Ben on his Hind...

(From an email conversation earlier today)

Back to the swap line problem.

The swap lines world wide are now over 522Bln. This is the ECB (and
now many others, like Brazil and Mexico) borrowing unsecured from the
U.S. in order to stave off deflation. Who knows what the process is
for granting these swap lines.

its the old-fashioned external debt problem and I don't expect some of
these funds to return (especially in ECB dollar funding to Eastern
European countries...plenty of room for outright fraud there as
regional banks give sweetheart loans to their future business
associates).

A massive transfer of wealth with no congressional approval, as I have
stated before. Forget lower interest rates, this is Ben Bernanke on a
Hind Helicopter, strafing the world with dollars. And why unlimited
lines for the Euro area alone, which in my mind now has the biggest
incentive to break up the Euro and simply keep the dollar wealth.

If/when, BHO takes office, I expect these types of facilities to be
extended to sub-saharan African banks, not with any "systemic risk to
the financial architecture" argument, but on any grounds the Executive
branch chooses.

K-T Boundary Event for Banks.

The "flailing around" by Congress and certain members of the Executive branch (namely, those who chair the Fed and head the Treasury) is producing some serious dislocation in the banking system. The promise of the TARP plan to inject equity in banks is going to produce winners and losers.


This is a K-T boundary type event for the banking ecosystem, and the corresponding meteorite is a wall of cash funded by the U.S. government. These organisms thought they lived on a different planet effected by things called "market forces". Now, the meteor has struck and they must obey "governmental largess". A very large change in ownership basis.

Proximity (and a good relationship) to governmental officials just became one of THE most significant source of profit and risk to all U.S. Banks for the immediate future.

For better or for worse, this is what government does best: destroy and force the organism to re-organize into different ecosystems. I believe that this, somewhat paradoxically, creates value. Anti-trust measures in the Sherman act are another similar event.

G20 goes under the knife once again...

Cut, cut and cut again. This is as much an exercise in placation as it is masterful economic policy.

As the FED has cut yet again, China lowers their own loan rates to a somewhat appropriate number given the proximity to the U.S. Halloween celebrations.

The world is digesting the events and policies of the past six months, and it it apparent that most G20 countries (ex the Anglo-American financial axis, which are executing Keynesian prescriptions at light speed with draconian lack of due process or a scintilla of understanding by our political leaders) have no idea how to stoke domestic demand even with an improving trade gap via the rapidly strengthening dollar.

However, lower rates are not necessarily "expansionary".

BEIJING, Oct 29 (Reuters) - China's central bank cut banks' benchmark lending and deposit rates by 0.27 percentage point on Wednesday, the third cut in six weeks.
The cost of one-year bank loans will fall to 6.66 percent from 6.93 percent, while the benchmark one-year deposit rate falls to 3.60 from 3.87 percent, the People's Bank of China (PBOC) said.
The cut in interest rates takes effect on Thursday, the central bank said on its website (www. pbc.gov.cn).
The PBOC gave no reason for the easing.

Populism as problem solving, cont.

This will be an open-ended string of posts. Again, expect all countries to re-trench and revisit old populist and mercantilist arguments to placate a populace faced with the decrease of wealth in nominal and real terms.

The French Version:

By James G. Neuger

Oct. 24 (Bloomberg) -- Since the era of Charles de Gaulle, France has rebelled against the American-style capitalism that put a ``Made in U.S.A.'' stamp on the world economy.

Now, as convulsions on Wall Street shake the global financial system, French President Nicolas Sarkozy is seizing the opportunity to remake the free-enterprise model along more state-managed Gaullist lines.

Emboldened by the U.S. pursuit of a European-style bailout, Sarkozy has packed his wish list for an upcoming international summit with calls for everything from stiffer bank supervision and limits on executive pay to state aid for hand-picked industries. While the moment is in his favor, history is working against him: throughout the postwar era, French attempts to subdue globalization and come up with an exportable economic model have misfired.

``There will be so much opposition against this grand idea of putting in more state control,'' says Paul de Grauwe, a professor at the Catholic University of Leuven in Belgium. Sarkozy is chasing ``a kind of French favorite dream that others do not perceive to be really necessary.''

As the financial crisis spiraled in early October, Sarkozy made a pilgrimage to De Gaulle's onetime country hideaway in eastern France, dedicating a memorial in the shadow of a double- barred Cross of Lorraine honoring the Free French in World War II. A prickly ally during the war, De Gaulle made a postwar reputation for defying the U.S.

`Mysterious Force'

``Gaullism is the spirit of rupture,'' Sarkozy said at the Oct. 11 ceremony attended by German Chancellor Angela Merkel. The general's legacy is a ``mysterious force,'' he said. It breaks with ``habits, routines, conventions,'' demanding ``exertion by all so that France may regain its rank among nations.''

The nominally pro-American Sarkozy, who ran as a pro- business candidate last year against Socialist Segolene Royal, is taking his crusade for a ``re-founding of global capitalism'' to Beijing today, when European leaders meet with the heads of 16 Asian countries including China, India and Japan. His next chance comes at the first in a series of global summits addressing financial markets slated for Nov. 15 in the Washington area.

``Nothing in the global economy will be the same as before,'' Sarkozy said yesterday in Annecy, France, as he announced plans to create a sovereign wealth fund to invest in French companies, protecting them from foreign ``predators'' after the global stock-market rout.

Populism as problem solving

Populist rhetoric...much more of this to come. This official obviously has no idea that its not just the global financial architecture that is a strategic asset to America, but also the global security environment. Everything is connected. Does China have the resources and the political will to police its own backyard? No. It outsources its security services for a fee to the world's top provider of those services.

U.S. has plundered world wealth with dlr -China paper
Fri Oct 24, 2008 1:59am EDT
BEIJING, Oct 24 (Reuters) - The United States has plundered global
wealth by exploiting the dollar's dominance, and the world urgently
needs other currencies to take its place, a leading Chinese state
newspaper said on Friday.

The front-page commentary in the overseas edition of the People's
Daily said that Asian and European countries should banish the U.S.
dollar from their direct trade relations for a start, relying only on
their own currencies.

A meeting between Asian and European leaders, starting on Friday in
Beijing, presented the perfect opportunity to begin building a new
international financial order, the newspaper said.

The People's Daily is the official newspaper of China's ruling
Communist Party. The Chinese-language overseas edition is a small
circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views.
But the commentary, as well as recent comments, amount to a growing
chorus of Chinese disdain for Washington's economic policies and
global financial dominance in the wake of the credit crisis.

"The grim reality has led people, amidst the panic, to realise that
the United States has used the U.S. dollar's hegemony to plunder the
world's wealth," said the commentator, Shi Jianxun, a professor at
Shanghai's Tongji University.

Parabolas

Parabolas describe so many things. From markets to V2 rockets, events are shaped by unseen gravities that compel them to follow paths with varying degrees of predictability.

Nature abhors a void. Where there is a nutrient supply (even something as ubiquitous as sunlight) natural destructive forces only serve to test systems and create opportunities for new organisms to fill niches. Populations rise and fall in parabolic shapes.

The parabolic rise and fall of global stock markets also serves as a reminder that economics is "everything" when determining future human behavior.

So enough prattling and curve worship. What are some of the geo-political ramifications given the current circumstances, keeping in mind the LOCAL (present) position on our parabolic (sine) WAVE.

The European experiment is creaking along. Its (French at the moment) President is uttering populist rhetoric regarding the wholesale nationalization of economies and seems to advocate central control of banking systems. Of course, the central problem, and the assumptions that went with it, is not discussed. No "responsible" EU political figure has called for an open debate regarding the viability of the Union. A political fiction built by "elites" which the constituent people mistrust and which has no real economic power at the national country level. Can anyone think such a system will last? And then there is the problem to the East...

We are also seeing the fissures that create a capital route in "Emerging Markets". Foreign capital inflows manifest themselves in parabolic shapes which follow the unseen "gravity" of human fear and greed. I have said here on multiple occasions that "Latin America is next", this should be obvious by now and the vacuum thus created WILL be filled by other, more socialist/Marxist, niches of political leaders.

As for the Paper Dragon, I am slightly less pessimistic about its prospects given its return to earth. But only just. While it still has control over currency and debt issuance (unlike the Euro area), the political system is a horrid mess of cronyism and the ruling party is devolving into a USSR-type aristocracy, far more concerned with relative prosperity than the plight of the proles.

All of the above throws into stark relief what our current security position is now vs. what it will be in 10 years. Once Iraq is stabilized, I fully expect an antipodean emphasis in Africa and Latin America, with a steady eye on instability in all of Europe. This neo-Monroe Doctrine, pan African emphasis will allow the U.S. to achieve its strategic goals of cheap hydrocarbon fuel, cheap labor/gains from trade, and to capitalize on the plentiful natural resources in both continents.

Thus, I am positioning for the above to happen in the financial markets...and in some parabolic way may help strengthen the causational links to same. The irony is not lost.

But gravity is what it is.

Achtung USA!

The ECB is now accepting all kinds of collateral for their U.S. dollar funding facilities. There is a non-zero risk that since the ECB's liabilities are denominated in foreign currency, they could engineer a default or engineer a massive depreciation of their own currency when the liabilities come due.

In other words, there is a danger that the U.S. will hold worthless Euros (as EU member countries revert back to national currencies) backed by substandard collateral.

This turn of events also invites fraud - the Euro banking system is basically getting cheap dollars that they have to pay back "someday". This invites national banks to give "sweetheart loans" (i.e., loans that do not have to be paid back) to their favored contacts. I don't think our politicians understand this risk.

PRESS RELEASE
15 October 2008 - Measures to further expand the collateral framework and enhance the provision of liquidity
The Governing Council of the European Central Bank (ECB) today decided, by means of a teleconference, on the following measures:

The list of assets eligible as collateral in Eurosystem credit operations will be expanded as set out below, with this expansion remaining into force until the end of 2009.

As from the operation settling on 30 October 2008 and until the end of the first quarter in 2009, the provision of longer-term refinancing by the Eurosystem will be enhanced as set out below.

The Eurosystem will start offering US dollar liquidity also through foreign exchange swaps.