“Perpetual Economic Suzerainty”___The Free-Trade Limit…
“Perpetual Economic Suzerainty”___The Nation to Nation Transactions’ Flows, Until A New Nation Is Crowned___King!
The Self-Arbitrage of Capitalism Into Communism…?
“It‘s all a matter of currency exchange rate laws, and true ppp’s.” me
We need to raise the stage of understanding to higher levels of perception. At present, the highest levels of vision seem to be divided between the special interests of free-traders, and the special interests of controlled traders, with the middle position of universal sustainability and subsidiarity of all, being completely ignored, as it seems not yet, to be clearly defined. The special interests, of both sides, are both worshipping conflicting and unsustainable systems of laws, which have mainly evolved over the last century, whose ideas were developed over many centuries of trial and error. The standards of value, which guide both these diametrically opposed systems, have very different fundamental principles, but are very much identical in total transactions’ results___They both wish to maximize profits, over the greater good, for all their citizens___This is a cruel truth we all must accept, to understand the world’s true law and money dynamics. Capitalism cherishes liberty and a semi-freedom of the people, the sovereignty and security of state, and the general welfare, wealth and protection of its international community. Communism cherishes extreme governmental freedom without freedom of its people, a similar sovereignty and security of a highly protected state, and a very different controlled welfare and rent, yet protection, of its special invested international community.
Let’s look at what makes these two law systems so very different. I think it easiest to understand by a new view and open-eyed perception of recent history. By recent, I mean from 1775-2008. In 1775, America was just a fledgling, fighting for survival, baby nation, yet she had an un-precedented access to free-for-the-taking commodities, land and resources, allowing her to experience the lowest real wages, in all of history, to that point in time. Is it any wonder why she eventually assumed, by perpetual economic and trade suzerainty, financial dominance over the known world, by WW I? At the same time, communism was still just an ideal, in the books of Karl Marx, who had only written “The Communist Manifesto” in the 1850’s, and in the 1870’s he’d penned “Das Capital”. It was not until WW I, that the markets brought any true fruition to Marx’s ideas, and then they remained quite fledgling, for many years, in Russia. China started its long march in the 1920’s, with Mao not achieving communist victory until 1949. She really remained just a fledgling nation until the `70’s and `80’s, when she began to make her presence known, on the greater world stage, but from the `80’s to `08, she’s truly become a dominant force, not only on the world military and political stage, but the economic and trade stage, as well, especially in Africa, as pertains to commodity, other resources and oil extractions. Of course, we are all familiar with the rise of Lenin/Stalin’s super-power state, it’s fall in the `90’s, and its new emergence, as one of the BRIC’s,(Brazil, Russia, India, China), growing very rapidly. I could go into all the intricate law system evolutions of both the capitalist and communist/socialist systems, but I wish to concentrate on the trade and money systems’ laws, and their intricate inter-actions of transactions’ evolutions, over the last 213 years…
Economic law systems’ evolutions have been un-successfully penetrated by all the world’s major historians, economists, systemologists and universologists, to this point in time, yet I intend to develop this higher level of perception and understanding, to clear and simple visions, of new knowledge. There are several old tools, laws and theories I intend to use, and some new ones. First of all is law itself, especially long and short positions’ laws of trade transactions and contracts. Next is the natural law of “perpetual economic suzerainty”, where nations’ laws, and money systems of, short sell themselves, through co.’s/corporate, labor and trade arbitrage, to other nations’ laws, and money systems of. Incentive point theory and facts will be used to clearly see these transactions, in our present world, as well as their clear facts in history, such as the Spanish Empire’s over-acquisition of gold, causing over-incentivization and specie point inflation/deflation and decline, leaving the English Empire in control, by the natural law processes of, over-arbitraged and over-short sold, “perpetual economic suzerainty”. True PPP(purchasing price parity, and not Arrow-Debreau’s black hole of false purchasing power parity, false neutrality of money, and false equilibrium theory, and other monetarist false money theories) and real money reality, will be used to clearly show the comparative dis-advantages of empires’ declines, and true PPP’s will also be used to show other empires’ comparative advantages’ rises, and eventual over-beliefs’ of free-trade comparative advantages’ falls. All the economic history books, especially Dr. Paul Einzig’s, Lord J.M.Keynes’, Dr. Hyman Minsky’s, Dr. Paul Davidson’s, Dr. Paul Krugman’s, Jane D’Arista’s, and Robert Skedelsky’s, the banking history books, and all government documentations, are very clear to the facts backing my words, when today’s, overly glaringly obvious, history of global transactions’ law systems, are clearly transposed onto the English and Spanish Empire’s past history of slowly short-selling themselves to the “American IMF Empire”(and I am aware the IMF didn‘t exist until 1945), of global transactions’ trade and law evolutions, through the systems’ law processes, of the un-intended natural law of “perpetual economic suzerainty”, from the period of 1875 to 1945. Further, the above also pertains, now, to “America’s/OECD's IMF Empire”, arbitraging, off-shoring, and short selling free-trade and transactions’ law capitalism, to controlled-trade and transactions’ law communism.
The imperial preference laws in play, of Spain and England then, and America now, through the IMF and the “Washington Consensus”, are the major arm and culprit, in the battle of global transactions’ true law systems’ battles, pushing free-trade capitalism into controlled-trade communism, and not what China is doing to us. We are the ones responsible for our own nefarious laws’ and transactions’ realities, of blind irrationalisms and outright self-inflicted currency-trade-market suicide. We threw down the very IFA Bretton Woods I system, China is now punching us in the trade face with, called IFA Bretton Woods II… It’s always been the play between imperial preference laws, and currency law realities, of their true PPP’s, controlled by the true incentives’ points, and the specie points of, held in over-all play by the IFA laws, of all concerned___It’s just the fact that we’ve thrown our IFA away, and freely opened ourselves to outright law and money systems’ manipulations… The Spanish and English Empires’ imperial preference IFA laws over-exploited their satellites self-sustainability, by setting currency and commodities’ prices at low un-fair market rates, first over-benefiting the empires, thus reducing the satellites to the conditions of the “over-development of under-development”, as Andre Gunderfrank has so aptly labeled it. It’s an overly fair assessment, as all history clearly records it, and now, when transposed up to the present, we have the “American/OECD's IMF Empire” creating the same global conditions, in its satellite nations, of nothing short of the “over-development of under-development”, or over-exploitation of subsidiarity and real and fair sustainability... Well, when nations are exploited to the levels Spain and England practiced, one must realize currencies drop to levels where a common subsidiarity and solidarity develops by the underdogs, to go after the giant who’s been stealing their food and shelter, and that’s just what happened, with America being one of the exploited, by imperial preference laws, and she joined in solidarity and subsidiarity with Spain’s and England’s satellites, to over-take the major empires, as is clear of all historical evidence. The PPP, currency, trade and commodity numbers are all there for everyone to investigate, especially in William Spaulding’s and Dr. Paul Einzig’s currency history books… This is nothing but the ruling empires short-selling, arbitraging, off-shoring and free-trading their empires away, to the satellites, by the over-arching IFA(international financial architectures’) laws of the time, through the natural total transactions’ realities of “perpetual economic suzerainty”(evolution of nation to nation transactions’ power flows), the highest truth and understanding level of perception, of global markets and free-trade transactions, possible___“Perpetual economic suzerainty”___The free-trade limit___if you wish to maintain eco-geo-political sovereignty, subsidiarity and true sustainability...
And finally, we come to the China/America conundrum, of a seeming free-trade, transactions and markets’ capitalism, verses, a known controlled-trade, transactions and markets’ communism, or at the least autocracy, and at the most totalitarianism. Do we want to free-trade capitalism into controlled-trade communism…? This is the heart of the two IFA law systems’ intents and realities COLLISIONS, of the existing systems___Which road? What road…? If we sincerely again transpose the past actions of capitalist nations onto the present capitalist/communist collisions, we clearly see the same identicality of PPP’s, currencies, trade and market transactions taking place, with the added dis-functionality danger, of the highest natural law of “perpetual economic suzerainty”, playing directly into communist China’s hands, yet we, through our imperial preference IMF empire laws, created the very market, trade and transactions, of the “over-development of under-development” taking place, reducing our satellite countries to the PPP, commodity and currency levels, more aligned and beneficial with and to China than ourselves, putting our very national security at stake, our national freedom at stake, and our national economic security, in the hands of the enemy, as China will never turn real power over to democracy, as many falsely believe. They’ve the best of all possible world’s___Absolute power over wealth and security___Why give up power and success to a shared democracy? They see they have the most powerful system of law, to ever share the world stage, and know its true intent and abilities, if they only maintain the autocracy they have. This is why America must internally and externally change course___If not___We become the underdog satellite of communist China, the BRIC’s, and their minions, of other China satellites. The mathematics of “perpetual economic suzerainty” are irreversible through free-trade, as we now know, and have it constructed, which can be described as external un-regulated transactions free-trade and markets___That’s irreversible…? As we know it…but, it is reversible by internal transactions’ law changes, coupled with external law changes of the IFA laws___to avoid the “perpetual economic suzerainty”, of free-trade’s limit, we all by now know, as a devilish black hole, of all the world’s past empire experiences, since it’s actually true, no matter which empire we study, as Dr. Paul Einzig’s anthropology, “Ancient Money”, and “History of Foreign Exchange”, clearly show………………….
What’s your choice? To continue short selling, arbitraging, off-shoring and free-trading capitalism into the black hole of controlled-trade communism, or REAL CHANGE…?
I choose CHANGE…!
Just another short warning to Obama, about America’s NATIONAL SECURITY…
P.S.
All free-traders should realize high and low currencies are nothing but extreme tariffs and opposite direction trade subsidies, and have been since abandoning any semblance of any real standards of value, truly principled, capitalism, in the `70’s___The death of Bretton Woods I. Free-traders have been screaming for trade barriers to come down, as they’ve really been jacking them with currency bands widening, with their false floating exchange mentality and reality, fostered and furthered by the false “Washington Consensus”, of the academic pin-heads, and the political and economic pin-heads, all thinking and falsely believing, absolutely inane money mechanics’ non-sense, for over 35 years…
We now have the BRIC’s Bretton Woods II system, of superior trade mechanics operations, also known as Mercantilism eating us alive, and we are the seeming helpless, diminishing power Hegemon, as were Spain and England, years past…
This my friends, must change…!
America definitely needs “A Grand Independent Finance and Energy Strategy”___Immediately…!!!
Remember, they’ve got the money, we’ve got the debt___A $9+ trillion national debt, and $1+ trillion leaving the nation for the oil autocracies/dictatorships, and the trade-goods autocracy of China, every year___How long does anyone, truly, think this can last…? We’re free-trading the Eagle’s paper money, into the mouth of a Fierce Fire Breathing Dragon…!!! Last I checked, fire burns paper eagles…
America must realize, “You can only free-trade, until cheap labor, out-trades you.” This is the #1 law of capitalism and free-trade, and China has clearly, out-foxed, and out-traded us. The BRIC’s and Japan, have $3.5 trillion of our hard currencies, while we have the debt of that plus, and they will burry us alive, unless we change course___immediately___I can ADD…!!!
I think it’s high time to awake…America…!
P.S.
U.S. Busy - China On The Move
The most interesting dynamic in the world is China as a capitalist power, a huge future economic powerhouse. How will America fair in the dynamics of this great competition? Will we awake and rise to the challenges posed, and reform the international financial architecture, as needed, so fair trade can finally start the long journey to rebalance the world's markets? Or, will we play Rip-Van-Winkle too long? I have no idea which choice we will make, but, I do know if nothing is done America Inc. will pass by “perpetual economic suzerainty”[just as England did to America] from our hegemonic power to the hegemonic power of China Inc. Some may say, here, that China has no chance of this, it will go the way of Russia. Well, maybe so, but again, in this case due to the massive amount of global derivative insurance contracts, foreign direct investment, and global treasury instruments invested in or held by China - a controlled capital market, the rest of the world would trip over itself being first to either help or support China in any future serious financial market troubles, as such could bring down the entire house of cards. This would then leave her strong enough to become the example of the first scenario - global eco-political hegemon. I'd say we'd better soon awake from the Great Cold War Snooze.
The Liquidity Conundrum
China, the global wages dynamic and the global resources dynamic - is this all the story or is this a much more complex dynamic? My answer to this is one you may never have thought of. I've recently been involved with many academic and intellectual groups pouring over the world's problems, and mainly from economic perspectives. What has struck me as novel is the fact the U.S. and many western nations preached for the downfall of Marxist philosophy nations for over 75 years, yet never penned hardly a word about what the world would be like if their dream came true - what the economic, ie., wage, inflation and resource dynamics set in play would truly be. By this I mean Marxist nations for all these years had barely any inflation in wages and internal resource prices compared to the western world. Then I got thinking about colonialism and imperialism exerting a very similar economic dynamic in the countries where practiced for centuries - and then them also re-entering the free capitalist system mostly after WWII. Most of the colonial nations didn't experience the rates of inflation their host countries did either, much the same as the Marxist countries, since they were manipulated low - kind of like capitalism's socialist surrogates. This means that a huge, more than huge, economic dynamic has been released on the world, first by the post colonial period after WWII, and then by the post Marxist period since the early `90's.
After thinking about the above I got thinking about what my grandfather had told me about time - ie., empire time and timing of nations' integrations and re-integrations. Looking back over history we all recognize the many great, and not so great empires that have existed. They all existed for a time - time and the timing of empires and nations' existence is key to my thinking. If we boil this down to a basic model of ET=WIR, or empire time equals wages, inflation and resources, I think we can see quite a simple example of otherwise complex data. It matters not which empire or nation we use, as our model, as all work the same to these four factors - time, wages, inflation and resources, since these four items can represent everything present in any and all empires and nations. Nations and empires all started out with cheap wages, low inflation and cheap resources. Time, there it is again, time changes this dynamic and only time does. Now, that may seem quite obvious but, over time any empire or nation, such as the U.S., starting out with practically free for the taking resources, which in itself would have created cheap real wages, was a huge dynamic on the then existing capitalist world. Defining this further, we were a mercantilist nation entering the hegemonic capitalist world of the European empires. By us having such cheap real wages and resources we couldn't help but accidentally grow into the greatest power and wealth nation the world has ever known, but now we face the same problem from China that we then posed on the capitalist hegemonic world of 1791. We are now the hegemon and China is the mercantilist with the cheap wages and internal resources - not to mention her mercantilist minions all over the globe.
This timing dynamics has been going on since the dawn of economic time. Any one nation or potential empire starts out with the cheapest wages and resources, whether it be Egypt or the Mayan's, and over time inflates to higher levels than the periphery, and at some point the periphery becomes a new center. This happens due to nothing more than the time and timing growths and integrations of wage prices, inflation rates and resource prices. Low price nations and empires become high price nations and empires over time, and thus trade places one after another through the process of “perpetual economic suzerainty” - the never ending cycle of the circle of nations' time cycles. So time and re-timing the global cycles into and by global re-balancing through sliding time scale law structures is the only way this author sees to solving this greatest of history's global problem.
P.S.
A Note To Paul Krugman
Excellent view of Keynesian thought, Paul. I'd just like to point out something you wrote, but may not have realized its thorough implications. WWII, as you rightly mentioned, was a public works project, but a massive one, and is the most important implied aspect of Keynes' entire manifesto, imho. Expansionary fiscal policy, alone, doesn't cut it. It must be accompanied by public works, in the most dire of times, as the `30's certainly were, and WWII’s recovery, clearly shows, etc., as fiscal stimulus, only, simply goes up the chimney of Wall St. investment and speculation, far too quickly, thus lowering TFP(total factor productivity). It must be spread to Main St., through public infrastructure spending, as Keynes suggested, in the worst of times, to spread and slow the velocity of stimulus mechanics, throughout the entire economy, to truly raise TFP…
As to the deeper analysis of Keynes' great work, his "IFA-international financial architecture", of which you do not mention, in your piece, since it really wasn't in his "General Theory", yet is the central achievement of his thought, must be brought to the front, and thoroughly re-interpreted. I would title such a work, "The General Theory of Massive Currency Tariffs, Massive Currency Credits, and TFP Decline"___What Keynes/Einzig tried to prevent in 1945___Nixon instituted in the 1972 era, and evolved by 2008___to the highest, most nefarious, currency trade tariffs, credits/subsidies and off-shoring incentives, the world has ever known… Skedelsky is quite clear on the importance of Keynes IFA contributions, and further, his yet untried balance of payments "Bancor" system. I think if we were to work through a re-interpretation of these more central mechanics of Keynes' thought, we would be better prepared for what the world may shortly face…
Thanks for your great thinking,
and with due respect,
Lloyd Gillespie
(a polymath, autodidact, true Keynesian economist) The American Mind
Thanks to Obama___Change the world? YES WE CAN…!
Friday, July 11, 2008
Sunday, July 06, 2008
Gustav Cassel - PPP's - China? You were all warned...!
Gustav Cassel - PPP's - China?___An older article, updated and re-published, yet still very pertinent...
Over the past week I have posted several articles about the international financial architecture, the IMF, WTO, sweatshops, FTAA, etc. I felt I should expand my ideas to bring more clarity to these posts. I thought I'd use the case of China - U.S. trade and purchasing power parities. Below is quoted a few lines about Professor Cassel, the creator of purchasing power parity theory. I feel this is the most important economic theory, especially in trying to understand the global labor and wealth arbitrage now going on in the world. Many have argued trade will eventually rebalance markets. As I have already pointed out in a recent post, "the glaring imbalances in global wages is beyond economic reality, no matter what other economists' dribble may say. This sweatshop situation will almost empty America of jobs befor trade realities rebalance markets to fair global ppp's if let to continue." Let me expand.
Let's just take Wall-Mart for an example as it is the largest corporate footprint between the U.S. and China trade and economic realities - close to a trillion dollar corporation. It would be one thing if we only had to deal with a currency value at 6.86 to 1. It's quite another when the internal value of that currency is another 25 to 50 times cheaper[depending on location in China] than ours, making real wages for Wall-Mart sweatshops at an average of 10 cents/hr. to an average of 25 cents/hr. for their retail stores' workers in China(86 cents average for entire country). I think all the economists writing on this subject should get a handle on it by rereading Professor Cassel's books again. They may wake up and come to different conclusions about trade and economic realities being able to rebalance world markets over time - how much time, a hundred years? China is in real deflation, while also inflating, making matters worse, not better. They have lost 22million jobs, themselves. World demand has shrunk tremendously since the crashes of `95 to 2002. We have never been here befor as Edward Hugh often points out.(Much of this needs updating, but the point remains, massive losses of jobs in certain sectors, as other sectors add more workers, yet overall decrease of jobs, even today).
The NGO's around the world are trying to wake up everyone, but the sleep seems to be a Rip-Van-Winkle reality. Befor the Elite Consensus awakens we will have arbitraged every democracy in the world to corporatocracy(and communism). Do we want that? America has been nothing but a giant dump truck full of corporations, with the body slowly going up for the last thirty years, spewing extractive corporations to every nation. No one wants them coming in and destroying but they are there doing just that. Now at this point economists and others will scream what are you a kook? No, I am not. I am simply pointing out a powerful economic reality. It is impossible to build locally, or nationally fast enough to keep up with the international economic extractive capabilites of the corporations. As Steven Roach pointed out, global trade has risen from 11% of global GDP in 1970 to 25% of global GDP in 2003(and when derivatives are added in, a massive 95+%), with no end in sight. Pretty soon the oceans and skys are going to be overfull with cargo carriers, polluting and using massive amounts of our precious fossil fuels, for nothing other than infectious greed.
Corporations operating out of China are making as high as 40 to 90 cents profit on every dollar. This is outrageous, and it will not stop, and they surely arent sharing out of the 37+ tax havens. Not only are they not sharing the wealth but the internation dynamics of credit producitvity and multiplication factors of drastically reduced reserve requirements' banking, is contributing to an ever faster creation of massive asset bubbles that will surely end in crashes, sooner or later. The major question is how soon, and where?
Now if anyone still thinks trade will rebalance world markets in a climate of global deflation, of 31million manufacturing jobs vanished from 1995 to 2002, let me know. Even if the currencies between China and the U.S. were floated and reached 1 to 1 the internal ppp values would still allow corporations plenty of profit to continue the madness for years to come. An does anyone seriously think the U.S., or other nations, is going to let the dollar become cheaper than the yuan? It would have to be .87, or there abouts, to the dollar to balance ppp's, and truly rebalance these markets. This is why I say this situation is beyond economic realities' solutions - future crash guaranteed if let to continue.
Over the past week I have posted several articles about the international financial architecture, the IMF, WTO, sweatshops, FTAA, etc. I felt I should expand my ideas to bring more clarity to these posts. I thought I'd use the case of China - U.S. trade and purchasing power parities. Below is quoted a few lines about Professor Cassel, the creator of purchasing power parity theory. I feel this is the most important economic theory, especially in trying to understand the global labor and wealth arbitrage now going on in the world. Many have argued trade will eventually rebalance markets. As I have already pointed out in a recent post, "the glaring imbalances in global wages is beyond economic reality, no matter what other economists' dribble may say. This sweatshop situation will almost empty America of jobs befor trade realities rebalance markets to fair global ppp's if let to continue." Let me expand.
Let's just take Wall-Mart for an example as it is the largest corporate footprint between the U.S. and China trade and economic realities - close to a trillion dollar corporation. It would be one thing if we only had to deal with a currency value at 6.86 to 1. It's quite another when the internal value of that currency is another 25 to 50 times cheaper[depending on location in China] than ours, making real wages for Wall-Mart sweatshops at an average of 10 cents/hr. to an average of 25 cents/hr. for their retail stores' workers in China(86 cents average for entire country). I think all the economists writing on this subject should get a handle on it by rereading Professor Cassel's books again. They may wake up and come to different conclusions about trade and economic realities being able to rebalance world markets over time - how much time, a hundred years? China is in real deflation, while also inflating, making matters worse, not better. They have lost 22million jobs, themselves. World demand has shrunk tremendously since the crashes of `95 to 2002. We have never been here befor as Edward Hugh often points out.(Much of this needs updating, but the point remains, massive losses of jobs in certain sectors, as other sectors add more workers, yet overall decrease of jobs, even today).
The NGO's around the world are trying to wake up everyone, but the sleep seems to be a Rip-Van-Winkle reality. Befor the Elite Consensus awakens we will have arbitraged every democracy in the world to corporatocracy(and communism). Do we want that? America has been nothing but a giant dump truck full of corporations, with the body slowly going up for the last thirty years, spewing extractive corporations to every nation. No one wants them coming in and destroying but they are there doing just that. Now at this point economists and others will scream what are you a kook? No, I am not. I am simply pointing out a powerful economic reality. It is impossible to build locally, or nationally fast enough to keep up with the international economic extractive capabilites of the corporations. As Steven Roach pointed out, global trade has risen from 11% of global GDP in 1970 to 25% of global GDP in 2003(and when derivatives are added in, a massive 95+%), with no end in sight. Pretty soon the oceans and skys are going to be overfull with cargo carriers, polluting and using massive amounts of our precious fossil fuels, for nothing other than infectious greed.
Corporations operating out of China are making as high as 40 to 90 cents profit on every dollar. This is outrageous, and it will not stop, and they surely arent sharing out of the 37+ tax havens. Not only are they not sharing the wealth but the internation dynamics of credit producitvity and multiplication factors of drastically reduced reserve requirements' banking, is contributing to an ever faster creation of massive asset bubbles that will surely end in crashes, sooner or later. The major question is how soon, and where?
Now if anyone still thinks trade will rebalance world markets in a climate of global deflation, of 31million manufacturing jobs vanished from 1995 to 2002, let me know. Even if the currencies between China and the U.S. were floated and reached 1 to 1 the internal ppp values would still allow corporations plenty of profit to continue the madness for years to come. An does anyone seriously think the U.S., or other nations, is going to let the dollar become cheaper than the yuan? It would have to be .87, or there abouts, to the dollar to balance ppp's, and truly rebalance these markets. This is why I say this situation is beyond economic realities' solutions - future crash guaranteed if let to continue.
Gustav Cassel
Gustav Cassel, a Swedish economist, developed the theory of exchange rates known as purchasing power parity. He did so in some post-World War I memoranda for the League of Nations. The basic concept can be made clear with an example. If 2 U.S. dollars buy one bushel of wheat in the United States, and if 1.6 German marks exchange for 1 U.S. dollar, then the price of a bushel of wheat in Germany should be 3.2 German marks (2 * 1.6). In other words, there should be parity between the purchasing power of one U.S. dollar in the United States and the purchasing power of its exchange value in Germany.
Cassel believed that if an exchange rate was not at parity, it was in disequilibrium and that either the exchange rate or the purchasing power would adjust until parity was achieved. The reason is arbitrage. If wheat sold for $2.00 in the United States and for DM4 ($2.50) in Germany, then arbitragers could buy wheat in the United States and sell it in Germany and would do so until the price differential was eliminated.
Economists now realize that purchasing power parity would hold if all of a country's goods were traded internationally. But most goods are not. If the price of a hamburger in the United States was $1.00 and in Germany was $1.50, arbitragers would not buy hamburgers in the United States and resell them in Germany. Transportation costs and storage costs would more than wipe out the gain from arbitrage. Nevertheless, economists still take seriously the concept of purchasing power parity. They often use it as a starting point for predicting exchange rate changes. If, for example, Israel's annual inflation rate is 20 percent and the U.S. inflation rate is 4 percent, chances are high that the Israeli shekel will lose value in exchange for the U.S. dollar. ....Article Continued
Monday, June 23, 2008
To Fareed Zakaria at CNN___The World’s Last One-Hundred Years, Most Important Event
To Fareed Zakaria at CNN___The World’s Last One-Hundred Years, Most Important Event
Hi Fareed, thanks for the program, it’s great___Keep up the fine work… As to your question; “What’s the world’s last one-hundred years, most important event?” That, transactions’ mathematically factually, would definitely be Nixon’s `71 and `73 decisions to end the gold std. and the Bretton Woods system, and replace them with the longest era of currency tariff manipulations of nations’ trading systems, the world has ever known___Almost all the world’s excess off-shoring, excess arbitraging, hedging and speculation, is controlled by this one famous inane, freely-floating exchange’s, decision era. This has evolved into the system of extreme currency tariffs and subsidies, of between 400% and 800% actual ppp(actual purchasing price parity, and not the false purchasing power parity) exchange rate differences, between the developed world and the under-developed world, especially when Japan’s over-valued, and the BRIC’s(Brazil, Russia, India, China), and satellites, under-valued currency tariffs and subsidies are considered, at the extremes. The extreme economic senility, of trillions of dollars, of capitalist system costs added, by this “Kabuki Shadow Banking” mafia-capitalism’s imbalanced system, hasn’t been seen since China and Japan, some 600 and 400 years ago had such imbalanced currency systems’ standards, with China at 10 to 1, and Japan at 6 to 1, silver to gold ratios, when the West was at 14.5/15 to 1. History clearly records the devastating results of these collapses, when just semi-free, yet vastly imbalanced currency systems’, trade was first, large scale, tried, between the East and West. It wasn’t pretty…
Extremely imbalanced currencies, ARE, Extremely High Trade Tariffs, and opposite direction Trade Subsidies…!
The world can handle 10% and 20% imbalanced currencies. It can not handle 400% to 800% true PPP Currency Imbalances. The Derivatives $596 trillion markets(now fast expanding, notional transactions turnover trading value, per year___BIS numbers) simply put far too much financial pressure on Capitalism’s Aggregate System Operations’ Costs, as is now being clearly witnessed in our financial markets…
Unless we take down the extreme global currency tariffs and subsidies systems, by instituting a new “International Financial Architecture” re-balancing system, of sliding time scaled, self-balancing laws, capitalism is mathematically transactions guaranteed, to fully collapse, with all the system and currency raiding, taking place, by none other than Nixon’s, originating and now fully grown, Corporate Currency Raiding Mafia-Economists & Co... The show continues…
Dr. Paul Einzig’s complete works, some 65 books, verify the above facts, along with hundreds of other historical financial economists’ books and facts …
It’s time for America to awake…
Lloyd Gillespie
(a polymath, autodidact economist)
Post also published on my blog at: MacroMouse
Hi Fareed, thanks for the program, it’s great___Keep up the fine work… As to your question; “What’s the world’s last one-hundred years, most important event?” That, transactions’ mathematically factually, would definitely be Nixon’s `71 and `73 decisions to end the gold std. and the Bretton Woods system, and replace them with the longest era of currency tariff manipulations of nations’ trading systems, the world has ever known___Almost all the world’s excess off-shoring, excess arbitraging, hedging and speculation, is controlled by this one famous inane, freely-floating exchange’s, decision era. This has evolved into the system of extreme currency tariffs and subsidies, of between 400% and 800% actual ppp(actual purchasing price parity, and not the false purchasing power parity) exchange rate differences, between the developed world and the under-developed world, especially when Japan’s over-valued, and the BRIC’s(Brazil, Russia, India, China), and satellites, under-valued currency tariffs and subsidies are considered, at the extremes. The extreme economic senility, of trillions of dollars, of capitalist system costs added, by this “Kabuki Shadow Banking” mafia-capitalism’s imbalanced system, hasn’t been seen since China and Japan, some 600 and 400 years ago had such imbalanced currency systems’ standards, with China at 10 to 1, and Japan at 6 to 1, silver to gold ratios, when the West was at 14.5/15 to 1. History clearly records the devastating results of these collapses, when just semi-free, yet vastly imbalanced currency systems’, trade was first, large scale, tried, between the East and West. It wasn’t pretty…
Extremely imbalanced currencies, ARE, Extremely High Trade Tariffs, and opposite direction Trade Subsidies…!
The world can handle 10% and 20% imbalanced currencies. It can not handle 400% to 800% true PPP Currency Imbalances. The Derivatives $596 trillion markets(now fast expanding, notional transactions turnover trading value, per year___BIS numbers) simply put far too much financial pressure on Capitalism’s Aggregate System Operations’ Costs, as is now being clearly witnessed in our financial markets…
Unless we take down the extreme global currency tariffs and subsidies systems, by instituting a new “International Financial Architecture” re-balancing system, of sliding time scaled, self-balancing laws, capitalism is mathematically transactions guaranteed, to fully collapse, with all the system and currency raiding, taking place, by none other than Nixon’s, originating and now fully grown, Corporate Currency Raiding Mafia-Economists & Co... The show continues…
Dr. Paul Einzig’s complete works, some 65 books, verify the above facts, along with hundreds of other historical financial economists’ books and facts …
It’s time for America to awake…
Lloyd Gillespie
(a polymath, autodidact economist)
Post also published on my blog at: MacroMouse
Thursday, June 12, 2008
Oil's Tulip Mania?___Oil & Reality
Att: Hon. President Elect, Barack Obama___NATIONAL SECURITY
Iff: In case the oil and derivatives mess, the world is presently in, turns into a full blown national and global emergency, here’s an emergency sketch-plan for the necessary moves to be taken, and WHY…
U.S. Balance of Payments With China Link:
Important article: The End of The Beginning
Paul Krugman
http://theawakeningoftheamericamind.blogspot.com
Oil’s Tulip-Mania?___Oil & Reality
Long ago people became so exuberant they actually paid as much as $75 thousand dollars, for certain species of tulip bulbs___How far might oil prices rise before people and nations come to their senses, and realize something must be done?___Something really meaningful and serious… Years past, it collapsed the whole system, before people came to their senses___Need this happen again? Not if we actually learn from history’s many, many past mistakes, of similar nature. Plain and simple, this is perpetual economic suzerainty(aggregate incentives’ transactions flows) from one main power nation to another___It’s mathematically, mechanically going to take place, unless we change course. It’s happened before, with Spain’s economic suzeraintic changes over the Dutch. It happened with England’s economic suzeraintic changes over the Dutch and Spanish Empires. It happened with America’s economic suzerainty over England’s Empire, and it’s now happening to America, as China assumes perpetual economic suzerainty over us, unless we drastically change course. The other related economic name and theory for this extreme market condition mechanics is best explained and known as “Specie Point Theory”(treasuries are here, transposed as a new specie theory mechanics), and it’s well documented and understood. Once massive currency imbalances exist, as they do between China, America and others, and commodity and goods prices start inflating/deflating, then hyper-inflating/hyper-deflating(incentives’ massive transactions flows___short and long), in a bottled up area, it becomes, at a certain point, impossible to stem the rising tide___and the world presently has five such major areas of concern___The Mid-East, China, Russia, Wall St., and the global Enron style derivatives’ “Shadow Banking” market(derivatives are here transposed as a new specie theory mechanics). It happened with tulip bulbs. It happened with gold from the new world, in Spain. It happened with John Law’s bank note over-issue. It happened with Napolean’s currency speculation during the French Revolution. It happened with Germany `23’s intentional currency hyper-inflation. It happened with Russia’s intentional currency hyper-inflation, in the early `20’s, shortly before Germany’s. It has happened in numerous countries then, before and since, and many of recent years, but the possibility of oil depletion offers a truly unique and fundamental change of outright potential necessity___Mother nature rules, in this case___Will we foolishly let it happen with derivatives, and or, oil? This is a first, where the world may be running low of the most needed commodity/resource in the history of humanity___and everyone will be fighting for it___and the world is massively currency imbalanced(Prof. Cassel’s true PPP{purchasing price parity} theory is here transposed). Must it become another “Tulip-Mania”, turning out as extreme “perpetual economic suzerainty” changes from America to China, and most likely eventual outright war, or can we develop the intelligence, and grand strategies necessary, to avoid such a potential catastrophe?
Now, the argument goes that we even have plenty of oil, right here in America, and the other side is we are truly running short, not only in America, but globally. After studying and writing others about this problematic argument for years, it seems to be clear we should listen to the experts. As far back as the `50’s, a Shell Oil engineer, one Mr. Hubbert, warned the US it would reach peak oil by the `70’s___We did. He also predicted the world oil supplies would also peak between 2000 and 2010___It seems to be true, especially when we combine this information with oil Bankers like a Mr. Mathew Simmons, and hundreds of other experts in the field of oil, such as T.Boon Pickens___They all agree that oil demand is beginning to exceed supply. They are all singing Hubbert’s song, as am I. Whether we have truly peaked, at this very moment, or not, the problem is still certainly serious enough to warrant emergency change, to ensure true social and military defense capabilities and future safety, when the market price rises to $140 a barrel, before dropping slightly___and we’ll, absolutely, certainly arrive at peak oil, all too soon . The real point is one of facing the eco-geo-political-military requirements, stabilities, and possible outcomes over time and truly doing something about it, or not___and now and not later___Better safe than sorry…!
If after reading what I write below(China’s Intent or Resources Depletion Necessities), and deeply contemplating the seriousness of potential outcomes, maybe we can talk about possible solutions, and I mean real and mammoth, extremely responsible, mathematically realizable, visionary projects. I’m just going to be brief and paint with a broad brush, but you’ll get the ideas. We immediately need to delist and negotiate a reasonable, sliding time scale, set price, for all the world’s oil, with all the nations of the world involved___as this problem is not going away any time soon. We immediately need a new “National Emergency Bank of the US.” We immediately need a new “National Energy Bank.” The Emergency Bank can and should be housed in the US Treasury, and instituted by re-chartering. The Energy Bank can and should be housed within the Dept. of Energy, and also instituted by re-chartering. We immediately need major IFA(international financial architecture) reform___True global PPP(purchasing price parity, not the false Arrow/Debreau purchasing power parity) currency re-balancing, which can be housed and re-chartered under the existing IMF(International Monetary Fund). This will require major new IXC(internal exchange clearing) capital controls, and external capital controls, during the temporary implementation period, and clearing, and serious attention must be paid to new “Sliding Time Scale Laws” implementations___this is possible with or without global cooperation___I offer a completely self-balancing, self-autonomous system, if interested. The WTO(World Trade Organization), trade treaties should be, sliding time scale, re-aligned with the new IFA___many varied options exist for final implementations. The new Emergency Bank will require Keynes’ highly expanded Bancor, to a sliding time scaled “Triple Entry Banking” law and emergency lending system. Keynes’ Bancor System will be required to be stabilized by Alfred Marshall’s major “Units of Production” standards, to control any possible inflations of the massive printing of monies needed, to reach a safe emergency level of real and workable national eco-political-military defense, of total energy independence, enhancing social and military safety. This will require new instituting and chartering laws, within the commercial entities’ existing corporate charters, of the entire nation___complete explanations will show this system’s higher efficiencies and productivities of transactions’ capital flows, at no added costs to corporations and businesses___It‘s just an inflation stabilizer system, to make reasonable fundamental use of the printing press___and actually pays down existing national and global debt(imbalances of balance of payments liquidations), with a new highly productive credit mechanics, to its percentage of sliding time scale institution. The Emergency Bank will be required to safely and timely create the trillions of dollars necessary to finance three major refinery systems, Coal, Sugar and Water___That’s major coal hydrogenation/liquifaction/gassification refineries, huge sugar refineries to ethanol, and massive water desalinization refineries and pipelines to irrigate the deserts, and southern farmlands, to grow the necessary sugar cane, for our future national energy security and food needs’ supplementations. All three will be required, even if we finance and drill everywhere possible, and build and finance nuclear power plants, wind farms and solar plants, and go to all other green technologies possible___as fast as safely possible…
The local and global eco-geo-political-military situation requires it…
Is this at all exaggerated?___Read below…
China’s Intent or Resources Depletion Necessities?
The Chinese intent is the most important national security issue, we Americans face, now and in the future___What is it? America needs a major awakening, macro-globally, to what we truly face, by being foreign-dependent on our oil supplies. IMO, China views the global eco-geo-political-military position of America very clearly, while our officials make false assessments, of the dire situation developing, by being blinded by our over-inflated nuclear-ego assessments of the real potential danger. Has anyone truly realized, our oil must be carried across two major militarily un-protectable oceans, leaving America a sitting duck, on the tiny islands of N. and S. America. We need far more oil than will be available, should a conventional WW-III break out, or even a major terrorist attack takes place on Mid-East oil ports. We will be stranded, by China's future submarine capabilities___I do not state this lightly, as I have studied the sub-hunting capabilities, for years___sound, radio and magnetic wave capabilities of all detection systems, if you know what I mean. Everyone must realize, while we've been asleep under BushCo's wars, China has also moved extensively into Africa's rich resources, of which oil is 30% of global supplies. Also, strategically, Africa, and China's entry of over 2000% increase of resource exports, from Africa, over the last decade, compared to America's only 400% increase, gives China a geo-military-political advantage of considerable force___She's now practically surrounding the Mid-East oil fields, as well, with all the Chinese she’s shipped to Africa, to do her bribed bidding. Somebody had better wake up in America, and see China, from China's, long term, strategic military and eco-geo-political perspectives, than from America's false ego's confidence, short term, perspective.
All I need do is ask, “How do you expect America to transport its oil across two oceans, if an almost certain, future conventional oil war breaks out, over known resource declines of said oil?” And, if one plays out the strategic logistics of an extended conventional oil war, just look at the eco-geo-political-military regional consequences___Three basic autocracies___Russia, China and Islam, while democracy is globally in decline, as autocracies rise, as Robert Kagan has pointed out in his newest book, and will more than likely see a capitulation of India and Europe, over the time of an extended war, to the Chinese side, in any real global conventional conflict, as nuclear must be ruled out as “MAD”(mutually assured destruction), and I don‘t really believe anyone is going to be that stupid, yet the conventional advantage is glaringly obvious… And, believe me, conventionally, it's approaching fast, and America better awaken___the logistics I speak of are a real possibility. Further, do it by population scenarios of macro eco-geo-political-militarism, and one quickly sees why any Mid-East oil war, would force India and Europe to capitulate___We all know, in the back of our minds, who will be the true land-powers, in any such scenario___They can walk to the Mid-East___We can’t, and remember, one of the major reasons Germany lost WWII was our cutting off her oil supplies in N. Africa. Is it going to be a repeat of history, or will we awake? China and Russia could hold Mid-East oil hostage to India and Europe, joining them, by the shear forces of economic and food starvation tactics, to Russia and China’s side, as China is presently buying submarines from her friend, Russia, along with building her own, faster than we’re baking new loaves of bread. In any extended conventional naval battle, America would surely lose against such odds, and the autocracies’ sophisticated technologies’ capabilities, as all these land locked autocratic empires need do, is sink our oil tankers, with any number of conventional means{also remember China hitting that satellite with a missile last year___they have the capabilities}, thus possibly forcing America to even think about taking over all of N. and S. America’s oil supplies to survive___yet how long would this last, with their starving populations, coming here for food, and vengeance?___and remember also, one of China's new class diesel-electric-battery-air propulsion subs surfaced, right in the middle of our Pacific Ocean carrier group, etc., exercises, just last year, without detection___A major embarrassment to the big wigs…
We'd better start studying these scenarios a bit deeper, and fast make America energy independent, as at the moment, we have a very insecure, and extremely inadequate, national defense policy and actual potential. In just a few years, we'll have a naked national security defense potential. This is serious...!!!
America definitely needs “A Grand Independent Finance and Energy Strategy“___Immediately…!!!
A $9+ trillion national debt, and $1+ trillion leaving the nation for the oil autocracies, and the trade-goods autocracy of China, every year___How long does anyone, truly, think this can last…? We’re free-trading the Eagle’s paper money, into the mouth of a Fierce Fire Breathing Dragon…!!! Last I checked, fire burns paper eagles…
Thanks to Obama___Change the World? YES WE CAN…!
Please read these articles___important…
http://www.fastcompany.com/magazine/126/the-race-for-raw-materials.gif {Scroll down page for info-graphics}
http://www.fastcompany.com/magazine/126/special-report-china-in-africa.html
http://www.dailymail.co.uk/news/article-492804/The-uninvited-guest-Chinese-sub-pops-middle-U-S-Navy-exercise-leaving-military-chiefs-red-faced.html
P.S.
A Note To Paul Krugman
Paul Krugman Link:
Paul Einzig Link:
Excellent view of Keynesian thought, Paul. I'd just like to point out something you wrote, but may not have realized its thorough implications. WWII, as you rightly mentioned, was a public works project, but a massive one, and is the most important implied aspect of Keynes' entire manifesto, imho. Expansionary fiscal policy, alone, doesn't cut it. It must be accompanied by public works, in the most dire of times, as the `30's certainly were, and WWII’s recovery, clearly shows, etc., as fiscal stimulus, only, simply goes up the chimney of Wall St. investment and speculation, far too quickly, thus lowering TFP. It must be spread to Main St., through public infrastructure spending, as Keynes suggested, in the worst of times, to spread and slow the velocity of stimulus mechanics, throughout the entire economy, to truly raise TFP…
As to the deeper analysis of Keynes' great work, his "IFA-international financial architecture", of which you do not mention, in your piece, since it really wasn't in his "General Theory", yet is the central achievement of his thought, must be brought to the front, and thoroughly re-interpreted. I would title such a work, "The General Theory of Massive Currency Tariffs, Massive Currency Credits, and TFP Decline"___What Keynes/Einzig tried to prevent in 1945___Nixon instituted in the 1972 era, and evolved by 2008___to the highest, most nefarious, currency trade tariffs, credits/subsidies and off-shoring incentives, the world has ever known… Skedelsky is quite clear on the importance of Keynes IFA contributions, and further, his yet untried balance of payments "Bancor" system. I think if we were to work through a re-interpretation of these more central mechanics of Keynes' thought, we would be better prepared for what the world may shortly face…
Thanks for your great thinking,
and with due respect,
Lloyd Gillespie
(a polymath, autodidact, true Keynesian economist)
Iff: In case the oil and derivatives mess, the world is presently in, turns into a full blown national and global emergency, here’s an emergency sketch-plan for the necessary moves to be taken, and WHY…
U.S. Balance of Payments With China Link:
Important article: The End of The Beginning
Paul Krugman
http://theawakeningoftheamericamind.blogspot.com
Oil’s Tulip-Mania?___Oil & Reality
Long ago people became so exuberant they actually paid as much as $75 thousand dollars, for certain species of tulip bulbs___How far might oil prices rise before people and nations come to their senses, and realize something must be done?___Something really meaningful and serious… Years past, it collapsed the whole system, before people came to their senses___Need this happen again? Not if we actually learn from history’s many, many past mistakes, of similar nature. Plain and simple, this is perpetual economic suzerainty(aggregate incentives’ transactions flows) from one main power nation to another___It’s mathematically, mechanically going to take place, unless we change course. It’s happened before, with Spain’s economic suzeraintic changes over the Dutch. It happened with England’s economic suzeraintic changes over the Dutch and Spanish Empires. It happened with America’s economic suzerainty over England’s Empire, and it’s now happening to America, as China assumes perpetual economic suzerainty over us, unless we drastically change course. The other related economic name and theory for this extreme market condition mechanics is best explained and known as “Specie Point Theory”(treasuries are here, transposed as a new specie theory mechanics), and it’s well documented and understood. Once massive currency imbalances exist, as they do between China, America and others, and commodity and goods prices start inflating/deflating, then hyper-inflating/hyper-deflating(incentives’ massive transactions flows___short and long), in a bottled up area, it becomes, at a certain point, impossible to stem the rising tide___and the world presently has five such major areas of concern___The Mid-East, China, Russia, Wall St., and the global Enron style derivatives’ “Shadow Banking” market(derivatives are here transposed as a new specie theory mechanics). It happened with tulip bulbs. It happened with gold from the new world, in Spain. It happened with John Law’s bank note over-issue. It happened with Napolean’s currency speculation during the French Revolution. It happened with Germany `23’s intentional currency hyper-inflation. It happened with Russia’s intentional currency hyper-inflation, in the early `20’s, shortly before Germany’s. It has happened in numerous countries then, before and since, and many of recent years, but the possibility of oil depletion offers a truly unique and fundamental change of outright potential necessity___Mother nature rules, in this case___Will we foolishly let it happen with derivatives, and or, oil? This is a first, where the world may be running low of the most needed commodity/resource in the history of humanity___and everyone will be fighting for it___and the world is massively currency imbalanced(Prof. Cassel’s true PPP{purchasing price parity} theory is here transposed). Must it become another “Tulip-Mania”, turning out as extreme “perpetual economic suzerainty” changes from America to China, and most likely eventual outright war, or can we develop the intelligence, and grand strategies necessary, to avoid such a potential catastrophe?
Now, the argument goes that we even have plenty of oil, right here in America, and the other side is we are truly running short, not only in America, but globally. After studying and writing others about this problematic argument for years, it seems to be clear we should listen to the experts. As far back as the `50’s, a Shell Oil engineer, one Mr. Hubbert, warned the US it would reach peak oil by the `70’s___We did. He also predicted the world oil supplies would also peak between 2000 and 2010___It seems to be true, especially when we combine this information with oil Bankers like a Mr. Mathew Simmons, and hundreds of other experts in the field of oil, such as T.Boon Pickens___They all agree that oil demand is beginning to exceed supply. They are all singing Hubbert’s song, as am I. Whether we have truly peaked, at this very moment, or not, the problem is still certainly serious enough to warrant emergency change, to ensure true social and military defense capabilities and future safety, when the market price rises to $140 a barrel, before dropping slightly___and we’ll, absolutely, certainly arrive at peak oil, all too soon . The real point is one of facing the eco-geo-political-military requirements, stabilities, and possible outcomes over time and truly doing something about it, or not___and now and not later___Better safe than sorry…!
If after reading what I write below(China’s Intent or Resources Depletion Necessities), and deeply contemplating the seriousness of potential outcomes, maybe we can talk about possible solutions, and I mean real and mammoth, extremely responsible, mathematically realizable, visionary projects. I’m just going to be brief and paint with a broad brush, but you’ll get the ideas. We immediately need to delist and negotiate a reasonable, sliding time scale, set price, for all the world’s oil, with all the nations of the world involved___as this problem is not going away any time soon. We immediately need a new “National Emergency Bank of the US.” We immediately need a new “National Energy Bank.” The Emergency Bank can and should be housed in the US Treasury, and instituted by re-chartering. The Energy Bank can and should be housed within the Dept. of Energy, and also instituted by re-chartering. We immediately need major IFA(international financial architecture) reform___True global PPP(purchasing price parity, not the false Arrow/Debreau purchasing power parity) currency re-balancing, which can be housed and re-chartered under the existing IMF(International Monetary Fund). This will require major new IXC(internal exchange clearing) capital controls, and external capital controls, during the temporary implementation period, and clearing, and serious attention must be paid to new “Sliding Time Scale Laws” implementations___this is possible with or without global cooperation___I offer a completely self-balancing, self-autonomous system, if interested. The WTO(World Trade Organization), trade treaties should be, sliding time scale, re-aligned with the new IFA___many varied options exist for final implementations. The new Emergency Bank will require Keynes’ highly expanded Bancor, to a sliding time scaled “Triple Entry Banking” law and emergency lending system. Keynes’ Bancor System will be required to be stabilized by Alfred Marshall’s major “Units of Production” standards, to control any possible inflations of the massive printing of monies needed, to reach a safe emergency level of real and workable national eco-political-military defense, of total energy independence, enhancing social and military safety. This will require new instituting and chartering laws, within the commercial entities’ existing corporate charters, of the entire nation___complete explanations will show this system’s higher efficiencies and productivities of transactions’ capital flows, at no added costs to corporations and businesses___It‘s just an inflation stabilizer system, to make reasonable fundamental use of the printing press___and actually pays down existing national and global debt(imbalances of balance of payments liquidations), with a new highly productive credit mechanics, to its percentage of sliding time scale institution. The Emergency Bank will be required to safely and timely create the trillions of dollars necessary to finance three major refinery systems, Coal, Sugar and Water___That’s major coal hydrogenation/liquifaction/gassification refineries, huge sugar refineries to ethanol, and massive water desalinization refineries and pipelines to irrigate the deserts, and southern farmlands, to grow the necessary sugar cane, for our future national energy security and food needs’ supplementations. All three will be required, even if we finance and drill everywhere possible, and build and finance nuclear power plants, wind farms and solar plants, and go to all other green technologies possible___as fast as safely possible…
The local and global eco-geo-political-military situation requires it…
Is this at all exaggerated?___Read below…
China’s Intent or Resources Depletion Necessities?
The Chinese intent is the most important national security issue, we Americans face, now and in the future___What is it? America needs a major awakening, macro-globally, to what we truly face, by being foreign-dependent on our oil supplies. IMO, China views the global eco-geo-political-military position of America very clearly, while our officials make false assessments, of the dire situation developing, by being blinded by our over-inflated nuclear-ego assessments of the real potential danger. Has anyone truly realized, our oil must be carried across two major militarily un-protectable oceans, leaving America a sitting duck, on the tiny islands of N. and S. America. We need far more oil than will be available, should a conventional WW-III break out, or even a major terrorist attack takes place on Mid-East oil ports. We will be stranded, by China's future submarine capabilities___I do not state this lightly, as I have studied the sub-hunting capabilities, for years___sound, radio and magnetic wave capabilities of all detection systems, if you know what I mean. Everyone must realize, while we've been asleep under BushCo's wars, China has also moved extensively into Africa's rich resources, of which oil is 30% of global supplies. Also, strategically, Africa, and China's entry of over 2000% increase of resource exports, from Africa, over the last decade, compared to America's only 400% increase, gives China a geo-military-political advantage of considerable force___She's now practically surrounding the Mid-East oil fields, as well, with all the Chinese she’s shipped to Africa, to do her bribed bidding. Somebody had better wake up in America, and see China, from China's, long term, strategic military and eco-geo-political perspectives, than from America's false ego's confidence, short term, perspective.
All I need do is ask, “How do you expect America to transport its oil across two oceans, if an almost certain, future conventional oil war breaks out, over known resource declines of said oil?” And, if one plays out the strategic logistics of an extended conventional oil war, just look at the eco-geo-political-military regional consequences___Three basic autocracies___Russia, China and Islam, while democracy is globally in decline, as autocracies rise, as Robert Kagan has pointed out in his newest book, and will more than likely see a capitulation of India and Europe, over the time of an extended war, to the Chinese side, in any real global conventional conflict, as nuclear must be ruled out as “MAD”(mutually assured destruction), and I don‘t really believe anyone is going to be that stupid, yet the conventional advantage is glaringly obvious… And, believe me, conventionally, it's approaching fast, and America better awaken___the logistics I speak of are a real possibility. Further, do it by population scenarios of macro eco-geo-political-militarism, and one quickly sees why any Mid-East oil war, would force India and Europe to capitulate___We all know, in the back of our minds, who will be the true land-powers, in any such scenario___They can walk to the Mid-East___We can’t, and remember, one of the major reasons Germany lost WWII was our cutting off her oil supplies in N. Africa. Is it going to be a repeat of history, or will we awake? China and Russia could hold Mid-East oil hostage to India and Europe, joining them, by the shear forces of economic and food starvation tactics, to Russia and China’s side, as China is presently buying submarines from her friend, Russia, along with building her own, faster than we’re baking new loaves of bread. In any extended conventional naval battle, America would surely lose against such odds, and the autocracies’ sophisticated technologies’ capabilities, as all these land locked autocratic empires need do, is sink our oil tankers, with any number of conventional means{also remember China hitting that satellite with a missile last year___they have the capabilities}, thus possibly forcing America to even think about taking over all of N. and S. America’s oil supplies to survive___yet how long would this last, with their starving populations, coming here for food, and vengeance?___and remember also, one of China's new class diesel-electric-battery-air propulsion subs surfaced, right in the middle of our Pacific Ocean carrier group, etc., exercises, just last year, without detection___A major embarrassment to the big wigs…
We'd better start studying these scenarios a bit deeper, and fast make America energy independent, as at the moment, we have a very insecure, and extremely inadequate, national defense policy and actual potential. In just a few years, we'll have a naked national security defense potential. This is serious...!!!
America definitely needs “A Grand Independent Finance and Energy Strategy“___Immediately…!!!
A $9+ trillion national debt, and $1+ trillion leaving the nation for the oil autocracies, and the trade-goods autocracy of China, every year___How long does anyone, truly, think this can last…? We’re free-trading the Eagle’s paper money, into the mouth of a Fierce Fire Breathing Dragon…!!! Last I checked, fire burns paper eagles…
Thanks to Obama___Change the World? YES WE CAN…!
Please read these articles___important…
http://www.fastcompany.com/magazine/126/the-race-for-raw-materials.gif {Scroll down page for info-graphics}
http://www.fastcompany.com/magazine/126/special-report-china-in-africa.html
http://www.dailymail.co.uk/news/article-492804/The-uninvited-guest-Chinese-sub-pops-middle-U-S-Navy-exercise-leaving-military-chiefs-red-faced.html
P.S.
A Note To Paul Krugman
Paul Krugman Link:
Paul Einzig Link:
Excellent view of Keynesian thought, Paul. I'd just like to point out something you wrote, but may not have realized its thorough implications. WWII, as you rightly mentioned, was a public works project, but a massive one, and is the most important implied aspect of Keynes' entire manifesto, imho. Expansionary fiscal policy, alone, doesn't cut it. It must be accompanied by public works, in the most dire of times, as the `30's certainly were, and WWII’s recovery, clearly shows, etc., as fiscal stimulus, only, simply goes up the chimney of Wall St. investment and speculation, far too quickly, thus lowering TFP. It must be spread to Main St., through public infrastructure spending, as Keynes suggested, in the worst of times, to spread and slow the velocity of stimulus mechanics, throughout the entire economy, to truly raise TFP…
As to the deeper analysis of Keynes' great work, his "IFA-international financial architecture", of which you do not mention, in your piece, since it really wasn't in his "General Theory", yet is the central achievement of his thought, must be brought to the front, and thoroughly re-interpreted. I would title such a work, "The General Theory of Massive Currency Tariffs, Massive Currency Credits, and TFP Decline"___What Keynes/Einzig tried to prevent in 1945___Nixon instituted in the 1972 era, and evolved by 2008___to the highest, most nefarious, currency trade tariffs, credits/subsidies and off-shoring incentives, the world has ever known… Skedelsky is quite clear on the importance of Keynes IFA contributions, and further, his yet untried balance of payments "Bancor" system. I think if we were to work through a re-interpretation of these more central mechanics of Keynes' thought, we would be better prepared for what the world may shortly face…
Thanks for your great thinking,
and with due respect,
Lloyd Gillespie
(a polymath, autodidact, true Keynesian economist)
Friday, June 06, 2008
China Invades Africa
Here's an extremely important article for understanding our present world situation, as communism relates to capitalism___The survival of which system...?
Survival of Humanity
Survival of Humanity
Wednesday, May 21, 2008
A Conservative For Obama
I really enjoy it when I find honest conservatives, linking sincere market analysis to Obama's ideas, of a better way forward. There's still a little hope for us that more will discover the merits of Hyman Minsky's Heinz 57 capitalism's truly fundamental, and profound, yet simple, analyses...
Other great links to Minsky ideas, and others promoting them: Pimco
Pimco Archives
JPRI, Marshall Auerback
Here's another important paper, from the BIS, everyone should read; "A History of Deflation": Link
Here's an eye opening warning from Sybil...
Other great links to Minsky ideas, and others promoting them: Pimco
Pimco Archives
JPRI, Marshall Auerback
Here's another important paper, from the BIS, everyone should read; "A History of Deflation": Link
Here's an eye opening warning from Sybil...
Government Failed, Not The Market
Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site www.greatconservatives.com
As commentators have come to realize the depth of the economic mess in which the United States is now mired, an increasingly loud theme of their wailings is that the free market has failed, so that we need more government regulation and state control. One expects the Democratic Presidential candidates to take this view (though Barack Obama is mercifully mild on the subject) but we hear it also from John McCain, nominally a Republican. The truth is quite the opposite: the free market has not failed, in the US over the last few decades it was never properly tried. Time after time, bedrock principles of a free market economy have been violated by the corrupt and overblown US government.
The most fundamental way in which free market principles have been violated, central to the entire course of the US economy over the last 13 years, is monetary policy. Economic theory is based on money, the unit of measurement, being fixed in value so that its fluctuations do not affect purchase and sale decisions. It is well known that in the Weimar Republic hyperinflation of 1923 or the Latin American periodic hyperinflations, the economic system does not work properly, because price signals are not properly transmitted through the monetary mechanism and consumers are forced to modify their behavior to take account of the quirks in money. The average apartment-dwelling German consumer of 1923 did not intrinsically need a wheelbarrow, but was forced to buy one anyway to carry his money if he wanted to go shopping, since Diners Club had not yet invented the credit card.
In the United States since 1995, the Federal Reserve has increased the broad money supply -- whether measured by M3, disgracefully discontinued by the Fed in March 2006, or by the St Louis Fed’s Money of Zero Maturity (MZM) -- almost 4% per annum faster than the growth rate of nominal GDP. The true potential increase in money-generated activity may well have been somewhat greater than that, because new and more efficient payment mechanisms, PayPal and the like, have been introduced during that 13 year period – thus one would expect the velocity of money, its ability to generate economic activity, to have increased. This money supply increase was wholly artificial, generated by actions of government, notably former Fed Chairman Alan Greenspan’s bizarre 1993 decision to cease targeting the money supply in forming monetary policy. It had nothing whatever to do with the market.
Wall Street, the Fed and the Clinton and Bush administrations would claim that, since inflation has been modest during the period, the market’s price mechanism has not been distorted and no harm has been done. But that is of course unmitigated twaddle. Because of global outsourcing through the Internet and modern telecoms, consumer prices have not risen much (though more than is admitted by the Bureau of Labor Statistics, more on which later) but we have been subjected to a series of asset bubbles. First stocks soared in the late 1990s to levels entirely unjustifiable on any reasonable valuation mechanism, with even the Dow Jones Index of 2000 being more than double its proper level. That had happened previously in history, in 1929 in the United States (though 1929’s overvaluation was less egregious) and in 1989-90 in Japan; in both cases it had resulted in a severe economic downturn, the one unprecedented in its depth, the other unprecedented in its duration.
In the US after 2000, the solution was to expand the money supply still further, overriding the market’s natural deflationary corrective mechanisms by forcing real interest rates down to well below zero. That, allied to the “creativity” of the housing finance sector produced a boom in housing that was unprecedented in the United States. When that in turn led to disaster, the Fed over-expanded money supply yet again, and produced a commodity bubble that has pushed the oil price up by 50% in eight months, and is now threatening the entire fabric of the world economy, as well as potentially starving millions of the Third World’s impoverished. While the poor may starve, the rich, either asset owners or, as on Wall Street and in corporate top management, asset manipulators, have done very well indeed from cheap money – much better than they should have done in a truly free market.
These three highly damaging excesses, the stock bubble, the housing bubble and the commodities bubble, all utilized the mechanisms of the free market, but their underlying cause was a government policy: the Fed’s excessive monetary expansion over a 13 year period. Since Jean-Claude Trichet took over the European Central Bank from Wim Duisenberg in late 2003, the ECB has joined in excessive expansionism, pushing euro M3 up by 8.3% annually compared with a 4.3% annual rise in nominal eurozone GDP, the same 4% annual excess of monetary expansion as in the United States. The Bank of Japan, the People’s Bank of China and the Reserve Bank of India have also pursued excessively expansionary monetary policies. International reserves of foreign exchange increased by almost 17% per annum in the decade to December 2007, almost treble the increase in nominal global GDP. The current global inflation was thus inevitable; it is likely to get substantially worse.
The excesses of the housing bubble and the especially damaging nature of the subsequent housing finance collapse were also due to government, in this case misguided regulation. Fannie Mae and Freddie Mac, those tottering behemoths of the housing finance market, should not exist in a free market system. Their superfluous quasi-government guarantees of housing finance led to the advent of securitization, a pernicious Wall Street product that separated the origination of home loans from their ownership. The interest rate ceilings of the 1970s, followed by the partial cack-handed deregulation of the sector in the 1980s, led to the collapse of the savings and loans, destroying the local system of housing finance that has worked well in other countries and worked perfectly adequately in the US before the 1970s. However it was bank capital regulations, and the loophole that allowed banks to create minimally capitalized special purpose vehicles to hold securitized home mortgages, that produced the subprime bonanza and subsequent collapse. Again, all were actions of government, to which the free market simply reacted.
As an indication that the innovations in housing finance were not driven by a true free market, the cost of home loans increased from an average of 108 basis points above 20 year mortgages in 1972-78 to 122 points above that average in 2000-06. If an innovation increases the price of a product to the consumer, we can be certain that the innovation, like the CAFÉ automobile fuel economy standards of the 1980s, was directed by government, not the market.
To operate properly, the modern free market needs accurate economic statistics. Before 1900, the economy operated satisfactorily without such statistics, though swings in the business cycle were more extreme since planning for inventory and capital expenditure was more difficult. Lack of statistics thus has a cost, but only a moderate one. Much larger than the cost of no statistics, however, is the cost of inaccurate statistics that are nevertheless regarded by the market as credible. Those can produce distortions lasting many years, including excessive consumption and excessive asset price inflation. The short term effect of dishonest statistics may be positive, like that of embezzlement (which increases GDP through the multiplier effect until the victim discovers his loss.) However the long term effect in destruction of both value and confidence is far greater and more prolonged; indeed in some respects it may be permanent.
We can thus blame the government for significant economic distortion over the last decade, through its falsification of inflation figures. The Boskin Commission of 1996 allowed the government to “adjust” inflation figures by taking account of “hedonic” effects, by which supposedly products improved in quality in ways not captured by inflation calculations. The example always given was the tech sector, in which processing power doubled every 18 months. Thus following Boskin US price indices were adjusted to take account of that doubling, being rebased every year in order to take account of each subsequent year’s progress in processor power. There are three problems with this. First, doubling processor power does not anything like double the benefit one gets from a computer; the computers of today are at most twice as “hedonic” as those of 1998, not 64 times as hedonic as predicted by their increase in processing power. Second, the annual rebalancing allows the price benefits in the tech sector to be repeated every year, as though computers were now available for $5. Third, the Boskin methodology took no account of the costs imposed on consumers through technology, for example the negative hedonic effect of automated telephone help lines, which appear deliberately designed to maximize the time wasted and minimize the probability of getting the consumer’s problem solved.
(As an aside, US taxpayers and the economy generally dodged a bullet when the Presidential candidacy of former New York mayor Rudy Giuliani collapsed. Not only was his chief foreign policy advisor Norman Podhoretz, author of “World War IV – the long global struggle against Islamofascism” -- think for a moment of the budgetary effect of that approach to security policy -- but his chief economic advisor was Michael Boskin. Phew!)
The Boskinized price indices are thus downward biased, probably by about 0.8%-1% per annum, thus saving the government trillions of dollars on social security payments for the unfortunate elderly. As well as ripping off old folk, this has caused a number of distortions. Since nominal GDP is known, real GDP growth rates are distorted upwards by the same amount as price indices are distorted downwards. Likewise, productivity growth figures are also distorted upwards – the “productivity miracle” relied upon by Fed Chairman Alan Greenspan for his misguided monetary policy was a mere statistical fiction. With such distortion it is little wonder that the voting public has come to suspect published economic growth figures, or to assume that even more of such growth has gone to “the rich” than is actually the case.
The price index distortion has since January 2008 grown even worse, through the use (or more probably misuse) of seasonal adjustments, by which “unadjusted” price indices are smoothed for seasonal effects, providing a supposedly more accurate picture of consumer price inflation. Such seasonal adjustments are ignored in setting social security and bond indexation – there is thus no further cash fraud against the public. However adjustments have been used to produce spuriously low consumer price inflation figures, certainly in March and April 2008, thus propping up the stock market and appearing to justify the Fed in its manic loosening of monetary policy.
March’s consumer price index was adjusted down by 0.6%, from 0.9% to 0.3%, while April’s was adjusted down by 0.4%, from 0.6% to 0.2% -- both “adjusted” figures were greeted by the stock market with a sharp upward move. In the ten years to 2007, no seasonal adjustment has ever exceeded 0.3%, plus or minus; the probabilities that the March and April seasonal adjustments were randomly arrived at by the same method as those of the last decade were thus 0.18% and 2.3% respectively (so the probability of two such anomalies in successive months was 0.0041%, about 1 in 25,000.) If the raw March and April figures are adjusted by the average March and April seasonal adjustments of the last decade, consumer price inflation in those two months averaged 7.4% per annum. Needless to say, neither the bond market, where 10-year Treasuries yield 3.9%, nor the stock market, within 10% of its overblown all-time high, comes close to reflecting this. Again, the losses and poor investment decisions caused by this massively false market are due to the government, not market failure.
There are many other “market failures” which are in reality due to government manipulation. Real wage rates for low-skill US employees have dropped sharply in the last 30 years, primarily due not to globalization and free trade but to government’s failure to enforce immigration laws, which has led to excessive low-cost illegal immigrant wage competition. The shortage of graduate engineers is due to the H1B visa program, which lets in floods of engineers but not lawyers – so the average earnings of a young graduate lawyer are more than twice those of an equivalently qualified young graduate engineer. Distortions in agriculture policy are notoriously the result of government meddling, reportedly about to get worse with the new $300 billion farm bill. (It is however not true that all of the world’s high food prices are caused by US ethanol subsidies – an even more important cause is excessively lax US and global monetary policy.) The number of lobbyists in Washington has more than doubled since 2000 – so consequently has the level of wasteful earmarks and destructive special interest legislation. McCain’s “cap and trade” environment proposal would open up a huge new arena for government favor-shopping – and do almost nothing to reduce carbon emissions, even were such a reduction desirable (Obama’s proposal is somewhat more market-oriented.)
Don’t let anybody tell you in this election season that the “market has failed.” In the United States since about 1995, it has never been allowed to operate properly.
Wednesday, May 14, 2008
The Strange Tale of the Bare-Bottomed King
I am re-posting this tale from Pimco's Bill Gross, to show you how correct the bears, have been all along. The article's forcast was and is right on. Check it out, and be sure to read the post of Auerback and Dialynas, I posted yesterday. They're on the money. It's going to be a very interesting world, when the "Bears" will be, or are, required to re-educate the "Bulls."
Bill Gross
The Strange Tale of the Bare-Bottomed King
They say never sell America short and with good reason. Any country whose equity market has been able to crank out 6.8% real returns annually over the past century stands as a formidable obstacle for any speculator willing to bet the “don’t come” line. The odds of winning a long-term wager laid against the U.S. “house” have been about as bad as heading out to the track and betting on your favorite color of jockey silks. Even when the bear gets his facts right, the timing and the wait often spell his doom; the “house” has more chips, especially a house with reserve currency status like the U.S., so a wager must be done prudently in order to conserve capital for that prospective rainy day.
Our recent PIMCO Secular Forum, held over a 3-day period in mid-May, discussed this cautionary and historical framework within the context of a U.S./global economy that clearly had begun to resemble a casino, but nonetheless appeared to have ample chips or reserves to keep the game going for awhile. Speakers such as Michael Dooley, conceptualizer of the current Bretton Woods II arrangement, and Jonathan Wilmot of CSFB, presented their bullish and in some cases bearish arguments for economic growth and investment returns over the next 3-5 years. Over 100 PIMCO professionals actively participated in the discussions and decision-making, which by its heritage has a long-term secular orientation. In the end, while the gambling metaphor and betting against the house advice was more than apropos, we chose instead to weave our tale around the story of the Emperor who had no clothes and the solitary boy who in his innocence cried out that this sovereign was indeed – naked. Not wanting to sell America short just yet however, and being mindful of our country’s dynamic past and the lessons that its history inevitably has taught wayward doubters, we decided to modify the parable just a tad. We agreed that the U.S. was indeed King of the World and was indeed outfitted in a grand set of clothes. Biggest economy, most powerful military, best universities, highly productive, freest capital markets, bearer of the world’s reserve currency status – these are all characteristics that describe our current King, and any little boy or bear who shouts that they can’t see them is close to blind. So our monarch has some spiffy threads indeed. Still, after analyzing not only the U.S. in 2005, but the global kingdom that it rules, we had legitimate concerns as to how well those threads were put together. They look good, but can they hang tight without shredding during a storm, or will they come undone, leaving our ruler bare-bottomed in the wind? The answer, we decided, was dependent on the quality of the cloth and its stitchery – how well they were put together – and of course, the probability of a storm epitomized in our cartoon by the terrier of Coppertone fame. But lest we give too much away in this reality–show fairytale let us recap the past and begin as they say at the beginning.
Secular Review and Current Update
One day sometime in the early 21st century, there was a global economy that was growing at what appeared to be a decent enough rate but which was suffering from a strange malady – something economists describe as a lack of “aggregate demand” – in essence an inability to make use of available global capacity to produce. Now that was a condition that most citizens could hardly comprehend because mankind’s desires/demands appear to forever be insatiable. We always want more of everything so how could there ever be a lack of “aggregate demand” in this magic kingdom? The historical textbook example of this malady probably first appeared during the depression of the 1930s when what Keynes labeled as capitalism’s “animal spirits” were so dampened that corporations and consumers sat out the dance, preferring to hide their money in a mattress instead of risking it in a transaction during a deflationary spiral. In their place, government became the buyer of last resort. The world’s most recent example has unfolded in Japan over the past decade, but scores of other instances now abound centering around either 1) mercantilistic or 2) demographic secular influences. The mercantilistic draining of global demand has its most recent origins in the Asian crisis of nearly a decade past when South Korea, Malaysia, and others left themselves exposed to the seemingly whimsical liquidity injections – then withdrawals – of global bankers and investors. Whispered vows of “never again” placed an increasing emphasis on exports/production as opposed to imports/consumption and the result was massive increases in Asian and selected emerging country reserves as the U.S. current account deficit helped build the war chests shown in Chart I.
“If you don’t have enough reserves it can cost you a lot. We learned that (in the late 90s),” ex-Korean official Hong-choo Hyun warned recently. Asia’s mattress in the past few years, then, has taken the form of massive recycling of reserve surpluses into U.S. Treasuries instead of reinvestment in infrastructure or government sponsored business ventures. To make this arrangement possible, a fixed currency in China and “dirty floating” currencies in the bulk of Asia have mirrored an image reminiscent of the Bretton Woods era of reserve management during which the U.S. dollar was fixed to gold and the remaining currencies were fixed to the dollar. Our new arrangement is being labeled Bretton Woods II even though the dollar no longer has any such anchor and currencies such as the Euro are free to float. China itself is expected to institute a freely floating currency within the context of existing WTO plans during the next 3-5 years, but for now, BWII and its currency fix is standard operating procedure.
Supporters of this process such as Forum speaker Dooley, argue that its informal yet semi-regulated structure is helping to generate sufficient global demand for goods and services by flowing money from those countries that want to produce (Asia) to countries that still want to spend (the U.S.), and they have a point. Yet to focus on currently attractive global growth rates under the umbrella of Bretton Woods II misses the broader and overarching point. The global economy needs more consumers, but because of prior financial crises and advancing demographic influences that focus on savings for retirement, shown in Chart II, the primary willing spenders reside in the U.S.
Newly prosperous emerging market countries are the world’s natural deficit countries – instead they are building surplus reserves. Together this combination of American shoppers and Asian/emerging market/European savers are exchanging dollars, and goods and services in what for now appears to be an OK arrangement for both parties. But because it is so consumption one-sided, there are risks – increasing risks – that this apparent equilibrium is rather unstable and may at some point tip over. Unless Asia and Europe can join the consumption party, there may come a time when the U.S. Viagra wears off. Because of Bretton Woods II, the recycling of reserves into U.S. Treasuries has allowed Americans to finance their imports at exceedingly attractive interest rates. Yields on U.S. Treasuries and corporates may be as much as 100 basis points below prior equilibrium levels, so if the U.S. is King, then we undoubtedly have purchased for ourselves a fine set of clothes on cheap credit. The new threads, however, have been secured on the back of rapidly increasing debt, resulting in a 6% of GDP balance of trade deficit, and that debt has been extended to consumers only because of asset appreciation in the financial and housing markets. Can this King continue to reign over a seemingly prosperous yet imbalanced global and U.S. economy?
We advised in prior pages that the King’s clothes and their ability to cling to his bod were dependent on two things – the quality of the stitchery and the potential for a storm. Let’s put ourselves first of all in the role of royal seamstress to get a behind-the-scenes look at how these clothes have been put together. We acknowledge once more that the finest cloth has been purchased due to productivity advances, leading technologies, superb higher education, free-flowing capital markets, and a military dominance that allows the U.S. to exert its will in supranational agencies such as the U.N., World Bank, IMF, and the WTO. But in recent years, America’s growth has been stitched together more from the iron fist of government policies than the invisible hand of a dynamic free enterprise economy. (In a world deficient in aggregate demand, the case for free markets and the invisible hand grows weaker as PIMCO’s Paul McCulley has pointed out.) Its budget surpluses of the late Clinton years are a distant memory due to tax cuts and Iraq-related defense expenditures. Without them however, and the resultant deficits, our recovery from the stock market “bubble popping” of 2001 might never have occurred. In turn, reflationary monetary policies of global central banks, especially our Federal Reserve, have fostered a low nominal and much lower still real interest rate environment that has remarkably failed to stimulate normal domestic investment as in prior business cycles. Instead it has led to higher levels of U.S. consumption due to housing appreciation/equitization which have provided the ability to buy goods with money that can only be described as near “costless.” Without this government intervention, which in some ways is reminiscent of the 1930s depression – differing for the time being primarily in its earlier and more efficient implementation – the U.S. and global economy might be sinking instead of floating.
What’s New
But there are limits, both fiscal and monetary, and the monetary limit – what we will describe on the next few pages as the “Pump,” as well as our recognition of the still developing Bretton Woods II policy arrangement – stand as PIMCO’s primary 2005 additions to our ongoing secular outlook. While Bretton Woods II is odds-on in PIMCO’s book to be with us during the bulk of our 3-5 year secular timeframe, and therefore continue the 100 basis point interest rate subsidy to our financial markets, there undoubtedly are risks that must be monitored. It isn’t prudent for U.S. citizens to continue to expect to consume 6% more than they produce, nor is it rational for investors to expect foreign central banks – primarily the Chinese and Japanese – to invest that 6% surplus and other direct investment monies into the U.S. Treasury market forever. At some point it comes undone, either through a massive revaluation and dollar decline, a Treasury buyer’s boycott, or a whimpering U.S. consumer beaten down by the cost and/or amount of their burgeoning leverage – much of which is housing related. Geopolitical risks abound as well with North Korea, Taiwan, and Iran serving as potential flash points. Since the Bretton Woods II arrangement currently seems to satisfy giver and taker, consumer and maker, it should survive for a few years. Cross those fingers, though.
Because that conclusion nearly mandates a continuation of our artificially low U.S. and global interest rates fostered at the expense of the yield insensitive Chinese and Japanese Bretton Woods II (BWII) “cartel,” it might seem that all we as bond investors have to do is to head for the bar to get a tall cool one. But that would neglect the potentially reflationary impact of this artificially low yield environment. Surely, near 0% real short-term rates here and abroad have got to stimulate an inflationary resurgence. Au contraire. China has opted into BWII for one reason only – to employ hundreds of millions of unemployed workers in its interior. And it is those same workers, requiring only 5-10 cents per U.S. wage dollar that have kept inflation competitively low nearly everywhere in the global economy. What inflation we do have – 3% in the U.S., 2% in Euroland, 0% in Japan – is due to asset inflation – higher commodity prices, higher housing prices, and higher stock prices – creating artificial wealth and immediate purchasing power through what we described at our Secular Forum as the “Pump.” In some secular stretches, real, not artificial wealth is generated by productivity surges and the advancement of new technologies. The 1990s was such an example, but during the past five years wealth has come more from finance-based miracles than those based on productivity.
Nearly everyone knows that oil prices, housing prices, and even stock prices are up in the past few years and in some cases spectacularly. Not everyone knows why. Enter the “Pump.” The pump in its purest sense – sans the risk premium, and the P/E, P/Rents multiple changes of stock and home prices – can best be explained via the price action of a good old inflation protected Treasury, a 5-year maturity TIPS shown in both yield and price terms in Chart III.
This asset has been “Pumped” over the past 4 years to the tune of 14% price appreciation by the low interest rate policy of Alan Greenspan. Its 4% real yield has been lowered to 1% real yield with a resultant 14% price pop. That increase is reflective of the wealth creation pump for more well known asset classes – our homes, our stocks, our corporate bonds with their CDO structures and so on, except in these cases, the asset pop has been more than 14% because they are risk assets and in many cases levered ones.
Now this concept of the “Asset Pump” (which in combination with fiscal deficit spending and associated tax cuts has been the primary U.S. induced policy to keep consumption up and the recovery going) is important to understand because it gives us a strong hint about our economic and investment future and allows us to describe our King’s seamstress as having done a rather poor job of sewing. That seems evident because her creations have been put together not based on savings and domestic investment but on finance-based consumption fed from asset appreciation based on the Pump.
Future finance-based consumption, however, is limited by our ability to keep pumping lower and lower yields, which in the past have led to higher and higher TIPS, home, stock, and associated asset prices. Let me do the TIPS math for you and then you can draw the implications for other asset classes. The 14% 5-year TIPS capital gain over the past few years that Alan Greenspan has been able to manufacture probably can only go up by 5 more points, because a 0% real yield for a 5-year maturity TIPS serves as a practical limit that investors will tolerate during deflationary, and most low inflationary environments. A 5-year TIPS moving lower in yield from 1% to 0% goes up 5 points. Even if the Fed continues to “Pump,” then, we are ¾ of the way complete in terms of the Fed’s ability to continue to stimulate asset prices, because its 21st century journey started at 4%, we are now at 1%, and 0% is the practical limit. That doesn’t mean that the housing “bubble” can’t keep going because it likely will if the Fed “Pumps” real yields closer to 0%. But there are limits, and we are heading down the home stretch of this U.S. race towards prosperity based on asset price appreciation.
Our point on the “Pump” then, is to suggest that in combination with a globalized free trade-based economy exhibiting a surfeit of cheap Asian labor, it will be difficult to generate U.S. inflation higher than our current 3% even if interest rates fall further. If 3% inflation is all we can get from the past 5-years’ asset inflation, it’s hard to believe that we get more from what’s left. The potential to reflate via interest rates is nearly over. We draw the same conclusion for Euroland and Japan. Japan, of course, is the primary example of how 0% nominal yields can fail to generate any inflation whatsoever, is it not? Continued disinflation not reflation, then, will rule our fragile future kingdom, with the potential for 1-2% CPI prints in most years between 2006 and 2010 throughout much of the global economy. Readers may remember our past few years’ Secular Forum descriptions of the tug-of-war between disinflation and reflationary forces. We have proclaimed a winner based on our observation of massive fiscal and monetary global stimulation described above, the limited inflationary response, and the lack of further ammunition. Long live our disinflationary King.
Investment Implications
The risk to bond markets going forward, therefore, will not be from having too much high quality duration, but too little. The demand for Treasuries should continue at high levels from foreign central banks due to the continuation of Bretton Woods II and from private global bond investors who will sense no threat from accelerating inflation over our secular 3-5 year timeframe. In addition, as our Secular Forum speaker Olivia Mitchell described, private and public sector pension fund changes are underway which will likely mandate increased allocations to long-term bonds in order to accommodate many nations’ demographic surge towards old age and retirement. The change is even further advanced in Euroland based on UK and Dutch pension accounting modifications. If we had to forecast (and we do), we believe a range of 3 - 4½% for 10-year nominal Treasuries will prevail during most of our secular timeframe and that yields on Euroland bonds will be slightly lower due to their structural unemployment problems, disinflationary incorporation of new Central and Eastern European countries into their existing family of nations, and more growth-inhibiting demographics. This bullish scenario is not without its risks, be they geopolitical, trade, oil, or internal budget popping related in the U.S. or Euroland. In addition, anything that threatens BWII or resembles a “helicopter money” monetary response described by Ben Bernanke could ultimately be bond market destructive.
Furthermore, the inherent leverage throughout the global financial system will pose a danger to risk-oriented markets (stocks, high yield debt, CDO structures, real estate) as owners gradually realize their returns can no longer be pumped anywhere near double-digit expectations. Whether this can be accomplished gradually as central bankers maintain or happen quickly as others believe is an important question, and points to the potential storm referred to in previous pages. We would suggest that although financial innovation and derivative products allow for diversification and a spreading of risk across more market players, the increased liquidity of our modern day system has also allowed for increased leverage, quicker exits, and therefore more systemic, system-wide risk. If institutional and retail investors in levered products become increasingly disenchanted with quarterly/annual returns, an unwind of levered structures could take place even in the face of continued economic growth, much like we’ve seen in recent weeks.
Well our reality-based fairytale must now come to a close. The one reality we are sure of is that we at PIMCO are most fortunate to be entrusted with the management of your assets. The responsibility, while heavy, is the reason we are in business. Thank you. As to happy endings in the global economy and financial markets? Well some assets – high quality bonds, and certain commodities in limited supply among them – may continue to do well; other risk-oriented holdings can be pumped only a little bit further. And then? Well, given appropriate steps from government policymakers that attempt to rebalance our decidedly imbalanced global economy, we can still continue to prosper, but as with most fairytales, the wicked witch lurks. For now we at PIMCO will be content to acknowledge our reigning King’s clothes, the poor quality of the stitchery, and the partial exposure of his bare-bottom displayed on our front cover. Stay tuned in future years. This may yet turn into a reality show that resembles not the Coppertone Girl but Uncle Sam with a crown on his head and not much else to show for his/our years of profligate consumption based upon Bretton Woods II and the leveraging of near costless finance.
William H. Gross
Managing Director
Tuesday, May 13, 2008
Libor Set for Overhaul as Credibility Is Doubted
And the "shadow banking system" squeaks and groans a bit more...
As an extra related series, check out Sybil Star's links.
Here's an older article of Marshall Auerback's everyone should read; Link It is certainly still pertinent.
This article by Karol Gellert should also be read by everyone. It may be old, but very pertinent.
And finally for the real truth: Auerback, Gross and Dialynas
To contact the reporters on this story: Ben Livesey in London blivesey@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
As an extra related series, check out Sybil Star's links.
Here's an older article of Marshall Auerback's everyone should read; Link It is certainly still pertinent.
This article by Karol Gellert should also be read by everyone. It may be old, but very pertinent.
And finally for the real truth: Auerback, Gross and Dialynas
Libor Set for Overhaul as Credibility Is Doubted (Update1)
By Ben Livesey and Gavin Finch
May 13 (Bloomberg) -- The benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages is set for its biggest shakeup in a decade on concern that banks misquoted their true borrowing costs.
``We have not run away or hidden from the need for reform or the need for review'' of ``serious issues'' in the U.K. financial-services industry, British Bankers' Association Chief Executive Officer Angela Knight said at a hearing of a parliamentary committee in London today. The BBA is set to announce the results of its most far-reaching review of the way it sets the London interbank offered rate in a decade on May 30.
The association, an unregulated London-based trade group, is under pressure to show that Libor is reliable following complaints by investors that financial institutions weren't telling the truth about their funding costs after rising mortgage defaults contaminated credit markets and drove up borrowing costs.
While the association set the one-month dollar Libor rate at 2.72 percent on April 7, the Federal Reserve said banks paid 2.82 percent for secured loans later that day. Secured loans typically yield less than unsecured debt.
``The Libor numbers that banks reported to the BBA were a lie,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``They had been all along. The BBA has been trying to investigate them and that's why banks have started to report the right numbers.''
April Warning
Libor rates jumped after the association said April 16 that any member banks found to be misquoting rates will be banned. The cost of borrowing in dollars for three months rose 18 basis points to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze last August. The one-month rate climbed 14 basis points, the most since November.
The cost of borrowing in dollars for three months should be as much as 30 basis points, or 0.30 percentage point, higher than the current rate, Citigroup Inc. said in a report last month.
Banks are understating borrowing costs on concern they will be perceived as ``weakened'' by the credit turmoil that forced financial companies to record $323 billion of losses and credit- markets writedowns, said Peter Hahn, a fellow at the London- based Cass Business School.
``Since the credit crunch, it's something that appears to have been manipulated,'' said Hahn, a former managing director at Citigroup. ``We are in an extraordinarily delicate confidence time where a small event can shatter things quite easily.''
Review Brought Forward
The BBA accelerated its annual review of Libor to assess if there's a fault with how the rate is computed, if it reflects ``difficult markets'' or is ``giving the right answer, just one that people don't want to hear,'' Knight said yesterday.
``Libor has stood the test of two decades,'' she said at today's parliamentary committee hearing. While the association has contacted all the member banks to investigate Libor ``volatility,'' the swings in the rate are ``hardly surprising'' amid the credit turmoil, Knight said.
The association has submitted a report based on discussions with member banks to its independent Foreign Exchange and Money Market Committee, which is carrying out the review of Libor, said Brian Mairs, a spokesman for the BBA in London.
The banking group, which represents Citigroup, HSBC Holdings Plc and 14 other lenders, asks members each morning to say how much it would cost them to borrow from each other for 15 different periods ranging from a day to a year in dollars, British pounds, euros and eight other currencies.
BIS Report
The Bank for International Settlements said in a March report some lenders were manipulating the rates to prevent their borrowing costs from escalating. The system still worked as it was meant to do as the credit crunch began in the middle of last year, the Basel, Switzerland-based BIS said.
Libor is used to guide banks in setting rates on most adjustable-rate mortgages. It's also the benchmark for the $1.2 trillion of interest-rate swap contracts traded every day worldwide, according to the BIS.
``Libor is a proxy for the effective rates of the economy,'' said Rav Singh, an interest-rate strategist at Morgan Stanley in London. ``Libor eventually feeds into the economy. There's so much on the back of the Libor problem. There are structured products, all the swaps and then there are the hedging positions.''
Fed Cuts
To ease the credit crunch, the Fed cut rates seven times, created three lending facilities to help both banks and securities firms obtain funds and backed the takeover of Bear Stearns Cos., which was on the verge of collapse. In all, the central bank made more than $600 billion available to lenders and allowed Wall Street firms to borrow money overnight at the same so-called discount rate charged to commercial banks. Fed Chairman Ben S. Bernanke provided $29 billion of financing to back JPMorgan Chase & Co.'s bailout of Bear Stearns in March.
Bank representatives declined to say what recommendations they are making to change Libor.
HSBC and HBOS Plc spokesmen declined to comment, as did Bank of America Corp. spokesman Scott Silvestri. Barclays, Royal Bank of Scotland Group Plc, Lloyds TSB Group Plc also declined to comment. Deutsche Bank AG spokesman Ronald Weichert wasn't immediately able to comment.
``I can confirm that along with the other 15 members of the BBA, as happens every year, we have been in consultations,'' said Richard Bassett, a London-based spokesman for WestLB AG. Rabobank Groep NV spokesman Anthony Arthur wasn't immediately available for comment.
Spokesmen for Mitsubishi UFJ Financial Group Inc. and Norinchukin Bank Ltd. weren't immediately available. A Royal Bank of Canada spokeswoman said it had discussions with the BBA as part of consultations with all Libor panel members and awaits the association's recommendations.
To contact the reporters on this story: Ben Livesey in London blivesey@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
Thursday, May 08, 2008
The 12 Steps to a Financial Disaster
We caught wind of a recent analysis from Professor Nouriel Roubini of the Stern School of Business at New York University. Nouriel has become known for his rather clear clarion calls that the housing bubble would lead to a credit crisis and possibly much worse. He has been one who has been on CNBC and was in the clear minority early last year, but now no one is laughing.
John Mauldin's Outside the Box posted the Nouriel details for us on how a worse case scenario would develop. "We both hope this does not develop. It can be avoided, but realistic investors need to know what to look for to make sure we are not going there. I like Nouriel's work, as it pull's no punches. You can go to RGE Monitor at www.rgemonitor.com to see his regular work, which is geared to institutions. Like this letter, he offers Outside the Box analysis, which I think you will find useful." The Rising Risk of a Systemic Financial Meltdown:
The Twelve Steps to Financial Disaster
by Nouriel Roubini
Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.
To understand the Fed actions one has to realize that there is now a rising probability of a "catastrophic" financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
That is the reason the Fed had thrown all caution to the wind - after a year in which it was behind the curve and underplaying the economic and financial risks - and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.
To understand the risks that the financial system is facing today I present the "nightmare" or "catastrophic" scenario that the Fed and financial officials around the world are now worried about. Such a scenario - however extreme - has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.
Start first with the recession that is now enveloping the US economy. Let us assume - as likely - that this recession - that already started in December 2007 - will be worse than the mild ones - that lasted 8 months - that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households - whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?
Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession.
First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use "jingle mail" (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders' stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.
Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005
through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages - already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.
Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing - rather than reducing systemic risk - and making the credit crunch global.
Third, the recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.
Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package - short of an unlikely public bailout - is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.
Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses - and potential runs - on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines' downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.
Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead - with a short lag - to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.
Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors' panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide - an institution that was more likely insolvent than illiquid - has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks' bankruptcies will add to an already severe credit crunch.
Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans - a good chunk of which were issued to finance very risky and reckless LBOs - is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone - not avoid - such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.
Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD - or recovery given default - rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen.
While on average the US and European corporations are in better shape - in terms of profitability and debt burden - than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection - possibly large institutions such as monolines, some hedge funds or a large broker dealer - may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.
Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don't have direct or indirect access to the central bank's lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system - stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.
Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession - and a sharp global economic slowdown. The fall in stock markets - after the late January 2008 rally fizzles out - will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008.
Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.
Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dryup of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates - TED spreads, BOR-OIS spreads, BOT - Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors' risk aversion - will massively widen again. Even the easing of the liquidity crunch after massive central banks' actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.
Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.
Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds - about $80 billion so far - will be unable to stop this credit disintermediation - (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.
A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties - driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities - will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.
In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century. Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question - to be detailed in a follow-up article - is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response - monetary, fiscal, regulatory, financial and otherwise - is coherent, timely and credible. I will argue - in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis."
We thank John Mauldin for making the Professor's thesis available. John can be reached at:
JohnMauldin@InvestorsInsight.com.
checkthemarkets.com
http://www.checkthemarkets.com Powered by Joomla! Generated: 8 May, 2008, 12:15
John Mauldin's Outside the Box posted the Nouriel details for us on how a worse case scenario would develop. "We both hope this does not develop. It can be avoided, but realistic investors need to know what to look for to make sure we are not going there. I like Nouriel's work, as it pull's no punches. You can go to RGE Monitor at www.rgemonitor.com to see his regular work, which is geared to institutions. Like this letter, he offers Outside the Box analysis, which I think you will find useful." The Rising Risk of a Systemic Financial Meltdown:
The Twelve Steps to Financial Disaster
by Nouriel Roubini
Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.
To understand the Fed actions one has to realize that there is now a rising probability of a "catastrophic" financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
That is the reason the Fed had thrown all caution to the wind - after a year in which it was behind the curve and underplaying the economic and financial risks - and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.
To understand the risks that the financial system is facing today I present the "nightmare" or "catastrophic" scenario that the Fed and financial officials around the world are now worried about. Such a scenario - however extreme - has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.
Start first with the recession that is now enveloping the US economy. Let us assume - as likely - that this recession - that already started in December 2007 - will be worse than the mild ones - that lasted 8 months - that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households - whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?
Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession.
First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use "jingle mail" (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders' stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.
Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005
through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages - already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.
Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing - rather than reducing systemic risk - and making the credit crunch global.
Third, the recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.
Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package - short of an unlikely public bailout - is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.
Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses - and potential runs - on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines' downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.
Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead - with a short lag - to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.
Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors' panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide - an institution that was more likely insolvent than illiquid - has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks' bankruptcies will add to an already severe credit crunch.
Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans - a good chunk of which were issued to finance very risky and reckless LBOs - is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone - not avoid - such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.
Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD - or recovery given default - rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen.
While on average the US and European corporations are in better shape - in terms of profitability and debt burden - than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection - possibly large institutions such as monolines, some hedge funds or a large broker dealer - may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.
Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don't have direct or indirect access to the central bank's lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system - stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.
Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession - and a sharp global economic slowdown. The fall in stock markets - after the late January 2008 rally fizzles out - will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008.
Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.
Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dryup of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates - TED spreads, BOR-OIS spreads, BOT - Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors' risk aversion - will massively widen again. Even the easing of the liquidity crunch after massive central banks' actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.
Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.
Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds - about $80 billion so far - will be unable to stop this credit disintermediation - (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.
A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties - driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities - will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.
In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century. Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question - to be detailed in a follow-up article - is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response - monetary, fiscal, regulatory, financial and otherwise - is coherent, timely and credible. I will argue - in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis."
We thank John Mauldin for making the Professor's thesis available. John can be reached at:
JohnMauldin@InvestorsInsight.com.
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