Perspectives on the global economic meltdown (Jan 26 2010)

svinayak · Post by **svinayak** » 26 Apr 2010 21:01

Simon Johnson argues that the fundamental causes of our financial crisis are still with us and that a second financial shock is inevitable. He makes the case that until recently President Obama has been more aligned with bankers than consumers and that there has been a complete breakdown of consumer protection regarding mortgages and other financial products. He joins the Council to argue that the six largest banks comprise a powerful and dangerous oligarchy, and that the regulatory agencies in charge of policing financial institutions have been co-opted by the banks and now act in their interests. Breaking up the big banks, he asserts, is essential for any meaningful financial reform. Simon Johnson, a former chief economist at the IMF and now co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, is one of the most authoritative voices on world economics.

svinayak · Post by **svinayak** » 27 Apr 2010 01:40

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
~ Simon Johnson (Author), James Kwak (Author)

13 Bankers takes us through he painful history of the financial crisis that brought us where we are today and that now makes it so hard to move forward. Simon and Kwak argue that absent reform, another bailout - a more costly bailout with even greater global consequences, millions of jobs lost, and a ruinous impact on our government budget - is unavoidable.

Many Americans apparently do not yet understand how much influence financial institutions have in Washington, DC. Banks used to answer to Washington and were once held accountable for their actions. That is no longer is the case. We have never had such a concentrated banking system in the United States and it's dangerous that so much of our financial future is wrapped up in the big banks.

But the book is not pessimistic. Simon and Kwak offer instances from our history when elected representatives took on concentrated financial power. Each time, most Americans initially did not grasp how the system works, and this proved a major obstacle to reform. But the political leadership was able to explain what needed to be done, and to persuade average Americans that the nature of power in and around the financial sector had become so great and so distorted that something major had to be done.

The book is not anti-finance, but it is very much against the way our biggest banks operate today. The book describes exactly what needs to be done so that what happened in 2008-09 will never be allowed to happen again. Let's hope the prescription works.

The authors give readers a quick concise history of finance and banking in the United States, something that many Americans are woefully unaware of, that points out how banks and financial institutions came to garner so much power over the economy. While efforts have been made to regulate them to varying degrees those regulations have often proven ineffective or are too often enacted AFTER financial catastrophes, much our current situation. The authors rather persuasively argue that the "too big to fail" model and the bailouts of 2008 and 2009 were misguided, arguing that nationalization would have been the better route to go. They continue the argument that the forced mergers, such as Merrill Lynch and Bank of America, were mistakes and instead had created institutions that are now truly to big to fail. In some respects it almost sounds like a Teddy Roosevelt-era trust buster and his argument that these large institutions need to be broken up to diffuse their power certainly makes sense. They also point out the corrosive effect their political clout and donations carry with the political process, hindering further efforts at regulation.

Ameet · Post by **Ameet** » 27 Apr 2010 02:50

1 in 3 San Francisco employees earned $100,000

http://www.sfgate.com/cgi-bin/article.c ... 1CLUBN.DTL

More than 1 in 3 of San Francisco's nearly 27,000 city workers earned $100,000 or more last year - a number that has been growing steadily for the past decade.

The number of city workers paid at least $100,000 in base salary totaled 6,449 last year. When such extras as overtime are included, the number jumped to 9,487 workers, nearly eight times the number from a decade ago. And that calculation doesn't include the cost of often-generous city benefits such as health care and pensions.

The average city worker salary in San Francisco is $93,000 before benefits, according to Deputy City Controller Monique Zmuda. The data take into account everyone from park gardeners and street cleaners to attorneys and technology specialists.

Hari Seldon · Post by **Hari Seldon** » 27 Apr 2010 05:40

Neshant wrote:hell they are bailing out pakistan with billions, why not Calif

the *scale* of the headaches involved in quite different, IMHO. E.g., the cash that will keep pak afloat for a year will last barely a week in calif. Only.

Neshant · Post by **Neshant** » 27 Apr 2010 06:58

Hari Seldon wrote:
Neshant wrote:hell they are bailing out pakistan with billions, why not Calif
the *scale* of the headaches involved in quite different, IMHO. E.g., the cash that will keep pak afloat for a year will last barely a week in calif. Only.

Money circulating within a country is different than money that leaves a country. If India spends 1 billion to build a plane, its different than India paying 1 billion to some other country to import that plane. In the first case the money is still circulating in the country, in the latter its vanished.

Its fuzzier in the case of the US handing out money to Pakistan as what they hand out is USD that they print themselves. Still however, some kind of purchasing power is leaving the country.

If you total up all the money being spent fighting in Afghanistan (which is mostly a pakistan terrorism problem) and the money given as aid to pakistan and the soft loans and loan forgiveness and other handouts, I'm sure its some significant proportion of the Calif budget deficit. Calif annual budget shortfall is at 16 billion btw.

However the US has it in its strategic interest to prop up Pakistan and they will pay a pretty penny for that.

Hari Seldon · Post by **Hari Seldon** » 27 Apr 2010 07:17

If you total up all the money being spent fighting in Afghanistan (which is mostly a pakistan terrorism problem) and the money given as aid to pakistan and the soft loans and loan forgiveness and other handouts, I'm sure its some significant proportion of the Calif budget deficit. Calif annual budget shortfall is at 16 billion btw.

However the US has it in its strategic interest to prop up Pakistan and they will pay a pretty penny for that.

I agree with all that. My point is zimbly this: just like "work expands to fill all available time", places like Calif are full of special interests who will sniff blood and "will expand to soak up all available credit". (wow, kewl phrase, eh?). A '1-time' bailout signals to the special interests that the next bailout must be round the corner only. Yeah, funny how that works.

Added later:
IMO, the bigger fear is that of contagion/domino-effect. The moment DC bails out Calif, I'll bet my chaddi-baniyan there'll be plenty more states pulling out their begging bowls in a jiffy. IL, IN, FL, MI, NJ, NY etc come to mind. Let DC deny them after having bailed out CA - that'd be a fun watch.

Sure money spend domestically and that's spent abroad (like INR in Afgn) is qualitatively different only, despite its fungibility and all that. That doesn't mean domestic dollahs are more effective/efficient/manageble/harmless than the phoren ones. After all the POTUS is blessed with the power to sign void any bonds payable to phoren powers declared enemies of the united states, only. Let DC try walling itself off of liabilities incurred by CA, for instance. That'd be another fun watch, I wager. Not happening only.

derkonig · Post by **derkonig** » 27 Apr 2010 11:56

D&G about Portugal, Greece and "haircuts"

http://www.bloomberg.com/apps/news?pid= ... yUNg&pos=5

Neshant · Post by **Neshant** » 27 Apr 2010 12:28

Hari Seldon wrote:That doesn't mean domestic dollahs are more effective/efficient/manageble/harmless than the phoren ones.

I don't get what you mean. Money circulating within a country whether efficiently or inefficiently is at least circulating within its borders. If the first person does not use it efficiently, he passes it onto some guy who may use the (slightly inflated currency) more efficiently. If not the third or the fourth.

Economically speaking, giving it to any person within the country is infinately better than handing it to some caveman in pakistan. The only reason for handing it to Pakistan is because US is hoping to use to use pakistan to hold down India's rise to power with terrorism. Its an 'investment' of that sort.

We'll see how far that gets them long term and if its marginal utility outweighs the cost. So far, they are the ones being held down in Afg.

On India's part, it has no obligations to preserve the global monetary status quo so its in a position to screw both US and China by buying up physical gold.

Neshant · Post by **Neshant** » 27 Apr 2010 12:41

Interesting documentary on the rise of the federal reserve.

It highlights the extreme danger of corporations and other interests co-opting politicians to gain control over the national wealth. Anytime you have some entity inserting itself between a person and the fruits of his labor, its a guarantee that theft will occur.

--------

America - Freedom to Fascism
http://video.google.com/videoplay?docid ... 3867390173#

Hari Seldon · Post by **Hari Seldon** » 27 Apr 2010 13:12

Sri Derkonig above posts about Portugal related D&G. Well, well, aren't coincidences grand coz Sri AEP is in on it too, full-time this time.

The EU-IMF “therapy” of deflation for Greece repeats the catastrophic errors of Chancellor Heinrich Bruning in the early 1930s and must lead to a depression,,,The Greek people must be sacrificed for the Project and to hold the EMU line, like the Spartans of Thermopylae who perished to gain time for the Alliance.
{Oh, mebbe moi was wrong about the IMF. They ain't racist after all. Their misguided (some say malicious) prescriptions impose pain and doom even on tfta beebals like greeks and not just 'em sdre Asians only.}

They are to squeeze fiscal policy by 6pc of GDP this year in a slump – a “death spiral”, warns George Soros. They are to do this without the IMF’s devaluation cure. If they do stabilise the debt – to hit 130pc of GDP this year after Eurostat’s revelations – they will be left paying 6pc to 8pc of GDP to foreign creditors for ever. Will Greeks comply meekly, or turn their Spartan blades on Europe?
{Debt slavery, new age colonism of the sort bolded above is precisely what Sweden tried to impose on the Latvians and the ~~brits~~ shits on Iceland. There's no way a politically sovereign people can ever stand for such khanomic serfdom. No way. Alas, my Yindia wasn't politically sovereign before '47}

No country in Western Europe has defaulted since the Second World War. More than €7 trillion has been lent to Club Med states, banks and homeowners in the belief that it cannot happen. EMU shut the warning signals, disguising risk. What investors overlooked is that currency risk mutates into default risk in a monetary union.
{The same theme reverberates. Bravo AEP for saying it so eloquently}

It makes default more likely, not less. The bond markets have suddenly twigged.

In barely two weeks, the City mood has shifted from ruling out a Greek default as absurd, to accepting that it could happen, to now fearing that restructuring is highly likely.

A country such as Portugal with total debt of 300pc of GDP, a current account deficit of 11.2pc, and a budget deficit of 9.4pc should not think it has the luxury to trim spending at a leisurely pace. Portugal has an ugly choice. If it tightens hard to soothe bond markets, it too risks depression. EMU’s Faustian Pact is closing in.

And here's sri wolfganag manchau in FT:

This is going to be the most important week in the 11-year history of Europe’s monetary union. By the end of it we will know whether the Greek fiscal crisis can be contained or whether it will metastasise to other parts of the eurozone…..There are three things to watch out for. First, and most important, Greece will need to present a transition programme that explains how a large primary deficit can be turned into an equally large primary surplus without causing a slump in economic growth….

Second, the total loan package has to be substantially higher than the €45bn pledged so far….The EU’s contribution is for one year only, and I see little chance that the EU will be able to increase it either now or next year…..What we need to hear is a credible and watertight commitment that extends beyond €45bn….Third, we need to watch the situation in Germany. The government originally tried to tag the Greek loan legislation on to an existing piece of legislation, but this ran into opposition. There will now be a full legislative process. Some parliamentarians from Angela Merkel’s coalition have already cast doubt on whether they will support it…

There are many co-ordination problems and too many self-important people to be consulted, most of whom lack an understanding of what is going on and have a wrong sense of priorities. In such an environment, accidents happen. So far the EU’s policy process has been a net contributor to this crisis. We need to hear something that does not fall short of our lowest expectations. Otherwise Greece will be heading for default, and the crisis will spread to Portugal and beyond.

But gentle readers, rest easy. Its not like the sky will fall tomorrow (well if mt.katla erupts, then who knows but until then). In the US, it seems to me that a truly dangerous bullet has been successfully dodged. Perhaps, the worst in terms of fin system shocks is behind us in the new world. In the old world of europe, however, deflation is the future - both literally and figuratively only. In the ancient world (India and china) the cycle has reset and hopefully a new dawn awaits.

Jai ho, gentle readers. have a nice day.

.

Hari Seldon · Post by **Hari Seldon** » 27 Apr 2010 13:19

Satyajit Das: Rand World

Fun read, esp if you've read Ayn Rand's 2 famous tomes already.

One of the strange by-products of the publishing boom around the global financial crisis is the revival of the Ayn Rand’s reputation. The sales of her books, such as “The Fountainhead” and especially “Atlas Shrugged”, the 1957 novel that for libertarians is the marker for the rise and failure of collectivism, has risen sharply outperforming most living writers and most recent contributions.

The spike is neither unexpected nor surprising. The rise in fortune coincides directly with massive state intervention in the economy following market failures in the fallout from the financial crisis. As one recently formed group on the social networking site, Facebook, expressed it: “Read the news today? It’s like ‘Atlas Shrugged’ is happening in real life”. The writer just forgot to add the “Oh boy!” at the end of “Read the news today?” to complete the nostalgia.

Bah. analogies and parallels can only be stretched so far. After that, they all break down. History may rhyme, it seldom repeats only.

For some, the future predicted and feared by Rand is coming true. Alan Greenspan’s downcast admission in Congress about the failure in his view of the world echoed similar admissions by the character, Robert Stadler, the gifted physicist in “Atlas Shrugged”, who had betrayed his faith cravenly in exchange for political favour. The fact that Alan Greenspan was once a member Rand’s circle merely added to the parallels.

Ayn Rand was a trenchant critic of the popular collectivism movements of the twentieth century. Her view was always resolutely pro-individual and anti-government. Rand helped shape the libertarian self image – the gifted individual restricted, brought down and in permanent conflict with power hungry bureaucrats, officials and the untalented ‘second handers’ who populate life.

Her writing never rose to high standards. The stereotyped characters in her novels were poor caricatures. These weaknesses did not detract from a unique popular appeal.

In “Goddess of the Market”, Jennifer Burns identifies the source of her appeal. The very shallowness of her thinking that intellectuals dismissed was inherently attractive to a certain sensibility, especially adolescents. Her absolute values and intolerance are attractive to those who prefer a Manichean worldview. Rand’s popularity also derives from her correct insight that thriving societies are not possible without freedom, entrepreneurial abilities and innovation. This fact is most evident in China’s embrace of market economics to some degree.

jai ho

ramana · Post by **ramana** » 27 Apr 2010 21:23

Hari Seldon wrote:
Politicians go along with this scam because they get compensated like CEOs. So they don't care if they don't win a second term. They get invited to do some 'consulting' for a bank after they leave office and retire wealthy. How much you want to bet Geithner will be doing 200 million in salary easy after he leaves office.
Interesting, but I'll go with whatIlargi @ TAE says here:
I think the undoing of Goldman will be that its execs, just like those at Morgan Stanley, or GE, or GM, have failed to understand that their own personal wealth can only last as long as the "lower classes" have at least a decent life. A chance to feed their kids and send them to a proper school, to get proper medical treatment for their families if and when required, and, when they age, to draw sufficient retirement funds not to suffer from hunger and cold.

The Blankfeins and Jamie Dimons of the planet have no idea who these people are, or what they think, what they're going through, many hundreds waiting in line for an entire day for a handful of low-paid jobs.
Interesting POV, IMHO. Time will tell who was right, of course.

The bolded part is what did the French elite before the revolution. "Let them eat cake!" mentality when there was no bread.

ramana · Post by **ramana** » 28 Apr 2010 00:14

S&P has cut Greek bonds to junk status. This has caused Dow Jones to drop ~100 points. Great apprehension Greece will default.

Carl_T · Post by **Carl_T** » 28 Apr 2010 00:28

This might be a good time to buy greek stocks that have not been fundamentally hurt by the crisis and get most of their revenues from abroad.

Sanjay M · Post by **Sanjay M** » 28 Apr 2010 02:00

Neshant wrote:Money circulating within a country is different than money that leaves a country. If India spends 1 billion to build a plane, its different than India paying 1 billion to some other country to import that plane. In the first case the money is still circulating in the country, in the latter its vanished.

US is handing out $$$ to Pakistan which get spent on buying more US weapons to fight terrorists (and to fight US and Indian troops as well)

So it's more like vendor financing. They're mainly lending money to see it get spent on their own products. The real losers are US and Indian troops, who see these products get used against them.

Satya_anveshi · Post by **Satya_anveshi** » 28 Apr 2010 06:06

Hope folks had good time watching Blankenfien's testimony on the senate floor. Let's see what comes out of this.

Neshant · Post by **Neshant** » 28 Apr 2010 06:10

Nothing will come out of it. Its just a show. Goldman Sachs will just get a small fine while politicians will get a chance for grand standing as corruption fighters.

Neshant · Post by **Neshant** » 28 Apr 2010 06:15

Ah! Another day another scam.

I'm sure the day will come with Conman Sachs will spring a surprise on India after having done some financial advising.

------------
How Goldman Sachs Screwed Ghana

http://www.ghanaweb.com/GhanaHomePage/N ... ?ID=180487

Neshant · Post by **Neshant** » 28 Apr 2010 06:25

US is handing out $$$ to Pakistan which get spent on buying more US weapons

Its not all going to military stuff. That's a separate component of the handouts. Most of it is going towards propping up their economy. Pakistan should have financially speaking been in a debt trap by 2000 and bankrupt months thereafter and probably worse with the number of coups they've had.

What's keeping them afloat are infusions of US $ and debt cancellations.

Neshant · Post by **Neshant** » 28 Apr 2010 06:28

Goldman Sachs and Gold

..."In other words, Arab oil producers had few qualms about pumping out their oil, as fast as possible, and at a “low” price – as long as the currency used in these contracts was redeemable in gold, which was also fixed at a low price. However, selling their oil cheap and only getting paper in return was something which the OPEC nations would not tolerate, given that most of their own advisors had learned about economics and markets at Western universities.

Quoting from the “FOFOA” blog again, what OPEC essentially did in setting their own “price quotas” for oil was to change our system of payment so that instead of a barrel of oil being “defined” by a measure of dollars, that essentially the dollar was re-defined as representing a fixed quantity of oil. It was simply a variation of “The Golden Rule”: he who has the 'gold' makes the rules – except now the rule-makers were holding “black gold”.

Naturally, the West in general, and Western bankers in particular, were horrified by these developments, for two reasons. First, the economic sophistication of the Arab OPEC producers was making it very difficult to engage in the 'economic rape' which was the modus operandi toward developing nations by Western capitalists. Even more horrifying to the bankers was the fact that these OPEC oil producers were creating a grave risk of exposing their entire “fiat currency” Ponzi-scheme: where worthless banker-paper is exchanged for valuable, “hard” assets – ultimately ending with the bankers holding all the hard assets, while the masses held nothing but their worthless paper.

Thus began two long-term initiatives by the Western banking cabal. First, OPEC nations were suddenly flooded with new “branches” of Western banks. While these OPEC Arabs may have been well-schooled in “economics”, they (and the rest of the world) were unacquainted with the bankers' world of “high finance”. Western bankers began to 'help' the OPEC Arabs to “finance” all sorts of grandiose projects – and once again the economic rape of the oil-producing nations could continue. But that is another story...

The second initiative of the Western bankers was to preserve the illusion – at all costs – that their worthless paper did have “value”. They had only just achieved the ultimate banker-fantasy: a world where they could exchange completely “un-backed”, completely worthless paper for the wealth of the masses. They were not about to let a handful of oil-producing 'upstarts' expose their scam, through demonstrating that their paper had no value – through establishing their own exchange rate for the paper, and continuing to devalue that paper (by raising the price of oil).

Thus, the multi-decade campaign to suppress the price of precious metals (and especially gold) was born. The reason why the bankers' Ponzi-scheme (and the deception which came with it) centered upon suppressing the price of precious metals is that for close to 5,000 years precious metals have been the ultimate “stores of value”: perfectly preserving the wealth of the holder. "

Read the rest :
http://www.bullionbullscanada.com/index ... Itemid=131

Hari Seldon · Post by **Hari Seldon** » 28 Apr 2010 07:54

So it begins??

Greek Two-Year Note Yield Climbs to More Than 17% on S&P Cut

Greek two-year government note yields surged to more than 17 percent after Standard & Poor’s cut the nation’s credit rating three levels to BB+, or junk.

The two-year yield has since hit 18 percent.
Funny how even th inevitable feels like a surprise, sometimes? Or maybe it was just that I didn't expect the ~~raping~~ rating agencies to take action before the mkts did.

Restructuring Would Cause 50-70 Percent Losses

S&P lowered its long- and short-term sovereign credit ratings on Greece to BB+ and B, respectively, from BBB+ and A-2. The outlook is negative.

“We assigned a recovery rating of ‘4’ to Greece’s debt issues, indicating our expectation of ‘‘average’’ (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default,” S&P said in the statement.

Dollar, Treasuries Soar in Flight to Safety. EU Handling "Inept"

Yields on two-year notes fell the most since March 2009 before the Treasury sells a record-tying $44 billion of the securities.

“People are flocking to security,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “They’re seeing how inept the EU is in handling this Greek thing. If Italy, Portugal or Spain has the same problems this could be a real bad situation.”

The flight to safety returns, I guess. Jai o. Great times ahead for the almighty dollah only.

Portugal Suffering Greek Contagion Pressures EU Bonds
Contagion hits portugal. eurostanis playing "let the mkt monster catch and eat the weakest and the slowest first" perhaps. Well, too bad the currency union thingies they're in ties them all together with eu-rope to the slowest and the weakest among them.

Portugal risks becoming the new Greece.

With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala.

“We do not ignore that Greece’s particular situation has contagion risks, and we are feeling it,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon on April 22. “The performance of spreads in the market reveals that contagion risk.”

While Portugal’s public debt of 77 percent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 percent of GDP. The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development, according to the Paris-based group’s data.

“The reason we’re concerned about Portugal is not because its public sector debt ratios are excessively high, it’s more that the Portuguese economy doesn’t really grow,” said Kenneth Wattret, chief euro region economist at BNP Paribas SA in London.

CDS spreads have gone into a tizzy, besides.

So what could be next? Any number of bad things. IMHO, Mish puts it succintly here:

I do not think we have seen panic yet. However, we will see panic if contagion spreads to Spain or traders start questioning UK debt, or interest rates in Japan. All of those are possible and Spain is likely up next.

Sanjay M · Post by **Sanjay M** » 28 Apr 2010 10:15

If I were the Germans, I would hedge my bets by forging more independent bilateral deals with big non-EU players nearby like the Russians. Sign some deals for access to resources, with prices locked into the contract, and then use that to ride out any inflationary tide that comes with the drop in the Euro's value due to this financial crisis.

vina · Post by **vina** » 28 Apr 2010 12:27

Hmm. In the midst of the crisis , ol vina the bear had said that this is like a staged thermonuclear weapon, with the mortgage meltdown the implosion trigger, the collapse of credit and banks the 1st stage and that later stages will follow as the material gets compressed and the chain reaction takes place and the final stage mega boom will be China going off.

Obviously now there are clear signs that the financial crisis is morphing into a Sovereign Debt crisis. The bail out numbers are looking really nice indeed. Euro 90b for Greece, Euro 40b for Portugal and Euro 350b for Spain .. Close to a nice round figure of Euro 500b to back stop peripheral Eurozone. This is not counting Italy which is anyway perennially shaky. And of course, if the shock waves reach Londonistan, the 4% "safe" rate that the UK Land borrows at wont be there anymore.

And now Hari Seldon says that Cheena has put in ANOTHER $600b "stimulus" .. Nice nice.. Just waiting for the shock waves to propagate to China. Of course, there will be time lag effects, it wont be as quick as a nuclear chain reaction. But a chain reaction all the same.

Jai Ho.

rsingh · Post by **rsingh** » 28 Apr 2010 14:59

Perspectives on the global economic meltdown...............chances are higher then ever.

girish.r · Post by **girish.r** » 28 Apr 2010 15:52

vina wrote: And now Hari Seldon says that Cheena has put in ANOTHER $600b "stimulus" .. Nice nice.. Just waiting for the shock waves to propagate to China. Of course, there will be time lag effects, it wont be as quick as a nuclear chain reaction. But a chain reaction all the same.
Jai Ho.

It might well be there already......

http://money.ninemsn.com.au/article.aspx?id=1045765

Hari Seldon · Post by **Hari Seldon** » 28 Apr 2010 17:53

I somehow like this hedge fundoo - sri Hugh Hendry.

Guy's got attitude, spunk and smarts - all carried off with elan that is not programmed to offend.

Here's an interview from the guy. mast read only.

Hugh Hendry is not one to mince his words. The outspoken hedge fund specialist, formerly a partner at Odey and more recently a co-founder of investment boutique Eclectica, has previously appeared on Newsnight and presented a Channel 4 documentary on the banking crisis. Here he explains why he has been punished for good performance, why China could be the next Japan, and why he would insure you against the UK defaulting on its sovereign debt

On cheen:

Q:Do you think China is a bubble waiting to burst?

HH: I fear it could be, because it has not demonstrated an ability to create wealth.

It has demonstrated an ability to create GDP growth, which is a function of spending money. The priority of economic management at the macro level should be to have a high re-occurring level of household disposable income, which manifests itself in a high level of consumption as a percentage of GDP.

The scorecard for China using that metric is really bottom of the class. Over the last 30 years, that ratio has almost halved and we are talking about consumption being 35% of the economy. Now when I say that, people scoff and ask, how can you celebrate the venality of consumption? Isn’t there nobility to building bridges? However, infrastructure projects and steel plants that are publicly commissioned and have very uncertain economic paybacks ultimately require a subsidy from the household sector.

If you build a high-speed rail link and anticipate it improving the productivity of the economy over the next 10 years, but actually it does not, it means you will have to raise Government borrowing or tax the population to sustain the negative cashflow.

But OTOH....

Q:But is this all about producing more of everything and increasing their economic footprint?

HH:Well, yes. They are pursuing an Asian model and at the forefront of that model is Japan. My interpretation of all of that is, again at the macro level, profit has been displaced by the notion of sovereign power and accumulation.

If you define success on those criteria, they are clearly top of the class. But then we have witnessed Japan fall from being the unquestioned economic superpower – as it was in the 1980s – and it has now suffered two decades of profound reversal. I think the Chinese have to be concerned about that, because it has a portent their model is so similar.

OK, I don't subscribe to the cheen==japan parallel. Sure there are similarities but 1 isn't the other. yet.

On the equity mkts...

Q:Looking specifically at those equity markets – they do not appear enormously overpriced at around 20 times earnings do they? Especially if earnings power ahead in the next few years?

HH:This is back to the silly Slater notion of PEG ratio analysis, which has the flaw that it is not predicated on the accumulation of wealth. This saw Next become a retail empire in the 1980s by having not one but three stores in every high street. The same applied to Starbucks. Again it is this mechanistic notion of generating incremental revenue or earnings growth or GDP growth – at the expense of declining returns on marginal investment, which sows the seeds of its own destruction.

Read it all.

Hari Seldon · Post by **Hari Seldon** » 28 Apr 2010 19:50

AEP again.
Maastricht madhouse fuels EMU-wide contagion from Greece

...The rescue obliges countries in trouble to go deeper into trouble. Portugal must come up with €774m as its share of the EU's initial €30bn package. Ireland must find €491m, Spain €3.7bn. Yields on 10-year Portuguese bonds hit 4.94pc, a whisker shy of the 5pc rate that Lisbon must relend to Greece. Meanwhile, safe-haven Germany can borrow at just over 3pc. The bail-out cost falls hardest on those that can least afford it. It deepens the North-South divide that lies at the root of Europe's crisis.

I wonder at times why the peoples of the PIIGS are not out in open revolt. Not yet perhaps but that time ain't far. What're the odds Greece, which is to obtain this largesse will ever, every repay even 10 cents on the euro of this loan, eh??

Germany, as usual, is both the problem and the solution.

Chancellor Angela Merkel continues to equivocate, demanding "very strict conditions". Dissent is growing louder in her coalition ranks.

Both Free Democrats and Bavarian Social Christians have said it is time to break the taboo and ask whether Greece should "step outside" EMU. Werner Langen, the leader of Christian Democrat MEPs, said the bail-out appears to breach Germany's constitution. If so, we will find out soon. Four professors will launch a legal challenge in early May at the Verfassungsgericht (high court). Should they secure an injunction, EMU may fly apart. The Court ruled in 1993 that Maastricht was constitutional only as long as EMU remains an area of monetary order. "A 'transfer union' is a bottomless pit and is bound to threaten currency stability. That is what we are going to file," said Tübingen Professor Joachim Starbatty.

Aha. Which brings us back to the original deception....

In a rational world, Brussels would tap the EU's AAA rating to issue cheap "Barroso Bunds" to cover rescue costs. But we are not in a such a world. We are in the Maastricht madhouse, a currency union without a treasury, ruled by the "no bail-out" clause of Article 125 of the EU Treaties. Europe is at last paying the price for fudging the true implications of EMU 19 years ago in that Medieval city on the Maas, gambling that it would one day be able to lead Germany by the nose into a debt union.

Hari Seldon · Post by **Hari Seldon** » 28 Apr 2010 20:01

The national debt and Washington's deficit of will

Bill Gross is used to buying bonds in multibillion-dollar batches. But when it comes to U.S. Treasury bills, he's getting nervous. Gross, a founder of the investment giant Pimco, is so concerned about America's national debt that he has started unloading some of his holdings of U.S. government bonds in favor of bonds from such countries as Germany, Canada and France.

Gross is a bottom-line kind of guy; he doesn't seem to care if the debt is the fault of Republicans or Democrats, the Bush tax cuts or the Obama stimulus. He's simply worried that Washington's habit of spending today the money it hopes to collect tomorrow is getting worse and worse. It even has elements of a Ponzi scheme, Gross told me. "In order to pay the interest and the bill when it comes due, we'll simply have to issue more IOUs. That, to me, is Ponzi-like," Gross said. "It's a game that can never be finished."

OK, nothing new in that argument. But a good rephrasing is all.

As for puritans who may protest, the p[onzi-label, well here's a donut for ya...

Of course, at least in theory, this problem can be fixed. Unlike a real Ponzi scheme, which collapses when no new suckers offer money that can be used to pay off earlier investors, the government can restore fiscal sanity whenever our leaders decide to do so. But that premise is what has people like Gross worried. In addition to running a budget deficit, Washington for years has had a massive deficit of political will.

Over the past decade, lawmakers have avoided the kind of unpopular decisions -- tax increases, spending cuts or some combination -- needed to keep the debt under control. Federal Reserve Chairman Ben Bernanke testified recently that, for investors, the underlying problem with the debt isn't economic. "At some point, the markets will make a judgment about, really, not our economic capacity but our political ability, our political will, to achieve longer-term sustainability," he said.

Have to wonder who this 'market' is that all folks keep worrying about.....

Meanwhile, the problem buildup continues.

The national debt -- which totaled $8,370,635,856,604.98 as of a few days ago, not even counting the trillions owed by the government to Social Security and other pilfered trust funds -- is rapidly becoming a dominant political issue in Washington and across the country, and not just among the "tea party" crowd.
...
It's a tough task. The short term looks awful, and the long term looks hideous. Under any likely scenario, the federal debt will continue to balloon in the years to come. The Congressional Budget Office expects it to reach $20 trillion over the next decade -- and that assumes no new recessions, no new wars and no new financial crises. In the doomsday scenario, foreign investors get spooked and demand higher interest rates to continue bankrolling American profligacy. As rates shoot up, the United States has to borrow more and more simply to pay the interest on its debt, and soon the economy is in a downward spiral.

Exactly. And that is why rates won't shoot up. Its no mkt-warket deciding what the rates should be. Its the Fed that decides. And they'll keep rates low till hell freezes over. Oh, should sundry 'investors' get too arrogant to buy US debt, a few wars, scars and czars can be arranged to ignite more 'flights to safety' back to the almighty dollah. Has worked well so far, hasn't it?

The economic recovery has been picking up steam in recent weeks -- "America's Back!" trumpets Newsweek -- but the political recovery has been feeble. Whether on taxes, entitlements, military retooling, financial reform, energy policy or climate change, Washington is mired in a political enmity that makes tough decisions nearly impossible. In the fiscal debate, the default position, as it were, is to do nothing. Debt is the grease of Washington legislation; for short-sighted leaders, it is less a political problem than a political solution. As long as the government can continue borrowing at reasonable rates, citizens can have their tax cuts and government services, and eventually the growing debt becomes someone else's problem.

Bravo. brilliantly articulated that bolded part, that.

But lest folks think me some D&G aytollah, no, all is not lost. There's silver linings to be had too.

he latest news from the Treasury is hopeful: Tax revenues are slightly higher than anticipated so far this year. The TARP program to bail out financial firms has proved far less costly than expected. Investors from around the world still eagerly bid on Treasury notes at auction. During this global recession, the U.S. Treasury has been a safe port in the storm.

When I spoke to Peter Orszag, the director of the Office of Management and Budget, he expressed optimism that the administration can balance the primary budget -- not including interest payments -- by 2015. The longer-term deficits are his bigger worry. Asked if the political process in Washington is broken, he answered: "I think it's too soon to know whether the system's broken. The problem is not what happened last year or this year. The real issue is when we move forward in time, something has to give."

Read it all.

shyamd · Post by **shyamd** » 28 Apr 2010 20:45

Safe haven, for now

Stephanie Flanders | 13:03 UK time, Wednesday, 28 April 2010

"Could it happen here?" That's the question I keep getting asked, as the Greek tragedy in the markets continues to unfold.

I did a fairly comprehensive piece on the differences between Britain and Greece some time ago. But a pocket summary of my conclusions: like Greece we're borrowing a lot at the moment. Like other governments that are borrowing a lot, ours would be vulnerable if international investors decide, overnight, that sovereign debt isn't a safe bet after all. We recently won the chance to host the Olympics. But there the similarity ends.

We also have four important advantages which Greece lacks.

First, our stock of debt is rising fast, but it's still much lower than in Greece - and many other European countries. The OECD predicts that British government debt will rise to 78% of GDP in 2010. The forecast for Greece is 120%, with an average for the Euro area of 85%. (These are all on the Maastricht definition of gross public debt, which comes out higher than the net debt figure the government tends to use.)

Second, the average maturity of our debt is much higher - at around 13 years. That's the highest of any major economy. It means that, even with our big deficit, the British government is going to be raising less new debt in the markets this year than Germany, France or Italy. It also means that any rise in the cost of borrowing takes a long time to affect the average cost of the debt. (A point I made on Today this morning.)

Third, unlike Greece, we have a good track record of raising - and collecting - taxes when the Treasury needs them. Many voters would say, too good.

Fourth, and, most crucially, we're not in the euro. If push comes to shove, we can always rely on a falling currency to make our debt easier to manage. That is why most investors think it is more or less inconceivable that the British government would actually go into default.

If you don't believe me, ask international investors. The price of British government debt has risen today, only slightly less than Germany's -as the price of Greek debt continues to fall. You wouldn't guess it from the feverish debate here over the deficit, but right now investors think we're a "safe haven".

That may change. We may, after all, have some serious political uncertainty coming down the track. But market movements today are a good reflection of the distance between London and Athens.

Investors may worry a lot more about Britain's public finances than they did a few years ago. But they worry half as much about it as they worry about Greece.

A conspiracy of silence

Stephanie Flanders | 15:12 UK time, Tuesday, 27 April 2010

They may disagree in public, but privately they couldn't agree more. On the single most important issue facing the country after this election, our politicians think it's better to keep us in the dark.

Ever since the disastrous state of the public finances became clear, the Institute for Fiscal Studies and other experts have been talking about the need to cut borrowing drastically after the election - and the kind of tax rises and spending cuts that might be involved. The politicians have obliged with talk about "tough choices" - the Conservative shadow chancellor talked about a coming "age of austerity".

But what, exactly does that mean? Which public services would need to go? How much would defence - or road-building, be squeezed? Which benefits would need to be cut or reined back? We don't know. More than halfway through this election campaign, the three largest parties have still given us only a small hint of what they would do.

Robert Chote, the IFS's director, hammered away at them, once again, this morning:

"Repairing the public finances will be the defining policy task of the next government. For the voters to be able to make an informed choice in this election, parties need to explain clearly how they would go about achieving it. Unfortunately, they have not. The opposition parties have not even set out their fiscal targets clearly. And all three are particularly vague on their plans for public spending. The blame for that lies primarily with the government for refusing to hold a spending review before the election."

The chancellor has said that it cannot do this until the autumn, because the outlook for the public finances is uncertain. But, says the report, "Uncertainty is a fact of fiscal life: any responsible government would face up to it, and seek to reduce it, not use it as something to hide behind."

In today's report, the IFS estimates that the Conservatives would plan to cut spending by £57bn a year, in today's money, by 2015-16. The Liberal Democrats would cut by £51bn by 2016-17, and Labour would need to find cuts amounting to £47bn by 2016-17. Given the protection that Labour and the Conservatives are offering to some departments, the cuts for other parts of spending would be even greater than these headline figures imply.

Under any of the parties, the years 2011-2015 would involve the "deepest sustained cut to spending on public services since 1976-80", when the UK was forced to borrow from the IMF. The Conservatives' plans, starting in 2010, "imply cuts to spending on public services that have not been delivered over any five-year period since the Second World War."

None of the parties has revealed more than a fraction of what this would involve. True, the IFS thinks the Liberal Democrats are "slightly less bad" than the other parties in the amount of detail they have provided to the voters. They have proposed detailed spending cuts amounting to about £12bn a year, more than the others. But even that is only about a quarter of the spending cuts they would need to make their numbers add up.

Labour has announced concrete cuts in public services amounting to £6.7bn, only just over a tenth of the spending cuts they would need to find. Whereas the Conservatives have detailed proposals that would cut spending by £11.3bn. And that sounds better than it is: remember that they are relying more on spending cuts to start off with. So £11.3 bn is less than one fifth (17.7%) of the total cuts they would need.

There are some other interesting nuggets in this report. The IFS confirms that tax increases over the next Parliament would be highest under Labour: in the region of £24bn, of which £17bn have already been announced.

The Conservatives would be looking for total tax increases of £14bn, including many of those proposed by Labour. But the pledge to avoid Labour's National Insurance rise, along with other Conservative promises, will probably mean the Tories would need to raise taxes by an extra £3.5bn over the Parliament. They have not indicated whether, or how, they would do this.

George Osborne's office have now responded to the report, saying that the IFS is underestimating what they would raise from the new levy on banks. They deny that they would need to raise taxes by more than Labour has already announced, though of course, they have never ruled that out.

All three parties seem to want to cut government borrowing by £71bn over the next few years - the main difference is that the Conservatives would aim to achieve this one year sooner. The IFS estimates that this would leave the government needing to borrow an additional £604bn over the next seven years. Under Labour or the Liberal Democrats, the government would need to borrow £643bn - a difference of just 6%.

The IFS is sceptical that the Tories will be able to achieve their aim of cutting spending by £4 for every £1 raised in extra tax. In the early 1990s, under the (then) Chancellor Ken Clarke, the ratio was 1:1.

That did not come after such a long period of rapid spending growth. It might be a little easier today. But, again, the Conservatives would make their case more credible if they showed more clearly where they expect the axe to fall.

Since last autumn I've been banging on about the welfare bill being a large area of potential savings that the parties had kept below the radar. The IFS has highlighted this point again today. It is difficult to believe that the next five years will see double-digit real terms cuts in the budgets of some departments, all so the structure of tax credits and benefits can remain more or less unchanged. But that is what the publicly stated policies of the three main parties basically imply.

Then again, a few months ago, it would have been difficult to believe that we would not have got to these crucial issues, three weeks into an election campaign.

Given the dramatic turnaround in the polls, it's no surprise that everyone wants to think about what will happen in the days after the election. But given the momentous decisions that the next government will have to take, it is a shock that there has been so little interest in what happens in the months and years after that.

Suraj · Post by **Suraj** » 28 Apr 2010 20:47

This whole 'flight to safety' line of argument really rubs me the wrong way now. It was on full display yesterday:
"US Dollar strengthens as investors flee to safety!"
"US treasuries up"
"Emerging markets in Asia risk Europe style default as EM bond yields rise"

All these have the contours of a massive scam, devised around a system that places the USD and US markets at the center and repeatedly pushes the line that they are safe. There's no 'flight to safety', just Pavlovian conditioning in the works.

svinayak · Post by **svinayak** » 28 Apr 2010 21:25

Greek 2-Year Yield Tops 23%
Published: Wednesday, 28 Apr 2010 | 10:29 AM ET Text Size
By: Bob Pisani
The 2-year Greek bond passed a 23 percent yield, which must surely be some kind of selling climax. This has no doubt brought out the vulture crowd; indeed, European stocks are well off their lows on hopes that a clear aid package will materialize this morning, and National Bank of Greece [NBG 2.90 0.30 (+11.54%) ] is up 10 percent.

Meantime, the Greeks are boldly going to the heart of the problem: they have banned short selling of stocks for the next two months. Problem solved.

ramana · Post by **ramana** » 28 Apr 2010 21:43

Hari,
Time to start a blog. you have enough content and thoughts to power one . If you need you can team up with some members to maintain it.

SS is starting a Eye On Pak blog soon with help.

Neshant · Post by **Neshant** » 28 Apr 2010 22:06

If Greece does default, there would be no sense in defaulting on just 30 or 40% of its debt. They may as well go for 80 or 90%. The market will punish them just the same.

The only problem of doing a major default like that is it won't go down well with the debt holders.

Satya_anveshi · Post by **Satya_anveshi** » 28 Apr 2010 22:30

MUST Read folks - US reaching Paki heights; this needs to be posted in US-India thread to caution desi janta.

Special Report: Rapid growth of militias feeds off politics

The SMVM is one of 200 armed militias in the United States, a number that has quadrupled since 2008, according to the Anti-Defamation League, a civil rights watchdog, which says they may have 6,000 members and many other adherents.

Today, militia members and experts say a number of factors are driving the new surge:

*The 9/11 attacks, which revived the notion that citizens should defend the United States against threats.

* The 2001 Patriot Act, passed in the wake of 9/11, which stirred fears that the government would use enhanced powers against ordinary citizens.

* Anger at government failure to stop mass illegal immigration from Latin America.

* The recent recession, the worst since the 1930s.
* The election in 2008 of President Barack Obama. Many see Obama as a Socialist bent on growing government, raising taxes and confiscating guns; his status as the country's first African American president exacerbated fears about him, according to the Southern Poverty Law Center.

* Healthcare reform, seen as exemplifying oppressive government power and intrusion -- the contemporary version of a 1994 ban on assault weapons that enraged the right wing.

Anujan · Post by **Anujan** » 28 Apr 2010 23:01

After Greece and Portugal, Spain is going down the Pakistan

ramana · Post by **ramana** » 28 Apr 2010 23:03

Anujan wrote:After Greece and Portugal, Spain is going down the Pakistan

You guys should write short description(500 -100 words) of whats happening in the PIGS so aam janata understands. Right now what we get are sound bytes and chirps or tweets!

Will get volunteers to set up blogs.

Satya_anveshi · Post by **Satya_anveshi** » 28 Apr 2010 23:57

Anujan wrote:After Greece and Portugal, Spain is going down the Pakistan

Moi needs to travel to some of these countries very soon - kind of in a fix. Could escape during past weeks thanks to Icelandic Valcano but I am afraid to get caught in the street fights. Hate to have blood on my hands.

Neshant · Post by **Neshant** » 29 Apr 2010 07:17

carry some pepper spray

Neshant · Post by **Neshant** » 29 Apr 2010 09:06

The World's Balance Sheet Recession
http://www.youtube.com/watch?v=HMFuIG6eYtg

Neshant · Post by **Neshant** » 29 Apr 2010 09:07

The Giant Sucking Sound....
http://www.youtube.com/watch?v=kxsF2Jf7qIo