The Paper Dragon...

...receives its rightful hageography. We are once again reminded of the dangers of linear extrapolation and I fully expect this work ("When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World") to be quoted with (failed) attempts at ironic humor in the undergraduate economic textbooks of the future, in the same vein as now infamous "Dow 40,000" book written near the height of tech bubble madness.

Of course this book cites a study by Goldman Sachs, which concludes that China's economy will Eclipse the United States by 2027. And once again, no error rates or deviation from prediction data is given for the reader to judge the accuracy of this prediction. Its a simple appeal to authority. The book progresses using vaguely familiar (i.e. dialectic) processes with all the trappings of an author attempting to convey an aura of inevitability, which is to be expected when the author was the editor of "Marxism Today"

If only the author explored some possibilities that contradicted his assumptions. As Bertrand Russell said in his book "The Problem of China":

I believe that, if the Chinese are left free to assimilate what they want of our civilization, and to reject what strikes them as bad, they will be able to achieve an organic growth from their own tradition, and to produce a very splendid result, combining our merits with theirs. There are, however, two opposite dangers to be avoided if this is to happen. The first danger is that they may become completely Westernized, retaining nothing of what has hitherto distinguished them, adding merely one more to the restless, intelligent, industrial, and militaristic nations which now afflict this unfortunate planet. The second danger is that they may be driven, in the course of resistance to foreign aggression, into an intense anti-foreign convervatism as regards anything except armaments.

The author also argues (in Jared Diamondesque fashion) that several accidents contributed to the present situation of Western nations bestriding the globe. This is of course a slippery slope as he is tacitly arguing that if China had more "accidents", it would have dominated the globe, and furthermore that the future of China will be met by a net positive "accident" ratio. As the great American thinker, Yogi Berra, said "Prediction is tough, especially when its about the future".

Captain Obvious writes a paper...

...called a "Red-Yellow-Green" study, which of course conjures images of primary color utilizing stoplights with the reader as driver looking around to see which light to obey. Given that the rating agencies are having some legal issues related to their "guidance", this kind of metaphor is probably not the wisest choice.

I wonder if they understand the scale of the problem.

The downward spiral in commercial real estate market fundamentals has
accelerated as the recession persists, Moody's Investors Service says in its
latest Red-Yellow-Green study. For the first time in six years, none of the
seven property types tracked by Moody's has a "green" or strong score, while
four of the property types are at levels of weakness unmatched in the almost
10-year history of the study.

Banning risk...

A most silly recommendation from the esteemed congresswoman from California. Because something is a "contributing factor" does not mean it should be banned. The problems we are having now are not because of improper instruments, but improper assumptions underlying the value of same. Extrapolating linear increases in prices or cash flows of just about anything is folly...this clearly holds for House Prices as well as the budget projections for individual states. So goes California, so goes America.

July 10 (Bloomberg) -- Representative Maxine Waters

introduced legislation to ban all credit-default swaps, the

financial instruments blamed in helping to take down American

International Group Inc.

“Credit-default swaps are one of many contributing factors

to the current economic crisis,” Waters, a California Democrat,

said in a statement released at a hearing today on the Obama

administration’s plan to rein in the $592 trillion industry.

“Preventing all credit-default swaps is essential to bringing

stability to the market and preventing a similar crisis in the

future.”

Treasury Secretary Timothy Geithner is testifying before a

joint hearing of the House Financial Services and Agriculture

committees. The administration’s plan doesn’t call for an

outright ban on credit default swaps.

Monsters from the deep...

The "green shoots" propoganda tool is not holding to the facts. We all harken back to the halcyon days of three weeks ago when Fed Ex and multiple T.V. sock puppets were proclaiming the worst was over. Little did we know (well, actually, the astute players are not surprised at all) of the dangers lurking beneath the surface...

Seasonal bumps in unemployment claims (which are further distorted by Auto issues) do nothing to hide declining payroll taxes, rising unemployment, etc. And we still have the next wave of commercial real estate disasters to deal with.

Typically, mindless government spamming (er...spending) is good for stocks, but most now realize the credit mechanism is hopelessly broken and will suffer further damage when the CMBS issue finally surfaces in its Godzilla-like ferocity.

Speaking of Japan and real estate risks, no shortage of pundits comparing our present situation to Nippon's lost decade. The comparison is clearly not apples to apples (demographics is one massive difference), but it is worth noting the policy responses and their effects. The following excerpt is from this article.

The scenario was eerily familiar. A long real estate bubble that had expanded extra rapidly for the previous five years suddenly burst, and asset prices came crashing back down to earth. Banks and financial institutions were left holding piles of worthless paper, and the economy soon headed south. The national government responded to the crisis by encouraging more lending and spending previously unfathomable amounts of money on public works projects in an effort to stimulate consumer spending and restart growth.

But that stimulus did not save the Japanese economy in the 1990s; far from it. The ensuing period came to be known as the Lost Decade, characterized by multiple recessions, an annual average growth rate of less than 1 percent, and a two-decade decline in stock prices and corporate profits.

The Japanese government’s easing of credit rates, instead of spurring real demand, created artificial demand. Federal loans and stimulus spending were not economically productive, and they vastly increased the nation’s debt and prolonged the economic malaise. Worse, businesses spent critical time on the sidelines, waiting for government bailouts and other centralized actions, instead of speedily consolidating their losses, clearing their balance sheets of bad investments, and reorganizing.

The United States in 2008–09, unfortunately, has started down the same path. Federal intervention and the expectation of additional government action are removing firms’ incentive to clean up their balance sheets by selling “toxic” assets. Why accept pennies on the dollar if a deep-pocketed new bidder (i.e., the state) looms large on the scene? The Japanese experience shows that when the government is an active participant in the market, many firms would rather accept state support than initiate the inevitable financial reckoning. Such a status quo does not provide a sustainable foundation for the economy. Instead, it restricts economic growth and creates a cycle of stagnation.

The ECB awakens...

...unfortunately, this might be too little, too late. Sweden is mentioned in the article and I am more confident they understand crisis response better than the ECB.

FRANKFURT (Reuters) - The European Central Bank kept euro zone interest rates at 1.0 percent on Thursday, and markets expect it to hold them at the all-time low for much of next year to help repair the region's economy.

The decision had been seen as a near certainty. Eighty-one of 82 economists polled by Reuters before the meeting, held this month in Luxembourg, had predicted no change from the bank.

"This was entirely expected," said UBS economist Sunil Kapadia. "We are not expecting any more additional non-standard measures. With the data in the market improving there is no compelling reason to do more right now."

Markets were little changed after the decision. Attention now switches to a 8:30 a.m. EDT news conference with ECB President Jean-Claude Trichet. Economists think he will probably repeat that rates are appropriate at the current record low and that the bank sees faint signs of economic recovery.

Earlier Sweden's central bank shocked markets by cutting its interest rates by a further 25 basis points to 0.25 percent. (for story please click)

But the ECB is likely to refrain from any new policy steps so that it can take stock of its unconventional measures to tackle the euro zone recession -- last week's injection of almost half a trillion euros of ultra-cheap funding into money markets, and the soon-to-be-launched program to buy 60 billion euros' worth of mortgage and public debt-backed bonds.

A more collaborative tone...

...that fools no-one. Round and round we go.

China Renews Call for ‘Stable’ Dollar, Monetary Diversification
July 2 (Bloomberg) -- China, the largest holder of foreign currency reserves, reiterated its call for a stable dollar and a diversification of the international monetary system.

“We hope that as the main reserve currency the exchange rate of the U.S. dollar will be stable,” Vice Foreign Minister He Yafei told reporters in Beijing. “This international financial crisis has fully exposed the weaknesses and loopholes in the international monetary system.”

China, whose leaders have expressed concern that U.S. government spending to counter a recession will weaken the dollar, cut its holdings of dollar reserves by $4.4 billion in April to $763.5 billion, the latest figures available show. President Hu Jintao will attend this month’s Group of Eight summit, where China expects the issue to be raised, He said.

“We hope that in the future the international monetary system will be diversified and I believe that this is the aspiration of the entire international community,” He said. “If this issue is raised by leaders during the meeting it is nothing strange, it is natural because we are all discussing how to respond.”

The dollar rose against the euro and erased losses versus the yen after the vice minister said he wasn’t aware that China had requested the issue to be part of the G-8 agenda. The dollar climbed to $1.4105 per euro as of 12:22 a.m. in Tokyo from $1.4142 in New York yesterday. The U.S. currency was at 96.66 yen from 96.65, after earlier falling to 96.38.

The dollar declined beyond $1.42 versus the euro yesterday after Reuters, citing G-8 sources, said China asked to debate proposals for a new global reserve currency at the summit.

Global Reserve Currency

More posturing from the Paper Dragon. Raise your hand if you think China can create the massive kind of domestic demand required with its nascent internal demographic drags and its net exporter of people status. Focus on their security actions as opposed to political and economic negotiations. These are tense times in historical terms...when politicians and rulers can no longer deliver on promises, blaming nefarious actors across the border is the easy play. As I have alluded to on previous occassions, this type of environment has its own angular momentum that seems to allow for disasterous concentrations of power. Central decision making during these times have the worst kind of unintended consequences, to say nothing of the intended consequences.

But enough pontification...

China's longstanding tacit agreement with the United States is in breach of (implied) contract...we are not buying their goods at the same rate but they still have a demand for dollar-denominated assets. The U.S. continues to dine on Chinese Foie Gras. Now how can China placate their citizens given lower monetary velocity, increased savings rates, and political intervention (protectionism) throughout the G20?

July 1 (Reuters) - China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.

One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.

This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.

A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit."