Perspectives on the global economic meltdown

[sanjaykumar]

The fcuking joke of the week.

Moody’s retains its negative view on India’s banking sector

http://economictimes.indiatimes.com/new ... 258832.cms

[Sanjay M]

US Entering into Fiscal Nightmare:

http://www.nytimes.com/2009/11/23/business/23rates.html

[Hari Seldon]

The fcuking joke of the week.

Moody’s retains its negative view on India’s banking sector

http://economictimes.indiatimes.com/new ... 258832.cms

The rating agencies are a freakin' disgrace. Their business model is beyond dead and is kept alive by gubmint/regulatory patronage alone.

Ideally, investors should pay rating agencies to rate securities, not the sellers of the securities paying the agencies coz that clearly creates a moral hazard and incentive conflict.

[Hari Seldon]

EU's weakest draw scrutiny

Worries about Europe's weakest economies may be resurfacing after a period of relative calm.

One sign of concern: Prices are rising on so-called credit-default swaps tied to Greece, Ireland, Portugal and Italy. Investors buy these swaps, which pay off when countries default, as a kind of insurance against bad government debt.

Meanwhile, in the bond market, the "spread," or difference, between the yield on Greek government bonds and relatively safe German debt has jumped significantly in recent days as investors have grown wary of taking on risk—especially Greek risk.

While such signals aren't flashing as brightly as they did earlier this year, they suggest investors are worried about how Europe's peripheral players will tackle the twin challenges of a tepid economic recovery and dire public finances in the months ahead.

"The weakest of the European Union's membership ranks remain vulnerable to the sometimes jarring disconnect between EU economic hopes and politics on the ground," said Scott MacDonald, director of research at boutique investment bank Aladdin Capital, in a recent note. "Investors should expect more volatility."

Countries like Greece and Ireland are taking much of the heat.

Greek government-bond prices have been hammered lately because of concern about the country's public finances and banks.

This month, the European Commission, the bloc's executive arm, chastised Greece over the shoddy state of its finances, directing the government to present regular progress on improvements. Last month, the Greek government said that its deficit will hit 12.7% of national income this year -- the biggest in the 16-nation euro zone and twice previous forecasts from just two months ago.

Meanwhile, credit-ratings firm Moody's Investors Service warned the Greek and Portuguese governments last month of possible future downgrades of their government debt.

{Warned? Just warned? That deficit baby is 12%+, you freakin' clowns! And you dare rate Yindia below the greeks and the portugeese? On what basis, pray? }

"The problem in Greece is the lack of political will to force through painful adjustments," Aladdin's Mr. MacDonald says.

Oh, show me one emerged TFTA khanomy where the political will is in full display? This polls every few yrs in democratic societies has made myopists outta us all. Just like the quarterly earnings results focus made myopic and destroyed the old corporate model of investing in innovation and invention and discoveries down the line.

Anyway, its not just greece, ireland, iceland and portugall in this mess. Turns out central EU khanomies like Latvia are in deep doodoo and can pull down the banking systems of tfta EU members like Sweden.

Since Nov. 10, the cost of insuring a Greek government bond against a default for five years has jumped 22%, while the same costs for Ireland climbed 14%. Italy's and Spain's credit-insurance prices, meanwhile, have jumped about 18% over the same time period.

To be sure, the rising insurance costs in the derivatives market are simply another sign that investors have been wary of taking on risk in recent days. Stock markets have struggled a little, too, with the pan-European Stoxx 600 index falling 0.8% Friday to 243.62, leaving it down 1.7% last week.

Sure, in other, simpler times these troubled khanomies would zimbly have devalued their currencies and exported their way outta the mess. With the Euro in place, that is not an option. Spain in particular is way overpriced and suffering. At least in Icleand, the debts have been wiped clean and a new beginning is being made.

[amol.p]

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.

Good analysis...but mean time China is going to eat all exports of other nation with fixed price of yuan in coming years if dollar keeps on losing its value. Even more & more companies in US & europe will favor imports from china as it will show huge profits on there books, and for huge profits companies in US & europe can make the govt change any damn rules. I dont think US & europe in coming decade will put regulation/taxes on chinese imports. Almost maufacturing is dead in US and they will take 2-3 yrs to build-up the whole industrial base. Are the US companies ready to put so much funds....???? or do they have so much funds...????...or are they ready to employ US people with daily wages of $100 and other benefits......the answer is simply NO.
Earlier people used cultivate there own food....but as you know today all prices of eatbles have gone over the roof...but have the people stopped buying from market and started there own cultivation.........same goes with US & China.

[amol.p]

[url=http://www.telegraph.co.uk/finance/econ ... 1/Societe-
Japan.

If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money.

If it happens so.......indian individuals.....will be the richest people in world....many people have retained gold which has come off generations to generations. I have seen people who have bough GOLD at Rs 1000/10 grams and have kept it in lockers for decades. Imagine the value that it will create......off the reocrd I bought in GOLD at 8500/- and today it is 17500/-............. ...thanks to US policies....else it would never had given me such returns

[rohiths]

Good analysis...but mean time China is going to eat all exports of other nation with fixed price of yuan in coming years if dollar keeps on losing its value. Even more & more companies in US & europe will favor imports from china as it will show huge profits on there books, and for huge profits companies in US & europe can make the govt change any damn rules. I dont think US & europe in coming decade will put regulation/taxes on chinese imports. Almost maufacturing is dead in US and they will take 2-3 yrs to build-up the whole industrial base. Are the US companies ready to put so much funds....???? or do they have so much funds...????...or are they ready to employ US people with daily wages of $100 and other benefits......the answer is simply NO.
Earlier people used cultivate there own food....but as you know today all prices of eatbles have gone over the roof...but have the people stopped buying from market and started there own cultivation.........same goes with US & China.

There are one of the two possibilities
1. China is a really efficient manufacturer
2. China is not a very efficient manufacturer but uses unfair means like currency manipulation, labour exploitation and poor environmental standards.

If the second possibility is true then there is only the question of time before the whole Chinese economy collapses. For every product they sell at a lower price they are losing money either as a opportunity cost or directly on the balance sheet. The pollution will show up as an externality which destroys wealth through increased medical expenditures. Artificially low labour costs will lead to mass revolt and corruption. This is inevitable.
Another good consequence of this is that, it will destroy the US economy as well the Chinese leading to killing 2 birds with a single stone.

The more scarier thing is if China is really an efficient manufacturer, then the rest of the world is in some really big trouble.

Either case, if China loosens capital controls then the Yuan is going to get so badly shorted that it will put George Soros to Shame. They simply cannot do anything drastic at any point of time. As long as there is no capital convertibility there is no chance of Yuan becoming a reserve currency.

[shyamd]

Wall Street's Naked Swindle
A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits.

On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — "like buying 1.7 million lottery tickets," according to one financial analyst.

But what's even crazier is that the bet paid.

At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.

The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…

Or what? That this was a brazen case of insider manipulation was so obvious that even Sen. Chris Dodd, chairman of the pillow-soft-touch Senate Banking Committee, couldn't help but remark on it a few weeks later, when questioning Christopher Cox, the then-chief of the Securities and Exchange Commission. "I would hope that you're looking at this," Dodd said. "This kind of spike must have triggered some sort of bells and whistles at the SEC. This goes beyond rumors."....................

[Hari Seldon]

^^^shyamd, that was posted here a moon or so ago, IIRC.

Amrose Evans Pritchard on the crisis in Greece

OK, lemme bask in my "I told ya so" moment.....

Brussels says Greece's public debt will rise from 99pc of GDP in 2008 to 135pc by 2011, without drastic cuts. Athens has been shortening debt maturities to trim costs, storing up a roll-over crisis next year. Some €18bn comes due in the second quarter of 2010 (IMF).

Modern economies have reached such debt levels before, and survived, but never in the circumstances facing Greece. "They can't devalue: they can't print money," said Mr Christensen.

Exactly what moi was alluding to a few posts above.

[SwamyG]

The hold Wall Street exercises on Obama's Administration.
The Phantom Menace
teaser

What happened? To be sure, “centrists” in the Senate have hobbled efforts to rescue the economy. But the evidence suggests that in addition to facing political opposition, President Obama and his inner circle have been intimidated by scare stories from Wall Street.

[shyamd]

Is Another Bubble in the Making? Could Central Banks Lose Control?

Print

Dr. Nouriel Roubini: What is fuelling the massive asset price rally across the board? "One important factor is the weakness of the US dollar, driven by the mother of all carry trades. Traders are borrowing at negative 20% rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade."

While the riskiness of portfolio investments has effectively increased due to the near perfect correlation in asset prices, the VIX and risk premiums in general have been receding thanks to the Fed's (an other central banks') QE operations.

Moreover, the dollar weakness exacerbates the global monetary easing in a self-reinforcing manner: "if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies."

What makes the carry trade unravel? First, the dollar cannot go to zero and at some point the cost of borrowing in dollars stabilizes. Second, the Fed cannot suppress volatility forever. Third, the Fed may tighten sooner than expected. Fourth, political risk may spark flight to safety. "The longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating." (11/01/09)

Is Another Asset Bubble in the Making? How Will Central Banks Respond?
* Bill Gross: "Moving out on the risk asset spectrum has worked wonders since March of this year, but it comes with the risk of principal loss – failing to receive the return of your money. ...China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland. With renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside – higher Treasury yields, and lower stock prices – which the Fed must surely be leery of before making any upward move, of its own." (11/19/09)
* Fed Vice Chairman Donald Kohn: Potential side effects "led me to a strong preference for using prudential regulation to deal with potential problems in credit and asset markets rather than interest rates." (11/16/09) ECB also shifted to a 'leaning against the wind' mindset while keeping the interest rate tool for the price stability goal and macro-prudential policy for financial stability purposes. (see e.g.speech by Gertrude Tumpel-Gugerell, 11/12/09)

'Meltups and Meltdowns'
* Andrew Hunt Economics (via FT/Morph 366): Looking back, a similar asset price "melt-up" happened in the aftermath of the S&L crisis in the early 1990s when Greenspan kept interest rates low for a long period of time for banks to earn their way out of their losses. Banks took advantage loading up on Treasuries and funding a global carry trade especially with emerging markets. However, as the Fed started to tighten in 1994, the meltdoown from the carry trade exit were substantial especially for emerging markets (e.g. Tequila crisis in Mexico). Moreover, all those banks loading up on subsidized Treasuries and MBS might get caught on the wrong side of things when interest rates rise. (10/30/09)
* Bill Gross (PIMCO): "Policy makers recognize that asset prices must be supported in order to generate positive future nominal GDP growth somewhere close to historical norms. Investors must recognize that if assets appreciate with nominal GDP, a 4–5% return is about all they can expect even with abnormally low policy rates." In order to avoid debt deflation in the real economy, nominal GDP must grow in the 4-6% range. (11/2009)
* Didier Sornette, Ryan Woodard (ETH Zurich): The current crisis is the latest of a sequence of asset bubbles blown to lead the way out of the former. "The accumulation of several bubbles and their interplay and mutual reinforcement has led to an illusion of a perpetual money machine allowing financial institutions to extract wealth from an unsustainable artificial process. Taking stock of this diagnostic, we conclude that many of the interventions to address the so-called liquidity crisis and to encourage more consumption are ill-advised and even dangerous."
* Alan Meltzer: "Don't be fooled by the bond market rally. Banks are holding prices down because they can buy Treasurys with free money from the Fed." (10/23/09)
* Wolfgang Munchau: According to standard indicators such as Cape and Q, loose monetary policy is artificially propping up risky asset prices which will crash as soon as policymakers start their exit strategies. "We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control. This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis. He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices." The two possible scenarios include another fall in asset prices sometime in 2010 or a bond market crash down the line when easing is kept for too long. (10/19/09)
* Spiegel Online: Unlike 1929, debts are being fought with debts, meaning that not only banks but entire countries could end up bankrupt. Perhaps the efforts to combat the current crisis are merely laying the foundations for the next crisis, which will be bigger still. See 1929 vs. 2009: Parallels And Differences To The Great Depression

What prevents central banks from draining liquidity?
* IMF Global Financial Stability Report (October 2009): "Private sector credit continues to decelerate but public borrowing needs are not slowing at the same pace thus giving rise to a financing gap in the future which may require further asset price adjustments or continued central bank support."
* Aurelio Maccario (Unicredit Global Research): One complicating factor for the ECB's exit strategy is that a particular subset of banks remains dependent on the central bank's lending facilities while other are weaning themselves off. (10/05/09)The same problem persists in the U.S. unless regulators are willing to take over and liquidate unviable banks, even big ones.
* Comstock Partners (Aug 14, 2009): "We don't believe that the U.S. massive stimulus programs and money printing can solve a problem of excess debt generation. If this were the answer Argentina would be one of the most prosperous countries in the world."
* Menzie Chinn: Main difference to Japan: America is a big net debtor to the rest of the world. This is why high real interest rates are more detrimental to the U.S. than higher inflation. Still, real yields according to TIPS seem fairly low in historical perspective.
* Axel Weber: Call for a more symmetric monetary policy across asset price cycles. To be more specific, a more symmetric policy would also realize implicit risks in times when money and credit growth is dynamic, asset prices go up and risk perceptions decline, possibly creating a need to act despite current inflation rates being sufficiently low. See Should Central Banks Fight Asset Bubbles?

Why central banks should not drain liquidity

Irving Fisher (1933): The combination of over-indebtedness and deflation can lead to depressions. Over-indebtedness alone is less dangerous--and the ensuing cycle milder-- as long as the price level is kept stable through reflation.

See also: Is There Too Much or Too Little Liquidity? A Contrarian View

Background
German Chancellor Merkel on June 3: “We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.” So far, government policies are replacing shrinking private demand in order to stave off a deflationary spiral. Crowding out only occurs in a situation of full employment as opposed to the current situation of low capacity utilization (Krugman). Nevertheless, sustained QE and loose fiscal policy need credible government backup (Buiter, Ferguson). Ultimately, deleveraging requires the writing down of debt as reflationary policies are not a free lunch and won't solve the debt overhang problem (Dr. Roubini). Important case study: Japan back into deflationary territory despite huge public debt and QE (Chinn). Rather than a sign of inflation, higher long-term yields may be pointing to higher real interest rates which are compatible with a deflationary environment (BofA). The equilibrium coexistence of zero interest rates, high unemployment, deflation, rising cash balances and excess reserves points to a liquidity trap environment as during the Great Depression and Japan's lost decade.

[SwamyG]

Ah........so enjoyable to see this cheerful face putting "Indic"ness

[Hari Seldon]

Krugman and his ilk are quick to point out the evilness of all things rich. none of his posts on his blog are without some reference to Progressive wet-drea** of taxing the evil rich.

but even Krugman supports the Greenspan theory: low interest rates and more bubbles. he has even argued on his blog that interest rates should be in the negative right now...

If that is indeed Sri Krugman's stance (and I suspect it is), then its self-contradictory. Low interest rates --> surge in easy money supply --> surge in asset prices --> bubble territory etc are precisely the policy measures that most benefit the already wealthy. So yup, taxing the evil rich and stuff makes no sense when the policy prescription the anti-rich prof professes does nothing but protect the asset values of the rich often at the expense of the aam aadmi taxpayer.

[Hari Seldon]

^^^Prad,

We can agree to disagree on this one perhaps. IMO, loose monetary policies of the Greenspan variety ultimately do endup shafting the non-rich. The reason the elites fear deflation more than inflation is because the former causes precipitous drops in asset values and hence wealth - i.e. hits the wealthier folks balance sheets quite hard whereas the non-rich type would find post bubble asset prices dropping to affordable territory, perhaps.

The elites favor inflation - systematic lopping off of savings that ends up shafting the non-wealthy, IMO.

[kmkraoind]

China Drywall Linked to Corrosion, Health Complaints, U.S. Says

US is firing first potshots for the future trade war.

[Hari Seldon]

The IMF warned this weekend that a second bailout would "threaten democracy

Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.

No kament only save that it becomes increasingly clear to one and all - even to the TFTA home of democracy, human rites and all that nice stuff - that only the cheena model is destined to survive and prosper in the coming brave new world.....

[shyamd]

Have been thinking about this crisis... here are my thoughts.

I think we are heading for deflation despite all the efforts to inflate by central banks. Deflationary forces are too strong in the short term.
I get the feeling that we are heading for another downward spiral in stock markets after December end. People think the old days are back.

Muni bonds in the US are receiving a lot of investment. I think its $55billion?? It just shows people think that state govts in the US will never go bust. I think they have too much debt and will probably default in the 5 years or so. They have big pension issues too. The stimulus package has backed them up for now.

If the value of mortgages fall, which it is, then this could be massively deflationary. Banks will go broke (I suppose this is what has been happening already). The report of higher home sales also showed that house prices are falling. Its banks and so on just getting rid of property to speculators at any price. I get the feeling these banks just want OUT. They want cash (if everyone wants cash now, isn't that deflationary?)

The banks today focused more on consumer credit rather than lending to businesses. Consumer credit-- well in this crisis, thats obviously taking a massive hit which will cause deflation.

Banks have tightened their credit supply(for many reasons such as capital controls), the lack of credit in the market is deflationary(this is what Merv King was saying). Was having a chat with this visiting professor from the US, he was saying the FDIC are asking healthy banks for more premiums, and FDIC are using these premiums to fund the bail outs. So these healthy banks don't have the money to lend either.

Remember the days of LBO's?? Wonder whats happening to that debt. Have a look at this by Moody's. 4 of the top 10 have defaulted, and 2 are "under distress" read headlines.
These deals were massive. Again deflationary pressures. Does anyone know when most of the LBO debt will mature?

Everyone is after T-bills, which is the safest investment.
MONEY MARKETS-U.S. Treasury bill rates dip below zero

Yields on short-dated Treasury bills pushed below zero on Friday as investors clamored for
low-risk investments in bets that central banks will hold interest rates at ultra-low levels for a long time.

Dollar interbank lending rates hit a new low as an
abundance of liquidity and dovish central banker comments also
eroded short-term market rates.

Even as policy makers begin to talk about exit strategies
from extraordinary measures put in place during the depth of
the financial crisis, investors expect policy rates around the
globe will stay low well into next year.

"People are getting out of risk, getting into Treasuries
for the year-end, everybody is parking money," said James
Combias, head of government bond trading at Mizuho Securities
USA in New York, adding that the Federal Reserve is
expected to hold interest rates near zero for the foreseeable
future.

Anyway, these are just random thoughts, all imo etc.
Added later: Its deflation in the short term and possibly inflation issues in medium to long term.

[Hari Seldon]

^^ nice summary, shyamd.

Does help to pause and collect one's thoughts every once in a while.

Yup, so deflation it is. Japan is the new role model, IMO. Mighty soon many tfta emerged ekhanomies may well be wishing they get to land as softly as Japan has apparently managed to in its 2-decades old soft-landing program.

[Hari Seldon]

Ilargi over at automatic earth, saying it like it is.

the official federal deficit recently broke through the $12 trillion mark. And all this is happening in a situation with very low interest rates. A quote from the NYT article: "The government is on teaser rates". Which seems a good comparison. And which cannot last forever. And no, it can also not last as long as Ben Bernanke wills it to. The $5 trillion US debt in 2010 will have to compete for buyers in a global market that can look forward to a minimum of $12 trillion in sovereign debt being available for purchase.

Perhaps the best shot the US government has in that market is for the stock markets to crash, since that will lift the US dollar, and free up a lot of financial space for the administration. Of course, it would also crash the banks and the housing industry, but then, they are goners anyway. Politically, job creation would be good. Let's see Washington add another $1 trillion to that debt load.

Mind you, CDS bets against Italy are through the ceiling, Greece may fall through the floor any day now, Spain moved into the basement months ago, Japan is celebrating a decade of rigor mortis and China is a bubble with 1.5 billion souls wearing brave faces who have no-one left to sell their earthly goods to.

Everybody has to keep on buying. Until they won't.

And when they no longer do, and they're busy stampeding through the exit, you can apply all the game theory you want.

[shyamd]

Dr. Roubini: "The stock market’s latest 'dead cat bounce' may last a while longer, but three factors will, in due course, lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast the consensus expects. Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low. Third, financial shocks will be worse than expected. At some point, investors will realize that bank losses are massive, and that some banks are insolvent. Deleveraging by highly leveraged firms -- such as hedge funds – will lead them to sell illiquid assets in illiquid markets. And some emerging market economies -- despite massive IMF support -- will experience a severe financial crisis with contagious effects on other economies." (RGE Monitor/Project Syndicate)

Is Roubini hinting at banks collapsing again?

The US govt is thinking of giving tax credits for businesses to hire new employees. But why would you want to hire new employees if demand for your goods is not there?

[SwamyG]

Prad & Hari:
{it is like addressing Prahalad and Lord Hari }
Economy is a manifestation of culture. I have held this view for few years now. All analysts and experts are boxed in their own cultural framework. I posted a link in the Indian economy thread - a portfolio manager had opined about the state of Indian economy. She had good words, but she thought India did not have enough penetration of cars and that segment will grow. While she is correct and probably looking at purely from numbers/growth perspective. It is not her job to question or answer the following: What is the impact of more cars in Indian cities and driving conditions? What are the alternatives? Where are cars useful? Where are they detrimental? And sundry questions.

[Hari Seldon]

^^^Swamygal,

The realization has dawned that 'peak living standards' may have already happened for our contemporary generation in much of the emerged world. The sdre emerging world will of course never get to see the levels of consumption, opulence and affluence (only effluents) that characterized the golden era just gone by in the emerged world. It is physically impossible/infeasible that such happen from a per capita resource intensity POV.

So best bet lies in sustainable ekhanomic solutions - like veggies instead of meat, the metro instead of the car, the 2BR flat instead of a bunglow with 2 garages and a half-acre lawn, and so on - reaching the aam aadmi.

Sadly, the emerged economystics can't help but linearly extrapolate current trends into infeasible territory and then lose their investors money.

[kmkraoind]

Dubai Autonomy Fades as Crisis Strengthens Abu Dhabi

Code: Select all

 Dubai’s financial woes have tamed the once-independent emirate and forced it closer to Abu Dhabi, which holds 90 percent of the U.A.E.’s oil. Sheikh Mohammed last week demoted three business aides and fired one. All had been pivotal in the debt-fueled expansion of past years, requiring Dubai’s rescue with a $10-billion loan from the U.A.E. central bank.

The global financial crisis that swept into Dubai last year not only put an end to a construction boom that saddled it with $80 billion of debt. It may also mark a turning point in the U.A.E.’s history toward a stronger central state, which investors say will make Dubai a more attractive destination by bolstering its creditworthiness. 

[Hari Seldon]

The last bubble

Jesse's on a roll with this one.

The pulse of patient, their blood flow, is the dollar. And the dollar is laboring under serious difficulties. The disease is consuming it, and the Fed is adding clear plasma to replace it, but is unable to add vitality, the white and red blood cells. They cannot create life, only sustain its appearance.

The liquidationists, by the way, would simply take the patient off all medications, and see how well he can fight the disease while running on a treadmill, hoping his body can cure and correct itself on its own. If the patient is not too sick, this has worked in the past. But if the problem is systemic, if the disease is advanced, then the patient is likely to go critical and sustain a stroke, and a major loss of functionality, even death. Benign neglect might work, it might not. Sometimes the cure is worse than the disease when applied without a perceptive diagnosis.

The Obama Administration (the doctors) and the Congress of both parties (the hospital administrators) and banks (the hospital owners) and the mercantilist trade system most notably China and Japan (the medical suppliers) are failing to deal with the problems of the US economy at hand, merely applying the anesthetic and antiseptics, for which they are being paid handsomely as the hospital bills run higher and higher.

This may be the last bubble, the one that takes the patient to a hospice for long term care in a zombie like condition, or worse, to the morgue. It is the last bubble, malpractice of the highest order, the mother of all policy errors. Nothing is inevitable here except selective default most likely through inflation.

The banks must be restrained, and the financial system reformed, and balance restored to the economy before there can be any sustained recovery.

good read.

[Johann]

Re. state structural debts, rising college tuition, etc, there's no question that California is perhaps *the* 'failed state' of the US.

Not only are its own problems amongst the most serious, but I think it exemplifies, far more than Michigan or Louisiana or Illinois how the United States squandered tremendous advantages.

California's problems were serious long before last year's crash, but there was no social consensus, and no bipartisan political will to face reality.

California's population grew enormously since WWII, and has continued to swell with deliberate efforts of the state to draw people in. Much of this was driven by real estate speculators who had been trying to pull as many people in to the state as possible. The state picked up the tab for generous services and benefits to provide quite a nice quality of life. That was fine as long as the tax base was realistic.

But for a couple of decades now people had been growing their personal wealth through real estate speculation, yet thanks to referendums property taxes were not allowed to increase, but popular appetite for state services (locked in by law) kept growing, and the population kept growing.

Its utterly insane, yet few who spoke the truth could get elected, which was higher taxes *and* spending cuts were the only way out, even if it was designed as a gentle upward slope. People would argue about taxation, but not spending.

Financial collapse is really the only way to fundamentally change people's expectations, and to wake them up from the delusion that you can have the perfect life for free.

[Singha]

someone had posted a chart that number of people on "disability" in CA was 20 times higher per capita than US avg

now I know 75% of the people in ITvity are mentally ill in some way ... but ....

[Neshant]

deflation doesn't help the common man. it destroys wealth

It does not destroy wealth any more than inflation destroys wealth. This preaching of false economic theories comes mostly from the people who benefit the most from inflation. Namely banksters upstream who get to handle the money first before it gets inflated away downstream under the currenct ponzi system.

Savers with fiat money or gold are enriched by deflation. Things are cheaper for them and they swap currency for assets at a bargain with those foolish enough to have bought in at the top like house flippers. Another thing deflation does is it causes a surge in productivity. It does cause unemployment as the excess capacity/inefficiency gets wrung out but eventually it is the market that will decide when things have bottomed out and deflation is over.

Deflation is as necessary as inflation in providing feedback in a free market when things are in excess or are deficient.

The current scheme of some guy in an office fiddling around with interest rates, spending away, transferring wealth from the responsible to the irresponsible or greedy under the guise of 'promoting' inflation for the good of society is a scam.

The market does not need these charlatans to determine supply and demand. This is the reason I've said the whole idea of central banking is a bullshit concept

[kmkraoind]

Half of Banks' Losses May Still Be Hidden: IMF Head

"It's possible that 50 percent (of bank losses) are still hidden in their balance sheets. The proportion is greater in Europe than in the United States," he said.

"Europeans must, however, better affirm their economic strategy if they do not want to let the Sino-American couple dominate the global debate for the next 20 years," he said.

Strauss-Kahn said the two crucial factors to achieve the status of major economic power today are a big population and technological advances.

[amol.p]

As Bank Failures Rise, F.D.I.C. Fund Falls Into Red

The fund had a negative balance of $8.2 billion at the end of the third quarter--{The organization that saves people from bankruptcy itself may go bankrupt}

Federal regulators seized 50 banks in the third quarter

http://www.nytimes.com/2009/11/25/busin ... f=business

[amol.p]

Vietnam Devalues Currency and Raises Interest Rates

Seems most asian nation to follow the same to counter chinese Yuan.........


http://www.nytimes.com/2009/11/26/busin ... f=business

[abhischekcc]

Vietnam Devalues Currency and Raises Interest Rates

I was hoping India would do this. Still

I have long held the contention that among the large economies, India is the one with the least commitment to the current global economic order. We are not dependent on exports (like China, Japan, SK, Germany), commodities (Russia, ME), or external finance (US). We are comfortably ensconced in our own cocoon, and can afford to play games.

Anyway, back to the topic of Vietnam:
The devaluation will put pressure on other countries to devalue, no question about that. The combined impact on China will be to prevent it from appreciating the yuan. Given that western countries want China to appreciate the yuan, the Vietnamese move will squarely put China on a collision course with the west. I expect more fireworks in the days to come.

--------------
Hari,
Are you back in India? Is it in Delhi? I was offline for a long time, so couldn't ask you. I'll be back in Delhi early Jan. If you are in the city, let's get together for another chit-chat.

[Hari Seldon]

Hi abcc,

Hari,
Are you back in India? Is it in Delhi? I was offline for a long time, so couldn't ask you. I'll be back in Delhi early Jan. If you are in the city, let's get together for another chit-chat.

Moi shifted base to Hyderabad. Would love to meet you over beer and gossip, though. Someday, if I'm around in Dilli or you in Hyd, lemme know. Haven't seen you around on this forum a lot, lately. Welcome back.

[Hari Seldon]

^^^ Thats indeed a positive development prad. Lets hope the recovery is as real as it looks.

However, as usual the D&G crowd won't give up so soon.

Recession shows shortcomings in U.S. economic data

The Labor Department said that it planned to revise the job figures by subtracting more than 800,000 jobs that it had wrongly estimated were filled by workers.

The so-called “benchmark revision” that was announced today will not formally be incorporated into the job figures until February, and could be revised. But the figures indicate that last March the government overestimated the total number of jobs by 824,000, or 0.6 percent. Its overestimate of private-sector employment was even greater — 855,000 jobs, or 0.8 percent.

The culprit is probably the much maligned birth-death model, although Victoria Battista, an economist at the Bureau of Labor Statistics, said the bureau was looking into other possible issues, such as changing response rates to the questionnaire sent out by the bureau to employers each month.

That model adds in jobs assumed to have been created by employers who are too new to have been added to the survey, and subtracts jobs from employers assumed to have failed and therefore not responded to the bureau’s survey.

IOW, the BLS overestimated job creation by a 800k number in the last few months by misreading SME job creation..

The U.S. government is having a tough time guesstimating how many small businesses failed in this recession, casting doubt on the reliability of vital data on employment and economic growth.

The formula the U.S. Labor Department designed to help it deliver timely, thorough monthly employment reports broke down in the heat of the financial crisis, miscounting the number of jobs by an estimated 824,000 in the year through March.

That model appears to have misjudged how many companies went out of business during the recession, meaning the labor market was even weaker than initially thought when President Barack Obama took office in January. More recent figures may still be underestimating job losses now, but it will be many months before the Labor Department is certain.

I'm on the side of hope and harmonious change, just to come clean about it. However, I doubt we'll have the luxury of watching it unfold either slowly or harmoniously.

[Hari Seldon]

Aha....boor moi spoke of peak living standards a few posts before. Turns out Sri Marc faber agrees.

Faber: The years 2006 and 2007 were "the peak of prosperity" and the world economy is not likely to return soon to that level.

Mish: Agreed. I had quite some time ago proposed Peak Credit and her twin sister Peak Earnings have arrived. Here is a snip from the former. ... That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

Faber: “No decent citizen should trust the Federal Reserve for one second. It’s very important that everyone own some gold because the government will make the dollar (in the long term) useless."

Mish: No decent citizen should trust any central bank anywhere. The problems go far beyond the Fed and in the long run all fiat currencies are worthless. Fiat currencies do not float, instead they all sink at varying rates.

[amol.p]

China banks' rush for billions could trip markets

http://www.reuters.com/article/newsOne/ ... nnel=11617

The banks could go to the market with a slew of new stock and bond offers as they look to raise as much as 300 billion yuan ($44 billion).
The move would follow a surge in bank lending in the first half of this year--{one more bubble in creation}

China's top banking regulator Liu Mingkang warned in an article published on Tuesday that banks need to protect themselves from credit risk caused by changes in the country's industrial structure. ...{ does this mean huge industrial production lines are still idle...and they are not going to pay back the loans..???}

[amol.p]

Bank 'problem' list climbs to 552----more D&G

Despite the frenetic pace of bank failures this year, 552 lenders are still at risk of going under, according to a government report published Tuesday.

Mounting bank failures have proven costly for the FDIC, the government agency created to cover the deposits of consumers and businesses in the event that a bank is shut down.

FDIC Chairman Sheila Bair, who has won praise both in Washington and on Main Street for shepherding the industry through a particularly difficult period, said the industry's fate is tied to the broader recovery.

[amol.p]

Dubai Fund Asks for Stay on Debt Payments ---Here comes the first defaulter of GULF

The government of Dubai, in a blunt acknowledgment of the severity of its financial position, said on Wednesday that it had asked its banks for a six-month stay on its schedule of debt repayments.

The terse statement came in the middle of negotiations between creditors and Dubai World, the corporate arm of Dubai, which has led many of its most ambitious real estate projects, but is now struggling under the burden of $59 billion in liabilities.For the banks that financed the debt-fueled ascent of Dubai — analysts’ estimates put its total debt at about $80 billion. { Difference of $21 billion...????}

The bonds of Dubai World’s property developer, Nakheel, dropped sharply and the cost of insuring against a Dubai government default soared.


http://www.nytimes.com/2009/11/26/busin ... f=business

[amol.p]

World debt to soar 45 per cent: Moody's

http://economictimes.indiatimes.com/new ... 269231.cms

GM may shed 9,500 jobs in Europe

http://economictimes.indiatimes.com/New ... 269305.cms

[kmkraoind]

China Overcapacity Wreaks Global Harm, EU Group Says

A 4 trillion yuan ($586 billion) stimulus package is worsening overcapacity, especially in the steel, aluminum, cement, chemical, refining and wind-power equipment industries, according to a study by the chamber and Roland Berger Strategy Consultants, released in Beijing today.

The world’s third-biggest economy has rebounded this year on stimulus spending and a $1.3 trillion credit boom. China is adding capacity when global demand is yet to recover from the financial crisis, increasing the risk of trade frictions undermining commerce and making the threat of non-performing loans within the nation “ever larger,” the EU Chamber said.

The whole economic mess can be corrected by sacrificing China's interests. My sixth sense is telling that we are going to see a great trade war, never seen before or never imagined its consequences.

[Neshant]

well, the housing crash was essentially deflation (housing prices tanked). what was the result?

The result is a return to the norm which is exactly where prices should have been. You seem to be confused about the cure and the disease where the cure has become the disease. Blindly following economics textbooks will get you there.

It is always the market which should impose inflation and deflation to regulate prices. Not some guy in a suit sitting in an office like Bernanke who is trying to turn economics into a science of sourcery. He has no clue what the effect of fiddling around with interest rates and money printing will do to an economy - positive or negative. Yet he goes on fiddling with just two solutions to every problem - money printing & fiddling with interest rates. I call it the one-two step as you could train a monkey to press one of two buttons.

The end result is that when he screws up as he has by causing a massive inflationary bubble based on fraud, he wrecks the economy. Then he wakes up the next morning and starts preaching how his active intervention is needed to fix the problem when in fact he is the problem.

My point is that inflation and deflation are the means by which the market sets prices, interest rates..etc and these clueless charlatans are not needed. Their fiddling with money printing & interest rates usually comes at the expense of the productive elements of the real economy. For every dollar they siphon off through inflation from the productive elements to give to the non-productive, the real economy is destroyed that much faster.

By trying to prevent a recession since 2000, what they ended up doing was causing this massive crash. They will lead everyone down into an even worse future the more the fiddling continues. A vast majority of economic problems can be traced to fiddling.

The great depression was needed to clear out all the excess capacity from the system which should not have been there in the first place and which only arose due to fiddling. Anyway you need to toss out the textbook and consider a non-interventionist economic system.