Perspectives on the global economic meltdown (Jan 26 2010)

shyam · Post by **shyam** » 25 Oct 2010 21:43

Christopher Sidor wrote:^^^^
The question ought to be what can the G20 countries do, if Fed were to inflate its way to growth?

Then the question is why Geithner was so keen to get commitment from other G20 countries to not artificially peg their currencies to USD?

Hari Seldon · Post by **Hari Seldon** » 25 Oct 2010 22:00

^^^ Uncharted waters, folks. Dunno where the waterfall begins. Just hang on tight and hope for the best. India's luckily got a rather good and strong boat. So unless there's a sharp rock directly at the end of the waterfall, ours won;t likely break. The Eu won;t be so lucky though, their boat's leaking even in still water as of now - they won't make it even given the gentlest of falls. And what appears to be coming roars like the Niagara itself.

Neshant · Post by **Neshant** » 26 Oct 2010 08:01

Given the precarious state of the money and economic system with banking crooks running all over the place, India should be especially careful.

The US is running up a mountainous debt which it has no intention of repaying. So too are other developed nations - excluding a few like Canada, Australia and Scandinavia.

First opportunity the dead beats get, they will relieve themselves of debt by passing on the loss to suckers down the line. Make no mistake, that IS what's going to happen. India should be very careful its not that sucker.

The way I envison this will take place is the US will setup an SDR type currency at the IMF. This allows China to offload a good deal of its massive USD reserves on the many nations of the IMF (at a fixed not sliding rate) and take SDRs in return. Once that is complete, the resulting devaluation of the dollar (read loss) can then be safely passed onto a broad array of suckers (countries). Works for the US govt (not savers of USD) and works for China. Everyone else gets screwed.

You can already see shuffling going on at the IMF which tells you soemthing is coming from that angle. India's share of the IMF was expanded which in light of what's mentioned above does not sound like a good thing. Keep an eye out for further moves to introduce some BS international currency which won't be worth the paper its not printed on. As soon as you hear about it, exit the dollar post-haste.

ShivaS · Post by **ShivaS** » 26 Oct 2010 11:28

Christopher Sidor wrote:
^^^^
The question ought to be what can the G20 countries do, if Fed were to inflate its way to growth?

Then the question is why Geithner was so keen to get commitment from other G20 countries to not artificially peg their currencies to USD?

I had earlier talked about Thimmarus, Bukkaraya and shortening of a line with out erasing.

Generally inflation (uncontrolled) drives the devaluation of a currency (as seen in Zimbabwe Argentina Mexico, India as well in till the 1990s US lead IMF pressure on IG in 1967 if you remember)

But how do you devalue the currency when you have asituation in which you have to devalue the comparator currency itself? Here in this case the comparator being Dollar.

There are vested parties who want Dollar to be strong and there is the owner of dollar who wants to devalue but it’s not being allowed to do so.

Devaluation or revaluation upwards are relative terms ( everything is relative which I talked about in comment on Valuations ... some time back).

So US wants to reverse the trend of recession by Keynesian way of spending out of it means pump up supply of money thereby create inflation of goods costs (in this case costs of imports there by simulate local production, because the price advantage of imports will vanish)

Therefore the struggle to find new comparator than dollar because the intrinsic dollar is going down the tubes for a long time, Uncle by pumping more and more dollars to inflate itself invent by new local production, in effect makes Dollars held currently by PRC are going to be even more worthless.
But Alas US doesn’t want to relinquish the Dollar to a new comparator existing or new invented currency...while PRC doesn’t want the dollar to be turned into even more worthless... this is the crux of the problem.
I had mentioned that if US devalues Dollar all others (currency) will slide down the valuations by artificially pegging their currency low relative to dollars.. this will further trigger commodity prices to fall even further hurting developing countries which mostly export commodities...
so further deflation will occur and then stagflation then inflation..

hence ecvery body agreed to devalue the dollar via the SDRs.
Watch this space...

Christopher Sidor · Post by **Christopher Sidor** » 26 Oct 2010 12:30

shyam wrote:
Christopher Sidor wrote:^^^^
The question ought to be what can the G20 countries do, if Fed were to inflate its way to growth?
Then the question is why Geithner was so keen to get commitment from other G20 countries to not artificially peg their currencies to USD?

Countries peg their currency to USD, like China, because they concentrate on exports and not on domestic market building. Currently if USD falls then due to the peg the other currencies pegged to the dollar also fall. This way American economy does not get assistance. If countries do not peg their currencies to USD, then invariably in the short and medium term their currencies would rise while USD would decline, relatively. This would help America in one way big way, exports.
And if Geithner can get a commitment, from the various countries for just that, then America's pain would be eased significantly. The problem is that some of the pain would be transferred to some G20 countries.

shyam · Post by **shyam** » 26 Oct 2010 12:44

You seem to assume that non-US G20 leaders are a bunch of idiots. The question was, if G20 nations agreed not to perform competitive devaluation, and US goes ahead with QE2, do you expect G20 leaders to stand stupid and watch their economies crashing to ground? What should be implied in the G20 unofficial agreement, though not documented, is that QE2 is also deferred or significantly reduced in size.

Christopher Sidor · Post by **Christopher Sidor** » 26 Oct 2010 12:51

^^^^
The question was "why Geithner was so keen to get commitment from other G20 countries to not artificially peg their currencies to USD?". If this question had some double meaning hidden inside, then I am sorry it escaped me. What exactly can the G-20 leaders do, if the Americans do in fact decide to go ahead with QE2? And oh by the way, if you read what I have written, I never said that G-20 leaders were idiots.

shyam · Post by **shyam** » 26 Oct 2010 12:57

Original question was "How will G20 nations react if Fed were to print $4 trillion after getting commitments from others not to devalue their currencies?". If Fed goes ahead with QE2, which is an alternate form of currency manipulation, G20 has to throw the recent agrement down the drain and start devaluing their currencies too. Then Korea meet would become just a waste of money.

BTW, I said

You seem to assume that non-US G20 leaders are a bunch of idiots.

ShivaS · Post by **ShivaS** » 26 Oct 2010 13:51

the name of the game is levelling the playing field, and denying the cost advantge to command economies which are pretending to be free market.

Christopher Sidor · Post by **Christopher Sidor** » 26 Oct 2010 14:32

To fix the economy (US), let bad banks die

This is a plea from the author, to avoid the so called zombie banks of Japan.

Borrowers stay stuck in homes they can't afford, meaning they can't get on with their lives. Prospective home buyers still can't afford property, and those who can remain wary because until lenders clear their backlog of foreclosures, house prices won't fall to realistic levels. At the same time, small businesses cannot create jobs because banks and investors stuck with old, bad loans don't want to make new ones.

The author paints a pretty clear picture on why the US economy is where it is. But the remedy is all about the old wine new bottle.

Here's what Washington should do: Regulators should require banks to promptly fulfill their safety and soundness duties. Banks would do so, obviously, by foreclosing on defaulted homeowners in a timely, consistent and honest fashion, even if it means that the firms must shell out big money to hire enough qualified people.

This sounds awfully like self-regulation or banks know how best to run their business or worst the "efficient market hypothesis". All of these along with their high priest have been retired and thoroughly discredited.

....
One way or the other, it's time to get it over with.
....
In other words, big banks could fail. And that's the problem. Despite having signed into law the Dodd-Frank financial reform bill three months ago, the White House still has not created a predictable way in which large financial firms can go under, with investors taking warranted losses. Instead, the new law directs regulators to make up the job as they go along.
....

Another remedy, this time the free market style variant. Let the weak go and the strong survive. This comes from the belief that the 2008-9 financial crisis was not about liquidity but of insolvency. This is taken one step further by saying that there are many institutions which are basically insolvent, and should be wound up.

The first remedy is about the normal persons who bought the homes to share the pain with the lending financial institutions. The second remedy is about the pain being borne predominantly by the lending institutions.

After Lehman Collapse, US regulators have been terrified of replaying the lehman collapse with other financial institutions, with some justification.

Neshant · Post by **Neshant** » 26 Oct 2010 19:16

small businesses cannot create jobs because banks and investors stuck with old, bad loans don't want to make new ones.

Its nothing of that sort.

There has not been a single productive industry that can generate well paying jobs since 2000. That is the basis of the problem.

The technology to enable direct lending from the producer of the wealth to the company that needs to borrow the money already exists. There is no reason to even have this useless fee collecting middleman 'industry' called a bank which merely adds costs to any transaction.

Hari Seldon · Post by **Hari Seldon** » 26 Oct 2010 21:13

AWMTA, folks, AWMTA!

Vipul wrote:India's crisis man calls for action on capital inflows.

Expressing concern over the rising capital flows into the country, former Reserve Bank of India governor Y V Reddy said that the time has come to devise ways to control them.

The policy boost given by the US Government to revive its economy is one of the factors that is causing high inflation in countries like India, he said.

"USA is trying to pump in liquidity to revive its economy. Quite a bit of that liquidity is going to India and China. So, it is not serving the purpose. Liquidity is coming to countries where inflation is very high. There is already a bubble building up and therefore something has to be done," Reddy said on the sidelines of an event here.

He said now the time has come to address the issue of capital flows and think about ways to control them.

About two to three years back, everyone thought that restriction on capital flows was bad. But now there is a rethinking about it. We should think about the action the country should take to reduce excessive capital movement and also what is the origin (of capital flow), he observed.

The former central bank governor pointed out that the capital flows would also depend on the difference of tax rates among the countries.

When there are tax differential regimes, capital movement is high from one regime to another and it has been accepted in principle by G20 and is looking at it, he said.

Heh, heh. Moi been shouting hoarse only for over a year now that capital controls need to be considered actively only. Thank Gawd, GOI is considering it. Before its too late, we gotta stabilize our ship against these forces only.

Prem · Post by **Prem** » 26 Oct 2010 23:26

http://www.electronista.com/articles/10 ... are.chaos/

Sony's share value surged by as much as three percent in Japan on Tuesday after a rumor that Apple was considering it a buyout target. The rush was triggered by speculation by Barrons that the company's $51 billion in cash might be used to buy a major company, with Sony as just one of the targets. Original author Eric Savitz has since said it was "pure speculation" and was likely taken too seriously by Japanese investors.

( how mighty are falling like ripe Pumpkins)

Prem · Post by **Prem** » 26 Oct 2010 23:29

http://www.dailyfinance.com/story/buffe ... /19689252/

BYD, a Chinese car company backed by Warren Buffett, hit a pothole as profits fell 99% in the third quarter. The firm recently delayed plans to export electric cars to the U.S. and the Chinese government seized seven of its locations, saying they were built illegally. BYD was the fastest-growing car company in China last year, but that expansion has slowed, nearly to a halt.
Bloomberg calculated the earnings numbers based on the BYD financial release. BYD units sales dropped 25% in September to 33,085.

ramana · Post by **ramana** » 26 Oct 2010 23:31

You mean Buffet getting buffeted by markets!

Prem · Post by **Prem** » 27 Oct 2010 02:11

Chinese served cheap Buffet .Appetizers ,A La carte, not full meal!!

Sooner or latter , majority foreign investors will burn their fingers in China. Its not the nature of Chinese to share the profit. Lets hope Buffett kind dont come to india. His type of investment is to soak money out of the country and not to share /contribute to development.

Ambar · Post by **Ambar** » 27 Oct 2010 10:39

Neshant wrote:Given the precarious state of the money and economic system with banking crooks running all over the place, India should be especially careful.

The US is running up a mountainous debt which it has no intention of repaying. So too are other developed nations - excluding a few like Canada, Australia and Scandinavia.

First opportunity the dead beats get, they will relieve themselves of debt by passing on the loss to suckers down the line. Make no mistake, that IS what's going to happen. India should be very careful its not that sucker.

The way I envison this will take place is the US will setup an SDR type currency at the IMF. This allows China to offload a good deal of its massive USD reserves on the many nations of the IMF (at a fixed not sliding rate) and take SDRs in return. Once that is complete, the resulting devaluation of the dollar (read loss) can then be safely passed onto a broad array of suckers (countries). Works for the US govt (not savers of USD) and works for China. Everyone else gets screwed.

You can already see shuffling going on at the IMF which tells you soemthing is coming from that angle. India's share of the IMF was expanded which in light of what's mentioned above does not sound like a good thing. Keep an eye out for further moves to introduce some BS international currency which won't be worth the paper its not printed on. As soon as you hear about it, exit the dollar post-haste.

Neshant, China does not/will not readily trust IMF and the elements that make up the SDR basket as it stands today. If China demands that RNB be included in SDR and India does the same with rupee, won't that give us atleast some sort of a control over the impending dollar devaluation? Keyenes never trusted the US government to remain honest after 'Bretton Woods', infact, Keynes did suggest a mixed basket as 'global reserve' to which US vehemently opposed.

SDR might not stop US from devaluation of dollar, but in my opinion it would be much better than having dollar as the sole reserve currency.

Ambar · Post by **Ambar** » 27 Oct 2010 10:43

ShivaS wrote:
I had mentioned that if US devalues Dollar all others (currency) will slide down the valuations by artificially pegging their currency low relative to dollars.. this will further trigger commodity prices to fall even further hurting developing countries which mostly export commodities...
so further deflation will occur and then stagflation then inflation..

hence ecvery body agreed to devalue the dollar via the SDRs.
Watch this space...

Help me understand here, if currencies are devalued won't that push the nominal prices of commodities up as it did to oil in 2007-08 when the USD was falling like a rock?

ShivaS · Post by **ShivaS** » 27 Oct 2010 12:51

Ambar wrote:
ShivaS wrote: I had mentioned that if US devalues Dollar all others (currency) will slide down the valuations by artificially pegging their currency low relative to dollars.. this will further trigger commodity prices to fall even further hurting developing countries which mostly export commodities...
so further deflation will occur and then stagflation then inflation..

hence ecvery body agreed to devalue the dollar via the SDRs.
Watch this space...
Help me understand here, if currencies are devalued won't that push the nominal prices of commodities up as it did to oil in 2007-08 when the USD was falling like a rock?

The 1974 Yom Kippur war and subsequent oil shock was the cause of world wide economic disruption. That was supply side shock of(controlling the oil out put by a oligopoly.
In 2007 and 2008 the oil prices were manipulated in collusion with OPEC by Dick the mighty.. Shoot in the face specialist, It was highly manipulative speculative to say the least.. All kinds of garbage was touted for the oil prices, India consuming more PRC consuming more, BS. The refining capacity of US was declining, the consolidation of oil companies during Clinton Bush era, can you imagine Exxon merging with AMCO BP merging with many small Cos… Russians entering the market with their own retailing outlets…

Remember the significance of RELATIVE PRICING, the dollar was steady in supply and oil became short in supply hence the dollar fell relative to oil, and oil rose. That is exactly happening with GOLD prices, even after you make allowance for speculation and hedging. So dollar again devalued against Gold which is all too evident.

The impact of Gold to drive hyper inflation is far less than the complete absence of |Oil in the market. Oil percolates into many segments of daily activity productive and non productive (driving 350 cc Lexus with one man driving it or a Hummer driven by Harbhajan singh at 20 KM in his mohallah….)

Remember even inflation measurement is relative with a base CPI year and with basket of goods, some times with energy costs included (oil) sometimes not. There are also substitutes for Oil good old bail gadi but not for Gold….

This time the US is making a deliberate and conscious effort to (by printing and pumping money, borrowing money) to make dollar cheap to turn the tables around….
Especially on countries like PRC who are deliberately pegging their currency lower relative to dollar.

If you notice I used the word comparator.
Here is rule of thumb. If you know the price of Dollar in INR the to know the value of BP just multiply the INR dollar value by 1.5 you get exchange rate of BP ( very very close) vice versa… If you know the INR exchange rate to BP then divide by 1.5 you will get INR exchange rate of Dollar.

This what I was saying about relative sliding of exchange rates… because the underlying comparator is Dollar…
The biggest consumer is still US

Rahul Mehta · Post by **Rahul Mehta** » 27 Oct 2010 15:27

ShivaS wrote:Help me understand here, if currencies are devalued won't that push the nominal prices of commodities up as it did to oil in 2007-08 when the USD was falling like a rock?

Yes. The prices will increase. To be specific, if US starts printing dollars en-mass, then oil price will increase. The way US will benefit from that is that - when oil prices increase, the US oil companies in mid-west will reap profits. How? Because the royalties that countries will get will not increase by same fraction. Further, almost all oil that will come from Iraq is now US property and every inch of Iraq is now de-facto US property. And as oil prices increase, blame will go on the heads of gulf countries.

IOW, US will come out of depression - or will be able to pass depression to others such as India - by increasing oil prices, and pumping in the profits from oil into US.

In 1970s, oil prices increased because of huge volumes of dollars that had been printed and NO other reason.

Satya_anveshi · Post by **Satya_anveshi** » 27 Oct 2010 19:53

Just as expected.
China official: dollar printing causing inflation

ramana · Post by **ramana** » 27 Oct 2010 19:53

Hari there was guy (head economist at UBS) on Bloomberg Radio, saying that the QE2 is needed due to emplyment woes. Other factors don't warrant it. And some mumbo jumbo about needing the infaltion rate to be a bit higher than it is now. I wonder if its due to expected deflation?

SwamyG · Post by **SwamyG** » 27 Oct 2010 20:02

Stiglitz on new world economy. Salon.com

Joseph Stiglitz: Well, before the crisis, the United States was living beyond its means, and much of what it was spending beyond its means was consumption. It is still the case that the United States is living beyond its means, but the good news is that the households are now beginning to save. But on the other hand, the government deficits have actually increased. So the fact is, the U.S. is continuing to spend beyond its means. Now in the long run, this can’t continue, and that is what is sometimes referred to as the problem of global imbalances. It changed a little bit since the crisis, but the fundamental problems that have given rise to it have not been corrected.

Policy-makers often talk about the U.S. as the world’s indispensable nation. Is that consistent with how you view America’s place in a post-crash world economy?

Well, America is still the largest economy in the world, and in that sense it is going to continue to be a central player. Even the most optimistic forecast for China’s growth suggests that it will be a quarter century before China is comparable in size, and even then, China’s per capita income will be markedly lower than it is in the United States. And I think the United States is likely to continue to be the source of innovation, the source of higher education. So, the role of the U.S. is going to continue to be very, very strong. But there was a short period between the end of the Cold War and the crash of Lehman Brothers where the U.S. was the superpower not only militarily, but economically. It had a very strong role in dictating the terms of international agreements. That position is not likely to be restored.

***************

Stiglitz on QE. Why Easier Money Won't Work {from WSJ}

shyam · Post by **shyam** » 27 Oct 2010 21:24

G-20 commitment is already going down the drain...

`Every Man for Himself' as Emerging Markets Curb Currencies

shyam · Post by **shyam** » 27 Oct 2010 21:29

A case for no QE2:

A Quick Glance At Real World Inflation

"On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October." Of course, the ongoing deflation in items purchases requiring leverage will continue to skew the CPI so far south to make all those who bought 5 Year TIPS yesterday at negative yields end up losing money on the transaction.

ramana · Post by **ramana** » 27 Oct 2010 21:43

So how does the CPI-U show such lows when its components that matter are very high? Is the weightage factors skewing the number?

Meanwhile US news says

Who gained and who lost in last two years?

Neshant · Post by **Neshant** » 27 Oct 2010 22:06

2 reasons

1) CPI does not factor in food & fuel costs because its purpose is to hide the real rate of inflation.

2) It enables the federal reserve crooks to justify printing money for the benefit of their underwater member banks and passing the loss onto the people who see savings & salaries evaporate.

Prem · Post by **Prem** » 27 Oct 2010 23:38

Asian Commodities Sink as Spectre of New Regulations Spooks Speculators
See full article from DailyFinance: http://srph.it/9W4FD1

Finding it harder to flip properties for inflated prices due to new regulations, Chinese speculators have turned to commodities, sending prices soaring over the past few months. But today, fears of new trading rules sent shares tumbling. The Zhengzhou Commodity Exchange took the first step of increasing margin requirements for certain products, including rice and sugar, and according to Bloomberg, will begin to examine trends and look for "abnormal" trades. Some warn that commodity hoarding of cotton could drive consumer prices up. "We WILL see pricing for many items increase by 20% or more because of cotton shortages and hoarding in China," says a note from an apparel worker posted on Mike Shedlock's 24hgold.com blog. The note goes on to describe how some cotton merchants aren't even filling promised orders, but holding on to the raw material hoping prices will rise further. For smaller garment factories, the price surges may be enough to put them out of business.Today speculation, compounded by a strengthening dollar and focus on an impending U.S. Federal Reserve asset-purchase program, sent mining shares plunging as investors took profits. In Hong Kong Zhaojin Mining Industry slumped 4.7% and Jiangxi Copper tumbled 4.4%. Real Gold Mining plunged 3.7% and gold miner Zijin Mining sank 3.2%.

Shankas · Post by **Shankas** » 28 Oct 2010 09:12

Satya_anveshi wrote:Just as expected.
China official: dollar printing causing inflation

Love it or hate it, when USA decides to tackle a problem, they draw up a playbook, assemble a team, get them to understand every play, then go to work.
What we are seeing is a systematic, deliberate and calibrated carving.

Added later:
The world has been expecting to hear some noise from the US about China being a currency manipulator. China is good at reacting, thus carving them without confronting them makes China look like a whiner

ShivaS · Post by **ShivaS** » 28 Oct 2010 12:08

Satya_anveshi wrote:Just as expected.
China official: dollar printing causing inflation

Aha han...
WHy should it bethe concern of PRC if dollar is falling, when Unkil says the PRC Yuan should be rising, why is PRC mumbling none of your concern?

What is going to happen is PRC inflation is going to effect the COGS (Cost of Goods and Services) to go up, that in turn means COGS( If no dumping and no hidden subsidies) of exports to US will also go up. That in turn means (less margins to importers like Walmart , Family Dollar Dollar stores etc) costly imports, that in turm means local manufacturing or alternatives( To PRC imports), thats means real stimulus to local manufacture....

ShivaS · Post by **ShivaS** » 28 Oct 2010 12:14

COLA alone will zoom through roof if no fudging of figures are allowed, I mentioned this couple of posts ago. Also COLA is always retroactively increased or Lags inflation.

Neshant · Post by **Neshant** » 28 Oct 2010 12:24

Nothing will be increased. Just recently the US federal govt cut food stamp subsidies to pay for some public sector union perks so where would the money for COLA come from. In the end, someone has to be robbed to pay for COLA or any other raise that's offered.

The only so called deflation that's happening is in living standards & purchasing power.

The inflating is going on in all things essential.

ShivaS · Post by **ShivaS** » 28 Oct 2010 12:36

Dr. Tim took exception when I said in(1997 old format of the forum) that Indian economy and US economy should not be tightly coupled.
Even today actually it is even more acute that we develop internal consumption of service and goods and not be be heavily dependent on exports to US alone. But our netas you see and our praja too.

A million mafia ruling over a billion....

Hari Seldon · Post by **Hari Seldon** » 28 Oct 2010 12:54

Ramana garu, I currently see a deflation play in macro indicators all the way till 2012 at least.

PIMCO's sri sri Bill Gross makes another discerning column.... recommended read.

Run Turkey, Run

There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”

My answers - No and Yes.

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

Could one be clearer?

We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan.

Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

Baloney. PIMCO is more than bloody sure, am sure.

Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion.

Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Yeah, we all know how that movie will end.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead.

The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

OMG. Jai ho and all that. read it all and tremble, friends....only.

Rahul Mehta · Post by **Rahul Mehta** » 28 Oct 2010 15:59

Those who calling bankers as crooks,

Are RBI Governors etc also crooks as per you?

Or only US bankers are crooks?

.

vera_k · Post by **vera_k** » 28 Oct 2010 20:41

Lax regulation and low protection of ordinary people means RBI system is more crooked than US banksters. Only time RBI seems to act is if GoI is being duped, not if layman is taken for a ride.

ramana · Post by **ramana** » 28 Oct 2010 20:56

Thats a AR type comment.

shyam · Post by **shyam** » 28 Oct 2010 21:30

Rahul Mehta wrote:Those who calling bankers as crooks,

Are RBI Governors etc also crooks as per you?

Or only US bankers are crooks?

To understand this you need to understand the difference between RBI and the so called bankers.

The bankers are private businessmen and TBTF banks are private, for profit enterprises. They have their own motive to do things the way they do. Ultimately, when they fail, they get bailed out and nobody from their group goes to jail.

On the other hand, RBI is a Goi institution, and the RBI Governor is a government employee. The RBI officers can become corrupt (we don't have any past incident to show that though) but not crooked. RBI never makes profit and when public sector banks makes profit, that profit goes to the government.

I'm for nationalization of Fed and TBTF banks in massa.

Neshant · Post by **Neshant** » 28 Oct 2010 22:42

^^ Well said.

But I'm not for nationalisation of central banks either. I'm for their elimination.

Although nationalisation may remove institutional corruption (e.g. federal reserve working in the interest of its share holders the commercial banks instead of the public's interest), it does not remove personal corruption & incompetence.

Govt positions inevitably get staffed by ex-employees of private banks like Geithner. They get put there to help forward the interest of banks and in turn get rewarded handsomely like Robert Rubin who got 125 million from banks after leaving his post as Treasury Secretary. Geithner will be expecting the same reward from banks for handing out tons of taxpayer money as bailouts once he leaves office.

Goldman Sachs has even packed the top position of the financial fraud investigation arm of the US govt with its ex-employees. Meanwhile an incompetent guy like Bernanke who practically slept his way into the housing crisis is not fired but instead continues on.

As you can see, a revolving door between govt and banking begins to open up. It defeats the purpose of keeping things supposedly "independant" by placing them in government although it may be somewhat better than leaving it in the hands of a private banking cartel where theft is a guarantee.

The only good way to go is for the person who earned the wealth to control it. The technology already exists for a person to invest his money without a ton of useless middlemen so banks are not even needed anymore. And certainly a money counterfeiting institution is not needed either.

Any other scheme to hand over power to some private banking cartel or put it in govt where its prone to being hijacked by banking crooks leads to corruption.

ramana · Post by **ramana** » 29 Oct 2010 00:15

Ind Exp story:

How they saved India story

2008 crisis handling by GOI.

Recall the ICICCI taking a dive due to speculators after Lehman tanked?