Sunday, February 28, 2010

Is Obama a zombie?

I wonder who is behind US president Obama. Because by all accounts that I am aware of, he it neither original nor authentic nor trustworthy. His acendency into the office of the Presidency seems miraculous. He has had no serious credentials. And since he has been in office, he still hasn't gained any.
Where does he come from? What does he really believe in? He is, quite different from any earlier president.
What is going on? Was Obama put into office by some mysterious power to tranquilize the masses for the terrible period to come? Obama appears to be a person without individual power and authority. He seems to be the incarnation of T.S. Eliots' "hollow man".
With all respect and doubt: he appears much more as a zombie than anything else. Nevertheless I admit that I could be wrong.
Is he the ultimate hollow man?

What may be in for Goldman Sachs

Forget about Greece, worry about California

California is a greater risk than Greece, warns JP Morgan chief
Jamie Dimon, chairman of JP Morgan Chase, has warned American investors should be more worried about the risk of default of the state of California than of Greece's current debt woes.
.... Last summer, California issued $3bn of IOU's to creditors including residents owed tax refunds as a way of staving off a cash crisis. "I can't write checks without money; that's against the law. My main goal is to keep the state afloat, but I won't be able to do it without the help of new legislation," said Mr Chiang..."
Read more
Comment: Never forget: all states are corrupt, the difference is only in degree. Never forget: "Paper money eventually returns to its intrinsic value --- ZERO." - Voltaire (1694-1778)

Comeback of the dollar woes

From Reuters: "History suggests that a currency is supplanted the same way Ernest Hemingway said a man goes broke: gradually, then suddenly."
Read more

Saturday, February 27, 2010

Soros will make you pay dearly

It may well be that George Soros himself is behind the mega plot to bring down the euro. He is instigating his fellow hedge funders to jump in on the assault of the euro. However, the true reason for Soros' (not so secretive) promotion of the "secret" meeting may well be to let his fellow hedge fund managers to fetch the hot coal from the fire. This way, Soros can pull out from a position he has taken against euro knowing that it won't play out as planned.
Here's some news about this. The problem with Soros is that he has good inside informants when it comes to the US and Britain. His insider information is much less solid when it comes to continental Europe. This way he has fallen into a trap to bet against the euro. Now he is trying to get out of the hole through the set-up of well-publicized "secret" meetings. Nevertheless, it seems that if the mean Soros plot will fail. What we may see is the demise of the Soros fund, a well-deserved fate.

Feeding the monster

James Turk of the Gold Money Report writes:
"... This significant shift in bank assets has implications for the economy and the US dollar.
Instead of depositor money being used to stimulate economic activity in the private sector by lending to businesses and consumers, the banks are helping to fund the growing federal deficits.  This re-allocation of resources has a negative long-term impact on the economy.  Depositor money is not being used for productive purposes like building manufacturing plants and making other investments that will create jobs and grow the economy.  It is being spent by the government, which consumes in the present and does not invest for the future.
This shift in bank assets also has negative implications for the dollar.  As the realization grows that the financial condition of the federal government is not much different from Greece and the dozens of other over-indebted countries, the value of US government paper declines as a consequence of the US government’s deteriorating creditworthiness.  Given that the quality of bank assets perforce determines the quality of the dollar, deterioration, i.e., debasement, of the dollar is inevitable as banks funnel depositor money into US government paper instead of making loans.
Lastly, the reduction in bank loans does not mean the money supply is shrinking.  Rather, it is simply changing.  More and more dollars (i.e., the liabilities on bank balance sheets) are being backed (i.e., the assets on bank balance sheets) by US government debt instead of loans to the private sector."
Full text
Comment: Because of the shift of bank assets from private to public debtors, the deflationists are probably wrong. A change from private to public debt is the most direct channel available to increase demand without a corresponding expansion of production. It is the attempt of the US central bank to save the banks at the costs of the real economy. Yet this is a game without a winner because in the end, when hyperinflation strikes, the financial sector will come crashing down along with the economy. Central banking in the US has reached a stage of irresponsibility and recklessness like never before.

Who'll bailout LA?

Los Angeles, the second-largest US city, is facing a crisis of funding not seen since the darkest days of the Great Depression
Read more
Comment: As if by some magical hand or by outright manipulation, there is a man at the US presidency who will help to keep the American underclass silent -- at least for some time. Yet if things will not improve soon, all the pent-up anger, frustration, fear, and hate will explode in one forceful explosion and devastation will sweep across the country like a tsunami.

Assault on the euro will fail

Rumors and some news are out that Greece will get assistance from a group of carefully selected private and public banks to finance due debt. Instead of a public auction which could become a disaster with extremely high interest rates to pay, Greece will sell bonds directly to certain banks which in turn will be protected by the promise of public banks of the eurozone, mainly of Germany, to safeguard the financing project.
If this is correct, and as of now there is little doubt that it should not be, the attack on the euro which some hedge funds are planning and which we commented below, will certainly end in a fiasco if these funds should not back off. Maybe the publicized plan of the assault on the euro contains a second plan which says that let us make some of our competitors jump over the cliff by making them believe that the assault on the euro were a sure thing. The reason to suppose this is that the first plan was made available to the press -- which otherwise would make little sense. Let some of the hedge funds who do not belong to the select few insiders run against the euro which would allow the big shots to unwind their short positions against the euro not only without a loss but by making a killing.

Sorry, now it is too late

From The Wahington Times: "... With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.
Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said...."
Read more
Comment:  You're too late, my friend. The Fed's statement is of little use because now we are already beyond the point of no return. For the Fed's trouble to keep up with current developments, see my article: "Trouble at the Fed".

Friday, February 26, 2010

Massive assault against the euro in the making

There are rumors out there that a group of hedge fund manager are planning a massive assault on the euro with the expectation to bring down to a parity of 1:1 against the dollar. This is good news for the European economy and it will be terrible for the US economy. Even if the onslaught on the currny should succeed, it won't be long-lived. Those who hold large euro position and do not care about short-term fluctuation of a couple of months need not change positions. Those who want to participate in the game should be forewarned that it may succeed for only a short time and those who are too slow to get out of the game in time will suffer massive losses. In fact, I would not exclude that by this game of fighting against economic fundamentals on a massive scale, some hedge funds, maybe even some very renowned-ones, will go bankrupt and by this will lose the last shirt of their clients. The small gain to win if the plan to assault the euro should work is not worth the risks of bearing the consequences if the plan should fail. I actually believe that the chance of failure are higher than the chances to win the game.

British media bias

Why are British Eurosceptics so rude? Feb 26th 2010, 8:53 by Charlemagne from The Economist
"THE Belgian newspaper, De Standaard, asked me to write an op-ed explaining to their baffled readers why a British Eurosceptic politician was so very rude to the President of the European Council, Herman Van Rompuy, in the European Parliament this week. Nigel Farage, a member of the European Parliament (MEP) from the United Kingdom Independence Party, called Mr Van Rompuy (a Belgian) that he had the "charisma of a damp rag", among other insults.The short version of why Mr Farage was winkled out of the UKIP politician by BBC Radio 4's Today programme yesterday morning. What does being so rude achieve, Mr Farage was asked. Well, it has got me on this programme, hasn't it, he replied. And there you have it. "Today" is a flagship programme on the BBC: about the most serious news programme in Britain, along with "Newsnight" on BBC television. And calling a foreign politician names gets you on it...." Full text
Comment: I suggest reading most of the British press (with the possible exception of The Economist and The Times) only for the purpose of fun. The talent to twist the truth, uncontrolled bias, appeal to the lowest instincts makes the circulation go up. Sometimes one may think that as much as Britain is the envy for many around the world, a large part of the rest of the world, particular near and no so near neighbors of the Kingdom such as the PIIGS or the Frogs or the Huns are the envy of the British.

British pound to collapse?

"... Jim Rogers has predicted that the British Pound could completely collapse within weeks, sending shockwaves throughout the global economy and heralding the beginning of a downturn that would make the recent economic crisis look tame in comparison..."
Full text
Comment: Whether Jim said it or not, let's not exclude the possibility that the hot talk about the PIIGS and about the (financially rather unimportant Greece) was just a side show to turn attention away from the more imminent danger and the much more large danger: the collapse of the British pound. This leads us to consider buying euros against the pound - sell all credit insurance vehicle on Greece and those of the rest of the PIIGS and buy as much credit insurance as you can get on British liabilites as long as the first group is still extremely expensive and the second group is still unreasonably cheap. Nevertheless, I still expect that the showdown will happen in the US later this year.

Tuesday, February 23, 2010

Euro banks in trouble

European banks face showdown over €1 trillion of debt
European banks need to roll over €1 trillion (£877bn) of debt over the next two years at a much higher cost and in direct competition with hungry sovereign states, according to a report by Morgan Stanley.
Read more
Comment: I had my first more intensive encounters with big-shot bankers in the 1980s when I studied sovereign risk analysis. When I asked them about their mediocre sovereign risk analysis models, they openly told me: who cares, in the end the government will bailout us because they have to. The bigger the bank, the more clear was this message. "Too big to fail", as the saying goes. Another name would be: "moral hazard". An even better terms would be "moral corruption".

The eurozone on a dangerous path

From the German weekly "Der Spiegel":
European Inflation Union
The Finance Ministry officials are also thinking about creating a new institution, modeled after the IMF, to handle future bailout efforts. This European fund would provide financing to countries in difficulty.
It is still unclear how the new rescue fund will be financed. There are two conceivable options: Each member state's contribution could be based on either its share of ECB capital or the level of its deficit.
The second solution would be fairer: the worse a country's financial policy, the higher its contribution. In other words, the biggest sinners would be required to pay the highest indulgence.
Such an institution doesn't exist yet, which means that European politicians will have to make do with what they have. The financial strength of the donor countries could soon be depleted. This could force ECB President Jean-Claude Trichet to buy up the debt of the countries facing bankruptcy -- which is tantamount to printing money. Although this is prohibited under the Maastricht statutes, the EU finance ministers already demonstrated that the treaty could be amended if necessary when, in 2005, they stealthily relaxed the 3 percent criterion for government debt.
Such a bailout would come at a high price: It would turn the European monetary union into an inflation union.
Full text
Comment: Be it dollar, euro, yen or whatever currency. As long as it is fiat money it's path is the way of destruction.

How to ruin an economy

Here is the recipe: At first take a deep dose of Keynes. The master Keynesians prefer the vulgar kind.

Saturday, February 20, 2010

Faber predicts total collapse of financial system

Watch but take care not to fall from your chair:
Comment: I see no reason how to challenge Mark Faber. He is right on all counts. The problems have been building up over a long period of time. In the meantime many cried "wolf" and recessions and downturns have occurred, but a total collapse did not take place. Yet remember how the old fairy tale ends in the story about the wolf: finally the bad wolf shows up indeed. As the smart wolf that he is he waited for the time when only very few people were left to expect that he'll ever show up. The rest of th poeple was asleep trusting that government and central banks would take care of them. Yet as they only later found out, governmens and central banks, instead of being the guardians of the people, were part of the problem.

Who'll bailout US states?

"... (US) States face budget holes totaling $134 billion over the next three years, according to the governors, explaining that tax collections keep declining as Medicaid costs soar. High unemployment persists. States cut 18,000 jobs in January alone and more job losses are anticipated. Because states are required to balance their budgets, shortfalls will be made up by raising taxes or fees or cutting services..."
Read more
Comment: And from here we can go on with no end in sight. The money supply grows, the economy continues to shrink. More money is injected into the system. More bailouts, more stimulus programs. In the end, we'll have even more government debt, more inflation, more unemployment, more misallocation and an economy that gets weaker with each round of these silly policies.

Eurozone bailout for Greece

A bailout package is underway for Greece in the amount of 25 billion euros.
Eurozone countries will contribute according to their relative weight which they possess as shares of the capital of the European Central Bank. Germany will bear about twenty percent. The Eurozone will impose a series of criteria for the Greek government to follow in order to receive the tranches of the bailout money. What the Euros are doing is basically a Euro-version of an IMF program.
Read more (in German)

Brazil at risk

At least compared to the standards of the past, Brazil has performed extremely well in terms of economic growth and monetary stability over the last six years. This success has come to a large extent from the peculiar fact that the current Brazilian president, InĂ¡cio Lula da Silva, has mostly done nothing. He did some traveling abroad, gave a lot of talk, did extensively tour the country and not missing the chance of a drink or two. Besides his anti-hunger campaign "zero fome" (no hunger), Lula initiated no large economic program and this way he has broken with a Brazilian tradition according to which each and every new president entered office with a package full of ill-devised projects, spend most of his time by ill-implementing the plans and finally leave office with the result that things were worse than before. Different from that tradition, Lula came into office, did mainly nothing, and can leave his office now with the pride of being one of most successful -- maybe the most successful -- Brazilian presidents of the past couple of decades. 
Yet the recent happy phase of modern Brazilian history may be at risk if Dilma Rouseff, the candidate who is sponsored by Lula, were to win the presidency later this year. A Marxist at heart and endowed with stubbornness and a difficult character, things do no look too bright if she should win. In fact, all that has been accomplished over the past couple of years may be squandered again light-heartedly as it has happened so often in Brazil's history.
See Bloomberg report

Friday, February 19, 2010

Greece is not alone - the world is full of PIGS

Muni Threat: Cities Weigh Chapter 9
by Ianthe Jeanne Dugan and Kris Maher
Thursday, February 18, 2010
Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9. The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders. The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk...
Read more
Comment: There is no safety in anything that is linked to the State. The State lives from the illusion that HE is the protector, savior, the WORLDLY GOLD when in fact the state is nothing else but an instrument for a specific (yet changing) small group to enrich itself at the cost of the rest. One may get rid of one elite only to be suppressed and exploited again by another one. The answer is not change of regime but change of system. This was the great project of the founding fathers of the American Republic. However, it did not take long for the US to become like the rest, and in some respects even worse.

Demise of the middle class

David DeGraw writes: "... Current statistical societal indicators clearly demonstrate that a strategic attack has been launched and an analysis of current governmental policies prove that conditions for 99 percent of Americans will continue to deteriorate. The Economic Elite have engineered a financial coup and have brought war to our doorstep...and make no mistake, they have launched a war to eliminate the U.S. middle class..."
Read more

Comment: The surest way to destroy a country is to destroy its middle class, and US "elites" have done a terrific job doing it.

Forget about Greece and the rest of the PIGS - it's about the big swines

'Power Lunch' Guest Says No to Greek Debt, Warns All Governments Will Default
Marc Faber tells CNBC that market turmoil caused by Europe is a 'correction,' praises soundness of emerging economies.
By Julia A. Seymour Business & Media Institute
2/10/2010 3:11:24 PM

Just one day after Treasury Secretary Timothy Geithner said the U.S. wouldn’t lose its “top-notch” credit rating, one CNBC guest said that ‘”all governments” will default – it’s only a matter of time. When asked by “Power Lunch” co-anchor Sue Herera if he would buy Greek debt, Marc Faber said: “No, I’m not interested in government or sovereign debts because I think that all governments will eventually default, including the U.S.”
Shocked, Herera replied, “What! Whoa, whoa, whoa.” Co-anchor Dennis Kneale asked for clarification, “All governments?”
“Mhmm. All governments,” Faber, editor of the Gloom, Boom & Doom Report, explained. “Some like Singapore that have basically no government debt and have huge reserves … in general the problem is the emerging economies today are financially much sounder in terms of debt to GDP than the developed world, including the U.S., Western Europe, the U.K. and so forth.
Read the rest of the article 
Comment: Faber talks about the obvious. Just do the math or rather apply simple arithmetic -- a discipline which has fallen out of fashion but in business it is more useful than calculus. Have you ever met a mathematical economist who can quickly verify if the restaurant bill is correct? Well, that is the problem we have now with governments and central bankers nowadays. 

Wednesday, February 17, 2010

Run, rabbit run

WASHINGTON (AP) -- A record drop in foreign holdings of U.S. Treasury bills in December sent a reminder that the government might have to pay higher interest rates on its debt to continue to attract investors.
China reduced its stake and lost the position it's held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.
The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009.
Private analysts, though, were split over the significance of the decline. Some doubted that the drop in foreign holdings of short-term Treasuries signified growing unease about holding U.S. debt. They noted that net purchases of longer-term Treasury debt rose in December by $70 billion.
But other economists saw the decline as a warning signal. They fear that foreigners, especially the Chinese, have begun to worry about record-high U.S. budget deficits and are looking to diversify their holdings...
Full story
Comment: Once the avalanche begins to roll, there's no more halting.

Inflationists on the loose

Watch out: a dangerous breed comes creeping back.
Caroline Baum explains:
Feb. 17 (Bloomberg) -- Policy makers are looking for measures to avert the next financial crisis. Most of the proposed solutions involve enhanced regulation. Economists at the International Monetary Fund have a better idea: higher inflation.
Yes, that’s right. After a multidecade effort to become credible and anchor inflation expectations, central banks are now supposed to throw it all away in order to have more room to maneuver in financial crises.
Start with the inflation target, or ceiling, most central banks have adopted of 2 percent, multiply by five, add six, divide by four, and bingo! That’s the new, improved inflation target of 4 percent, according to IMF economists Olivier Blanchard, Giovanni Dell’Ariccia and Paolo Mauro, authors of a new paper, “Rethinking Macroeconomic Policy.”
Read more
Link to IMF paper
Comment: One may only wonder about the frivolity how so-called top-economists treat serious matters. Well, anyway, they have been trained in the kindergarden of silly math and can do no better. The inability to learn is striking. Yet what is a joke for them, is a tragedy for the American people. They do not know that price inflation is the consequence of this policy mix of easy money, fiscal stimuli and bailouts. Inflation completes the destructive work that was initiated by this trinity. It was John Maynard Keynes himself who aptly described this process that “engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”. Indeed, Keynes was not a Keynesian, and upon the modern self-styled Keynesian the old master would probably spill even more contempt and ridicule than he did on his contemporary followers.
Easy money policies, malinvestment, bailouts, more easy money policies, fiscal stimuli and so on, go hand in hand. There is no end to this vicious cycle until everything comes falling apart.

Monday, February 15, 2010

Spain is next in line

MADRID (AP) -- Could Spain be the next Greece? The government bristles at the very thought, and points out its debt burden isn't nearly as heavy.
It's a stinging comparison nonetheless for a country that only a few years ago had burgeoning growth but is now lumped with other deficit-laden countries on a watch list for a Greek-style crisis.
The collapse of a real estate- and consumer-fueled boom has left Spain with a eurozone high jobless rate of nearly 20 percent, and the government ran up a deficit that in 2009 equaled 11.4 percent of GDP. That is way over the eurozone limit of 3 percent and earned Spain a place as the letter "S" in the inelegant PIGS acronym coined by analysts (the others are Portugal, Ireland, and Greece)...
Full text 
Comment: Financial market always go for the easiest victim first. In they succeed, they'll take on the next. If they do not succeed, they also take on the next in line. This way they move up the latter, and sometimes it is not the weakest that gets killed but the fattest.

Forget about the Greek drama - the tragedy will take place in America

Niall Ferguson writes: "... What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.
 The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF...
Full text

Comment: Indeed, the real tragedy will unfold when the US gets into trouble simply because lenders refrains from loading ever more funds upon a sinking ship. Greece is financial peanuts for the world, and its debt problem can be easily handled by the European Union or one of EU's large members, such as Germany or France and Germany together. What will make the earth shake will be when the US comes under heavy pressure and will beg to borrow - albeit in vein.

Who'll be the ECB's next chairman?

Feb. 15 (Bloomberg) -- Germany’s Axel Weber leads the race to succeed Jean-Claude Trichet as president of the European Central Bank and Portugal’s Vitor Constancio is likely to be his deputy, a survey of economists shows...
Full text
Comment: Germany will push and shove to make him the next chairman. Yet it will be an easy walk. Particularly after the Southern European calamity, resistance will be nil.

Goldman's murky role in Greek drama

Feb. 15 (Bloomberg) -- A Greek government inquiry uncovered a series of swaps agreements with securities firms that may have allowed it to mask its growing debts.
Read full text
NYT article

Comment: EU officials are eagerly waiting for a reason to declare Goldman Sachs a criminal organization and to have it banned from operating in Europe or preferably to hang or to guillotine some its big shots. No-one need be surprised by Greece. Dirty business is part of politics. Yet Goldman's involvement in the tricky deals shows that the large American investment bnaks have lost all sense of decency and ethics. Most of the Goldman Sachs rivals have vanished. It is high time that Goldman will vanish, too.

Saturday, February 13, 2010

Year of the tiger

Year of the Tiger: Big Changes Ahead

In Chinese astrology the tiger is one of the most dynamic and powerful signs. Its nature is unpredictable, courageous, and explosive. Therefore, the year of the Tiger is usually associated with big changes and social disorder; 2010 is likely to be a turbulent year—on both a global and a personal level. However, those who gain an understanding of it through this article and their own spiritual awareness can cultivate the flexibility to adapt to changes and keep a steady hand on the keel through these rough waters. When you meet the challenges head on and get proactive about your health, you will be all the stronger for it by year's end.
Read more

Comment: Rarely could one agree more with a prediction like what the Chinese myth says about the year of the tiger: like the tiger, the (Chinese) year will be unpredictable and explosive. One has to be courageous in the face of  big changes and social disorder. The year will be turbulent on a global level. In order to survive and prosper for the coming 12 months one needa flexibility and the willingnes to adapt to changes. Be swift in thought and action while keeping a steady head.

Trouble at the Fed

Mises Institute Article by Antony Mueller: "Trouble at the Fed"
More links to Trouble at the Fed

No place to hide

Feb. 12 (Bloomberg) -- Investors pulled the most money from emerging-market equity funds in 19 months as Greece’s debt crisis escalated and the Federal Reserve laid the groundwork for exiting its record credit expansion...
Full text
Comment: Current market action is guided by fear, and fear is not a good counselor. Take care when you run away. Where you run to may be even more dangerous. The greatest risk is usually there where it is least expected.

Easy Money and Bailouts

Antony Mueller: The Tragedy of Easy Money and Bailouts

Thursday, February 11, 2010

The saving of the PIGS

Feb. 11 (Bloomberg) -- Euro-region leaders ordered Greece to get the bloc’s highest budget deficit under control and said they are prepared to take “determined” action to staunch the worst crisis in the currency’s 11-year history.
Greek bonds rose after officials including German Chancellor Angela Merkel, Greek Prime Minister George Papandreou, and European Central Bank President Jean-Claude Trichet brokered the deal before a European Union summit in Brussels. The euro was little changed at $1.3717.
“Euro area member states will take determined and coordinated action if needed to safeguard financial stability in the euro area as a whole,” President Herman Van Rompuy told reporters. “We fully support the efforts of the Greek government and their commitment to do whatever is necessary including adopting additional measures.”--
Full text
Comment: Well, as of now, Greece is saved, but the saviors themselves may soon need a bailout. Who's gone save the fat swines, Germany or France? Soon, California, too, will be in need to be saved, but who will bail out the US?

Default risk - watch out for California

According to CMA, which is a leading credit default swap data service, California is the tenth most likely to default major government in the world, with a 26% chance of default. They are in poor company with the likes of Argentina, Venezuela, Pakistan, Latvia, Iceland, Dubai and Greece.
Full text

New kid on the block

Feb. 11 (Bloomberg) -- The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions.
The central bank is looking to the $3.2 trillion money- market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York...--
Full text

Comment: The Fed is desperate. Bernanke doesn't know yet how to neutralize the trillions of dollars he injected into the financial market. These dollar are like dynamite. It only takes spark and the reserves will explode into hyperinflation. If Bernanke slams the brakes to harsh, financial markets are in risk to collapse again and this would lead to deflation. Among these alternatives there is only a very slight chance that the Fed can manage the transition without extreme inflation or deflation. There is a chance, right, but it is small. As of now there is no way to tell what will happen. All we can do is watch closely, analyze sharply, and act courageously when the contours of the new phase will appear.

Wednesday, February 10, 2010

Triumph and Tragedy of Easy Money

"The temporary improvement of the economic performance of the US economy in the last quarter of 2009 will be one more source of deception in the long series of deceptions that have plagued policy makers and investors in the recent past. The current economic expansion is brought about by monetary and fiscal stimuli. Such a kind of economic expansion does not constitute genuine economic growth. While the official statistics register economic growth, the durable production potential of the economy is actually contracting....

Antony Mueller: "Triumph and Tragedy of Easy Money"
Read full article

The Fed's balance sheet

This graph shows the expansion of the "asset" side of the US central bank's balance sheet. As its counter position at the "debit" side, an equivalent amount of dollars outstanding has been created.

Hard to sell

BEIJING (Reuters) - Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan...--
full text
Comment: It is irrational to bring up military revenge as a reason for getting rid of US bonds when in fact it is an economic necessity and highly rational in terms of finance. The problem, however, remains what to do with the dollar cash when the bonds are sold. There is no simple solution to this problem and thus China is forced to hold on to its junk position much longer and to a much larger degree than financial rationality would suggest.

The paradox of success

Inspiring thoughts by author Rosabeth Moss Kanter:
"... All too often, long periods of continued success are undermined not by the competition but by self-inflicted wounds. I uncovered common patterns in business, sports, leadership, and life in research for my book Confidence: How Winning Streaks & Losing Streaks Begin & End.
Winners become sinners when confidence turns into complacency and arrogance. They over-estimate their own invincibility and under-value mundane disciplines. Whenever someone feels on top over a long period of time, they are tempted to neglect the very fundamentals that helped them succeed in the first place. They might even start to feel that the rules don't apply to them.
Success means that people or teams or organizations survive long enough to need maintenance, repairs, and reinvestment. Winners undergo natural aging processes, as people get older, slow down, leave. Facilities, tools, and bags of tricks get older, deteriorate, and run down. Newcomers might get less rigorous training while long-timers forget what they learned. As momentum runs down, people and buildings begin to look run down. Neglect takes on tangible physical manifestations, such as out-of-shape bodies or broken windows. Add to this the pressures in a recession to cut costs and defer expenditures.
Erosion begins by removing a process or discipline. Let's defer those roof repairs for another year... Let's cut out one practice; we already have so many... Let's save time by eliminating the weekly team meeting... The Chernobyl nuclear plant disaster was said to be caused by engineers neglecting small portions of routine safety checks because they had done so before, and nothing had happened. Oops.
Whether you head a company, lead a good cause, or coach your children's soccer teams, your job is to root out complacency. Remember to:

  • Keep up the essential disciplines every single day, not skipping a single one.

  • Keep checking everything carefully.

  • Repair, renew, relearn, and reinvest regularly.

  • Don't rejoice in others' misery, because you could be next.

  • Thank anyone who points out flaws. Listen to disgruntled customers or disaffected constituencies.

  • Treat even small setbacks as occasions for redoubled efforts.
    "Winning is great, but sometimes it takes a loss to get you motivated again. It humbles you down to reality," said a high school athlete in my research. That youth speaks truth! Although he might not be old enough to drive a Toyota, he is headed in the right direction...
    Full text

    Comment: Rather than assuming that one can handle decline by following Rosabeth' well-meant advice, I'd say that failure is inevitable for any organization that actuates in any complex game when played long enough, and that this holds for individuals as well. And this is good so because otherwise there would be no hope for the losers. And even more so: isn't it nice being on the top and at least for a while you can afford to be lazy and negligent and generous with time and money? That's what we want to from success, won't we? What would success be worth, if one had to continue to struggle even when being at the top? The world is cruel, but it needn't be that cruel that even at the top you're not allowed to have fun.

  • Tuesday, February 9, 2010

    The West beyond the point of no return

    Pat Buchanan speaks out some unpleasant truths:
    "... In every Western nation, government is growing beyond the capacity of taxpayers to bear. Deficits and debt are surging. Not enough children are being born to replace parents. The immigrant poor who consume more than they contribute are coming to take the empty places. Seniors and elderly are growing as a share of the population. Companies are saying goodbye to the West and moving offshore to low-wage lands.
    The West begins to look like yesterday, while the East begins to look like tomorrow.
    The West is approaching a crisis of solvency and of democracy..."
    Full text
    Comment: We are earning full harvest of the seeds that were sown when leftist Keynesianism conquered Europe and the US in the late 1960s. This ideology is still with us and the worse conditions get, the more popular government expenditure for war and welfare become. It is an vicious cycle, and the West is digging a hole that gets bigger each decade. Yet there is a difference between the 1970s up to 1990. In the first decade of the 21st century more and more people have become aware that the modern welfare-warfare state has to be ended. After fascism and communism, after absolutism and all kinds of dictatorship including the dictatorship of opinion in democracy the time has come to move beyond the welfare-warfare state towards a libertarian order. And then, there is a second point to make. Buchanan puts all the blame on the West, but in reality most of the so-called emerging countries aren't doing any better. Most of the countries in the developing world have economies that are even more regulated; government in these countries is not only as big  and sometimes bigger than in the West, government in the third world typically is much more corrupt and thoroughly inefficient.

    Fundamentals versus technical analysis

    Euro Gains Against U.S. Dollar, Yen as EU Says It Can Support Greece The euro rose the most in more than three months versus the dollar as European Union officials held out the prospect of aiding Greece if the country made progress in reducing its budget deficit.
    Euro to Drop After Forming `Dead Cross' Against Dollar: Technical Analysis The euro may fall toward a 15-month low against the dollar after forming a so-called dead cross, said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo.
    Euro Still Looks Like the `Sickest Dog in the Litter,' May Drop, RBS Says The euro risks further weakness after dropping below “key” technical levels, according to Royal Bank of Scotland Group Plc.

    Comment: As of now we'll stick with the analysis that high volatility is ahead with no clear trend.

    Seems like irony

    Feb. 9 (Bloomberg) -- The House Financial Services Committee postponed tomorrow’s hearing featuring testimony by Federal Reserve Chairman Ben S. Bernanke on unwinding the central bank’s expansion of liquidity.
    The committee said today in an e-mailed statement that the hearing was postponed because of snow in Washington. The testimony hasn’t been rescheduled.
    To contact the reporter on this story: Scott Lanman in Washington at
    see als Fed's exit strategy
    Comment: The real reason for the delay of the hearing may actually be that Bernanke doesn't have a clue how to do the "unwinding" of the central bank's expansion of liquidity. Snow is cute excuse, indeed better than "a cold".

    Watch what China is buying

    Feb. 9 (Bloomberg) -- China Investment Corp.,(CIC), the nation’s sovereign wealth fund, invested for the first time in the U.S. Oil Fund ... CIC also took a 1.45 million share stake, or 0.4 percent of the total, in the SPDR Gold Trust worth $155.6 million...
    CIC’s investments through the SPDR Gold Trust are equivalent to 145,000 ounces of bullion, or about 0.4 percent of the 33.9 million ounces China’s government maintains, based on data from the International Monetary Fund...
    CIC is considering new investments in resource-related companies this year. They held “early” talks for direct investments in Brazil, the world’s second-biggest iron-ore exporter, and Mexico, the No. 2 silver producer, Chairman Lou Jiwei said at the Asian Financial Forum in Hong Kong on Jan. 20. --
    Full text
    Comment:  It is is an easy task to guess where the future wealth will be: in Euroland or the US where the game is ever more debt accumulation or in China with the acquisition of gold and natural resources. Yet there is still the risk for China that it will miss the boat when the US bonds are crashing and that the Chinese will be left empty-handed with most of their foreign exchange reserves.

    Save the brat

    Feb. 9 (Bloomberg) -- The euro rallied and emerging-market stocks recovered from the worst three-day slide in a year on speculation Greece will get European help to tackle its budget deficit. U.S. stock-index futures advanced...
    Full story
    Comment: What comes under the name of "solidarity", be it the bailout of Greece or the welfare state, is nothing more than the institutionalization of moral hazard - with all its negative consequences on prudence, thrift and rational behavior. We're firmly on the path to misery.

    Setting priorities for financial survival - pay credit card bills, cancel mortgage payment

    , On Monday February 8, 2010, 2:49 pm EST
    Amid high unemployment and sliding home prices, a growing number of struggling consumers are doing what was once considered unthinkable: paying their credit card bills instead of their mortgages...
    The data reflects a "fundamental paradigm shift" in the way consumers prioritize payment of debt obligations, says Ezra Becker, of TransUnion. "This is dramatically different," he says. "It is a clear manifestation of the dynamics that lead up to the recession and the recession itself." --
    Full text

    Comment: Yet what do you do when money does no longer cover credit card bills? What we can expect is a gradual move downwards of the priority level. First comes to cancel mortgage payments, then comes to cancel installment rates, and so on. Each round involves less money until one gets stuck with a barter economy. Welcome to the dark ages.

    Death by debt

    Eric Margolis considers: "One of history’s most important lessons is that politicians should never be given a free hand to borrow money to cover the costs of wars, overseas adventures, or military spending.
    More empires have been brought down by reckless spending than by invaders. The late Soviet Union, which wrecked its economy by buying too many tanks, is the most recent example. Now, the United States appears headed in the same direction..."
    Full text 

    Comment: Once the path of spending funded by borrowing is taken, there is hardly a way back after only a short phase of an unhampered spending spree. This is the trap put in place when temporary good times appear to last forever. First you borrow because you can, then you borrow because you must. At fist you can spend what you borrow to the full, but the longer the debt accumulation goes on, the more of the new debt goes into debt service. Then you are right on the way to the poor house. When governments do it, the whole country is put on the way towards nation-wide poverty. 

    Monday, February 8, 2010

    Who gets hurt by a falling euro?

    Simon Johnson writes: Intensified fears over government debt in the eurozone are pushing the euro weaker against the dollar. The G7 achieved nothing over the weekend, the IMF is stuck on the sidelines, and the Europeans are sitting on their hands at least until a summit on Thursday. There is a lot of trading time between now and then -- and most of it is likely to be spent weakening the euro further.
    The UK also faces serious pressure, and there is no telling where this goes next around the world -- or how it gets there...
    The German authorities are happy to have the euro depreciate this far, and probably would not mind if it moves another 10-20 percent. They are convinced that they must -- in fact, should -- export their way back to acceptable growth levels...
    Germany and France have no objection to euro depreciation -- they are confident that the European Central Bank can prevent this from turning into inflation.
    It's the US that should be concerned about the effect on its exports (and imports; goods from the eurozone become cheaper as the euro falls in value) if the euro moves too far and too fast...
    Read full article

    Comment: The US needs a "strong" dollar to maintain its position as debtor, but a "weak" dollar is needed to pull the US out of the recession. Indeed, it is mainly only exports where an expansion can from. A temporary dollar strength will make matters only much worse for the time to come. For those who still invested in dollar bonds, a window of opportunity (maybe the last one) opens to get rid of the junk.

    Euro to peak out

    Feb. 8 (Bloomberg) -- The euro may have already peaked against the dollar this year and be heading for further declines for the balance of 2010, according to MIG Bank SA...

    Comment:  The question no longer is which currency is better than the other currencies but which currency is less bad than the other currencies. Our prognosis is that we will enter a phase of high volatility with no clear direction.

    Twilight of the welfare state

    British Mail writes: ".. Record numbers of pensioners were plunged into insolvency last year amid warnings the number will climb even higher in 2010. Disturbingly, the number of ' penniless pensioners' becoming insolvent is rising faster than any other age group.
    Nearly 7,000 lost their battle to keep financially afloat in 2009, tipped over the edge by large mortgages, personal loans and credit cards..."
    Read more
    British Telegraph writes: "More than 10,000 Britons declared insolvent every month.More than 10,000 Britons are being declared insolvent every month, the highest level on record, official figures have shown."
    Read more
    Comment: The age of frivolous debt is coming to an end.

    Sunday, February 7, 2010

    No end in sight for debt and deficits

    Feb. 7 (Bloomberg) -- Group of Seven finance ministers pledged to press ahead with economic stimulus measures even as investors intensify their focus on mounting budget deficits...
    Read more
    Comment: What we're seeing is the making of a mega disaster, a disaster that will be much bigger than the disaster that would have come with a temporary market breakdown in 2007 or 2008.
    The more governments spend and increase their debt and deficits for useless "stimulus measures", the less likely a sound recovery will become.

    Confidence in the euro

    German government economic advisor Peter Bofinger is confident that the euro will hold:
    SPIEGEL ONLINE: But isn't that precisely what is needed right now? The financial problems of the southern European members are putting pressure on the entire euro zone. Some of your fellow economists fear a crash would trigger a domino effect and cause a rapid plunge in the value of the euro.
    Bofinger: Some of my fellow economists are going too far. Compared to other currency zones, the euro zone is doing a lot better than many claim. The national debts and new state borrowing is lower than in the United States. And in an emergency it could also cope with a Greek bankruptcy. The country produces just 2.6 percent of the euro zone's GDP.
    SPIEGEL ONLINE: Still, the loss of faith in the euro would be massive. And regarding national debt, debt within the euro zone is currently about 88 percent of its GDP. You call that figure low?
    Bofinger: It is not low, but it is lower than in the US. There, the national debt is 92 percent of GDP. In Japan, it is even 197 percent. And the United Kingdom's budget deficit is far worse than that of the euro zone. And as far as a possible loss of confidence is concerned, let me point out that the state of California has been on the verge of bankruptcy for months and its share of the US's GDP is about 13 percent. Viewed from that perspective, my fear of a domino effect is limited...
    Read more

    Schlachtfest of the PIGS

    The debt crisis of the PIIGS countries demonstrates that there is no safety in government bonds. The debt crisis of the European fringe countries is only the beginning. Along with the PIIGS, the big swines (Germany, France, the US, Japan) will also get slaughtered.
    In the course of the collapse of the global debt pyramide, the major currencies will get crushed by hyperinflation. Prepare for the coming currency tsunami.
    For the elder people, pensions will go up in smoke, while the youngsters, even with the best available education, will find no jobs.
    A cynic may add that there is the good news that people will be too hungry for riots.

    Saturday, February 6, 2010

    Don't bank on China

    Can China's Model of Authoritarian Growth Survive? Yang Yao
    February 2, 2010
    YANG YAO is Deputy Dean of the National School of Development and the Director of the China Center for Economic Research at Peking University.
    "Since China began undertaking economic reforms in 1978, its economy has grown at a rate of nearly ten percent a year, and its per-capita GDP is now twelve times greater than it was three decades ago. Many analysts attribute the country's economic success to its unconventional approach to economic policy -- a combination of mixed ownership, basic property rights, and heavy government intervention...

    But, in fact, over the last 30 years, the Chinese economy has moved unmistakably toward the market doctrines of neoclassical economics, with an emphasis on prudent fiscal policy, economic openness, privatization, market liberalization, and the protection of private property...
    China's astronomic growth has left it in a precarious situation, however. Other developing countries have suffered from the so-called middle-income trap -- a situation that often arises when a country's per-capita GDP reaches the range of $3,000 to $8,000, the economy stops growing, income inequality increases, and social conflicts erupt. China has entered this range, and the warning signs of a trap loom large...
    Read more:

    Running away from the foxhole right into the lion's den

    Euro Tumbles as Budget Deficit Turmoil Damps Economic Outlook
    By Inyoung Hwang
    Feb. 6 (Bloomberg) -- The euro headed for a fourth weekly loss versus the dollar and yen on concern budget deficits in Greece and other European nations will hamper the region’s economic recovery.
    The 16-nation currency yesterday tumbled to an almost one- year low against the yen and to the weakest level in eight months versus the dollar as investors bet sovereign risk crises in nations such as Greece, Portugal and Spain will force policy makers to keep interest rates at record lows for longer. The Swiss franc fell from its highest level in 15 months against the euro as traders speculated the nation’s central bank sold the currency to curb its strength.
    “Greece was uncovered, and the bloodhounds are out now in the market looking for fiscal instabilities,” said Jessica Hoversen, a foreign-exchange and fixed-income analyst at the futures broker MF Global Ltd. in Chicago. “In the recent week, there has been increased rhetoric about Portugal and Spain. It’s putting pressure on the euro.”...

    Down with the euro

    Feb. 5 (Bloomberg) -- Futures traders increased bets to a record level that the euro will decline against the U.S. dollar on concern budget deficits in Greece and other European nations will hamper the region’s economic growth.
    The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, the net position, was 43,741 on on Feb. 2, compared with 39,539 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show...

    On pigs and piigs and other problems with the swine acronym

    Blaming China

    Feb. 6 (Bloomberg) -- Major economies with inflexible currencies must consider strengthening them if the global economy is to be weaned off its dependence on U.S. spending and Asian savings, according to a report prepared for a meeting of finance chiefs from the Group of Seven.
    “Countries with inflexible nominal exchange rates must permit greater flexibility in real exchange rates either through higher inflation or a nominal appreciation of their currency,” the document, drawn up by Canada’s Finance Ministry and obtained by Bloomberg News, said.
    G-7 finance ministers and central bankers are meeting in Iqaluit, Canada, today as policy makers seek to avoid a widening of distortions such as the U.S. trade deficit and the Chinese current-account surplus, which economists blame for helping deepen the worst postwar worldwide recession.
    “While global imbalances were not the primary cause of the financial crisis, there is little doubt that they were an important contributor to the recession we faced,” the G-7 document said. “For global growth to be sustainable, it must be balanced.”

    Monday, February 1, 2010

    Until bankruptcy will us part

    MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger:
    WASHINGTON – President Barack Obama sent Congress a $3.83 trillion budget on Monday that would pour more money into the fight against high unemployment, boost taxes on the wealthy and freeze spending for a wide swath of government programs.
    The deficit for this year would surge to a record-breaking $1.56 trillion, topping last year's then unprecedented $1.41 trillion gap..."

    In his 1776 Adam Smith wrote in his Wealth of Nations
    "When national debts have once been accumulated to a certain degree, there is a scare, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it hs ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed on, but alwasy ba real one, thourgh frequently be a pretended payment."
    Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Bk. V, CH. III, PT. V
    Of Public Debts