Perspectives on the global economic meltdown- (Nov 28 2010)

[gakakkad]

@ Dileep - Can certified gold bars depreciate? Even if they are never opened from the packet and kept in a locker for storage immediately after being bought ?

[Neshant]

In my reckoning, the Fed and the continued piling of money into US treasuries has set us up for a massive stock market rally over the next year. They have removed all uncertainty around what borrowing costs will be for 2 years.

I have ARMs resetting in October based on the weekly average this week, and so far this should be the lowest ever they have gone.

The only certainty I see coming is a crash bigger than that of 2008. If all that it took to cure indebtedness was more indebtedness & money printing, there wouldn't be any problems in the world.

Get out of ARMs while you still can.

[Neshant]

@ Dileep - Can certified gold bars depreciate? Even if they are never opened from the packet and kept in a locker for storage immediately after being bought ?

Unless you are clueless about who/where to sell it and gullible enough to get conned by unscrupulous jewlers, you can easily sell it for almost what you bought it for + appreciation. You might lose on the premium over spot for the bar in some cases depending on how recognized the bar is.

I'd be glad to buy .9999 24K recognized gold bars & coins for spot price if they are in mint condition.

[vera_k]

Get out of ARMs while you still can.

Such extreme risk averseness is only for poor people/countries. It is even what keeps them poor. What is the scenario where yields on US debt start to rise? The 10 year note is headed down closer to 1% if the economic softness persists.

[Neshant]

Nobody is stupid enough to lend money to the US govt for 10 years at 1% when real interest rates are negative. The US govt debt is one big ARM waiting to reset. Creditors are only holding these bonds for the short term and will dump it by the droves when the time is right. Rates will do a moon shot and you'll be joining the underclass if you are not careful.

[Theo_Fidel]

It may not seem that way but there is a ton of money that has no place to go right now in Massaland. ARM's likely to get cheaper as time goes on. Not only that you get to invest the money you save elsewhere.

Just corporates alone have $3 Trillion sitting around doing nothing and continue to accumulate at about $800 Billion a year. The US consumer is now a Saver! Miracles never cease, but six pack joe is saving about 5% of GDP now. $ 1Trillion or so a year. Local governments have completely disappeared from the bond market. Just those two items are enough to internally finance US deficit till kingdom come.

The real problem with US borrowing is that the economy is not growing. If the economy started growing at 3%-4% annually again all these debt/deficit problems would disappear in an couple of years. Of course no one knows how you get to that growth again.

[SwamyG]

^^^^
First step, bring back manufacturing to the country. Restore balance and curb the influence of Corporations on politicians.

[yogi]

The unmentionable is starting to get mentioned !!!

Greece feels push towards Euro Exit

[ramana]

Dow loses over 500 again today.

Concerns of Europe debt and US banks exposure to that debt spark the meltdown.

[Prem]

http://online.wsj.com/article/SB1000142 ... 11734.html
China's Stagflation

China's inflation hit 6.5% in July, another three-year high, but most analysts profess not to be alarmed. By itself, that rate is not especially high, and Beijing has succeeded in checking inflation in the past. Even as the economy grew quickly over the last decade, overheating was not a problem—GDP grew at an average annual rate of 10.5% from 2001-10, but consumer prices rose an average of only 2.2% per year during the same period.

The difference now is that inflation is rising even as growth slows, otherwise known as stagflation. This is a sign that Beijing's monetary policy, which kept both the exchange rate and prices stable for a decade even as productivity grew dramatically, is reaching its limit. If history is a guide, unwinding that policy may be painful both for China and the world.
During China's Goldilocks decade, foreigners bought her goods and invested in building factories. That inflow of dollars would normally have led the yuan to appreciate, but the government intervened to buy dollars and sell yuan. That in turn should have led to a blow-out of the money supply and inflation. The People's Bank of China stopped this by "sterilizing," selling government bonds to withdraw yuan from circulation. Increased productivity with stable prices and a stable exchange rate favors exporters, and so China's trade surplus continued and its foreign exchange reserves grew to $3.2 trillion.This policy is reaching the end of the road. Until now, the high savings rate meant Chinese banks were highly liquid, allowing the central bank to issue bonds and raise required reserve ratios to sterilize without crimping lending to companies. But as sterilization has accelerated over the past couple of years the banks have run low on liquidity, meaning that Beijing has to choose between starving companies of credit or allowing inflation to accelerate—or, as seems to be the case now, a bit of both.This is in line with the experience of other rising Asian economic powers that played out the Chinese growth model in the past. Japan ran a monetary policy similar to China's current one from 1966-71. The resulting outflow of dollars to Japan was one factor that helped drive the U.S. off the gold standard in 1971 and caused a crisis in the global monetary system. In the 1980s, the problem re-emerged, leading to the 1985 Plaza Accord. After the yen was allowed to appreciate, the Bank of Japan feared the impact on exports and allowed the money supply to expand dramatically, creating a bubble. The collapse of that bubble left Japan in a malaise from which it has never fully recovered.

Another example is Malaysia in the mid-1990s. When the central bank stopped accumulating reserves, inflation re-emerged and credit growth went to a 30% annual rate from 10% in the space of a few months. That overheating led to wasteful investment and a crisis in 1997.These examples show that China is no "miracle." Running a trade surplus while accumulating and sterilizing foreign reserves succeeds for a time. But inflation is only deferred, and the more that is stored up, the worse the hangover afterward. Investments that were predicated on the good times lasting forever must then be written off. Subsidized exports must shrink to a more appropriate share of the economy.There is some irony here in that one of the reasons Beijing has refused to change its monetary arrangements is that it doesn't want to repeat the experience of Japan. That was understandable during the Asian monetary turmoil of the late 1990s and again during the panic of 2008-2009. But in economics what can't continue won't. Tokyo pursued a policy of reserve accumulation for too long, making a difficult transition inevitable. Stagflation is a warning to Beijing that it is running out of time to avoid that fate.

[Neshant]

ItJust corporates alone have $3 Trillion sitting around doing nothing and continue to accumulate at about $800 Billion a year. The US consumer is now a Saver! Miracles never cease, but six pack joe is saving about 5% of GDP now. $ 1Trillion or so a year. Local governments have completely disappeared from the bond market. Just those two items are enough to internally finance US deficit till kingdom come.

So called corporate profits are nothing more than money ripped off from savers and creditors with money printing and negative real interest rates. Its not profit on the basis of innovation. Robbing peter and handing over to paul isn't economic gain and will only go on for a finite period before the money counterfeiters run out of suckers to rob.

There's a whole lot of debt is masquerading as wealth out there that's set to go boom. What's the level of private indebtedness and what's the leverage on it? One hears all kinds of figures e.g. 50 to 100 trillion! If so even robbing all 3 trillion in 'profits' from wherever is not going to amount to a hill of beans.

Since 2000, there has not been a single productive industry that has emerged to generate well paying jobs on a large scale. Yet the spending has gone ballistic and the useless middleman industry known as banking & financing has expanded. A massive over-leveraged real estate bubble has just popped and a lot of smoke & mirrors are being used to mask its aftermath.

We are going to soon find out what the losses associated with that scam are once the fog clears on the massive money printing, stock market rigging, running up un-payable debts and scamming. The sad part however is that banking crooks are in a rush to offload these bad gambling liabilities on the productive people of society.

The first sign of a real recovery is when the useless middleman sector starts shrinking and as yet, there's no sign of that.

[Prem]

http://video.ft.com/v/1101429063001/Fed ... e-thrilled
Fed should be thrilled

Ajay Rajadhyaksha, head of US fixed income strategy at Barclays Capital, tells Aline van Duyn, the FT’s US markets editor, that the Fed's decision to hold down interest rates until mid-2013 has so far had the intended effect of calming the risk markets. (3m 19sec

[ramana]

Som any desis this time around on all sides except the govt.

S&P, Banks etc. Bush had Neel Kashkari.

[Theo_Fidel]

Agree that those corporate dollars are misbegotten. They still have to stick it somewhere.

In keeping with the theme, problem with US is not a debt/spending problem entirely. 60% of it is a revenue problem. Check out the size of the Bush tax cuts 80% of which went to the wealthy. Amrika has spent 10 years not paying for its keep, now the bill is due and they don't want to pay, dead beat type activity. Hence the downgrade. All this tamasha is to obscure this reality.

Check out this video.

[hnair]

Som any desis this time around on all sides except the govt.

S&P, Banks etc. Bush had Neel Kashkari.

Ramanaji, dejavu - tilak-wearing types managing financial affairs of empires from discreet, dark corners. Leaving TFTA Robert Clive progeny to wield the wealth and power in ways inappropriate for entire humanity.

[Prem]

Som any desis this time around on all sides except the govt.
S&P, Banks etc. Bush had Neel Kashkari.

Its just the beginning. Desis will be making their deeper marks in Massaland in high tech and finance once Indians become 3% of population. It is good psy ops on Poaqootars also, they fear/find Inains behind every stone/tree in USA. About a year plus ago CNN was debating the heath care issue and they brought in the experts/incharge of heath care in Uk and Canada for comparison purpose ? Both UKite and Canadians were indians and CNn's Gupta was batting from US side.

[vera_k]

US Seeks To Rent Out Its Foreclosures

So now the government wants to get into the landlord business as well. Not a bad idea in itself to stabilise the market by setting up a national property management company (WSJ has more detail).

[vera_k]

The unmentionable is starting to get mentioned !!!

Greece feels push towards Euro Exit

Nothing surprising in these sentiments. Remember, people in Europe don't have a shared sense of nationhood, which is why the place is fragmented.

So the bigots will come over every now and then and claim that integration is bad.

[abhishek_sharma]

How to make the best of the long malaise: By Joseph Stiglitz

[Dileep]

Banks do not buy the gold back.

I don't know other cities, but the Jewelers here at DMA will gladly buy the hallmarked bars at the day's rate of gold. No discount. No, the bars do not depreciate/deteriorate, but it is a good idea to keep them in the sealed package. The refiner from whom I bought my lot also quotes both the buy and sell prices transparently, sell rate being buy rate plus margin.

One need to be wary about the tax obligations too. You are expected to consider the capital gains when you sell and pay tax. Of course, if you are not averse to a bit of cheating papa bharath, you can sell it for cash and be done with that)

[gakakkad]

Thanks people on you advice on gold . Some of the posts in this thread have been really helpful.

One need to be wary about the tax obligations too. You are expected to consider the capital gains when you sell and pay tax. Of course, if you are not averse to a bit of cheating papa bharath, you can sell it for cash and be done with that)

The money better stay in our pocket rather then go to Madam Maino or chidu bhai sahab or the wall street maggots.

[Singha]

20 nations with the highest debt
http://www.rediff.com/business/slide-sh ... 110811.htm

norway has a pretty scary level of per-capita debt if you look at it. japan actually seems in less trouble.

[ManjaM]

11. Luxembourg
Debt: $1.892 trillion
Per capita debt: $3,759,174
Debt as in percentage of GDP: 3,443


Not sure what this translates to, but sure looks bad.

[abhishek_sharma]

What Can Replace the Dollar? Barry Eichengreen

Too Big to Save? If Italy's economy goes bust, it could blow up Europe as well -- and small measures to save these economies won't work. It's time for the big guns.

[Ambar]

11. Luxembourg
Debt: $1.892 trillion
Per capita debt: $3,759,174
Debt as in percentage of GDP: 3,443


Not sure what this translates to, but sure looks bad.

Just like GDP, debt is also a skewed figure. External investments/lending by companies/individuals based out of Luxembourg will show up as "debt",same goes with the 400% figure of UK. Else just imagine someone trying to service such a large external debt!

[Singha]

four european countries incl France just banned short selling of stocks of banks and financial institutions.

[vera_k]

Not surprising. Banks are being taken to the cleaners. In the US, the Fed announced that interest rates will be kept low until 2013, effectively killing a big income stream for that time. Wouldn't be surprised to see banks merge or close due to the low margins they are operating on.

[Sri]

^^^

This will happen only if the borrowing doesn't kick in.

Hopefully businesses will borrow more but then in US corporations are sitting on huge cash reserves,this is redux from 2008 when it became clear that cash is king. Will the low interest regime lead more borrowing on real estate front? this again to be scene. US foreclosures and new home ownership hasn't seen the bottom yet.

One thing that may happen is increase in activity from emerging markets, companies may list in US or go for acquisitions there. But again this contributes to Jobless growth as these emerging market players aren't going to be major factor on increasing jobs in US itself.

Unfortunately there seems to be no other alternative but for the western nations increase government spending. A new 'New Deal', with populace. But in current scenario Obama can't hope for cooperation from the legislature. Interesting times ahead.

[vera_k]

Its happening already. ING and HSBC announced they will get out of the US banking sector. There's an article in the WSJ about how a bank in Texas wants to stop being a bank and move simply to lending.

[devesh]

^^^
what the legislative and executive branches should have achieved, that is being enforced by market realities. Jai Ho! sometimes we do see these "invisible hands," or perhaps they are all too visible if you care to look in the right places. mergers, and liquidation of banking empires is a good thing. painful in the short term. but necessary to shed the useless bloodsuckers.

[Airavat]

Burdened Germany

Germany's economy shows signs of slowing too, and Chancellor Angela Merkel is facing a backlash from critics in her own political coalition who are calling for her to put the brakes on further bailouts. "Who will be left to bail out us?" asked law firm office worker Esther Heerz, who lives in this middle-class Frankfurt suburb with her husband, Ralf, and son. The couple have so far supported the government's bailout pledges. But Ralf's recent brush with unemployment served as a reminder that Germany has to worry about its own citizens.

Some are urging Germany to use the worsening crisis as an opportunity to assert greater control over the Eurozone and bailout fund, demanding more leverage over the fiscal polices of those nations Germany is bailing out. But recalling the last century's two World Wars, European neighbors get anxious when Germany seeks to extend its authority in the region.

In some ways, Germany has been one of the biggest winners in the Eurozone. In addition to boosting its political clout in the region, the common currency has ensured that Germany's currency did not strengthen so much that it made the country's exports too expensive. As a result, Germany has been one of the world's economic stars since the 2008 recession. "Let's not kid ourselves: There is a massive benefit for Germany being in the euro," said David Bloom, currency chief at HSBC in London. "If Germany were not in the euro, its manufacturing sector would have been crushed."

[Christopher Sidor]

We have seen tons and tons of articles how dollar as a fiat currency of the world is doomed or how dollar, "allegedly", gives US some exorbitant privilege and so on. But there is a reason behind dollar dominance. And it consists of two parts.

Part one: Assume that India trades with country X and Y. With X we have a trade surplus of say 10 crore USD while with Y we have trade deficit of say 11 crore USD. If we trade in USD then the excess money that we get from trade with country X can be used to pay for our excess imports from Country Y. If we did not trade in USD then our task becomes expensive. It is possible that country Y might say that we will accept only INR and not country's X currency. This would mean a drain of Rupees from India. We have been there before, in the form of Gulf Rupee. It did not work out then. It is unlikely to work out now. The same money can come back into our economy and increase inflation or create asset bubbles like the sub prime one in US.
Also if we pay for imports in INR, our other trading partners will pay for their imports from India, i.e. our exports, in their local currency. The concept is called quid-pro-quid.

Part two: Look around, what are alternatives to USD. India will never accept Yuan. Let us consider SDR. IMF is dominated by western powers and with China. We already have experience of what China can do in multilateral forums, like ADB where our loan to Arunachal was blocked. Or consider certain European nations with their so called emphasis on human-rights or green power and so on. Giving up control to an international organization where we do not have a veto or sufficient powers is no go.

Now replace India with UK, Brazil, Singapore, South Africa, Japan and so on. The same logic applies. For UK it is the horror of Euro for Japan again it is Yuan and so on.

This talk about, dollar being mortally wounded, is just that, talk. America's economy as it stands is bigger than China's, Japan's and India's put together. The depth of its financial markets is amazing. The most liquid, i.e. asset which can be changed for cash easily, market in the world is in US. For most of the countries in the world, their biggest trading and/or investment partner is US.
Is dollar doomed? No. Not until Somebody replaces America as the world's largest economy. Not until some country manages to become the biggest trading partner for majority of nations on this planet.

Some years ago, in university of California Berkeley Department of Economics, a fascinating paper on how between WWI and WWII the worlds fiat currency fluctuated between Dollar and Sterling was published. The crux of this paper was given on page3, which I quote verbatim below

We find that the dollar first overtook sterling as the leading reserve currency not in 1928, 1938 or 1948 but in the mid-1920s, and that it then widened its lead in the second half of the decade
...
...
Then, however, with the devaluation of the dollar in 1933, sterling regained its place as the leading reserve currency. Contrary to much of the literature on reserve currency status, it does not appear that dominance, once lost, is gone forever.

Please note the year 1933. This was the year when US enacted the so called "The Gold Reserve Act". Offcourse that is a long story maybe for another post some time later on.

[Neshant]

^^^
Printing your own paper money and having the world accept it is one of the greatest priveledges that enriches a country, not impovrishes it.

The intial purchase paid for by paper money is essentially free since it cost nothing to print up paper. Any money that it spent eventually returns back as investment which is good. By inflating, US even gets to steal some of the creditor's purchasing power between the time the money is spent and returns.

The problem in the US is that the priveledge has been abused. I attribute much of that to the existance of the useless middleman economy.

A country unable to preserve the purchasing power of its currency will not be a reserve currency for long. The only way the US seems able to hang on to that priveledge these days is by forcing oil producers through coersion to use dollars or face invasion & regime change like Libya, Iraq, Iran, Kuwait, UAE, Venesuela..etc. It is the 2 trillion dollar oil trade (times some large multiplier on that money) that underpins the dollar's status & America's prosperity to a large extent. Take that away and America would have a tough time getting folks to accept paper losing its value from an over-indebted country.

It would be fantastic if India could pay for its oil imports in Rupees. For 60 years, Western nations primarily the US have enjoyed that advantage. It has come at the expense of developing countries like India which paid for this priveledge with all round higher cost in real terms.

[Neshant]

Personally i think one of the most dangerous things to happen in any country is not multi-nationals showing up but rather the expansion of the useless middleman sector known as banking & financing.

Regardless of developed or developing country, it drains money from the productive and diverts it to a smaller segment of unproductive. It does that by hijacking & corrupting the monetary system and later the laws & taxation and ultimately the government of the country itself.

The people are turned into serfs as gambling losses of the useless middleman sector are offloaded onto their backs while productive gain is skimmed off. India should really be on guard against fast talking financing & banking con artists "managing" our money or proposing paper scams be it monetary or investment/insurance related. It invariably turns out to be a parasitic form of croney capitalism.

The worst part is that it tries to recruit local elites into the scam who then form a 5th column lobby group within the country to keep the racket going.

[Ambar]

@ Chris Sidor : Somnath had written quite a lot about the status of USD as a global "reserve currency".Apart from the inflation/deflation hedge that you talk about, the sheer volume of trade and liquidity of USD backed by a strong political,diplomatic and military power of US ensures the status of USD as the defacto reserve currency.

As for oil in non-USD , if i had 1$ for everytime i have heard about collapse of US the day oil stops trading in USD theory, i would have been a very wealthy man by now! Someone mentioned the same theory in "India-US strategic discussion" thread about how India snubbed US by trading oil with Iran in INR rather than USD. You DONT need USD to trade oil esp. bilateral purchases unless you are a commodity trader in CME or IPE. Iran accumulates INR/Yuan as a part of their Forex and uses them while trading with India/China.Now, Iran will need USD when it trades with someone like Venezuela, and now someone else will end up with USD.The sheer fact that the massive deficit denominated in USD will ensures USD retains its liquidity and there by the reserve currency status.

As things stands today, there are no paper currencies,SDR included that are anywhere close to being in the position of USD let alone replace it as reserve currency.Unless countries figure out a way to run their surpluses without US being in the picture,USD is not going anywhere in a hurry.

[SwamyG]

Stop Coddling the Super-Rich by Warren Buffet. Calls the bluff on Reagonmics and Repubs.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

[Bade]

Buffett has taken the wind out of the argument of Reaganomics for sure, but makes me wonder why he waited this long till his old age to say the truth, after enjoying all the tax benefits for so long.

[Prem]

Sterling Proving No Refuge as King Eyes Stimulus While Gilt Yields Plunge

http://www.bloomberg.com/news/2011-08-1 ... lunge.html

Weaker Sterling Predicted
Sterling may depreciate to 96 pence per euro by the end of 2011, London-based Gallo said by e-mail last week, from 87.69 pence today. The pound rose 0.2 percent to $1.6312 at 10:44 a.m. in London. It slid to a record low 1.1470 francs on Aug. 9 and has dropped 11 percent this year against the Swiss currency. Obstacles to an economic recovery are intensifying “by the day” and “weakness in underlying activity is likely to be somewhat more persistent than previously expected,” King told reporters in London on Aug. 10. “The recovery will take longer and be harder than had been hoped,” Osborne said in Parliament in London a day later, while defending his plans to cut the budget deficit.
Economic Laggard
Britain’s economy will probably grow 1.2 percent this year, behind a 3.4 percent expansion in Germany and 1.8 percent increase in the U.S., according to Bloomberg surveys. Even with the Greek and Portuguese economies contracting, euro-region gross domestic product will climb 2 percent, a separate survey shows. The U.K.’s expansion was 0.2 percent last quarter after stagnating in the six months through March, according to government figures.
Investors sold a net 48.9 billion pounds ($79.6 billion) in U.K. stocks, bonds and money-market products in the first quarter, adding to the 55.3 billion-pound outflow in the previous three months, according to the most recent data from the Office for National Statistics in London. The next biggest outflows were in the third quarter of 2005. Sterling declined 1.2 percent then on a trade-weighted basis, according to a Bank of England index.

[ramana]

Prem,
Is WS making people into traders? The buy and hold strategy of investing seems risky in short term and in long term you are dead anyway.

[Theo_Fidel]

A lot of depression anxiety and uncertainty in the USA is because the Government refuses to pay for itself. The republicans are behaving like dead beats and democrats are behaving like spineless phonies. Hence the market down grade. WB recognizes this and understands the value of a solvent government. No way the USA solves this problem without letting the Bush tax cuts expire which is probably never going to happen.

75% of American public wants a slightly higher tax rate on the rich. Even 2% increase would do wonders as the rich now control the vast majority of the economy and income. Despite this a tax increase on the rich will never happen, AFAIK it has not been mentioned by anyone except Obama.

More down grades are coming. Esp. when the Debt/GDP ratio crosses 1.