Tuesday, August 18, 2009
Tuesday, August 4, 2009
My comments
The dollar is falling against other currencies. A lot of the run up in equities can be thought as a hedge against the dollar's loss in value.
This piece, also seen in Market Skeptics suggests an ominous future for the dollar. It means, for us, enormous deficits, high interest rates on less than top rated US debt, and high unemployment
The dollar is falling against other currencies. A lot of the run up in equities can be thought as a hedge against the dollar's loss in value.
This piece, also seen in Market Skeptics suggests an ominous future for the dollar. It means, for us, enormous deficits, high interest rates on less than top rated US debt, and high unemployment
ht leap 2020 eu
LEAP/E2020 believes that the next stage of the crisis will result from a Chinese dream. Indeed, what on earth can China be dreaming of, caught – if we listen to Washington – in the “dollar trap” of its USD 1,400-billion worth of USD-denominated assets? If we believe US leaders and their scores of media experts, China is only dreaming of remaining a prisoner, and even intensifying the severity of its prison conditions by always buying more US Treasuries and Dollars.
In fact, everyone knows what prisoners dream of. They dream of escaping of course, of getting away from prison. Therefore, LEAP/E2020 has no doubt that Beijing is constantly striving to find the means of disposing, as quickly as possible, of the mountain of « toxic » assets which US T-Bonds and Dollars have become, keeping the wealth of 1,300 billion Chinese citizens prisoner.
In any good escape story, the prisoners do not spend their time making announcements that they are preparing to get away. In fact, on the contrary, they tend to avoid arousing their guards’ vigilance. According to our team, the Chinese declaration of March 24th asking for the replacement of the US dollar by an international reserve currency was both a “testing of the waters” and a warning: a direct poll to make an assessment of the forces at work (within the G20 in particular) when it comes to moving to a post-Dollar era (1), and a constructive and destructive (depending of the reaction to the previous idea) warning sent to the various global players. A responsible player (and Beijing is one) must send discreet signals to the other players likely to follow or help “planning the job”. The preparation (2) and implementation of a « Great Escape » (3) requires the collaboration of several partners and no one who would have been willing to co-operate must end up in trouble because he was not informed (4).
Two estimates of Chinese Foreign Asset Growth (USD billion) - Sources: Central Bank of China / Brad Setser, 01/2009
Two estimates of Chinese Foreign Asset Growth (USD billion) - Sources: Central Bank of China / Brad Setser, 01/2009
In any event, thanks to the Central Bank of China’s “testing of the waters”, Chinese authorities have the following four beliefs confirmed:
1. A large part of the other members of the G20 are clearly in favour of a quick shift (5) to a post-Dollar era, in particular Russia, India, South Africa, Argentina, Brazil… therefore Beijing will not be alone when the time for a “Great leap forward ” (6) comes. On the contrary, China will be accompanied by a significant part of Latin America, Africa and Asia. The recent Yuan swap deals agreed with some of these countries is already paving the way in this direction (7).
2. The United States and the United Kingdom are refusing to consider any move in the direction of a post-Dollar era. Timothy Geithner’s blunder, when he considered discussing the Chinese proposal, was quickly corrected by US political leaders, but it revealed an interesting situation for Beijing. Geithner is Wall Street’s man in Obama’s team, and his blunder suggests that the financial Anglo-Saxon community would in fact be quite open to discussing any move likely to maintain their financial privileges, even if it means the end of the “Dollar era”. The « Dollar wall » is not so solid when it leans on « Wall Street ». Financial players have little attachment to a particular territory (this characteristic dates back to long before our current globalised system). In contrast, Washington still does not want to hear anything about the replacement of the US Dollar as global reserve currency, preferring to listen to and believe in soothing experts’ talk instead (8). We know what the result was in the case of subprime loans, the financial bubble, Wall Street’s banks, AIG, TARP, the recession, and so on.
3. The Europeans (except UK) are their usual selves, unable to make any really firm decision with regard to their former US protector (9). They are successful in resisting Washington’s orders, but they are not able to impose an agenda that would displease the United States. Nevertheless, thanks to their multilateral nature and numerous relays, it is obvious that, once the end of the « Dollar-era » has become irreversible, they would bring all their know-how and lobbying capacity to bear the creation of a new international currency, independent of any particular country. That is the reason why China launched the idea that the SDR (10) could be an alternative to the Dollar, proving that it was open to other suggestions than the Yuan (key condition for European support in the future).
4. Beijing is resorting to increasingly clear and bold announcements, always gradual, sometimes even followed by vague denials, coming from less important sources but soon widely circulated by the international financial media. It is thus increasing its freedom of speech (and of action, as, when it comes to monetary issues, what is said can be a lethal weapon or a soothing remedy) without significantly affecting the value of US Treasuries or the Dollar.
This last aspect is indeed the ultimate requirement of the Chinese government: to avoid by any means a collapse in the value of US Treasuries and the Dollar before it has escaped the « Dollar trap ». LEAP/E2020 believes that, in the coming months, China will reveal the exact meaning of this requirement. Is it a goal or a necessity? If it is a goal, then Washington, London and the international financial media are right: Beijing will follow in Washington’s footsteps, merely trying to enhance its influence on US decisions. On the contrary, if it is a necessity, then our team is right and Chinese leaders will strive to sell off their US-Treasuries and Dollars at the best « possible » price, choosing the best « possible » moment, avoiding creating turmoil likely to lower the value of these assets for as long as « possible » (of course, China has been thinking about all the « possibilities » before launching its « escape » plan). But, in contrast to the first option, once all “possibilities” have expired, Chinese leaders will all of a sudden contribute to accelerate the end of the Dollar-era; or, more likely, they will calmly announce that for a number of reasons beyond their control (11), they can no longer continue to play the role of US imbalances’ stabilizers.
Chinese US asset purchases vs. Chinese estimated reserve per category of US assets (green: Treasuries and deposits / Blue: Government Sponsored Enterprises (Fannie Mae, Freddy Mac, etc) / Yellow: Corporate bonds/equities / Red: Annualized estimated reserv
Chinese US asset purchases vs. Chinese estimated reserve per category of US assets (green: Treasuries and deposits / Blue: Government Sponsored Enterprises (Fannie Mae, Freddy Mac, etc) / Yellow: Corporate bonds/equities / Red: Annualized estimated reserv
Our anticipation, in this regard, is based on a number of developing trends which, in the last few months, have been confirming our analyses. Since the end of 2008, the Chinese government has undertaken to dispose of 50 to 100 billion USD worth of USD-denominated assets every month. Taking advantage of record-low prices in a large number of assets useful to the Chinese economy (minerals, farmland, energy, EU or Asian corporate shares – not US ones, this is not a minor detail), Beijing « went shopping » in line with its first requirement, making the best of its USD-denominated assets, i.e. exchanging them for non US assets, thus allowing it to go forward on the way to the “Great Escape”.
We would like to emphasise on just how fast this process is taking place. Despite the lack of transparency in the methods used (a precondition to prevent a collapse of US Dollar and Treasuries before the moment chosen by Beijing), a remarkable study has been conducted by Brad W. Setser and Arpana Pandey, published in January 2009 by the Council on Foreign Relations, which was an evaluation of Chinese foreign exchange reserves estimated to total around USD 2,300 billion at the end of 2008 (i.e. more than 50 percent of China’s GDP (12)), of which there were 1,700 billion worth of USD-denominated assets (900 billion in Treasuries, around 550 billion in GSE bonds (Fannie Mae, Freddie Mac…), close to 200 billion in corporate assets and 40 billion in short-term deposits). The author of the study comes to the logical conclusion that Beijing has no further interest in adding to this huge amount of assets, increasingly at risk because of the financial and economic decisions made by the US in addressing the crisis (13), now at risk of loss, and for which, in future, funds will no longer be available due to collapsing trade surpluses and the lack of inward flows of foreign investment.
Top: Chinese foreign exchange reserves and share of US assets / Bottom: Idem as a % - Source : BCA Research, 12/2008
Top: Chinese foreign exchange reserves and share of US assets / Bottom: Idem as a % - Source : BCA Research, 12/2008
Very logically, Beijing is now disposing of these huge surplus exchange reserves which keep Chinese leaders prisoners of US decisions with no further advantage for their country, as remarkably described by Rachel Zembia in an article published by RGE Monitor on 02/21/2009: loan credits to ASEAN countries (14), swap agreements, green light for 400 Chinese enterprises to trade in Yuan with Asian countries (15), loan credits to African states and Russia, long-term special oil rates negotiated with Persian Gulf states, loan credits to oil companies in Brazil and Abu Dhabi, purchase of European and Japanese company shares (no US shares, strangely…), etc. The author emphasizes the fact that these agreements would include guarantees for Chinese companies to have access to these resources. Contrary to appearances, what is really at stake in these deals is Beijing’s discreet disposal of its US Treasuries and Dollars in exchange for assets that the country needs, moreover available at record-low prices at a time when US Treasuries and Dollars still have some value.
With regard to US Treasuries, China has largely stopped buying them (purchases decreased by USD 146 billion in the first quarter of 2009 compared to the same period last year, representing an increase of only USD 7.7 billion! (16)) and only then purchasing short term (three month) Treasuries (17)!
Between the fact that it has nearly put a complete end to its purchase of US Treasuries and that it is accelerating the pace of its« global shopping » for more than USD 50 billion per month (swap agreements included), it appears that, between the end of 2008 and the end of summer 2009, China will have disposed of nearly 600 billion worth of USD-denominated assets, and it will have failed to purchase between USD 500 and USD 1,000 billion worth of US Treasuries that the Obama administration has begun to issue to finance its extravagant borrowings. LEAP/E2020 estimates that these two amounts added together give a clear idea of Beijing’s impact on the « Dollar-era » at the end of summer 2009, at the end of the US fiscal year. China’s disposals and failed purchases of US Treasuries alone will then represent a shortfall of between USD 1,100 billion and USD 1,600 billion in the United States’ financial needs. Ben Bernanke will be compelled to print Dollars in a (vain) effort to prevent his country from defaulting on its debt.
US monetary base - Source : Réserve fédérale US, 03/2009
US monetary base - Source : Réserve fédérale US, 03/2009
In the knowledge that each time Bernanke declares that the Fed will purchase its own US Treasuries, they lose 10 percent in one day, i.e. USD 140 billion compared to other international currencies, Chinese leaders will certainly find it acceptable to sacrifice USD 400 or 500 billion.
LEAP/E2020 believes that, at this stage, they will consider that they made the best « possible » use of their USD-denominated assets. Then, they would better be among those who push the « button » - or who do not try to prevent it. The second phase of China’s “Great Escape” out of the Dollar will then begin, depending on the behavior of the other key players. Either the Yuan takes its place as international reserve currency along with the Euro, Yen, Ruble, Real, or a process creating a new international reserve currency based on a basket of these currencies will begin. The Dollar will then be out of the race and the G20 reduced to a G18 (without the United States and the United Kingdom, but with Japan no longer able to escape the Chinese sphere of influence). Otherwise, the process of global geopolitical dislocation, described in GEAB N°32, will be underway, based on economic blocks, each of them trading in their own specific reserve currency.
---------
Notes:
(1) The corridors at the London G20 Summit were full of discussions about a post-Dollar era. The feedback we got from our own initiative (the Open Letter to the G20 leaders) already proves it. So the declaration of the Central Bank of China on the same day was certainly at the centre of all the serious conversations (not those covered by the media) during and after the London Summit.
(2) Beijing has recently launched a think-tank dedicated to the global economic crisis intended to help Chinese leaders with their decisions. Regardless of the increasing traffic observed since the end of 2008 on LEAP/E2020’s websites coming from China (and Japan too, including spontaneous translations of our public announcements on a variety of websites and blogs), this initiative clearly suggests that China now wishes to distance itself from US and UK analyses which represented, until then, 90 percent of Chinese experts’ sources. Source: ChinaDaily, 03/21/2009
(3) The movie of the same name, based on a true story, shows nothing else. In real life, the lack of meticulous preparation would doom the escape to partial failure.
(4) The main players are perfectly aware that capital is now flowing out of the US at the precise moment when the country’s huge public borrowing requirements substantially increase the need for foreign capital. In January 2009, the net amount of capital that left the US was USD 150-billion. Source: US Department of Treasury, 03/16/2009
(5) In this case, our researchers are talking months, not years (like the experts, who « concede » that there is a problem of status with the Dollar, would like to believe), because the size of the out-of-control US deficits represent a major threat in the short-term for the entire monetary system.
(6) China’s great political leap, which took place in the 1950s, entailed many disastrous collateral effects (millions of people died of the resulting hunger), but no one can tell whether or not the political leadership of the Chinese communist party is ready to take this kind of risk in the event its own survival and/or the country’s internal stability are at stake. European and American analysts pretend to know what Chinese leaders have in mind, because they have a tendency to think of them in their own image. According to our team, the post-Dollar era (if executed in an organized manner, by means of a new international reserve currency based on a basket of currencies, or chaotically by means of a sudden and non-negotiated end to the Dollar era) marks first of all a post-European era (or post-Western, if we estimate that there is an American specificity as far as core values are concerned), and that such an era has surprises in store for Europe- and West-centered people. Those who doubt it should read these remarks from a Chinese central banker on China’s « superior system advantage ». Source: MarketWatch, 04/26/2009
(7) After South Korea, Malaysia and Indonesia, it was the turn of Argentina to sign a swap agreement with China for a USD 14.5-billion equivalent in their currency, thus allowing each country’s businesses to bypass the US Dollar in trade and strengthening the Yuan’s position as international exchange currency outside Asia. Source: AustralianNews, 04/01/2009
(8) This Los Angeles Times article, dated 04/03/2009, is one of the broadest-minded on this subject! But, it is a fact that China is far closer to Sunset Boulevard than to the Beltway.
(9) We say « former protector » because, as the last NATO summit again proved, Europeans and Americans no longer agree at all on the nature of current threats. The war in Afghanistan is becoming a US war only and the Europeans are mostly preoccupied by the reorganization of their strategic relationship with Moscow. In short, the Alliance (with France a member again, as our team announced when Nicolas Sarkozy was elected) is now nothing more than a senior club in need of common goals other than spending some time together and pretending that everyone gets on as well as they did 60 years ago. Unfortunately, « old age is a shipwreck » as Charles De Gaulle used to say.
(10) The idea is unrealistic. Indeed, SDR were killed by the US around 40 years ago. To have any chance of success, a brand new currency must be created (especially as, called« Special Drawing Rights », it would be very unlikely to enhance its reputation outside the strict circle of monetary experts).
(11) For which they will hold the US responsible: extravagant deficits, incapacity to stimulate economy… the reasons will be many at the end of summer 2009.
(12) On this subject, our team emphasizes that, contrary to the suggestions contained in Chinese leaders’ recent enthusiastic speeches suggest, China’s economic situation will not significantly improve this year. Between collapsing exports, an exploding housing bubble and soaring unemployment, Chinese GDP will remain stable in 2009 (or increase 2 to 3 percent maximum). This situation will strengthen Beijing’s intention to turn its back on all the strategies which led it into this situation for which the scapegoat is obvious. Sources: Financial Times, 04/13/2009; Chinaview, 04/02/2009; New York Times, 04/02/2009; ChinaDaily, 03/19/2009
(13) For instance, the AAA rating of the United States is a complete farce, as this article published in SeekingAlpha on 30/03/2009 explains. The whole country, companies, households, public services, are acquiring junk-bond status… but the federal government is still rated AAA! Rating agencies (all of whom are American) have well deserved the USD 400 billion they were paid by the federal government to help them in assessing the value of USD 1,000 billion worth of toxic assets that it is about to purchase from the banks. Assets which, of course, were rated AAA two years ago by the same agencies. But Beijing, as well as the rest of the world, has now fully understood the fraud. Source: BusinessInsider, 04/07/2009
LEAP/E2020 believes that the next stage of the crisis will result from a Chinese dream. Indeed, what on earth can China be dreaming of, caught – if we listen to Washington – in the “dollar trap” of its USD 1,400-billion worth of USD-denominated assets? If we believe US leaders and their scores of media experts, China is only dreaming of remaining a prisoner, and even intensifying the severity of its prison conditions by always buying more US Treasuries and Dollars.
In fact, everyone knows what prisoners dream of. They dream of escaping of course, of getting away from prison. Therefore, LEAP/E2020 has no doubt that Beijing is constantly striving to find the means of disposing, as quickly as possible, of the mountain of « toxic » assets which US T-Bonds and Dollars have become, keeping the wealth of 1,300 billion Chinese citizens prisoner.
In any good escape story, the prisoners do not spend their time making announcements that they are preparing to get away. In fact, on the contrary, they tend to avoid arousing their guards’ vigilance. According to our team, the Chinese declaration of March 24th asking for the replacement of the US dollar by an international reserve currency was both a “testing of the waters” and a warning: a direct poll to make an assessment of the forces at work (within the G20 in particular) when it comes to moving to a post-Dollar era (1), and a constructive and destructive (depending of the reaction to the previous idea) warning sent to the various global players. A responsible player (and Beijing is one) must send discreet signals to the other players likely to follow or help “planning the job”. The preparation (2) and implementation of a « Great Escape » (3) requires the collaboration of several partners and no one who would have been willing to co-operate must end up in trouble because he was not informed (4).
Two estimates of Chinese Foreign Asset Growth (USD billion) - Sources: Central Bank of China / Brad Setser, 01/2009
Two estimates of Chinese Foreign Asset Growth (USD billion) - Sources: Central Bank of China / Brad Setser, 01/2009
In any event, thanks to the Central Bank of China’s “testing of the waters”, Chinese authorities have the following four beliefs confirmed:
1. A large part of the other members of the G20 are clearly in favour of a quick shift (5) to a post-Dollar era, in particular Russia, India, South Africa, Argentina, Brazil… therefore Beijing will not be alone when the time for a “Great leap forward ” (6) comes. On the contrary, China will be accompanied by a significant part of Latin America, Africa and Asia. The recent Yuan swap deals agreed with some of these countries is already paving the way in this direction (7).
2. The United States and the United Kingdom are refusing to consider any move in the direction of a post-Dollar era. Timothy Geithner’s blunder, when he considered discussing the Chinese proposal, was quickly corrected by US political leaders, but it revealed an interesting situation for Beijing. Geithner is Wall Street’s man in Obama’s team, and his blunder suggests that the financial Anglo-Saxon community would in fact be quite open to discussing any move likely to maintain their financial privileges, even if it means the end of the “Dollar era”. The « Dollar wall » is not so solid when it leans on « Wall Street ». Financial players have little attachment to a particular territory (this characteristic dates back to long before our current globalised system). In contrast, Washington still does not want to hear anything about the replacement of the US Dollar as global reserve currency, preferring to listen to and believe in soothing experts’ talk instead (8). We know what the result was in the case of subprime loans, the financial bubble, Wall Street’s banks, AIG, TARP, the recession, and so on.
3. The Europeans (except UK) are their usual selves, unable to make any really firm decision with regard to their former US protector (9). They are successful in resisting Washington’s orders, but they are not able to impose an agenda that would displease the United States. Nevertheless, thanks to their multilateral nature and numerous relays, it is obvious that, once the end of the « Dollar-era » has become irreversible, they would bring all their know-how and lobbying capacity to bear the creation of a new international currency, independent of any particular country. That is the reason why China launched the idea that the SDR (10) could be an alternative to the Dollar, proving that it was open to other suggestions than the Yuan (key condition for European support in the future).
4. Beijing is resorting to increasingly clear and bold announcements, always gradual, sometimes even followed by vague denials, coming from less important sources but soon widely circulated by the international financial media. It is thus increasing its freedom of speech (and of action, as, when it comes to monetary issues, what is said can be a lethal weapon or a soothing remedy) without significantly affecting the value of US Treasuries or the Dollar.
This last aspect is indeed the ultimate requirement of the Chinese government: to avoid by any means a collapse in the value of US Treasuries and the Dollar before it has escaped the « Dollar trap ». LEAP/E2020 believes that, in the coming months, China will reveal the exact meaning of this requirement. Is it a goal or a necessity? If it is a goal, then Washington, London and the international financial media are right: Beijing will follow in Washington’s footsteps, merely trying to enhance its influence on US decisions. On the contrary, if it is a necessity, then our team is right and Chinese leaders will strive to sell off their US-Treasuries and Dollars at the best « possible » price, choosing the best « possible » moment, avoiding creating turmoil likely to lower the value of these assets for as long as « possible » (of course, China has been thinking about all the « possibilities » before launching its « escape » plan). But, in contrast to the first option, once all “possibilities” have expired, Chinese leaders will all of a sudden contribute to accelerate the end of the Dollar-era; or, more likely, they will calmly announce that for a number of reasons beyond their control (11), they can no longer continue to play the role of US imbalances’ stabilizers.
Chinese US asset purchases vs. Chinese estimated reserve per category of US assets (green: Treasuries and deposits / Blue: Government Sponsored Enterprises (Fannie Mae, Freddy Mac, etc) / Yellow: Corporate bonds/equities / Red: Annualized estimated reserv
Chinese US asset purchases vs. Chinese estimated reserve per category of US assets (green: Treasuries and deposits / Blue: Government Sponsored Enterprises (Fannie Mae, Freddy Mac, etc) / Yellow: Corporate bonds/equities / Red: Annualized estimated reserv
Our anticipation, in this regard, is based on a number of developing trends which, in the last few months, have been confirming our analyses. Since the end of 2008, the Chinese government has undertaken to dispose of 50 to 100 billion USD worth of USD-denominated assets every month. Taking advantage of record-low prices in a large number of assets useful to the Chinese economy (minerals, farmland, energy, EU or Asian corporate shares – not US ones, this is not a minor detail), Beijing « went shopping » in line with its first requirement, making the best of its USD-denominated assets, i.e. exchanging them for non US assets, thus allowing it to go forward on the way to the “Great Escape”.
We would like to emphasise on just how fast this process is taking place. Despite the lack of transparency in the methods used (a precondition to prevent a collapse of US Dollar and Treasuries before the moment chosen by Beijing), a remarkable study has been conducted by Brad W. Setser and Arpana Pandey, published in January 2009 by the Council on Foreign Relations, which was an evaluation of Chinese foreign exchange reserves estimated to total around USD 2,300 billion at the end of 2008 (i.e. more than 50 percent of China’s GDP (12)), of which there were 1,700 billion worth of USD-denominated assets (900 billion in Treasuries, around 550 billion in GSE bonds (Fannie Mae, Freddie Mac…), close to 200 billion in corporate assets and 40 billion in short-term deposits). The author of the study comes to the logical conclusion that Beijing has no further interest in adding to this huge amount of assets, increasingly at risk because of the financial and economic decisions made by the US in addressing the crisis (13), now at risk of loss, and for which, in future, funds will no longer be available due to collapsing trade surpluses and the lack of inward flows of foreign investment.
Top: Chinese foreign exchange reserves and share of US assets / Bottom: Idem as a % - Source : BCA Research, 12/2008
Top: Chinese foreign exchange reserves and share of US assets / Bottom: Idem as a % - Source : BCA Research, 12/2008
Very logically, Beijing is now disposing of these huge surplus exchange reserves which keep Chinese leaders prisoners of US decisions with no further advantage for their country, as remarkably described by Rachel Zembia in an article published by RGE Monitor on 02/21/2009: loan credits to ASEAN countries (14), swap agreements, green light for 400 Chinese enterprises to trade in Yuan with Asian countries (15), loan credits to African states and Russia, long-term special oil rates negotiated with Persian Gulf states, loan credits to oil companies in Brazil and Abu Dhabi, purchase of European and Japanese company shares (no US shares, strangely…), etc. The author emphasizes the fact that these agreements would include guarantees for Chinese companies to have access to these resources. Contrary to appearances, what is really at stake in these deals is Beijing’s discreet disposal of its US Treasuries and Dollars in exchange for assets that the country needs, moreover available at record-low prices at a time when US Treasuries and Dollars still have some value.
With regard to US Treasuries, China has largely stopped buying them (purchases decreased by USD 146 billion in the first quarter of 2009 compared to the same period last year, representing an increase of only USD 7.7 billion! (16)) and only then purchasing short term (three month) Treasuries (17)!
Between the fact that it has nearly put a complete end to its purchase of US Treasuries and that it is accelerating the pace of its« global shopping » for more than USD 50 billion per month (swap agreements included), it appears that, between the end of 2008 and the end of summer 2009, China will have disposed of nearly 600 billion worth of USD-denominated assets, and it will have failed to purchase between USD 500 and USD 1,000 billion worth of US Treasuries that the Obama administration has begun to issue to finance its extravagant borrowings. LEAP/E2020 estimates that these two amounts added together give a clear idea of Beijing’s impact on the « Dollar-era » at the end of summer 2009, at the end of the US fiscal year. China’s disposals and failed purchases of US Treasuries alone will then represent a shortfall of between USD 1,100 billion and USD 1,600 billion in the United States’ financial needs. Ben Bernanke will be compelled to print Dollars in a (vain) effort to prevent his country from defaulting on its debt.
US monetary base - Source : Réserve fédérale US, 03/2009
US monetary base - Source : Réserve fédérale US, 03/2009
In the knowledge that each time Bernanke declares that the Fed will purchase its own US Treasuries, they lose 10 percent in one day, i.e. USD 140 billion compared to other international currencies, Chinese leaders will certainly find it acceptable to sacrifice USD 400 or 500 billion.
LEAP/E2020 believes that, at this stage, they will consider that they made the best « possible » use of their USD-denominated assets. Then, they would better be among those who push the « button » - or who do not try to prevent it. The second phase of China’s “Great Escape” out of the Dollar will then begin, depending on the behavior of the other key players. Either the Yuan takes its place as international reserve currency along with the Euro, Yen, Ruble, Real, or a process creating a new international reserve currency based on a basket of these currencies will begin. The Dollar will then be out of the race and the G20 reduced to a G18 (without the United States and the United Kingdom, but with Japan no longer able to escape the Chinese sphere of influence). Otherwise, the process of global geopolitical dislocation, described in GEAB N°32, will be underway, based on economic blocks, each of them trading in their own specific reserve currency.
---------
Notes:
(1) The corridors at the London G20 Summit were full of discussions about a post-Dollar era. The feedback we got from our own initiative (the Open Letter to the G20 leaders) already proves it. So the declaration of the Central Bank of China on the same day was certainly at the centre of all the serious conversations (not those covered by the media) during and after the London Summit.
(2) Beijing has recently launched a think-tank dedicated to the global economic crisis intended to help Chinese leaders with their decisions. Regardless of the increasing traffic observed since the end of 2008 on LEAP/E2020’s websites coming from China (and Japan too, including spontaneous translations of our public announcements on a variety of websites and blogs), this initiative clearly suggests that China now wishes to distance itself from US and UK analyses which represented, until then, 90 percent of Chinese experts’ sources. Source: ChinaDaily, 03/21/2009
(3) The movie of the same name, based on a true story, shows nothing else. In real life, the lack of meticulous preparation would doom the escape to partial failure.
(4) The main players are perfectly aware that capital is now flowing out of the US at the precise moment when the country’s huge public borrowing requirements substantially increase the need for foreign capital. In January 2009, the net amount of capital that left the US was USD 150-billion. Source: US Department of Treasury, 03/16/2009
(5) In this case, our researchers are talking months, not years (like the experts, who « concede » that there is a problem of status with the Dollar, would like to believe), because the size of the out-of-control US deficits represent a major threat in the short-term for the entire monetary system.
(6) China’s great political leap, which took place in the 1950s, entailed many disastrous collateral effects (millions of people died of the resulting hunger), but no one can tell whether or not the political leadership of the Chinese communist party is ready to take this kind of risk in the event its own survival and/or the country’s internal stability are at stake. European and American analysts pretend to know what Chinese leaders have in mind, because they have a tendency to think of them in their own image. According to our team, the post-Dollar era (if executed in an organized manner, by means of a new international reserve currency based on a basket of currencies, or chaotically by means of a sudden and non-negotiated end to the Dollar era) marks first of all a post-European era (or post-Western, if we estimate that there is an American specificity as far as core values are concerned), and that such an era has surprises in store for Europe- and West-centered people. Those who doubt it should read these remarks from a Chinese central banker on China’s « superior system advantage ». Source: MarketWatch, 04/26/2009
(7) After South Korea, Malaysia and Indonesia, it was the turn of Argentina to sign a swap agreement with China for a USD 14.5-billion equivalent in their currency, thus allowing each country’s businesses to bypass the US Dollar in trade and strengthening the Yuan’s position as international exchange currency outside Asia. Source: AustralianNews, 04/01/2009
(8) This Los Angeles Times article, dated 04/03/2009, is one of the broadest-minded on this subject! But, it is a fact that China is far closer to Sunset Boulevard than to the Beltway.
(9) We say « former protector » because, as the last NATO summit again proved, Europeans and Americans no longer agree at all on the nature of current threats. The war in Afghanistan is becoming a US war only and the Europeans are mostly preoccupied by the reorganization of their strategic relationship with Moscow. In short, the Alliance (with France a member again, as our team announced when Nicolas Sarkozy was elected) is now nothing more than a senior club in need of common goals other than spending some time together and pretending that everyone gets on as well as they did 60 years ago. Unfortunately, « old age is a shipwreck » as Charles De Gaulle used to say.
(10) The idea is unrealistic. Indeed, SDR were killed by the US around 40 years ago. To have any chance of success, a brand new currency must be created (especially as, called« Special Drawing Rights », it would be very unlikely to enhance its reputation outside the strict circle of monetary experts).
(11) For which they will hold the US responsible: extravagant deficits, incapacity to stimulate economy… the reasons will be many at the end of summer 2009.
(12) On this subject, our team emphasizes that, contrary to the suggestions contained in Chinese leaders’ recent enthusiastic speeches suggest, China’s economic situation will not significantly improve this year. Between collapsing exports, an exploding housing bubble and soaring unemployment, Chinese GDP will remain stable in 2009 (or increase 2 to 3 percent maximum). This situation will strengthen Beijing’s intention to turn its back on all the strategies which led it into this situation for which the scapegoat is obvious. Sources: Financial Times, 04/13/2009; Chinaview, 04/02/2009; New York Times, 04/02/2009; ChinaDaily, 03/19/2009
(13) For instance, the AAA rating of the United States is a complete farce, as this article published in SeekingAlpha on 30/03/2009 explains. The whole country, companies, households, public services, are acquiring junk-bond status… but the federal government is still rated AAA! Rating agencies (all of whom are American) have well deserved the USD 400 billion they were paid by the federal government to help them in assessing the value of USD 1,000 billion worth of toxic assets that it is about to purchase from the banks. Assets which, of course, were rated AAA two years ago by the same agencies. But Beijing, as well as the rest of the world, has now fully understood the fraud. Source: BusinessInsider, 04/07/2009
Monday, August 3, 2009
more from business insider
Mort Zuckerman (of all people) has an op-ed in today's WSJ explaining why the jobs situation, which is quite clearly horrific, is even worse than you think.
Here are his points, condensed
* 185,000 workers in the June number were the product of statistical sampling, but could not be verified by the government.
* Companies are asking employees to take unpaid leave.
* 1.4 million unemployed workers weren't counted because they're not searching for work.
* Part-time employment has doubled to 9 million.
* The work week is 48 minutes shorter than when the recession began.
* The number of long-term unemployed (4.4 million) is at an all-time high.
* There were no wage gains in June.
* The goods-producing sector lost over 223,000 jobs just in June.
* When business picks up, businesses will just add hours to existing workers, rather than create new jobs.
* Old business lines are being eliminated entirely, not shrunk down, decreasing the odds that the unemployed will be able to find work.
Says Zuck: It's time for a serious second stimulus -- not a hodge podge of pork and transfer payments, but a truly big and bold infrastructure program (like what we were promised the first time, but which didn't happen) to put people to work.
my comment: No stimulus is needed, just time, inexpensive online job training, and make small business regulations as minimal as possible.
Mort Zuckerman (of all people) has an op-ed in today's WSJ explaining why the jobs situation, which is quite clearly horrific, is even worse than you think.
Here are his points, condensed
* 185,000 workers in the June number were the product of statistical sampling, but could not be verified by the government.
* Companies are asking employees to take unpaid leave.
* 1.4 million unemployed workers weren't counted because they're not searching for work.
* Part-time employment has doubled to 9 million.
* The work week is 48 minutes shorter than when the recession began.
* The number of long-term unemployed (4.4 million) is at an all-time high.
* There were no wage gains in June.
* The goods-producing sector lost over 223,000 jobs just in June.
* When business picks up, businesses will just add hours to existing workers, rather than create new jobs.
* Old business lines are being eliminated entirely, not shrunk down, decreasing the odds that the unemployed will be able to find work.
Says Zuck: It's time for a serious second stimulus -- not a hodge podge of pork and transfer payments, but a truly big and bold infrastructure program (like what we were promised the first time, but which didn't happen) to put people to work.
my comment: No stimulus is needed, just time, inexpensive online job training, and make small business regulations as minimal as possible.
ht business insider
"By our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this, which is why they are not just downsizing their payroll, but have also cut the workweek to a record low of 33.1 hours. Fewer people are working and those that are still working have seen their hours dramatically cut this cycle....
The op-ed column by Bob Herbert in the Saturday New York Times really hit the nail on the head on this whole ‘green shoot’ issue — how can there be ‘green shoots’ when the labour market is deteriorating at such a rapid clip fully nine months after the Lehman collapse.
The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labour markets and deflating home prices, are very much still front and centre. For every job opening in the USA, there are more than five unemployed actively seeking work vying for those jobs.
That is unprecedented and nearly double what we saw at the depths of the 2001 recession. The official ranks of the unemployed have doubled during this recession to 14 million and if you take into account all forms of labour market slack, the unofficial number is bordering on 30 million, another record.
For those who still believe that we somehow managed to avoid an economic depression this cycle because of a 13% fiscal deficit/GDP and a pregnant Fed balance sheet, the Center for Labour Market Studies at Northeastern University estimates that the real unemployment now stands at 18.2%, which is actually higher than the posted rate at the end of the 1930...
What makes this cycle “different” is that three-quarters of the workers that were fired over the last year were let go on a permanent, not a temporary basis. A record 53% of the unemployed today are workers who were displaced permanently — not just temporarily because of the vagaries of the traditional business cycle.
This means that these jobs are not going to be coming back that quickly, if at all, when the economy does in fact begin to make the transition to the next expansion phase."
The real unemployment: more than 18%
"By our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this, which is why they are not just downsizing their payroll, but have also cut the workweek to a record low of 33.1 hours. Fewer people are working and those that are still working have seen their hours dramatically cut this cycle....
The op-ed column by Bob Herbert in the Saturday New York Times really hit the nail on the head on this whole ‘green shoot’ issue — how can there be ‘green shoots’ when the labour market is deteriorating at such a rapid clip fully nine months after the Lehman collapse.
The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labour markets and deflating home prices, are very much still front and centre. For every job opening in the USA, there are more than five unemployed actively seeking work vying for those jobs.
That is unprecedented and nearly double what we saw at the depths of the 2001 recession. The official ranks of the unemployed have doubled during this recession to 14 million and if you take into account all forms of labour market slack, the unofficial number is bordering on 30 million, another record.
For those who still believe that we somehow managed to avoid an economic depression this cycle because of a 13% fiscal deficit/GDP and a pregnant Fed balance sheet, the Center for Labour Market Studies at Northeastern University estimates that the real unemployment now stands at 18.2%, which is actually higher than the posted rate at the end of the 1930...
What makes this cycle “different” is that three-quarters of the workers that were fired over the last year were let go on a permanent, not a temporary basis. A record 53% of the unemployed today are workers who were displaced permanently — not just temporarily because of the vagaries of the traditional business cycle.
This means that these jobs are not going to be coming back that quickly, if at all, when the economy does in fact begin to make the transition to the next expansion phase."
The real unemployment: more than 18%
Sunday, August 2, 2009
ht Powerline
While the Bush administration was investigated for seeking out conservative lawyers and staff, the Obama administration has been given a pass for going to the other extreme and stocking Justice with ultra-left leaning partisans. Overt signs of political activity and support now are on full display throughout the department. While it was unheard of to display campaign literature or paraphernalia during the Bush years, in the Holder Justice Department "Yes we did!" signs are fully evident, as are copies of reverential Obama campaign posters.
The bottom line is a degree of politicization that we have not witnessed in modern times:
Any demarcation between the Obama administration's political agenda and the impartial administration of justice is being eradicated. "Holder is the most political, partisan attorney general I can remember," says Frank Wolf. A former Justice Department official says that "the entire equilibrium of the department is out of whack." Lamar Smith, too, is dismayed. He says he has met with Holder several times. "You hear the words but there is a disconnect with the actions. We keep hoping for better."
While the Bush administration was investigated for seeking out conservative lawyers and staff, the Obama administration has been given a pass for going to the other extreme and stocking Justice with ultra-left leaning partisans. Overt signs of political activity and support now are on full display throughout the department. While it was unheard of to display campaign literature or paraphernalia during the Bush years, in the Holder Justice Department "Yes we did!" signs are fully evident, as are copies of reverential Obama campaign posters.
The bottom line is a degree of politicization that we have not witnessed in modern times:
Any demarcation between the Obama administration's political agenda and the impartial administration of justice is being eradicated. "Holder is the most political, partisan attorney general I can remember," says Frank Wolf. A former Justice Department official says that "the entire equilibrium of the department is out of whack." Lamar Smith, too, is dismayed. He says he has met with Holder several times. "You hear the words but there is a disconnect with the actions. We keep hoping for better."
Wednesday, July 29, 2009
...Van Jones, who started an environmental nonprofit called Green for All before joining the administration in March. Now, a senior adviser for the White House Council on Environmental Quality, Jones is tasked with leading the administration's crusade for a green-based economy. On the road in Indiana, Jones spoke to Newsweek's Daniel Stone.
This is an inordinately gentle Newsweek biography of the very radical Van Jones. Jones is also, according to the D.C. Examiner:
...(T)he founder of California's Ella Baker Center for Human Rights, "a non-profit agency for justice, opportunities and peace."
The Ella Baker Center was connected to STORM (Standing Together to Organize a Revolutionary Movement), a "multi-racial activist collective with Marxist influences" with which Jones was involved....
Jones told the East Bay Express in 2005:
I was a rowdy nationalist on April 28th [1992], and then the verdicts came down on April 29th. By August, I was a communist. (...)
I met all these young radical people of color – I mean really radical: communists and anarchists. And it was, like, 'This is what I need to be a part of.' I spent the next ten years of my life working with a lot of those people I met in jail, trying to be a revolutionary.
This is an inordinately gentle Newsweek biography of the very radical Van Jones. Jones is also, according to the D.C. Examiner:
...(T)he founder of California's Ella Baker Center for Human Rights, "a non-profit agency for justice, opportunities and peace."
The Ella Baker Center was connected to STORM (Standing Together to Organize a Revolutionary Movement), a "multi-racial activist collective with Marxist influences" with which Jones was involved....
Jones told the East Bay Express in 2005:
I was a rowdy nationalist on April 28th [1992], and then the verdicts came down on April 29th. By August, I was a communist. (...)
I met all these young radical people of color – I mean really radical: communists and anarchists. And it was, like, 'This is what I need to be a part of.' I spent the next ten years of my life working with a lot of those people I met in jail, trying to be a revolutionary.
The blue dog democrats have caved, as we expected. The blue dogs have voted party line all along, and this last holdout was more kabuki and negotiating than anything else. Remember, the important part of this plan is that eventually it will be single payer, and all services will be rationed from the White House.
The good news is that if the plan is dreadful, a Republican president can undo almost all the damage in 2012.
The good news is that if the plan is dreadful, a Republican president can undo almost all the damage in 2012.
Monday, July 27, 2009
My Ketsugo strategy - Ketsugo understands that victory is unattainable, but by heroic effort and sacrifice, we can make total victory impossible for our enemies, and force them to a negotiated settlement.
Just a note to thank you for not voting for the Obama health plan.
In any version that gets passed, there will be a computer screen in any of my physicians' offices. This is in the present bill, and will likely be in any Obama medical bill. Any medical decision made between me and them will need approval from the government, specifically from an unelected committee containing Rahm Emmanuel's brother among others, who would decide for or against any treatment I get, based on whether they perceive me as politically valuable. And, every other person, those elderly on medicare, and those now on private insurance now who will be forced on to some new program, will be subject to this review as well.
I will be reminded of this every time I visit a doctor. I will ruminate on this every time I think about medical care for my family. I will never ever, even for a moment, forget those politicians that are trying to deny me and my loved ones the services that can save their lives, solely for political power. I will make sure that before each election, I will make 5,000 phone calls to any voters I can find and tell them how to vote for those candidates who opposed or supported this health plan or any others like it.
Please do not vote for any health care reform bills from Obama.
Just a note to thank you for not voting for the Obama health plan.
In any version that gets passed, there will be a computer screen in any of my physicians' offices. This is in the present bill, and will likely be in any Obama medical bill. Any medical decision made between me and them will need approval from the government, specifically from an unelected committee containing Rahm Emmanuel's brother among others, who would decide for or against any treatment I get, based on whether they perceive me as politically valuable. And, every other person, those elderly on medicare, and those now on private insurance now who will be forced on to some new program, will be subject to this review as well.
I will be reminded of this every time I visit a doctor. I will ruminate on this every time I think about medical care for my family. I will never ever, even for a moment, forget those politicians that are trying to deny me and my loved ones the services that can save their lives, solely for political power. I will make sure that before each election, I will make 5,000 phone calls to any voters I can find and tell them how to vote for those candidates who opposed or supported this health plan or any others like it.
Please do not vote for any health care reform bills from Obama.
Saturday, July 25, 2009
Part of the new Obama education initiative is a program to increase internet based education. There is no greater example of opportunity than this. Even the poorest and most disadvantaged child or adult has the opportunity to get the best education, while working at a regular job or caring for a family, at no cost. Internet education can provide almost all degrees, at almost all levels. It is great. No one has any excuse any more, except for their own lassitude.
I would like clarification that speaking in a bad tempered criticism of a police officer, in my own home, while not be the best in manners, is not a crime. I have been a police auxiliary, long ago, and my memory is that cops really that believe part of their job is to punish disrespect, in any form. I believe this is poisonous, and reflects the ongoing hostility between Cops and most poor folks.
Good cops are civil to everyone, friendly to no one, and arrest only after someone has committed a crime, not just to enforce a respectful tone.
Our local town police are superb. Each officer realizes that a weak arrest like this Gates matter would put a hold on their career.
The military has it right. If you, an officer, get into a racial or sexual discrimination problem, your career is on hold. This way, everyone bends over backwards to achieve civility and fairness. As a result, there are few complaints and overall good morale.
Good cops are civil to everyone, friendly to no one, and arrest only after someone has committed a crime, not just to enforce a respectful tone.
Our local town police are superb. Each officer realizes that a weak arrest like this Gates matter would put a hold on their career.
The military has it right. If you, an officer, get into a racial or sexual discrimination problem, your career is on hold. This way, everyone bends over backwards to achieve civility and fairness. As a result, there are few complaints and overall good morale.
Tuesday, July 21, 2009
TARP IN CONTEXT: OTHER GOVERNMENT PROGRAMS TO ASSIST THE FINANCIAL SECTOR
By itself, the Troubled Asset Relief Program (“TARP”) is a huge program at $700 billion. As discussed in SIGTARP’s April Quarterly Report, the total financial exposure of TARP and TARP-related programs may reach approximately $3 trillion. Although large in its own right, TARP is only a part of the combined efforts of the Federal Government to address the financial crisis. Approximately 50 initiatives or programs have been created by various Federal agencies since 2007 to provide potential support totaling more than $23.7 trillion.
The Federal Reserve has been one of the lead agencies responding to the financial crisis — increasing its balance sheet to more than $2 trillion to implement a wide range of programs designed to stimulate liquidity in financial markets, as well as several institution-specific interventions.321 The Federal Reserve’s $2 trillion balance sheet (which grew from approximately $900 billion prior to the financial crisis to a peak of nearly $2.3 trillion in December 2008),322 however, does not reflect the true potential amount of support the Federal Reserve has provided to those programs, which is estimated to be at least $6.8 trillion. This is because many of the programs involve guarantees that, although not listed on the balance sheet, expose the Federal Reserve to significant losses if the assets they are backing deteriorate in value.
Other players in the Government’s efforts include the Federal Deposit Insurance Corporation (“FDIC”), which has contributed more than $2 trillion in new gross potential support. The newly created Federal Housing Finance Agency (“FHFA”) — under whose auspices fall the Government-Sponsored Enterprises (“GSEs”) such as Fannie Mae, Freddie Mac, and Federal Home Loan Banks (“FHLBs”) — has effectively provided more than $6 trillion in gross potential support. Meanwhile, Treasury itself has programs outside of those authorized under the Emergency Economic Stabilization Act (“EESA”), and has supplied potential support beyond TARP of approximately $4.4 trillion. An overview of the Government’s new potential support relating to the financial crisis is listed by Federal agency in Table 3.4.
Of this $23.7 trillion in assistance to financial institutions, participants in non-TARP programs are not subject to TARP’s restrictions and conditions, such as executive compensation, nor do they necessarily require specific Congressional approval. Although SIGTARP’s oversight responsibility is for the operations of TARP and directly related programs (such as TALF and the Public-Private Investment Program (“PPIP”)), it is necessary to understand the larger context in which TARP operates, the linkages between TARP and the trillions of dollars of other Government initiatives. As noted earlier, SIGTARP has no authority over any of the non-TARP activities of the agencies discussed below.
By itself, the Troubled Asset Relief Program (“TARP”) is a huge program at $700 billion. As discussed in SIGTARP’s April Quarterly Report, the total financial exposure of TARP and TARP-related programs may reach approximately $3 trillion. Although large in its own right, TARP is only a part of the combined efforts of the Federal Government to address the financial crisis. Approximately 50 initiatives or programs have been created by various Federal agencies since 2007 to provide potential support totaling more than $23.7 trillion.
The Federal Reserve has been one of the lead agencies responding to the financial crisis — increasing its balance sheet to more than $2 trillion to implement a wide range of programs designed to stimulate liquidity in financial markets, as well as several institution-specific interventions.321 The Federal Reserve’s $2 trillion balance sheet (which grew from approximately $900 billion prior to the financial crisis to a peak of nearly $2.3 trillion in December 2008),322 however, does not reflect the true potential amount of support the Federal Reserve has provided to those programs, which is estimated to be at least $6.8 trillion. This is because many of the programs involve guarantees that, although not listed on the balance sheet, expose the Federal Reserve to significant losses if the assets they are backing deteriorate in value.
Other players in the Government’s efforts include the Federal Deposit Insurance Corporation (“FDIC”), which has contributed more than $2 trillion in new gross potential support. The newly created Federal Housing Finance Agency (“FHFA”) — under whose auspices fall the Government-Sponsored Enterprises (“GSEs”) such as Fannie Mae, Freddie Mac, and Federal Home Loan Banks (“FHLBs”) — has effectively provided more than $6 trillion in gross potential support. Meanwhile, Treasury itself has programs outside of those authorized under the Emergency Economic Stabilization Act (“EESA”), and has supplied potential support beyond TARP of approximately $4.4 trillion. An overview of the Government’s new potential support relating to the financial crisis is listed by Federal agency in Table 3.4.
Of this $23.7 trillion in assistance to financial institutions, participants in non-TARP programs are not subject to TARP’s restrictions and conditions, such as executive compensation, nor do they necessarily require specific Congressional approval. Although SIGTARP’s oversight responsibility is for the operations of TARP and directly related programs (such as TALF and the Public-Private Investment Program (“PPIP”)), it is necessary to understand the larger context in which TARP operates, the linkages between TARP and the trillions of dollars of other Government initiatives. As noted earlier, SIGTARP has no authority over any of the non-TARP activities of the agencies discussed below.
Thursday, July 9, 2009
Tuesday, July 7, 2009
There is a new technology, Internet based computer phones, suitable as learning machines, for as little as two cents with a long term phone contract. Capable of teaching any hs or college course, offering courses, grading tests, small and cheap. Good for any students, prisoners, or international folks too poor to pay for school...
These results from Powerline speak to an opportunity and a lesson for Conservatives. We lost our way, but there is redemption, if we go back to our virtue, small and honest government, social conservatives, almost isolationist foreign policy unless drastic national interests are at stake, and economic conservatism, to preserve our nation's wealth and prosperity, as well as sensible but well run medical and social welfare aimed at only the most poor.
hy Powerline
Michael Barone notes the most recent Quinnipiac poll from Ohio:
The latest Quinnipiac poll from Ohio shows Barack Obama's job rating at just 49%-44% positive, down sharply from 62%-31% in early May. That's a sharp and surprising drop. In the race for the Senate seat left open by Republican George Voinovich, Republican Rob Portman is running better than in previous Quinnipiac polls. He now trails Lieutenant Governor Lee Fisher 37%-33% and Secretary of State Jennifer Brunner 35%-34%. In three previous Quinnipiac polls this year Portman trailed both of them by an average of 39%-31%, so this is also a significant change. Other previous polls showed similar results. What to make of this? This is just one poll, and thus a possible outlier. But if the trend it suggests is in fact real, this suggests trouble for Obama and the Democrats in the industrial heartland.
And not only there. Today's Rasmussen survey, a likely voter poll, shows President Obama's "approval index," the difference between those who strongly approve and strongly disapprove of his performance, at -3, the worst showing of his administration so far. Likewise, Obama's 52 percent approval rating in today's survey is the lowest since his inauguration.
In Congress, "moderate" Democrats--a term that generally means liberal Democrats who come from moderate districts--are growing increasingly nervous about cap and trade, socialized medicine and the Obama/Reid/Pelosi deficit spending spree.
Hope and change will be on the ballot in 2010 and 2012
Michael Barone notes the most recent Quinnipiac poll from Ohio:
The latest Quinnipiac poll from Ohio shows Barack Obama's job rating at just 49%-44% positive, down sharply from 62%-31% in early May. That's a sharp and surprising drop. In the race for the Senate seat left open by Republican George Voinovich, Republican Rob Portman is running better than in previous Quinnipiac polls. He now trails Lieutenant Governor Lee Fisher 37%-33% and Secretary of State Jennifer Brunner 35%-34%. In three previous Quinnipiac polls this year Portman trailed both of them by an average of 39%-31%, so this is also a significant change. Other previous polls showed similar results. What to make of this? This is just one poll, and thus a possible outlier. But if the trend it suggests is in fact real, this suggests trouble for Obama and the Democrats in the industrial heartland.
And not only there. Today's Rasmussen survey, a likely voter poll, shows President Obama's "approval index," the difference between those who strongly approve and strongly disapprove of his performance, at -3, the worst showing of his administration so far. Likewise, Obama's 52 percent approval rating in today's survey is the lowest since his inauguration.
In Congress, "moderate" Democrats--a term that generally means liberal Democrats who come from moderate districts--are growing increasingly nervous about cap and trade, socialized medicine and the Obama/Reid/Pelosi deficit spending spree.
Hope and change will be on the ballot in 2010 and 2012
Monday, July 6, 2009
ht mary matalin
Too many Republicans go weak-kneed in the face of chattering-class criticism of personalities that don’t conform to a clichéd, insular ideal of urbanity — which, not incidentally, never includes conservative Americans. Rather than defend the true superstars of message-coherence and -delivery, such as Rush Limbaugh, they jump on the trendy totalitarian bandwagon in the absurd belief that they will either be let into the club or spared its wrath.
Too many Republicans go weak-kneed in the face of chattering-class criticism of personalities that don’t conform to a clichéd, insular ideal of urbanity — which, not incidentally, never includes conservative Americans. Rather than defend the true superstars of message-coherence and -delivery, such as Rush Limbaugh, they jump on the trendy totalitarian bandwagon in the absurd belief that they will either be let into the club or spared its wrath.
Saturday, July 4, 2009
from my lips to God's ears....
ht Politico
PALIN PLANS, from very close friends: Plans to remain
extremely visible and will give serious consideration to
running for president in 2012, but has made no decision.
she'll be very busy as a mother of five, which friends say
is her top priority. She plans paid speeches, and will spend
time writing her book, which is due this fall, then promote
it heavily when it comes out in spring 2010. She's the
Republican Party's biggest draw for fund-raisers and
conservative events (along with Cheney and Gingrich), and
she plans to spend a lot of time traveling in 'the lower 48'
states, as Alaskans call the continental U.S. The governor
also plans to make free GOP appearances, collecting
political IOUs for herself as she raises money for the
party, for candidates and for issues.
ht Politico
PALIN PLANS, from very close friends: Plans to remain
extremely visible and will give serious consideration to
running for president in 2012, but has made no decision.
she'll be very busy as a mother of five, which friends say
is her top priority. She plans paid speeches, and will spend
time writing her book, which is due this fall, then promote
it heavily when it comes out in spring 2010. She's the
Republican Party's biggest draw for fund-raisers and
conservative events (along with Cheney and Gingrich), and
she plans to spend a lot of time traveling in 'the lower 48'
states, as Alaskans call the continental U.S. The governor
also plans to make free GOP appearances, collecting
political IOUs for herself as she raises money for the
party, for candidates and for issues.
ht BBC
North Korea is facing a "critical" food shortage, especially for children, the UN's food agency has said.
The World Food Programme's director for North Korea said the agency was unable to reach millions of North Koreans due to a shortfall in funding.
The director, Torben Due, said the WFP had received no new donations for North Korea since Pyongyang conducted a nuclear test in May.
He also said Pyongyang had barred the WFP from using Korean-speaking staff.
North Korea had given no reason for that decision, he added.
Mr Due told reporters in Beijing that the WFP had received only 15% of an international appeal for $504m (£306m) and had to cut back plans to provide food aid to 6.2 million North Koreans to 2.27 million.
North Korea has relied on food aid from China, South Korea and aid agencies to feed millions of its people since a famine in the 1990s resulted in the deaths of hundreds of thousands.
Recent flooding and the suspension of South Korean fertiliser aid shipments have hindered food production.
Is North Korea facing famine?
We are now in the middle of the lean season in North Korea, where food supplies are low and it's a very difficult situation for many people in the country "
We should make more public how much aid we give to NK for food aid.
Job for Sarah Palin - go to South Korea, talk about food aid, peace, and a new American policy," walk quietly, help the starving, proclaim righteousness and freedom, encourage capitalism"
North Korea is facing a "critical" food shortage, especially for children, the UN's food agency has said.
The World Food Programme's director for North Korea said the agency was unable to reach millions of North Koreans due to a shortfall in funding.
The director, Torben Due, said the WFP had received no new donations for North Korea since Pyongyang conducted a nuclear test in May.
He also said Pyongyang had barred the WFP from using Korean-speaking staff.
North Korea had given no reason for that decision, he added.
Mr Due told reporters in Beijing that the WFP had received only 15% of an international appeal for $504m (£306m) and had to cut back plans to provide food aid to 6.2 million North Koreans to 2.27 million.
North Korea has relied on food aid from China, South Korea and aid agencies to feed millions of its people since a famine in the 1990s resulted in the deaths of hundreds of thousands.
Recent flooding and the suspension of South Korean fertiliser aid shipments have hindered food production.
Is North Korea facing famine?
We are now in the middle of the lean season in North Korea, where food supplies are low and it's a very difficult situation for many people in the country "
We should make more public how much aid we give to NK for food aid.
Job for Sarah Palin - go to South Korea, talk about food aid, peace, and a new American policy," walk quietly, help the starving, proclaim righteousness and freedom, encourage capitalism"
North Korea is going through its succession, and for whatever reason, they are being belligerent. Now, the reality is that they are on a very short leash from China. All of our discussions about North Korea should be with China.
Here is something to ponder. What would happen if China US trade dropped in half. US demand for inexpensive products would be filled immediately from other countries, and from increased domestic manufacturing. China has an ongoing boom based largely on internal business and trade worldwide, not just US.
We could easily live through a trade war with China, if it was necessary to push China to restrain North Korea.
And, by the way, North Korea is testing Skud missiles, not exactly anything more powerful than WWII German V-2 missiles. Everyone, chillax.
Here is something to ponder. What would happen if China US trade dropped in half. US demand for inexpensive products would be filled immediately from other countries, and from increased domestic manufacturing. China has an ongoing boom based largely on internal business and trade worldwide, not just US.
We could easily live through a trade war with China, if it was necessary to push China to restrain North Korea.
And, by the way, North Korea is testing Skud missiles, not exactly anything more powerful than WWII German V-2 missiles. Everyone, chillax.
The buzz on the net is that there may be a serious problem with Governor Palin using donated money for her house. Her husband had claimed he did the work himself, but this would be one of the "ethics" problems that might stick. Hey, I'm from Massachusetts. Our last three speakers of the House have been indicted and quit in shame.
She should start a weekly column, the book, lots of interviews, and she should be the spine of the Republican party. Who else is standing up to Obama's new socialism? And, she needs to do some serious fund-raising for all Republican senators and Congressmen. She may never again be on the top ticket, but she could get a super job in a new Republican administration.
She should start a weekly column, the book, lots of interviews, and she should be the spine of the Republican party. Who else is standing up to Obama's new socialism? And, she needs to do some serious fund-raising for all Republican senators and Congressmen. She may never again be on the top ticket, but she could get a super job in a new Republican administration.
Sunday, June 28, 2009
Thursday, June 25, 2009
Head of GE Jeff Immelt is a total disappointment. He giggles on Charlie Rose. He talks about projects as being good for the country so he goes after all the green business, sure to bubble.
And, he refuses to take responsibility for his stupid ideas about GE Cap. I can't believe Jack Welch chose this moron. Total stooge for Obama Cap adn Trade. Dumb as an Ox. and a crybaby to boot. GE is nothing now.
And, he refuses to take responsibility for his stupid ideas about GE Cap. I can't believe Jack Welch chose this moron. Total stooge for Obama Cap adn Trade. Dumb as an Ox. and a crybaby to boot. GE is nothing now.
How a Republican majority can stop Obama’s legislation in 2010.
Assuming we get a few dozen congressional leaders to cooperate with each other, they should operate off the same message. The theme should be, Obama, nice guy, but spends too much money and makes a train wreck of everything he touches.
The most vulnerable congressional and senate candidates should be attacked as if the ideas of Pelosi and Obama were there ideas alone. Every single bit of corruption and vote stealing should be attributed to each of these. If the Republicans can all stay on message and constantly be on the media, all media, all the time, and raise an army of folks to sanitize the voter lists, and get out the vote, we could get a veto proof minority.
Two years of vetoes should be enough to stop Obama and Nancy. The congress should constantly be talking about how much tax bills should come down. We must blame the democrats for every increased expense, every flawed idea. The emphasis should be criticism of policy, and criticism of corruption.
If we get the White House back in 2012, w should follow Obama’s plan and pass big legislation in the first three months.
How to undo the Obama legislation? For immigration, permit essentially unlimited legal immigration for college grads from around the world, from all countries. The big problem with immigration is not jobs, it is there expense and their criminality. College grads behave well, generate jobs, and pay taxes.
How to solve the medical crisis? Make adjustments to Medicare so that very few doctors and Hospitals use it, and so the rest of us are not subsidizing it. All other insurance should be completely free of any government interference. Folks can choose to have very cheap and Canada style insurance, and the rest of us can deal with the private sector. The insurance market should be unencumbered by any regulations at all, just that they can’t be used to subsidize Medicare. So, as Medicare rolls grow, folks can be told, this is cheap health care, Canada style. No state limitations, no guaranteed coverage, let the free market answer the call.
For the energy bill, administrative changes can simply have a revenue neutral policy like Brazil, where gasoline that contains alcohol from sugar cane is a few pennies less than regular. Coal plants can have the best pollution controls. Cap and Trade limits can be raised so there are no penalties.
The Republican party has to change the science of the USA from thinking of CO2 as a pollutant to thinking of water shortages, heavy metal pollution, food safety, and replanting the country with lots of vegetation. There are fabulous new discoveries for plants grown in brackish water or low water, and the US should push hard for more of those. The emphasis should be on building a huge reserve of cheap food so that we can be prepared for famine.
Once the big legislation has passed, then quickly the President must make thousands of changes to administrative law, reducing the complexity of the Income tax, reducing the size of virtually all Federal programs, all under the claim that we simply can not afford all this.
For the financial system, we must have strict laws for truth in packaging, so that risky debt must be labeled as such, and we must prevent banks and insurance companies from being too large and too big to fail. That’s it. Let the free market take care of everything else, and have Elliott Spitzer like prosecution of any copany that screws its customers.
For folks who are long term drug abusers, deport them and their families.
For future plans about recessions, make a constant shopping list of “shovel-ready” road, airport, and infrastructure. No more rail construction, just nice private run bus service on dedicated rush hour passenger lanes.
All education expenditures should go to college loan, or subsidies for private college loans, junior college loans, and trade schools. No more money for teachers in high school middle school or lower school. If kids drop out, they should be able to go to a short term of trade school to learn something. If kids want college, it should be easy for anyone to get loans.
The emphasis should be to get rid of Obama’s ideas and make sure they never return.
The military should emphasize whatever they can do to fight wars with few casualties by using technology and robotics.
Assuming we get a few dozen congressional leaders to cooperate with each other, they should operate off the same message. The theme should be, Obama, nice guy, but spends too much money and makes a train wreck of everything he touches.
The most vulnerable congressional and senate candidates should be attacked as if the ideas of Pelosi and Obama were there ideas alone. Every single bit of corruption and vote stealing should be attributed to each of these. If the Republicans can all stay on message and constantly be on the media, all media, all the time, and raise an army of folks to sanitize the voter lists, and get out the vote, we could get a veto proof minority.
Two years of vetoes should be enough to stop Obama and Nancy. The congress should constantly be talking about how much tax bills should come down. We must blame the democrats for every increased expense, every flawed idea. The emphasis should be criticism of policy, and criticism of corruption.
If we get the White House back in 2012, w should follow Obama’s plan and pass big legislation in the first three months.
How to undo the Obama legislation? For immigration, permit essentially unlimited legal immigration for college grads from around the world, from all countries. The big problem with immigration is not jobs, it is there expense and their criminality. College grads behave well, generate jobs, and pay taxes.
How to solve the medical crisis? Make adjustments to Medicare so that very few doctors and Hospitals use it, and so the rest of us are not subsidizing it. All other insurance should be completely free of any government interference. Folks can choose to have very cheap and Canada style insurance, and the rest of us can deal with the private sector. The insurance market should be unencumbered by any regulations at all, just that they can’t be used to subsidize Medicare. So, as Medicare rolls grow, folks can be told, this is cheap health care, Canada style. No state limitations, no guaranteed coverage, let the free market answer the call.
For the energy bill, administrative changes can simply have a revenue neutral policy like Brazil, where gasoline that contains alcohol from sugar cane is a few pennies less than regular. Coal plants can have the best pollution controls. Cap and Trade limits can be raised so there are no penalties.
The Republican party has to change the science of the USA from thinking of CO2 as a pollutant to thinking of water shortages, heavy metal pollution, food safety, and replanting the country with lots of vegetation. There are fabulous new discoveries for plants grown in brackish water or low water, and the US should push hard for more of those. The emphasis should be on building a huge reserve of cheap food so that we can be prepared for famine.
Once the big legislation has passed, then quickly the President must make thousands of changes to administrative law, reducing the complexity of the Income tax, reducing the size of virtually all Federal programs, all under the claim that we simply can not afford all this.
For the financial system, we must have strict laws for truth in packaging, so that risky debt must be labeled as such, and we must prevent banks and insurance companies from being too large and too big to fail. That’s it. Let the free market take care of everything else, and have Elliott Spitzer like prosecution of any copany that screws its customers.
For folks who are long term drug abusers, deport them and their families.
For future plans about recessions, make a constant shopping list of “shovel-ready” road, airport, and infrastructure. No more rail construction, just nice private run bus service on dedicated rush hour passenger lanes.
All education expenditures should go to college loan, or subsidies for private college loans, junior college loans, and trade schools. No more money for teachers in high school middle school or lower school. If kids drop out, they should be able to go to a short term of trade school to learn something. If kids want college, it should be easy for anyone to get loans.
The emphasis should be to get rid of Obama’s ideas and make sure they never return.
The military should emphasize whatever they can do to fight wars with few casualties by using technology and robotics.
ht mark Levin show
MEMBERS OF CONGRESS AT
202-224-3121 AND TELL THEM NO TO CAP AND TRADE
Repubs:
Bartlett (MD)
Bono Mack (CA)
Castle (DE)
Dent (PA)
Ehlers (MI)
Frelinghuysen (NJ)
Gerlach (PA)
Inglis (SC)
Tim Johnson (IL)
Kirk (IL)
Lance (NJ)
LoBiondo (NJ)
Petri (WI)
Platts (PA)
Ros-Lehtinen (FL)
Democrats:
Altmire (PA)
Bright (AL)
Dahlkemper (PA)
Drieshaus (OH)
Ellsworth (IN)
Kissell (NC)
Kratovil (MD)
Kanjorski (PA)
Minnick(ID)
Teague (NM)
MEMBERS OF CONGRESS AT
202-224-3121 AND TELL THEM NO TO CAP AND TRADE
Repubs:
Bartlett (MD)
Bono Mack (CA)
Castle (DE)
Dent (PA)
Ehlers (MI)
Frelinghuysen (NJ)
Gerlach (PA)
Inglis (SC)
Tim Johnson (IL)
Kirk (IL)
Lance (NJ)
LoBiondo (NJ)
Petri (WI)
Platts (PA)
Ros-Lehtinen (FL)
Democrats:
Altmire (PA)
Bright (AL)
Dahlkemper (PA)
Drieshaus (OH)
Ellsworth (IN)
Kissell (NC)
Kratovil (MD)
Kanjorski (PA)
Minnick(ID)
Teague (NM)
ht energy post
Steven Kopits of Douglas Westwood Energy research discusses this urgency in a new report, noting that in the last 37 years, the US has suffered six recessions. From the beginning of each, he says, oil played a central role. In every case when oil consumption breached 4 per cent of GDP, he notes, the US has suffered a recession. Indeed, he says, the current US recession began within two months of oil hitting the 4 per cent threshold, when oil reached $80 per barrel.
Kopits also notes that a sustained rise in the oil price of 50 per cent or more has always been associated with recession, and this applies to the current recession as well.
From his research, then, it seems there are three rules by which to avoid recession caused by oil prices:
Crude oil expenditures should not exceed 4 per cent of GDP.
Oil prices should not increase by more than 50 per cent year-on-year.
Oil price increases should not be so great that a potential demand adjustment should have to reach 0.8 per cent of GDP on an annual basis, as shedding demand at this rate has generally been associated with recession.
Steven Kopits of Douglas Westwood Energy research discusses this urgency in a new report, noting that in the last 37 years, the US has suffered six recessions. From the beginning of each, he says, oil played a central role. In every case when oil consumption breached 4 per cent of GDP, he notes, the US has suffered a recession. Indeed, he says, the current US recession began within two months of oil hitting the 4 per cent threshold, when oil reached $80 per barrel.
Kopits also notes that a sustained rise in the oil price of 50 per cent or more has always been associated with recession, and this applies to the current recession as well.
From his research, then, it seems there are three rules by which to avoid recession caused by oil prices:
Crude oil expenditures should not exceed 4 per cent of GDP.
Oil prices should not increase by more than 50 per cent year-on-year.
Oil price increases should not be so great that a potential demand adjustment should have to reach 0.8 per cent of GDP on an annual basis, as shedding demand at this rate has generally been associated with recession.
ht market ticker
In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."
andAnother FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold...
I think MS is right. The entire banking system is so loaded with bad debt as well as commercial loans which are now bad debt as well, I can see a bank holiday...this recession has a long way to go.
In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."
andAnother FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold...
I think MS is right. The entire banking system is so loaded with bad debt as well as commercial loans which are now bad debt as well, I can see a bank holiday...this recession has a long way to go.
ht Jesse's Cafe Americain
A serious bout of inflation is rarely caused by normal business activity, such as commercial bank lending and private debt.
In almost every case that I have studied, a very serious monetary inflation is triggered by excessive government debt obligations, and not private debt, that can no longer be adequately serviced by a productive real economy and domestic taxation.
That unserviceable debt becomes 'monetized' and a serious inflation results. It is a form of debt default.
Devaluation of a currency is a form of inflation which specifically addresses external debt obligations, as well as default on bonds which is a form of selective national bankruptcy.
The reason that the output gap is no barrier to this type of inflation is that it actually feeds it, since it dampens tax revenues and domestic GDP.
But the notion that banks must always lend to create inflation, or employment must be at robust levels, absolutely flies in the face of all historical experience.
A serious bout of inflation is rarely caused by normal business activity, such as commercial bank lending and private debt.
In almost every case that I have studied, a very serious monetary inflation is triggered by excessive government debt obligations, and not private debt, that can no longer be adequately serviced by a productive real economy and domestic taxation.
That unserviceable debt becomes 'monetized' and a serious inflation results. It is a form of debt default.
Devaluation of a currency is a form of inflation which specifically addresses external debt obligations, as well as default on bonds which is a form of selective national bankruptcy.
The reason that the output gap is no barrier to this type of inflation is that it actually feeds it, since it dampens tax revenues and domestic GDP.
But the notion that banks must always lend to create inflation, or employment must be at robust levels, absolutely flies in the face of all historical experience.
Wednesday, June 24, 2009
There are several fallacies making the rounds of the economic community, often put forward by pundits on the infomercials for corporate America, and also on the internet among well-meaning but badly informed bloggers.
The first of these monetary fallacies is that 'the output gap will prevent inflation.' The second is that a lack of net bank lending or other 'debt destruction' will require a deflationary outcome. Let's deal with the output gap theory first.
Output gap is the economic measure of the difference between the actual output of an economy and the output it could achieve when it is most efficient, or at full capacity.
The theory is that when GDP underperforms its potential, with unemployment remaining high, there can be no inflation because demand is weak and median wages will be presumably stagnant. This idea comes from neoliberal monetarist economics, and a misunderstanding of the inflationary experience of the 1970s.
The thought is that sustained inflation is due to a 'wage-price' spiral. Higher wages amongst workers cause prices to rise, prompting workers to demand higher wages, thereby fueling inflation. If workers do not have the ability to demand higher wages there can be no inflation.
While this is in part true, it tends to confuse cause and effect.
The cause of a monetary inflation, which is a broadly based inflation across most products and services relatively independent of demand, is often based in a monetary expansion of the currency resulting in a debasement and devaluation.
A monetary expansion is relatively difficult to achieve under an external standard since it must be overt and often deliberative. A gradual inflation is an almost natural outcome under a fiat currency regime because policy-makers can almost never resist the temptation of cheap growth and the personal enrichment that comes with it.
There can be short term non-monetary inflation-deflation cycles that tend to be more product specific in a market that is not under government price controls. But this is not the same as a broad monetary inflation or deflation.
The key difference is the value of the dollar which has little or nothing to do with a business cycle or product demand/supply induced inflation/deflation.
In the modern era the Federal Reserve can increase the money supply independent of demand by the monetization of debt, with the only restrictions on their ability to increase supply being the value of the dollar and the acceptability of US sovereign debt. This requires the acquiescence of the Treasury and the cooperation of at least one major money center bank.
People tend to invent 'rules' about how the money supply is able to increase, and confuse financial wagers and credit with money. This is in part because the average mind rebels at the reality behind modern currency and the ease at which it can be created. Further, people often invent facts to support theories that they embrace in an a priori manner.
In a pure fiat currency regime, the swings between inflation and deflation are almost always the result of policy decisions, with the occasional exogenous shock. A government decides to inflate or strengthen their money supply relative to productivity as a policy decision regarding spending, central bank credit expansions, banking requirements and regulations, among other things.
As a prime example of a rapid inflation despite a severe economic slump, what one might call uber-stagflation, is the Weimar experience.
Since pictures are worth 1000 words, let me be brief by showing you a few important charts.
The basic ingredients of the Weimar experience are...
A high level of official debt issuance relative to economic growth
High unemployment with a slumping real GDP
Wage Stagnation
I should stop here and note that although the statistics at hand involve union workers, in fact unemployment was widespread in the Weimar economy. The saving grace of being in the union was that one was more often able to retain their jobs and some level of nominal wage increases.
Anyone who has read the history of the times knows that unemployment, underemployment and slack demand was rampant, and that hoarding was commonplace as people refused to trade real goods for a rapidly devaluing currency.
Rapidly Rising Prices Despite Slack Demand and High Unemployment
So much for the wage price spiral and the output gap.
A Booming Stock Market, at Least in Nominal Terms
Booming Price of Precious Metals as a Safe Haven Even While Basic Material Prices Slumped
Notice the plunge in the price of copper as the economy collapsed and gold and silver soared.
If one can obtain a copy, as it is out of print, one of the best descriptions of the German inflation experience is When Money Dies: the Nightmare of the Weimar Collapse by Adam Fergusson. There is a copy of the book available online for free here.
From my own readings in this area, the people who tended to survive the Weimar stagflation the best were those who:
1. Owned independent supplies of essentials including food and shelter and were reasonably self-sufficient.
2. Had savings in foreign currencies that were backed by gold such as the US dollar and the Swiss Franc
3. Possessed precious metals
4. Belonged to a trade union and/or had essential skills or government position which guaranteed a wage
5. Were invested in foreign equity markets, and even in the domestic German stock market for a time
People will argue now that the Fed understands that inflation is caused by perceptions, and that by managing those perceptions inflation can be avoided because even those prices are rising and the currency is being devalued, if they ignore it the inflation cannot reach harmful levels.
This is what I call the "psychosis school" of behavioral economics.
Granted, perception is important, and managing perception may delay outcomes for a period of time. But unless the underlying cause of the problem is remedied during what is at best is an extended interlude, the resulting break in perception will ignite a firestorm of cognitive dissonance, loss of confidence, and social unrest.
In summary, in a purely fiat currency regime a sustained monetary inflation or deflation is an outcome of policy decisions regarding fiscal policy, monetary policy, and economic balance and output.
As long as the government is able to generate debt, deflation is a highly unlikely outcome. And when the government reaches the practical limits of debt creation, the underpinnings of the currency give way and the economy tends to collapse in a stagflationary slump.
There are no predetermined outcomes in a fiat monetary regime. Deflation, stagflation and hyperinflation are not 'normal' but are certainly possible if the central authority is permitted to abuse the real economy and the money supply for protracted periods of time.
What about Japan? Japan is the perfect example of a policy decision made by a fiat currency regime in what was decidedly NOT a free market, but under the de facto control of a highly entrenched bureaucracy, a single political party, and large corporate giants in pursuit of an industrial policy that favored exports and domestic deflation.
The difference between the Japan of the 1980s and the US of today could not be more stark. Choosing a deflationary policy and high interest rates as a debtor nation is economic and political suicide. It would be interesting to see what happens if the US elites try to take that path.
We will know if there is a true monetary deflation in the US because the value of the dollar will start increasing dramatically with regard to other hard assets, other currencies, goods and services, and precious metals and commodities. Prices will decline especially for imports as the dollar gains in purchasing power.
Remember that a true monetary inflation and deflation would only show up over time. Even in the Great Depression in the US, as demand slumped and prices fell, the stage was set for a significant devaluation of the US dollar and a rise in consumer prices well in advance of the eventual recovery of the economy that caused the Fed to tighten prematurely. As I recall the actual contraction in money supply lasted two years. This again highlights was an amazing piece of bad policy that Japan represents in its 'lost decade.'
People embrace beliefs for many motivations. So often I find they are not 'rational' and based on a scientific study of the facts, even on the most cursory level. Fear and greed and prejudice are often motivations that are surprisingly resilient, even in the face of overwhelming evidence against them. Leadership understands this well.
There are often appeals to private judgement. I do not care what you say, this is what I believe, what I think, what I feel. This is appropriate in the supra-natural realm, but in the natural realm there may be private judgement but the facts are public, and the outcomes are well beyond the complete control of the most fully-managed perceptual campaigns, at least so far in human experience.
"The lie can be maintained only for such time as the State can shield the people from the political, economic and or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State." Joseph Goebbels, of the perception modification school of economic thought
What is truth? It is difficult to estimate but not completely out of reach.
Our own view is that a serious stagflation with further devaluation of the US dollar as it is replaced as the world's reserve currency is very likely, after a period of slackening demand and high unemployment. A military conflict is also a probable outcome as countries often go to war when they fail at peace.
Weimar was not an anomaly although the level of inflation was indeed legendary. Argentina, post Soviet Russia, and most recently Zimbabwe are all similar examples. Serious Instances of Monetary Inflation Since World War II
There are many, many variables in play here, and policy decisions yet to be made. It is highly discouraging to see Obama's Administration fail so miserably to do the right things, but there is always room for hope, less so today than six months ago however.
Argue and shout grave oaths and wave our hands though we might, we are in God's hands now.
Let's see what happens.
A very special thanks to our friend Bart at Now and Futures who makes these charts, among other things, available on his highly informative web site for public review. If you are not familiar with his work you might do well to view it. We do not always agree, but he demands attention because of the rigor which he applies to his work for which we are grateful, always.
As far as my two cents goes, one could easily argue that the dollar's long-standing role as a reserve currency means that there are a great many "unnatural" holders of the U.S. currency around the globe. Generally speaking, they require more incentives than Americans to remain invested. In a world where the U.S. is no longer seen as the leader it once was, where the risks stemming from hyper-expansive fiscal and monetary policies are increasingly apparent and growing by the day, and where many old truths are no longer being taken for granted, it is not a stretch to think that today's demand for the currency could easily evolve into tomorrow's rapidly growing supply.
The first of these monetary fallacies is that 'the output gap will prevent inflation.' The second is that a lack of net bank lending or other 'debt destruction' will require a deflationary outcome. Let's deal with the output gap theory first.
Output gap is the economic measure of the difference between the actual output of an economy and the output it could achieve when it is most efficient, or at full capacity.
The theory is that when GDP underperforms its potential, with unemployment remaining high, there can be no inflation because demand is weak and median wages will be presumably stagnant. This idea comes from neoliberal monetarist economics, and a misunderstanding of the inflationary experience of the 1970s.
The thought is that sustained inflation is due to a 'wage-price' spiral. Higher wages amongst workers cause prices to rise, prompting workers to demand higher wages, thereby fueling inflation. If workers do not have the ability to demand higher wages there can be no inflation.
While this is in part true, it tends to confuse cause and effect.
The cause of a monetary inflation, which is a broadly based inflation across most products and services relatively independent of demand, is often based in a monetary expansion of the currency resulting in a debasement and devaluation.
A monetary expansion is relatively difficult to achieve under an external standard since it must be overt and often deliberative. A gradual inflation is an almost natural outcome under a fiat currency regime because policy-makers can almost never resist the temptation of cheap growth and the personal enrichment that comes with it.
There can be short term non-monetary inflation-deflation cycles that tend to be more product specific in a market that is not under government price controls. But this is not the same as a broad monetary inflation or deflation.
The key difference is the value of the dollar which has little or nothing to do with a business cycle or product demand/supply induced inflation/deflation.
In the modern era the Federal Reserve can increase the money supply independent of demand by the monetization of debt, with the only restrictions on their ability to increase supply being the value of the dollar and the acceptability of US sovereign debt. This requires the acquiescence of the Treasury and the cooperation of at least one major money center bank.
People tend to invent 'rules' about how the money supply is able to increase, and confuse financial wagers and credit with money. This is in part because the average mind rebels at the reality behind modern currency and the ease at which it can be created. Further, people often invent facts to support theories that they embrace in an a priori manner.
In a pure fiat currency regime, the swings between inflation and deflation are almost always the result of policy decisions, with the occasional exogenous shock. A government decides to inflate or strengthen their money supply relative to productivity as a policy decision regarding spending, central bank credit expansions, banking requirements and regulations, among other things.
As a prime example of a rapid inflation despite a severe economic slump, what one might call uber-stagflation, is the Weimar experience.
Since pictures are worth 1000 words, let me be brief by showing you a few important charts.
The basic ingredients of the Weimar experience are...
A high level of official debt issuance relative to economic growth
High unemployment with a slumping real GDP
Wage Stagnation
I should stop here and note that although the statistics at hand involve union workers, in fact unemployment was widespread in the Weimar economy. The saving grace of being in the union was that one was more often able to retain their jobs and some level of nominal wage increases.
Anyone who has read the history of the times knows that unemployment, underemployment and slack demand was rampant, and that hoarding was commonplace as people refused to trade real goods for a rapidly devaluing currency.
Rapidly Rising Prices Despite Slack Demand and High Unemployment
So much for the wage price spiral and the output gap.
A Booming Stock Market, at Least in Nominal Terms
Booming Price of Precious Metals as a Safe Haven Even While Basic Material Prices Slumped
Notice the plunge in the price of copper as the economy collapsed and gold and silver soared.
If one can obtain a copy, as it is out of print, one of the best descriptions of the German inflation experience is When Money Dies: the Nightmare of the Weimar Collapse by Adam Fergusson. There is a copy of the book available online for free here.
From my own readings in this area, the people who tended to survive the Weimar stagflation the best were those who:
1. Owned independent supplies of essentials including food and shelter and were reasonably self-sufficient.
2. Had savings in foreign currencies that were backed by gold such as the US dollar and the Swiss Franc
3. Possessed precious metals
4. Belonged to a trade union and/or had essential skills or government position which guaranteed a wage
5. Were invested in foreign equity markets, and even in the domestic German stock market for a time
People will argue now that the Fed understands that inflation is caused by perceptions, and that by managing those perceptions inflation can be avoided because even those prices are rising and the currency is being devalued, if they ignore it the inflation cannot reach harmful levels.
This is what I call the "psychosis school" of behavioral economics.
Granted, perception is important, and managing perception may delay outcomes for a period of time. But unless the underlying cause of the problem is remedied during what is at best is an extended interlude, the resulting break in perception will ignite a firestorm of cognitive dissonance, loss of confidence, and social unrest.
In summary, in a purely fiat currency regime a sustained monetary inflation or deflation is an outcome of policy decisions regarding fiscal policy, monetary policy, and economic balance and output.
As long as the government is able to generate debt, deflation is a highly unlikely outcome. And when the government reaches the practical limits of debt creation, the underpinnings of the currency give way and the economy tends to collapse in a stagflationary slump.
There are no predetermined outcomes in a fiat monetary regime. Deflation, stagflation and hyperinflation are not 'normal' but are certainly possible if the central authority is permitted to abuse the real economy and the money supply for protracted periods of time.
What about Japan? Japan is the perfect example of a policy decision made by a fiat currency regime in what was decidedly NOT a free market, but under the de facto control of a highly entrenched bureaucracy, a single political party, and large corporate giants in pursuit of an industrial policy that favored exports and domestic deflation.
The difference between the Japan of the 1980s and the US of today could not be more stark. Choosing a deflationary policy and high interest rates as a debtor nation is economic and political suicide. It would be interesting to see what happens if the US elites try to take that path.
We will know if there is a true monetary deflation in the US because the value of the dollar will start increasing dramatically with regard to other hard assets, other currencies, goods and services, and precious metals and commodities. Prices will decline especially for imports as the dollar gains in purchasing power.
Remember that a true monetary inflation and deflation would only show up over time. Even in the Great Depression in the US, as demand slumped and prices fell, the stage was set for a significant devaluation of the US dollar and a rise in consumer prices well in advance of the eventual recovery of the economy that caused the Fed to tighten prematurely. As I recall the actual contraction in money supply lasted two years. This again highlights was an amazing piece of bad policy that Japan represents in its 'lost decade.'
People embrace beliefs for many motivations. So often I find they are not 'rational' and based on a scientific study of the facts, even on the most cursory level. Fear and greed and prejudice are often motivations that are surprisingly resilient, even in the face of overwhelming evidence against them. Leadership understands this well.
There are often appeals to private judgement. I do not care what you say, this is what I believe, what I think, what I feel. This is appropriate in the supra-natural realm, but in the natural realm there may be private judgement but the facts are public, and the outcomes are well beyond the complete control of the most fully-managed perceptual campaigns, at least so far in human experience.
"The lie can be maintained only for such time as the State can shield the people from the political, economic and or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State." Joseph Goebbels, of the perception modification school of economic thought
What is truth? It is difficult to estimate but not completely out of reach.
Our own view is that a serious stagflation with further devaluation of the US dollar as it is replaced as the world's reserve currency is very likely, after a period of slackening demand and high unemployment. A military conflict is also a probable outcome as countries often go to war when they fail at peace.
Weimar was not an anomaly although the level of inflation was indeed legendary. Argentina, post Soviet Russia, and most recently Zimbabwe are all similar examples. Serious Instances of Monetary Inflation Since World War II
There are many, many variables in play here, and policy decisions yet to be made. It is highly discouraging to see Obama's Administration fail so miserably to do the right things, but there is always room for hope, less so today than six months ago however.
Argue and shout grave oaths and wave our hands though we might, we are in God's hands now.
Let's see what happens.
A very special thanks to our friend Bart at Now and Futures who makes these charts, among other things, available on his highly informative web site for public review. If you are not familiar with his work you might do well to view it. We do not always agree, but he demands attention because of the rigor which he applies to his work for which we are grateful, always.
As far as my two cents goes, one could easily argue that the dollar's long-standing role as a reserve currency means that there are a great many "unnatural" holders of the U.S. currency around the globe. Generally speaking, they require more incentives than Americans to remain invested. In a world where the U.S. is no longer seen as the leader it once was, where the risks stemming from hyper-expansive fiscal and monetary policies are increasingly apparent and growing by the day, and where many old truths are no longer being taken for granted, it is not a stretch to think that today's demand for the currency could easily evolve into tomorrow's rapidly growing supply.
ht weasel zippers
U.N. to Emerge as Global IRS
June 23, 2009
If implemented, the document would officially mark the end of the United States as the world’s leading economic power.
While our media sleep, the United Nations is proceeding, with President Obama's acquiescence, to implement a global plan to create a new international socialist order financed by global taxes on the American people.
The Conference on the World Financial and Economic Crisis and its Impact on Development that begins on Wednesday will consider adoption of a document calling for "new voluntary and innovative sources of financing initiatives to provide additional stable sources of development finance..." This is U.N.-speak for global taxes. They are anything but "voluntary" for the people forced to pay them.
The most "popular" proposals, which could generate tens of billions of dollars in revenue for global purposes, involve taxes on greenhouse gas emissions and financial transactions such as stock trades.
The document was agreed to at an informal meeting of expert "facilitators" and was made available on Monday afternoon at 3 p.m. It is doubtful that any changes will be made to it.
The conference was postponed from June 1-3 and will now take place June 24-26 at the U.N. in New York. While the "outcome document" has been watered down somewhat from the previous version, it still reaffirms attainment of the U.N.'s Millennium Development Goals, which would require the payment of $845 billion from U.S. taxpayers. A commitment to the MDGs was a stated objective of the Global Poverty Act, which Barack Obama had introduced as a U.S. senator. It requires the U.S. to devote 0.7 percent of Gross National Income to foreign aid.
Now, as President, Obama can bypass the Congress and simply direct his Ambassador to the U.N. Susan Rice to approve the U.N. conference document. Then the pressure will be increased on Congress to come up with the money and satisfy our "international commitments."
This is the pattern that he followed in regard to more money for the International Monetary Fund (IMF). After agreeing at the G-20 summit to provide more money for the IMF, the Obama White House slipped the cash and credit into the recently passed emergency war funding bill. The Obama White House had added billions in cash, as well as a $100 billion line of credit, for the IMF.
Rep. Mike Pence commented, "This legislation, which includes $108 billion in loan authorizations for a global bailout, for the International Monetary Fund-at a time when this government has run up a $2 trillion annual deficit-I believe does a disservice to taxpayers and to those that defend us. Passing a $108 billion global bailout on the backs of our soldiers is just not right."
The U.N. conference document explains where all of this is leading-the destruction of the American dollar as the world's reserve currency and the build-up of global institutions such as the IMF and the U.N.
It declares that "We acknowledge the calls by many states for further study of the feasibility and advisability of a more efficient reserve system, including the possible function of SDRs in any such system and the complementary roles that could be played by various regional arrangements." SDRs are Special Drawing Rights, a form of international currency that enables global institutions like the International Monetary Fund to provide more foreign aid to the rest of the world. The U.S. pays for SDRs through its financial contributions to the IMF.
If implemented, the document would officially mark the end of the United States as the world's leading economic power.
Urging socialism as the solution to the crisis, the document states that "Insufficient emphasis on equitable human development has contributed to significant inequalities among countries and peoples. Other weaknesses of a systemic nature also contributed to the unfolding crisis, which has demonstrated the need for more effective government involvement to ensure an appropriate balance between the market and public interest."
U.N. to Emerge as Global IRS
June 23, 2009
If implemented, the document would officially mark the end of the United States as the world’s leading economic power.
While our media sleep, the United Nations is proceeding, with President Obama's acquiescence, to implement a global plan to create a new international socialist order financed by global taxes on the American people.
The Conference on the World Financial and Economic Crisis and its Impact on Development that begins on Wednesday will consider adoption of a document calling for "new voluntary and innovative sources of financing initiatives to provide additional stable sources of development finance..." This is U.N.-speak for global taxes. They are anything but "voluntary" for the people forced to pay them.
The most "popular" proposals, which could generate tens of billions of dollars in revenue for global purposes, involve taxes on greenhouse gas emissions and financial transactions such as stock trades.
The document was agreed to at an informal meeting of expert "facilitators" and was made available on Monday afternoon at 3 p.m. It is doubtful that any changes will be made to it.
The conference was postponed from June 1-3 and will now take place June 24-26 at the U.N. in New York. While the "outcome document" has been watered down somewhat from the previous version, it still reaffirms attainment of the U.N.'s Millennium Development Goals, which would require the payment of $845 billion from U.S. taxpayers. A commitment to the MDGs was a stated objective of the Global Poverty Act, which Barack Obama had introduced as a U.S. senator. It requires the U.S. to devote 0.7 percent of Gross National Income to foreign aid.
Now, as President, Obama can bypass the Congress and simply direct his Ambassador to the U.N. Susan Rice to approve the U.N. conference document. Then the pressure will be increased on Congress to come up with the money and satisfy our "international commitments."
This is the pattern that he followed in regard to more money for the International Monetary Fund (IMF). After agreeing at the G-20 summit to provide more money for the IMF, the Obama White House slipped the cash and credit into the recently passed emergency war funding bill. The Obama White House had added billions in cash, as well as a $100 billion line of credit, for the IMF.
Rep. Mike Pence commented, "This legislation, which includes $108 billion in loan authorizations for a global bailout, for the International Monetary Fund-at a time when this government has run up a $2 trillion annual deficit-I believe does a disservice to taxpayers and to those that defend us. Passing a $108 billion global bailout on the backs of our soldiers is just not right."
The U.N. conference document explains where all of this is leading-the destruction of the American dollar as the world's reserve currency and the build-up of global institutions such as the IMF and the U.N.
It declares that "We acknowledge the calls by many states for further study of the feasibility and advisability of a more efficient reserve system, including the possible function of SDRs in any such system and the complementary roles that could be played by various regional arrangements." SDRs are Special Drawing Rights, a form of international currency that enables global institutions like the International Monetary Fund to provide more foreign aid to the rest of the world. The U.S. pays for SDRs through its financial contributions to the IMF.
If implemented, the document would officially mark the end of the United States as the world's leading economic power.
Urging socialism as the solution to the crisis, the document states that "Insufficient emphasis on equitable human development has contributed to significant inequalities among countries and peoples. Other weaknesses of a systemic nature also contributed to the unfolding crisis, which has demonstrated the need for more effective government involvement to ensure an appropriate balance between the market and public interest."
ht http://www.wilmott.com/blogs/paul/index.cfm/2008/12/12/Magicians-And-Mathematicians
Magicians And Mathematicians
Posted At : December 12, 2008 2:18 PM | Posted By : Paul Wilmott
Related Categories: General
Quantitative finance and risk management are not just about the numbers. Numbers play a part, but so does the human side of the business. When analyzing risk it is important to be able to think creatively about scenarios. Unfortunately the training that most quants get seems to actively discourage creativity.
Some of the following appeared on the BBC website in December 2008.
We've learned the hard way how important it is to measure and manage risk. Despite the thousands of mathematics and science PhDs working in risk management nowadays we seem to be at greater financial and economic risk than ever before. To show you one important side of banking I'd like you to follow me in an exercise with parallels in risk management.
You are in the audience at a small, intimate theatre, watching a magic show. The magician hands a pack of cards to a random member of the audience, asks him to check that it's an ordinary pack, and would he please give it a shuffle. The magician turns to another member of the audience and asks her to name a card at random. "Ace of Hearts," she says. The magician covers his eyes, reaches out to the pack of cards, and after some fumbling around he pulls out a card. The question to you is what is the probability of the card being the Ace of Hearts?
Think about this question while I talk a bit about risk management. Feel free to interrupt me as soon as you have an answer. Oh, you already have an answer? What is that, one in fifty two, you say? On the grounds that there are 52 cards in an ordinary pack. It certainly is one answer. But aren't you missing something, possibly crucial, in the question? Ponder a bit more.
One aspect of risk management is that of 'scenario analysis.' Risk managers in banks have to consider possible future scenarios and the effects they will have on their bank's portfolio. Assign probabilities to each event and you can estimate the distribution of future profit and loss. Not unlike our exercise with the cards. Of course, this is only as useful as the number of scenarios you can think of.
You have another answer for me already? You'd forgotten that it was a magician pulling out the card. Well, yes, I can see that might make a difference. So your answer is now that it will be almost 100% that the card will be the Ace of Hearts, the magician is hardly going to get this trick wrong. Are you right? Well, think just a while longer while I tell you more about risk and its management.
Sometimes the impact of a scenario is quite easy to estimate. For example, if interest rates rise by 1% then the bank's portfolio will fall in value by so many hundreds of millions. But estimating the probability of that interest rate rise in the first case might be quite tricky. And more complex scenarios might not even be considered. What about the effects of combining rising interest rates, rising mortgage defaults and falling house prices in America? Hmm, it's rather looking like that scenario didn't get the appreciation it deserved.
Back to our magician friend. Are those the only two possible answers? Either one in 52 or 100%? Suppose that you had billions of dollars of hedge fund money riding on the outcome of this magic trick would you feel so confident in your answers? When I ask this question of finance people I usually get either the one in 52 answer or the 100%. Some will completely ignore the word 'magician,' hence the first answer. Some will say "I'm supposed to give the maths answer, aren't I? But because he's a magician he will certainly pick the Ace of Hearts." This is usually accompanied by an aren't-I-clever smile! Rather frighteningly, some people trained in the higher mathematics of risk management still don't see the second answer even after being told.
This is really a question about whether modern risk managers are capable of thinking beyond maths and formulas. Do they appreciate the human side of finance, the herding behaviour of people, the unintended consequences, what I think of as all the fun stuff. And this is a nice question because it very quickly sorts out different types of thinkers.
There is no correct answer to our magician problem. The exercise is to think of as many possibilities as you can. For example when I first heard this question an obvious answer to me was zero. There is no chance that the card is the Ace of Hearts. This trick is too simple for any professional magician. Maybe the trick is a small part of a larger effect, getting this part 'wrong' is designed to make a later feat more impressive...the Ace of Hearts is later found inside someone's pocket. Or maybe on the card are written the winning lottery numbers that are drawn randomly 15 minutes later on live TV. Or maybe the magician was Tommy Cooper. Or it was all the magician's performance-anxiety dream the night before. When I ask non mathematicians this is the sort of answer I get.
The answer one in 52 is almost the answer least likely to be correct! Magicians only rarely rely on probability. Clue: How many times did Houdini die during his Water Tiorture trick? (Unless the magician was using an ordinary deck of cards, was aiming to pull out a different card but accidentally pulled out the Ace of Hearts instead! Accidentally not making the intended 'mistake.')
A member of wilmott.com didn't believe me when I said how many people get stuck on the one in 52 answer, and can't see the 100% answer, never mind the more interesting answers. He wrote "I can't believe anyone (who has a masters/phd anyway) would actually say 1/52, and not consider that this is not...a random pick?" So he asked some of his colleagues the question, and his experience was the same as mine. He wrote "Ok I tried this question in the office (a maths postgraduate dept), the first guy took a fair bit of convincing that it wasn't 1/52 !, then the next person (a hardcore pure mathematician) declared it an un-interesting problem, once he realised that there was essentially a human element to the problem! Maybe you have a point!" Does that not send shivers down your spine, it does mine.
Once you start thinking outside the box of mathematical theories the possibilities are endless. And although a knowledge of advanced mathematics is important in modern finance I do rather miss the days when banking was populated by managers with degrees in History and who'd been leaders of the school debating team. A lot of mathematics is no substitute for a little bit of commonsense and an open mind.
How can we get quants and risk managers to think beyond the mathematics? I'm afraid I don't think we can, the way the majority of them are currently educated.
Magicians And Mathematicians
Posted At : December 12, 2008 2:18 PM | Posted By : Paul Wilmott
Related Categories: General
Quantitative finance and risk management are not just about the numbers. Numbers play a part, but so does the human side of the business. When analyzing risk it is important to be able to think creatively about scenarios. Unfortunately the training that most quants get seems to actively discourage creativity.
Some of the following appeared on the BBC website in December 2008.
We've learned the hard way how important it is to measure and manage risk. Despite the thousands of mathematics and science PhDs working in risk management nowadays we seem to be at greater financial and economic risk than ever before. To show you one important side of banking I'd like you to follow me in an exercise with parallels in risk management.
You are in the audience at a small, intimate theatre, watching a magic show. The magician hands a pack of cards to a random member of the audience, asks him to check that it's an ordinary pack, and would he please give it a shuffle. The magician turns to another member of the audience and asks her to name a card at random. "Ace of Hearts," she says. The magician covers his eyes, reaches out to the pack of cards, and after some fumbling around he pulls out a card. The question to you is what is the probability of the card being the Ace of Hearts?
Think about this question while I talk a bit about risk management. Feel free to interrupt me as soon as you have an answer. Oh, you already have an answer? What is that, one in fifty two, you say? On the grounds that there are 52 cards in an ordinary pack. It certainly is one answer. But aren't you missing something, possibly crucial, in the question? Ponder a bit more.
One aspect of risk management is that of 'scenario analysis.' Risk managers in banks have to consider possible future scenarios and the effects they will have on their bank's portfolio. Assign probabilities to each event and you can estimate the distribution of future profit and loss. Not unlike our exercise with the cards. Of course, this is only as useful as the number of scenarios you can think of.
You have another answer for me already? You'd forgotten that it was a magician pulling out the card. Well, yes, I can see that might make a difference. So your answer is now that it will be almost 100% that the card will be the Ace of Hearts, the magician is hardly going to get this trick wrong. Are you right? Well, think just a while longer while I tell you more about risk and its management.
Sometimes the impact of a scenario is quite easy to estimate. For example, if interest rates rise by 1% then the bank's portfolio will fall in value by so many hundreds of millions. But estimating the probability of that interest rate rise in the first case might be quite tricky. And more complex scenarios might not even be considered. What about the effects of combining rising interest rates, rising mortgage defaults and falling house prices in America? Hmm, it's rather looking like that scenario didn't get the appreciation it deserved.
Back to our magician friend. Are those the only two possible answers? Either one in 52 or 100%? Suppose that you had billions of dollars of hedge fund money riding on the outcome of this magic trick would you feel so confident in your answers? When I ask this question of finance people I usually get either the one in 52 answer or the 100%. Some will completely ignore the word 'magician,' hence the first answer. Some will say "I'm supposed to give the maths answer, aren't I? But because he's a magician he will certainly pick the Ace of Hearts." This is usually accompanied by an aren't-I-clever smile! Rather frighteningly, some people trained in the higher mathematics of risk management still don't see the second answer even after being told.
This is really a question about whether modern risk managers are capable of thinking beyond maths and formulas. Do they appreciate the human side of finance, the herding behaviour of people, the unintended consequences, what I think of as all the fun stuff. And this is a nice question because it very quickly sorts out different types of thinkers.
There is no correct answer to our magician problem. The exercise is to think of as many possibilities as you can. For example when I first heard this question an obvious answer to me was zero. There is no chance that the card is the Ace of Hearts. This trick is too simple for any professional magician. Maybe the trick is a small part of a larger effect, getting this part 'wrong' is designed to make a later feat more impressive...the Ace of Hearts is later found inside someone's pocket. Or maybe on the card are written the winning lottery numbers that are drawn randomly 15 minutes later on live TV. Or maybe the magician was Tommy Cooper. Or it was all the magician's performance-anxiety dream the night before. When I ask non mathematicians this is the sort of answer I get.
The answer one in 52 is almost the answer least likely to be correct! Magicians only rarely rely on probability. Clue: How many times did Houdini die during his Water Tiorture trick? (Unless the magician was using an ordinary deck of cards, was aiming to pull out a different card but accidentally pulled out the Ace of Hearts instead! Accidentally not making the intended 'mistake.')
A member of wilmott.com didn't believe me when I said how many people get stuck on the one in 52 answer, and can't see the 100% answer, never mind the more interesting answers. He wrote "I can't believe anyone (who has a masters/phd anyway) would actually say 1/52, and not consider that this is not...a random pick?" So he asked some of his colleagues the question, and his experience was the same as mine. He wrote "Ok I tried this question in the office (a maths postgraduate dept), the first guy took a fair bit of convincing that it wasn't 1/52 !, then the next person (a hardcore pure mathematician) declared it an un-interesting problem, once he realised that there was essentially a human element to the problem! Maybe you have a point!" Does that not send shivers down your spine, it does mine.
Once you start thinking outside the box of mathematical theories the possibilities are endless. And although a knowledge of advanced mathematics is important in modern finance I do rather miss the days when banking was populated by managers with degrees in History and who'd been leaders of the school debating team. A lot of mathematics is no substitute for a little bit of commonsense and an open mind.
How can we get quants and risk managers to think beyond the mathematics? I'm afraid I don't think we can, the way the majority of them are currently educated.
Tuesday, June 23, 2009
Saturday, June 20, 2009
It is amazing how much credit has contracted. Both the banks' ability to lend, as well as the demand for loans has slowed way down. Few companies are buying additional capacity, since there is so much overcapacity. There is a bleak market for any luxuries, and the new normal will be high unemployment, low incomes, high taxes, and low growth. While we have deflation, our dollar will be worth so much less in terms of other currencies and commodities that all imports, including energy, will be very dear. Oh well...
Friday, June 19, 2009
The new Healthcare emphasis scares me a bit. It makes sense to spend money on prevention, except that it won't save a dime. To take a smoker who will die at an early age, of a disease that is uncurable and quick, and transform them into a healthy person, who lives for years, has numerous and expensive treatments over a long life, is a good thing, but it doesn't save money. Also, our best new diagnosis tools are the high tech scanners, and our best strategy is to permit lots of these to drive the price of a scan down. That won't happen.
The key to lowering health care cost is to persuade someone headed to the emergency room for a toothache or an upset stomach to go to a CVS clinic instead. The other key is for all Medicare and Medicaid service to be HMO programs, where unnecessary treatments are not reimbursed.
The final part of the cost is to have a very inexpensive catastrophic very high deductible insurance policy available for everyone.
The key to lowering health care cost is to persuade someone headed to the emergency room for a toothache or an upset stomach to go to a CVS clinic instead. The other key is for all Medicare and Medicaid service to be HMO programs, where unnecessary treatments are not reimbursed.
The final part of the cost is to have a very inexpensive catastrophic very high deductible insurance policy available for everyone.
Thursday, June 18, 2009
Ht truthdig
This week marks the end of the dollar’s reign as the world’s reserve currency. It marks the start of a terrible period of economic and political decline in the United States. And it signals the last gasp of the American imperium. That’s over. It is not coming back. And what is to come will be very, very painful.
the rest of the world knows we are bankrupt. And these nations are damned if they are going to continue to prop up an inflated dollar and sustain the massive federal budget deficits, swollen to over $2 trillion, which fund America’s imperial expansion in Eurasia and our system of casino capitalism. They have us by the throat. They are about to squeeze.
There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully.
“This means the end of the dollar,” “It means China, Russia, India, Pakistan, Iran are forming an official financial and military area to get America out of Eurasia. The balance-of-payments deficit is mainly military in nature. Half of America’s discretionary spending is military. The deficit ends up in the hands of foreign banks, central banks. They don’t have any choice but to recycle the money to buy U.S. government debt. The Asian countries have been financing their own military encirclement. They have been forced to accept dollars that have no chance of being repaid. They are paying for America’s military aggression against them. They want to get rid of this.”
This week marks the end of the dollar’s reign as the world’s reserve currency. It marks the start of a terrible period of economic and political decline in the United States. And it signals the last gasp of the American imperium. That’s over. It is not coming back. And what is to come will be very, very painful.
the rest of the world knows we are bankrupt. And these nations are damned if they are going to continue to prop up an inflated dollar and sustain the massive federal budget deficits, swollen to over $2 trillion, which fund America’s imperial expansion in Eurasia and our system of casino capitalism. They have us by the throat. They are about to squeeze.
There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully.
“This means the end of the dollar,” “It means China, Russia, India, Pakistan, Iran are forming an official financial and military area to get America out of Eurasia. The balance-of-payments deficit is mainly military in nature. Half of America’s discretionary spending is military. The deficit ends up in the hands of foreign banks, central banks. They don’t have any choice but to recycle the money to buy U.S. government debt. The Asian countries have been financing their own military encirclement. They have been forced to accept dollars that have no chance of being repaid. They are paying for America’s military aggression against them. They want to get rid of this.”
Tuesday, June 16, 2009
Sunday, June 14, 2009
lazy american students
hat tip ft
American children have it easier than most other children in the world, including the supposedly lazy Europeans. They have one of the shortest school years anywhere, a mere 180 days compared with an average of 195 for OECD countries and more than 200 for East Asian countries. German children spend 20 more days in school than American ones, and South Koreans over a month more. Over 12 years, a 15-day deficit means American children lose out on 180 days of school, equivalent to an entire year.
American children also have one of the shortest school days, six-and-a-half hours, adding up to 32 hours a week. By contrast, the school week is 37 hours in Luxembourg, 44 in Belgium, 53 in Denmark and 60 in Sweden. On top of that, American children do only about an hour’s-worth of homework a day, a figure that stuns the Japanese and Chinese.
Americans also divide up their school time oddly. They cram the school day into the morning and early afternoon, and close their schools for three months in the summer. The country that tut-tuts at Europe’s mega-holidays thinks nothing of giving its children such a lazy summer. But the long summer vacation acts like a mental eraser, with the average child reportedly forgetting about a month’s-worth of instruction in many subjects and almost three times that in mathematics.virgins
Men and women who attended church at least once a week were respectively 5 and 3.9 times more likely to be virgins than those who attended church less often. Virgins of both sexes were slightly less likely to have swigged a beer in the last year, compared to non-virgins. And women with college degrees were 5.4 times more likely to be virgins than women who never got their Bachelor's. ht futurepundit
Monday, June 8, 2009
This is without question the best description of the speech in Cairo.
Obama in Cairo
June 4, 2009 · 3 Comments
Have teleprompter, will travel.
President Obama’s long-awaited speech in Cairo on US-Muslim relations met expectations. It was passionately read and delivered (except for one stumble: calling a “hijab” a “hajib,” an understandable error), touched all the rhetorical bases and, like typical Obama, actually said much less than it read. And what it said should cause Jews, frivolous worriers, to worry for real. As always, what was said was as important as what not was said, and the audience reaction spoke eloquently about the effect of these words on the Muslim world.
Many will perceive the speech as a success simply by virtue of its being given, and because Obama was met by occasional applause but never with a shoe or two. But what in fact did he say?
Praising Islam for all its contributions to civilization is admirable and accurate; of course, Obama could have then delivered this speech in the year 1200, by which time all the “contributions” that he mentioned had already been made. But Islam has been slumbering, in primitivism and occasional barbarism, for 800 years, and but for the discovery of vast oil reserves a century ago would be today completely ignored by the civilized world, as is, for the most part, Africa. To speak of Islam as a wellspring of “dignity, justice and tolerance” is, at this point in history, delusional, as is the attempt to marginalize Islamic radicals as some fringe element in Islamic society, when in fact their supporters number, perhaps, in the tens of millions. And terming Islam, as a religion, part of the “solution” for global peace would have been more meaningful had it followed the simple truth that Islam is the only religion sparking violence across the globe today.
But Jews should be most concerned. Speaking of America as “partners” with Moslems and Jews in forging peace is a troubling code that signals that America and Israel – according to Obama – no longer share the special relationship that has always marked the two countries. The moral equivalence uttered between the suffering of the Jews historically (especially during the Holocaust) and the suffering of the Palestinians “in their quest for statehood” was obscene. Studiously avoiding Israel on this trip, instead tossing Jews the bone of visiting Buchenwald, sends Jews the clear message that we are to be best perceived as history’s victims, to be sheltered by the beneficence of a kind world, but not at all as national actors with rights, interests and claims of our own. And the comparison of moral offenses committed by both sides – lodging rockets at sleeping babies and blowing up old ladies on city buses (Arabs) vs. settlements !!! (Jews) is grotesque. Hmm, Jews build houses on empty land given to them by their government…what an outrage !
Whatever his personal background (rootless, without any real identity, and therefore a citizen of the world who is above the parochial religion that engender strife) and his rhetorical nods to Israel (America will never abandon Israel, etc.), deeds speak louder than words. And Obama’s campaign to weaken Israel and force it into making suicidal concessions is now crystal clear. He has decided what will bring lasting peace in the region, and he will impose whatever he has to – despite the fact that the same solution has been tried in the very recent past, and failed miserably. He – Obama – is just another slave to the “peace idol” who cannot ever admit that peace is not coming anytime soon. Who will pay the price for those fantasies? Jews.
Once again, Jews are expected to make concrete concessions, dismember their land and jeopardize their existence – in exchange for a repeat (sixth or seventh time, by my count) of Arab promises not to use violence, not incite violence, not to indoctrinate their children with the ideals of violence, etc. Same defective merchandise being sold, this time by a new and charming salesman.
The real gauge of the speech was the audience reaction. The State of the Union address, with its constant and insipid interruptions of hand clapping, it was not. Obama’s brutal and truthful comments about the Holocaust and the evil of Holocaust denial – was met with stony silence. His impassioned declaration that Arabs must recognize Israel’s right to exist – generated no applause at all. And this took place in what passes in the Muslim world for a bastion of moderation – a university setting, in which students in the past have participated in pro-democracy riots. But any positive reference to Israel – indeed, any indication that Arabs might have to compromise on anything – was greeted with dead air.
But a denunciation of settlements, the “history” of Palestinian suffering (almost all, by the way, self-inflicted), the grievances of the Arab world against the West and the United States all drew wild, enthusiastic applause. The silence of the audience was more revealing of the current state of Arab-American and Arab-Israeli relations than anything President Obama said.
In media-speak, Obama showed great courage in going to Cairo and even giving a speech in which he did, on occasion, challenge his audience to re-think some of their prejudices. But that seems to be drama, not courage (which involves the risk of some personal sacrifice), and Obama is an individual who loves a stage and knows how to perform on it. Real courage would have required him to challenge the audience on their silent reaction to crucial parts of his speech, rather than just move on to the next paragraph. Real courage would have Obama challenging Mubarak on his authoritarian rule and suppression of dissent, much like Condaleeza Rice did in 2005 in Egypt. Real courage would have required Obama to call upon the Arab world to join America in arresting Iran’s nuclear program by any means necessary. Real courage would have Obama telling the Arab world that Israel is a reality, that it unreasonable to expect any further Israeli concessions when past surrenders have sowed the seeds of future conflict, that it is senseless to further carve up the one small Jewish island in the Arab-Muslim ocean of 22 states in order to create an irredentist, 23rd Arab state, and that the Arabs now dwelling in the Land of Israel should find their nationalistic aspirations elsewhere if they are unhappy in Israel. (Actually, that courage would be welcome in an Israeli prime minister as well.)
Therein lies the confrontation ahead. Obama has paskened the solution to the conflict. It is up to the Israelis to say “No, that has not worked in the past, and there is not a shred of evidence that it will work in the future. We will not betray our heritage and endanger our existence based on your fantasies.” They will need the strength and political support of American Jews – 80% Obama supporters – to inundate the White House with protests and their congressmen with our expectations and interests, taking nothing for granted, and rallying our support for the right of Jews to settle anywhere in the land of Israel and for a strong hand to be raised against any hint of terror. American Jews – and their obeisance to the Democratic Party – will be tested.
Then the Obama Cairo speech will take its proper place in the other dramatic Obama addresses – rhetorical flourishes, symbols without substance – until this moment passes, and strong leadership will arise that can address problems in the real world, and not the world of our illusions. Until then, we will have to show fortitude, tenacity, and real courage.
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