Friday, January 30, 2004

Corrupted Thinking In A Money Culture

Dr. Kurt Richeb├Ącher

Dr. Kurt Richeb├Ącher's articles appear regularly in The Wall Street Journal, Barron's, the U.S. edition of The Fleet Street Letter This piece was orginally published in the The Daily Reckoning, a free daily e-mail offering commentary on the days stock news.
It used to be a truism among economists of all schools of thought that the growth of an economy’s tangible capital stock was the key determinant of increased productivity and subsequently of good, high-paying jobs. And it also used to be a truism for economists that from a macroeconomic perspective, tangible capital investment into factories, production equipment, and commercial and residential building represents the one and only genuine wealth creation.

But in America’s new money culture, policymakers and economists make no difference between wealth created through saving and investment in the real economy and wealth created in the markets through asset bubbles, engendered by extremely loose money and credit.

In 1996, an article in Foreign Policy entitled “Securities: The New Wealth Machine,” explained how securitization - the issuance of high-quality bonds and stocks - has become the most powerful engine of wealth creation in today’s world economy. Whereas societies used to accumulate wealth only slowly, they can now do so quickly and directly, and “the new approach requires that a state find ways to increase the market value of its productive assets.” In such a strategy, “an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.”

This a perfect description of the corrupted economic thinking that is today ruling in America not only in corporations and the financial markets, but even among policymakers, elevating wealth-creation, that is, bubble-creation, to the ultimate of wisdom in the policy of economic growth.

There can be no question that the rapid sequence of asset bubbles - stocks, bonds, housing - that the United States has seen in the past few years were crucial in stimulating economic growth. Considering, though, its tremendously lopsided effect on consumer spending and the associated consumer-borrowing orgy, we are unable to regard this as a reasonable and sustainable policy. It works in the short run from the demand side, but it has come at heavy structural costs.

With these remarks, we wanted to make one thing perfectly clear. It is not profits, savings and investment that drive U.S. economic growth. It is America’s unparalleled credit machine, and that alone, which makes all the difference in economic growth and wealth creation between America and the rest of the world. ...Continued

The End of Rationalism?

Ah, finally found someone to really wake up the comfortable elite's lazy intellectual positions of incorrect thought and reasoning. John's been around a long time, but I was just recently introduced to his work, and I must say it is excellent - a real wake-up!

Insight & Outlook - An Interview with John Ralston Saul

"John Ralston Saul has been called 'an erudite Toronto gadfly whose bete noire is the abuse of thought and language at the hands of arrogant elites.' He is perhaps best known for his international bestseller Voltaire's Bastards, a wide-ranging and unwieldy jeremiad about the decline of Western civilization that appeared in 1992. The book is still at the center of a lively debate about the trouble with rationalism in contemporary Western culture. One critic aptly described it 'a hand-grenade disguised as a book.' When asked why he wrote it, Saul has said, 'I thought I would write a book which would be the sort of book you're not supposed to write: an anti-expert book which will be hated by all the ideologues and all the beneficiaries of the system.' While Saul is forceful and convincing as a cultural critic, I wondered after reading the book whether he is just a fussy intellectual or, as the Utne Reader suggested, one of today's great visionaries. I had a chance to find out in person in late 1996 following an academic conference in southern California. Our conversation began with the subject of his then newly released The Doubter's Companion. " ...Continued

Wednesday, January 28, 2004

BonoboLand? Wait Until the Spring Bandini

BonoboLand? Edward Hugh

"Amid growing hope the world's top economy has hit a sweet spot of accelerating growth and scant inflation, the Federal Reserve was set to keep U.S. interest rates on hold on Wednesday." Now why exactly is it that I don't share this 'sweet spot' sentiment? Or what, come to that is the difference between sweet and sour? And what is the difference between scant inflation and deflation danger? A mere hair's breadth some would say.

It looks as if the Fed is all set to keep interest rates on hold one more time today, and the only real issue seems to be whether and when the keywords "considerable period" will dissapear from the statement (as in how long are you going to hold rates flat?). Fourth quarter GDP results are expected on Friday, and will probably be healthy looking.

One of the thorns in the side of this 'recovery' is of course job growth, another, as I indicated yesterday, is excessive dependence on China, a third could be the complex geopolitical situation (although surprisingly this hardly gets a mention in economic coverage these days). But one more on this list, and maybe this is the mother of them all, must surely be the worsening US Federal deficit situation. The US has achieved quite remarkable growth last year in my book for two reasons: IT leveraged outsourcing, and a hefty Federal deficit swing, from 2% positive to 4% negative in a relatively short period of time. Now this accelerating rate of deficit increase cannot continue indefinitely, with the consequence that what was a massive stimulus will inevitably be converted at some stage into some form of tightening. This week the Congressional Budget Office has again raised the alarm, suggesting that the budget deficit is set to ballon upwards towards nearly 500 billion dollars this year. Now this, in anyone's book, isn't a normal situation. Growth at around maybe 5%, interest rates on hold indefinitely at !%, and an explosion in public debt, with much worse to come just round the corner ( According to the CBO in the decade from 2004 to 2013, the budget shortfall could expand to a total 2.38 trillion dollars -- one trillion dollars more than they were predicting just five months ago). So why then is this such a sweet spot, and why is inflation being termed as scant? ...Continued

Tuesday, January 27, 2004

Weak Dollar - Collapse?

A Growing Weak Dollar Constituency…As Long As There’s No Collapse
By Marshall Auerback

From the early 1970's onward, American industrialists have been concerned about competitive inroads from lower wage countries on a rapid path toward modernization. In the 1980's the focus was on Japan and its successful takeover of a long succession of consumer durable goods markets (autos, TV's, etc.) and some high tech markets (semiconductors) that were developed initially by US firms. By the 1990's concerns were rife that imports of an ever widening range of goods from lower wage countries, particularly in the Far East, would "hollow out" America's industrial base.

Throughout most of the post-war period, a number of Treasury Secretaries conducted economic policy with an eye toward preventing a loss of US competitiveness. Faced with calls for protectionism from firms and workers whose industries and jobs were at risk, these former Treasury regimes were biased toward a low dollar exchange rate which would enhance the position of US industries in world trade without running the risk of trade wars posed by protectionist solutions. Most of these Treasury Secretaries remembered an earlier era when the US ran current account surpluses and was the world's largest creditor nation. They also had the experiences of the so-called Third World debt crisis of the 1980s in mind and the corresponding fear of debt trap dynamics. In other words, dollar devaluation was grounded in sound economic theory, rather than desperation. It was pro-active, rather than reactive.

Under Treasury Secretary Rubin, all of this changed. Secretary Rubin differed in his focus: trade competitiveness was seldom cited as an issue; instead, he emphasized the support a strong dollar gives to domestic financial markets. We see this clearly in an interview Mr. Rubin granted to the New York Times, September 29th, 1996.

Mexico was still boiling when Rubin faced his second potential political disaster, the fall of the dollar to below 80 yen. For Rubin, this was more familiar territory: he had supervised the currency traders at Goldman, and he knew both the fiscal and political risks. "These kinds of occurrences are not without consequences," Rubin said. A declining dollar tends to drive investors out of American stocks, bonds and Treasury debt, putting pressure on the federal government to raise interest rates. "It would take a while to show up, but I'm certain it would have happened," he said. ...Continued

Monday, January 26, 2004

The Chinese and Japanese Economies - Inflation/Deflation

The Chinese and Japanese Economies

Inflated Fears, Deflated Hopes
The Chinese fear inflation; the Japanese long for it


WILL the year of the monkey be marked by economic mischief? The Chinese celebrated the lunar new year on Thursday January 22nd, gladdened by the news that the economy grew by 9.1% in 2003. But this heartening performance has stoked fears that the Chinese economy is overheating. It wouldn’t be the first time. During the last year of the monkey, in 1992, China’s then leader, Deng Xiaoping, made his famous tour of the south, urging the country to make the most of its new economic liberties. Liberty soon slid into licence, however, and within a year or two the economy was struggling to cope with rampant over-investment and inflation over 20%.

This year marks an equally troubling anniversary for China’s neighbouring economic giant, Japan. It was ten years ago that the economic superpower fell into a deflationary quagmire from which it has yet to escape. Core consumer prices registered a small increase in October, but fell again in November. The GDP deflator, a broader measure of prices, continues to fall by over 2% a year. While the Chinese authorities are acting smartly to head off inflation, the Japanese authorities are actively seeking it.

Inflation, said Milton Friedman, a Nobel prizewinning economist, is always and everywhere a monetary phenomenon. Maybe so. But Japan has phenomenal amounts of money, and inflation remains always and everywhere elusive. The Bank of Japan is pursuing a policy of “quantitative easing”. It cannot lower the price of money any further—nominal interest rates are already at zero—so it has boosted the quantity of money in the economy instead. Over the past two years, this policy has increased the monetary base by half. On Tuesday, the central bank surprised onlookers by increasing the money supply still further. It now aims to flood the banking system with reserves of ¥30 trillion-35 trillion ($280 billion-330 billion), up from its previous target of ¥27 trillion-32 trillion. ...Continued

Friday, January 23, 2004

Double Bubbles - China - U.S.?

China-US: Double bubbles in danger of colliding
By Ian Williams

What happens when two bubbles collide? Do they both burst, or do they coalesce and become an even bigger bubble - which will eventually burst even more spectacularly? That is the question posed by the growth figures from both the US and China, whose growth rates are tied in ways that neither seems to want to admit too loudly.

Even before this week's figures on China's explosive 9.1 percent growth in 2003, which many commentators thought actually understated the reality, the United Nations' annual economic report had identified the People's Republic of China as the locomotive for growth in Asia (with a nod to India), and added that the US with its 4 percent growth rate will do the same job for the industrialized world. But once again, the question must be asked - will these two Chinese and US engines run in the same direction indefinitely, or will they begin to diverge? Indeed, even more scarily, will they have a head-on collision and involve the world economy in the mother of all train-wrecks? "....

....The China Bubble is expanding dangerously
At one time, China's autarkic economy protected it from outside influence. But along with this week's figures on economic growth came another ominous big number. From once being nearly self-sufficient in oil, China is now the second biggest oil importer in the world - and is on the verge of needing massive coal imports as well. The China Bubble has expanded to a point where it will soon reach the sharp edges of infrastructural capacity and reckless over-investment to the point of over-production. That is when bubbles burst. ....

.....China recycles trade surplus into US Treasury bonds
American companies may have forgotten what Henry Ford propounded when he first built his Model T: If you do not pay high enough wages to your workers, they can't afford to buy your product. One simple basis for that Bush boom is that China is recycling its US$100 billion-plus trade surplus with the US back into dollars, and especially into US Treasury bonds. Almost half of the US Treasury bonds are now owned in Asia. So China is financing Bush's bold economic experiment: running two or more wars simultaneously with a huge budget and trade deficit, and equally huge tax handouts for the richest Americans. ....Link

Thursday, January 22, 2004

America's Financial Dictatorship of The Global Economy Through The Bretton Woods System! - The Global Corporate State's Hegemony of Capitalism!

MacroMouse

I'm going to go way out on a limb with this post and probably get a lot of ink splashed back in my face. All I can say is, blame it on my pen. It won't stop. I can't control it. Over some thirty years ago I had the strange opportunity to accidentally encounter the super-conscious of the global mind. Many of us have brief glimpses or visions into this most controversial area of the mind - actually the mind of God, or however you want it. I am often an atheist, and at other times an agnostic - can't quite make up my mind. But anyway, the fact remains that I experienced more than the average glimpse into this great often forbidden area. I am writing about it now because after thirty years the same strong vision into the super-conscious has returned by simply talking to my wonderful sister-in-law.

We were having a general convesation when events turned to a more serious tone - relationships. It didn't take long to get pretty deep, as we have talked much through the years. Tonight we were looking for the clearer meanings of intricate life problems between people and mates. As she also has a very high perspective and common sense view of awareness, it lead us both into the super-conscious - intuition and visions of and into the God mind. We had already been discussing my economic work and many other areas of the workings of the personal mind as well, when we looked from the personal into the global. From the personal we both agreed that it was extremely difficult for most mates to communicate and live together successfully. Then we began to question why this was. After leading from one psychological subject to another it ended up at the practical or impractical, however you want it.

After discussing and questioning each for some time, it evolved to the statement made by "The Guess Who" Canadian rock and roll band popular when we first met. The prominant lyric was, "American woman gonna mess your mind." Then it lead to why? Why were American relationships more in jeapardy than say Canadian or most other countries? This is where our super-consciouses started kicking in. She was relating through the spiritual God factor, and I was relating through the practical God factor. Now we all know what the spiritual God factor is, but what is the practical God factor? Both are the totality of everything, but the practical God factor is that which can be reductively deduced and understood. By this I mean if we look at the totality of the universe and everything down to the simplest of life on earth, it represents what we can understand through numbers logic. We can practically eliminate everything outside the earth as God neutral as it performs to the neutral and natural laws of physics. It's just the way it is. So this leaves us with what is happening on earth, and even spiritually, this can be reduced to numbers. Is the spirit a digital numbers God?

If we answer in the affirmative then we can discover the possible answers to why America has the highest divorce rates and most bad relationships, along with being ill blessed with the worst administration in history. Notice I said Possibly. Why is this? If you do the numbers of the practical spirit, America is very much outnumbered in the global economy and spirit realities, yet we have global financial hegemony over the entire global economy and spirits through the dying Bretton Woods System. Now if we are the dying global hegemon, we being the ones most responsible for this fact, are the evil demon in the mind of the spirit, because we, at the same time, have the power to correct Nixon's great error and fix this evil system and yet are not doing so. Thus, the global spiritual actions of the many yearly deaths of all countries concerned are being reflected back onto the U.S. spirit, creating our bad energy and bad relationships, bad economy, bad adminstration, etc. It's a simple process of doing the practical numbers, counting heads, and finding a practical spiritual truth. The minority population hegemon is doing the greatest financial damage in the world, without accepting responsibility and or repairing Nixon's evil mistake of destroying the better workings of the Bretton Woods System up to 1971 and 1973. Therefore, in the super-conscious spiritual view, of pretending to be God for this post, America is seen in the eyes of the spirit as a very evil nation, and may be paying us back for our ill actions/inactions. This is just a simple expansion of Pierre Teilhard's Noosphere ideas. In doing the historical numbers, I see no deductive reason for it not being true.

Now, most will scream that America is no where near as guilty as Russia and China with their some hundred million of their own people killed over the last seventy odd years, as shown by the great historian Paul Johnson of England, but they should consider the much higher global death rate of corporate America's dying Bretton Woods System over just the last thirty years. The global numbers are approaching Russia's and China's evil, yet we have been the global financial hegemon all these years through our veto and financial voting power in the Bretton Woods System. It's a tough pill to swallow, but the spirit is watching - you decide. Evil breeds evil.

"The house of fundamental monetary truths shows the monetary system's spiritual hand of greed controls all life through money. Furthermore, the world is a gambling casino of greed designed and sanctioned by God. Money is the mind of the spirit. The bankers are the dealers. Government is the laws and we are the hands playing the cards of greed. This my friends must change!!!

Who's country is it? - The billionaires - or the people's?!!!" C.H.I.P.S.

The Big Kahuna

I love a good mataphor. Lawrence has awakened me to a great perceptive veiw, here. I think you may have to agree.

The Big Kahuna

Lawrence Schnurmacher is executive director/investments, private client division, for a national brokerage firm.

Did you have high speed internet access in 1987? Me neither. Isn't technology great? Today I can access the internet from my cell phone, I can e-mail you from my Blackberry, I can get instant alerts on my PDA. And I can do it all very fast from anywhere. What a world we live in. Some people say they are always "in touch" and can be reached anytime of day or night on any one of a number of devices that keep them connected to their business, friends, & loved ones.

While all the connectivity may be good for business and for staying in touch with your spouse, there may be one problem that nobody is thinking about. Being connected may let too many people know about, and act upon, a stock market correction or crash, faster than anybody might like.

In 1987, one of the biggest problems, other than the market dropping 23% in a single day, was that investors could not get through to there brokers or mutual fund companies to place orders, which were mostly to sell. By the time the dust settled, many investors were locked out of trading and it was too late to sell or buy anything. Today, with all the high speed internet connections, cell phones, PDA, blackberry pagers and the like, everybody will know what's happening at the same time, and will be able to act upon that information, in real time and very fast. No broker to call or mutual fund hold messages to annoy you. Just hit the "enter" key and its done. ...

...I do not know how the market triggers would hurt or help, but suffice to say, that traders and investors would not rely on those stop gap measures to see how and even if they would stem the declines. When I think about a 2004 market crash, it is not only scary but exciting as well, because nobody knows how it would look or feel. If its anything like surfing the web, I think the "Big Kahuna" will be an apt way for it to be described. ...Link

Tuesday, January 20, 2004

A Bit of A Currency Warning?

You know I am watching this currency question pretty close, but has anyone really considered the true dynamics in play. Oh, there's been a lot written about all nations concerned but has anyone really considered it in its true deflationary paradigm? By this I mean the real nature of the end of the cold war, socialism in Russia, communism in China, and the fact that two gigantic fuedalism era wage nations have entered the capitalist system! This is a dynamic never before witnessed in economic history in such magnitude. These nations have been out of the capitalist inflation system for not only the 70 some years, but some hundred years before that, by not advancing due to maintaining fuedalist wage systems, or practically barter in some areas. The internal ppp's of these two nations are drastically lower than any textbook realities have yet been written. Economists must awake from their seventy years cold war snooze. We must start discussing this unparalleled new dynamic, in totally new language.

Many speak of inflation fears in the developed world. How can this happen, except of course absolute currency crash, when Russia and China's ppp's are almost off the scales? Euroland should have no fears of inflation in such a world and I would suggest buying time and their own survival by selling the Euro massively to defend against its rise. Of course this is only a short term band aid, but it would give the world time to come to its senses to reform the international financial architecture once again to sanity. If it is not reformed soon Russia's and China's deflationary realities will definitely eat us all alive. China could easily hyper-inflate with all the excess liquidity in this unbalanced ppp world - then what? If not Euroland, with its rising currency, is going to be stuffed full of China goods and a possible severe deflation. Now it may not be importing as much from China as America but it is importing from us and the big rigs are gearing up to ship from ship to ship across this nation[America] and straight to Euroland. Arbitrage will assure this.

It is high time everyone in the world starts to see these glaring economic ppp realities. People may accuse me of crying wolf, but what does it take for people to understand these simple dynamics?

Gold, stocks and '70s Lite

Chris Temple is editor of The National Investor newsletter and founder of The Foundation for American Renewal.

At long last, we’ve recently heard cries of “Uncle” from some quarters where the U.S. dollar’s relentless decline—and the corresponding increase in other currencies—is concerned. As a result, there have been some significant market developments over the last several days. They are not ones likely to change the many longer-term trends that have become evident over the last year or two. However, these changes have been affecting many investors, especially those who were unprepared for them.

On the currency front, the highest-profile grumbling has been coming from the European Central Bank, whose currency has been the most prominent gainer among the major ones versus the greenback. On Monday, the dollar’s decline against Europe’s common currency reached new lows of over $1.29 per euro. Then, new E.C.B. President Jean-Claude Trichet publicly expressed concern for the first time over the “brutal” rise in the euro’s value, one which has hurt exports from the eurozone and threatened its fragile recovery.

As a result, we’re finally seeing an overdue correction in the euro’s ascent, together with a commensurate respite for the dollar, now that at least someone in such a position has decided to fire a shot across currency traders’ bows. Today, we’ve dropped back to just below $1.26 per euro. What’s been interesting about the currency markets, though, is that the dollar has NOT enjoyed similar rebounds against most other currencies. Against the yen, in fact, it has hit another new low this week below 106 yen before bouncing; and this in spite of yet more Bank of Japan intervention.

The dollar-versus-euro move is far from evidence of any renewed confidence in the U.S. currency. In fact, that the dollar has not rallied much yet against other currencies is evidence that traders still have no love for America’s scrip. However, part of the Federal Reserve’s present plan—which I’ll be exploring in The National Investor in the not-too-distant future—is to actually lead the world in “competitively devaluing” its currencies. Greenspan and Company know that they can’t be the only ones keeping interest rates at puny levels, and are trying to force other countries now to actually cut interest rates further, so as to have the best hopes of keeping the global economy grinding ahead. Few fully grasp, in fact, that the big worldwide trend in prices is in transition; it’s moving from one dominated by China’s purported exporting of deflation, to one where America will seek to export inflation. ...Continued

Small Is Beautiful?

Here's an interesting perspective about the European Union by Marshall Auerback. Quite informative.

Euro

The European constitution has been derailed, the Stability Pact looks to be jettisoned, and a nagging rupture over Iraq has affected overall cohesiveness in the European Union. The greatest fears of the euro-sceptics look set to be justified and many are now forecasting the beginning of the end of the European Monetary Union.

To us, it appears as if the fears are overstated. True, the fragilities of the EU have been magnified by the destabilising impact of enlargement. The entry of the former Warsaw Bloc nations has shifted the centre of gravity eastward, whilst simultaneously diminishing the drive to greater integration. But a reduced ability to integrate and centralise is no bad thing, if the EMU is to emerge as a proper functioning currency union.

This is not consensus opinion, as the whole historic thrust of the EU has been toward “ever closer union”. Indeed, the concept of a “United States of Europe” has had a history going back centuries. The notion of a pan-European Parliament was promoted by William Penn as early as 1693. German philosopher Immanuel Kant stressed the need for a league of nations and a Federal Europe in the 18th century. French author Victor Hugo took up the cause during the latter part of the 19th century, after the Serbians revolted against Turkish domination in the Balkans.

In more recent times, economic integration was used after the Second World War to realize political goals, chiefly to anchor West Germany within the western European alliance. Since that time the economies of member states have slowly integrated. The economic environment of the 1950s is a far cry from the integrated community of today. In the 1950s European currencies were not convertible and domestic trade was highly protected. Intra-European trade was based on bilateral clearing arrangements institutionalized by the European Payments Union. Today EU currencies are fully convertible; capital controls, intra-EU tariffs, and quotas have been eliminated; and the single market has been completed. Now the talk is of a new constitution, ostensibly to provide the final institutional arrangements governing the European Union and the euro. But is the constitution really necessary? ...Continued

Monday, January 19, 2004

Is China the Next Bubble?

Is China the Next Bubble?
By Keith Bradsher

...Japan had its bubble in the late 1980's, when the Imperial Palace grounds in Tokyo became worth more than all the land in California. Thailand and Indonesia had their bubbles in the mid-1990's, when speculators and multinationals poured money into what seemed like a Southeast Asian miracle. The United States had its Internet and telecommunications bubble in the late 1990's, when stock prices looked as if they could rise indefinitely and unemployment kept hitting new lows.

Each of those bubbles ended badly, with millions of families losing their savings and many losing their jobs.

As 2004 begins, China's economy looks as invincible as the Japanese, Southeast Asian and American economies of those earlier times. But recent excesses - from a frenzy of factory construction to speculative inflows of cash to soaring growth in bank loans - suggest that China may be in a bubble now, especially on the investment side of the economy.

Bubbles can last years before they pop, but they seldom deflate painlessly when they do. Nobody knows how harmful a sharp economic slowdown would be to China, a country undergoing huge social changes, like the migration of peasants to the cities. The Communist Party rests its legitimacy on delivering consistent annual increases in prosperity.

The Chinese government is showing concern. In the last few weeks, the central bank has tried to dissuade banks from reckless lending while the government has bailed out two of the largest ones, to prepare them for possible hard times as well as planned stock sales. The State Council, China's cabinet, has warned that it will discourage further construction of new factories in industries like aluminum and steel, whose capacity has grown swiftly in the last three years.

Because China is now so important to the global economy and to global political stability, the possibility of economic trouble is starting to draw serious attention among economists and China specialists. ...Continued

IMF Delivers Strong Warning On Growth of US Debt

I'm a solid capitalist, but I thought this an excellent piece from the Socialist web site.

By Nick Beams

The International Monetary Fund has sounded the alarm on the state of US finances, warning that the growth of external debt and the increase in the budget deficit are threatening global financial stability.

The warning came in a 60-page report entitled “US Fiscal Policies and Policies for Long-Run Stability” published last Wednesday. It said that large US budget deficits posed “significant risks” for the US and the rest of the world and that the rising US external debt, estimated to hit the equivalent of 40 percent of gross domestic product within the next few years—an “unprecedented level” for a large industrial country—could destabilise international financial markets.

The rising US demand for finance from the rest of the world—its balance of payments deficits currently absorb about three quarters of the world’s surpluses—coupled with a decline in the value of the dollar “could possibly lead to adverse consequences both domestically and abroad”. This could produce a collapse in international investor confidence in the US pushing up interest rates, leading to cutbacks in investment and a rapid slowdown in the world economy. ...Continued

Saturday, January 17, 2004

MacroMouse - IFA

MacroMouse

"We need a fixed value monetary system. At the present time, we have none. Under floating exchanges, America is simply a powerful ship on an ocean, with no rudder. Old gold, silver, and other known standards will no longer work. They will not work due to the massive increases in communication's speed, the varied endowments of nations' natural resources, and encrypted international speculative opportunities. Therefore, we need a new system. INTERNAL EXCHANGE CLEARING is such a system. It is an entirely new fixed value enhancing - [production standard] - monetary system, to benefit all humankind."

Interest Rates - Arbitrage - Hedging - Deflation?

Pollock & MacKenzie

Warren Pollock is a guest author on Jim Sinclair’s Mineset and has been published in journals including the Journal of Homeland Security. John Mackenzie manages private capital and host's a gold forum/investors exchange on Yahoo groups.

Over the last few days Central bankers have been making statements to firm the dollar. There are also signs that they are taking less visible, coordinated action. While this action may provide short-term stability - by providing supply-side stimulus to inflate financial assets - in total these actions are actually deflationary.

The move to reduce the supply of guaranteed long-dated debt, which began with the withdrawal of 30-year notes, means that any debt retired must be replaced with debt at the shorter end of the yield curve. Of course, this action reduces the government’s cost of capital, at least in today’s environment. But in our view, this move also was made to encourage the issuance of mortgage-backed securities. Regardless of the reason, this shortening process is ongoing and it represents a major deflationary exposure in a way that investors may not have noticed.

Long bonds and Treasury finance
Long end paper has many uses. For investors, it provides a steady and predictable income stream against money borrowed in the marketplace. Additionally it provides arbitrage profits, which have become the most important aspect of our service-based economy. Every manufacturer has become a financier that borrows and re-lends money against guaranteed notes.

Lowering rates towards zero destroys this “new era” profit equation. With less capital available for arbitrage, there are less financial profits, and less money available for traditional capital expansion. Meanwhile, savers experience a negative return. These forces cause economic contraction and reduce systemic liquidity. ...Continued

Will China Avoid Japan-Like Debt Nightmare?

W. Pesek

Will China Avoid Japan-Like Debt Nightmare?
William Pesek Jr.
Chinese regulators entered 2004 with rarely seen enthusiasm to repair the rickety banking system.

First, Beijing said it used about a 10th of its foreign exchange reserves, $45 billion dollars, to bail out its second- and third-largest lenders. The money will boost the capital adequacy of two banks it plans to take public this year or next.

Next, the Ministry of Finance, according to the New York Times, is preparing to write off its $41 billion stake in the two banks, Bank of China and China Construction Bank. The hope is to jumpstart the disposal of non-performing loans. China is sitting on a bad loan problem than is worse than Japan's.

China has done more to revive its banks in the first two weeks of 2004 than it did in the previous two years. In any economy's development, there are pivotal moments that offer hints for the outlook. Beijing's move to accelerate its bank-repair efforts is such a moment, and investors shouldn't miss it.

Yet Beijing will need to get far more ambitious, both with funds and reforms. The problem isn't one of capital, per se, but the nature of the four biggest banks.

`Achilles' Heel'

``China's `commercial banking system' is the Achilles' heel of China's economy,'' says Donald Straszheim, president of Straszheim Global Advisors. ``Their banks are not banks. The four big banks, state-owned, dominate the industry and are merely lending arms of the government.''

Regulators have considerable heavily lifting to do. And it's possible all this is merely an effort to dress up banks so investors will find them more attractive. China isn't renowned for its transparency, and its track record on bailouts isn't good.

That said, there's reason to applaud Beijing's efforts -- and to give it the benefit of the doubt, at least for the moment. Here are three reasons why.

One, it's heartening to see China get serious about one of the biggest obstacles to becoming the superpower that is its potential. Regardless of how cheap its labor and land costs are, China will only thrive if its underlying financial system is sound. ...Continued

Friday, January 16, 2004

Elusive Global Healing

Sorry for the absence. Been on vacation in Florida. Steven still seems to be doing the best job of explaining global imbalances and the problems it poses, so I am posting his material again. At this point in time, many more people need to awake from their Rip-Van-Winkle sleep! We need international financial architecture reform, now! On another note check out Bonobo's new look.

Morgan Stanley

Steven Roach

With the world economy rebounding smartly in the second half of 2003, talk of global healing is back in the air. But compared with the circumstances prevailing in late 1998, when the stage was set for a spectacular rebound from the Asian financial crisis, today’s global economy is in a very different place. Despite the hopes and dreams of momentum-driven financial markets, I would attach a slim probability to another bout of global healing.

It’s hard to forget the stunning turnaround in the global economy in 1999 that we dubbed “global healing.” For me, it was just about the last time I was bullish on global growth prospects. Back then, the confluence of an ever-deepening Asian financial crisis, together with the failure of Long-Term Capital Management, had pushed the world economy to the brink of something awful. Financial markets had effectively seized up, pricing assets for the twin perils of a deep recession and deflation. In the midst of that despair in late 1998, we turned bullish on the global outlook. The world economy had gotten the functional equivalent of a massive tax cut — more than $160 billion in IMF-led bailouts worth about 0.5% of world GDP, coordinated G-7 monetary easing, and a disinflationary shock that boosted consumer and business purchasing power in the developed world. Just as it seemed that the crisis was spiraling out of control, the seeds were, in fact, being sown for a powerful revival. Global healing took a bruised and battered world by storm. Why can’t it happen again?

A replay of this glorious scenario is highly unlikely today, in my view. The main reason is that today’s global economy is far more unbalanced than the world was five years ago when global healing took hold. The evidence is compelling: As I have noted repeatedly, the US accounted for fully 96% of the cumulative increase in world GDP over the 1997–2002 period — the most lopsided mix of global growth on record. A similar conclusion can be drawn from the dispersion of the world’s current-account deficits and surpluses. In 1997, prior to the onset of the Asian crisis, the world’s external deficits (mainly America) amounted to –0.8% of world GDP, whereas the world’s surpluses (mainly Asia and, to a lesser extent, Europe) totaled 0.7% of world GDP. By contrast, in 2003, the disparities had widened dramatically: Deficits hit –1.6% of GDP, whereas surpluses amounted to about 1.1%. (Note: Due to long-standing statistical anomalies, the world’s current-account surpluses and deficits never seem to add up). In other words, the spread between the world’s current-account surpluses and deficits in 2003 was about twice as wide as it was in 1997. ...Continued

Monday, January 05, 2004

Rules To Tame The Global Casino

This article is a few years old but well worth the post, as I am also an advocate of reform of the international financial architecture, and more than happy to list anyone with serious agreement. Hazel has many interesting and sound points of view on many subjects of interest to all of us.

Hazel Henderson

What is needed is nothing short of a "New Bretton Woods" the international conference which in 1944, created the first global architecture. These multilateral rules and agencies, including the World Bank and the IMF, served the world economy until 1971 when US President Nixon unilaterally pulled the plug by slamming the US gold window shut.

Since then, the world has lurched from crisis to crisis - through a roller coaster of global recessions, currency gyrations, and many ad hoc arrangements for floating currencies, capital movement controls and convertibility rules. Today's growth of financial flows: daily $1.5 trillion global tides which slosh back and forth -- create asset bubbles on Wall Street and currency meltdowns in Asia. Huge lossses, collapses of banks and brokerages resulted -- as volatility and volumes grew.

Investors began hedging their holdings by buying future contracts "derivatives" -- betting on which way interest rates and currencies would move. Today, there are between $30-50 trillion in such derivative positions -- where each player hedges their individual risk by adding such risks to the whole global system.

Back in 1995, at Copenhagen a set of proposals emerged in the report of the Global Commission to Fund the United Nations (which this author co-edited). We called for: A very small (0.05%) tax on all currency trades, first discussed at Bretton Woods in 1944 and later versions proposed by US economists James Tobin (in 1975) and by Lawrence Summers, now Under Secretary of the Treasury, in 1989. Such a tax would not hurt real, long-term investors, but would bite speculators who move money across borders often hundreds of times a day.

A global version of the US Securities and Exchange Commission (SEC) to harmonize regulations of securities and currency markets. Such an international supervisory body would curb today's unregulated global casino of insider trading, fraud, money-laundering and capital flight. Today, speculators' "bear raids" attack perceived weak currencies such as those in 1993 which drove the British pound down and out of the European Monetary Union (EMU).

A proposal that the world's major central banks get together and set up their own "public utility" currency exchange. Thus they could compete with today's money center banks and speculators and properly oversee their currencies to protect their domestic purposes.

Clearly, it is time for a new Bretton Woods conference -- convened by the United Nations --to redesign the world's financial architecture and at last, cooperatively write new rules needed to tame the global casino. ...Continued

Friday, January 02, 2004

Demand in China, Weak Dollar Will Support High Oil Price

Demand in China, Weak Dollar Will Support High Oil Price
By Simon Romero

THE price of oil this year will turn on several developments around the world, among them the rise of China's economy, whether the United States dollar continues falling as many in the industry expect and political uncertainty in nations with substantial oil reserves: Iraq, Russia, Venezuela and Saudi Arabia.

Major developments in any of these areas could cause the price of oil to rise from its current $32.52 a barrel for light crude on the New York Mercantile Exchange. Barring any unexpected or calamitous events, many analysts say it is even possible that the price will slip slightly, possibly to $27 to $30. But the price is expected to remain relatively high.

Fast-industrializing China has emerged as a crucial source of increasing demand for oil, already eclipsing Japan by some measures as the world's second-largest oil market, after the United States. This trend, creating upward pressure on the price of oil, is expected to continue in 2004 as the Chinese economy continues to grow. An annual growth rate of 7 percent is forecast.

China's demand for oil grew 10 percent in 2003, and it is expected to increase 6 percent this year, or the equivalent of an additional 320,000 barrels a day, according to the International Energy Agency. While the strain of coping with the growing thirst for oil may become evident in China's energy infrastructure this year, oil exporters are toasting the emergence of an important market.

Stronger demand in China, and, to a lesser extent in other Asian economies, was a main reason that the Organization of the Petroleum Exporting Countries decided not to cut production at its last meeting in Vienna in December, leaving in place its production limit of 24.5 million barrels a day. None of OPEC's 11 members showed displeasure with leaving the price of oil hovering around $30 a barrel, or $2 more than the top of the group's self-proposed trading range of $22 to $28 a barrel, which is often flouted. ...Continued