Perspectives on the global economic meltdown

Satya_anveshi · Post by **Satya_anveshi** » 16 Nov 2009 09:23

Hari ji,

All this khanomic theorizing is one thing but the reality could be much, much more zimble. my take is as follows:

Bush’s family, as you know, has historically been in the banking business and hence has been slush with funds and contacts with the who's who of the financial world. Be that as it may, when he took over as POTUS, Clinton gave him the dot-com busted economy (people talk about budget surplus yes but economy is what matters when you are POTUS). So, the guy started to let loose his financial machinery coupled with energy loot via wars.

His financial hara-kiri needed sustained efforts over 3-5 years and thus his second terms was most vital. He had to have it else he would have got screwed (we can come up with all theories of how and why Al Gore/Kerry got screwed). As expected, the entire financial world, population went on the debt binge.

When his second and final term was about to end, he wound down the shop, exited with tons of profit to himself and to people who mattered to him. For the rest all, it is consolidation, meltdown, liquidity crunch, recession, depression and whatever you call it.

Like all else, it takes comparatively minimal efforts to screw up something than building it.

the amount of forward buying that happened in those 5-6 years under Bush need at least a decade to set it right and so it will be. Obama is trying the best he can to emulate Bush but I doubt he can succeed in it. People just won't bite especially with the faux-pause which brought them to reality. They will be ready again in due time but not as yet.

Meanwhile, the show must go on else the *outsiders* with all the $$ will buy solid American companies and that is what is keeping it warm and fuzzy. My guess is it will remain warm and fuzzy for the most part. Be prepared to take advantage if we get another opportunity of a life time

That IMO is just plain, simple life and simple opinion of yours truly.

Neshant · Post by **Neshant** » 16 Nov 2009 09:46

Gotta hand it to slick talking investment advisers. They know how to milk a cow. The advisor is definately central banker material. If you can baffle your audience with bullsh*t jargon and explain away your blunders, there's a place for you in the financial "industry".

Famous last words of any disasterous financial manager - 'remember you're in it for the LONG TERM'. Except when the long term finally arrives and your investments are doing even worse, the financial manager has pulled a vanishing act.

------

Nicolas Cage Loses Homes To Foreclosure Auction

The latest blow in Nicolas Cage's financial battles was dealt on Thursday when two of his New Orleans homes were sold at auction.

The two properties were bought by Regions Bank, the only bidder. People reported the bank was Cage's lender. Regions Bank reportedly bought the properties for $4.5 million, a bargain on the estates, which were appraised for more than $6.8 million in total.

Last month, Cage filed suit against what he called an allegedly "incompetent business manager" for a string of financial troubles.

Cage, who has put a number of properties on the market in recent months, alleged that he is "now forced to sell major assets and investments at a significant loss and is faced with huge tax liabilities because of Levin's incompetence, misrepresentations and recklessness."

The actor claimed that Levin paid himself "millions of dollars" while putting Cage's money into "risky" and "highly speculative" investments, also allegedly failing to "timely pay taxes."

Cage claims Levin is responsible for more than $20 million in damages and that he and other parties are "guilty of malice, oppression and/or fraud and [Cage] is entitled to recover an award of exemplary and/or punitive damages."

http://ca.news.yahoo.com/s/accesshollyw ... re_auction

Hari Seldon · Post by **Hari Seldon** » 16 Nov 2009 10:16

The dollah carry trade is catching cheena's attn, as well it should.

In brief, the carry trade is about borrowing in USD @ 0% interest rates for now and the foreseeable medium term future, and investing in anything and everything (at low risk) that offers positive returns, in turn fueling speculation and asset bubbles in the targeted ekhanomies.

Oh, and sure Ben and Timmy know full well about the carry trade. They are encouraging it for their own reasons - namely a de facto dollar devaluation that will help melt away at least some of the debt burden they currently face.

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.

“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

link

Read it all.

Sri Denninger's advice:

If we don't stop with our boozing on "free money" for the banksters (which is NOT filtering to the common man!) the resulting crash will have consequences for our nation and indeed the world akin to liver failure rather than a hangover.

Bernanke and the United States Government must stop their madness, and do so today. We have done nothing but made the pain and "creative destruction" that must come worse than it would have been in 2007, and far worse than it would have been in 2000.

Those who made the bad loans cannot be protected from their foibles and the just consequences of their bad decisions. We must ring-fence the Federal Government, withdraw the excess liquidity, and force rates high enough to kill the dollar carry - even if it hurts.

It is better to lose a limb than your life.

In economic terms that's the choice folks; the gangrene is spreading and if we do not amputate it will reach our torso.

If it does our economic and quite possibly our political system will die.

OK, dark wordfs there. Denninger does have a way with rhetorical flourish. But hopefully folks got the message that the scene on the ground is dire.

wig · Post by **wig** » 16 Nov 2009 11:58

the problem from the US point of view is China.
keep in mind that China does not permit free float valuation of the Yuan. It pegs the yuan at 6.8 (approx) to the US dollar to help its exports.
also 39% (approx) of GDP of China is made up of exports.
this figure puts it pretty much at the mercy of the US. It hold huge quantities of US debt but market forces and the zillions of US Dollars printed to bail out banks and mortgage giants in the US have fuelled inflation lowering the value of dollars held by china in real terms.
In theory the US could simply introduce exchange controls and erect tariff barriers to force china. but there are complex factors at work. US business houses hire cheap workers and cheap factories with little or no environmental responsiblity to produce goods at low prices and then export the same to the US. i opine that these corporates then make sure that US law is not used to erect tariff barriers.
i am unsure of how long this state of affairs can continue. in the US unemployment figures are up. if more and more manufacturing is outsourced to china by US corporates the low end US job availablity will suffer.
if the US erect tariff barriers and attempts to regenerate competetive industry(it can do that quite easily) then the chinese economony goes for a long march in the wilderness along with the regime.
from the Indian point of view the query now is that this much is clear to the chinese and the USa. how and in what manner does the chinese regime motivate its population to accept that the current regime has the skill and competence to watch over the interests of the chinese population.

wig · Post by **wig** » 16 Nov 2009 16:52

AkshayM wrote:Hope the economists do better next time around.

on a lighter note; economics is considered the science where you are always correct in hindsight!

Hari Seldon · Post by **Hari Seldon** » 16 Nov 2009 16:55

Apna favorite alarmist Sri Ambrose Evans Pritchard rides back to the rescue painting D&G scenarios with a straight face only.
China’s policies are global economic menace number one

By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

At some point, American workers will rebel. US unemployment is already 17.5pc under the broad “U6″ gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should….

It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.

Aha, re-read the bolded part. Smoot Hawley II can blindingly speedily regress to ekhanomic armageddon. Duniya is poised rather precariously at abyss-edge onlee. DollahoAkbar!

Singha · Post by **Singha** » 16 Nov 2009 21:11

this must be really bad for immigrant mexicans if people are wiring money from mexico into america.

http://www.nytimes.com/2009/11/16/world ... ml?_r=1&hp

Kakkaji · Post by **Kakkaji** » 16 Nov 2009 21:30

Some time ago I had posted how bodies of indigents are piling up in the freezer of Detroit morgue, with neither the family nor the city able to pay the cost of burial. In this follow-up story, who else but a desi comes to the rescue. Kudos to her:

Detroit finds dignity in death

A record number of unclaimed bodies were piling up in the Detroit morgue. But now, thanks to a stranger, some are being laid to rest.

Last Updated: November 16, 2009: 10:26 AM ET

DETROIT (CNNMoney.com) -- Six people. Buried. In Detroit.

Just six weeks ago, a record number of bodies lay unclaimed in the freezer of the Wayne County morgue. Some had been there for years.

But now, the tally has fallen from 67 to 52, thanks in part to Shanti Das, a former New York-based music executive with Universal Motown Records.

"They were stacked up like shoes in a closet," Das recalled thinking after CNNMoney reported what was happening at 1300 E. Warren St. in October. "It was such a horrific situation. I thought, 'Oh my god, we have to try and restore some dignity to these families.'"

Even though Das isn't from Detroit, the corpses triggered a very personal reaction: Her father had committed suicide when she was just eight months old, and Das' mother had struggled to find the money to bury him.

"There were just a lot of things that hit home for me, and I just wanted to immediately take action," she said.

Das started the non-profit organization May We Rest in Peace with a single goal: Bury the 67 unclaimed bodies in Detroit. She raised $6,000 in just a few weeks, calling on her personal connections with recording artists such as Busta Rhymes and Akon.

And on a crisp, clear November afternoon, with the sun shining down on a burial plot at Knollwood Cemetery, on the outskirts of Detroit, six people were laid to rest.

Charles Hopkins.

Karen McDermott.

Paul McGrath.

Valinda Miles.

Michael Wilcox.

Frank Woodward.

"Without these additional funds...they'd be in our cooler system," said the morgue's chief investigator, Al Samuels.

The economic downturn has hit Detroit so hard that many families have been unable to find the money to bury their loved ones. So they've abandoned the bodies in the morgue, hoping that the county will find the funds to offer a final resting place. But the county was out of money, so the bodies piled up.

And while fifty-two bodies remain unclaimed in Wayne County's morgue freezer, their situation is less dire than before. The county's fiscal 2010 budget has been approved, and it allots $22,000 for unclaimed burials. Plus, there is state aid available to help families.

"I think the worst is over," said investigator Samuels.

Nevertheless, Das' goal remains unchanged. She intends to raise enough to bury all the abandoned. "It's going to take one person like me and a million others to start shedding lights on these problems," she said. "But just because I'm a country girl from Atlanta doesn't mean I can't help someone in Detroit."

Singha · Post by **Singha** » 16 Nov 2009 23:09

reuters.

Food short for 14.6 percent of U.S. households
Mon Nov 16, 2009 12:41pm EST

WASHINGTON (Reuters) - One in seven Americans struggles to get enough to eat, the government reported on Monday, and more than a third go hungry from time to time -- the highest levels since the "food security" report began in 1995.

The new report covers 2008, when the United States was in economic recession and financial markets plunged. The jobless rate has surged past 10 percent.

The number of households with trouble providing enough food for all family members rose sharply in 2008 from the preceding year, said the Agriculture Department (USDA), which produces the annual report. It is based on a survey conducted each December.

"The recession has made the problem of hunger worse, and it

has also made it more visible," said David Beckmann of the antihunger group Bread for the World. Beckman called for stronger federal antihunger programs. The school lunch and school breakfast programs are due for renewal.

In 2008, 14.6 percent of U.S. households, equal to about 49.1 million people, "had difficulty providing enough food for all their members due to a lack of resources" said USDA. The families, which the USDA calls "food insecure," went to food pantries, enrolled in antihunger programs and ate less varied diets.

About 5.7 percent of households, or 17.3 million people, had "very low food security," meaning some members of the household had to eat less. Typically, food runs short in those households for a few days in seven or eight months of the year, USDA said.

(Reporting by Christopher Doering and Charles Abbott; Editing by David Gregorio)

ManuJ · Post by **ManuJ** » 17 Nov 2009 03:55

Just heard an interview on NPR of the author of The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis , Joshua Kosman.

He stated that today, around 9 million Americans are employed by private equity firms. According to a conservative estimate, about 50% of these firms will go bankrupt within the next few years (due to drying up of easy money). Assuming that about 50% of the people employed in the bankrupt private equity firms are laid-off, about 2 million people will be laid off just by these firms. Scary thought for the American economy.

The interview was very interesting. The author talked about the common strategy of the private equity firms (buy, show higher profits in the next few years by ruthlessly cutting costs including in R&D, then sell at profit), the types of companies/sectors they prefer, the reason for their rise (easy access to low-interest-rate capital), the close relationship between these firms and politicians, and why they are unequivocally bad for investors, for the acquired companies and for the economy as a whole.

As I understood it, the private equity companies are the sub-primers of the corporate world, and their crash is going to be spectacular and imminent.

Hari Seldon · Post by **Hari Seldon** » 17 Nov 2009 07:37

He stated that today, around 9 million Americans are employed by private equity firms. According to a conservative estimate, about 50% of these firms will go bankrupt within the next few years (due to drying up of easy money).

Wow. scary.

Its no secret that despite the Fed's 0% funds rate, bank credit to even prime borrowers - small businesses and households - is simply not flowing. Credit squeeze in this sector - that employs many millions, can have nasty consequences.

COTUS can and IMHO soon will force banks to lend to this sector. Unemployment has to rise further and crisis situ don unignorable proportions for crisis to break out and overcome the entrenched special interests protecting the indefensible status quo.

OTOH, the fed is subsidizing, nay singularly propping up, the entire housing market as itstands in the US today through the FHA etc. Handing out massive $8000 'tax credits' to induce zero-down payment home purchases the sort that led to the present bust. Nobody's learned anything or wants to learn anything, IMHO.

IMO, the US is moving into a protectionist mold. It can and will erect tariff walls behind which it will revive domestic manufacturing driven job growth. I do not see how else jobs can be grown under the present dispensation when all manner of jobs are leaking out to Asia and LatAm.

Nandu · Post by **Nandu** » 17 Nov 2009 07:51

Link to above story.
http://www.npr.org/templates/story/stor ... =120391729

kmkraoind · Post by **kmkraoind** » 17 Nov 2009 11:07

China slams U.S. Federal Reserve's low interest rates

"Low interest rates for the U.S. certainly do create problems for the rest of the world. ... There's a very strong temptation for money to flow out of the U.S. and into other countries," says economist Eswar Prasad, a former International Monetary Fund official.

In China, foreign currency borrowing has risen eight consecutive months and now totals $360 billion – 40% more than a year ago, says Marc Chandler of Brown Bros. Harriman. The so-called carry trade is driving some stock and property markets to new, potentially unsafe heights.

The Shanghai exchange is up 79% this year. And housing prices in China's 70 largest cities rose 3.9% last month, their fastest rate of increase in a year, according to JPMorgan.

Every economic downturn has its own problems and solutions. While 1930s depression is aggravated by protectionism, the current one is being aggravated by excessive infusion of funds, leading biggest bursts of bubbles. The two Siamese twins needs to operated. Everyone know that the operation will be fatal for one and another needs to be in ICU for extended periods of time. If we leave them unoperated, they will drag down everybody.

The current US president's visit to China is to correct global imbalances (to reduce excessive Chinese exports/to reduce excessive Western imports), but US and China are sticking to their own solutions. Perhaps, if they do not find an amicable solution to this mess, except a full-blown trade war between China-US initially in the next few months, then later Europe joining US, later at later stages Japan and SK and Eastern Asian nations joining along side of US to gain spoils.

Satya_anveshi · Post by **Satya_anveshi** » 17 Nov 2009 20:36

kmkraoind wrote:"Low interest rates for the U.S. certainly do create problems for the rest of the world. ... There's a very strong temptation for money to flow out of the U.S. and into other countries," says economist Eswar Prasad, a former International Monetary Fund official.

This is a very valid concern that must be raised by everyone. US is trying to buy up assets world wide with its wumpum even as it vehemently stops anyone to buy US assets with their hard earned currency. We have seen the contempt US had for SWF's when they were trying to buy US assets.

Futher, there is a clear arbitrage oppty when Fed keep the interest rates to near zero while there exists investment opportunities with possitive growth rates. Hope our babus recognize this and are ensuring our interests are protected.

Suraj · Post by **Suraj** » 17 Nov 2009 21:19

It is unlikely that the Fed can raise rates in the medium term considering the current economic situation. The situation will lead to other countries imposing their own currencies as a trade and inward investment transaction medium.

Ameet · Post by **Ameet** » 18 Nov 2009 00:49

America's newest land baron - FDIC

http://online.wsj.com/article/SB125840904423151209.html

Ameet · Post by **Ameet** » 18 Nov 2009 00:56

Cultural factors help limit recession's impact

http://www.usatoday.com/news/nation/200 ... ians_N.htm

The unemployment gap — 7.5% for Asians in October, compared with 10.2% nationwide — stems from a combination of education benchmarks and cultural traditions that foster family support when someone is out of work, researchers say

"Asians in the United States, both native born Asians and Asian immigrants, have higher educational levels than other groups," says Alan Berube, senior fellow and research director of the Brookings Institution's Metropolitan Policy Program.

A recent Labor Department report on the work force shows a greater proportion of Asians than other racial or ethnic groups in management, professional and related occupations — jobs that require more schooling and are high-paying. About 47% work in management or professional jobs compared with 35% for the U.S. work force as a whole.

Asians account for 5% of U.S. workers but make up a disproportionate share of computer software engineers (29%), computer programmers (20%), computer scientists and system analysts (16%).

"The character of this recession and how it's affected groups by educational attainment shows that information technology has done better, health care has done better," Berube says.

Asians also are "tied in by a social network, a family network," says Paul Ong, a professor of Asian American Studies at UCLA. "Rather than lay people off, you will find them spread the work out and there is lots of use of family labor."

svinayak · Post by **svinayak** » 18 Nov 2009 01:56

http://www.oftwominds.com/blognov09/mar ... 11-09.html

Stating the Obvious: Why the Stock Market Should Crash
(November 16, 2009)

The trillions squandered on "stabilization" is not leading to "recovery" of the real economy; it is only life support keeping a sick economy from imploding. The stock market rally rests on rapidly crumbling sand.

The current politics of experience (a key concept in Survival+) is so warped by misleading statistics and orchestrated propaganda that it feels strange to state the obvious and find it is "that which cannot be spoken": the credit-dependent, consumer-dependent U.S. economy is going down, and going down hard, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to crank up a recovery have failed completely, utterly and totally.

Of the $1.5 trillion mortgage securities issued in 2009, a mere 1% ($15 billion) have been issued by banks 99% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via its defacto ownership of Fannie Mae and Freddie Mac, and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.

The residential mortgage market is now effectively owned lock, stock and barrel by the Federal government and its private "central bank", the Federal Reserve.

Should the Fed and Treasury reduce their subsidies (that wonderful $8,000 giveaway tax credit to new home buyers or anyone claiming to be one), guarantees and outright purchases of mortgages ($1.2 trillion this year alone), then the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.

Hari Seldon · Post by **Hari Seldon** » 18 Nov 2009 07:28

x-post

Five Reasons China Is Not a Bubble

At first I thought twas a lifafa article. And then when I saw who wrote it, all doubts about the authors' possible lack of neutral objectivity faded away.

This article is a guest contribution by {Sri}Romeo Dator, Co-manager, China Region Fund (USCOX)

Lengthy read. The 5 reasons cited are:

1. Consumption Continues to be Strong...
2. Structural Changes to Domestic Economy.
...
3. Stimulus Exit Strategy in Place
...
4. Government Controls on Flow of Money
...
5. China’s Long-Term Goals Match Up With Short-Term Goals.

Good read in that it counters notions popular among desi jingoes about the People's Liberation economy.

Rapid economic growth may be common in emerging economies, but there’s only one China. Already the world’s third-largest economy on a nominal GDP basis and second-largest based on purchasing power parity, the Chinese aren’t making a break from the back of the pack—they’re leading it.

Domestic consumption, the rise of the service sector and increased private investment won’t make China immune to economic bubbles, but these strengths will provide some protection from external forces.

Wow. Am feeling all warm and fuzzy about investing in cheena already. As should you. BTW, how many phoren investors so far have made money in china playing the chini domestic market, again??

However, the fact that there's zero mention of rampant overcapacity in practically every sector there is and could be, money supply out of control thx to the fixed exchange peg coming under pressure from a deluge of dollahs being exchanged by the PBoC into renminbi, export markets under pressure as G7 consumers face real debt stress, obscenely misallocated stimulus and bank deposits into directed lending to prop up state enterprises as well speculate in equity and realty markets, etc etc.... gives pause. And cause. For concern only.

To make up for these emissions, oops omissions, Sri Author garu has this to say:

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. {adulterated adult-rated stuff, you know} Foreign and emerging market investing involves special risks {phor witch we charge special risk premia} such as currency fluctuation and less public disclosure, as well as economic and political risk {You havben't uttered a word on cheena specific aspects of such risk, good sir!}. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

Tenku tenku only.

Hari Seldon · Post by **Hari Seldon** » 18 Nov 2009 08:25

Rude, Crude and nasty corruption happens only in emerging khanomies and not in the emerged tfta ones, you say? Think again....

Nov. 17 (Bloomberg) -- Bank of America Corp., UBS AG and JPMorgan Chase & Co. were sued by a California public utility over claims they rigged sales of municipal derivatives and shared illegal profits through kickbacks.

The lawsuit, filed by the Sacramento Municipal Utility District, is based on federal and state antitrust claims. It alleges Charlotte, North Carolina-based Bank of America and more than a dozen other banks conspired to pre-select winners of municipal derivative auctions, coordinated their pricing, and accepted kickbacks disguised as fees from co-conspirators.

Well at least they can be sued in the khanate. But this is one minor event. The really big fish, having gobbled really large sums, have not yet even been indicted for deliberate and chronic fraud, IMHO.

link

Pranav · Post by **Pranav** » 18 Nov 2009 09:08

This is what is interesting about Fed policy -

- They printed a bunch of money
- Then handed it out to criminal banks as bailouts
- Then they pay those banks interest to keep the money locked up in the Fed
- Thereby starving the rest of the economy of credit

Why print the money if it's not going to circulate in the economy anyway?

The answer, perhaps, is that the bailouts have to be repaid and the only way the banks can repay them is if they get good interest and the only place that can give them good interest is the Fed (which can print some more to pay the interest).

Meanwhile business pushed into bankruptcy by the crunch will be picked up by the bankers for pennies on the dollar.

Only guys who are winning on this are the criminal bankers. These are classic inflate-deflate tactics that have been used for ages.

Hari Seldon wrote:
He stated that today, around 9 million Americans are employed by private equity firms. According to a conservative estimate, about 50% of these firms will go bankrupt within the next few years (due to drying up of easy money).
Wow. scary.

Its no secret that despite the Fed's 0% funds rate, bank credit to even prime borrowers - small businesses and households - is simply not flowing. Credit squeeze in this sector - that employs many millions, can have nasty consequences.

COTUS can and IMHO soon will force banks to lend to this sector. Unemployment has to rise further and crisis situ don unignorable proportions for crisis to break out and overcome the entrenched special interests protecting the indefensible status quo.

OTOH, the fed is subsidizing, nay singularly propping up, the entire housing market as itstands in the US today through the FHA etc. Handing out massive $8000 'tax credits' to induce zero-down payment home purchases the sort that led to the present bust. Nobody's learned anything or wants to learn anything, IMHO.

IMO, the US is moving into a protectionist mold. It can and will erect tariff walls behind which it will revive domestic manufacturing driven job growth. I do not see how else jobs can be grown under the present dispensation when all manner of jobs are leaking out to Asia and LatAm.

Hari Seldon · Post by **Hari Seldon** » 18 Nov 2009 10:34

Beautiful commentary. The guy Hugh Hendry writes with panache. He's one of the few contrarian investors who's called the markets right in the past. Of course, thats no guarantee he's calling them right this time.

PDF download - 8 pages

He's basically in the deflation camp now. Says not only will long bond yields not rise, they will stay down for lot longer than most folks realize. Is predicting a stringer dollah as deflation takles hold in the khanate. Dollahoakbar indeed.

Some fascinating excerpts:

And so, just as the Church of England commissioners became convinced by the cult of equity way back in the whimsical days of 1999 and went 100% long the stock market, investors today recant a new mantra of, “anything but the dollar (A-B-D)”. Inflation bets are all the rage. Some would insist that it is their fiduciary duty to protect their clients' capital; I say tell that to the Church of England pension fund, whose assets today are just £461m against liabilities of £813m. Austerity beckons for the clergymen; heaven will have to pay their stipend.

But the spell cast by a contemporary cult is hard to resist. Take another august body, the Harvard Endowment Fund. Not typically renowned as a hotbed of reactionary fervour, the fund is nevertheless radical in its construction and has come to typify the A-B-D {Anything-Bud-Dollah} stance.

Harvard’s position could well be construed as a one-way bet. Almost half of the fund is invested in emerging market equities, commodities, real-estate, private equity and junk bonds. It is as though the rap artist 50 Cent has taken over the advisory board. The fund is going to, “get rich or die tryin’".

Yup, the Al-Harvardi endowment fund has taken a harsh beating of late. The ivory tower shall rise again, no dobt but for now has been laid low by its own alumni selling it lemons so squeezed out no lemonade will come anymore.

My intellectual foes, on the other hand, are adamant that long duration government bonds are a short. I even hear that some Wall Street legends are so convinced of the argument made by the likes of Niall Ferguson that they personally own Treasury put options and are actively counselling others to do the same. The argument can be condensed into just two fears.

First, they will suggest that 4.5% is not an adequate return for lending your money to the profligate United States for 30 years. I agree wholeheartedly. Again, I fear it is my accent, but let me stress once more that I do not propose that anyone adopt a buy-and-hold policy for the next thirty years in bonds. However, a nominal rate of 4.5% might prove very profitable over the coming year should breakeven inflation expectations head south again.

Second, the bears contend, a lower Chinese trade surplus will eliminate a very large source of Treasury buyers at a time of burgeoning supply. Again, we find ourselves agreeing vigorously. However, it is our contention that US savings are heading north over the months and years to come. And an America that saves is an America that does not run a current account deficit. It is an American that can finance its own spending domestically. The US produced a small surplus back in the 1990-91 recession, so why not again?

Persuasive. Rise in US savings can quite peacefully take the slack from any one large phoren investor slacking off. Besides, there's every reason for the Fed to not raise interests rates for a while. It keeps debt servicing burdens manageable and over half the housing market float just above the water line.

Again, it all really comes down to your take on the ratio of total debt-to-GDP. If you believe, like I do, that it peaked in 2007 then the repercussions are enormous. The leverage does not necessarily have to come down (after peaking in 1932 at 300% it troughed 20 years later at 150%). Rather, it may well be that low interest rates allow the mountain of debt to continue to be serviced. This has been the Japanese experience to date. However, everything in our economic life exists at the margin, and the consequences of just maintaining the leverage constant would be a very low delta in nominal GDP growth. Consider that the Japanese, under these very circumstances, have managed to grow nominal GDP at just 1% compound since 1990.

IOW, like Japan, the khanate will likely show sluggist growth for yrs to come.

On Japan...

Japan has championed both Friedman and Keynes. They have built bridges to nowhere and dropped ¥en notes from helicopters for twenty years and still they have nothing to show for it. Clearly the additional return from ¥en debt in Japan is close to zero and it exposes the nightmare of interventionists everywhere: it may just be that there are no policy remedies for a debt deflation. {well, no remedy short of extinguishing debt by defaultor jubilee, IMO - that is not acceptable to ruling elites everywhere.}
...
But first, it may require the spectacle of seeing Japan implode and so we have been actively positioning the Fund to profit from such a scenario. As many of you know, the fiscal situation in Japan is rapidly rising out of control. Government tax receipts are down 14% over the last 12 months; government spending is twice the receipts and the trade surplus appears structurally impaired. We have to go back to 1991 to find the last time they ran a primary surplus sufficient to meet their national debt’s interest payments. Today they would need the equivalent of 4.4% of GDP. Failing this, and assuming they do not shorten the debt maturity of the JGBs that they sell to the public, then the ratio of public debt to GDP is guaranteed to rise further. It is currently 196% of GDP with the IMF estimating that it will rise to 234% by 2014.

This situation has not gone unnoticed. The sovereign dollar default swap has doubled to 75bps since August, and Japan is now the most expensive credit to insure against a dollar default in the G10.{Wow. Really? So all this misplaced observation of the traditional gubmint bond mkts was no good? The action is all in the futures mkts and insurance premia only, eh?}

On Cheena:

This is why China's mad dash for commodities and its investment splurge this year is so worrying. ... Now, if we repeat the Japanese experience then it is possible that nominal US GDP will rise from $14trn today to perhaps just $16trn in ten years time. Along similar lines, the German government does not anticipate its economy exceeding its previous GDP high until 2014. And yet it is as though the other surplus countries are behaving like Madoff’s former investors who, believing in the stated NAV and its promise of more of the same (i.e., predictable and attractive compound growth rates), were happy to spend lavishly. The Chinese are building capacity to meet a world where US nominal GDP is $25trn in ten years time. I fear they could be in for a nasty shock.

Consider the steel market. The homogeneous nature of steel, as well as other factors such as its price-to-density, allows for the export of the finished good across trade boundaries. Now with China having been on such an expansionary tear, it may not surprise you to hear that finished Chinese steel prices today trade below their production cost. Furthermore, import license applications to sell steel in the US, the world's largest export market, rose 24% last month. Now, mostly this comes from Mexican and Korean producers, but clearly there is the implicit threat that their Chinese competitors might also be tempted {to further drop prices?!}.
...

Singha · Post by **Singha** » 18 Nov 2009 11:30

dont know how scientific this is:

http://www.transparency.org/policy_rese ... 2009_table

India & PRC are clubbed together @ 79 and 84.

Nepal, BD, Sri Lanka and Pak @around 140.

Sri lanka dropping so far down is a bit shocking.

Hari Seldon · Post by **Hari Seldon** » 18 Nov 2009 14:33

x-post

The gfacade is cracking.

Here's from a keyed in aam amerikhan aadmi verbalizing the US response to the cheenis when push comes to shove.....

Open Letter To The Chinese Premier

Must read, IMHO. Though the writer is a tad excitable.

Some choice excerpts:

Dear Wen Jaibao:

We in America have noted with concern your nations' expression of alarm at our Federal Reserve's blatant money-printing, debt monetization, and interference in the free markets, in particular the recent commentary of China's bank regulator.

However, yesterday afternoon Ben Bernanke gave you the finger, Donald Kohn, another Fed Governor, erected his middle finger in your direction as well with his comments last night and Yellen added her view this morning in which they also both said "we see no bubble." That's three.

How many more times do you need to be flipped off before you get it: The Fed isn't going to do what you want, and neither is Obama. Get over yourself.

On the objective measures the price/earnings multiple of the S&P 500 currently stands at over 130, more than double its previous record and vastly beyond anything achieved even in China's manipulated and overheated markets. In short, they're lying and they don't care.

Welcome to American Politics Mr. Wen.

Meaning - the Fed is not going to raise interest rates anytime soon. Period. And no one, not even the superpower-in-waiting, can make them. Period again.

Now that I have your attention by making sure you that you realize that our Central Bank has flipped you off, let me point out something you should be aware of:

The so-called "paper" you hold denominated in our dollars will not be paid in full.

Let me put forward a few realities you may not be aware of, since you are the Premier of a Communist Nation where there is no freedom of the press nor, for that matter, any of the other freedoms guaranteed in our Bill of Rights. That is, you head a nation where you believe the government has rights and the serfs, er, population has privileges you grant, where our founding documents express the precise opposite view - we believe that all people have rights that are endowed by our creator, that government can secure and protect rights but is incapable of bestowing them (since it didn't have them in the first place), and that government has mere privileges granted by the people - and that the people have the right to revoke those privileges.

Here's the problem you face, in a nutshell, just to make sure you read it correctly the first time:

We're not going to pay.

Uh-oh. Is he verbalizing what is already on many minds? That the US might wilfully have to default on its debts? Nothing new, has happened before with many many countries only.

But on what basis the default? Well, the obvious reason is that to maintain solvency. The ostensible reasons though will be couched in high rhetoric.

First, we (the citizens) didn't enter into these obligations. You pursued a mercantilist strategy that involved, among other things, near-literal enslavement of your citizens under working conditions equal to or worse than those we imposed on the Africans we forcibly imported into this nation (that is, kidnapped) in the 1600s and 1700s. ...
As a consequence we the people don't like you very much. In fact, some of us would be quite content to invite you to dinner - as the main course.

Wow. so the pitch begins or what? Is that the line the yanks will ultimately pull?

Next, it is clear that you have strong-armed our government into exchanging toxic securities you bought from private actors for "good credit" US Treasuries. You are among those who have played the "Financial Armageddon" card with a fair measure of success. Precisely what you said and to whom you said it has not been publicly disclosed, but that threats were part of the negotiation is essentially assured, since nobody in their right mind would exchange used toilet paper for good Treasury Debt otherwise. Yet our government wasn't the agent of the original fraud - those were private corporations and actors. Instead of doing what reasonable people do - that is, sue in a US Court and hold the guilty to account - you decided to play geopolitics. You have that right, but we have the right to tell you to stuff it - today or tomorrow. That day will come I can assure you.

Hmmm. I see.

Third, there is the matter of our citizens waking up to the scams - including your scams....
Trust me when I tell you we're just as pissed off about the frauds and scams as you are, but that doesn't give you the right to obligate we the people who were not the architects of these scams and frauds to pay for them, and we will not accept any such putative "obligation." Go take your gripe up with Mr. Paulson, Bernanke, Geithner, Obama, Bush and those who peddled all this crap worldwide. Your beef is with them, not us, and we hold that those who commit bad acts are where the liability for same begins and ends.
...
Finally, we have the matter of our children and those yet unborn. They did not consent to any of this - not even the rampant consumerism you fueled in this nation with your slave labor and pegged currency. They have no obligation whatsoever to you or to any debt contracted by anyone prior to their coming of age, and it is highly unlikely they will consent to be bound to it.

You proceed from the unfounded belief that our government will be able to extract this effort from us via either voluntary compliance with ever-rising taxation or the employment of naked force at arms. This is not a sound assumption.
...
Sooner or later, whether by peaceful election or less-than-peaceful means, a leader will arise in America who will contemplate erecting the middle finger back in your direction, just as many Americans have flipped off Washington DC. Ben Bernanke, Mr. Kohn and Ms. Yellen are just the first three you've seen in our officials who are willing to tell you where to stick your expectations - the day will come, I assure you, where a decision is made to simply tell you to stuff it at the highest levels of our government. Yes, such a declaration - that your alleged and dear "Treasuries" are in fact nothing more than toilet paper - would have severe geopolitical consequences. So what? By then our nation will be incapable of paying anyway - a default by any other name is still default. But our citizens, unlike yours, are and will be armed - go ask Admiral Yamamoto about the wisdom of considering an attempt to enforce your alleged debt by force. While you're at it count the blades of grass in our nation. I think you can figure the rest out for yourself.

Worse for you, while we would suffer were America to turn isolationist, we would survive. Your nation and its people would not.

There you have it. The bare naked iron claw. No more velvet gloves now. No?

Read it all.

Tanaji · Post by **Tanaji** » 18 Nov 2009 15:20

^^^

Dangerous and faulty logic no? Treaties are done with governments and not people. If the author has beef with his leaders making wrong decisions, it is between him and the leaders. Where does China come into it?

Yes, US can default of course.... but along with it will come the ramification of a default, not a get-away-scot-free card.

Singha · Post by **Singha** » 18 Nov 2009 16:04

well the key is default, but make some a few other OECD do it too (UK

) and ensure the general level of chaos and fear is so high, the US still looks like safe haven

Khan is a master of the "game".... in the end if push comes to shove, I have no doubt Khan will manage the fallout (with lots of obedient munna's like India rallying to its flag), while the PRC will have blood crazed riotious mobs of peasants and factory workers leading the november revolution - nobles, courtiers, eunuchs, concubines in the forbidden city will yet taste the anger of people.

Hari Seldon · Post by **Hari Seldon** » 18 Nov 2009 16:47

Tanaji wrote:^^^
Dangerous and faulty logic no? Treaties are done with governments and not people. If the author has beef with his leaders making wrong decisions, it is between him and the leaders. Where does China come into it?

Agreed. Logic doesn't nearly come into it anywhere. So chini factory workers are worse off than 17th century African abductees sold in the Americas?? Wow. To claim that with a straight face means the decision is already made, just the excuse to wage trade war is being sought. It will be found, make no mistake about that.

Yes, US can default of course.... but along with it will come the ramification of a default, not a get-away-scot-free card.

Time will tell. Moi would agree with Singha saar's prognosis above.

Singha · Post by **Singha** » 18 Nov 2009 18:02

cash rich "munna" types like soko, taiwan, japan, singapore, and now India are in the fold. the OECD sink or swim with khan, so they will lash themselves to the biggest piece of wood (khan). australia, canada, brazil the 3 resources superpowers are all part of the 'western bloc' . russia cannot survive on just chinese markets and tech alone, they will fall in line albeit after extracting a heavy price.

in the red corner we shall have noko, pakistan, vanuatu, somalia, sudan, nicaragua, cuba....

I will bet my chips on the blue corner

Hari Seldon · Post by **Hari Seldon** » 18 Nov 2009 19:54

Insurers Face $23 Billion Loss on Commercial Property

U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., may lose as much as $22.6 billion on investments in commercial real estate through 2011, Fitch Ratings said.

Losses on investments in apartment buildings, offices, shopping malls and other commercial real estate will begin to increase in the next 6 months to a year as rents decline and vacancies increase, said Fitch Senior Director Andrew Davidson. Life insurer losses on commercial real estate have been “virtually nil” so far, he said.

“It will be more of a 2010 and 2011 issue,” Davidson said in an interview today. “It will put some stress on the capital positions as they realize the losses.”

Life insurers held more than $450 billion in commercial loans and mortgage-backed securities at the end of 2008, Fitch said in a related report. The delinquency rate on U.S. CMBS rose to 4.01 percent at the end of October, almost seven times what it was a year ago, Moody’s Investors Service said yesterday.

MetLife has recorded three straight quarterly losses and Hartford Financial Services Group Inc. has lost money since June 2008 as investments that include those backed by commercial and residential mortgages dropped in value. New York-based MetLife and Prudential have said commercial mortgage defaults will climb in the next year.

The credit crisis has driven $138 billion worth of U.S. commercial properties into default, foreclosure or debt restructuring, according to New York-based Real Capital Analytics Inc. Commercial real estate prices have plunged almost 41 percent since October 2007, the Moody’s/REAL Commercial Property Price Indices show.

Bottomline, CRE losses will hit small, local banks hardest. These are crazily invested in local CRE which is DOA. (No, DOA==Dead on Arrival, *not* DollahoAkbar!)

As it is some 150 small banks have chosen the warm embrace of the death at the FDIC's receivership already with a deluge more set to follow suit. The only bankers left standing will be the big-5, in the end. Pretty much what happened in the 1929-30 too.

ldev · Post by **ldev** » 18 Nov 2009 23:19

The deflationary fright is because of credit contraction. Other than in finanacial asset classes the money multiplier is way down and hence overall credit has contracted.

As far as China goes, what is more important is its ability to influence commodity prices via its huge manufacturing capacity rather than the immediate potency of its 2T reserves in the financial markets. Those reserves are significant though in buying commodity resources globally. And its hanging on tenaciously to its hard dollar peg. Short of direct protectionsim, the US can do little to change the status quo.

Added later:
The primary reason the powers that be fear deflation is because deflation via credit contraction will reduce M3 and hence cause the US dollar to rise which will make it harder to get out of the current debt overhang in fact it will make it absolutely necessary to recognize/writeoff vast amounts of debt which are not collectible. Paradoxically that may be the only way to shake the Chinese off the dollar peg because if the dollar rises, the last thing the Chinese want is a yuan tied to a rising dollar.

ldev · Post by **ldev** » 19 Nov 2009 00:40

Because Chinese manufacturing capacity is not geared for the Chinese market but for the world market, that is what that huge amount of capital investment is for. And a rising yuan will hurt Chinese exports in every other market other than the US with all the attendant domestic, political and economic consequences including for the CPC.

But in any event for that to happen, the US elite has to be ready to recognize that debt overhang and be prepared to write off that debt. That is a very remote possibility right now. They all want to kick the can further down the road.

Johann · Post by **Johann** » 19 Nov 2009 04:21

L Dev, Prad, Hari

I think your discussion raises interesting questions about

- Hu (and Hao) designs PRC inc.'s long term economic strategy.

- How long can the PRC sustain economic growth based on being the world's most cost-effficient manufacturer, given their population structure, rising prosperity, anticipated changes in manufacturing technology, and sources of raw materials and energy.

- what brands have the largest market share in the PRC across different sectors

- How many companies with consumer goods or services *currently* find China an indispensible market, particularly outside the luxury segment.

All of those together might give a better picture of the ways in which China is going to shape and react to the global political economy of tomorrow

Hari Seldon · Post by **Hari Seldon** » 19 Nov 2009 08:25

Prad,

interesting commentary there and much I would agree with. However:

the above argument is furthered by the strong deflationary forces that are already present in the economy right now. once again imvho, it is easy to ridicule Bernanke as printing-press economist, but as a student of the Great Depression he knows that the real factor is money supply.

Hmmm. GD-1 happened during the time of the gold standard. Artificially printing money wasn't quite an option then, IMHO. OK, one can argue (as the monetarists have) that raising rates in 1937 was a tad too quick that hobbled the slow recovery and pushed the economy into recession again till WWII rode in to the rescue (or so the story goes).

considering 20 Trillion was wiped out by the housing crash, he is worried that the money supply and credit crunch together will produce deflationary forces so strong that the economy will be pushed into a deflationary spiral a.k.a another Depression, with massive private sector collapses across all sectors with unemployment shooting into the 20's.

Exactly. So a lot of notional wealth, based on which debt was taken on by private entities (households and firms) has evaporated leaving all the debt behind intact. This debt has to be extinguished somehow before any semblence of normalcy or growth can return with the khanomy's current structure. Debt-deflation spiral (classic Irving Fisher, 1935) is an inevitable consequence until a new equilibrium arises and debt dies (violently). But deflation causes much more pain than inflation, or even very-high-inflation.

One proposed way out is a debt jubilee. That would be unfair to savers and the prudent though, who never borrowed during the boom years. Another is external default - debt repudiation by the sovereign and capital controls. Far-fetched but not impossible. A third would be to inflate the debt away by devaluing the dollah and thereby reducing the real debt burden. The corollary to any attempt at devaluation though is heightened interest rates in the bond market and everywhere else in the economy that would yet again plunge everything in fresh crisis.

So its a delicate dance the Fed is dancing. Lets see where this goes. A soft landing is not impossible but is unlikely, IMHO. And it doesn't include the prospect of real recovery i.e. real growth. Lets hope for the best, anyhow.

ldev · Post by **ldev** » 19 Nov 2009 09:15

Johann wrote:L Dev, Prad, Hari

I think your discussion raises interesting questions about

- Hu (and Hao) designs PRC inc.'s long term economic strategy.

- How long can the PRC sustain economic growth based on being the world's most cost-effficient manufacturer, given their population structure, rising prosperity, anticipated changes in manufacturing technology, and sources of raw materials and energy.

- what brands have the largest market share in the PRC across different sectors

- How many companies with consumer goods or services *currently* find China an indispensible market, particularly outside the luxury segment.

All of those together might give a better picture of the ways in which China is going to shape and react to the global political economy of tomorrow

Johann,

In a sane world where everybody plays by the rules the questions you pose make sense. But in my IMO right now the parts I have bolded in your set of questions are the most relevant.

China has grown so far so fast because they have always emphasized the Investment component of the GDP growth number as opposed to Consumption. That artificial distortion has been made possible via currency manipulation. Without manipulating down the value of the yuan as they have done so far, their currency would have appreciated and Consumption would have grown at the expense of Investment - like all other contries that have modernized from Germany and Japan after WW2 to South Korea later and even India now.

This artificial manipulation has allowed them to grow Investment in Fixed Assets to to become the Factory For the World., most other countries stop when domestic demand is met or when they have relatively modest current account surpluses.

Therefore the short answer is that so long as they are allowed to manipulate their currency they will remain the lowest cost producer in the world. I see that when Obama, on his trip, pushed them on this issue, they pushed back.

To protect their status as the premier resource conversion machine in the world, they are buying up resource assets whereever they can get away with it politically. The lowest hanging fruit are falling first. Africa.

The West particularly the US is hobbled in terms of policy responses due the the debt overhang. But the simple answer is the most direct answer. What would happen to the Chinese Investment/Resource Conversion machine if the G20 decided to erect tariff barriers on all Chinese imports? Tariff rates can be determined to be a function relating to the manipulation of the yuan tied to a notional basket of G20 currencies. How is that for bringing a little common sense and fairness home to the Chinese.

Umrao Das · Post by **Umrao Das** » 19 Nov 2009 09:36

"It pays to be insane when dealing with uncle"
Any questions ask TSP and PRC

Unkil need slave or bonded labor, 1700 & 1800 they imported accross the atlanic pond by force, now from hondarus to PRC.

vina · Post by **vina** » 19 Nov 2009 11:11

Guys.. Guys.
On a Macro level, this is what is happening.

The US , with Helicopter Ben going into overdrive is basically exporting and getting interest rate down to near zero and a sea of easy money , all directly hitting the USD value, is EXPORTING INFLATION via higher commodity prices to the rest of the world.

The PRC on the other hand by pegging itself firmly to the USD , even as the USD sinks to the abyss is effectively subsidizing exports to every part of the world in an unprecedented scale and is EXPORTING DEFLATION to the rest of the world.

The question is which of the two, US vs China is going to win eventually. The current situation of global low inflation is because the US action is largely balanced by China's deflationary export on global manufactured goods.

So what is the fly in the ointment ?. Well, the US labor market will not recover by this arrangement and US manufacturing will suffer massively unless the US domestic economy recovers. US exports should pick up.

But bigger fly.. With US depreciating, who are left holding the can ?. Why the Euros and Japanese of course. They and the rest of the APAC (Except Australia, which is a commodity economy) countries are seeing their exports being killed and massive pain for their domestic economies and employment levels with the flood of subsidized Chinese exports and more competitive Unkil exports.

Well Eurostan will immediately lower the boom via "Fortress Europe" and wall themselves in. The noises from France and Germany are already starting to rumble out. The ASEAN countries will be collateral damage and will suffer terribly by China's actions. For eg. Korea etc have seen their currencies appreciate by the order of 30% to 40% or so.

So the two guys left duking it out will be China and Unkil.

India is in a happy position. We are a current account deficit country. So there is a macro "depreciation" bias built into the Indian currency. The INR has not appreciated much and since we are a commodity importer (esp oil), which is directly priced in USD, there will be downward pressure on the rupee if Dollar depreciates further , which I think will counteract whatever upward pressure the INR might appreciate. I dont see the rupee going up too much . Nowhere like the shock 40% levels like in Korea and Brazil.

How will all this end. The Chinese cannot subsidize their export indefinitely. The US is exporting inflation to the Chinese. The result is the huge asset bubbles within China. One of the two sides can break first. The Chinese asset bubble bursts with catastrophic consequences (remember the Japanese bubble in the 90s?) or the US says enough and walls itself off from the Chinese (only) while being open to the rest of the world.

Inflation is good for US (it is a borrower remember?) because it can pay it's way out of trouble with paper Wampums. But that is disastrous for the Chinese.

Like Singhaji, I would put my bets on the US in the longer term. The Chinese are going to be sorry about it if they dont stop playing with their currencies. They are taking on the entire rest of the world on it. I think the EU action on China , which will come if the intolerable situation continues will be the first nail in the coffin. Then it will be the US. The little poodles in ASEAN etc know that the bulk of their exports to China is for re-export anyway. They will jump on Unkil's side.

The Chinese export driven model is living on borrowed time. It is dead for sure. And with that I am willing to take a $100 bet here with anyone that the Chinese export growth rate has crested and so has Chinese economic growth rate. It is all the way downhill from now.

Digest on that my Chinese friends. Have a nice day.

Chinmayanand · Post by **Chinmayanand** » 19 Nov 2009 13:40

Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank's "Bear Case" scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral". Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.

SocGen's case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.

Hari Seldon · Post by **Hari Seldon** » 19 Nov 2009 15:06

^^^ Illuminating read, Durgesh.

Also, agree 400% with vina saar's prognosis above.

kmkraoind · Post by **kmkraoind** » 19 Nov 2009 21:05

Geithner: Recovery not enough without reforms

"That is why recovery alone is not enough. To ensure the vitality, the strength and the stability of our economy ... we must bring our system of financial regulation into the twenty-first century. We need comprehensive financial reform," Geithner said.

I think the recent Obama's China's trip is to find an amicable solution to improve US employment scenario and its marcoeconomic situation, but any solution towards the way leads to some pains for PRC. But the fragile mob culture of PRC's population dreads them this way. In the coming months are interesting, if PRC does not stop reduce yuan-dollar discrepancy expect a trade war between two gaints US-PRC. I think silver lining for India is Pakis are too choose between Goliath and Monster and it will be crushed by remaining one.

Johann · Post by **Johann** » 19 Nov 2009 21:56

Vina wrote:The Chinese cannot subsidize their export indefinitely.

Hi Vina,

L Dev suggests they can do this for as long as they can get away with their manipulation of the Yuan's value, and currently they dont seem to be facing nearly enough pressure on this front.

Inflation is good for US (it is a borrower remember?) because it can pay it's way out of trouble with paper Wampums.

Doesn't that depend on the dollar's status as the global reserve currency? What about the interest of China and major energy exporters in moving away from the dollar to a new reserve currency?

Obviously China would be interested in a gradual move given the extent of their dollar and T-bond holdings, but as you've pointed out the US export of inflation gives them an incentive.

Which leads me to scratch my head again - given that the Yuan is pegged to the dollar, doesn't a fall in the dollar's value mean good news for the Yuan?

Given their dependence on manufacturing exports what are the conditions under which the PRC would prefer the dollar as opposed to a new reserve currency?

The US is exporting inflation to the Chinese. The result is the huge asset bubbles within China. One of the two sides can break first. The Chinese asset bubble bursts with catastrophic consequences (remember the Japanese bubble in the 90s?) or the US says enough and walls itself off from the Chinese (only) while being open to the rest of the world.

In the Japanese and American cases real estate speculation became the economy's primary growth engine, and the enormous gap beyond fantasy and reality ultimately broke the banks, and leaving these economies saddled with enormous debt.

Is that really the case in China? Aren't manufactured exports the fundamental driver of growth, with state spending on construction coming second? In which case as L Dev suggested the real threat is overcapacity, and a massive loss of return on investment should PRC inc. lose its cost advantage.

Secondly, given state ownership and control of banks, isnt it likely that the PRC can disguise the extent of losses for far, far longer than banks in Japan, US, or Europe, avoiding the dramatic credit crunch that seized up their economies?