Perspectives on the global economic meltdown

ramana · Post by **ramana** » 12 Jun 2009 09:35

Looks like BRF has to start charging for all the wisdom and advise being given out.

Prem · Post by **Prem** » 12 Jun 2009 10:36

paramu wrote:They need access to Indian market and Indian labor. Without that they can't make their savings and investments grow.

With present leeders ,it will take them 10 years to come to the above conclusion .

By then it will be too late and Obama1 and Obama2 will be gone after hard but futile churning of water in hope to extract butter to make ghee.

svinayak · Post by **svinayak** » 12 Jun 2009 20:44

Prem wrote: They need access to Indian market and Indian labor. Without that they can't make their savings and investments grow.

With present leeders ,it will take them 10 years to come to the above conclusion . By then it will be too late and Obama1 and Obama2 will be gone after hard but futile churning of water in hope to extract butter to make ghee.

They have set India in a collision course by their intervention in the last 20 years in the region.
After talking to many people I see that they do not see a long term relationship. They see Indian labor in the global market place but not as a source of production inside India. There is some quick money thru FII and some local units for catering to local region.
Only few companies have started seeing India as a base for large global operations. The conflict is the main image they see in the region.

Singha · Post by **Singha** » 12 Jun 2009 20:59

except for aeroplanes and weapons the US no longer produces much of manufactured goods unlike china, japan or germany. the intangibles they produce like design, IT, financial services, advertising, films is already present in india via offshore units.

US produces lot of agri products and minerals but these by nature cannot be outsourced.

if we are really interested in manufacturing driven boom, we need to undercut china which nations like vietnam are successfully doing. germany will remain protectionist and cautious. japan is similar and they have invested heavily into prc.

of the manufacturing powers the one with heaviest bet on india seems to be south korea and to a small extent japan.

SwamyG · Post by **SwamyG** » 12 Jun 2009 21:03

Snow gaaru: I know you had given your cycle in the past. Can you give it once again? And explain each of the steps? TIA? Or if you can point me to the post, that will do too.

Added: And meanwhile...for the learned gurus Will There be Zimbabwe-Type Hyperinflation in the USA?

vsudhir · Post by **vsudhir** » 12 Jun 2009 21:04

They have set India in a collision course by their intervention in the last 20 years in the region.
After talking to many people I see that they do not see a long term relationship. They see Indian labor in the global market place but not as a source of production inside India. There is some quick money thru FII and some local units for catering to local region.
Only few companies have started seeing India as a base for large global operations. The conflict is the main image they see in the region.

The "they" also spectacularly failed to foresee the global conomic meltdown and thereafter the demography driven great bear phase in the G7 (think of japan in the last 20 yrs and extrapolate a similar fate to all 'em emerged economies) that could last a decade+.

I know that whilst wild theories suggesting how the powers that be gamed the whole thing to their benefit are rife, what comes across from a slightly more careful reading of the leading personalities and institutions involved is varying grades of rank incompetence, determined negligence, flawed regulation, myopic criminality and outright fraud.

In other threads folks have opined on how the same set of wise, emerged minds were unanimous in their belief in the 50s and 60s that yindia would collapse and splinter and how TSP was the natural heir to the $hitish legacy of martial superiority, right to rule, exploitation and expropriation. We know how that turned out.

Today the same emerged (from musharraf) minds are confident that the PRC model is the future. Am not saying they will 100% be wrong again, just that their record flunks any notions of their infallibility.

Meanwhile, the ordinary minds that live outside ivory towers and gubmint corridors - those that put their money where their mouth is - are slowly but surely pouring their monies into what they see as a decent bet -a group of emerging markets that have potential. And yup, India figures in their plans.

vsudhir · Post by **vsudhir** » 12 Jun 2009 21:10

SUdhir garu, thats what I was attempting to show in my cycle of probable events

there will be deflation initially for assets in US atleast ( the world follows is another matter), which makes the dollar go up, then the swing will be to stagflation and then to hyper inflation...

JS garu,

Not quite sure i follow. The (rather unexpected) drop in yield in the 30yr bond means folks don't expect the inflation, stagflation of certainly the hyperinflation scenario to come about. I was imagining the 30 yr Tbond breaking the 5% barrier but nope, its firmly below 5.

IMO, it will be prolonged deflation for USA only. Note - deflation in some ways is more deadly than even hyperinflation. And it is demographic trends driving the game. Come 2012 and a plurality of boomers retire. Thereafter, where from will growth come in the US mkt? Which sector do you see currently has any hope in hell of emerging an employment generator? Even healthcare is saturated for the next several yrs with a long pipeline of folks wanting to get in. we'll see.

SwamyG · Post by **SwamyG** » 12 Jun 2009 21:11

Personal savings is increasing in the USA, and some experts are worried about it. They say it is good in the long-term but bad in the short-term. Common sense is unless, unless something bad is going to happen in the short term they should be happy that people are saving more especially if it is going to help in the long run. If a patient is going to die in the next few minutes, everything is possibly done to save him/her. Long term side affects are not taken into mind. So why are experts worried about increased personal savings? Something is wrong with them or the system or the current situation.

Satya_anveshi · Post by **Satya_anveshi** » 12 Jun 2009 21:16

But it gets blurr who the patient is: Consumer or Economy.

If everyone (consumer) saves and does not buy (market tanks). Individual behavior change is gradual and not rapid. Hence the worry even if in the long term savings are good, in the short term it is something you don't want to happen beyond control.

SwamyG · Post by **SwamyG** » 12 Jun 2009 21:19

^^^^
In USA it is always the Economy. Corporations are the Kings. Corporations need economy to keep running, to keep economy running they need consumers.

John Snow · Post by **John Snow** » 12 Jun 2009 22:38

Sudhir garu

yes deflation is more deadly than inflation ( that has been the mantra {inflation better than deflation}for Indian economy for a very long time to sustain the growth, after Independence, the way we went about Public sector building by deficit financing causing inflation and even devaluation of currency, 1967, 1969 and subsequent erosion of Rs value till we partially freed the Rs against $).

In order stem deflation Keynesian model suggests that govt intervention by massive public spending on projects
In the current context the wages are already spiraling down (IT firms in US have asked High end of the wage earners to take cuts from 15% to 30% or will be let go) steadly in addition to unemployment. SO USG is pumping money into projects (to a lesser extent, and buoying up banks and fianacial institutions with bad assets which isall to well known to repeat)
The money for this activity is coming from borrowing, from outsiders which will crowd the market, so the private sector cant borrow unless its rates are higher, so Cost of goods will go up, which is inflation, in addition there is defacto devaluation of $ which will gradually trigger hyper inflation this time by commodity prices especially $ based trading like oil. Thats where the hyperinflation will start.

Also recall I said that in order to continue Amrikhans to continue consumption atleast till alternative markets are found, all other countriess will deliberately devalue their currencies to continue to feed the consumption in USA, which cant overnight become frugal, thats why Big O will have to continue to implore people to spend. As it is people are worried that overnight peoples savings in USA is starting climb at an alarming rate causing the recovery to be very very slow, aka consumer confidence that GO GO days are Gone Gone days.

I hope I made my point.
Thanks for bearing with me.

derkonig · Post by **derkonig** » 12 Jun 2009 23:42

John saar,
IMHO, while the GoUSA stimulus package is being financed via the monetization of debt, IIRC, the bulk of the new money is being pumped by the Fed & not by foreign t-bill purchases. Therefore, crowding out wrt corporate borrowing may not be as big a problem is the prevailing negative sentiment & consequent lack of trust in lending to corporates amongst banks & the public.
But, the creation of money, will sooner or later result in serious devaluation of USD & runaway inflation.

vsudhir · Post by **vsudhir** » 12 Jun 2009 23:50

JS garu,

I understand where you are coming from. In fact moi too was in the soaring-inflation-will-follow-deflation camp till the day before yesterday.

Problem is the bond mkt kinda voted that camp down.

If 30yr T bond yields are not spiking == buyers' expectations of inflation over a 10+ yr horizon are reasonably stable == 4.8% yield over 30 yrs is a good deal == de facto deflationary scenario onlee despite every chance of running trillion dollar deficits over the next decade.

Turns out there may be a solution to the riddle. The 'buyer' with these quaint expectations on in-de-flation could well turn out to be the Fed itself. Implausible? Illegal? Well. Check this out:

Which is why we were greatly troubled when we learned recently on good authority that Federal representatives may have opened multiple undisclosed-type accounts with none other than State Street Global Advisors over the past few months. All of these accounts are allegedly handled by one single trader, who is cocooned and isolated from interaction with other partners.

Zero Hedge can, as of yet, not vouch for this being 100% factual and is asking readers who may have additional knowledge of the situtation to please come forward and share their views ([email protected]). If, indeed, the Federal Reserve or other derivatives of the administration, are now directly involved in trading, managing repo terms, stock lending, collateral distribution and other liquidity-crucial aspects of what was once an efficient market, then indeed this rally could be written off not merely as the biggest short covering rally of all time, but one that has been explicitly orchestrated by those who should be most impartial to an efficiently working market.

Link

So mamma Fed might just be running unnamed trading desks eh? These could well have bought a lot of bonds. Rumors were rife that even many Primary Dealers were stunned to see the fall in yield yesterday. Now we know that the Fed is most certainly interested in keeping the 30 yr yield low as it impacts the mortgage industry mighty heavily onlee and the admin is despo level trying to revive the dead housing bubble.

Denninger writes:

The Fed's charter and statement of operation is that liquidity operations are to be performed through the NY Fed dealing desk. That transparency is important. It is why I was able to detect the liquidity drain on September 24th and sound the alarm - even though it went unheeded - three days before the equity market collapsed.

This sort of transparency of open market operations is critical. Even though nobody gave a damn about the huge liquidity drain in September, the record remains for Congress and others to look at in the future, should they so choose, and if there is an investigation of the propriety of those actions, the proof is right there in front of people's nose.

If The Fed is dealing through one "special trader" at State Street, then all such transparency of action and intent is GONE.

Such intentional obfuscation can only have the purpose of being able to "act in the shadows." It is entirely possible that while Congress ignored my warning call, The Fed did not, realizing that there is a tremendous amount of exposure for them (as there should be!) for such an action, and therefore, acts were undertaken to hide this sort of thing in the future.

Bad juju folks.

Worse is that if this is true and is proved the risk of capital flight is extremely high. Do you want to participate in a market that is "rigged" like this by The Fed, operating with essentially limitless liquidity to game the markets any time they'd like in violation of the law?

If this is just a bad rumor or some tinfoil conspiracy, then it is. Lord knows there have been plenty about the "Plunge Protection Team" over the years.

If this proves up as real, The Fed must be immediately decertified and, if we can find a criminal act in here (I suspect that prosecutors might be able to) everyone responsible for this, or who acted with knowledge of it, needs to wind up in prison.

Link

Read it all.

darshan · Post by **darshan** » 12 Jun 2009 23:52

Folks, how would the wedding seasons pan out in India in next few years? This drives lot of consumption.
For example, elders in my family are scared by just thoughts of having two weddings in the same year or even over two years.

Anujan · Post by **Anujan** » 13 Jun 2009 00:50

This Bernanke character is quite shady. Under "Bernanke Doctrine" he outlines seven salient aspects, all of which range from unethical and conspiratorial to illegal. In fact, I am still incredulous and think that the wikipedia page has been vandalized

The seven steps that the Federal Reserve needs to take are:

1) Increase the money supply (M1] and M2). {Aka Everybody is rich and can spend money because, hey, we can print as much as we want}

"The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."

2) Ensure liquidity makes its way into the financial system through a variety of measures. {Aka: Bank is out of money ? Not to worry. Feds will show up at the middle of the night, in a black truck and unload boxes of money}

"The U.S. government is not going to print money and distribute it willy-nilly..."although there are policies that approximate this behaviour."

3) Lower interest rates - all the way down to 0 per cent. {Aka Yields for T-Bills determined by the market are so yesterday}

Bernanke observed that people have traditionally thought that, when the funds rate hits zero, the Federal Reserve will have run out of ammunition. However, by imposing yields paid by long-term Treasury bills,

"a central bank should always be able to generate inflation, even when the short-term nominal interest rate is zero ...[this] more direct method, which I personally prefer, would be for the Fed to announce ceilings for yields on all longer-maturity Treasury debt."

He noted that Fed had successfully engaged in "bond-price pegging" following the Second World War.

4) Control the yield on corporate bonds and other privately issued securities. {Aka It is illegal for us to buy corporate bonds directly. So we will give supari to someone else to do it -- Reminds me of Paki govt intervention in the stock market}

Although the Federal Reserve can't legally buy these securities (thereby determining the yields); it can, however, simulate the necessary authority by lending dollars to banks at a fixed term of 0 per cent, taking back from the banks corporate bonds as collateral.

5) Depreciate the U.S. dollar. Referring to U.S Monetary Policy in the 1930's under Franklin Roosevelt, he states that: {Aka Chinis holding too many greenbacks ? We will turn them into trash !}

"This devaluation and the rapid increase in money supply ... ended the U.S. deflation remarkably quickly."

6) Execute a de facto depreciation by buying foreign currencies on a massive scale. {Aka Same as above}

"The Fed has the authority to buy foreign government debt ... [t]his class of assets offers huge scope for Fed operations because the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."

7) Buy industries throughout the U.S. economy with "newly created money" In essence, the Federal Reserve acquires equity stakes in banks and financial institutions. In this "private-asset option," the Treasury could issue trillions in debt and the Fed would acquire it - still using newly created money. {Aka Well I am out of words Let me try. You set up industries, indulge in productive enterprise and employ people. I have a printing press. Guess who buys who ? }

vsudhir · Post by **vsudhir** » 13 Jun 2009 01:14

So who bought all the recently issued treasuries?

Old china hand Brad setser is sure its US households and not the Fed. Hmmm. Lets hope so.

John Snow · Post by **John Snow** » 13 Jun 2009 02:14

That means the people and institutions are moving from stocks and mutual funds to T bills, via insurance company offered annuties.

Shyam garu had asked the question so what grows in a bear market.

The answer is the above shift from stocks oriented holdings to T bills

Also people and institutions might be dumping longterm 30 yr T bills and moving to 10 yr. The demographic conditions also supports that move as the boomers need money today and into 10 yrs

Nandu · Post by **Nandu** » 13 Jun 2009 05:48

Anujan, as far as I can see, the only step they haven't taken so far is #6, buying foreign currency to drive down the dollar. Can it be far behind?

vsudhir · Post by **vsudhir** » 13 Jun 2009 06:18

Still leveraging up

Nice, peaceful, zimble read that lays out the situ (snafu?) in plain terms.

Some excerpts:

True, this is a slower pace of debt buildup than seen in the recent past. In 2008, total debt rose at an average of $654 billion per quarter, and in 2007 the pace was 1,149 billion a quarter. But the point is that we are still taking on debt, not deleveraging. What we have been doing is replacing private debt for public debt, and to some extent replacing State and Local debt for Federal debt.

What does bringing down the total debt burden on the economy mean? Barring a dramatic and sustained acceleration in the rate of GDP growth to Chinese-type levels (not going to happen), it means that households and businesses are going to have to borrow less, save more and pay back the debt...or start defaulting on it. {Or, as seems likely to happen, have the federal gubmint take over the debt and zimbly inflate it away} We got a taste of what it is like when households and businesses are not able to borrow last fall, and it is not any fun.

Given the number of states and localities that are in deep fiscal trouble (see California), this may extend to huge numbers of Chapter 9 bankruptcies (municipal) as well as Chapter 11 (corporate) and Chapter 13 (personal). This will not be good news for the financial sector -- most notably the banks, but not limited to them. Given its ownership of the printing press, the bankruptcy of the Federal government is not likely until long after the dollar loses its reserve currency status and the Federal government is forced to borrow in currencies other than the dollar.

However, the prospect of very high inflation down the road is real. It is not a current danger given the huge amount of slack in the system. With unemployment at 9.4% and rising, there is simply no way that the wage side of a wage-price spiral can take hold. Thus for the time being, any inflation will simply serve as a method to reduce the real incomes of Americans.

This last one is for you, JS garu.

Singha · Post by **Singha** » 13 Jun 2009 10:46

the US household savings rate seems to be gone from slightly -ve to +5% in one year. some people claim it will climb to 15% and stabilize.

this will have a tremendous impact on consumer driven GDP side which iirc is 75% of US spending.

germany, china, japan, all luxury goods exporters(oecd), textile & handicraft makers (india included) are
already feeling the bite.

I dont think germany, china, japan will be able to find alternative markets to sell the deficit from the US
market. emerging market consumers are more value conscious, recycle , frugal and dont live on credit.

vsudhir · Post by **vsudhir** » 13 Jun 2009 18:08

US cities may have to be bulldozed in order to survive

The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.

The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

Have to admire the alacrity with which unkil moves when crisis shows up on the door. The democracy obstacles - lawsuits, delays etc - apply much less than in India.

On the flip side, reminds me of what GI Joe once said rationalizing some controversial actions in 'nam

We had to destroy the village in order to save it.

vsudhir · Post by **vsudhir** » 13 Jun 2009 19:35

Car arson up 27%.

One theory doing the rounds is that if you're behind on your car payments, might as well torch it, obtain the insurance, payoff the car loan and pocket the change. Zimble onlee, no?

I know sounds too unpleasently rough for the genteel 'emerged mkts' but hey, tough conomic times have been known to make behavior predictably unpredictable, many a time. Who knows?

Link

SwamyG · Post by **SwamyG** » 13 Jun 2009 19:50

I dont think germany, china, japan will be able to find alternative markets to sell the deficit from the US
market. emerging market consumers are more value conscious, recycle , frugal and dont live on credit.

Ain't that the best way to live? USA is (re)discovering that now.

Sudhir gaaru: Uh Oh, that is not going to go well with the automobile-lobbyists, oil-lobbyists, suburbia lobbyists etc etc. There are folks who want to have smaller cities, smaller cars etc and folks on the other side clamor for big cars, big cities. Truly it is a battle between the Republicans and Democrats. Is USA fighting for its Empire like Britain in the early 1900s?

Singha · Post by **Singha** » 13 Jun 2009 21:52

I had posted an nyt/wsj article of a midwestern city (cleveland ohio?) where entire subdivisions are virtually abandoned and the police and city council have no real $$$ to keep those areas clean and safe. 'investors' are said to to be buying in at prices like $2000 for a home.

meantime CA governor said school textbooks cost the state $350 mil / annum and since
CA had no money, he is going to cut down on schoolbooks and depend on students
learning things online and from their ipods.

it was left as a assignment for the reader who would fund and setup the all e-book
infra and readers I suppose.

http://www.thestar.com/news/insight/article/650231

Cash-strapped California, ever compelled to be in the forefront of change, took a giant leap into uncharted territory this week.

Facing a staggering $42 billion (U.S.) budget deficit and desperate to cut costs, the state announced its public school system is tossing out pricey textbooks in favour of free digital versions.

This fall, high school maths and science texts will be entirely digital and, as the program rolls out, all textbooks on all subjects, K through 12, will join them.

That, at least, is the ambitious plan.

Gov. Arnold Schwarzenegger said it's "nonsensical and expensive" to stick with hard-bound books – "instructional materials made possible by Gutenberg's printing press" – when outside the classroom, "kids get their information from the Internet, downloaded onto their iPods and in Twitter feeds to their cellphones."

With education accounting for about 40 per cent of the state's budget, the move will save "hundreds of millions of dollar," he declared.

And lest anyone miss his personal attitude toward traditional books, he pressed the point home by holding up four large texts and adding dismissively, "I can use these for (bicep) curls."

Poor old Gutenberg, sent for another spin around his grave by the whoosh of historical inevitability.

No one with faculties intact doubts that fully digitalized teaching and learning are en route. But this fast, this soon?

Will California's move really prove to be a tipping point?

Don't bet on it, says Toronto school board trustee Howard Goodman, a leading advocate of technology in Ontario schools. He thinks the plan is dangerously premature.

"I was completely shocked when I heard about it," he says. "No kind of subtle interactive technology is mature enough for a large-scale implementation like this."

The technology is still three to five years away, he says. Even if Ontario had the money, which it doesn't, he wouldn't make the move Schwarzenegger has just made.

"Nobody knows how to do it overall. And trying it prematurely is a big disservice to 2 million students down there. They'll be guinea pigs."

Details of the state's plan are, to put it mildly, thin on the ground.

Goodman, like others, also finds it disconcerting that even the man handling the expedited vetting – of the open-source content to be used this fall – doesn't know what device students will be using, if any.

Brian Bridges, director of the California Resource Learning Network, wondered aloud the day after the announcement: "Is it a Kindle? Is it some other kind of e-reader? Is it a one-to-one laptop program? Will (teachers) just print pages out?."

If so, the big announcement may have been exaggerated as well as premature.

"Kids have to have their own devices," says Goodman.

He argues that for technology to achieve its potential, the culture of schools and of teaching practices have to be changed through an orderly, two- to three-year transition. "If the timeline on this is as fast as they say, their teachers won't be prepared, let alone the technology."

There are more unanswered questions, says Ryan Paul, a California-based technology writer, chief among them distribution. "That's the biggest challenge because not all kids have their own computers or e-readers and a lot of school districts can't afford them."

Will the state pay or at least subsidize the cost of them? Nobody knows.

With textbooks costing $75 to $100, California has been spending $350 million annually buying and replacing them. Schwarzenegger says that once the digital program is in full swing, a school district with 10,000 high school students could end up saving about $2 million a year.

Come again, say critics. Presuming teachers won't be just distributing print-outs and students will be given some sort of electronic device, aren't those savings wiped out?

Forget computers, they say. An Amazon Kindle e-reader prices in at $360. For a school board with 10,000 students, that's $3,600,000. And even a bulk-buying deal has a price-tag, says Ryan Paul (and that's before replacing the lost or damaged devices).

David Wiley, a specialist in instructional psychology and technology at Brigham Young University, is the man who coined the term "open source" to refer to digital material that is free because it's in the public domain or copyright has been fully or partly waived.

Open-source content can be modified, reproduced and distributed by the user. In this context, it could be tailor-made to reflect the demographics, for example, of individual schools and boards.

Wiley is excited by California's plan to make use of open source, saying it definitely will save money in the long run. But he likens the move to hearing your favourite book is being made into a movie: "Great, but where will they go wrong?

"The ratio of devices to students has to be one-on-one, so the kick-off costs will be huge." Also, warns Wiley, the digital material "has to be of the same quality" as traditional texts.

California content evaluator Brian Bridges says the state is already working with 10 publishers and expects up to 16 to submit content by the end of the month.

"This will be pretty groundbreaking," he told arstechnica.com this week, "and be a paradigm shift for the publishers as well. They're taking a paid resource they used to charge for, and basically allowing it to be downloaded for free."

At which point, the state's educators can make all the changes they want.

To date, textbooks have been on a six-year update cycle. That's meant that ones on television technology still focus on cathode-ray tubes, without mention of LCD or plasma. Science books adopted in 2006 still call Pluto a planet (instead of a" "plutoid").

The constant updateability of digital books is irrefutably a point in their favour. "The ability to modify presents opportunities, yes," says Toronto's Goodman, "but it can mean dangers, too."

What if one school board wants creationism taught as an alternative theory to evolution and amends the online text to say so? Goodman says that developing guidelines for issues like that is exactly what he means by "going through an orderly transition" before leaping into the technological deep end.

It's no surprise to Ryan Paul that the state is limiting itself to maths and science for the fall launch: "They're safest." The expedited vetting process means the normal evaluation criteria, primarily on depictions of women and minorities, are being set aside to meet the deadline.

The state's notoriously arduous and bureaucratic review process for other subjects – especially history, social sciences, English literature – has stopped some publishers from selling to the state, says Paul, and been a key reason for spiralling costs.

Whether the process will repeat itself digitally remains to be seen. Along with much else. Then again, as Goodman notes, major political announcements are typically long on fanfare, short on details. He's doubtful, but still curious to see how California's gambit plays out.

Maybe it will be like U.S. President John F. Kennedy in 1962, pledging to land an American on the moon before the end of the decade. "He had no idea how they were going to do it. But they did."

vsudhir · Post by **vsudhir** » 14 Jun 2009 00:21

The fiscal black hole in the US

William Buiter in FT., Recommended read folks. And yup, if Buiter is saying JS garu's model holds, then it holds onlee.

Obama’s plans for public expenditure are conventional, middle-of-the road social democratic spending plans. You cannot have social democratic spending ambitions if you are not able to impose social democratic tax burdens. {Duh, but surprising how many dunno}

My fears about the sustainability of the US public finances is based on my belief that the US public believes there is a Santa Claus: that you can have the higher benefit levels and higher-quality provision of public goods and services without paying the price in the form of higher taxes or user charges. The US polity is so polarised, that it is not likely that a compromise will be achieved in the years and decades to come, on how to raise the additional revenues or how to cut public spending by enough to restore public debt sustainability. Exaggerating slightly, the Democrats will veto any future public spending cuts and the Republicans will veto any future tax increases.

{Not really. The GOP is irrelevant in DC now. The Dems have block-proof majorities in all branches (soon, even in the supreme court). Obama agenda will steam ahead and I wish it greater godspeed.}

The result will be a build-up of public debt of such magnitude, that the markets will force the government to choose between inflation and default. The state will choose inflation. It always has done to in the past when the debt burden was exceptionally high. If the state wanted to signal it will not choose inflation, it would retire its dollar-denominated debt and replace is with index-linked debt or foreign-currency denominated debt. There is no sign of this. Indeed, even as regards new debt issues, index-linked debt is hardly on the menu at all. When a commitment device is easily available but is not adopted, I tend to get concerned.

The markets are slowly waking up to the threat of inflation as a solution to fiscal unsustainability in the US. The fact that, in the short run (say for the next 3 years or so) deflation is much more likely than inflation does not help, as markets are hopelessly myopic. But once we get more than 3 years into the future, and certainly more than 5 years, the risk of high inflation (between 5 and 15 percent, say) is a material one. Only if Obama manages to put together a new coalition, based on a new national consensus, about the level of public spending and the distribution of its funding burden, will there be a non-inflationary way out of the debt dilemma. Such a major political realignment is possible, but not likely.

Ten-year rates on Treasury Notes have just begun to tickle 4 percent. Sooner (if markets become less myopic) or later (if markets remain stuck between blindness and myopia) the reality of the future inflationary threat will feed into interest rates at maturities of five years and longer. The Fed will not be able to stop this. It may temporarily be able to check the rise in long rates at those exact maturities it decides to purchase, but it cannot be present continuously at all maturities.

Read it all.

vsudhir · Post by **vsudhir** » 14 Jun 2009 00:39

Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman has a good piece out today highlighting the differing economic policy agendas of the BRIC group (Brazil, Russia, India and China). In it he suggests CRIBS is a more appropriate moniker for the group as it is China and Russia leading the way for the four, with Brazil the least influential.

One of the most important reasons why the BRICs do not have the economic clout that they would like is frankly they don’t deserve it. Goldman-Sachs had a story (and more) to sell with its BRICs concept, but those same letters spell a real word, CRIB. The point is that the countries, outside of China, are not among the largest.
According to Bloomberg data, at the end of last year, China was the fourth largest economy ($3.2 trillion), behind the US, Japan, and Germany. This of course takes the Chinese data at face value, and given the often large gaps between energy production and reported GDP growth, as well as the amazing consistency of the pace of growth, many often cast a suspicious eye on Chinese data.

With a GDP of $1.3 trillion in 2008, Brazil was the 10th largest economy, though it is roughly half the size of France, which is the 6th largest economy. Russia and India were neck-and-neck for 11th and 12th places with each having produced about $1.2 trillion of goods and services last year. Spain’s economy is nearly 20% bigger than Russia’s and India’s, and it is the 8th largest economy. Together the BRICs account for a little more than 12% of the world’s GDP, and China alone accounts for half of that.

The BRICs are also small in terms of the depth of the capital markets. Together, according to Bloomberg data, they account for a little more than 6% of the world equity capitalization (MSCI World Index). What equities that are truly tradable are very limited and concentrated in a few names. Often the markets lack the kind of transparency that many Western investors are familiar with, even given the financial crisis.

There are various capital controls and the BRIC’s currencies are not freely convertible or tradable. The banks have managed to partially circumvent the restrictions of the domestic (on-shore) market by creating a parallel off-shore market and non-deliverable forward contracts. Rydex’s CurrencyTrust ETF that tracks the ruble (XRU) was launched at the end of last year and has drawn little interest. It boasts a lowly $5 million market cap (assets under management).

Good read. Course I don't agree entirely with the conclusions but still... interesting how the put-downers use USD sizes when comparing conomies but switch to PPP sizes when talking about climate change, eh? IOW, emohasize slumdawg when convenient and millionaire at other times.

Besides, I like it that we (as in, India) are firmly under the radar, attracting minimum attn, etc etc. Don;t want all the hot money flows of the west land in here and make things unaffordable for the aam ram and renuka.

Link

vsudhir · Post by **vsudhir** » 14 Jun 2009 01:22

San Francisco at Crossroads Over Immigration

SAN FRANCISCO — The city is deeply conflicted over how to cope with the fallout of illegal immigration and its sanctuary policy.

Huh?

You can't marry a welfare state with an open immigration policy. No can do onlee.

Singha · Post by **Singha** » 14 Jun 2009 16:06

Six Flags Inc filed for bankruptcy today.

SwamyG · Post by **SwamyG** » 14 Jun 2009 19:48

vsudhir · Post by **vsudhir** » 15 Jun 2009 17:45

Nanny deflation?

Past: "I've heard nannies deliberate between a swimming pool and a Lexus, between a month of paid vacation and a trip to Europe with the family," Kline wrote in . . .

Present: Nannies and nanny agencies report that the power shift appears to have gone to some parents' heads. Prospective employers are offering some candidates salaries well below average and pushing them to handle additional tasks such as housecleaning. Some families have tried to deduct "rent" from live-in nannies' salaries -- unheard of before the economic downturn . . .

How truly heartbreaking. For the Lexus-driving nannies anyway. Hope they didn't take a car loan now...

vsudhir · Post by **vsudhir** » 15 Jun 2009 18:07

Federal Intervention Pits 'Gets' vs. 'Get-Nots'

HAMBURG, Pa. -- Factory worker Dennis Davis recently stopped at the Cabela's store here to buy a $90 carrying case for the long-barreled Contender pistol he uses to shoot pesky groundhogs at his brother's farm. He paid with a store-issued credit card.

The U.S. government helped finance the transaction. Earlier this year, it recharged the credit-card operations of the Nebraska-based retailer of hunting and camping gear with nearly $400 million of federal financing.

...........The effects are rippling into nooks of the economy far beyond Wall Street and Detroit's troubled car industry. The massive intervention has shifted the way companies do business in a host of ways -- not all of them intended by the government. Increasingly, companies big and small are competing on the basis of their ability to tap government money. A divide is opening between gets and get-nots.....

vsudhir · Post by **vsudhir** » 15 Jun 2009 22:01

Anyone remember Pandit Sukh Ram hiding black money banknotes inside curtains and mattresses? Ho we laughed at how crude desi corruption was etc.

Well, things have gotten crude even in that most advanced of conomies, that most emerged of markets and that most transparent of societies.

The current P/E of khan equity markets is well over 100:1 (around 130 to 1 was what I read a few days back). Again, thats a P/E of 100+!

But the pundits in gubmint, CNBS and elsewhere peddling 'green shoots' and round-the-corner-recovery fairytales won't tell you that. Rather, they will lie through their teeth and tell you that the P/E is actually inthe mid-30s onlee!

Check this out - Denninger railing at the WSJ's brazen misleadership on the matter.

The media doesn't help. The WSJ has been reporting an entirely-fictional "P/E" ratio on the major indices for months, ignoring investment and credit losses (using what is called "operating earnings"), which is fundamentally dishonest. What - a loss that is caused by writing crap loans didn't really happen? Since when?

This has been somewhat corrected - I say "somewhat", because the numbers are still wrong. The last check I made of the S&P 500 on "as reported" earnings (a month or so ago) pegged the P/E over 100. But now the WSJ's "data page" is showing the Nasdaq at 34.7, the S&P at 36.4, and the Russell 2000 as "nil".

Two questions: What possible benefit to the readers of the paper does the WSJ bring by distorting market P/E ratios, and why the sudden change back to including credit losses? None of this was announced anywhere; unless you watched the footnotes, you'd have never caught it. And exactly who is Birinyi Associates (their "data provider" for this), and where is the disclosure of their methodology and math? Since the WSJ is the nation's "business paper of record" would really be that hard for their business desk to do this work themselves? Well, no, but then they'd be responsible for it. "See duck duck!" A most-honest report from S&P itself is found at this link; why doesn't the WSJ simply use the folks who publish the index?

Finally, how do you like owning stocks with a P/E of 36.

And his summary of the snafu is classic Denninger:

Look folks I realize nobody likes hearing this, but I'm not going to quit saying it: asset prices that are pumped due to financial fraud, which then entice people to take on unsupportable and insoluble debt using them as collateral always leads to a huge economic bust.

In fact, every single economic depression since the founding of our republic and before, back to Tulip Mania, in fact was caused by this very same thing.

There is no means to "stop" the corrective process, one can only make it worse. The best, proper, and indeed only choice is to force all the bad debt into the open, force those who both lent and borrowed imprudently to go bankrupt, and allow asset prices to collapse back to sustainable levels.

Whether you want a different solution does not matter.

The math does not permit any other outcome.

link

SwamyG · Post by **SwamyG** » 15 Jun 2009 22:07

G8 Can't stop future inflation

There are many mysteries to life. One of them is NOT how we got in this economic mess. Anyone looking at the history of finance can see that credit bubbles always lead to crashes that we call ‘depressions’. And that using credit to finance wars is the #1 way of creating a credit bubble. All nations don’t need to go to war, to create a global credit bubble. Generally speaking, when major global empires go to war, they create global credit bubbles if they refuse to tax their imperial core to pay for wars. And generally speaking, no empire ever dares to tax the populace at home, for international wars. So they create immense amounts of credit based on future taxes.

The problem with all this is, if a major empire doesn’t tax its populace while going to war, if these wars never end or take forever to end like the Vietnam War or the Cold War, these quickly build up immense mountains of IOUs. So, this weekend, the G8 nations are meeting yet again, in desperation, trying to figure out how to have the pre-2008 status quo while changing nothing essential.

Added more:

All very, very big numbers. The EU is a bigger economic entity than the US after it foolishly expanding wildly, for geopolitical reasons: to surround Russia so Russia could be intimidated and controlled. This has fatally weakened the EU and has not weakened Russia more than it weakened the EU/NATO system. One thing that commentators often forget, is that all things are relative.

For example, the US was badly damaged by the Great Depression. But it was still stronger than all other nations, on the whole. And came out of its shell like a thunderbolt when Japan foolishly attacked the US directly. All things are relative: if both Europe and Russia fall off the economic cliff, the question is, who has the strongest potential? In this case, the fact that Russia has a stranglehold on Europe’s gas supplies means, Russia is relatively stronger than the EU. So, expanding to draw in all of Russia’s former provinces into the EU doesn’t help one bit, if they don’t provide gas directly, themselves.

Russia knows that Europe is fatally weakened. All they have to do is have a loud dispute about gas production on the coldest month of the year, yet again. The immense amount of debt taken on by Europe means, they can’t afford energy inflation, it will kill them just as it will kill the US economy. So what is happening? The price of energy is rising compared to last fall, when the crisis suddenly went into overdrive.

HAHAHA, the G8 want the IMF to tell us what to do? All third and second world nations know that the IMF’s rules are extremely cruel and usually decimate populations and cause death, doom and destruction. They always order higher taxes and reduced borrowing and starving the population and handing off resources to creditor nations. Oops…this means, China!

The G8 still control the IMF. And are in a hurry to use the IMF wealth to make themselves strong again and not do what the IMF does to all other debtor nations! Also, if they tell us, ‘The IMF orders us to cut Medicaid, Medicare and Social Security’, they will act all innocent about this. ’Sorry, the international bankers are forcing us to do this.’ Hell, they may even blame the Chinese! And the Chinese know this.

Some of the above quotes might make more sense when you read the entire blog with the articles and charts.

vsudhir · Post by **vsudhir** » 15 Jun 2009 22:18

Interesting link, swamyg. Thx.

John Snow · Post by **John Snow** » 15 Jun 2009 22:32

"Wars cannot be waged unless financed by taxation, or pillage and plunder, or atleast by war reparations" Spinster 2004.

Added later

Sudhir garu, yes yes I do remember the episode of Sukh Ram. We had this quote from senior Congress wallah

"SUKH RAM BADA DUKH DETA HAI"

Ameet · Post by **Ameet** » 16 Jun 2009 02:52

US credit card defaults rise to record in May

http://www.reuters.com/article/marketsN ... 615?rpc=44

* Bank of America charge-off rate soars to 12.50 percent

* American Express default rate rises to 10.40 percent

* Citigroup charge-off rate goes up to 10.50 percent

* JPMorgan credit-card default rate rises to 8.36 percent

CalvinH · Post by **CalvinH** » 16 Jun 2009 05:02

I am not sure about the reality but the general mood is that recession is easing. I have a hypothetical question for you folks: If current US govt is by some means able to pull US out of the current recession in another 6-9 months then what are the chances that there would be another recession soon in future (4-5 years) time.

I believe that massive money put into the system before it could have corrected itself to a stable state would lead of bubble somewhere else which could lead to a bigger event then what we encountered late last or early this year. Do you folks agree with this hypothesis.

Pls ignore if this is a stupid question.

Bade · Post by **Bade** » 16 Jun 2009 06:09

CalvinH, all economic predictions and forecasts are not absolute facts. There is nothing absolute about economics, it can be best described as a fraudulent science of the relative states of human hope and achievement. One can be correct if one says there will be no more bubbles or even the exact opposite.

disclaimer: not a guru just an observer.

John Snow · Post by **John Snow** » 16 Jun 2009 06:09

Credit Cards and student loans were the biggest money spinners for banks.

Student loans were underwritten by federal funds, and banks got hold of those funds at prime rate (Beta near beta) then turned around started charging students with 15+ percent.

Now credit card rules and student funds have changed so wtach more news on defaults and write offs.
****
As to CalvinH question.

If the recession is really going to be over in 6 months to a year that will financial accounting maya not real growth. More gimmicks are expected. My humble estimate is it will take 18 months plus to go out of recession.Japan is oing to the model here for us to compare. Definitely the days drill baby drill into bank vaults for borrowing are over for sure.

Good will and thrift stores will give the fillip to GDP

John Snow · Post by **John Snow** » 16 Jun 2009 06:11

"If statisticians are half liers, economists are three fourth liars" based on statistics gathered by Spinster