Perspectives on the global economic meltdown (Jan 26 2010)

svinayak · Post by **svinayak** » 18 Oct 2010 10:13

shyam wrote:There is a bear market ETF at NYSE with symbol "FAZ". Its value is supposed to go up when market goes down. People who really believe in economic collapse may use that to hedge the risk. Do this at your own risk, and BR or me are not liable if you lose money.

http://etfdailynews.com/blog/2010/10/15 ... s-xlf-faz/

abhischekcc · Post by **abhischekcc** » 18 Oct 2010 10:25

Hari Seldon wrote:Great Mathematician - and easily among the greatest of the 20th century - sri Benoit Mandelbrot is dead. http://nyti.ms/bjyxN8

His work, AFAIK, led to fractal geometry and had a lot to do with predicting the financial crash.

How did this happen? Could you elaborate onlee? TIA

Tanaji · Post by **Tanaji** » 18 Oct 2010 12:53

abhischekcc wrote:
Hari Seldon wrote:Great Mathematician - and easily among the greatest of the 20th century - sri Benoit Mandelbrot is dead. http://nyti.ms/bjyxN8

His work, AFAIK, led to fractal geometry and had a lot to do with predicting the financial crash.
How did this happen? Could you elaborate onlee? TIA

From the article:

The cause was pancreatic cancer, his wife, Aliette, said.

abhischekcc · Post by **abhischekcc** » 18 Oct 2010 14:23

No no, I meant, how was fractal geometry used to predict the crisis.

nandakumar · Post by **nandakumar** » 18 Oct 2010 14:28

abhischekcc wrote:No no, I meant, how was fractal geometry used to predict the crisis.

Perhaps this helps. the link to the article in telegraph.

http://www.telegraph.co.uk/news/obituar ... lbrot.html
some extracts:

In the 1960s Mandelbrot, a research fellow with IBM, began a mathematical analysis of electronic "noise" which was sometimes interfering with IBM electronic transmissions, causing errors. Although the nature of these errors was not understood, IBM scientists noted that the blips occurred in clusters; a period of no errors would be followed by a period with many.

Examining these clusters, Mandelbrot noticed that they formed a pattern and that the closer they were examined, the more complex the pattern seemed to become. An hour might pass with no errors, while the next hour might pass with several errors. However, if one of the hours that contained errors was divided into 20-minute sections, there would be 20 minutes with no errors, then 20 minutes with many errors.

On any scale of magnification, Mandelbrot found, the proportion of error-free transmission to error-ridden transmission remained constant. In other words the electronic interference exhibited "self-similarity" at every scale of magnification: each small part, when magnified, reproduced exactly the larger portion.

Mandelbrot began to notice the same phenomenon of "self similarity " in other fields. For example, when he analysed statistical records of cotton prices, he noticed that, while the daily, monthly and yearly pricing of cotton was random, the curves of daily monthly and yearly price changes were identical.

Examining coastlines, he found that while the lines on maps featured bays, they did not feature the small bays that are within the bays, or the small structures within the small bays, and so on.

In a seminal essay entitled How Long Is the Coast of Britain? (1967), Mandelbrot showed that the answer to that question depends on the scale at which one measures it: the coastline grows longer as one takes into account first every bay or inlet, then every stone, then every grain of sand.

These patterns could not be explained by existing statistical methods, so Mandelbrot set about devising a system that would. Through the years that followed, he developed the concept of fractal geometry, codifying the "self-similarity" characteristics of many fractal shapes. (He coined the word "fractal" – from the Latin verb frangere, "to break" – in 1975). Mandelbrot's eclectic research ultimately led to a great breakthrough summarised by a simple mathematical formula: z = z² + c. This formula is now named after its inventor and is called the Mandelbrot set. Computer images of fractal shapes became popular on T-shirts and album covers.

First in isolated papers and lectures, then in The Fractal Geometry of Nature (1982), which has sold more copies than any other book of advanced mathematics, Mandelbrot argued that most traditional mathematical and classical geometric models were ill-suited to natural forms and processes. "Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line," he wrote.

Instead these phenomena and others, including variations in stock market prices, the fluctuations in turbulent fluids, geologic activity, planetary orbits, animal group behaviour, socioeconomic patterns and even music, can be modelled using fractals. The difference between the flower heads of broccoli and cauliflower, for example, can be exactly characterised in fractal theory.

The discipline of fractals came into its own in the computer age. It is now possible to create "fractal forgeries" of mountains, coastlines, trees, clouds, cell growth and other processes which bear an uncanny resemblance to the real thing. Applications range from digital compression in computers to finding the best mix of tyre ingredients, and from modelling turbulence on aircraft wing designs to texturing medical images.

Hari Seldon · Post by **Hari Seldon** » 18 Oct 2010 14:39

^^^ Died of natural causes, abcc. No CT here. Awesome character. Taleb mentions him in 'Black swan'.
http://en.wikipedia.org/wiki/Beno%C3%AEt_Mandelbrot

Christopher Sidor · Post by **Christopher Sidor** » 18 Oct 2010 16:29

Rules for a frugal superpower

This is an article written by a professor at John Hopkins University, Maryland, USA. While most of the article is due to the precarious American economic situation, I do find faults with the reasoning/assumptions and conclusions drawn

“Don’t chase the rabbits,” an old saying has it, “because if you chase the rabbits, the elephants will kill you.” Somalia, Haiti, Bosnia, Kosovo, Afghanistan, and even Iraq qualify as rabbits – distractions from what should be the focus of US foreign policy.

While I agree with the "old saying", I would beg to disagree with the assumption drawn over here. Afghanistan and Iraq are not rabbits.
Iraq holds the worlds 2nd largest oil/gasoline reserves, almost comparable to Saudi Arabia in the volume of oil reserves. Iraq has not been able to pump out oil consumerate with its known held reserves is one of the reasons, that oil has scaled such high peaks. Offcourse QE+QE2 and demand from Asia are also responsible, but on their own they would not been able to cause oil to touch USD 150 a barrel. Further if one is going to attempt a reform Saudi Arabia, then one has to assume that there will be disruptions in Saudi oil supply. Only Iraq holds the potential of taking up slack caused by disruptions in Saudi supply. Add to this that Iraq is the center of Shiite world. More than Iran. Iraq is the birth place of Shiite sect of Islam.
If Afghanistan is left as it is, be prepared to have another 9/11 and another mumbai. Be prepared for big moral booster to fundamental Islam and all the Islamic terrorist organisations this planet has.

If the world used less oil, this would become less threatening.

Fat Chance. Oil or its presence in some volatile region or its control by some maverick leader is not the problem over here. If America suddenly stopped using Middle Eastern Oil, then the slack in consumption would be taken up by India and China. And if Oil or specifically middle eastern oil, is the problem then there are alternatives like Brazil and France have shown. Taxing oil is not going to miraculously change this, but would cause a run away inflation in America, something which is the nightmare of American Fed and Treasury currently.

....
Rule I: No More Nation-building
....
The US government will no longer be able to afford to invest hundreds of billions of dollars (the cost in Iraq alone will run into the trillions) trying to supply other people with decent government.

I agree with the second statement. America is running a debt burden in excess of USD 1 Trillion and it can hardly spend money which is required on Afghanistan. But in Afghanistan you have cases where there are countries which are spending money and are willing to spend more like India, Japan, etc. But these countries are being shut out of Afghanistan or their essential interests are not being catered to. Afghanistan is doable. Maybe not by US going all alone but with other countries help it is still doable. But first the sanctuaries in Pakistan have to be erased. If that is not feasible, then the borders of Afghanistan will have to be policed better.
If NATO/america is worried about its supply lines to its forces in afghanistan than alternatives can be arranged. Central Asia and its fabled oil reserves can supply fuel to the ISAF and US forces in Afghanistan. Food, medicines and munitions can be air lifted from Oman or from Georgia or even from India into Afghanistan. It seems that US and its allies have forgotten the Berlin Airlift. I am painting a very simplistic picture, but the fact that America and its allies are dependent on a double-dealing South-Asian country, which wants to use Afghanistan as its strategic depth, is Americas fault. The very fact that barring one country in the region, all the other countries don't want to see Taliban reappear on Afghanistan's scene, should have given America enough leverage.

abhischekcc · Post by **abhischekcc** » 18 Oct 2010 16:30

I am not an advocate of CT. I just believe in extreme edge political machinations

I will have to study this more - perhaps it has applications in share trading, no?

nandakumar · Post by **nandakumar** » 18 Oct 2010 17:41

abhischekcc wrote:I am not an advocate of CT. I just believe in extreme edge political machinations

I will have to study this more - perhaps it has applications in share trading, no?

Perhaps, yes. I am not very familiar with algorithmic trading using all kinds of price imperfections across markets and asset classes. The central idea that there are discernible and more importrantly, repetitively occuring patterns when natural phenomenon is sliced into its 'fractal' parts which is what Benoit Mendelbrot hypothesis is about, ought to be capable of being used in stock trading.

svinayak · Post by **svinayak** » 18 Oct 2010 20:25

Christopher Sidor wrote:Rules for a frugal superpower

There is no mention of "south asia" which will be subject to sudden policy changes.
Rapid changes in the policy will upset the balance of power and it can create chaos in economy and market.

Rule II: Concentrate on the Elephants
The functional equivalents of elephants are Europe, East Asia, and the Middle East. These are three of the most important parts of the world, and in each the American military presence plays a constructive role.

In the first two, the US reassures each of these region’s countries that there will be no sudden change in the balance of power that will threaten them. In Europe, Germany can be confident that the US would help to contain an aggressive Russia, while Russia knows that Germany will remain tied to, and thus restrained by, the US. In East Asia, American air and naval forces provide a check on China, but also serve one of China’s strategic interests by keeping Japan from conducting an independent military policy. To keep the peace in both regions, a continuing US military presence of some kind will be needed. Complete American withdrawal could lead to suspicion, arms races, and, in the worst case, wars among the countries of Europe and Asia.

In the Middle East, the US confronts Iran. Nuclear weapons would make the threat all the more severe.

Singha · Post by **Singha** » 18 Oct 2010 23:31

http://www.nytimes.com/2010/10/17/world ... f=homepage

Japan - the elves of rivendell...the age of the orc is upon us...
---
In 1991, economists were predicting that Japan would overtake the United States as the world’s largest economy by 2010. In fact, Japan’s economy remains the same size it was then: a gross domestic product of $5.7 trillion at current exchange rates. During the same period, the United States economy doubled in size to $14.7 trillion, and this year China overtook Japan to become the world’s No. 2 economy.

China has so thoroughly eclipsed Japan that few American intellectuals seem to bother with Japan now, and once crowded Japanese-language classes at American universities have emptied. Even Clyde V. Prestowitz, a former Reagan administration trade negotiator whose writings in the 1980s about Japan’s threat to the United States once stirred alarm in Washington, said he was now studying Chinese. “I hardly go to Japan anymore,” Mr. Prestowitz said.

Singha · Post by **Singha** » 18 Oct 2010 23:40

year after year the great long ships from distant shores that brought trade and fresh ideas and immigrants became fewer and fewer
until one year they stopped coming and never returned again
to the marooned residents this spelt the eventual end via a slow but certain and crippling loss of living standards
some went quietly insane, some died from revelry and still some sought solace in little wars, perversions and jousts...to feel alive again
ultimately the last survivors just stopped having children and grew old together..walking in quiet companionship over the pebbles of the desolate seashores
nobody knows what the last family or last human did on the now depopulated and vast island but we can know the approximate time
the forest and forest creatures came forward to reclaim the empty land
centuries passed until not a trace remained of the once mighty civilization who had ruled this land...

RamaY · Post by **RamaY** » 19 Oct 2010 00:10

Singha wrote: future arbiters of world trade will be the Apokolips type nations like china, agricultural surplus nations in a time of climate change (those with land and forest to keep raping for a while longer) canada, brazil, ukraine, sweden..; mineral powers like australia, brazil, russia ..... generally climatic patterns tend to be good and moderate before turning bad for another few hundred years and so on.

This is where I have high hopes for Massa. In 2004 I told my boss at Citi that the next Massa economic export would be food products beside arms. At that time he was overwhelmed with the outsourcing mania to China, India and everywhere and wondering about the economic value of Massa.

I still bet on Massa than PRC for the following reasons -

1. Massa has invested industrial and civic infra that can be used for next 20-30 years
2. Massa still attracts worlds talents.
3. Massa has one of the highest living standards at $37000 per capita GDP. PRC will need another 20 years to reach that level. No one knows the economic costs of such a feat by PRC with its 1.3 billion population. Even then, no one knows if it can continue at that pace given its demographic decline.
4. Mass is at least 10-15 years ahead of PRC technologically.

Who knows who will be the king and who will be the slave in 15 years???

Hari Seldon · Post by **Hari Seldon** » 19 Oct 2010 05:20

Singha wrote:http://www.nytimes.com/2010/10/17/world ... f=homepage

Japan - the elves of rivendell...the age of the orc is upon us...

, so it is an LOTR theme/meme now, eh? Hey, I'm no stranger to that, lemme say....

Aaah..... so it is left upon us men to forge a last alliance of elves and men to take on the evil that stirs behind the gleat wall?

And what of isengard (islamabad)? Mordor's tactical ally but who too harbors dreams of world domination? Shouldn't it know that Barad-dur (Beijing) doesn't share power? That at one time, only one hand wears the Ring?

Truly is gondor (Yindia) holding out against gleat odds only. The Anduin (Himalaya) has been a natural defense but for how long? Already Osgiliath (Nepal) has fallen. Our lands beyond the Anduin such as Ithilien (Tibet) have been taken by the enemy. Everyday more armies from Harad and Umbar join Mordor..... Gondor's leadership is old and frail (MMS as Deneathor, anybody??) and has likely fallen under the influence of the enemy. The line of stewards (the die-nasty) is failing. Gondor awaits the return of the king....who will lead us from darkness into the night. Our sole allies the Russians (Rohan) may or maynot ride to our aid when war does come to our shores....

Oh, the parallels....

ShivaS · Post by **ShivaS** » 19 Oct 2010 11:45

fractal geometry is used in many ways it was used in proving solution exists for Fermats Enigma or last theorem.

A creative method for supporting computer_aided architectural design was presented in this paper, which relied on the L-system, shape grammar and the space surface equation theory. By the computer program, various building grounds, building bodies and building domes with fractal characteristics could be generated in a short time, in the end the results were sent into the database, Using the database model, it could not only assist the designers when they are lacking of the inspiration, but also accumulate knowledge through the expansion of the database. A building was successfully formed by the designers by selecting some building grounds, building bodies and building domes.

read here on semantic search

http://www.miislita.com/fractals/fracta ... ieval.html

much much more I'll stop

naren · Post by **naren** » 19 Oct 2010 12:02

With all due respects to my fractal guru Benoit Mandelbrot, fock him. SDREs have done it before.

Indra's net

Far away in the heavenly abode of the great god Indra, there is a wonderful net which has been hung by some cunning artificer in such a manner that it stretches out infinitely in all directions. In accordance with the extravagant tastes of deities, the artificer has hung a single glittering jewel in each "eye" of the net, and since the net itself is infinite in dimension, the jewels are infinite in number. There hang the jewels, glittering like stars in the first magnitude, a wonderful sight to behold. If we now arbitrarily select one of these jewels for inspection and look closely at it, we will discover that in its polished surface there are reflected all the other jewels in the net, infinite in number. Not only that, but each of the jewels reflected in this one jewel is also reflecting all the other jewels, so that there is an infinite reflecting process occurring.

(fractals used to be me favourite pastime in me teens. Designed several of 'em.)

Singha · Post by **Singha** » 19 Oct 2010 12:04

pak definitely is the mother lode of mindless but violent Orcs in middle earth. the han is more like the uruk hai - violent but more deliberate.
in between are loose cannons like the Nazgul - trans national jihadis so far gone into dementia there is no way back for them.

who can stand before the combined power of Sauron and Sarumaan remains to be seen...

gondor is confused and focussed on internal squabbles, led by a weak king manipulated at will by scheming courtiers and dynasts. rohan has been torn apart into ten pieces and the core corps of horse riders scattered far to the north...and this incessant chaos has affected their birth rate. the elves to the east are dying out.

perhaps the only hope is the last great alliance as you mention of men and elves - Elrond must pass us the technology and magical skills used to forge elfish weapons so that gondor may stand a chance against the evil. horsemen of the rohirim must return in a new armoured army to rule the wide lands of the steppe again...

Christopher Sidor · Post by **Christopher Sidor** » 19 Oct 2010 13:14

Singha wrote:http://www.nytimes.com/2010/10/17/world ... f=homepage

Japan - the elves of rivendell...the age of the orc is upon us...
---
In 1991, economists were predicting that Japan would overtake the United States as the world’s largest economy by 2010. In fact, Japan’s economy remains the same size it was then: a gross domestic product of $5.7 trillion at current exchange rates. During the same period, the United States economy doubled in size to $14.7 trillion, and this year China overtook Japan to become the world’s No. 2 economy.

China has so thoroughly eclipsed Japan that few American intellectuals seem to bother with Japan now, and once crowded Japanese-language classes at American universities have emptied. Even Clyde V. Prestowitz, a former Reagan administration trade negotiator whose writings in the 1980s about Japan’s threat to the United States once stirred alarm in Washington, said he was now studying Chinese. “I hardly go to Japan anymore,” Mr. Prestowitz said.

China and japan share the same development path, massive export oriented growth, with subdued domestic consumption. Just like japan in late 1980's which ended up buying half of California, if you believe some pundits, and major chunk of pacific islands real estate, China is also exporting its capital to the world. Setting up Sovereign Wealth Funds, buying commodities, etc.
But where as Japan had limited manpower, china still has abundant cheap manpower, even after the global meltdown of 2008-9. Whereas Japan became a middle-income nation very quickly, china still has some way to go. Some commentators have also commented on the so called limitless cheap labor which china can provide. They have obviously been carried away by this hyperbole. China's labor supply is not limitless and it is not going to remain cheap in the long run, i.e 10-20 years from now.
So China might escape the fate of japan now but if it continues on its export-led growth path, then in the future it will have a stagnation which will be proportionally equal to that which japan underwent in 1990-2003. Please note that in 2003-4 japan first showed some sign of economic/GDP growth. Some commentators have said that it was anemic growth. But hey any growth, even at 1%, after more than a decade of 0% or close to 0% growth is extremely good.

Over here I am assuming that there will be a market, whether international or American or some other economic bloc like EU, which will be able to absorb Chinese manufactured products in significant quantities. If not then the above analysis goes for a toss and China will face a difficult time to maintain the break neck growth that it has enjoyed till now.

So the question ought not to be, how much can US learn from Japan. Rather the question should be how much has China learnt from Japanese mistakes?

Chinmayanand · Post by **Chinmayanand** » 19 Oct 2010 16:33

Few Nuggets from an email :

Clearly, the biggest question and argument at this time is whether we're heading into deflation, inflation, stagflation -- or deflation and then inflation. Nobody has a clear answer to this puzzle, so I say, "why push it? What's wrong with just waiting and observing. We may be late with this strategy, but better to be late than wrong, and costly wrong.
----------
At this point, I want to borrow a quote from my friends at Investment Rarities: "This fiat currency experiment will end badly in a currency crisis, and when that happens, as it surely will, gold will go parabolic and silver along with it but even more so as the gold/silver ratio adjusts itself to a more historical correlation. The wealthiest people in the world will be those who put 10% to 15%(or perhaps more, much more!) of their portfolios into physical silver today." Lorimore Wilson, editor.
-----------
Compounding has been the "magic" road to wealth building. But I've also been warning about compounding in reverse.
The interest on the national debt is now about $375 billion a year. By 2013 it will be about $560 billion. By 2017 it will swell to $675 billion. At 2020 interest costs will surge to $750 billion. In an economy (the US) with a $14 trillion GDP, government interest expenses of $600 to $700 billion are prohibitive.
The statistics above are probably based on something close to today's low interest rates. But as the compounding goes on, our creditors will want higher interest to make up for the rising risk. How this will work out will be a brutal problem for our children to address. The only possibilities are default or hyperinflation. There are no other ways.
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Banks can go under, corporations can fail, nations can fall apart, but through it all, the yellow metal is still there.
----------

MChandraSekhar · Post by **MChandraSekhar** » 20 Oct 2010 04:41

Singha wrote:pak definitely is the mother lode of mindless but violent Orcs in middle earth. the han is more like the uruk hai - violent but more deliberate.
in between are loose cannons like the Nazgul - trans national jihadis so far gone into dementia there is no way back for them.

who can stand before the combined power of Sauron and Sarumaan remains to be seen...

gondor is confused and focussed on internal squabbles, led by a weak king manipulated at will by scheming courtiers and dynasts. rohan has been torn apart into ten pieces and the core corps of horse riders scattered far to the north...and this incessant chaos has affected their birth rate. the elves to the east are dying out.

perhaps the only hope is the last great alliance as you mention of men and elves - Elrond must pass us the technology and magical skills used to forge elfish weapons so that gondor may stand a chance against the evil. horsemen of the rohirim must return in a new armoured army to rule the wide lands of the steppe again...

Is Massa going to play Gandalf's role then, never confronting Sauron directly. SE Asia could be the madmen of the mountians? Who once broke their allegiance to Gondor and havent been able to experience peace since then.
Just continuing the theme and idly speculating, hope its alright.

shyam · Post by **shyam** » 20 Oct 2010 12:09

N.Y. Fed Adds `Weight' to Mortgage Investors Seeking Relief

The regulator joined a group including Pacific Investment Management Co. and BlackRock Inc. in a letter to the lender and to Bank of New York Mellon Corp., the trustee for $47 billion of mortgage-backed bonds sold by Bank of America’s Countrywide Financial Corp. unit, people familiar with the matter said. Countrywide failed to service loans properly, law firm Gibbs & Bruns LLP said in a statement that didn’t name the firms.

Through Countrywide, Bank of America got suckered in.

Fannie Mae and Freddie Mac, the government-supported mortgage companies whose regulator in July issued 64 subpoenas to trustees and servicers seeking information on loans backing securities in which they invested, have joined with a separate, larger group of bondholders collaborating through a different Texas lawyer, people familiar with matter said last month.

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group represented by Gibbs & Bruns, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer.

“We now are in a position where we have to start a clock ticking,” Patrick said in a telephone interview.

If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide, which Bank of America bought in 2008, in default on its servicing contracts, Patrick said.

So, BoA was lying when it said that their foreclosure notices were perfect and will resume foreclosing in couple of weeks. If a bank openly lies, you know what to expect.

MetLife Inc., the biggest U.S. life insurer, is part of the group Gibbs & Bruns is representing, said the people, who declined to be identified because the discussions aren’t public. TCW Group Inc., the manager of $110 billion in assets, expects to join BlackRock, the world’s largest money manager, and Pimco, which runs the biggest bond fund, in the group, the people said.

Hari Seldon · Post by **Hari Seldon** » 20 Oct 2010 15:10

Aah, how could moi miss this only.....

Why America is going to win the global currency battle (Martin Wolf in FT)

Wolf is a smart guy. Pays to listen when he talks. His argument such as it is in this piece reduces to...

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

Hmmmm. Sounds reasonable and sane, no doubt.

If you wish to understand how aggressive US policy might become, read a recent speech by William Dudley, president of the Federal Reserve Bank of New York. He notes that “in recent quarters the pace of growth has been disappointing even relative to our modest expectations at the start of the year”. Behind this lies deleveraging by US households, in particular. So what can monetary policy do about it? His answer is that “very low interest rates can help smooth the adjustment process by supporting asset valuations, including making housing more affordable and by allowing some borrowers to reduce debt interest payments. Beyond this ... to the extent that monetary policy can ‘cut off the tail’ of the distribution of potential adverse economic outcomes ... it can help encourage those households and businesses with money to spend to do so”.

Above all, today’s low and falling inflation is potentially calamitous. At worst, the economy might succumb to debt-deflation. US yields and inflation are already following the path of Japan’s in the 1990s (see chart). The Fed wants to stop this trend. That is why another round of quantitative easing seems imminent.

In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.

Ho hum, you say. Fed can only do so much and no more, some will say. BoJ tried every trick in the book and then some and even then failed to lift itself out of its deflationary spiral. Fed is mightier, so brute force might just work, eh?

What about our options and impact on us SDRE turd world types??

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).

Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

I strongly urge the capital controls route while we still have time and confusion on our side.

For more of why, see:

Naturally, one could imagine an opposite course. Indeed, China objects to the huge US fiscal deficits and unconventional monetary policies. China is also determined to keep inflation down at home and limit the appreciation of its currency. The implication of this policy is clear: adjustments in real exchange rates should occur via falling US domestic prices. China wants to impose a deflationary adjustment on the US, just as Germany is doing to Greece. This is not going to happen. Nor would it be in China’s interest if it did. As a creditor, it would enjoy an increase in the real value of its claims on the US. But US deflation would threaten a world slump.

Prof Blanchard is clearly right: the adjustments ahead are going to be very difficult; and they have also hardly begun. Instead of co-operation on adjustment of exchange rates and the external account, the US is seeking to impose its will, via the printing press. The US is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange controls (such as China), able to manage the adjustment better.

Oh, read it all only.

Hari Seldon · Post by **Hari Seldon** » 20 Oct 2010 15:14

Ooooh, excellent critique of a cheeni farticle by yves smith here:

There are several points in the argument below that are curious, to say the least. One is the notion that the US came out the loser as the result of forcing the yen up through the Plaza accords. If this was so terrible for the US, why is China resisting taking the same moves now? I’d say the contrast between the reasonably prosperous, if unsustainable two decades starting in 1986 in the US, versus the bubble turned to stuck-in-the-mire bust for Japan says any Japanese victory way Pyrrhic.
{Absolutely. 400% agreed.}
Second is the contention that the US can’t influence the level of the renminbi. Narrowly correct, but irrelevant. If the US forces the dollar down, China will have to keep buying more dollars to suppress the remninbi. Its foreign exchange purchases are now so large that it can’t fully sterilize them, so a bigger level of purchases will generate even more inflation. A fixed currency peg with rising prices means higher export prices and thus worse competitiveness.
{Excellent point only. Why don;t other countries' follow the cheeni example and peg to the USD overtly then, one might wonder, eh?}
Third, he argument the US needs China to fund its deficit is also incorrect (see our many posts on modern monetary theory or MMT; the constraint on spending is inflation, which is no where in sight right now, in fact, the Fed is so desperate to create some inflation that it is about to embark on QE).
{Correct again. Which is why I hesitate to writeoff umreeka just yet. The khan is in decline but the dlagon is less than a midget in a firefight, at present. 15 yrs down, no longer, of course.}

There are plenty of reasons not to like QE (see our earlier post for a good recap) and we are not fans. But if the reasoning below is widely shared within China, it says China is asserting that the US has downside that the US does not believe it has. So the US is not likely to be deterred, and per above, the US believes it can impose costs on China regardless (worsening its terms of trade).

Now despite the Fed winking and nodding about QE2, the Fed was very slow to act in the crisis, then overreacted, and there isn’t much reason to expect a change in behavior. But the contrast between the Western assessment of the benefits and costs of currency depreciation versus the Chinese stance (at least as presented below) suggests we are indeed on a collision course.

Read it all, of course.

Tanaji · Post by **Tanaji** » 20 Oct 2010 16:59

The UK seems to be quite serious on tackling its financial issues. The new govt has announced quite sweeping cuts across the board, not the least of which affect their Armed Forces. Even traditional voters were not spared when they cut some of the entitled benefits. Don't know how much all this will impact their situation, but at least they are making a start. People are saying there may be riots later in the year similar to the ones the French are having

Why don't we see similar cuts being practiced in the US? What gives? I would have thought they were in as much trouble?

(Just a naive query onlee)

Hari Seldon · Post by **Hari Seldon** » 20 Oct 2010 17:43

The UK seems to be quite serious on tackling its financial issues. The new govt has announced quite sweeping cuts across the board, not the least of which affect their Armed Forces. Even traditional voters were not spared when they cut some of the entitled benefits. Don't know how much all this will impact their situation, but at least they are making a start.

Good for UKstan, I guess, if it has taken the writing on the wall seriously. All these aam-aadmi cuts are easy, perhaps, relatively speaking. Labor is so weakened and discredited that this is about the only time the UQ gubmint has to slip bitter pills and sharp things through UQ's musharraf. Going will get tougher as time passes and UQ's barely begun on the path to sustainability, IMHO.

I meanwhile, shall await UQ cutting back on its propagandu organs - beeb for one. Beeb was doing some 'beebeecee hindi seva' on radio and what not the other day. Pure, adult-rated propagandu only. We're not launching news channels in UQ are we, why for do the briturds need to come here to spread their poison? The CWG also showed the mentality of the britard media. Weren't the past 200 yrs of pillage in my country and genocide of my countrymen freakin' enough for the briturds?

And then there is this entire rogues' gallery - from mass-murderers like mushyrat to common murderers like nadeem saifi and not to mention an entire bevy of terrorists, insurgents, drug peddlers, criminals etc who have found shelter, nurture, networking opportunities, HMG sponsored security, a propagandu platform and other such force-multipliers in lundon. Why not cut this sinister program, eh, rather than cut retired granny's heating and fixed income interest, eh?

Yeah, whatever, I'm sounding like a broken record, blah blah. I don't care. Briturd perfidy needs to meet sunlight more freakin' often. The turds have gotten away easy for all the horrors they inflicted on my country.

Oh, IMVVHO and all that.

People are saying there may be riots later in the year similar to the ones the French are having

Bah, all talk baba. Kuch nahi hoga. Let it happen, then we'll see.

Hari Seldon · Post by **Hari Seldon** » 20 Oct 2010 17:52

Why don't we see similar cuts being practiced in the US? What gives? I would have thought they were in as much trouble?

(Just a naive query onlee)

The cuts have been in the coming for a while. And they will be forced. Entire cities, municipalities and local gubmints declaring bankruptcy - IOW recognizing the blatantly obvious. The Fed can print to bail them out, am sure it will have to happen especially since the jobs on the line are all public sector employees - all hardcore Dem constituents. Also serves the Fed's dollah debasement agenda.

And while wall street has been on a bonus binging spree the last 2 yrs (essentially make hay coz the sun is threatening to set), the real economy has been paying an increasingly heavy price - in terms of an across-the-board fall in living standards, shrinking middle class, unemployment, underemployment, debt burdens, dissavings and liabilities, delayed family formation among younger cohorts, record numbers on food stamps and emergency handouts, record numbers of medically uninsured, and an entire set of slowly emerging social problems that will become clearer only in the years ahead.

Its an ugly scene. I wish the US well and hope it is able to emerge from this mess. The transition may last years and involve a lot of dislocation and pain, though. The rest of the world too shall feel the effects of an American transition to a much smaller, simpler, sustainable-er, SDRE-er way of life.

Tanaji · Post by **Tanaji** » 20 Oct 2010 19:26

Hari Seldon wrote:
I meanwhile, shall await UQ cutting back on its propagandu organs - beeb for one. Beeb was doing some 'beebeecee hindi seva' on radio and what not the other day. Pure, adult-rated propagandu only. We're not launching news channels in UQ are we, why for do the briturds need to come here to spread their poison? The CWG also showed the mentality of the britard media. Weren't the past 200 yrs of pillage in my country and genocide of my countrymen freakin' enough for the briturds?

Bah, all talk baba. Kuch nahi hoga. Let it happen, then we'll see.

You are getting your wish O man from Foundation:

http://www.bbc.co.uk/news/uk-politics-11579979

The BBC has been told it must freeze the licence fee for six years and take over the cost of the World Service, currently funded by the Foreign Office, and the Welsh language TV channel S4C. This adds up to an estimated 16% cut in the BBC's budget in real terms.

Defence cuts: http://www.bbc.co.uk/news/uk-politics-11570593

Read it all as you say

Hari Seldon · Post by **Hari Seldon** » 20 Oct 2010 20:06

^^^Wow, interesting. Thx, Tanaji.

Actions squeal far louder than words and the cuts to 'core arsets' like the beeb and later, hopefully, the dissident/insurgent/terrorist network on UQ shores shall speak far louder than mere words from Cameron and Osborne only.

Hari Seldon · Post by **Hari Seldon** » 20 Oct 2010 20:41

Shucks, man, UQ is truly on a roll here, they might even (gasp) emerge at the other end of this deflationary tunnel the rich world (sic) is staring into. Sample this:

500,000 public sector jobs to go (Mail online)

* David Cameron and Danny Alexander snapped with secret drafts
* 1 in 10 public sector jobs to go as government gambles on private recovery
* Speculation mounts of deliberate 'leaks' by government ministers

The coalition expects 500,000 public sector jobs to be lost as a result of the drastic spending cuts, it was revealed today.

Danny Alexander let slip the forecast when he was spotted driving into the Treasury with an open copy of the Comprehensive Spending Review on his lap.

The Chief Secretary to the Treasury - who has been nicknamed Beaker after the Muppets character - was reading the document, which was caught on camera by waiting photographers.

While figures in Mr Cameron's documents appeared to show the defence budget was to be cut by 6 per cent, the Prime Minister confirmed to the Commons this afternoon that the department's cuts will be 8 per cent.

The fact that both were photographed on the same day has sparked speculation that the papers were deliberately 'leaked' to soften the blow ahead of the official announcements.

Mish appears shocked at the news:

What do you call dismissal of 10% of the public sector workforce?

A start.

Yeah, there're no SDRE coolies whose meager rations the briturd lawds can further cut down for the greater glory of empire, now, eh? No more colonies to exploit and squeeze 'em SDREs blood dry, eh? No more rapacious trade terms for 'imperial preference' to retreat behind now, eh? LOL. IMVVHO, UKstan richly deserves every paki it has x10 and every bit of pakistaniyat x10 that will bloom on its shores (hopefully) in the years to come......inshallah. But that's just me. And I'm well aware that UQ is a survivor if nothing else and may yet emerge unscathed outta this one. In fact., given their past record, I would count this as quite likely. Theek hai, karma will collect, someday, I hope. And will spare no juice when it is her time.

Strategic defence review means end of Iraq-scale military interventions

Britain's armed forces will no longer be able to mount the kind of operations conducted in Iraq and Afghanistan, the government's strategic defence review made clear today. For at least a decade it will also be impossible to deploy the kind of carrier taskforce which liberated the Falklands 28 years ago.

Though defence chiefs said today they will still have significant expeditionary forces, they will not be able to intervene on the scale of recent years.

Cherished projects will be delayed, cut or dumped in an attempt to recoup a massive overspend in Britain's defence budget, which faces a black hole of £36bn. In the MoD, 25,000 civilian jobs will go, along with 17,000 from the armed forces. The £38bn annual defence budget will be cut by 8% over the next four years.

The ~~hart~~ fart breaks at this sad news.....imperial pretensions, even as pretensions are to be shelved now? Bwahahahahahaha!

Jiyo mere lal. On the bright side, youngistani brits will do better jobless and rioting at home with full constitutional safeguards for due process than getting hala-ed in far-away theaters like eyeraq and what not, eh?

Meanwhile, across the channel we all know and love so well, the stylish seductive french are having ball(s) too, seems like...
France hit by new wave of strikes over pension reforms (beeb)

Almost half a million people have taken to the streets of France in a sixth national day of action against planned pension reforms, officials say. Strikes have hit transport and education, 4,000 petrol stations have run dry and police have clashed with protesters in several cities.

Shops were looted in Lyon and cars were set on fire in a Paris suburb.{yawn. kuch nayi baat karo yaar....} President Nicolas Sarkozy appealed for calm but insisted he would press ahead with plans to raise the retirement age.

The BBC's Christian Fraser, in Paris, says there is a feeling that the demonstration could turn angry, with a noticeable change in atmosphere since last week.

And so on. Read it all, folks. Don't get me wrong, I don't want to wish (not that it matters) bad things on anybody, outside Briturdistan. Even within the UQ, may all good people get by and ride out the coming storm with dignity and peace. Peace.

Christopher Sidor · Post by **Christopher Sidor** » 20 Oct 2010 20:55

Maybe the time has come for a plaza accord - II. Maybe not. If there is no comparable initiative, countries are going to follow beggar thy neighbor policies. If there is a plaza accord - II then expect the value and not quantity of foreign reserves held by certain Asian and petroleum exporting countries to decline.

With most of the north Atlantic countries in mood for fiscal austerity, where is the demand for international growth come from? Where will China find consumers for the products that is manufactures? Where are the people and companies which will buy the services that India offers. It is likely that in order to reduce cost, we see more outsourcing, despite what obama is saying. But we are going to see a very subdued international demand.

Singha · Post by **Singha** » 20 Oct 2010 20:57

imo UKstan has even more reason to be seen as a attractive shelter for financial fugitives from around the world - they will bring their ill-gotten money to london (or atleast part of it), live large, spend lavishly, support the local economy, donate to the political elites and so on.

the hedge funds saw the higher taxes coming and fled enmasse to switzerland where apparently if you are gora AND rich you can 'negotiate' via a lawyer with individual cantons as to what tax rate you pay - the good lawyers bring it down to 15%. ofcourse lot duller than london and not 100% english speaking but so far they seem to have taken it well in stride, being the adaptable chameleons they are.

Manishw · Post by **Manishw** » 20 Oct 2010 21:03

Christopher Sidor wrote: If there is no comparable initiative, countries are going to follow beggar thy neighbor policies. If there is a plaza accord - II then expect the value and not quantity of foreign reserves held by certain Asian and petroleum exporting countries to decline.

This beggar thy neighbor policy might come to pass but all nations know where it leads in the short term.As Mish puts it hyperinflation ends the game , the elites would be better off imposing slow deflation/bankruptcies or they might like to go to war to end this.

Christopher Sidor wrote: With most of the north Atlantic countries in mood for fiscal austerity, where is the demand for international growth come from? Where will China find consumers for the products that is manufactures? Where are the people and companies which will buy the services that India offers. It is likely that in order to reduce cost, we see more outsourcing, despite what obama is saying. But we are going to see a very subdued international demand.

China will be in a jam for sure(IMO) but outsourcing to India does not seem plausible given the loss of jobs in the west.They will go in for slow deflation/barriers to trade et al IMO.

Tanaji · Post by **Tanaji** » 21 Oct 2010 12:39

What I dont seem to get is, UK appears at least its making an effort to get out of its hole: massive cuts across the board with nothing being spared. We dont hear the same things happening in the US. Perhaps its because of the differing nature of the two countries, one which is more centrally managed while the other has devolved power to the states. Still I dont see cuts on the same scale in the Federal government in US.

Or maybe as others have stated the Fed's sole plan to get out of this hole is to print more $.

Manishw · Post by **Manishw** » 21 Oct 2010 13:04

Tanaji wrote:.
Or maybe as others have stated the Fed's sole plan to get out of this hole is to print more $.

IMO We will have a better idea after the early november elections in US.

Christopher Sidor · Post by **Christopher Sidor** » 21 Oct 2010 14:05

US can afford currently to avoid the painful cuts that UK/Greece have undertaken. It is because it is the owner of the worlds reserve currency. And its economy is bigger than the other top 3 economies combined together. Add to this is the fact that it is the center and holder of world financial wealth.

In 1945-46 the gross GDP debt of America (i.e. Federal, local, state combined) was approximately 126% of its entire GDP. Prior to this the debt used to be below 40%. This debt of 126% came down only in 1970-79 decade to about 40%. Off course in this era, i.e 1945-46, America was fighting a world war, initiating a Marshall plan for Europe and putting japan, korea and formosa/taiwan back on its feet.

The only country which has exceeded the America in debt without any adverse blow back is Japan. The reason being that most of Japans debt is held domestically, in Japan itself. America is the same, just that holding its debt domestically or internationally makes no difference. After all even if you sell American debt you will still get dollars only. Dollar is manufactured in America. For all other countries, like Greece their debt is denominated in Dollars. Greece cannot print or manufacture Dollar.
This is called the perk of having the world's reserve currency.

Neshant · Post by **Neshant** » 21 Oct 2010 14:10

GDP numbers are as bogus as govt inflation statistics. A lot of hot air is being used to inflate things. Ask yourself how can GDP possibly go up after the biggest bubble in financial hisotry just blew up and more people are out of a job/under-employed ?

Beware of basing your theories on bogus stats.

The only reason US is not in the same situation as Greece is because of marketting. They are marketting themselves to the world as a state able to pay its debts. Whether that advertising is true or its caveat emptor, remains to be seen.

I can't see how one guy like Bernanke fooling around with trillions of dollars is not going to cause a huge mess in the near future.

Christopher Sidor · Post by **Christopher Sidor** » 21 Oct 2010 14:26

The GDP figures that I quoted, was to put things into perspective. About where America is currently w.r.t other countries and historically where it has been.

One of the biggest bubble in financial history just blew up. True. But to say that US is not in the same place as Greece is due to marketing is to avoid facts on the ground. US is the worlds biggest economy. It is also the holder and printer for the worlds reserve currency. The currency against which practically all the trade, investment and debt is denominated.

Hell even in India the domestic K&G Gas is priced in USD and not Rupees. The minerals that NMDC extracts is marked in USD, even though they are extracted in India and predominantly sold to Indian companies or consumed in India. Please do not underestimate the value of having the worlds reserve currency. Our foreign reserves are predominantly in USD.

Please do not underestimate the value of having the worlds reserve currency.

Tanaji · Post by **Tanaji** » 21 Oct 2010 17:36

Singha wrote:imo UKstan has even more reason to be seen as a attractive shelter for financial fugitives from around the world - they will bring their ill-gotten money to london (or atleast part of it), live large, spend lavishly, support the local economy, donate to the political elites and so on.

the hedge funds saw the higher taxes coming and fled enmasse to switzerland where apparently if you are gora AND rich you can 'negotiate' via a lawyer with individual cantons as to what tax rate you pay - the good lawyers bring it down to 15%. ofcourse lot duller than london and not 100% english speaking but so far they seem to have taken it well in stride, being the adaptable chameleons they are.

Singha and Hariji

http://www.bbc.co.uk/news/business-11593370

The levy will apply to the global balance sheets of UK banks and the UK operations of banks from other countries and will be introduced in January 2011, the Treasury said.

From 2012, it is expected to raise about £2.5bn ($4bn) a year.

The UK seems to have had a sudden outbreak of fiscal sense. Lets see how long it lasts.

Things must be pretty bad, and the reports of UK being next after Greece et al must have a ring of truth to them

svinayak · Post by **svinayak** » 21 Oct 2010 20:24

Yesterday the group I interact got an order to transfer millions maybe potential billions of euro to dollars.
Something is happening now.

Hari Seldon · Post by **Hari Seldon** » 21 Oct 2010 21:13

The UK seems to have had a sudden outbreak of fiscal sense. Lets see how long it lasts.

Things must be pretty bad, and the reports of UK being next after Greece et al must have a ring of truth to them

Remember Bill Gross's "bed of nitroglycerine" comment re UQ gilts? He seems to have made premature comments perhaps but am sure he was onto something. Something gross. Time will tell. Hold on tight for a bumpy ride!