Perspectives on the global economic meltdown (Jan 26 2010)

[negi]

How the heck do you justify an "investment property" that costs Rs. 50 lakhs to build, that you then rent out at Rs. 10K per month, and afford to pay back the loan at 9 percent interest, and pay the annual property tax?

Gurudev no one rents a property worth 50 lakhs at mere 10k a month. For example in the city of joy (cheapest of all the metros in terms of rent) the rent for a 2BHK flat valued at say 30 lakhs is at least 15000 INR.

[enqyoob]

OK, thanks for the data. 15000x12=180,000.

180,000/5000,000 ~ 0.036 or 3.6%.

Who gets loans at 3.6% ??? Otherwise u r losing money on the 50 lakhs, unless, of course, that came from some place that could not be invested in a bank account reported to the guvrmand EyeTee.

Q.E.D.

[vina]

OK, thanks for the data. 15000x12=180,000.

180,000/5000,000 ~ 0.036 or 3.6%.

Who gets loans at 3.6% ??? Otherwise u r losing money on the 50 lakhs, unless, of course, that came from some place that could not be invested in a bank account reported to the guvrmand EyeTee.

Real Estate math works ONLY if there is asset price appreciation (even in Massa). The rental yield is never going to cover the monthly payment, except in a commie "controlled" economy where "speculation" is tamped out by a rule book wielding babu (aka, the mixed economy of the 60s and 70s India).

The reason why you invest in RE is to diversify your assets away into different risk classes, take advantage of any taxbreaks that you might get and finally have a place to call your own.

The rental yields are actually pretty poor in any circumstances. In Bangalore Kerala, a house with a sticker price of 90l to 1 Crore will rent for 25 to 30K (maintenance @ Rs 4 to 5 per sqft per month included).

[negi]

^ Enqyoob garu firstly anyone who builds a house/flat worth 50 lakhs for the purpose of renting it has another one for himself (either in desh/videsh) so we know this chap essentially is a fat cat, secondly from whatever little I know about real estate transactions in desh most SDREs are indeed chankian i.e. just because they take a loan of say 30/40 lakhs for a property of say 50 lakhs doesn't mean they just have 10/15 lakhs in hand most of the times people have at least 2/3 or 3/4 of the moolah already stashed aside the loan is taken just because they are getting a huge lump sum amount in the name of housing loan which can be used for other bujiness.

[Bade]

As for Indian salaries, do desi DOOs REALLY get Rs. 20 lakh per saal in B'looru? How many, I wonder?

Starting salary on getting Buttuck degree for DOO I am told is 2L to 4L depending on your madarassa. Add 1L for each year of additional experience. So a 10+ yr DOO makes 15L on the average I guess. I know a couple of 20 yr ones, with some years in PhD time making 20+L every year as mid-level managers.

I have no real numbers to quote, so will try a WAG estimate in the spirit of all economic speculation. Somewhere I remember reading that Infosys has 20,000+ professionals in Blr alone. So assume the other two trinities of IT-Vitdom in India have similar. head counts too, which takes them to 60k total. Now, there are many other mom and pop type IT-Vity concerns with headcounts in the few hundreds to the low thousands other than the trinity. To make it easy they probably add up to another 40k to give me a round figure of ~ 100,000 IT-Vity superpower DOOs in Bengaluru alone. That is potentially 100k upper middle class households to fill all the 40-60Lacs price range luxury flats, not counting the chi-chi CEO crowd who live in Palm-xxxx lifestyle.

I doubt whether there are 100,000 flats in this category in place. Some of the biggest developments just coming in line have ~2000 flats each and they count less than the number of fingers. So 20,000 flats with cradle to grave facilities perhaps and another 20,000 total units with lesser facilities and smaller communities in the hundreds. So, you can see why there are people willing to still pay 50-60Lacs even with a 15 yr loan and 15% down-payment at the minimum.

Yes rents are low in general in India, and you make at most 5% RoI depening on how you calculate it. If you do not take in the cost of the shell of a home, since most well built flats will last a hundred years at least unlike home here in massa (my 20+ yr old town-home with climate control has walls showing age already, whereas a 15yr old brick and concrete home in monsoon dampened Kerala shows less damage to the walls), then your RoI should be higher...since only the fluff you add need maintenance after renting out unlike here where even the roof and the flooring needs to be replaced every 10-15 years.

[Bade]

OK, thanks for the data. 15000x12=180,000.
180,000/5000,000 ~ 0.036 or 3.6%.
.

So now re-do the same based on the sunken costs for the fluff - essentially kitchen cabinet works and light and bathroom fixtures. These will cost you at most 5Lacs a the bottom. So you are getting (15,000x12)/5,00,000 which means almost like 30%. If you were wise enough to have invested in flats in Bengaluru, Kerala 10 years ago like some early starters in IT-Vity did when costs were a mere 20L or less, you could be getting 30% returns, a cool Rs15k to Rs50K total from renting out 3 such units. No dependence on Social security benefits and a reasonable retirement income for the now famed Yindu way of life.

[Satya_anveshi]

I think the only solution is at this point, to cut back on government spending and reduce taxes for the upper middle classes to free up capital that can be deployed optimally.

Saar a little more gyaan would help

- Who are upper middle class?
- where spending cuts can be done? Who will be ready to be called a traitor to even propose defense spending cuts?
- where do you think "freed up" capital be employed ( how much will it be per house hold)? (perhaps pay credit card debt?)

But do note the following pseudo phacts:
- Nearly Half US house holds don't pay any taxes (rather they get money back)
- top 5% pay ~60% at about ~35% tax rates
- FY09 Spending was about $3.5T;
- FY09 Tax collections were at $2.1T (of which income taxes were about $1T)

Spending cut means job loses and worsening unemployment and lower tax revenues. On top of that you are proposing tax reduction to upper middle class; double whammy to compensate deficit reduction if any.

[Satya_anveshi]

ladies, I know we wandered around a while but there is also real estate thread out there

[geeth]

>>>And I just don't understand the madarssa math of desi real estate, I have to attribute it all to dowry and baksheesh and black money and IT evasion. Plus loans at ridiculous terms that no one ever pays back.

The reason for real estate boom in Kerala is pure speculation...every Tom, Di*k & Harry there is a Real Estate broker now...even if the owner wants, he can't sell the land. The broker decides the price, deal etc... There was a funny case in Cochin couple of years back, where in a property changed hands nine times within a span of a single day! (each time for a higher price) - ie., the initiator of the deal in the morning sold it verbally to the second 'buyer' and he to the third one etc...till the final deal was signed in the evening for a price much higher than that in the morning.

I frequently visit my native place and whenever I am there, at least 2-3 brokers enquire with me about "investible seed capital" - they promise I don't have to buy the property - just to give the advance money, and before the agreement period is over, they would sell it to third party for a higher price and give me the profit, after deducting their commission(This way they save on Registration fee). Most of the deals are like this and of course, there are rumours of counterfeit currency / black money into the real estate.


>>>How the heck do you justify an "investment property" that costs Rs. 50 lakhs to build, that you then rent out at Rs. 10K per month, and afford to pay back the loan at 9 percent interest, and pay the annual property tax?

Govt of Kerala had recently notified that the Govt valuation for one cent (0.01 Acre) in Trichur round is 2-5 ~ 3 crores. I understand the actual price to be paid is higher than this. The land unit, which used to be acres has become cents, and soon they would start quoting in Sq.Ft...similar to that in Manhattan.

[enqyoob]

Govt of Kerala had recently notified that the Govt valuation for one cent (0.01 Acre) in Trichur round is 2-5 ~ 3 crores.

AoA! So all those Sons-e-Soil who were given 10 cents by the kind Marxist gurvmand in the 1960s are now worth $6M each!

So here's my Conservation Law problem: If you take all the oil revenue sent back to Malloostan in the past 40 years and invest it at a reasonable 8% p.a. which is about all you can get from actually producing anything, would you be able to pay for the value of the real estate in, say, central Trichur?

1 cent = 48 sq. m.

Trichur central belt is about 2km diameter, annular area (around the central Thekkinkad) and about 1 km deep. Say around 6.4sq. km = 64E5 m^2 = 1.33E5cents

= 4E5 crore Rs = $8.00E10 = $80B. Well... I guess that's peanuts, wouldn't cover a month's bonus for Goldman Sachs or AIG execs, but that's just the central belt 1km out from center of 1 town out of many in one state out of 28 in desh.

My question was whether there was any realistic basis at all for all these valuations, but that probably cannot be asked about any economy. Stoopid pooch.

Man! The other day I heard a visiting parent from Bahrain explain that he was just dropping his beti off at the Private Tuition Madassa Hostel. $1000 for a month of coaching. Phew!!

Yes, massastan is dirt poor compared to this. No crash needed, it's already 3rd World compared to matrubhoomi.

[vera_k]

Real Estate math works ONLY if there is asset price appreciation (even in Massa). The rental yield is never going to cover the monthly payment

That is how it used to be a few years ago. With the low interest rates, and depressed prices, rentals in most markets here are cash flow positive from day 1.

I think it is safe to assume that real estate is in a bubble anywhere if you need appreciation to make the math work. Because the math depends on an ever increasing number of suckers buying in at inflated prices, which is what happens in a bubble.

[Hari Seldon]

I think it is safe to assume that real estate is in a bubble anywhere if you need appreciation to make the math work. Because the math depends on an ever increasing number of suckers buying in at inflated prices, which is what happens in a bubble.

Excellent point and moi 400% agrees only. Rents in Hyd have always been low (compared to the other 5 metors 'cept Kommie Kolkata) and wouldn't, sans capital appreciation, recover initial investment. Already, there's way too much supply coming into the mkt, seems like, in the next few yrs. As long as its only the realty co.s and their investor-speculators that get burnt, no problemo.

Oh, and count on evermore capital fdi, fii or otherwise flooding into yindia soon. There's nowhere else for the boatloads of herd capital (think pension funds and other institutional investors in high-cost high-debt low-growth tfta ekhanomies) to go to (prc? oirostan? ANZ? LatAm? where?). Can anyone say Asset price inflation imminent? Its not like nobody can see this one coming. The story repeats.

Meanwhile Sri Bernanke and his predecessor Sri Greedspan blamed the infamous 'savings glut' in asia for flooding unkil with capital -> lower interest rates -> subprime lending -> asset bubbles -> chota crash. Even now, the savings glut continues even with a measly 0.25% return on short term t-bills in massaland.

About land, like they say "they don't make any more of it anymore." And here's where demographics come into play as well. Yindia's slated to get its 55% population in urban ghettos before 2020. That frenzy of urbanization has just but started. And there's colossal black monies that regularly get laundered in the property sector. Stamp scam anyone?? Still, even accounting for all that, bubbliness seems to be everywhere. Let's hope a series of small bubble bursts bring 'balance', 'sustainability' and all those nice things back into this sector.

Tiem will tell. Jai ho.

[Sanjay M]

I think it is safe to assume that real estate is in a bubble anywhere if you need appreciation to make the math work. Because the math depends on an ever increasing number of suckers buying in at inflated prices, which is what happens in a bubble.

aka. Ponzi Scheme

no genuine increase in value, just a hype machine dependent upon sustaining itself

[Satya_anveshi]

Meanwhile here is the summation of all the gyaan gathering during the weekend:

Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite period of time

[hariks]

In Bangalore, IT salaries over 20L per year is quite common among people with more than 10 yrs of experience and a decent Madrassa training. In the company I work for (which is neither at the top or at the bottom) people who take transfers from US to desh are offered around 40-50% of their US wages in desh. Fresh recruits are paid around 4L, and 5 yr experienced around 10L.
15 yr experienced (mostly in senior manager grade) are offered 35L or more.

Rents above 20,000 pm are usually paid only by expats, since people who can afford to pay such rents will usually buy a place.
Rents do not yield more than 3-4% on houses/flats and that trend looks likely to continue. The situation in socialist republic of Kerala is a different story. There are not many high paying jobs, and the Gulf money had reduced as well, since there are pay cuts in Gulf following the Dubai fiasco. Still real estate prices continue to be high, a place 3-4km from Trissur round by the side of a major road sells for around 8L per cent.

[A Deshmukh]

OK, thanks for the data. 15000x12=180,000.
180,000/5000,000 ~ 0.036 or 3.6%.
Who gets loans at 3.6% ??? Otherwise u r losing money on the 50 lakhs, unless, of course, that came from some place that could not be invested in a bank account reported to the guvrmand EyeTee.
Q.E.D.

N^3
The interest payments for rented flats are deductible from Income.
Ex: if your income is 20Lpa. And a housing loan of 35L, for 15yrs @9%. you have interest payment of 3L.
You pay tax on only 17L.
so you are basically saving 30% of the interest payment, which otherwise you would end up paying to the Govt as Income Tax.

So, if your housing loan is 8.33% interest (assuming reducing balances).
Cut this down to 5.8% (30% in saved taxes).
Rental income of 3.6%.
tax on rental income = 1.2% (assuming the whole rent is shown on paper with receipts, which I doubt).

next outgo = 5.8+1.2= 7%

So, if the property values appreciates by > 7% every year average its still a gain.

Now, over a 15-yr period, will the property value appreciate by > 7% ?
Most people believe so, due to growing population in India.

[kubhamanyu]

I am stunned at how the property prices are taking off at home. Three years ago, 0.70L/sq. yard, now, 1.25L/sq. y. The punch line here --
we must think bubble ("big bumboo time a'comin") when it's boomin? I mean, when we say something keeps "appreciating" and note that mass is conserved on planet (desh, county, state), that's like getting to divide by zero eventually, isn't it? When does it stop appreciating, then? When all the have nots walk up with machetes in hand to renormalize the freemarket?

[enqyoob]

Thanks, learned much gyaan. Now suppose the highway system becomes decent, slashing commute time by 50%. (And the sun rises in the west, yeah, yeah, I know, but ADB loans can do wonders sometimes - after thees saal of wishing they would do it, this year I find that suddenly there are nice resilient red tile sidewalks around the whole circular shopping/commuter road in Bangalore, Kerala. Barefoot quality!!!! Some pi kilometers of it, came up in less than 6 months. Awesome. ).

For instance, in massastan, one's $$ buys maybe 4 times as much, 25 miles out of town as it does inside the city limits. Commute time if carefully planned, is still only 30 minutes, no real problem, and the air quality is orders of magnitude better and one cannot hear traffic even without head phones stuck over the ears and one can actually walk outside.

It suddenly becomes attractive to buy a similar flat twice as far from the workplace, increasing the diameter of the real estate price spike by factor of 2, and hence supply of equally desirable area increases by factor of 4. I do not see why downtown high-rises or other dumps would appreciate any more. So there is a limit where urban real estate at least flattens - no 7% pa appreciation, hence by above calculation, no net gain. Beyond that, you only win if some megaplex desperately wants YOUR corner of downtown and is willing to pay anything (or, in India, Supari you, to get it).

This still says that the street corner 3-4km out of the city center, which now looks like an absolute dump, may be a better investment. Or maybe one should wait for the full impact of the guvrmand's re-assessment of properties, the Dubai paycut, the KhanKrash and the TDS automation by the Eye Tea and the uncovering of the burkha of Swiss Banks by the Yoo Ess, to all combine in effect b4 tying up all one's cash in urban blight. But will one's massastan mutual fund with evil degenerate dohlar be worth a pakistan at that point?

Ah, I see why the Bandar-e-Dartboard wins all the time.

[kubhamanyu]

But even then, the roads can't grow as the square even as area does. I watch the people give up drivin, get on commuter trains, then the commuter trains get late, and everybody's sayin, f*ck this, I am going to north carolina or idaho or whatever, many do. Meanwhile, downtown, 1Br barsati, $1M now. Old buildings coming down newer taller ones going up, unless they zoned it. And the flats are getting smaller, each costing about the same as the larger one they divided into two by... $600 in Tokyo to live in a coffinbox (or something like that) now for commuters who "miss train" -- populated by people "out of work".

If the number of people were near steady and the boundaries are far away, this works nicely as things effectively diffuse out as much as they need to and viola, the magical steady state of "free market" But if you keep on adding, then conservation enforced on a larger scale. At least we believe there's plenty of space left and boundaries aint reached. Will be interesting to see what the boundary does...$49.99 stardust ship to mars, where you can buy 100sq km for only 1L, taxes included and AIG sells insurance for oxygen tank failure (and eventually bailed out). Or may be virtual reality becomes real, or 20,000 leagues under the sea. Something's f'ed up, we don't have the right scheme here, and the meltdown is completely entirely unsurprising. So are its deadly consequences.

[abhischekcc]

>>Ron Paul types are good in causing takleef to the smug front-runners in election debates, but beyond that, it is as dangerous to support such fellows as it was to support Hitler as the way to get out of the convenient whipping-boy of "market manipulation" by the then-German govt and the "Juden".

N^3, this is a wrong argument.

Ron Paul and Hitler are polls apart when it comes to affinity to big business. Hitler was the favourite battering ram of the German industrialist classes - the saviour who would deliver them from the sceptre of communist unions. Nazis has full blown storm troopers to enforce their agenda. Ron Paul has no such pretensions to anti communism and no storm troopers either.

He seems more like a Ghost of Christmas Past who refuses to go away. An irritant yes. But not dangerous like Hitler.

Comparing the two to discredit Ron Paul is dishonest argument as it ignores the role the two have played in their respective countries.

[geeth]

>>>Ex: if your income is 20Lpa. And a housing loan of 35L, for 15yrs @9%. you have interest payment of 3L. You pay tax on only 17L.

Max deductibles under interest on house loan is 1.5 Lakhs. Anything above that is added to your taxable income.

[SwamyG]

Hari gaaru: Okie dokie, will put them up, when I get the chance in the next day or two. Meanwhile Stiglitz uvacha:

Nobel Prize winning economist Professor Joseph Stiglitz has warned that the United States and Europe can't rely on Asia to help with their economic recovery. Speaking on the sidelines of his Australian lecture tour hosted by Australia's Economic Society, the former World Bank chief economist said Asia - particularly India and China - is successfully distancing itself from Western export markets and is refocusing on huge untapped domestic markets. However, the one-time advisor to former US President, Bill Clinton also says that social justice must be considered if they're to have any success.

Oops here is the Linky

[enqyoob]

But not dangerous like Hitler.

Comparing the two to discredit Ron Paul is dishonest argument as it ignores the role the two have played in their respective countries.

In AmirKhana today, one cannot succeed by coming out like Hitler, precisely because ppl like me will say that that's like Hitler. Instead the campaign will be like what Ron Paul runs. "He" is snow-white in pure sentiments. But, oh! he's not "responsible" for what his close associates and paid campaign managers say, hey?

If he gets elected, who do you think is going to be running the WHOTUS and occupying all the top positions in the (much-reduced, meaning they will kick out all free thinkers) Fed. Govt? The same people who ran the campaign. I could almost see the "No Dogs or Indians" sign on his campaign, given their views on Hispanic-Americans and African Americans. Want to know what we are called?

So that's where the real dishonesty lies (no pun intended). How smart does one have to be to see that? I am really shocked (but not if I had thought about it, I guess) to see desis blindly following such types. After all, we are all Fair N Lovely, hey?

Looking back, I don't think Hitler is reported to have fired a single shot or pressed the switch on any gas chamber, except for shooting himself at the end. The rest was all done by his "associates". Poor Adolf was an Intellectual who spent his time writing his memoirs in Mein Kampf and playing with his pet dog, and was unfairly blamed by all them communists and western propagandists and lesser gene pools, tsk-tsk!

Ron Paul is no different from Vladimir Zhirinovsky (haven't heard from him in a while) or David Duke or the similar twerps in the UQ. Same mentality, slightly different setting, that's all. And he has trained himself to do PC-speak.

All have "radical prescriptions" for the tough problems facing the majority community, involving stomping on the rights of those whom they will exclude anyway.

But always look at the scum that he attracts - and tolerates - around him. That's the SS / Hitler Jugend of tomorrow, and you are very much one of their targets, believe me.

I see the same thing in the reactions of T-Party supporters at lunch - they get very nasty if one suggests that, say, racial profiling at airports is bad ***because THEY feel "safer"**. They support Arizona's Yellow Armband law 400% because THEY don't get dragged out and made to stand in the sun for hours when they are 7 months pregnant, like what happened to those perfectly innocent and law-abiding DOOs at a Texas firm when the local INS goons came 'raiding' - and THEY won't get stopped by a bully sheriff because THEY don't LOOK like "illegal aliens" and their names don't "look wrong". They think medical reform is all "welfare state giveaways" because THEY don't have chronic conditions where the insurance companies hiked their premiums to the stars, and THEY don't need to buy drugs at $300 a tablet, nor face $100,000 doctors' bills to support the worthy cause of Porsche manufacturing for "DOCTOR" Ron Paul's buddies.

Until something happens to THEM, and then it's all and "Obama's fault".

A short word for people with such mentalities is "oiseules".

[SwamyG]

I quote the following paragraph from a review of a book on Burma Linky.

It is now a well-accepted fact that almost all our categories — politics and economy, state and society, feudalism and capitalism — have been conceptualised primarily on the basis of western historical experience. Too often these generalisations rest on the belief that the West occupies the normative starting position for constructing general knowledge. If you accept this proposition, then how much do you accept of western reportage of Third World societies...

There are increasing voices that talk about the modern economic principles having a basis on Western culture - an obvious which sometimes we forget. One of the outcomes of this crisis is the opportunity to restore a balance in the global economy/trade. The "World" as we know it is predominantly a European thought. Europe, Asia and Africa were the World for the most of the human history, until the "new world" was discovered. Now we have managed to populate the "new world" significantly.

[enqyoob]

My fear is that desinomy is not really "delinked" from Khanomy - it USED TO BE time-delayed (zeroth order), but now only phase-shifted (first order), but unlike a 1st order system, the desi market's reaction can also be hugely amplified and may not have any damping.

So we may be seeing in 2010, the run-up to the desi equivalent of late 2007 in Khana. There are some precursors - like I said, Fidelity Real Estate Fund FRESX peaked in EARLY 2007, long b4 the general market peak that October.

So I wonder if the Real Estate slide has already started in desh, the landslide noise is still too muted...

WHAT supports the immense land valuations, other than the Ponzi scheme?

Sometime back my 6th cousin tried predicting how a space-based economy would develop, and tried projecting without any actual resource or product being brought from space back to Earth. IOW, all wealth generation purely by trading between space-based entities. If the Kerala real estate boom is real (and believe me, I can count the luxury cars and new homes and they are very real) then this booming space economy should be perfectly feasible.
But is it? Doesn't there have to be some real wealth generation somewhere? In space it was the reduction of launch costs and risk, by enabling services up there, thus lowering the threshold expense and thus making breakeven feasible. What is it in Keralastan?

[enqyoob]

Added b4 I scoot:

Circa 2000, there was this "theory" and all sorts of highly popular articles, proclaiming how the New Internet Marketplace was fundamentally different from previous stock markets. There was no need for anything to ever come down.

I clearly remember arguing here that Yahoo! stock, then trading at around $500 because it was rising every day, was really only worth $2.

It did come down, at least as far down as $8, maybe to $2, before recovering to the 30s.

[A Deshmukh]

>>>Ex: if your income is 20Lpa. And a housing loan of 35L, for 15yrs @9%. you have interest payment of 3L. You pay tax on only 17L.
Max deductibles under interest on house loan is 1.5 Lakhs. Anything above that is added to your taxable income.

That is only if you occupy the house.
If it is rented, the deductible has no limits.

[Suraj]

The Indian RE market will certainly be volatile, but there's no comparison to the US RE market. The latter has the twin issues of enormous oversupply running into years even assuming higher than present household formation rate, and aggregate active mortgage values far in excess of nominal house prices, to the tune of a $4 trillion overhang. The latter essentially makes the banking system insolvent.

The difference in the case of India is that the RE boom has focussed on high value construction, which not only excludes the mango person, but also insulates him from the volatility of the sector, as well as reduces the potential for a popular backlash on a bust - people actually see it as a welcome correction. Further, there remains an enormous amount of unmet aspirational homeownership demand, part of which requires sufficient income gains before it can become actual demand. Further, there's a far greater insistence on cash upfront in Indian RE than the US case; there's no way you can get a no down no scrutiny loan, and loan terms aren't anywhere near 30 years.

[Hari Seldon]

OK, Back to scheduled programming....

Sri AEP's allah-ram-ism is back on traqck. This time tracking a sinister kawnspiracy to deny the land of the free and the home of the brave much needed resources for frontier tech development!

Grab a beer and ensoi the allah-ram-ism.

Hot political summer as China throttles rare metal supply and claims South China Sea

First the background buildup...

The United States and Europe have been remarkably insouciant about supplies of rare earth minerals so crucial to frontier technologies, from hybrid engines to mobile phones, superconductors, radar and smart bombs.

Lack of strategic planning by the West has allowed China to acquire a world monopoly on this family of seventeen metals. Assumptions that Beijing would never risk its reputation as a global team player by abruptly strangling supply have proved naive.

Then the meat....

China’s commerce ministry has cut export quotas for these metals by 72pc for the second half of this year. It is perhaps the starkest move to date in the Great Power clash over scarce resourses.

The Pentagon and the US Energy Department are still scrambling to work out what this means for US security. An interim report from the Government Accounting Office (GAO) has laid bare just how delicate the situation has become.

“The US previously performed all stages of the rare earth material supply chain, but now most rare earth materials processing is performed in China, giving it a dominant position. In 2009, China produced about 97 percent of rare earth oxides. Rebuilding a U.S. rare earth supply chain may take up to 15 years," it said.

Fifteen years?

Then the ass-covering...

There are no settled communities on the islands. The Falklands parallel is invalid.

Sri AEP's brit you see.

Then the supporting evidence marshalled...

China's rare earth blockade is becoming more piquant by the day as the country swaps threats with the US over the South China Sea. I leave it to scholars at The Hague to evaluate China's claim to "indisputable sovereignty" over waterways that carry half the world's freight shipping. One does notice that much of the sea is a long way from China, and close to Vietnam, the Philippines, and Brunei.

The GAO report said the US had been self-sufficient in rare earth minerals for most of the post-War era. The key mine at Mountain Pass in California shut down in the 1990s when China flooded the market with exports and drove Western mines out of business. One by one, US-based processing plants owned by German and Japanese firms switched operations to China. There are none left.

Cutting-edge weapon technologies are classified, but the GAO said the M1A2 Abrams tank and the Aegis Spy-1 radar both rely on chinese samarium. The US Navy's DDG-51 Hybrid Electric Drive Ship needs neodymium, which enhances the power of magnets at high heat. The Hell Fire missile requires Chinese components, as do a host of functions in satellites, avionics, night vision equipment, and precision-guided munitions.

Some of the metals such as terbium, dysprosium, thulium, and lutetium, europium, cerium, and lanthanum are more important that others, but crudely speaking they are the salt of life for the high-tech revolution -- sprinkled in iPads, Blackberries, plasma TVs, water filters, or lasers.

Each Toyota Prius uses a fistful of rare earth elements, which is why Toyota has purchased the rear metals dealer Wako Bussan. Cerium is used in catalytic converters for diesel engines. Terbium is key for low-energy light-bulbs that cut power costs by 40pc. Neodymium is used in hard-disk drives, wind turbines, and the electric motors of hybrid cars. Fresh research in Tokyo shows that rare metals can cut friction on power lines, slashing leakage.

Countries that cannot obtain these minerals --at any price – will not play much part in the technology revolution.

whoa, whoa! moi wonders where boor des is in this melee....


Then the conspiratorial climax...

What is new is that China has chosen to press the issue by calling these waters a "core interest" like Tibet and Taiwan, and is conducting live-fire naval and air exercises.

Equally new is that the Obama administration has chosen to resist, a change of tack after sponsoring China's fuller inclusion in world governance through the G20 and the IMF.

"We oppose the use or threat of force by any claimant. Legitimate claims to maritime space in the South China Sea should be derived solely from legitimate claims to land features," said Secretary of State Hillary Clinton . In plain English, “back off”.

The foreign ministry called this "an attack on China" and accused Washington of trying to "coerce" smaller countries to take sides in the dispute. There is more than a whiff of "encirclement" fever in these exchanges, like German neurosis in the decade before 1914 that became self-fulfilling. A ring of states around China are indeed beefing up their military ties with the US. Why might that be?

Why indeed.

Read it all. Ensoi.

[Hari Seldon]

Sri Bill Buiter on oiro-woes....

How gangsters are saving the eurozone“

Gangsters, drug dealers and money launderers appear to be playing their part in helping shore up the financial stability of the euro zone.

That’s thanks to their demand, according to European authorities, for high-denomination euro bank notes, in particular the €200 and €500 bills. The European Central Bank issues these notes for a hefty profit that is welcome at a time when its response to the financial crisis has called its financial strength into question.

The high-value bills are increasingly “making the euro the currency of choice for underground and black economies, and for all those who value anonymity in their financial transactions and investments,” wrote Willem Buiter, chief economist at Citigroup, in a recent research report. The business of issuing euro notes, produced at almost zero cost, is “wildly profitable” for the ECB, Mr. Buiter wrote.

Whoa!

The ECB’s gains from seigniorage are becoming increasingly important this year.

The ECB has taken hundreds of billions of euros of assets of unknown quality on to its balance sheet as it has reacted to the global financial crisis.

It holds more than €600 billion in collateral from banks to which it has made loans, and more than €400 billion in securities it holds outright, including government bonds.

Overall, the ECB’s balance sheet has grown to almost €2 trillion. It has a capital base of €78 billion. That creates leverage that makes it look like a “hedge fund on steroids,” Mr. Buiter wrote. It wouldn’t need to lose much on these assets to wipe out its thin cushion of capital.

Don't worry,nothing of that sort will happen. History gawah hai, aakhir. No?

Jai ho indeed.

[Neshant]

Comparing the two to discredit Ron Paul is dishonest argument as it ignores the role the two have played in their respective countries.

The so and so is 'Hitler' claim gets old after a while. I usually recognize the introduction of the "Hitler" comparison into an argument as the other side conceeding that they are having difficulty finding a real flaw in the man's profile. Hence the need to invoke a boogey man.

Ron Paul recognizes that the raiding of people's pockets by politicians is wrong. People who currently depend on this raiding naturally do not like him. More so he's the only politician I know of who exposes the fiat money scam and that earns him a lot of enemies among the pocket pickers and beneficiaries of the setup.

Margeret Thatcher socialism works great until you run out of other people's money to spend and that day is fast coming.

I predict the federal reserve will not exist in 10 years and the fiat pyramid scheme will unravel with millions being financially destroyed in the process. The Internet spreads information too fast and the only defence the federal reserve has now is promoting secrecy (which they more politely called independance) and bribing politicians to keep the public from knowing the truth.

[Sanjay M]

Ron Paul's a libertarian, whereas Hitler was a socialist - the 2 are poles apart.
One believes in small govt, the other believed in big govt.

Regarding US dependence on China, yeah the G2-lovers will be all too happy to build up the US dependence upon China for critical materials or components. Then they'll say, "but we can't enter into a military conflict with someone we're so dependent upon! it's too risky! it's futile! better to work with them than against them!"

[SwamyG]

HSBC chart.

India bucked the trend, with its manufacturing purchasing managers' index, often seen as a proxy for economic growth, rising slightly for a 16th straight month. But declines in PMI readings from South Korea and Taiwan Monday underscored how Beijing's efforts to curb a boom in property prices have affected the rest of Asia, whose export industries have been driven by Chinese demand

[Sanjay M]

(TIME)Which Will Burst: Gold or Treasuries?


Hmm, sounds like another Race-to-the-Bottom.

Which would fade out first - inflation fears or recession fears?
Or alternatively, which would be realized first - inflation fears or recession fears?

Who/what are the biggest contributors to each of these fears?

It seems like China is the biggest determinant for both.
If a recession happens, it will emerge from China's end, since US will sustain itself through borrow-and-spend as long as the Chinese keep lending it money.

However, China's overheating has led to things like its real estate bubble, as well as the onset of labour activism for wage-hike demands.
The Chinese leadership know this can't be allowed to continue, and so they are trying to allow the yuan to gradually rise.

The new Japanese ambassador to China has publicly speculated that exchange rate will get to 5 or 6 yuan to the USD within the next several years. That would of course dampen Chinese export competitiveness to the point where their growth is severely hampered, and consequently their domestic political stability of their very brittle political setup. If China's real estate bubble bursts and throws it into recession, then it would instinctively devaluate its currency in order to export its way out of recession.

Like Satyam's Raju, the Chinese are riding the tiger, and don't know how to get off.
I can picture a large number of second-/third-rung communist officials being executed as scapegoats at some point eventually.

If China's political setup fractures, it would be like watching an amorphous alloy rupture under fatigue - it would be a catastrophic rupture, due to all the pent-up stresses.
At that point, G2-Atlanticist spin-doctors will further exert themselves to claim that "US must do more to stabilize China, or risk the world suffering damage"
Obama will exhort Americans to go out and spend more.

Send more money to China and export more American jobs, so that it can lend more money to the US, so that Obama can spend this money on its special interest groups, who then vote to keep him in power.

Send more money to Pakistan, so that it can give it to ISI, which can then give it to Taliban, which can then kill more US soldiers.

Somebody posted that cartoon by Danziger which shows the US-Pak-ISI-Taliban nexus. Maybe a similar cartoon needs to be drawn about the similar nexus for the Obama-overspending-China-borrowing-votebank game.

[Sanjay M]

Desperation Grows as Unemployment Benefits End

[enqyoob]

The so and so is 'Hitler' claim gets old after a while. I usually recognize the introduction of the "Hitler" comparison into an argument as the other side conceeding that they are having difficulty finding a real flaw in the man's profile. Hence the need to invoke a boogey man.

Ha! Precisely what I was thinking as I quoted those precise comments from Ron Paul's Personal First Person Newsletter - the above would be Neshant's response. He does not disappoint. It is the mindless oh-so-superior response and cheap shot at seeing the Hitler analogy - the assumption that others are too stupid to have read the same silly Theorem about the Hitler introduction to a discussion. Sorry, but here the comparison to Hitler is because the analogy is very very relevant. Labels such as "libertarian" and "socialist" are completely meaningless when one digs deep enough and asks about the effects of not recognizing the symptoms. If you think "Hitler" is banned in the e-forum textbooks, OK, go with Pol Pot or Idi Amin or the Rwandan dictator, the mentality is no different.

The followers of Ron Paul are very clearly on record as demonizing minorities as sub-humans, opposing civil rights, and demanding rollback of all the gains made in civilization in the USA. Very specifically, these people are bloody racists, probably many of them ARE part of Neo-Nazi movements (the ones demonstrating for the Arizona Law included a good proportion, bedsheets, pointy heads and all). They have noooo problem with Big Government when it comes to the military-industrial complex, or protectionist laws on everything, or to shutting off the rights of immigrants (unless of course they are Aryan or Anglo-Saxon). They specifically oppose the idea that people born in the USA have the right to US citizenship.

Abraham Lincoln dared to put the whole nation at war to eliminate these scourges.And died for it, along with a million others. John Kennedy put his foot down and sent the National Guard against these sh1ts - and got murdered for it. The entire Civil Rights Movement was to "win" rights which were guaranteed in the Constitution by any civilized reading, but Doctor Paul and his horde can't see those "specifically mentioned" so they claim that civil rights are invalid.

And they are whipping up support for their Talibanic sh1theadedness by using the convenient platform of "bailout" today, ignoring the simple facts that
(a) it was neocon greed in the name of "small government" that created all the problems by dismantling or gutting all enforcement agencies
(b) several of the smart people who came up to the top of various corporations by merit are not necessarily Baptists.

You STILL can't see the parallels in what Hitler and his gang did to gain power - exploiting the rage of desperate people in desperate times?

It boggles the mind (not a problem for the mindless, of course) to see present-day desis rushing to endorse these sh1ts.

[SwamyG]

Hari garu: Idheegondi.... as I said there is nothing that you or others would not have known. Remember sometime back I had solicited points and you listed some. Stiglitz just washes their dirty underwear in a book. Looks like he has written about them in another book "Globalization and Its Discontents".

I list these lines verbatim from the book "Freefall" with the subtitle "America, Free Markets, and the Sinking of the World Economy". Copyright 2010 Joseph Stiglitz. W.W. Norton & Company, Inc.

• ….in East Asia, the International Monetary Fund (IMF) and the U.S.Treasury were, in part at least, responding to the interests of their “constituents”, the creditors in their financial markets, which were focused on getting repaid what they had lent to these countries – even if doing so entailed socializing private obligations.
• It is worth noting that the East Asian countries that followed the traditional Keynesian recipe (Malaysia and China) did far better than those that were forced to follow the IMF dictates.
• ..the IMF’s policies( often based on the flawed market fundamentalism…..) led downturns into recessions, recessions into depression, and imposed unpalatable (and often unnecessary) structural and macro-policies that impeded growth and contributed to poverty and inequality.
• As a condition for giving money, the IMF insists that the recipient country do certain things. Every bank imposes certain conditions on borrowers to enhance the likelihood that the loan be repaid, but the conditions the IMF imposes sometimes reduce the likelihood of repayment, and often are only very loosely connected to the loan itself. There may be “macro-conditions” (for instance, requiring that the central bank raise its interest rates or that deficits be cut), structural conditions (for instance, requiring that the government privatize its banks), or political conditions (for instance, requiring that the government give full independence to the central bank). In total, the conditions reduce the scope for independent policy making. Many developing countries view the conditions as taking away their economic sovereignty.
• The IMF used its usual tactics for enforcing budget cuts in Latvia with a threat to delay the next installment of its loan, which might have pushed the country into bankruptcy.
• ….the IMF put pressure on Pakistan to raise interest rates and taxes.
• (on global recovery) The choice of the IMF as the institution to deliver the money was itself problematic. Not only had the IMF done very little to prevent the crisis, but also it had pushed deregulatory policies, including capital and financial market liberalization, that contributed to the creation of the crisis and to its rapid spread around the world.
• The central banker of one developing country shared with me a view that was not uncommon: the country would have to be on its deathbed before turning to the IMF.
• In the past, the IMF had provided money but only with harsh conditionalities that had actually made the downturns in the afflicted countries worse. These conditions were designed more to help Western creditors recoup more of their money than they otherwise would have been able to, than to help the afflicted country maintain its economic strength. The strict conditionalities the IMF frequently imposed induced riots around the world .
• The IMF was an old boy’s club of the rich industrial states, the creditor countries, run by their finance ministers and central bank governors. Its views of good economic policies were shaped by those in finance – views that were, as I have explained and as the crisis has amply demonstrated, often misguided. The United States alone had the power to veto any major decision, and it always appointed the number two in command; Europe always appointed the head.
• While the IMF pontificated about good governance, it didn’t practice what it preached. It did not have the kind of transparency that we now expect of public institutions.
• The large giants in Asia – China and India – managed their economies their own way, producing unprecedented growth. But elsewhere, and especially in the countries where the World Bank and IMF held sway, things did not go well.
• America and IMF forced countries to raise interest rates, in some cases (such as Indonesia) to more than 50 percent. They lectured Indonesia about being tough on its banks and demanded that the government not bail them out.
• America and IMF demanded that the affected countries reduce their governments’ deficits by cutting back expenditures – even if, as in Thailand, this resulted in a resurgence of the AIDS epidemic, or even if, as in Indonesia, this meant curtailing food subsidies for the starving, or even if, as in Pakistan, the shortage of public schools led parents to send their children to the madrassas, where they would become indoctrinated in Islamic fundamentalism.

[Satya_anveshi]

Some forum gurus did make an effort to explain and argue against the fallacies of Gold economy which also happens to be one of Ron Paul's fantasy:

It ignores some of the really basic points (all gyaan from gurus of the thread):

- Fiat is a logical evolution of gold economy; During those "golden" years, when you went to bank with $100 and exchanged for dollars, you *believed* what govt gave you was indeed gold. So, even there the system rests upon believing someone. (minus all the hassles and inefficiencies of people running around verifying the gold)
- Reverting to it will bring the complete breakdown of international trade in today's world
- Today's world wide GDP is about ~$55T
- Last time I summed up gold reserves of top 20 countries at *peak* price levels - it came to about ~$600B
- Assuming 80/20, the total could be about ~700B
- How are we going to support a $55T economy with ~700B gold of which BTW a vast majority is possessed by big bad western countries.

It was one thing to have protested during that transition in the 70s; It is also understandable to *may be* possess some gold in situations of Zimbabwean hyperinflation (till the point you cross the border) - anything more you will invite your murder anyway but continuing to argue for gold takes the focus away from finding sensible solutions.

[Satya_anveshi]

US as a country is in political mood; See how 200+ point increase coincides with all the euphoria see in the different news outlets. The secular way everyone jumped on this euphoria implies some agreements/understandings at some level and to move on with those measures (ignore deficit, continue to spend, focus on employment, health care/financial industries reformed). Extending Bush tax cuts IMO is given. IMO, I am speculating a short term bull run in the coming weeks to last at least till the year end.

[Pranav]

Ron Paul's a libertarian, whereas Hitler was a socialist - the 2 are poles apart.

Both Ron Paul and Hitler are agents of the same elites.