Media slut watch (Nadler, Roubini)

Media exposure is not a bad contrary indicator. Indeed, a pundit’s prescience is, plus or minus, inversely proportional to his/her proximity to the nearest reporter.

In this light, first up, John Nadler at Kitco, the scrap gold recycler. Nadler’s bandwidth to content ratio might be seen as amongst the highest on the net. A typical comment might run: “Gold could trade lower today where it may find some physical interest. But if something happens, it may trade higher.” Extreme vigilance is undertaken to distance himself from the “radical goldbugs” (who happen to constitute a large swath of his customer base) and whom he, presumably, fears may one day be right. He is well covered by wires on the gold beat.

His year-end wrap-up reads in part as follows:

The "You Couldn't Have Been More Wrong, But You're Forgiven" award goes to … those … who awarded the "Moron of the Year" award to our 12/31/07 projections for 2008 gold prices ("from $640 (off by $80) to $940 (off by $93) and a chart pattern which might see the highs being made well ahead of the lows" it was March to October).

Not quite right. Here is, in fact, what you said a year ago:

Our price projections indicate a likely channel of from $640 to $940 and a pattern which might see the highs being made well ahead of the lows. The average price for bullion in the coming year is still seen as rising, possibly to $730 per ounce…[Emph added.]

Nadler omitted, if you missed it, magnanimity re the award giving and all that perhaps getting the better of him, his key projection for the year. As we can see from the original clip (yet omitted in his re-cap), he called for $730/oz gold, on average. In fact, the average price for 2008 was about $872/oz (London AM fix), or about 18% higher than Nadler’s prediction. Indeed, Nadler’s average price call for 2008 was only $20 higher than the lows of the year, and a whopping $300 lower than the highs of the year. Put differently, gold traded higher than his predicted average price 97% of the time.


This oversight may be understandable in light of his busy schedule, as per:

My own, "Infinite Gratitude" award goes to all those who clicked on my humble musings 4,580,745 times (up to this day) during this past year and gave their time to read what I had to relay on a given day. With special mention to all of my friends in the media, who had their hands extremely full this year. [Emphasis in the original.]

Isn’t the media supposed to be thanking you, Jon? For all your cogent thoughts throughout the year? What am I missing?

Next we have Nouriel Roubini, who takes time out from interviews to do some economics now and then (and, apparently, much else.) More ink in the FT over the week-end, this time a fawning profile.

In the buzzy, scruffy warren of offices in New York from which Nouriel Roubini runs his economics aggregration and commentary website, one of the young cyber-serfs has taped a New York Post story about the boss to the chalky wall. “NYU Playboy Warns: Econ Party’s Over”, the sub-heading declares, next to a photograph of a smiling, open-shirted Mr Roubini, sandwiched between two attractive young women.

Not so long ago, the phrase “playboy economist” would have been a joky oxymoron, likely to feature in satirical lists alongside “selfless hedge fund manager” and (at least before the US surge in Iraq) “military intelligence”. But, in a sign that practitioners of the dismal science are among the few beneficiaries of the global economic meltdown, this crisis has transformed the 50-year-old New York University professor from a respected academic economist into a minor celebrity.

Mr Roubini, who offered one of the first and most nuanced predictions of the financial and economic crash, is ambivalent about the personal scrutiny his fame has attracted. After Nick Denton, founder of the Gawker website, first pointed to the contrast between the economist’s “Dr Doom” public persona and his party-going private life, Mr Roubini sent Mr Denton a Facebook message in which he declared: “I work very, very hard and I also enjoy life . . . To paraphrase Seinfeld: anything wrong with that?”

But sitting at his modest desk in the corner of an open-plan office, Mr Roubini tells me the “playboy” tag was “a gross mischaracterisation”. He said he was sometimes recognised on the street, but mostly by “geeks and wonks”. “There are not paparazzi yet,” Mr Roubini, wearing jeans, a black jacket and a deep tan that belies the miserable New York weather, says with a self-deprecating chuckle. “No one has said, ‘You have a brilliant mind’, and asked me out.”

Self-deprecating?! Consider what Nick Denton at Gawker.com actually turned up. Here is an email sent by Roubini to a female “facebook friend”, which was in turn passed on to the gossip site:

Ciao bella. How are you fashionista glitterata glamorata?

I am in decadent St Trop now vacationing with Arab Sheiks, Russian oligarchs and assorted aristocratic Euro trash. More silicon here than in Silicon Valley...lol

I had to escape NYC as my Barron's interview (http://www.rgemonitor.com/roubini-monitor/253240/) on $2 trillion of losses made the markets swoon last week and angry mobs of investors were chasing me.

So life is a beach here and am studying Beach Economics and the IELs (International Elites of Leisure) with a grant from the Institute for Advanced Vacations; hard job but somebody gotta do it.

This coming Sunday August 17th the New York Times Magazine (http://www.nytimes.com/pages/magazine/index.html) will publish a long profile article (4 pages and 3000 words) about me. So beware of markets shivering the next day.
Want to come visit here in St Trop? I would be too lucky.

I will be back this weekend to NYC but off then to Brazil, UK and Sweden. But I will have parties over the coming weekends.

I hope to see you in nyc if not in St Trop. A drink some time too?
xoxo

Nouriel [Emph added.]

Self-deprecating? In the least, it is clear Roubini reads his own press. Lol.

The spat was apparently sparked by Denton’s “calling out” of the economist as per:

It's time to call bullshit. The image of Dr. Doom may satisfy the needs of the media and partygoers this Halloween—but Roubini is anything but dour. The 50-year-old Iranian-Jewish economist is a promiscuous Facebook friend who draws a cosmopolitan crowd to the frequent parties at his Tribeca loft—an apartment with walls indented with plaster vulvas, incidentally. As this party photograph shows (right), the professor's gloomy public image is entirely at odds with his playboy lifestyle.

This did not go down well and Roubini went nutso (or, in Denton’s words, Roubini suffered a “personal meltdown – as dramatic as the economic disintegration he’s so long predicted”) on Denton’s facebook wall:

“You [Denton] are a loser and an intellectual dwarf who cannot engage me on my widely respected views on the economy and financial markets; too bad I was the first one that early on predicted in minute and precise details this most severe financial crisis. So which financial institution – that cannot stand my intellectually independent and correct views – paid you for this hatchet job? And how much have you been paid for it you little loser anti-Semitic jerk?”

Umm, Roubini was the first to sound alarms about the dangers of near infinite credit expansion? Really? This will come as a shock to many.

At any rate, it certainly appears we are reaching some sort of high water mark, in Roubini’s mind, if nowhere else.

When "radical gold bugs", tin foil hats and all, start to bask in this sort of fawning media attention, someone please sound the alarm, for a secular change will clearly be at hand.

Ours don't smell

From an op/ed in Korea:

If a nation’s economy teeters on the brink of collapse, the value of its currency will inevitably fall.

No truer words were ever put to to page. Why isn't this obvious on this side of the pond? Time after time after time after we see this pattern of failed currencies following failed economies into the ditch, yet the rockstars of the punditry class still there remain shills, for example here and here and here, for lending their money to a bankrupt institution, namely, the US government. It seems one needs some critical distance away from the echo chamber of professional finance types to gain proper persepctive. Here is the entire article:

If a nation’s economy teeters on the brink of collapse, the value of its currency will inevitably fall. The U.S. dollar faces a devastating crisis due to the nation’s huge trade deficit, financial losses and zero-level interest rates. It plays a much smaller role than it used to in foreign currency reserves worldwide. The share of euro-denominated bonds in the international bond market has risen substantially, overwhelming dollar-denominated bonds.

Money naturally flows toward a safer currency. It is unreasonable to expect global funds to continue to be poorly distributed toward the U.S. dollar despite low interest rates and losses from foreign currency exchanges. If recent trends persist, a global currency war is inevitable.

French President Nicolas Sarkozy said, “The U.S. dollar can no longer claim to be the only currency in the world,” calling for a transition to a multilateral currency system that includes the euro. His comments came as the euro surged to a record high against the dollar.

China poses the biggest threat to the U.S. dollar. China has the world’s largest currency reserves, which are poised to top $2 trillion. The country has said it will not continue to buy more U.S. Treasuries in the future.

In addition, China has started the internationalization process of the yuan by allowing the currency to be used in deals with 10 Southeast Asian countries, as well as in Hong Kong and Macao.

Japan is also not sitting idly by. The idea of an Asian yen used to be Japan’s dream. However, it has not yet taken any official measures because of the U.S.-Japan alliance.

The global currency war may have an impact on Korea. The weak dollar may lead to the re-emergence of hyperinflation by stimulating raw materials prices. There is a need to diversify foreign reserves in order to stabilize the Korean won, in case the new key currency faces difficulty.

However, Korea can create new opportunities. It is undeniable that our success in concluding currency swap deals with the U.S., China and Japan was mainly due to strong nerve. The change of the key currency will cause a dramatic shift in the world economy. We need to pay more attention to forging closer ties with China and Japan for a rainy day. We need to accelerate the creation of the Asian Monetary Fund. However, the only way to survive in the age of the global financial turmoil is by further promoting the development of strong manufacturers and establish a sound financial system.

If we don't think our farts smell, clearly others, at greater distance, feel somewhat differently.

But where is Krugman on US devaluation?

Here is Krugman ("Latvia is the new Argentina"), with reference to this piece, discussing how devaluation is the only way out of Lativa's problems:

I’ve been saying this for a couple of weeks, but Edward Hugh has the goods.

Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.

Latvia is, of course, a mini-US -- too much debt spending plowed into rampant consumption -- yet we hear no calls from this quarter for devaluation state-side. How come? Goose. Gander. What am I missing?

Rather, Krugman has become the poster boy for massive fiscal efforts, as though filling potholes is in and of itself a road to salvation. Or is Krugman being too coy by half? That is, is his fiscal program merely a means to an end? If so, he should say so.

Holiday Dogerel

This has been making the rounds:

'Twas the night before Christmas in hostel downtown
Curled a certain proud goldbug of former renown
His suit was dishevelled, His eyes? Dare discuss!
The po’ bastard looked like he’d been hit by a bus.

“What the hell happened?” he’d say if he could.
But market conditions had turned him to wood.
Though speech was beyond him, mouth parched an’ dry,
Why not be morbid and peer through mind’s eye?

“For year upon year now, through Greenspan excess
Or Nixon before him: The Great Acquiesce.
The market did party, on whisps of champagne,
And one upon other of products arcane.”

“The driver at root was a Fed run amok
Issuing paper to the quack of a duck.
‘Don’t worry, be happy, in the end we’re all dead’
Refusing to see the wall straight ahead.”

“Paribus’ hiccup, cued beginning of end,
And Lehman’s demise? We could not pretend!
The music had stopped, the end of the dance.
The Prince’s grand world, pricked by a lance!”

“The instinct, of course, in blink of an eye,
Was to turn on the spigots and print for the sky.
The TARP, the FIRP, the four-letter disaster.
Let’s damn the torpedoes and print more more faster.”

“The market reaction? It beggars belief.
Someone must have slipped it wrong brief.
Ignoring history, drunk on wild oats,
They hammer the metal and run to T-Notes!”

“We were the first to see this mess for a bubble
Yet our savings now stand, turned to dust rubble.”
Oh cruel irony and fate – our goldbug now foetal ,
Sweat from his brow, traversed by red beetle.

The matron of house had seen this whole scene
No stranger to misery or venting of spleen.
A buxom young gal from somewhere afar
She wandered on over and sat by pee jar.

“I’ve seen this before”, eyes blue an’ dart-quick
As she parted his hair and gave beetle quick-flick.
“A spat with the margin clerk, snarling and burly?
Prescience’ a curse, your type’s always too early.”

“Those schoolmarm-ish types who sing of deflation
And wag their stern fingers, and warn of damnation:
‘Let’s nuke the economy until we’re in clover,
Let’s purge all our sins, ’til nothing left over.’”

“Son fret you not, this won’t come to pass.
For no banker on earth has testes of brass.
On selective case basis, it’s been readily tried
A Lehman experiment, economy-wide?”

“Far better to use the one trick in bag
It’s a time-tested measure – we’ll give cash a good shag.
Should we decide on less pain and more pleasure
We’ll take out our pens an’ change unit of measure.”

“With a stroke such as this, the debt burden will lift
And from financial shenanigans our focus will shift
To productive endeavours, a better foundation
All with the help of a little inflation.”

“I tell you no tales, nor fancy blue fiction.
But hold up a portal to real-time addiction.”
The goldbug looked up, a glimmer of hope,
The two then turned to slippery slide slope:

“Behold the Fed’s ledgers, after buying spree pink.
The blotter now shows the coffee room sink!
And stop the print presses! A Latin cliché!
We’ve just learned from the wires the whole curve’s a buffet.”

“We see there’s a coupon: it’s purely deceit.
(In a ZIRP scenario even gold might compete!)
The money base soaked to soggy foundation;
A cash wave be triggered on smallest vibration.”

“An’ when time comes to pass, to mop up the flood,
The Fed will be helpless, its sponge soiled with crud.
The dollar’s demise is thus baked in the cake
Its anchor bank status will crumble and flake.”

“That is the backdrop, now turning ahead
Your hard asset names should rise from the dead.
So worry sweet not, in the end you’ll be right
Stick to your vision, notwithstanding this fright.”

“(And with nod to the T-Notes, I think you’ll agree
Before God doth destroy, He first fills with glee.
Roubini et al, those Blodget’s of paper
Exposed for shame truth: blind peddlers of vapour!)”

“History is quirky, it eschews a straight line
A lesson we learned from brutal decline.
But stage is now set, sprung from the fetter.
Merry Christmas to all – next year should be better!”

Somene says "Weimar" in print.

Rarely do I agree with someone about just about everything. This piece, by Liam Halligan of the Telegraph, comes close. Prize snippets follow; no colour needed.

The danger isn't deflation, but a surge of Weimar Republic-style inflation. The US authorities aren't lubricating the system, as they claim. They're flooding – drowning – their economy with cash. And they'll carry on doing so – pandering to Wall Street – until something forces them to stop.

That something could be the dollar – and even a US gilts strike. The yield on the 30-year US bond is now 2.6pc – the lowest for 50 years. Traders aren't buying those bonds because they think it's a good deal to collect 2.6pc on their money each year. They're buying them because, under intense pressure from bosses and regulators to "go safe", they're scared for their jobs.

Such forced buying and related low yields suggest the US Treasuries market is now a bubble. And bubbles always burst. The Fed is committed to buying long-term US government debt itself in huge quantities. But, as America's liabilities rise and the printing presses keep rolling, the dollar must surely keep falling. And as it does, the argument for holding US Treasuries collapses.

The danger looms that, pretty soon, the only net buyer of US Treasuries could be the Fed itself. Very serious questions would then be asked about America's ability to service its debt. Foreign creditors could start calling in the money they're owed by the States.

This scenario is alarming, but far from impossible. And the reason the world is flirting with this danger is because the Fed needs to fight deflation.

But the Fed's argument doesn't stack up. US inflation – as measured by the pre-Clinton methodology, before the politicians started messing with the numbers – stands at 4.5pc.

Deflation is being used as an excuse for the US authorities to print money like crazy, attempting to bury their mistakes and bail out their Wall Street friends. [Emph added].

Alright, a little bit of colour. Most of the above has been said before (although the mastheads are getting more respectable with time). What is more rarely expressed is the observation that managers are buying treasuries for ass-covering reasons. Amen to all that. It's quite true, especially around year-end. Fact is, no one has ever been fired for owning treasuries. The intermediation of real-estate lending was the root cause of the clusterf-ck. The intermediation of financial asset stewardship will make the mortgage fiasco seem like LTCM. And that's with Madoff already in the history books. You can argue that treasuries are not a bubble, but you can't argue they're not a crowded trade. PM's are drawn to crowded trades, I suppose, by definition (again, no one has every been fired for being center of the pack). Individuals? Less so. There is daylight between a professional's motivations and the motivations of those whose money the professional manages. When the money bubble turns, this will become more apparent and "riskless" will become a term laden with irony.

"The Age of Obligation"

A thoughtful article by Niall Ferguson in the week-end FT (subscription only). The piece covers the various ways society has dealt with excessive debt in the past. And when I say 'the past', I mean the way past:

In the Old Testament Book of Leviticus, God commands the children if Israel to observe a Jubilee every 50 years. Nowadays, we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth's golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts.

Much of the article walks through what we know -- we took on too much debt and now we are screwed: "Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession." The numbers are familiar, tedious even, if comprehensive. What to do about it? He doesn't know, and suggests no one else does either. "What makes this crisis of burning interest to financial historians is the knowledge that we are witnessing a real-time experiment with not one but two theories about the Depression." Bernanke is doing a Friedman while Paulson's channeling Keynes. The bulk of the article drives us to this question: "Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector?" He lays it out:

The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy) inflation or conversion.

Mass defaults and bankruptcy "are not a pretty prospect." Agreed, especially when the collateral damage to the real economy, the very sectors of the economy we'll need when we reach the far shore and start to rebuild, will be catastrophic. Ferguson's preferred option is then "conversion" whereby mortgage debts are converted into longer-term low interest rate loans. It is here where he loses me: isn't this a form of restructuring? And additionally, the logistics of piecemeal restructuring would be a nightmare. And why stop at mortgage debt? What about credit card debt? What about the debt at all those autoparts suppliers? Who's going to play God in all this?

His treatment of inflation as a solution is disappointing:

Inflation, ..., is hard to worry about in the short term, not least because the Fed's expansion of the monetary base is leading to no commensurate expansion of the broad money supply;

Fair enough, but it is just as fair to ask why he doesn't look how most countries induce inflation: via devaluation. That's how non-reserve currency countries do it (and thereby cut their debt burden) and that's how FDR did in the 30's. In this regard, the problem isn't "new" (as he insinuates); rather, what is new is the fact that we now live in a world of fiat currencies backed by nothing and therefore there is no reference system against which the US can now easily devalue. A paradigm gap plagues the debate. This too, in time, shall pass.

Roubini Speaks! (On Currencies...)

Oh my! From Brain Surgeon Roubini:

Does the U.S. dollar’s December slide mean the USD has passed its peak? Most likely not. The turn-of-the-year profit-taking on long USD positions creates a near-term blip in the dollar's uptrend...

It was profit taking that caused the "blip"? Really? Or maybe it has something to with the Fed saying it would rain money from heaven until Wall Street (and Main Street) looked like a ticker tape parade? He continues:

More aggressive policy response in the U.S. compared to Europe, could bring the U.S. out of a recession faster than the Eurozone (though growth will most likely remain subdued for some years to come), supporting the dollar against the euro. In the longer term, however, once risk appetite revives, the greenback might lose its defenses in wake of worries surrounding U.S. public debt expansion and the potential inflationary effect of quantitative easing. [Emph added.]

Well, at least, in the emphasized passage, he acknowledges the existence of history, even as he doubts its veracity. "Potentially inflationary effect"? This is what he said in the FT some two weeks ago:

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government.

So sure, go buy the dollar!! I mean, if the issuer goes bankrupt, we'll let you know ahead of time. We'll send you the word. Wink, wink, touch nose. In the meantime, we see nothing wrong with driving on the wrong side on the highway. Less traffic there, see?

Why isn't there deflation in Iceland?

The finacial sector goes crunch when spree of bad lending meets inevitable end and, well, isn't that a sign of impending deflation? The latest from Iceland:

The decline of the krona, which has lost half of its value since the start of 2008, has resulted in rampant inflation, which is now over 20 percent. Many people are seeing costs skyrocket, particularly on imported goods. Due to the high interest rates in Iceland, many people took out loans in foreign currencies where interest was lower. For them, costs have doubled.

The economy is set to suffer a severe contraction in the coming year. Lars Christensen, an economist from Dansk bank commented, "Given the base now, GDP will then fall at least 10 percent, or even 15 to 20 percent."

The crippling level of debt from the collapsed banks will exacerbate this problem. Recent analyses indicate that in total the banks' liabilities will cost Iceland 80 percent of its GDP.

What happened in Western economies is fundamentally no different than what happened in Iceland; indeed, Iceland is our lab bench experiment, our trial run. Eyes peeled.

Cat sighting

It will be instructive to track folks' acceptance of an inflationary resolution to the debt hole the global economy now finds itself in. It is, of course, the only way out, but at the same time it remains the forbidden fruit of policy options, the solution that dare not speak its name, etc. and it is easy to see why: the monetary system as we know it is based on credit, from credere - to believe - and the moment creditors stop believing, things can unravel quite quickly. It remains though that the benefits of such measures will seep into the public debate as other approaches fail and options become increasingly limited. Whether it will proceed along the classic stages of grief -- denial, anger, bargaining, depression, acceptance -- remains to be seen. But expect more mentions, and expect these to become more supportive over time. Necessity being the mother of invention, of some variant thereof. A first posting to this effect is here.

The clip below falls very clearly into the "acceptance" stage of inflation as the cure for excessive debt. Released in 1933, just after FDR revalued the dollar, the grandfatherly narrator walks the viewer though the wonderful tonic that is inflation and how it will better their lives. And surely, to the average viewer, the narrator is right. (The creditors were another story...) What is particularly telling is how inflation had to be explained, as though it were a foreign concept, which it surely was. (That's the gold standard for ya.) Nowadays, the phenomenon is the object of scorn and ridicule, and it is in this light that the clip, which has gone viral, is now treated. This too will change...

Bastille Day!

Wow, how's that for luck? You start a blog called "Weimar Watch" and not two weeks later the Fed coughs up Tuesday's FOMC statement. That's kinda like deciding to get into ponies and seeing your horse win a stakes race on its fifth start. (I've been slow on getting this out due to associated festivities.) For the record, here it is:

For immediate release

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

The new carry

From Across the Curve's closing comments today:

For the moment inflation is quiescent. That and the allure of nearly 300 basis points per day of carry make the 30 year bond appear to be an attractive investment. So, as the Federal Reserve places that funds rate at zero it will compel more and more investors to climb out the yield curve to capture some performance. (A stable well defined trajectory for funding and lots of positive carry. That was one of the main ingredients for the sub prime debacle.) [Emph added.]

So we lurch from one carry trade to the next. For this reason and this reason alone we can take comfort that the euphoria in the bond pit is based not on fundamentals (3% for 30 years!!) but rather on (more) performance chasing. And insofar that this is so, the move in treasuries is not terminal and will, like all the other carry trades passim, have to be unwound.

Those in glass houses...

I have no views on Ecuador's default one way or another -- I don't know why they did it and don't know where they are going with it. But Felix Salmon sure has views. Check it out:

In the annals of idiotic political decisions, today's default by Ecuador has to rank pretty high. The country failed to pay a $30.6 million interest payment on its 2012 global bonds, despite the fact that it has $5.65 billion in cash reserves and debt service accounts for less than 1% of Ecuador's GDP.

As a result, Ecuador's economy will suffer greatly. The country is a major exporter, not only of oil, but also of such things as shrimp, bananas, and cut flowers; trying to get trade finance for any of that will now be all but impossible.

...

[Ecuador] has no chance [of winning the resulting legal dispute] for one big reason: Ecuador has dollarized. The dollar is the legal currency of Ecuador; there is no other. As a result, all of Ecuador's assets, ultimately, are US assets.

Ecuador's bondholders will vote to accelerate its debt very quickly. As a result, Ecuador won't have to just pay its $30 million coupon payment any more: it will have to pay the full $510 million principal amount. And the chances are that the 2015s and 2030s will be accelerated too. What's more, if it doesn't pay up in full, its creditors will surely find a way to take the money anyway.

...

If this default isn't cured in a matter of days, Ecuador is going to lose billions of dollars it can ill afford to see go. Surely Correa knows this -- and surely he knows, too, that whenever Latin American presidents announce a debt default, they rarely last long in office. Which makes this decision even more inexplicable. But there's Ecuador for you: always bet against the country taking the logical and sensible course of action, and you're likely to make a lot of money. [Emph added.]

Salmon seems bewildered as to why the country would do something like this. Here's a hint: Ecuadorians resent US power, resent the influence it has exercised over the country's internal affairs and resent the condescending manner in which it has been treated by American politicians, military officials and, I guess, financial columnists.

And it's not surprising, given the sheer arrogance exhibited right here. "The dollar is the legal currency of Ecuador; there is no other. As a result, all of Ecuador's assets, ultimately, are US assets." Huh? Really? I mean, wow. And: "if it doesn't pay up in full, its creditors will surely find a way to take the money anyway." By hook or crook, no doubt.

But the fact is, American interests haven't needed the pretext of a bond default to assume such an attitude all along. For example, the US built a military base on Ecuadorian soil some ten years ago, in a deal signed with a lackey president on his knees to the IMF, and saw fit to pay rent of $0/year. The base was allegedly used to coordinate a recent attack by Columbia on Ecuadorian soil. (Can Salmon imagine an Ecuadorian military base in, say, Oregon? Especially if it were to be used to help the Mexicans attack California?) Correa quipped in the last election campaign that the foreign oil companies were in fact charities, for the tax returns of their local subsidiaries have never shown a profit and therefore never paid any tax. There is an "oil bar" in Quito where the industry ex-pats hang out and where darts is a popular past time. Salmon should spend an evening there, hoist a couple, and shoot the shit with these guys. Ecuador and Ecuadorians exist to be fleeced, don't ya know?

Or how about this for a good deal:

From a list of donations to be made by Agip Oil Ecuador to the Huaorani tribe in eastern Ecuador, in return for releasing Agip from any liabilities when carrying out oil exploration on Huaorani land. The contract dates from 2001 and was obtained last year from Bolivar Beltran, an Ecuadorian lawyer, by journalist Kelly Hearn. Translated from the Spanish by Dan Keane.

Two (2) buckets of lard
One (1) sack of salt
100 pounds rice
100 pounds sugar
One (1) chalkboard
One (1) Ecuadorian flag
Fifteen (15) plates
Fifteen (15) cups
Fifteen (15) spoons
Two (2) pots
Two (2) ladles
Two (2) soccer balls
One (1) stopwatch
One (1) referee whistle

The US stands as the world's biggest debtor by far. One day it might find itself in tough times and in need of refinancing. Or, in the least, in might find itself in need of oil, as it has burned through most of its own. Is it really in the long term interests of the country to continue to exercise a heavy hand in relations with its neighbours, as is seemingly being advocated here?

My homies

We have this from Gata and Bill Murphy, the plaid shirts of the gold community:

I received a call this morning from a commodities broker who told me that the Comex is alerting various futures firms about the potential of a squeeze on the December contract and is advising the $840 December shorts to exit their positions. That is the remaining open position.

There have been 12,636 notices of delivery. The shorts have until December 31 to make delivery. Normally they deliver early to take in cash and earn the interest. They must be delaying. As I understand the situation, that represents about 40 percent of the gold available at the Comex, and of course someone could enter the scene late, buy February gold, and then spread into December, which would stun the shorts.

My broker friend said his back office said this sort of alert is highly unusual and that the concern is real, not only for gold, but for other commodities too, like copper and palladium, as there is a good deal of talk of taking deliveries there too. But gold is the one for which the advice to cover went out.

This is an extremely productive development and could spur the price of gold up quickly as word spreads. As we all know, buying Comex gold and silver (the cheapest way to buy precious metals) makes all the sense in the world in this financial environment.

1. The only way you can issue a delivery notice is if you have the metal and the metal satisfies delivery requirements. That is, issuing a devliery notice amounts to delivering the gold. A 'large number' of notices, then, is only indication of 'large supplies' of gold available for delivery. Certainly, the number of delivery notices issued is no gage whatsoever as to the presence or likelihood of a squeeze. 2. Twelve thousand plus notices for gold is at any rate not abnormal. So, there is no squeeze on for the Dec contract. The Dec contract is, barring any last minute fireworks, and past experience suggests this is highly, highly unlikely, dead.

And if there were to be a squeeze, it wouldn't look like this. Rather, you'd see persistent high open interest into the delivery period and near-month spreads in severe backwardation. This is simply not happening.

A friend writes: "I read [Murphy's above dispatch] 3 times and thought either he's dangerously stupid or he's purposefully lying."

Then there's this guy, howling up another tree: "Backwardation that shook the world." I don't even know where to begin. The gold market is not in backwardation right now. It's flat, it's tight, it's somewhat strange times. But it's not in backwardation, and certainly not in a term structure that would "shake the world." The author is quite simply on drugs.

There are in fact reasons to think the flattening of gold forward rates is a positive development and it is, there's no doubt. (See here.) Then your cousins from Thunder Bay show up with a half bag and cooler.

Outside the echo chamber

Snippets from The End of the Washington Consensus, by Michael Hudson and Jeffrey Sommers. I would not agree with an awful lot here; I excerpt only the observations that resonate, for one reason or another. Must one travel to the (far?) left wing for refreshing insights these days?

Austerity and “fiscal responsibility” are for other countries. America acts ruthlessly in its own economic interest at any given moment of time. It freely spends more than it earns, flooding the global economy with what has now risen to $4 trillion in U.S. government debt to foreign central banks.

.......

This amount is unpayable, given the chronic U.S. trade deficit and overseas military spending. But it does pose an interesting problem: why can’t other countries do the same thing? Is today’s policy asymmetry a fact of nature, or is it merely voluntary and the result of ignorance (spurred by an intensive globalist ideological propaganda program, to be sure)? Does India, for instance, need to privatize its state-owned banks as earlier was planned, or is it right to pull back? More to the point, have the neoliberal programs imposed on the former Soviet Union succeeded in “Americanizing” their economies and raising production capacity and living standards as promised? Or, was it all a dream, indeed, a nightmare?

.........

The three Baltic countries, for instance – Latvia, Estonia and Lithuania – have long been praised in the Western press as great success stories. The World Bank classifies them among the most “business friendly” countries, and their real estate prices have soared, fueled by foreign-currency mortgages from neighboring Scandinavian banks. Their industry has been dismantled, their agriculture is in ruins, their male population below the age of 35 is emigrating.

..........

We expect the post-Soviet economies to go the way of Iceland, having taken on foreign debt with no visible means of paying it off via exports (the same situation in which the United States finds itself), or even further asset sales. Emigrants’ remittances are becoming a mainstay of their balance of payments, reflecting their economic shrinkage at the hands of neoliberal “reformers” and the free-market international dependency that the Washington Consensus promotes.

........

Total private-sector markets (in practice, markets run by the banks and money managers) have shown themselves to be just as destructive, wasteful and corrupt and, indeed, centrally planned as those of totally “statist” governments from Stalin’s Russia to Hitler’s Germany. Is the political pendulum about to swing back more toward a better public-private balance?

........

The policy implications go far beyond the United States itself. If the United States can create so much credit so quickly and so freely – and if Europe can follow suit, as it has done in recent days – why can’t all countries do this? Why can’t they get rich by following that path that the United States actually has taken, rather than merely doing what its economic diplomats tell them to do with sweet self-serving rhetoric?

........

By contrast, the financial and trade model that U.S. oligarchs and their allies are promoting is a double standard. Most notoriously, when the 1997 Asian financial crisis broke out, the IMF demanded that foreign governments sell out their banks and industry at fire-sale prices to foreigners. U.S. vulture capital firms were especially aggressive in grabbing Asian and other global assets. But the U.S. financial bailout stands in sharp contrast to what Washington Consensus institutions imposed on other countries. There is no intention of letting foreign investors buy into the commanding U.S. heights, except at exorbitant prices. And for industry, the United States has once more violated international trade rules by offering special bailout money and subsidies to its own Big Three U.S. automakers (General Motors, Ford and Chrysler) but not to foreign-owned automakers in the United States. In thus favoring its own national industry and taking punitive measures to injure foreign-owned investments, the United States is once again providing an object lesson in nationalistic economic policy.

.......

Most important, the U.S. bailout provides a model that is far preferable to the Washington Consensus-for-export. It shows that countries do not need to borrow credit from foreign banks at all. The government could have created its own money and credit system rather than leaving foreign creditors to accrue interest charges that now represent a permanent and seemingly irreversible balance-of-payments drain. The United States has shown that any country can monetize its own credit, at least domestic credit. A large part of the problem for Third World and post-Soviet economies is that they never experienced the successful model of managerial capitalism that predated the neoliberal model, advocated since the 1980s by Washington.

Simple debt dynamics

John Kemp at Reuters decomposes and thereby illustrates, if unknowingly, the tractor beam that now grips the US economy:

After six decades of uninterrupted credit creation and an unprecedented era of consumption and prosperity, the credit process has come to an abrupt halt. If credit has been the locomotive of the modern economy, the third quarter of 2008 marked the point when the engine stalled and the economy began to roll back down the hill.

For decades, financial activities have grown much faster than the real economy. Between 1952 and 2007, U.S. nominal GDP grew by a factor of 39 times, while total credit market debt outstanding surged 101 times.

Finance has become even more dominant in the last 25 years, as subdued business cycles, improvements in technology and communications, deregulation and pension privatization have fueled a massive increase in the issuance of debt and other financial assets.

In 1952, the U.S. economy had just $1.28 of debt for every dollar of GDP, and as late as 1980 this figure was still as low as $1.61. But beginning in the 1980s, financial services underwent a revolution that saw credit instruments per dollar of GDP rise to $2.28 in 1990, $2.67 in 2000 and a staggering $3.55 by the end of 2007.

Let's stop here and give thanks that for once we see total debt as a function of GDP, not just government debt, for when only the latter is quoted, it is almost immediately compared to like figures for Japan or Italy with a wink: things ain't so bad, see? No, what distinguishes the US from other debtors is the total absence of local creditors. In Japan, for example, households saved like squirrels while workers toiled like ants; net-net, their "lost decade" saw the country get richer, even as one component -- government -- went into hock. The US has no such crutch.

Ok, now for the simple math part: what is masked by these figures is the contribution of debt to GDP -- this ratio is, in some respects, a "biased" ratio, for debt expansion contributes to GDP expansion. What happens to the quotient if you fix the numerator? For this appears to be happening now:

But in the three months between July and September, the miracle of modern finance came crashing down.

Despite the turbulence, total debt rose another $585 billion, according to the Federal Reserve’s “Flow of Funds” report issued yesterday. But almost all the increase was government borrowing ($527 billion) to backstop the Federal Reserve and other rescue programs. The private sector borrowed just $58 billion.

So, the private sector stops borrowing and what happens to the GDP? It starts cliff diving. (And note, this is even as the government keeps expanding its balance sheet.) Looked at arithmetically, if the borrowing -- the rate of increase in the numerator -- slows down, the output -- the denominator -- starts to decrease. In other words, the US needs to borrow just to stay even. Question: given these dynamics, how is the quotient, the debt to GDP ratio, ever supposed to decrease? Put differently, how can the US ever pay back the debt?

It seems clear that it can't pay back the debt. Not ever. Rather, as they say, the US shall wear this debt. We've seen companies get trapped in debt-powered death spirals, but the world's largest economy? Den mother to subordinate economies? No, we're going Lehman or we're going Weimar.

Shades of 1989?

From Patrick Cockburn:

The Status of Forces Agreement (SOFA), signed after eight months of rancorous negotiations, is categorical and unconditional. America’s bid to act as the world’s only super-power and to establish quasi-colonial control of Iraq, an attempt which began with the invasion of 2003, has ended in failure.

I knew there had been some pushback, but hadn't appreciated that the end result was a complete rollover.

Astonishingly, this momentous agreement has been greeted with little surprise or interest outside Iraq. On the same day that it was finally passed by the Iraqi parliament international attention was wholly focused on the murderous terrorist attack in Mumbai. ... The White House was so keen to limit understanding of what it had agreed in Iraq that it did not even to publish a copy of the SOFA in English. Some senior officials in the Pentagon are privately criticizing President Bush for conceding so much to the Iraqis, ...

The US dollar's status as the reserve currency stems in part from the US' ability to project military power. Who needs gold backing when you've got nuclear backing, etc. In this regard, the image of the US in wholesale retreat likely won't bolster confidence.

Fed Debt

A flurry of thoughts and commentary about this yesterday:

(Reuters) - The U.S. Federal Reserve is considering issuing its own debt for the first time, the Wall Street Journal said, citing people familiar with the matter.

Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis, the Journal said.

Jesse argues that the measure is a preamble to "Selective Default and Devaluation."

This makes little sense unless the Fed wishes to be able to set different rates for their debt, and make it a different class, and whore out our currency, the Federal Reserve notes, without impacting the sovereign Treasury debt itself, leaving the door open for the issuance of a New Dollar.

What an image. The NY Fed as a GSE, the new and improved Fannie and Freddie. Zimbabwe Ben can simply print a new class of Federal Reserve Notes with no backing from Treasuries. BenBucks. Federal Reserve Thingies.

Perhaps we're missing something, but this looks like a step in anticipation of an eventual partial default or devaluation of US debt and the dollar.

Rosenberg out of Merrill Lynch suggests, among other things, that in fact the rationale behind the proposal is to provide themselves with a tool to mop up excess liquidity once this little crisis is over. (The "old way" of doing this was for the Fed to sell treasuries but, you see, they've now few treasuries left, the government paper having been replaced by illiquid mortgage dreck that the banks couldn't unload.) Additionally, Rosenberg speculates that this might be driven by the Fed's desire to operate more independently of the Treasury. A third point of view, from an East Coast broker, has it that this is an attempt to circumvent the statutory debt ceiling. Whatever the "correct" answer is, there has certainly been no shortage of coverage/opinions on what would normally be considered a highly arcane matter.

As for me, I've not the faintest. But the scramble to explain and shed light reminds me of when my first child was being born. For those of you who haven't been through this before, the process, at least for the guy, is exceptionally boring, especially if your wife/mate is all doped up. The kid's vitals are wired back into the nursing station, and it is effectively the two of you in a room, alone, waiting. After about twelve hours of this I'd exhausted my reading material and was trying to get comfortable on a chair that was just about impossible to get comfortable on when all of the sudden all hell broke loose. Two nurses come flying in. They look at the scope and start tweaking dials. One of them leaves to return shortly thereafter with two more people in tow. Tables get wheeled in covered with stainless instruments arranged just so. Doctors arrive. Everyone is speaking everyone in "hospital voices." Neither my wife nor I knew what in the world was going on and certainly no one was telling us diddly. But one thing was certain: Something was wrong.

In the end, the kid came out just fine, even if her head got a bit mashed up on the way through. Nowadays, except when torqued up on candy, she is even pleasant to be around. We're not sure, given the cacaphony surrounding this proposal, that the Fed's offspring will be so lucky.

Cat pokes paw out of bag

This is the first mainstream reference I've seen to what will be (get over it already!) the grand solution.

World currencies should be devalued overnight.

It can be done on a country-by-country basis, but a coordinated devaluation would work best. A devaluation of 30% would raise the dollar value of all assets by 43%. A $200,000 home with a $230,000 mortgage would become a $286,000 home with the same mortgage. Presto! The homeowner who was $30,000 upside-down now has $56,000 equity and a good reason to make his payments. Both the homeowner and the bank are immediately better-off.

...

In 1933, through a series of gold-related acts, culminating in the Gold Reserve Act of 1934, America realized a dollar devaluation of 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce. America, like the others before, had its economy bottom and recover as a result. Of the larger economies, only the French and Italians continued to adhere to the gold standard, and their economies remained depressed until finally, in 1936, they allowed their currencies to devalue, and their economies then recovered.

Read the whole thing.

Devalue correctly (as it was done in the 30's), and there will be a one-time hit. Devalue incorrectly -- or pretend there's another way out and thereby ignore the problem altogether -- and the money will go to zero. Based on the general drift so far, caricatured by this comment:

This has to be one of the most ridiculous articles ever printed in Forbes. What drivel. Guaranteed to cause massive horrendous inflation on a level not contemplated by the writer or should I say drooler of this article. Im so glad I cancelled my Forbes subscription. Forbes needs grownup that can actually think writing their articles.

my money (as it were) is on the latter.

See ostriches fly! (Update 1)

A friend pointed out that "Mish" over here argues that backwardation in the gold markets is, effectively, no big deal. He quotes a trader as saying:

I have seen countless commodities go into backwardation for numerous reasons, the most frequent being a radical temporary divergence between immediate demand and overall demand. I have seen backwardations that have lasted years.

To which said friend responded:

But has he seen *gold* go into backwardation? Yes, I have seen birds fly -- this is normal -- but have you ever seen an ostrich fly? That's gold in backwardation, or just about. This has happened once in the last 10 years and that was when Ashanti and Cambior found themselves too short by half in what turned out to be an illiquid physical market. Both companies were almost undone. I cite this because it illustrates what backwardation speaks to, namely, tightness in the underlying markets. Now, this is normal in other commodities such as copper because there are no readily available above ground stocks of copper -- there is no copper "float", as it were. But gold? Aren't there vaults and vaults full of the crap? Is there not an active lending market in the stuff? We had thought so. And if so, does it not make sense to borrow gold, sell spot and lock in the front month at a discount? Isn't that free money? Alas, gold in backwardation is strange.

And if the float ever does get mopped up, look out.

Update 1: More on this topic over at FT Alphaville. One commentator had this to say:

As an OTC bullion forwards trader I can safely say there is no backwardation in the gold market at the moment and hasn’t been for a long time. It might be trading around flat and sometimes when I quote the short date forwards my bid is in backwardation but my offer is still in contango, but that is just because USD interest rates are effectively zero in the short end. So who really cares? A real backwardation is when it’s quoted like -1% mid market in USD across the curve while USD interest rates are significantly greater than zero. Obviously this is not the technical definition, just my loose criteria for a significant backwardation.

...

There are far too many gold bugs around who when they buy coins are having their eyes gouged out by the physical dealers and the refiners, and now they are now losing money on their long positions as gold drifts lower. All these gold bugs are trying hard to talk their books up with any silly reason they can find. Reality is there is so much gold around that we just don’t know what to do with it all... it’s useless; the only problem is in the refining bottleneck. If you want to buy 400 oz standard bars there are millions and millions of ounces of inventory just lying around London in vaults gathering dust

Two things: 1. If there are "millions and millions of ounces of inventory just lying around London in vaults" then why don't the owners lend it out? Right now, you'll get about 1% for your trouble, which is about 100 bps more than you'll get on short gov't paper. Or, sell the stuff, lend the proceeds at Libor and lock in a re-purchase three months flat? Not free money? The only reason I can see that this does not get done is because there simply ain't millions and millions of ounces just lying around and available.

Secondly, check out the attitude! Quote: "it's useless." Quote: "All these gold bugs are trying hard to talk their books up with any silly reason they can find." Etc. That's the bullion dealer community for ya. Who do you think is going to get it up the hoop first?

"Holistic Margin Management"

From Industrial Market Trends we see this:

"Across the supermarket, manufacturers are trimming packages, nipping half an ounce off that bar of soap, narrowing the width of toilet paper and shrinking the size of ice cream containers," one Los Angeles Times report states. "Often the changes are so subtle that they create 'the illusion that you are buying the same amount,'" a pricing consultant explained to the L.A. Times. The Consumerist blog calls it the Grocery Shrink Ray, wherein a product is sold in a smaller size at the usual price.

Apparently, in the biz, it's called "Holistic Margin Management." Are the CPI people capturing all this?

Deflation bandwagon rolls over conflicting evidence.

From Bloomberg, a bandwagon article if there was one:

“Deflation fear is alive and well,” said Wan-Chong Kung, who helps oversee $76 billion in fixed income as a money manager at FAF Advisors Inc. in Minneapolis, the asset-management arm of U.S. Bancorp. “The constant parallels being drawn to the Depression era as well as to the Japanese experience leads to the feeling we’re looking at a pretty gloomy period for a long time.”

Again (and again and again) we see prospects for economic contraction conflated with prospects for deflation. In fact, (and in fact and in fact), most periods of economic contraction are associated with inflation, not deflation.

A longer piece is needed to contrast the Japanese situation from the current US situation, but suffice it to say for the moment that a) the Japanese government debt was largely funded internally, unlike the US, which must go cap-in-hand to foreigners and 2) relatedly, Japanese households are rich whereas US households are in hock and 3) the export-oriented Japanese economy contrasts sharply with the US economy, which substantially consists of hair salons and riverboat casinos, hardly the basis for sound lending. As for the Depression, well, Mr. Kung seems to have overlooked the fact that the dollar was devalued by 40% and that bonds proved a terrible investment (h/t Jesse's Cafe):



Meanwhile, also from Bloomberg today, we see that the credit crunch is placing upward pressure on prices elsewhere:

The global credit crunch is a boon for rig operators such as Transocean because the lack of financing is preventing smaller rivals from following through with plans to build new vessels. As many as one-fifth of the new deepwater rigs on order in shipyards from South Korea to Norway will be canceled or delayed because of capital constraints, Uhlmer said in October.

Net result?

Transocean Inc., the world’s largest offshore oil driller, agreed to lease its C. Kirk Rhein Jr. rig to Burgundy Global Exploration Corp. for $550,000 a day, a 52 percent increase from the previous rate, according to a public filing today.

And from a couple weeks back, we see the same phenomenon in agriculture, namely, a lack of credit impacting supplies:

The collapse of global credit markets that is pushing the U.S., Europe and Japan into simultaneous recessions for the first time since World War II also threatens farmers in Brazil, the world’s biggest grower of coffee, oranges and sugar cane, the second-largest producer of soybeans and third-biggest of corn. Smaller harvests in Brazil may increase costs of commodities next year, said Andre Pessoa, an analyst at Agroconsult who conducts the country’s broadest crop survey.

“When we look ahead, we see demand continuing to grow, while supply will face difficulties,” Pessoa said in an interview from the Florianopolis, Brazil-based company.

In the 30's, cheap credit was directed at productive capacity buildouts. By contrast, over the last two decades, cheap credit was directed at a massive consumption binge, all while productive capacities atrophied. Add debt monetization to the mix of constrained capacities and what do you think is going to happen?

The critical differences between then and now, between here and there, blithely overlooked in the rush to board the deflation bandwagon, will have investors rue the day of simplistic analysis and pat comparisons.

Other people's reserves

Brad Setser at the Council on Foreign Relations has posted a piece which supports countries using their foreign exchange reserves to prop up their currencies. "Reserves are meant to be used in bad times," goes the title. Three things:

1. In my view, countries are nuts to support their currencies at artificially high levels. There is no more economic utility in this than there is in a company executing a share buy-back program at artificially high share price levels. In both cases, it is usually the political/executive class who stands to gain. Setser's point is that we (i.e. the U.S.) should encourage this, as it is good for the U.S. No shit. Why they would listen to him though is beyond me.

2. Setser claims that a retrenchment of foreign lenders is ok because, well, America won't need them anymore, or at least not as much, for:

[Retrenchment does not] necessarily mean that the US and others won’t be able to finance large fiscal stimulus.

Remember, the big if — a rise in the fiscal deficit only leads to a rise in the external deficit if private savings and investment do not change, so the extra call on savings from the deficit has to be met by the world. And right now private savings and investment patterns are changing — particularly in the US. Goldman forecasts private sector in the US will go from rough balance in q2 2008 to a large (10% of GDP) financial surplus by the end of next year. That means private savers in the US will be in a position to lend to the US government.

The US' borrowing needs next year might run to a trillion dollars. And he thinks somehow a depressed, indebted domestic population will be able to cough up? Really?

3. On the topic of countries running down their foreign reserves, more coverage here. It appears, betwen Russia, the Ukraine, South Korea and the like, net reserves are in aggregate down about $200b +/-. This is about what the US' monetary gold stocks (~8000t), accounting for the bulk of the US's "foreign currency reserves" would bring in at today's prices. Or, put differently, maybe what the Citi bailout will eventually cost.

Maybe we should all be buying the hrvynia.

With friends like Panarin....

The professor made waves a couple of weeks ago when he predicted the dissolution of US. Even Bloomberg picked it up:

“The dollar isn’t secured by anything,” Igor Panarin said in an interview transcribed by Russian newspaper Izvestia today. “The country’s foreign debt has grown like an avalanche; this is a pyramid, which has to collapse.”

(Interestingly, and perhaps too paranoid by half -- the article does not come up via Bloomberg's search facility.)

Panarin is at it again in an interview with Russia today. Some of the good professor's ideas seem spot on, others, well, a wee bit loopy:

Q: Will the entire American economy collapse?

A: It is collapsing now. Three out of the five largest and oldest banks on Wall Street ceased to exist because of the financial crisis; and the other two are on the verge of surviving. Their losses are the largest in history. Now we are talking about replacing the regulation system in the world: America will no longer be the world regulator.

Q: Which country will replace it?

A: Two countries are making a claim for this role: China with its large reserves, and Russia as a country which could play the role of a regulator on the Eurasian territory. A rather remarkable event took place at the G20 summit which has just taken place in Washington. Participants put forward the new architectonics of the international affairs where a key role would belong to the International Monetary Fund. But the International Monetary Fund needs funds. Thus the participants addressed China and Japan with a request to provide money. The gold reserves of China come to more than 2 trillion dollars. It is the largest creditor to the USA. Now it will definitely affect the policy of the fund. By the way, it is not accidental that Mr. Hu Jintao met two leaders at the summit: the Russian President and the leader of the UK. There are plans to hold the spring G20 meeting in England. And the meeting with Russia as a country which is putting forward the basic principles of reconstructing the world financial system also clearly fits the vision of the Chinese reformation process.

In fact, China has about 600 tonnes of gold which, at today's prices, is worth about $75b, not quite enough to shore up AIG. China's reserves rather take the form of IOU's from the coutry Panarin say is about to collapse; ditto for those of Russia. These sober facts shed a different light on the interviewer's preamble to the next question:

Q: We are clear about the world leaders [i.e. Russia and China] . But let’s go back to the USA. What makes you believe in the possible division of the country?

Expect more of this sort of thing as time goes on.

Someone gets it

I don't drive an American car either, but, from Counterpunch, these are all fair points.

Because of unfair trade and an overvalued dollar, America lost the so-called incumbent's advantage -- its historic position of productivity leadership based on being first into the business -- in the early 1980s. Thereafter Detroit needed not only a fair world market but lower wage rates than its main foreign competitors to have any chance of fighting back. Its pleas for a lower dollar have gone unheard, in part at least because members of the American elite wanted to enjoy the benefits of a high dollar when they travel abroad. The result is the desperately weakened industry we see today.

All this is well understood in foreign capitals, particularly in those of the major East Asian nations. So, yes, the American car industry's fate reflects in large measure American incompetence -- but the main source of this incompetence has not been the engineers of Detroit but the commentators of New York and Washington.

I would only add that the principal benefits of an overvalued dollar (a winnah!) had less to do with travelling abroad and more to do with the bounty of seignorage, the benefits of which rarely flow more than 50kms inland.

Growing resentment at "Dollar Hegemony"

At the end of the day the dollar will go poof (dragging all other currencies along with it) only when creditors get sufficiently pissed off with the issuer and declare that they've "had enough" funding American profligacy I wudda thunk this would have started long ago, but the resentment does seem to be building. At the G20 meeting in November, Brazil's foreign minister quipped that Brazil had been only invited to attend "the coffee breaks." Sarkozy was a little more piquant when he said: "The time when we had a single currency (the dollar), one line to be followed, that era is over and it came to an end on Sept. 18 when responsibility was taken without our opinion being asked with the failure of a major banking institution (Lehman Brothers)..." So folks are starting to speak out.

Less so in Asia, however, and that's where all the money (dollars) are. Well, here is Henry Liu serving up good a pee-pee slapping for such docility. Some snips:

The exporting economies have been lured into shipping real wealth to the US in exchange for US debt denominated in fiat dollars, which cannot be spent in their own domestic economy without monetary penalty and which must be returned to the US as capital to finance US sovereign debt. The adverse effects of this predatory monetary regime, known as dollar hegemony, differ on economies at different stages of development. But one common effect can be observed clearly: the helpless working poor in all trading economies around the world, who had no voice in economic, trade and monetary policymaking, did not benefit throughout the phantom boom phase from trade globalization and are now suffering the most in these days of reckoning when the boom bust.

And here:

Further damage to the global economy cannot be averted without a fundamental change in US policy that has been exploiting its predatory monetary hegemony. This dollar hegemony grows out of a fiat dollar that has allowed the US to finance its decades-long current account deficit with a compulsory compensatory capital account surplus. This sucks wealth from the exporting emerging economies to the US to keep it as the world's richest economy, consistently consuming more than it produces with the help of debt denominated in fiat dollars that the US could print at will.

Worth reading the article in its entirety.

Roubini sucks, blows at same time

This isn't a bad place to start. The other day Roubini writes in the op/ed pages of the FT that we're all going to hell in a handbasket, which is fair enough. Certainly, the employment numbers this morning say as much, and certainly, he has been as prescient as anyone viz. the great unwind. No argument here. It is his endgame that doesn't seem to follow. "Stag-deflation", he calls for, a theme that seems to be resonating. I suppose that's why I thought I'd start writing here; perhaps it will be more gratifying than banging my head against a wall.

I am at a loss as to why the guy can hold these views re deflation (even "stag-deflation") even as he appears to be able to think it through. Let's walk with him:

As traditional monetary policy becomes ineffective, other unorthodox policies have been used: massive provision of liquidity to financial institutions to unclog the liquidity crunch and reduce the spread between short-term market rates and policy rates; quasi-fiscal policies to bail out investors, lenders and borrowers. And even more unorthodox “crazy” policy actions become necessary...

This is not new. Mainstream commentators are now talking like this and "Quantitative easing" has become a watercooler expression. The next logical step:

With consumption by households and capital spending by corporations collapsing, governments will soon become the spenders of first and only resort as fiscal deficits surge.

No one blinks at this either. Then we have this:

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government. [Emph added]

Agreed. It is difficult to see how the "long-term solvency of the US government" will not be endangered. But how does this get us to stag-deflation? It would appear to lead us in precisely the opposite direction.

The bailout process is simply a matter of progressively passing bad debt upstairs. From the mortage holder and consumers to the banks, and then from the banks to the government. That's where, literally, the buck will stop. And when it parks itself upstairs, when the Fed's balance sheet starts racing into the trillions, ditto at the Treasury, then what? As Roubini correctly points out,then the solvency of the government itself is called into question.

When a government's solvency gets called into question -- when a government goes broke, as it were -- it is resolved in one of two ways: a) if the debt is foriegn-denominated, the government defaults; b) if the debt is locally-denominated, it devalues. The US falls into the latter camp. It will devalue. Massively. There is no other way out.

Stub

The quick brown fox jumped over the fence.