in 2008,
Holland's 7.5pc. Club Med deficits topped 14pc for Greece, and 10pc
for Iberia. The gap has narrowed since but remains structural.

Captain Obvious has a Chinese cousin...

From People's Daily:

Dumping could lead to domino effect and affect value of holdings

China can reduce its holdings of dollar assets, but should not "overdo" it as the country tries to adjust the structure of its dollar asset-dominated foreign exchange reserves, analysts said.

The country's foreign exchange reserves amounted to nearly $2.4 trillion by the end of last year - a third of the global total - raising concerns that the massive scale of the holdings could backfire.

About 70 percent of the reserves are dollar assets, according to various estimates by scholars, and the high proportion means that once the dollar's value slumps, China will incur huge losses.

But it is equally difficult for China to dump its dollar assets because that could lead to a domino effect on other investors and cause depreciation of China's holdings.

"China is in a dilemma," said Dong Yuping, economist at the Chinese Academy of Social Sciences.

Sunday, February 21, 2010

Of course they would...

...Treasuries are also semi-formal contracts for security action. Japan is buying insurance against a more aggressive neighbor to the West. Conspicuously absent are cries of doom and warning about Japan "calling in loans" or willfully bankrupting the U.S.

More to follow on geopolitical security strategy as a PRC communique has outlined the maritime strategy and ambition of China.

Feb. 22 (Bloomberg) -- Lost amid government reports showing
that China reduced its holdings of Treasuries by a record amount
in December were data showing Japan increased its stake, a move
that may signal U.S. yields are peaking.

Purchases by Fukoku Mutual Life Insurance Co., Mizuho Asset
Management Co. and Daiwa SB Investments Ltd. helped push Japan’s
holdings to $768.8 billion, an increase of $11.5 billion. U.S.
government debt held by China fell $34.2 billion to $755.4
billion, Treasury Department figures showed Feb. 16.

Increased buying from a country that has lived through a
decade of recessions and deflation indicates Treasuries are a
relative bargain, with consumer prices in check and savings
rates rising. Investors in Japan, where households have built up
1,400 trillion yen ($15 trillion) of financial assets, are
attracted by U.S. yields that reached the highest since 2007
compared with Japanese government bonds.

“When the yield is high, people buy,” said Satoshi
Okumoto, an investment manager in Tokyo for Fukoku, which
oversees the equivalent of more than $60 billion. “The prospect
for inflation is quite limited. Consumer demand is limited” in
the U.S., he said.

The insurer bought as yields on 10-year Treasuries rose to
2.55 percentage points above those on similar-maturity Japanese
bonds in December, the most in two years, he said. While the gap
shrank to 2.45 percentage points last week, it’s still about 40
basis points above the average in that period.

Hayek's warning...

...coming to fruition once again.

On Sunday February 21, 2010, 5:04 am EST

BEIJING (AP) -- Banking regulators in China have ordered institutions
to tighten controls on risk and carefully scrutinize borrowers'
ability to pay their debts in a new step to rein in lending.

The government's order comes as Beijing tries to prevent excessive
lending that it says could lead to financial problems while ensuring
adequate credit to keep the economic recovery on track.

Chinese leaders worry that a stimulus-driven torrent of lending is
fueling a dangerous bubble in stock and real estate prices. Beijing
has ordered banks to set aside additional reserves and to keep lending
stable, but the central bank has avoided raising interest rates, which
might slow down growth.

The China Banking Regulatory Commission, or CBRC, said in a statement
on its Web site Saturday that it issued two regulations to increase
risk management on personal and working capital loans. The rules took
effect Feb. 12.

An Elephant lands on the tackle pile...

As if the EU needed more problems from market participants or intellectuals. Our favorite Palindrome chimes in:

Financial Times:

by George Soros

Otmar Issing, one of the fathers of the euro, correctly states the
principle on which the single currency was founded. As he wrote in the
FT last week, the euro was meant to be a monetary union but not a
political one. Participating states established a common central bank
but refused to surrender the right to tax their citizens to a common
authority. This principle was enshrined in the Maastricht treaty and
has since been rigorously interpreted by the German constitutional
court. The euro was a unique and unusual construction whose viability
is now being tested.

The construction is patently flawed. A fully fledged currency requires
both a central bank and a Treasury. The Treasury need not be used to
tax citizens on an everyday basis but it needs to be available in
times of crisis. When the financial system is in danger of collapsing,
the central bank can provide liquidity, but only a Treasury can deal
with problems of solvency. This is a well-known fact that should have
been clear to everyone involved in the creation of the euro. Mr Issing
admits that he was among those who believed that “starting monetary
union without having established a political union was putting the
cart before the horse”.

The European Union was brought into existence by putting the cart
before the horse: setting limited but politically attainable targets
and timetables, knowing full well that they would not be sufficient
and require further steps in due course. But for various reasons the
process gradually ground to a halt. The EU is now largely frozen in
its present shape.

The same applies to the euro. The crash of 2008 revealed the flaw in
its construction when members had to rescue their banking systems
independently. The Greek debt crisis brought matters to a climax. If
member countries cannot take the next steps forward, the euro may fall

Saturday, February 20, 2010

Hundreds of economists...

...Are completely wrong.

The appeal to some sort of "fairness" as the primary motivator is appaling, and Global Warming is approaching levels of politicization not seen since the disaster of prohibition.

I wonder what organizations these 350 economists belong to...odds are they include the international rule makers. It is a slippery slope to abdicate any form of sovereignity these days, which is why countries such as China vociferously defend their power to command its subjects.

Hundreds of economists call for tax on currency speculation
By Sean O'Grady, Economics Editor
Monday, 15 February 2010

Some 350 prominent economists from all over the world have written to
the leaders of the G20 calling on them to implement the so-called
"Robin Hood tax" on the banks "as a matter of urgency".

Two Nobel prizewinners, including the outspoken critic of the
financial system Joseph Stiglitz, and scores of professors at
universities from Harvard to Kyoto, are calling on G20 governments to
back a financial transactions tax on speculative dealings in foreign
currencies, shares and other securities of 0.05 per cent – say £500 on
a £1m transaction.

The letter argues: "This tax is an idea that has come of age. The
financial crisis has shown us the dangers of unregulated finance, and
the link between the financial sector and society has been broken. It
is time to fix this link and for the financial sector to give
something back to society.

"This money is urgently needed. The crises of poverty and of climate
change require an historic transfer of billions of dollars from the
rich world to the poor world, and this tax would offer a clear way to
help fund this."

Epic Cross Subsidization...

...without control of Fiscal Policy. Yet another pretty graph to file in the "Why the EU failed" folder for future reference and review.

Fisherian Debt Deflation

With outliers such as Venezuela and Zimbabwe (I am still struggling with the IMF's decision to grant SDR rights to ZIM, as I said in a previous post, my intitial thought was a "combo-breaker" to China's ambitions in the region. However, there may be some long-term interest in Zimbabwe in particular since it is adjacent to the most stable country in Africa.) experiencing Weimar-style inflation, the rest of the world has the opposite problem.

The EU should seriously consider distributing several billion Euros to member states on an equal or per capita basis. They will not do this because of institutional memory (see that link above) and a misunderstanding of their monetary options.

With loans and special drawing rights...

...concentrated in commodity producing countries, the official policy of the IMF does not shock anyone.

But the extent this shadows official (and non-official) U.S. foreign policy is the interesting part.

The Fed...a continuing saga...

After kicking the bee hive (with a seemingly innocuous move), Bernanke and Fed now find themselves backtracking.

An expensive trial balloon, to be sure, and the objections for the Fed audit due to "independency" concerns becomes less credible.

The upcoming Humphrey Hawkins testimony will be important for Fed watchers: discerning any new metric besides unemployment is key.

With Core prices falling, Bernanke's own play book calls for ZIRP.

Feb. 20 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke will probably assure Congress that the central bank is mindful of the lack of job growth in the U.S. and an increase in the benchmark interest rate isn’t imminent after the Fed’s decision to raise the cost of direct loans to banks.

The Fed chief will deliver his semi-annual report on the economy and interest rates to House and Senate panels Feb. 24- 25. Fed officials last month forecast growth of 2.8 percent to 3.5 percent this year, and minutes of their January meeting showed they are seeking more evidence the recovery is sustainable.

New York Fed President William Dudley indicated yesterday that policy makers need to focus now on maintaining growth rather than fighting inflation, citing a smaller-than-forecast increase in the consumer-price index for January reported by the Labor Department. Another measure of prices, which excludes energy and food, dropped for the first time since 1982.

“Monetary policy is about the economy,” Dudley, a voting member of the rate-setting Federal Open Market Committee, told reporters after a speech in San Juan, Puerto Rico. “We need to see solid growth and job creation.”

Consumer prices rose 0.2 percent in January from December, and so-called core prices unexpectedly fell 0.1 percent. The report “showed there’s no inflation pressure,” Dudley said. “So our focus needs to be on growth and jobs.”

Friday, February 19, 2010

Major concessions... terribly run countries in order to compete with Chinese investors.

This helps an investment bubble to form in Africa, a process that is still on-going (and will take a few years to mature). An interesting about-face from the international community.

IMF Executive Board Restores Zimbabwe’s Voting Rights and Takes Steps Towards Unfreezing Access to the General Resource Account
Press Release No. 10/53
February 19, 2010

The Executive Board of the International Monetary Fund (IMF) decided today to restore Zimbabwe’s voting and related rights, and its eligibility to use resources from the IMF’s General Resources Account (GRA), following a request from Zimbabwe’s Finance Minister Tendai Biti.

Notwithstanding the restoration of the eligibility to use GRA resources, Zimbabwe will not be able to use resources from the GRA or the Poverty Reduction and Growth Trust (PRGT) until it fully settles its arrears to the PRGT (SDR 89.4 million or about $140 million). Access to IMF lending resources is also subject to IMF policies on the use of such resources, including a track record of sound policies and the resolution of arrears to official creditors, which would require donor support. Following today’s decision any remaining issues on further normalization of relations will be addressed over time.

A number of remedial measures remain in place, as Zimbabwe still has outstanding arrears to the PRGT. These are (i) the declaration of non-cooperation; (ii) the suspension of IMF technical assistance, except in targeted areas (see below); and (iii) the removal of Zimbabwe from the list of PRGT-eligible countries.

The Fed's...

...handling of the interest rate rise (after market hours and the day prior to option expiry) must have been calculated to determine the market's reaction and to gauge sensitivity for future moves.

No other explanation (save mere mental error) makes sense to me.

How is this possible?

With all the "money printing", "monetization", "Quantitative Easing", etc. that the EOTers have consistently harped upon?

But you, dear readers, already know the answer.

Feb. 19 (Bloomberg) -- The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is showing few signs of inflation.

The consumer-price index increased 0.2 percent for a fifth straight month, led by higher fuel costs, Labor Department figures showed today in Washington. Excluding energy and food, the so-called core index unexpectedly fell 0.1 percent, reflecting a drop in new-car prices, clothing and shelter.

Companies may have little success raising prices with unemployment projected to end the year at 9.5 percent. The yield on the 10-year Treasury note fell after the report showed restrained inflation will allow Federal Reserve policy makers to keep interest rates close to zero to help support the recovery.

Thursday, February 18, 2010


I suppose it is cheaper than going to Macau for the weekend...

Burnt by stocks,
betrayed by bonds and mauled by currencies, Japanese households are
being encouraged to take one last financial punt on the only asset
with any credibility left: cherry blossom.

Potential savers at Ikeda Bank are being enticed to bet on the precise
date in March that the cherry trees in Osaka will burst into bloom — a
moment that marks the start of spring.

Depositors who guess correctly — the current thinking is that blossom
day will be sometime between March 23 and 28 — will receive the
princely return of 0.87 per cent on their one-year fixed-term
deposits. For those who do not, a still generous yield of 0.39 per
cent will be given as a consolation prize.


This is getting silly. More posturing. In lieu of war, perhaps they should play a best of 3 Rugby series to determine which nation has the oil rights for that fiscal year?

"This is modern defence diplomacy in action," an MoD official said. "The warships are there to protect the UK interests in the South Atlantic. If the Argentines were interfere with the free movement of shipping on the high seas that would be illegal and we would make a decision to use our deterrence force.

"At the end of the day if the Argentines decide to up the ante and the Foreign Office agreed that our interests were being challenged we are there to stop that."

Argentinian officials have revived the country's claims to sovereignty over Falklands as it contests British claims on the potentially lucrative deep sea oilfields within the islands 200-mile economic zone.

Jorge Taiana, Argentina's foreign minister, scheduled a meeting with Ban Ki-moon, the UN secretary general, next week to discuss British failure to comply with resolutions calling for a "discussion" of sovereignty.

"What they're doing is illegitimate," Mr Taiana said. "It's a violation of our sovereignty. We will do everything necessary to defend and preserve our rights."

British diplomats have accused the Argentine government of posturing in order to gain a negotiating toehold on the future revenues from an oil find.

MMT is broken

Modern Monetary Theory (MMT) opines that decreases in interest rates portend inflation expectations, which finally leads to inflation. It also assumes that low or zero interest rates stoke inflationary pressures by making the price of credit cheaper. All things being equal, this means a greater demand for credit should follow.

Except there is a problem here, both on the supply and demand sides. Richard Koo has termed this a "balance Sheet Recession" whereby households and corporations are loathe to take on new debt in favor of cleaning up their own balance sheets. Banks are loathe to lend as assumptions for future capital needs are uncertain and access to capital markets are equally unknown.

SO BANKS DO NOT LEND AND THE CREDIT CHANNEL (via monetary policy through rate action) IS BROKEN.

Only FISCAL policy can fix this problem.

The Dollar

The reserve currency status remains undiminished by the current histrionics. Foreign investors still flock to the only currency backed by solid rule of law, excellent and transparent capital markets, and the most capable military the world has ever seen.

The Chinese will not buy our debt...

...they are "diversifying" and are "calling their loans", thus destabilizing our governments ability to fund itself.


This is not true in theory or actuality. In addition, the Chinese have gone through periods before where they abruptly sell a significant quantity of Treasuries, only to see their demand for U.S. dollar denominated safe assets "increase" (to put it lightly).

Mainstream media...

...starting to understand the issues I have been obsessing about on this blog regarding ZIRP and QE in this environment.

By Ambrose Evans-Pritchard, International Business Editor
Published: 8:43PM GMT 17 Feb 2010

US Federal Reserve - US bank lending falls at fastest rate in history

David Rosenberg from Gluskin Sheff said lending has fallen by over
$100bn (£63.8bn) since January, plummeting at an annual rate of 16pc.
"Since the credit crisis began, $740bn of bank credit has evaporated.
This is a record 10pc decline," he said.

Mr Rosenberg said it is tempting fate for the Fed to turn off the
monetary spigot in such circumstances. "The shrinking in banking
sector balance sheets renders any talk of an exit strategy premature,"
he said.

Rates may rise later this year, warns CBIThe M3 broad money supply –
watched by monetarists as a leading indicator of trouble a year ahead
– has been contracting at a rate of 5.6pc over the last three months.
This signals future deflation. The Fed's "Monetary Multplier" has
dropped to a record low of 0.81, evidence that the banking system is
still broken.

Is there a German word...

...for the unfortunate tendency of humans to feign comprehension and competance merely to avoid the appearance of ignorance?

There will of course be much more of this type of will eventually be found that municipalities and state governments in the United States engaged in similar activity with similar results. The people overseeing the purchase of these derivative contracts likely have no expertise in Gaussian copulas or the benefits of using splines vs. interpolation.

But they did not want to appear ignorant to people they wished were there peers.

ROME—Derivative contracts taken out by Italian municipalities could jeopardize local public finances for decades, even though the global financial crisis has softened the blow in the short term, Italy's Audit Court said Wednesday.

"Certain debt and imbalances are magnified over time, and may wring sacrifices from future generations for 20 or even 30 years," Mario Ristuccia, the chief prosecutor of the administrative court, said in a speech delivered here.

The Greek government's use of derivatives has stoked claims of deception and fraud as Athens used the sophisticated over-the-counter contracts to prod its fiscal accounts into apparent compliance with European Union rules.

Italy itself used a currency swap to help its application to join Europe's monetary union at its inception more than a decade ago.

National governments aren't alone. After a 2002 Italian budget law allowed local administrations to engage in sophisticated finance, local governments entered into around €35 billion ($) worth of derivative contracts. That is equivalent to almost a third of all debt held by Italy's regions, provinces and municipalities. More than 500 municipalities signed derivatives deals.

The contracts were often designed to protect public bond issuers against adverse interest-rate movements, until the central government banned the practice in 2008. But while the derivatives were supposed to hedge balance-sheet risks, they also were used to rake in upfront cash to use for current spending, and at times with a pure "speculative intent," Mr. Ristuccia said.

Wednesday, February 17, 2010

Much ballyhoo...

...has been made about the recent U.S. debt auction and the (relatively) large % of the issue that was purchased by "Direct Take Down", which are unknown purchasers. This has caused the Black Helicopter EOTers to surmise that the U.S. has purchased the debt and therefore its time to hoist 1 Lantern and say "THE FED IS COMING TO INFLATE AWAY OUR FUTURE".

However, even if the government purchased the securities, it could actually be for completely benign purposes, a possibility completely unknown to the EOTers: They could simply be buying them for other foreign governments who do not wish to tell the world they need Treasuries, either for themselves or their member banks.

Now back to the slow-motion crash...

...already in progress.

U.S. commercial mortgage delinquencies continued to climb in January,
with the increase from December the largest since the downturn began,
according to Moody's Investors Service.
The rate rose to 5.42% last month from 4.9% the previous month as another
409 loans became delinquent, according to Moody's Delinquency Tracker. "We
continue to expect loan performance to deteriorate further in 2010," added
managing director Nick Levidy.
Commercial real estate has been pummeled for more than a year as
occupancy rates and rents fall, putting increased pressure on property
owners, especially those who bought around the top of the bubble several
years ago.
The hotel delinquency rate grew the most in January, to 9.82%, followed
by retail loans, which make up 30% of the total outstanding balance and 40%
of last month's new delinquent loans. On a percentage basis, the
month-to-month change in the delinquency rate--which now sits at 5.24%--was
bigger for retail than the hotel sector.
The smallest increase was in loans backed by office properties. That
segment also has the lowest delinquency rate, 3.53%
By region, the West and Midwest saw the biggest delinquency rate
increases in January.

The D-Mark Strikes Back

Of course Germany will be feeling a little atavism. A precocious younger sibling appears to have lied and stolen from them, and now needs to be bailed out of jail.

We will see what kind of "family" the EU is: A white picket fence 1950s American archetypal nuclear family or something more akin to Henry Hill's "Family" in the movie "Goodfellas"?

BERLIN — The Greek financial crisis has given German bloggers a great opportunity to say what they really think about the European Union and especially the euro.

“Give us back our Deutsche mark,” wrote one blogger. Another told Britain, which is not a member of the euro zone, to stay away. “It’s not worth it. Keep your pound. We should have kept our D-Mark.”

It is hard to gauge just how deep such nostalgia for the German mark runs. But one thing is certain. For Germans, the mark was more than just currency. It symbolized the spectacular economic recovery of West Germany from the ruins of World War II. The worldwide respect it commanded became an immense source of pride for Germans. No wonder that when Germans exchanged their marks for euro coins in 2002, there was seething resentment.

So if Germany now is forced to bail out Greece and later protect Spain and Portugal against speculators, it could easily revive that resentment against Europe and the common currency.

“The Germans are angry,” said Elmar Brok, a leading member of Chancellor Angela Merkel’s Christian Democratic Union party and European Parliament legislator. “We have had to bail out our own banks, and now we have to help Greece. But what can we do? We have no choice.”

The (golden) nail in the coffin

Pension funds are almost always late to the party, and their involvement in passive commodity indexes presaged the previous commodity crash of '08.

Balancing future liabilities on an investment with negative yield (storage costs) and relying only on appreciation in anticipation of inflation (or rather interest rate volatility, which is more closely correlated with gold prices) seems like a rather rash move.

This will end badly and congress will likely hold hearings and pass forward looking legislation banning pension funds from commodity speculation, etc.

MOSCOW (Reuters) - Pension funds have started investing actively in gold last year viewing the metal as a safe long-term investment, the head of the World Gold Council told Reuters on Wednesday.

"Last year we saw a very notable switch of pension funds to holding gold for the first time," Aram Shishmanian, the CEO of the council, told Reuters Financial Television on the sidelines of a forum organized by the Adam Smith Institute in Moscow.

He said China and South Africa were the top producers last year and added Russia's weak mining legislation was the main constraint for the sector development in the country.

The WGC does not forecast gold prices for 2010.

Shishmanian said he believed the market will be "robust."

Global gold demand dropped 11 percent in 2009 on weaker industrial and jewellery demand, but investors appetite for bullion is likely to remain strong this year, the World Gold Council said earlier on Wednesday.

Tuesday, February 16, 2010

Speaking of South America...

I thought this was settled? Shall we see a dust-off of the QE2 for military use again? Economic hard times and brinksmanship. Wonderful.

Argentina has said that it is taking control over all shipping between its coast and the Falkand Islands, effectively awarding itself the power to blockade the disputed territory.

According to a decree issued by President Kirchner, all ships sailing through the waters claimed by Argentina must hold a permit. The measure looks set to deepen a row over conflicting claims to oil beds lying inside the Falklands’ territorial waters.

Argentina still claims sovereignty over the islands it calls “Las Malvinas”, nearly three decades after the end of the Falklands conflict in which more than a thousand people died.

Meanwhile, in Valencia...

(in keeping with some recent meta-themes on this blog)

With all the attention diverted to Vancouver, little press has been given for Larry Ellision and BMW Oracle and their victory in the America's Cup.

Congratulations to Mr. Ellison and his team on their amazing victory in what appears to be a Klingon Bird of Prey modified for sea-surface duty.

The credit channel is broken

Even the prospect of borrowing at zero and lending at 5 cannot seem to generate credit growth. In addition, its not just the scarcity of positive NPV projects, but the prospect of being shut out of the capital markets for future financing needs. You would conserve cash as well if you did not know if your business will have future access to credit.

By David HenryFeb. 16 (Bloomberg) -- U.S. lenders, criticized for being too reckless in the past and too stingy in the present, have been sitting on as much as $1.29 trillion in cash, equal to a record 98 cents for every dollar of existing business loans.The ratio of cash to corporate loans has more than quadrupled from 21 cents in June 2008, according to Jan. 13 Federal Reserve data compiled by Bloomberg. Corporate loans shrank 14 percent to $1.32 trillion during that period as bankers tightened standards to curb record defaults and meet demands by regulators for more liquidity.Banks are leaving more cash idle amid slack demand from borrowers throughout the economy and concern that regulators will require more liquidity to forestall another financial crisis. That’s crimping profit, and the result may be a drop in returns on equity by about 33 percent from pre-crisis levels, according to analysts at KBW Inc.

Tim Cavanaugh...

...of gets it right.

This is one of the reasons why the monetary channel is broken and QE, ZIRP are not going to have the effects the Fed thinks they will have. The "loanable funds" theory of reserve banking makes no sense in a fiat currency world, but that is framework the Fed is operating under when making decisions and suggesting action to congress.

Krugman is the same way, and intellectual ponzi schemes have the same effect as ones based in the real world. At some point, doctrine ossifies itself within its Economist host and mental pliability becomes impossible: defending the existing framework becomes more important than the search for truth...and humans are very, very good at that as well.

But I don't want to argue against Krugman with macroeconomics, a pseudoscience in which he is just one of a million witch doctors. Krugman doesn't need to be wrong in theory because he's wrong in reality. Nobody's lending because nobody's worth lending to. We are all worse credit risks than we were believed to be just a few years ago. That epiphany is going to take a long time to sort out. Runaway inflation will definitely make banks desperate to find places to put their money, but it will not suddenly make Americans into better credit risks. That can only be done through reducing borrowing, upping savings and employing policy that encourages frugality -- or actually, just policy that fails to punish frugality. The good news is that a big chunk of that work has already been done, despite the best efforts of the Keynesians in charge of U.S. economic policy. The bad news is that, just as he famously did in 2002, Krugman is arguing for the creation of another asset bubble, and too many people still take him seriously.

The Obama Doctrine

Over a year ago I made the argument (available in the "PAPERS" section to the left on this blog) that The Obama administration would consider an "Obama Doctrine" that would effectively focus efforts on the Antipodes; focusing on counteracting infiltration efforts by commodity dependent exporters, interdicting the import of socialist doctrine into Africa and South America, etc.

Now my attention turns to South America. Africa as proxy battlefield between the U.S. and China has become well-known to those who need to know these things.

But South America, which has experienced a commodity and property boom, will also face significant pressure from markets. Brazil will not be spared and the Andean countries will certainly suffer from decreased capital flow and rising real interest rates.

I fully expect the foreign policy stance of the Obama administration to shift towards the antipodes and away from the drama in Europe.

The Bandwagon is getting crowded...

With this amount of media coverage on an event that should have been readily apparent to professionals years ago, it becomes clear that the English speaking media is being spoon fed as much negative sentiment as possible in order to bolster trading positions.

This party is getting crowded and soon it will be time to leave.

Monday, 15 Feb 2010 02:48 PM

By: Greg Brown
The euro, already under pressure, came under renewed attack Monday as a French bank speculated that the currency union would inevitably collapse.

Meanwhile, a former chief economist of the European Central Bank warned that a bailout for member country Greece could damage the euro's credibility.

Société Générale strategist Albert Edwards warned investors that any help given to Greece merely “delays the inevitable break-up of the euro zone,” while former European Central Bank Chief Economist Otmar Issing, in a Financial Times piece, said bailing out Greece would be a “major blow” to the currency.

“The viability of the whole framework — nothing less — is at stake,” wrote Issing.

“Financial assistance for countries that violated the terms of their participation in EMU would be a major blow for the credibility of the whole framework.”

The euro could sink to $1.3483 from its $1.5144 high in November, traders told the U.K. Daily Mail.

At issue are the terms of the pact that created the euro, which requires its members to maintain an annual budget deficit no higher than 3 percent of GDP and a national debt lower than 60 percent of GDP.