Perspectives on the global economic meltdown (Jan 26 2010)

Neshant · Post by **Neshant** » 16 Sep 2010 10:05

I call it as it is. People should be angry at being ripped off by those who contribute nothing to society except scams and try to lie about their utility to society. Well they will be anyway in the next 3 to 5 years when they see their life savings/work evaporate on account of banking crooks.

VikramS · Post by **VikramS** » 16 Sep 2010 10:09

Neshant wrote:I call it as it is.

Just report the news. Trust the intellect of your fellow forum members to make the call.

Mort Walker · Post by **Mort Walker** » 16 Sep 2010 10:13

Nothing is going to work in the form of a stimulus. As said before, the problems are structural and not cyclical.

The Republicans have in the past shown their willingness to pursue a "Starve the Beast" strategy, to cut the funding to the welfare state programs that fuel the constituencies that donate to the Left. Similarly, by abandoning "quantitative easing" and Fed intervention to shore up US markets, the Republicans could simultaneously allow the dollar to drop and sour US debt so that foreign buyers of it would be deterred from making further acquisitions. This would help to protect American sovereignty and stymie others from continuing their creeping takeover of the US economy.

The Republicans are war mongering racist idiots and will start some sort of international crisis, via gun boat diplomacy, to ensure those with capital will continue to buy US debt. This time around it will lead to even more spending for military and national security while "starving the beast" of the Democratic party's electoral base. It will lead to the decline of western civilization. The big danger is that when a big ship is going down, you don't want to get caught in the whirlpool.

Mort Walker · Post by **Mort Walker** » 16 Sep 2010 10:18

Neshant wrote:I call it as it is. People should be angry at being ripped off by those who contribute nothing to society except scams and try to lie about their utility to society. Well they will be anyway in the next 3 to 5 years when they see their life savings/work evaporate on account of banking crooks.

Oh, so you mean like academics that provide an education and do fundamental or biological research, or government that provides infrastructure for commerce? Shit, we might as well have a cultural revolution and push these people out of 2-3 story windows to break their bones and become paraplegics with no health care!

Neshant · Post by **Neshant** » 16 Sep 2010 10:23

Mort Walker wrote: Oh, so you mean like academics that provide an education and do fundamental or biological research, or government that provides infrastructure for commerce? Shit, we might as well have a cultural revolution and push these people out of 2-3 story windows to break their bones and become paraplegics with no health care!

I don't have a clue what you're talking about but I was talking about banking crooks.

Neshant · Post by **Neshant** » 16 Sep 2010 10:26

According to the article U.S. would loose and inflation would be rampant.

Chinese think tank warns US it will emerge as loser in trade war

http://www.telegraph.co.uk/finance/curr ... e-war.html

"Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over $1.5 trillion (£963bn). This would trigger a rise in US interest rates. His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar.

China's authorities seem split over how to respond to moves on Capitol Hill for legislation to punish Beijing for holding down the yuan. The central bank has ruled out use of its "nuclear weapon", insisting that it would not exploit its $2.45 trillion of foreign reserves for political purposes. "The US Treasury market is a very important market for China," it said.... continued in article...

Mort Walker · Post by **Mort Walker** » 16 Sep 2010 10:30

^^^I was referring to the public sector crooks implied in your previous posts. It was tongue-in-cheek reply.

Suraj · Post by **Suraj** » 16 Sep 2010 10:46

The Chinese 'warning' doesn't make much sense. There's no way they can put in a sell order for $1.3 trillion of US debt. As and when they start selling, rates will spike, bond prices will tank, the dollar will plummet and their currency will face enormous pressure to appreciate, the end result being they'll get nowhere near the paper value of those bonds right now.

vina · Post by **vina** » 16 Sep 2010 11:12

the end result being they'll get nowhere near the paper value of those bonds right now.

And exports getting flushed down Pakistan as well.

ShivaS · Post by **ShivaS** » 16 Sep 2010 12:37

What if they trade the T bills for imports instead of currency.
They buy say 100 million dollar worth oil from KSA, they say take these T bills as of spot rate. then what...

The CHinese may lose in the short run but the USD will take a huge hit.

Why do you thing Tim G was laughed out of Bejing university address...

vina · Post by **vina** » 16 Sep 2010 13:05

What if they trade the T bills for imports instead of currency.
They buy say 100 million dollar worth oil from KSA, they say take these T bills as of spot rate. then what...

That is the same as using their dollars to buy oil!. They will do that in any case.

What you are saying is basically do that in massive bulk and inventory. That is, buy so much commodities and move away from dollar. Two problems,

1) You will send commodity prices through the roof and the resulting inflation will bite China in the a** the most as it is the largest commodity buyer

2) If you use 2.5t dollars to buy raw materials at massively inflated prices, you have to inventory it for a pretty long time. What you do is you expose yourself to massive price risk of the commodity.

And that $2.5T dollar driven commodity boom will be followed by a massive bust (all the buying would have happened and then the musical chairs stop and the mines and oil wells will have to sell at rock bottom prices) and the Chinese will lose their shirt. If ever they try to sell even an ounce of the commodities they stockpile, they will send the prices into the deepest hell.

Very dangerous to shift from T bills to commodity which is far riskier than T bill.

The CHinese may lose in the short run but the USD will take a huge hit

That is exactly what the US wants. US wants inflation to pay off debts as Wampum. China wants stable prices to have real growth. Inflation always favors borrowers and robs the bond holders. China is the biggest bond holder and US is the biggest borrower.

If the US dollar becomes worthless, they can pay off all the existing debt in Wampum and then when that is done, they can do the "miracle" of "New Dollar" .. exact stunts that were done in post WWII germany and recently Turkey (Yeni Turki Lira.. New Turkish Lira) to get the currnecny back in strength!

Frankly, the best thing the Chinese can do with that $2.5T is to consume it and that can happen only when the RMB corrects to the market rate (around 30% undervalued), imports will surge, global demand will pick up, Chinese exports will drop, industry will restructure and the global economy will be back in balance.

Notice this will force Chinese giving up on their export driven growth strategy using cheap labor and cheap currency and Chinese growth rates will hit the wall. But there is really no alternative.

There has been an act passed in the US congress mandating dept of homeland security and other Fed Govt agencies to buy 100% American. Geither has already started making noises about the Chinese RMB rate. If the Chinese dont bend now, expect joint and coordinated US/EU/Japan (and maybe roping in India ) action against Chinese exports via quantitative bans.

ShivaS · Post by **ShivaS** » 16 Sep 2010 13:26

No its not that dumb way to dump T bills that I was envisaging.

It is controlled way, PRC is not that dumb to do it overnight, most recent case they bought substantial amount of Gold (along with India).

The match between Unkil and PRC is a mismatch, one is nearly a free economy tghe other is controlled economy.

In economic wars you dont kill your enemy you subjugate him, thats what PRC is doing....

Your notion that PRC currency remembi or Yuan will not be allowed appreciate by administered exchange rate , yes in black market the exchange rate may be different. Like Indian Rs vs Dollar in mid 1995s

officially 1usd was 32 rs but in hawala it was priced at 44 to 45 till Rs dollar exchange was free..

No I ma no way suggesting dumping dollar and they will never do, read NYT columnist Krugman how PRC is buying up Yen to make Yen stronger there by sniffing out competetion from Japan to PRC ( if yen weakens vis a vis usd). Japanese are not allowing PRC to buy unless PRC explains what its intention is they say

That is exactly what the US wants. US wants inflation to pay off debts

No US wants growth not inflation, in the scenario if Remembi gains over dollar yes the imports will become expensive, there by spurring local manufacture which in the first place went away because of cost differential, or alternatives like Walmart buying more from India, from South Africa Hondorus Zimbabwae yes in the short run there will be turmoil but substitues will come up very soon to fill void.

nandakumar · Post by **nandakumar** » 16 Sep 2010 16:39

vina wrote:
Quote
2) If you use 2.5t dollars to buy raw materials at massively inflated prices, you have to inventory it for a pretty long time. What you do is you expose yourself to massive price risk of the commodity.
Unquote
Exactly. there is also the issue of none of these commodities either singly or taken together is an answer to the deployment of chinese foreign exchange reserves. just to give you an example. take the case of copper. this was a commodity that was much in the news during late 2009 and early 2010 as a case of chinese stockpiling. even if all the of the mined and refined copper of roughly around 18 million tonnes is bought over by the chinese it will use up no more than 135 billion dollars. a lot of these producing countries are also consumers of the metal. they are not going to allow china to walk away with the copper that is produced and starve the local industry of the raw material. you certainly can't lay your hands on all the copper in the world. may be at the margin you can stock pile a million tonnes or so. but that hardly is a solution to the problem. other than precious metal copper is by far potentially the single largest source of store of value. you can of course zinc tin and so on. but all of them put together is a mere blip in the hoard. then there is also the problem of physical storage- a supply chain ightmare in itself. if on the other hand one is talking of storing value through exchange traded derivative contracts for future delivery of copper you are once again talking of exchanging one piece of paper (t bills) for another piece of paper with perhaps even more disastrous consequences in terms of evaporation of portfolio wealth. net-net, chinese forexs reserves problem can not be viewed through the rubric of asset allocation framework.

ShivaS · Post by **ShivaS** » 16 Sep 2010 17:14

comon guys who in the world would dump 2T worth T bills one shot or in rapid fire..... even the dumbest bio unicellular oraganisms learn by bio feedback...and morph to evolving situations..
ps I have not read the article by PRC chaps link posted.

Christopher Sidor · Post by **Christopher Sidor** » 16 Sep 2010 17:35

Neshant wrote:According to the article U.S. would loose and inflation would be rampant.

Chinese think tank warns US it will emerge as loser in trade war

http://www.telegraph.co.uk/finance/curr ... e-war.html

"Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over $1.5 trillion (£963bn). This would trigger a rise in US interest rates. His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar.

China's authorities seem split over how to respond to moves on Capitol Hill for legislation to punish Beijing for holding down the yuan. The central bank has ruled out use of its "nuclear weapon", insisting that it would not exploit its $2.45 trillion of foreign reserves for political purposes. "The US Treasury market is a very important market for China," it said.... continued in article...

If you owe the bank 100 USD it is your problem. If you owe the bank 100 million USD, its the banks problem. Here the bank is China and its holding of US Treasuries. If China were to exercise its nuclear option, then it would be the one to loose. There is nobody on this planet, who will buy 800 Billion USD worth of US Treasuries, baring the US Government/Treasury or some Gulf Kingdoms.

China is the weak party where this is concerned, not US. Remember a creditor needs a debtor, otherwise his money will just rot away with inflation eating it up.

Sanjay M · Post by **Sanjay M** » 16 Sep 2010 17:51

No, we've heard this argument from Krugman before, only to see him later fume in frustration, implicitly indicating the desperate futility of his argument.

The Chinese strength isn't solely reposed in its past lending to the United States, but it's continuing ability to behave as a creditor. In other words, the Chinese can divert their lending elsewhere to strengthen other markets, at the cost of diminishing US importance - and that's what they're indeed doing.

If China had made all its money in the past, without any current ongoing ability to do so, and had lent all its past accumulated money to the USA, then I could see your argument of the US holding China to ransom as being valid. But the fact is that the Chinese haven't lost their ability to manufacture - they can keep doing that, and cultivate other markets to buy their goods, which would cause the US to slide in economic importance globally.

So it is China which retains the initiative, not the USA. It is China which can continue to alter the situation in its favour, to reduce its exposure to an increasingly deteriorating USA. China is building roads, highways, bridges, factories, etc in places like Africa, and those people will be able to mine coal, iron, etc, and consume Chinese-made goods. The US will be marginalized more and more, and that's not something they can easily reverse.

Hari Seldon · Post by **Hari Seldon** » 16 Sep 2010 18:12

Am in Bangalore on a visit and had the honor of meeting an esteemed BRFite here today - whose articles in DNA we all love to read

Well, couldn't keep away from BR even on a business trip. Here's a ZH takedown of the darkness facing Japan...

When Japan Collapses

Yup, take the rhetorical flourish with appropriate doses of salt..

Only a partisan two-bit hack economist/liberal rag columnist from an Ivy League University with a Nobel Prize could look at the following two charts and conclude that the Japanese Government failed to revive the Japanese economy over the last twenty years because they spent far too little on fiscal stimulus.

Japanese government debt as a percentage of GDP was 52% in 1989, prior to their real estate and stock market crash. Today it stands at 200% of GDP. Current budget projections show the debt reaching 250% of GDP by 2015.

The pundits who never see a crisis on the horizon point to the fact that Japan has not collapsed under the weight of this debt as proof that the U.S. debt level of 90% of GDP has plenty of room to grow without negative repercussions. This is the same reasoning “experts” used in 2005 when they proclaimed that home prices in the U.S. had NEVER fallen on a national basis, so therefore there was no reason to worry about home prices. A basic economic law is that an unsustainable trend will not be sustained.

Good point and old hat to thread regulars, am sure.

But just how bad things look is sometimes startling only.

A weakening Yen combined with a demographic nightmare would reduce demand for bonds paying 1.0%. This isn’t a positive development when you are running $600 billion annual deficits and desperately need investors to buy your debt. When demand for your debt is weak, increasing the interest rate you pay is the logical next step. Sounds reasonable unless you already have $10 trillion of debt outstanding. Currently, interest rates on 10-year Japanese government bonds are hovering around 0.5%.
Even at these extraordinarily low interest rates, debt service already consumes 59% of all Japanese tax revenues.

If the market demands an interest rate of anything more than 3.5% to buy their debt then Japan will not have the revenue to service its debt. As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. It becomes readily apparent that Japan will eventually be forced to default on their debt. There are no good options left. A minor uptick in interest rates will sink the 3rd largest economy on the planet. The near failure of a 3rd world country (Greece) turned the world upside down. The failure of Japan would likely touch off a worldwide crash.

OK, D&G fearmongering discount rate apply!

Japan is the Titanic and it has already hit the iceberg. It is taking on water rapidly. Paul Krugman has recommended that the captain speed up and all will be well. There aren’t enough lifeboats. Intervention in the currency markets are on par with rearranging the deck furniture. More stimulus is on par with the band playing while the boat sinks. The destination is certain and time is running out.

Wow. vivid imagery and all that. When's the book due?

Read it all.

nandakumar · Post by **nandakumar** » 16 Sep 2010 18:23

Sanjay wrote

So it is China which retains the initiative, not the USA. It is China which can continue to alter the situation in its favour, to reduce its exposure to an increasingly deteriorating USA. China is building roads, highways, bridges, factories, etc in places like Africa, and those people will be able to mine coal, iron, etc, and consume Chinese-made goods.

Chinese trade surplus in august alone was 20 billion dollars. its balance of payments surplus has always run ahead of trade surplus. so even if you discount capital account inflows- which incidentally has been strong all these years- one is lookng at an annual accretion of a minimum of $ 250 billion. the african countries with mineral wealth simply can not absorb these level of surpluses. there are also institutional rigidities in the capacity of third world countries where vested interests are opposed to investments that result in expansion of infrastructure capacities as they result in supply overhang in the short term and hence a dimunition of profits. so roadblocks are put up in the inflows. taken all in all, there is not much that the chinese can do by way of diversion of surpluses that are accruing on a continuing basis.

Suraj · Post by **Suraj** » 17 Sep 2010 00:27

There's really no way to dump $2 trillion of US IOUs on to the market, because they're just that - IOUs created out of the dynamic of Chinese trade surpluses vs US trade deficits. Any other entity from whom China attempts to buy commodities or goods will not price those IOUs at their current nominal value - they'll price it based on their economic relationship with the US. If the US doesn't have what they want to buy with those IOUs, they'll value them less. What does the US have worth $1.5-2 trillion that they're going to be ok with someone else owning ? If the Chinese attempt to exchange them for commodities, the seller will just respond to having to hold those IOUs by asking more as security, i.e. raising prices. Whatever they do, they'll still be hit with a massive nominal loss (compared to the current value of anything they could theoretically buy today) when they attempt to get rid of those IOUs. The question is how much they'll lose and how much they have the stomach to lose.

Ameet · Post by **Ameet** » 17 Sep 2010 02:55

US adds 4.8 million more to ranks of the poor as poverty rate jumps

http://www.csmonitor.com/USA/Society/20 ... rate-jumps

Some 43.6 million people were living in poverty last year – the highest number since 1959, five years before President Lyndon Johnson declared his War on Poverty. The poverty rate was 14.3 percent, up from 13.2 percent in 2008 and the highest level since 1994. Hispanic households took the hardest hit: Their poverty rate rose 2.1 percent from 2008's level, compared with a 1.1 percent jump in the rate for blacks and whites. (The US government considers an annual income of $21,756 to be the poverty line for a family of four.)

A record number of Americans, 50.7 million, were not covered by health-care insurance in 2009. At the same time the survey was being taken, Congress passed President Obama’s contentious health-care reform law.

The median household income was $49,800 last year, about the same as in 2008. This "hold steady" figure for income may reflect the fact that many people were helped by the government safety net, such as unemployment insurance, which Congress repeatedly extended and which kept some 3.3 million people out of poverty, according to the Census data.

The poverty rate is likely to rise further, predicts Isabel Sawhill, a senior fellow at the Brookings Institution in Washington, in a new analysis. The rate will approach 16 percent and stay high for most of this decade, she says. The recession will add some 10 million people, including 6 million children, to the poverty rolls.

Hari Seldon · Post by **Hari Seldon** » 17 Sep 2010 07:13

From the FT:

Greece’s finance minister has strongly rejected the idea that Athens will be forced to restructure its debts, saying that a default would break the eurozone.

On a two-day visit to London, Paris and Frankfurt to convince investors that Athens has turned a corner in its year-long economic crisis, George Papaconstantinou told the Financial Times that a Greek default would spark selling in other so-called peripheral bond markets of Portugal and Ireland.

“Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt,” he said.

“People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.”

Famous last words? Talk and cheap and such cheap talk indicates Greece, who does protest too much, is hiding even more than we first suspected. Anyway, Yves smith does a good takedown on this one:

The logic is not exactly encouraging. It isn’t a fact based “Greece can manage to get its gaping primary deficit and whopping government debt to GDP down,” probably because credible data to support that argument would be hard to muster. Instead, this sounds a lot like how Kim Jong Il must negotiate: “I can blow my neighbors up, so it makes sense for you to buy me off.”

If Greece were the only country in need of help, this still might be a valid argument, since the eurozone certainly has the capacity to rescue Greece. But where does this leave Ireland, Spain, and Portugal? How can their citizens be expected to make sacrifices if profligate Greece gets a big handout?
{Bingo. IMO, the PIIGS strategy must be to take what they can from EU now and default en masse afterwards. Right now only the EU biggies, notably germany looks like getting its way on EU monetary policy. No?}

Another little problem with the “we won’t default” (and a restructuring is just a tidier route to the same end, debt renegotiation) is that Greece and default are on a first name basis.

JwalaMukhi · Post by **JwalaMukhi** » 17 Sep 2010 07:28

Hari Seldon wrote:Am in Bangalore on a visit and had the honor of meeting an esteemed BRFite here today - whose articles in DNA we all love to read
.

Hari garu, if you are still in namma Bengaluru and bilekhalli campus, there is a lecture on "India's sustainability" by Stephen Knapp, guy who is little on the overdrive side, but still makes lot of worthy points, sept 17, 2010 Friday.

Hari Seldon · Post by **Hari Seldon** » 17 Sep 2010 08:04

^^^ Heard about it volcano ji. Not sure if I can make it though owing to prior engagements. Are you gonna be there, by any chance?

Dileep · Post by **Dileep** » 17 Sep 2010 11:24

nandakumar wrote:vina wrote:
Quote
<quoted text>
Unquote
<Uncapped, unpunctuated, unintelligible text>

Dear Nandakumar. There is a facility called "quote" on the forum software. Click the button labeled "Quote" on the post you want to quote, and you will see an edit screen with the text neatly quoted. Type your reply under all the existing text.

Click "Preview" button to see how it looks when posted. Edit if needed. Then Click "Submit" to post.

After you get the hang of it, you can edit the quoted portion to retain the significant portion you want to reply to.

And yeah, the first character of a sentence should be capitalized. The europeans decided that long time ago for a purpose.

ShivaS · Post by **ShivaS** » 17 Sep 2010 11:51

even though he is named Jwala Mukhi (one eminating fire from the face, Valcono, dragon, spitfire..)
He is actually Ujjwala, meaning splendorus, bright, radiating eminence etc

nandakumar · Post by **nandakumar** » 17 Sep 2010 14:02

Dileep wrote:
nandakumar wrote:vina wrote:
Quote
<quoted text>
Unquote
<Uncapped, unpunctuated, unintelligible text>

Dear Nandakumar. There is a facility called "quote" on the forum software. Click the button labeled "Quote" on the post you want to quote, and you will see an edit screen with the text neatly quoted. Type your reply under all the existing text.

Dear Dileep
Thanks for the tip. Started using it with this post. I am not too familiar with the norms as a discussant in a forum on the web. BR is my maiden effort. I grant that the post you were referring could have done with a little bit more punctuation but didn't feel it was unintelligible as well. But if you thought so then as a recipient of my post your word ought to be final. In any case, i was making the point that countries that traditionally generate a balance of payment surplus of an order that China has been doing do not really have the luxury of stockpiling commodities as a means of deployment. had given the example of copper in that context.

Hari Seldon · Post by **Hari Seldon** » 17 Sep 2010 15:25

^^^ Nandakumr, your post was a good one. Welcome to the dhaga and pls post more thoughts on economic issues here.

Hari Seldon · Post by **Hari Seldon** » 17 Sep 2010 15:45

So it begins...
Case Tests Retirees' Pension Cuts

A Minnesota court on Wednesday will consider whether the state can curtail pension benefits for current retirees from state jobs, in a case that could affect struggling public pension funds nationwide.

Majorly important case, no doubt. It's a trickle only as of now, but if it goes through the judicial lens, then expect a deluge.

States have responded to budget shortfalls by raising the retirement age and cutting pension benefits for new hires. ... This May, the state lowered that increase for some retirees and eliminated it for others, until the pension plans are 90% funded, a level that could take decades to reach.

A group of Minnesota retirees already receiving benefits under older pension formulas sued the state in May, seeking class-action status.

State courts generally have ruled that states can't reduce benefits for workers who already have retired.

OK, its not as if this ruling will set precedent elsewhere or something, it turns out. Still, hugely significant, IMO.

While a ruling allowing Minnesota's new pension formula to stand wouldn't establish a single legal precedent across the country, it could encourage other states, hit by deep budget deficits and a wave of baby-boomer retirements, to try to reduce benefits for current employees and retirees.

Cases similar to Minnesota's are pending in South Dakota and Colorado, and other states are watching the Minnesota case closely as they ponder solutions to their own pension dilemmas.

OK, before folks start saying it's cheating and amounts to robbery of the lawfully retired, kindly spare a thought for the state's defense:

Minnesota says retirees have no legal right to expect a specific formula of benefits.
{Think abt what this means - its goodbye to 'defined benefits' plans if this goes through.}
"A retiree's future benefits and rights are subject to reasonable legislative actions that are intended to preserve the fiscal integrity and stability of Minnesota's public employee pension plans," the state said in a court filing.

And the pensioners have a strong case too...

Stephen Pincus, a lawyer for retirees in the Minnesota, Colorado and South Dakota cases, said courts have ruled that benefits for current retirees can be reduced only when the employer funding the pension plans is on the brink of insolvency.

And they know they're protected by the US constitution under which no US state can declare bankruptcy. So the state gubmint retirees have thrown their city and municipal brethren under the bus or what? Is it OK for local gubmints to declare bankruptcy and emerge from their pension obligations morass?

Jennifer Munt, a spokeswoman for the Minnesota council of the American Federation of State, County and Municipal Employees, said the public-employee union "reluctantly" supported the pension changes "because it protected our defined-benefit pensions by taking responsible actions to stabilize the pension funds." The union believes the retirees' lawsuit is "without merit," she said.

Well, well well - here's a public union that actually supported reasoanble changes. Prolly coz they know how dire things really are. IN the worst of cases, when things do go down the p0tty, there'll be no pensions remaninig - defined benefit or otherwise. BUt, that scenario is extremely unlikely. Taxpayers are and will be on the hook, by hook or by crook, for this stuff, as far as I can see.

Neshant · Post by **Neshant** » 17 Sep 2010 21:32

good interview that gives an idea of what's coming down the pipe.

the prof is right on. the financial and monetary system is deliberately kept complicated and confusing to conceal and promote what is essentially a fraud - a ripoff from those that produce the wealth to those who have set themselves up as useless middlemen the system.

------------

U.S. Bankruptcy, Ponzi Scheme & Return of Inflation

http://www.financialsensenewshour.com/b ... 0911-2.mp3

Prem · Post by **Prem** » 17 Sep 2010 22:03

http://www.realclearpolitics.com/articl ... 07191.html

China's Currency Policies and the U.S.-China Economic Relationship

We recognize that this movement will not be a steady, uninterrupted path--there will be days when the exchange rate goes down, as one would expect as the exchange rate becomes more determined by market forces. And China is going to be careful to try to avoid creating a market expectation of a "one-way bet" that could cause a large speculative inflow. But the exchange rate must demonstrate a sustained, trend appreciation.As the exchange rate gets closer to a level that reflects underlying economic fundamentals, the level of intervention should decline. Continued heavy intervention, in contrast, would support the judgment that the currency remains undervalued.
As China's leadership has acknowledged, a more market-determined exchange rate is in China's interest. A more flexible exchange rate will allow China to pursue a more independent monetary policy better suited to responding to China's economic conditions. It will provide greater ability to pursue needed structural reforms to encourage consumption with less fear of feeding inflation. And it helps China prepare for further opening and internationalization of its capital markets.Going forward, sources of global demand growth have to adjust to the new economic realities. China and other surplus countries like Germany and Japan will have to increase domestic demand as the United States and other deficit countries save more and consume less. By continuing to maintain a rigid exchange rate, China is impeding the adjustments needed to secure the strong, sustainable global growth we all need.Creating a Level Playing Field for American Firms and WorkersBeyond the exchange rate, China has for a long time combined the pursuit of an export-driven growth strategy with a substantial set of protections and preferences for its domestic industries. We are committed to leveling that playing field.

It is a simple principle of fairness that American firms competing in China's markets should have the same rights enjoyed by Chinese companies, just as Chinese firms compete on a level playing field with U.S. companies here.For example, the government still plays a very large direct role in the economy, through state- owned enterprises, and in the allocation of credit and other inputs to domestic production. China pursues industrial policies to promote what it calls "indigenous innovation," aimed at promoting innovation and technological advancement in China that potentially discriminate against U.S. firms and their products, services, and technology. China also has yet to meet its 2001 commitment to sign on to the disciplines provided by the WTO Agreement on Government Procurement (GPA). And China continues to maintain investment barriers that prevent U.S. firms from having the same opportunities that Chinese firms enjoy in the United States.

ramana · Post by **ramana** » 18 Sep 2010 02:40

hari Seldon, Has anyone looked at capital accumulation advantage between trading nations with difference in wage structure? I mean suppose a $10/hr wage nation trades with a $1/hr wage nation how does the baalnce of money flows work out over time?

JwalaMukhi · Post by **JwalaMukhi** » 18 Sep 2010 07:25

Hari Seldon wrote: Are you gonna be there, by any chance?

Hari Garu, no. I wish. Moi,currently not in Bengaluru. Saw your trip to Bengaluru and would have definitely made an effort to meet. Hopefully will sometime either in Bhagyanagar or in Bengaluru when opportunity presents.

Hari Seldon · Post by **Hari Seldon** » 18 Sep 2010 07:50

ramana wrote:hari Seldon, Has anyone looked at capital accumulation advantage between trading nations with difference in wage structure? I mean suppose a $10/hr wage nation trades with a $1/hr wage nation how does the baalnce of money flows work out over time?

There have been quite a few studies on related problems starting with Ricardo's theory itself.

However, where theory diverges from practice is that a floating exchange rate is typically assumed whereby the rate of capital accumulation by 1 country is balanced out by rises in the exchange rate in the other which in turn makes returns on capital relatively more attractive in the first country.

With PRC, it's a pegged currency - it cheats through the setup. There is no 'equilibrium' outcome that I can think of in this case other than an abrupt end to the game down the line because there are no significant equalizing counterforces at work to the dominant flow of capital. Uncharted territory, indeed. However, its not as if there're no (unintended?) consequences of maintaining the peg. Inflation within PRC is rampant, am told. Understandable given the massive amounts of forex PBoC would need to sterilize on a weekly basis only to keep the peg constant. The resulting boom in money supply can't bode well for the $1/day wage levels for sure.

IMVVHO, of course. Would love to know what other folks think.

Hari Seldon · Post by **Hari Seldon** » 18 Sep 2010 10:16

More sabre rattling from DC that in the end, when the smoke clears reveals sound and fury signifying nothing.
US turns up heat over renminbi (FT)

Tim Geithner, US Treasury secretary, encouraged the US Congress to pile pressure on China to force it to allow its currency to rise and said the administration was examining a range of tools to urge Beijing to act.

But during his appearance in front of Senate and House of Representatives committees on Thursday, Mr Geithner stopped short of promising to impose any of the aggressive legal or administrative measures demanded by US lawmakers.

Yawn only.
Recall that in 1985, the US under Reagan had both the will and the clout to force the plaza accords down tokyo's unwilling throat. What followed is financial history - one of the the largest asset bubbles ever happened in Japan and when it burst in 1989, it was game over. Japan has never really recovered, and given its graphic demographic deficit, it may never really 'recover' in the traditional sense of the term.

Two congressmen have proposed a bill to declare Chinese currency manipulation an illegal export subsidy, thus increasing the emergency tariffs the US can impose on imports it deems subsidised. Mr Geithner said he was studying the proposal but that it was a “complicated question”. Sander Levin, chairman of the House ways and means committee, said he would decide by early next week whether to push ahead with the bill. He has also suggested taking a case to the World Trade Organisation.

But Mr Geithner resisted a third means of pressing Beijing – naming China as a currency manipulator in a twice-yearly foreign exchange report. The next version of the publication is due in mid-October, shortly before the G20 heads of government summit in Seoul.

Charles Schumer, a member of the Senate banking committee, criticised Mr Geithner. “I’m increasingly coming to the conclusion that the only person in this room who believes that China is not manipulating its currency is you,” he said.

More yawn. Wake me up when something actually happens only.

Singha · Post by **Singha** » 18 Sep 2010 10:24

they have been submitting C17 loads of dossiers and issueing threats to the big lizard for 3 yrs now on renminbi valuation. big lizard isnt even awake to hear it. Yawn, double yawn.

Hari Seldon · Post by **Hari Seldon** » 18 Sep 2010 10:25

Oh, sri Bob Reich has a perceptive take on the above problem. Recommended read, IMO.
Why Getting Tough With China Won’t Solve Our Jobs Problem

With unemployment in the stratosphere and the midterm elections weeks away, politicians naturally want to show voters they’re committed to getting jobs back.

So now they’re getting tough on China.

But it’s a dangerous ploy based on wishful thinking.

Treasury Secretary Tim Geithner told the Senate Banking Committee Thursday the Administration is “examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.” Translated: We’re on the verge of threatening them with trade sanctions.

Even this didn’t satisfy the Senators. Charles Schumer (D-New York) charged that trade with China “diminishes America, our standard of living here in America, and America as a world power.” Richard Shelby (R-Ala) demanded to know why “the administration protecting China by refusing to designate it as a currency manipulator” – a designation that could lead to trade sanctions.

On Wednesday the U.S. filed a pair of complaints against China with the World Trade Organization, alleging China was unfairly denying American companies access to its market. Meanwhile, several Democrats facing elections in November are introducing measures that would allow companies to pursue sanctions against China for manipulating its currency.

Here're some interesting bits:

Second, it’s already costly to China to keep its currency artificially low – requiring that China buy loads of dollars. So why would anyone suppose that making it more expensive for them would bring China around?

China has been willing to bear this huge cost because its export policy doubles as a social policy, designed to maintain order.

And why may sri Reich be finding excuses for/apologizing for china's behavior? Would he rather the social unrest reach critical mass in the US first due to stratospheric unemployment, trashed retirements and healthcare first? Aah, now I see why Reich built his case so far thus...

Third, even if China did allow its currency to rise against the dollar, there’s no reason to think this would automatically generate lots more American jobs.
...
American isn’t suffering high unemployment because we’re buying too much from China and not selling them enough. Trade with China is a small portion of the U.S. economy.

Twenty million Americans lack jobs because American consumers – especially America’s vast middle class – can no longer spend what’s necessary to keep nearly everyone employed.

After three decades of stagnant middle-class wages, during which almost all the economic gains have gone to the top, we’ve finally reached a day of reckoning. The middle class can no longer borrow vast sums by using their homes as ATMs. They can’t squeeze more working hours out of two wage earners. And they have to start saving for retirement.

The central challenge we face isn’t to rebalance trade with China. It’s to rebalance the American economy so its benefits are more widely shared.

Hmmm, Point worth pondering and all, eh?

Anyways, whilst we've kinda sorta reached broad consensus on at least the symptoms of the problem (declining real median wages from the 70s on), wonder what the contours of the solution would look like. The situ is still evolving - the compromises and revamps required to get the system sustainable again remain to be seen. Jai ho.

Hari Seldon · Post by **Hari Seldon** » 18 Sep 2010 10:34

US workers’ poverty reaches 50-year high (FT)
There it is. Read it all.
Reads almost like a western screed lamenting desi <$2 poverty, but with more H&D and less opinion thrown in for a change. IMO, the tempo is building towards some serious policy action. Watch for whether this drip drip drip of media articles to drown into a drumbeat level din clamoring for tough policy action. What next? Bomb Iran?

Singha · Post by **Singha** » 18 Sep 2010 11:32

and how will bombing iran reduce poverty in america? even a regime change will accrue all gains to dyncorp and blackwater types who will pick the carcass clean ... unless the unemployed and poor are formed into blackwater militias and given jobs policing iran in the aftermath!
iran is not radiating any overt threat to america right now and the american public opinion will be wary of fighting "israel's war" a second time
around.

Hari Seldon · Post by **Hari Seldon** » 18 Sep 2010 12:00

^^^That was tongue-in-cheek.

Point is, right now, there's no way to make from where the khanate is at present (point A) to where they wanna get to (Point B ). Nope, not even in the so-called challengers and the libertarian opposition do I see any whiff of confidence or understanding of how to get to point B.

My own thoughts are a tad inchoate at present on the roadmap to point B. IMO, it must certainly involve:
(a) breaking down the monopoly based healthcare-pharma-insurance ripoff cartel (immediately frees many tensions over healthcare costs and business slowdown in hiring due to insurance ripoffs),
(b) get marginal tax rates on the top 2% of US earners back upto 80% plus (yup twas there in the 60s and growth and wage growth for the median seemed fine then),
(c) capital controls to prevent capital flight following the tax rates hikes,
(d) do a cheena on cheena regarding gubmint protection, advisory and et al for domestic industry versus phoren industry,
(e) print a coupla trillion more and disburse directly to all US households some $50k types to pay down their costliest debt (student, credit card, mortgage) and start anew,
(f) widespread criminal prosecutions of finance-insurance and real estate high-flyers for fraud on charges across the board,
(g) close down half the overseas mil bases and bring the troops home- certainly get out of Iraq and Afgn, and last but not least
(h) hope and pray for change.

OK, incomplete list, messy, wishlisty and unrealistic and all that too. Theek hai. Points to the enormity of the problem built up over decades only. This didn;t happen overnight, no sir. But this would be a start. Oh, add allowing the worst of the banks to fail and taking the carcass into receivership to sort out whatever is left, pushing derivatives into an independent clearing house and other such basic commonsensical stuff to the list too.

Oh, and Jai ho.

svinayak · Post by **svinayak** » 18 Sep 2010 12:05

Americans struggle to regain their shrunken wealth
Americans' wealth drops for first time since early 2009, brought down by lower stock prices
http://finance.yahoo.com/news/Americans ... 2.html?x=0
Jeannine Aversa, AP Economics Writer, On Friday September 17, 2010, 7:20 pm EDT
WASHINGTON (AP) -- Americans' long journey to regain the wealth they lost in the recession is stalled.

Households failed even to run in place during the April-June quarter as sinking stock prices eroded wealth. Stocks have since recovered about two-thirds of those losses. But based on last quarter's data, household net worth would have to surge 23 percent to reach its pre-recession peak.

Net worth -- the value of assets like homes and investments, minus debts like mortgages and credit cards -- fell 2.7 percent last quarter, or $1.5 trillion, the Federal Reserve said Friday. It now stands at $53.5 trillion.

That's above the bottom hit during the recession, $48.8 trillion in the first quarter of 2009. But it's far below the pre-recession peak in wealth of $65.8 trillion.

The drop from April to June was the first quarterly decline in Americans' wealth since early 2009. Before then, net worth had risen slowly for four straight quarters.

Economists generally think household wealth has ticked up in the July-to-September quarter so far, because of higher stock prices. Yet given last quarter's setback and expectations of scant gains ahead, some economists have pushed back their forecast for when Americans will regain all their lost wealth: Not until the middle of this decade.

Their stagnant wealth will likely keep Americans from spending freely -- and the struggling economy from picking up strength. Consumers tend to spend according to how wealthy they feel. And their spending accounts for about 70 percent of the economy. In the meantime, people are saving more and paring debt, Friday's data showed.

The decline in net worth from April to June amounted to an average drop of $12,941 per household. Average household wealth now amounts to $455,173. That's up from $415,185 during the recession. But it's down from a peak of $563,438 in 2007.

One reason why economists foresee only slight gains in wealth is they expect real-estate values to stay weak. Residential real-estate accounts for 32 percent of net worth; individual stocks make up 13 percent. The balance includes retirement accounts, taxable mutual funds, bank accounts, bonds and possessions such as cars and jewelry.

During the recession, sinking home equity and stock prices made shoppers skittish. More than a year after the recession is thought to have ended, the housing and stock markets remain fragile. That's why most Americans aren't spending as much as they typically do after recessions.

Consumer spending grew at an annual rate of just 2 percent last quarter, about the same pace as in the first three months of this year. Most economists think Americans will spend at about the same pace, or only slightly better, in the current quarter.

By contrast, after the 1981-82 recession, consumer spending averaged a robust 6.5 percent pace during 1983.

"Consumer spending is going to show only stunted growth this year because the wherewithal to spend -- jobs, income, wealth -- are only inching higher," said Ken Mayland, president of ClearView Economics.

Another reason shoppers are unlikely to ramp up their spending: Their faith in the economy is sagging. Consumer confidence dropped in September, according to the University of Michigan/Reuters' consumer sentiment index fell released Friday.

Carla Fehribach, a retired airport ticket agent in St. Louis, said the stock market's failure to generate any real growth this year has made her more cautious about spending. "I'll feel a little more comfortable about spending more if the stock market and the economy turn around," said Fehribach, 67.

She and others are instead saving more. Americans saved 6.1 percent of their disposable income from April to June, the highest quarterly total in a year.

And they are slowly trimming their debt.

Overall household debt dipped to $13.45 trillion from April to June. That's a 3.2 percent decline from a peak in early 2008. People, on average, are carrying around $43,000 in debt -- from mortgages and credit cards to auto loans and home equity lines.

People who defaulted on mortgages and other loans accounted for some of the decline in debt. But many other households have been paying down debts and are reluctant to take on new loans, analysts said.

The decline in net worth underscores how much household wealth depends on stock values. About a fifth of household financial assets are in stock-market holdings. And the value of those holdings fell 12 percent in the April-June period compared with the first three months of the year.

Americans' home equity isn't making up for the loss in their stock values. Last quarter, U.S. real estate values ticked up a scant 0.3 percent compared with the January-March period.

And many economists expect the home market to weaken further, especially since a federal home buyer tax credit has expired. Most expect home prices to decline, on average, 5 percent to 10 percent by the middle of next year.

Some optimism about stocks has been sparked by the gains they've made since June 30. The Standard & Poor's 500 index, a broad gauge of the market, has recovered about two-thirds of its losses from the April-June period. That translates into modest advances in household wealth since June 30. Still, for the year, stocks are up just under 1 percent.

Though the S&P 500 remains 28 percent below its October 2007 peak, employees who have stayed invested in 401(k) plans and continued to contribute have fared better. About 78 percent of them now have more money in those accounts than before the market top three years ago, according to estimates by Jack VanDerhei of the Employee Benefit Research Institute.

Still, so many people have seen their overall wealth diminish since the recession that they lack confidence to spend much.

Scott Nieberg, a St. Louis veterinarian, for example, says his retirement account is worth about what it was a decade ago. Nieberg, 53, says he's all but given up hope his nest egg will grow significantly any time soon.

His business would have to improve significantly for him to feel comfortable enough to take a vacation, he said.

"In a down economy, you just work hard," Nieberg said. "We used to take vacations. Now, we take weekends."

AP Business Writers Dave Carpenter in Chicago, Alan Zibel and Christopher S. Rugaber in Washington and Christopher Leonard in St. Louis contributed to this report.