Saturday, February 23, 2013
Addiction of Duplicities
Addiction of Duplicities
By J.M. Hamilton 2-24-13
Why does the stock market soar?
To hear many a CEO or banker tell it, the economy, although improving, is still struggling. Economic headwinds from across the pond are not good. The uncertainty produced by a highly dysfunctional federal government has shuttered CAPEX and R&D, and so many corporations are sitting on mountains of cash. The consumer is still mired in debt, upside down on their mortgages, or reluctant to spend, as the baby boom generation begins to retire, those with the means that is. Job creation is still too few in number to bring down intransigent unemployment and underemployment. And, as reported by Bloomberg this week, bank lending is at a five year low. Wall Street banks have turned into giant hedge funds, speculating while borrowing at the Feds window. The malaise feeds on itself.
Dems are fretting over what the sequester will do to the economy. This is what happens when too many eggs are placed in too few economic baskets… that is, the U.S. has grown dependent upon too few industries (the financial sector, defense spending, government spending, agri-business, big oil and healthcare), and now pines for the return of manufacturing. When one of these sectors sneeze, or the government desires to spend less, the economy catches a cold; and of course, home building although showing some green shoots, remains in the cellar.
So if the fundamentals are lousy, the question gets asked again, why does the stock market soar?
The short answer is the Federal Reserve or Fed. The Fed has been printing some eighty odd billion a month to purchase T-bills and MBS, and the reasons for this are as multivariate as a rose. Among them: Fed purchases and balance sheet expansion keeps interest rates suppressed and allows the Wall Street banks and shadow banking to jack up the stock market to new heights (or what this blog has referred to as trickle down monetary policy); it keeps the interest on the national debt low, so that Washington can continue to live beyond its means; it keeps all those adjustable rate mortgages the banks like to sell Americans from being foreclosed upon; it allows the U.S. to export the few products it manufactures overseas at a discount (in the classic “beggar thy neighbor” approach); and of course, there are all those hundreds of billions (notional value) in credit default swaps that are betting on continued Fed interest rate suppression.
Many economist will tell you that the Fed plays a not insignificant role in the boom and bust cycles this country goes through, with greater rapidity and frequency. The stock market is now so addicted to easy money and short-term speculation, instead of long term investment and sound business fundamentals, that when the Fed talks of pulling away from its purchases or yanking the punch bowl, the Street begins to jones.
Meanwhile, M&A activity and private equity deals appear to be heating up, which tells me that we are on the cusp of yet another bubble (observe the LBO of Heinz). M&A is great for the banks and the financial elite, but presents a problem for employment prospects, as it invariably leads to synergy and pink slips to help pay for all that debt.
So little has changed since the last crisis, which one can argue we are still in the midst of; Dodd Frank has yet to be finalized, and derivatives and swaps regulation has still not been enacted. And Basel III has been punted down the road. The herd is now buying back into the stock market, while the heavy hitters are taking their money off the table.
In short, look for the Fed with no good options to keep its foot firmly mashed on the printing press accelerator, and lookout for the possibility of what PIMCO’s Bill Gross recently called a financial supernova.
Copyright JM Hamilton Publishing 2013
Monday, February 18, 2013
Chinese Gov tied to Hacking
Chinese Government tied to Hacking... NY Times
http://www.nytimes.com/2013/02/19/technology/chinas-army-is-seen-as-tied-to-hacking-against-us.html?emc=na
http://www.nytimes.com/2013/02/19/technology/chinas-army-is-seen-as-tied-to-hacking-against-us.html?emc=na
Sunday, February 17, 2013
Next Stop, Greece
Barron's Cover
| SATURDAY, FEBRUARY 16, 2013Next Stop, Greece
Special Report--Debt Crisis: If we fail to rein in spending and increase taxes -- starting now -- the U.S. in 22 years could be in worse shape than Greece is today.
Federal debt is a record $12.2 trillion, or 76% of the nation's annual output of goods and services. While that's still well below Greece's 153%, we're headed steadily in the wrong direction.
According to estimates by the Congressional Budget Office, adjusted by Barron's to account for recent tax increases and other factors, if the U.S. doesn't raise taxes further and cut spending dramatically, the national debt could easily reach 153% of economic output by 2035.
These are not just numbers. If the U.S. national debt continues ballooning, we can be sure of a deep, long-lasting recession -- very likely a depression -- sometime in the next two to three decades. The unemployment rate could easily surge to 20%.
Analysis: Euro strugglers eye Ireland
Analysis: Euro strugglers eye Ireland for crisis lessons
By Alan Wheatley, Global Economics Correspondent
LONDON (Reuters) - To the relief of its creditors, Ireland is showing the rest of the struggling euro zone periphery that fiscal and wage discipline will eventually be rewarded by the bond markets, if not appreciated by the man in the street.
A less heartening lesson is that throwing away the crutch of IMF and EU support, as Dublin is likely to be able to do later this year, is no ticket back to pre-crisis prosperity: nations on the euro zone's rim have dug a debt hole so deep that they face years more of morale-sapping austerity and sub-par growth.
"In all of these countries, it's going to take the rest of the decade to bring debt down to more comfortable levels," said Douglas Renwick with Fitch Ratings in London.
Take Ireland itself. The country is held up as a model pupil for the way it has complied with a loans-for-reforms rescue program agreed with the ‘troika' of the International Monetary Fund, the European Union and the European Central Bank after a banking crisis toppled its economy in 2008.
"Ireland is not in any sense in good shape," Kirkegaard said. "There are lessons to be learned for the rest of the euro area from Ireland. But the idea that you can get through a crisis of the magnitude that Ireland has had in just a few years is not one of them."
Thinking the Unthinkable
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Thinking the Unthinkable
Thinking the Unthinkable
By J.M. Hamilton (Originally Published 7-5-2010)
As stocks continue their downward decent (the S&P 500 is down 8.3% for the year), and unemployment remains recalcitrant (Shadow Government puts the U.S. unemployment/under-employment figure in excess of 20%), Keynesians, lead by Mr. Krugman, and Fiscal Conservatives, presently embodied by Mr. Paulson, are at war with one another.
Mr. Krugman is a Nobel Laureate, and a Princeton economist, and a long time advocate of the poor and the down trodden. His primary pulpit is the N.Y. Times editorial pages.
Mr.Paulson’s notoriety derives through that “market maker” institution – Goldman Sachs; Mr. Paulson, allegedly, hand-picked the deck in a CDO issuance, and walked away with extraordinary profits. A civil complaint has been filed against Goldman Sachs by the SEC, over this very same transaction. No similar filing, by the SEC, has been made against Mr. Paulson or his hedge fund.
The Keynesian Argument
Mr. Krugman is hammering for greater government spending to spur economic activity and to get Americans through the great recession. Mr. Krugman argues that we are not out this recession by a long shot; and only government spending can make up for, in terms of job creation and economic activity, the contraction in private sector spending and growth.
Keynesians argue that in the short run deficit’s don’t matter (as opposed to former Vice President Dick Cheney, who – when it’s politically convenient – is said to argue that deficits do not matter at all), and that deficit spending is a valid policy response to a down turn in the economy. They further argue that when times are good, government should rein in spending, and put money away for the next, inevitable, downturn.
Generally, many Americans would side with Mr. Krugman, were it not for the monstrous national debt visited upon this nation, by every administration from Reagan forward (the sole exception would be President Clinton, who actually ran budget surpluses). In fairness to President Obama, he inherited this fiscal nightmare, and gets a pass on deficit creation, at least in the short run.
Bottom line: There are two problems with the Keynesian argument: One, the second half of the Keynesian thesis simply falls apart in reality; that is to say, seemingly, no politician on earth, or all too few, has the self control to rein in government spending during the good times, and create budget surpluses. If the alleged keepers of the faith of fiscal conservatism, the Republicans, cannot rein in federal spending during prosperous times (e.g. witness Bush – Cheney, who actually expanded Big Government, with Entitlement D of Medicare), then how can U.S. citizens expect well meaning liberals to act accordingly? And two, the U.S. debt to GDP ratio is hovering around 90%… the servicing of such debt, and magnification of that debt, presents a huge fiscal drag on the U.S. economy, and other sovereign nations facing similar circumstances (witness the PIIGS in the E.U., and the fiscally “healthy” sovereigns propping up same).
Additional budget deficits at this point, although well meaning, may actually have a reverse effect, as businesses spend their time on alternative non-core pursuits, such as hoarding cash (to pay for inevitable higher taxes and worse economic times yet to come), hedging currencies, and loading up on gold.
Moreover, governments with sky high debt cannot continue to borrow forever to finance the Keynesian model, just ask Greece?
If the debt to GDP ratio wasn’t in the stratosphere, with the CBO and the OMB predicting trillion dollar deficits – seemingly in perpetuity, Mr. Krugman’s policy prescriptions would seem to make sense, in the short run.
The Fiscal Conservative Argument, or Let Them Eat Cake!
If one absolutely did not give a damn about the unemployed in this country, nearly 1/5 of all Americans, Mr. Paulson’s argument would be the way to go: simply rein in government spending, and cut social services – in order to get our fiscal act together . If one had a huge financial stake in perpetuation of the status quo – unemployed be damned – then Mr. Paulson’s “Pollyanna/rose colored glasses approach” would make perfect sense.
Who said Herbert Hoover is dead, why his spirit is alive and well in Mr. Paulson!
Mr. Paulson seems to be thinking (while not speaking it), if I may paraphrase and cut to the chase, ‘Heh, the economy is growing. The government largess, joy, and love showered upon the nation’s banking sector, seems to be a rising tide for me and my hedge fund, so why rock the freaking boat???’
The problem is the “voodoo economic theory” (read: laissez faire) that has been passed down for over a generation now, appears a bit tired and worn. Main Street is not profiting from the unprecedented bailout of Wall Street. And in fact the only parties that appear to be profiting from government intervention into the market place (TARP, TLGP, Fed Funds rate at Zero, Et Al.) are, ironically, the Wall Street banks, and their close associates.
The rising tide is not lifting all ships, thank you Mr. Paulson, nor can the 1/5 of American’s presently unemployed wait for crumbs to come trickling down. Mr. Paulson seems to have forgotten, conveniently enough, that the manner in which he’s made his extraordinary fortune, via an unregulated derivatives market and Goldman Sachs (now being pursued by the SEC), in short laissez faire capitalism run amok, are both primary contributors to the mayhem visited upon both the U.S. and world economies. Separately, one cannot recall Mr. Paulson calling for fiscal discipline during the peak of economic cycle, say around 2006 and early 2007. Why?
Mr. Paulson’s position, if allowed to play out, could lead to problems with the social fabric. For some reason, Americans have come to believe in the semi-egalitarian social construct of a middle class.
Monetary Policy
Another approach to our economic Hiroshima is through monetary policy, which posits that massive inflows of liquidity into the economy should stimulate growth and prosperity.
Note to readers, I am on my roof, nightly, feverishly scanning the horizon for Ben Bernanke and his helicopter to come to the rescue, and dump that load of cash right into my waiting arms. But alas, no Ben - only pigeons dumping an entirely different load.
Here again, a liberal monetary policy would work quite well if the nation had healthy banks and some semblance of a normal fiscal policy, but this perfect storm of a financial nightmare appears to have left monetary policy face down in the water.
That is to say, while Mr. Bernanke is busily printing money at the Fed, he appears to be “pushing on a rope,” in terms of stimulating the economy. Try as the Fed might, M3 is actually contracting at an alarming pace. The banks aren’t lending, at least not to small or mid-sized businesses, or individual consumers – the life blood of U.S. job creation and the engine of economic growth.
Instead, the Wall Street banks appear to have entered into a symbiotic relationship with the federal government, whereby the government provides them with free liquidity through the Fed Funds window, and severely watered down bank reform legislation, and in return the banks finance ever growing government debt.
Many banks balance sheets are still a wreck. And globally banks are so leveraged up with government debt that – going forward – when we talk about governments bailing out “the banks,” we really are talking about bailing out the international order or world governments, themselves. Governments and banks are more interconnected than ever, but I digress.
Thinking the Unthinkable: A Global Restructuring of Debt
So if all the economic answers (Keynesian, Fiscal Conservatism, and Monetary policy) are shot, dulled, or worse yet, may actually aggravate the situation, what then? What is left?
Here’s a hint: South and Central American countries have been known to do it from time to time, and some have done quite well, economically, after the fact.
Centrals bankers meet some weekend, ask the creditor nations to take a “haircut,” and abracadabra a new currency is born, Monday morning.
Of course, this could upset the international order of things. On the “con” side: Creditor nations might demand that in exchange for “haircuts” on debt, that the western democracies surrender the ability to print fiat currencies? Fiscal order might be pushed by creditor nations, and profligate government spending might be banished (e.g. the end of politicians making spending promises that have to be financed), but is that really a bad thing? After seeing the chaos within the E.U. and the lack of centralized political power over the euro, a real world bank might be created to control, monitor, and oversee a new world currency. The monetization of debt might no longer be available to many sovereign nations. The truly American value of living within one’s means, thrift and frugality, might be imposed, where our politicians have failed us.
On the “pro” side: The crushing debt with which western democracies are presently faced with might be wiped out, or eliminated to a large degree. The government deficits, and debt, that are such a drag on the world economy, could be eliminated. Governments, no longer faced with catastrophic debt, would no longer have to deploy contractionary fiscal policies during the ongoing economic crisis, such as tax increases and reductions in public spending and social services, so that debt loads could be serviced. The social order could be preserved. Governments – no longer dependent upon banks to buy their debt – could, in turn, install mark to market accounting and let the chips fall where they may among banks.
In short, no more propping up banks so that they can finance sovereign debt, the mess that we are presently in. Banks that survive mark to market accounting would be free to lend to the private sector, again, instead of being tied up financing government debt. With bad banks washed away, and healthy banks free to lend, a floor could be established in the real estate market, a huge driver of economic activity, job creation, and wealth creation. As real estate makes a comeback, government, the Fed, Freddie/Fannies, and the banks may actually make a buck off of what is presently referred to as toxic assets.
Protectionist forces might be held at bay.
Basically, we are talking about clearing the decks for global economic activity. The global economy may enjoy a renaissance, and economic growth could be explosive! Today’s creditor nations, post restructuring, could be primary beneficiaries of rapid worldwide economic growth, especially the export lead Pacific Rim (i.e. China). Multi-national business would flourish, having to worry less about hedging currencies and escalating taxes. Global banking could be significantly simplified. Business could expand globally, as they would no longer have to worry about market instability and problematic currencies.
Main Street could return to a preeminent position of economic activity, and Wall Street could return to its secondary position of supporting Main Street. The “pros” of a global restructuring, at the end of the day, could overwhelmingly outweigh the “cons.”
Reactionary Forces
To be sure, there would enormous political pressure not to engage in such an enterprise, much of the pressure deriving from the banking sector, hedge funds, politicians, and some sovereign nations (admittedly, a fierce crowd). The old international order of nation states might come under fire, to some degree, as they surrender some economic power to a global bank; but many nations/states have already surrendered banking authority to some centralized power, such as: all 50 states that make up the United States, or members of the E.U.
The need for many disparate powerful private banking enterprises, and the incumbent global systematic risk and moral hazard, might also come to an end – or be mitigated; and with it, the tremendous sway the banks hold over the political and economic processes, particularly within democracies.
There would be many intended and unintended consequences from such a proposal, but if we are truly honest with ourselves, isn’t this what the world is headed towards anyway, a global financial restructuring? The only question is will it happen sooner rather than later, after considerable economic suffering and hardship. Is it more advantageous for the U.S. to engage in restructuring negotiations now, while the dollar is still strong, or to wait until such time as there is a global run on the dollar?
Apparently, the only reason the dollar is strong is due to the collapse of the euro – the catalyst for the euro down fall occurred when Goldman Sachs sold Greece derivative products, all the better to obscure Greek financials for E.U. admittance. Up until the fall of the euro, presumably more than one hedge fund and more than one Wall Street bank (and perhaps some U.S. politicians) were gambling that the dollar was in the decline, and in the long run, they, unfortunately, are correct.
The point at which nations can no longer finance their debt load is near for many countries around the world. And how will each country handle their respective crisis(?), by printing paper! Either that, or wealthier nations will have to come to the table to bailout nations with problematic financials, but in doing so, the financially stronger nations will only weaken themselves (German citizens appear well aware of what is happening in the E.U. and many are perfectly prepared to walk away from the Euro). And we wonder why corporations are hoarding cash!
And the alternative to a global restructuring? Well, read the press, take a walk in your local mall, look at the stock market, stagnation and decay are appearing everywhere, as is substandard economic growth, except in the golden halls where Mr. Paulson operates.
The Fourth of July is all about Freedoms: Economic, Political and Spiritual. A global restructuring may serve to better preserve those freedoms, as well as greater economic opportunity, for the many rather than a few! The real question is will politicians surrender power, the ability to monetize debt, and global economic hardship, so that the world economy can take off again? World-wide economic recovery is being held hostage by crushing sovereign debt and an exceptionally nasty private sector debt hangover, in the incarnation of banks and the real estate bubble. A world economy deserves a global banking system.
Copyright JM Hamilton Publishing 2013
As stocks continue their downward decent (the S&P 500 is down 8.3% for the year), and unemployment remains recalcitrant (Shadow Government puts the U.S. unemployment/under-employment figure in excess of 20%), Keynesians, lead by Mr. Krugman, and Fiscal Conservatives, presently embodied by Mr. Paulson, are at war with one another.
Mr. Krugman is a Nobel Laureate, and a Princeton economist, and a long time advocate of the poor and the down trodden. His primary pulpit is the N.Y. Times editorial pages.
Mr.Paulson’s notoriety derives through that “market maker” institution – Goldman Sachs; Mr. Paulson, allegedly, hand-picked the deck in a CDO issuance, and walked away with extraordinary profits. A civil complaint has been filed against Goldman Sachs by the SEC, over this very same transaction. No similar filing, by the SEC, has been made against Mr. Paulson or his hedge fund.
The Keynesian Argument
Mr. Krugman is hammering for greater government spending to spur economic activity and to get Americans through the great recession. Mr. Krugman argues that we are not out this recession by a long shot; and only government spending can make up for, in terms of job creation and economic activity, the contraction in private sector spending and growth.
Keynesians argue that in the short run deficit’s don’t matter (as opposed to former Vice President Dick Cheney, who – when it’s politically convenient – is said to argue that deficits do not matter at all), and that deficit spending is a valid policy response to a down turn in the economy. They further argue that when times are good, government should rein in spending, and put money away for the next, inevitable, downturn.
Generally, many Americans would side with Mr. Krugman, were it not for the monstrous national debt visited upon this nation, by every administration from Reagan forward (the sole exception would be President Clinton, who actually ran budget surpluses). In fairness to President Obama, he inherited this fiscal nightmare, and gets a pass on deficit creation, at least in the short run.
Bottom line: There are two problems with the Keynesian argument: One, the second half of the Keynesian thesis simply falls apart in reality; that is to say, seemingly, no politician on earth, or all too few, has the self control to rein in government spending during the good times, and create budget surpluses. If the alleged keepers of the faith of fiscal conservatism, the Republicans, cannot rein in federal spending during prosperous times (e.g. witness Bush – Cheney, who actually expanded Big Government, with Entitlement D of Medicare), then how can U.S. citizens expect well meaning liberals to act accordingly? And two, the U.S. debt to GDP ratio is hovering around 90%… the servicing of such debt, and magnification of that debt, presents a huge fiscal drag on the U.S. economy, and other sovereign nations facing similar circumstances (witness the PIIGS in the E.U., and the fiscally “healthy” sovereigns propping up same).
Additional budget deficits at this point, although well meaning, may actually have a reverse effect, as businesses spend their time on alternative non-core pursuits, such as hoarding cash (to pay for inevitable higher taxes and worse economic times yet to come), hedging currencies, and loading up on gold.
Moreover, governments with sky high debt cannot continue to borrow forever to finance the Keynesian model, just ask Greece?
If the debt to GDP ratio wasn’t in the stratosphere, with the CBO and the OMB predicting trillion dollar deficits – seemingly in perpetuity, Mr. Krugman’s policy prescriptions would seem to make sense, in the short run.
The Fiscal Conservative Argument, or Let Them Eat Cake!
If one absolutely did not give a damn about the unemployed in this country, nearly 1/5 of all Americans, Mr. Paulson’s argument would be the way to go: simply rein in government spending, and cut social services – in order to get our fiscal act together . If one had a huge financial stake in perpetuation of the status quo – unemployed be damned – then Mr. Paulson’s “Pollyanna/rose colored glasses approach” would make perfect sense.
Who said Herbert Hoover is dead, why his spirit is alive and well in Mr. Paulson!
Mr. Paulson seems to be thinking (while not speaking it), if I may paraphrase and cut to the chase, ‘Heh, the economy is growing. The government largess, joy, and love showered upon the nation’s banking sector, seems to be a rising tide for me and my hedge fund, so why rock the freaking boat???’
The problem is the “voodoo economic theory” (read: laissez faire) that has been passed down for over a generation now, appears a bit tired and worn. Main Street is not profiting from the unprecedented bailout of Wall Street. And in fact the only parties that appear to be profiting from government intervention into the market place (TARP, TLGP, Fed Funds rate at Zero, Et Al.) are, ironically, the Wall Street banks, and their close associates.
The rising tide is not lifting all ships, thank you Mr. Paulson, nor can the 1/5 of American’s presently unemployed wait for crumbs to come trickling down. Mr. Paulson seems to have forgotten, conveniently enough, that the manner in which he’s made his extraordinary fortune, via an unregulated derivatives market and Goldman Sachs (now being pursued by the SEC), in short laissez faire capitalism run amok, are both primary contributors to the mayhem visited upon both the U.S. and world economies. Separately, one cannot recall Mr. Paulson calling for fiscal discipline during the peak of economic cycle, say around 2006 and early 2007. Why?
Mr. Paulson’s position, if allowed to play out, could lead to problems with the social fabric. For some reason, Americans have come to believe in the semi-egalitarian social construct of a middle class.
Monetary Policy
Another approach to our economic Hiroshima is through monetary policy, which posits that massive inflows of liquidity into the economy should stimulate growth and prosperity.
Note to readers, I am on my roof, nightly, feverishly scanning the horizon for Ben Bernanke and his helicopter to come to the rescue, and dump that load of cash right into my waiting arms. But alas, no Ben - only pigeons dumping an entirely different load.
Here again, a liberal monetary policy would work quite well if the nation had healthy banks and some semblance of a normal fiscal policy, but this perfect storm of a financial nightmare appears to have left monetary policy face down in the water.
That is to say, while Mr. Bernanke is busily printing money at the Fed, he appears to be “pushing on a rope,” in terms of stimulating the economy. Try as the Fed might, M3 is actually contracting at an alarming pace. The banks aren’t lending, at least not to small or mid-sized businesses, or individual consumers – the life blood of U.S. job creation and the engine of economic growth.
Instead, the Wall Street banks appear to have entered into a symbiotic relationship with the federal government, whereby the government provides them with free liquidity through the Fed Funds window, and severely watered down bank reform legislation, and in return the banks finance ever growing government debt.
Many banks balance sheets are still a wreck. And globally banks are so leveraged up with government debt that – going forward – when we talk about governments bailing out “the banks,” we really are talking about bailing out the international order or world governments, themselves. Governments and banks are more interconnected than ever, but I digress.
Thinking the Unthinkable: A Global Restructuring of Debt
So if all the economic answers (Keynesian, Fiscal Conservatism, and Monetary policy) are shot, dulled, or worse yet, may actually aggravate the situation, what then? What is left?
Here’s a hint: South and Central American countries have been known to do it from time to time, and some have done quite well, economically, after the fact.
Centrals bankers meet some weekend, ask the creditor nations to take a “haircut,” and abracadabra a new currency is born, Monday morning.
Of course, this could upset the international order of things. On the “con” side: Creditor nations might demand that in exchange for “haircuts” on debt, that the western democracies surrender the ability to print fiat currencies? Fiscal order might be pushed by creditor nations, and profligate government spending might be banished (e.g. the end of politicians making spending promises that have to be financed), but is that really a bad thing? After seeing the chaos within the E.U. and the lack of centralized political power over the euro, a real world bank might be created to control, monitor, and oversee a new world currency. The monetization of debt might no longer be available to many sovereign nations. The truly American value of living within one’s means, thrift and frugality, might be imposed, where our politicians have failed us.
On the “pro” side: The crushing debt with which western democracies are presently faced with might be wiped out, or eliminated to a large degree. The government deficits, and debt, that are such a drag on the world economy, could be eliminated. Governments, no longer faced with catastrophic debt, would no longer have to deploy contractionary fiscal policies during the ongoing economic crisis, such as tax increases and reductions in public spending and social services, so that debt loads could be serviced. The social order could be preserved. Governments – no longer dependent upon banks to buy their debt – could, in turn, install mark to market accounting and let the chips fall where they may among banks.
In short, no more propping up banks so that they can finance sovereign debt, the mess that we are presently in. Banks that survive mark to market accounting would be free to lend to the private sector, again, instead of being tied up financing government debt. With bad banks washed away, and healthy banks free to lend, a floor could be established in the real estate market, a huge driver of economic activity, job creation, and wealth creation. As real estate makes a comeback, government, the Fed, Freddie/Fannies, and the banks may actually make a buck off of what is presently referred to as toxic assets.
Protectionist forces might be held at bay.
Basically, we are talking about clearing the decks for global economic activity. The global economy may enjoy a renaissance, and economic growth could be explosive! Today’s creditor nations, post restructuring, could be primary beneficiaries of rapid worldwide economic growth, especially the export lead Pacific Rim (i.e. China). Multi-national business would flourish, having to worry less about hedging currencies and escalating taxes. Global banking could be significantly simplified. Business could expand globally, as they would no longer have to worry about market instability and problematic currencies.
Main Street could return to a preeminent position of economic activity, and Wall Street could return to its secondary position of supporting Main Street. The “pros” of a global restructuring, at the end of the day, could overwhelmingly outweigh the “cons.”
Reactionary Forces
To be sure, there would enormous political pressure not to engage in such an enterprise, much of the pressure deriving from the banking sector, hedge funds, politicians, and some sovereign nations (admittedly, a fierce crowd). The old international order of nation states might come under fire, to some degree, as they surrender some economic power to a global bank; but many nations/states have already surrendered banking authority to some centralized power, such as: all 50 states that make up the United States, or members of the E.U.
The need for many disparate powerful private banking enterprises, and the incumbent global systematic risk and moral hazard, might also come to an end – or be mitigated; and with it, the tremendous sway the banks hold over the political and economic processes, particularly within democracies.
There would be many intended and unintended consequences from such a proposal, but if we are truly honest with ourselves, isn’t this what the world is headed towards anyway, a global financial restructuring? The only question is will it happen sooner rather than later, after considerable economic suffering and hardship. Is it more advantageous for the U.S. to engage in restructuring negotiations now, while the dollar is still strong, or to wait until such time as there is a global run on the dollar?
Apparently, the only reason the dollar is strong is due to the collapse of the euro – the catalyst for the euro down fall occurred when Goldman Sachs sold Greece derivative products, all the better to obscure Greek financials for E.U. admittance. Up until the fall of the euro, presumably more than one hedge fund and more than one Wall Street bank (and perhaps some U.S. politicians) were gambling that the dollar was in the decline, and in the long run, they, unfortunately, are correct.
The point at which nations can no longer finance their debt load is near for many countries around the world. And how will each country handle their respective crisis(?), by printing paper! Either that, or wealthier nations will have to come to the table to bailout nations with problematic financials, but in doing so, the financially stronger nations will only weaken themselves (German citizens appear well aware of what is happening in the E.U. and many are perfectly prepared to walk away from the Euro). And we wonder why corporations are hoarding cash!
And the alternative to a global restructuring? Well, read the press, take a walk in your local mall, look at the stock market, stagnation and decay are appearing everywhere, as is substandard economic growth, except in the golden halls where Mr. Paulson operates.
The Fourth of July is all about Freedoms: Economic, Political and Spiritual. A global restructuring may serve to better preserve those freedoms, as well as greater economic opportunity, for the many rather than a few! The real question is will politicians surrender power, the ability to monetize debt, and global economic hardship, so that the world economy can take off again? World-wide economic recovery is being held hostage by crushing sovereign debt and an exceptionally nasty private sector debt hangover, in the incarnation of banks and the real estate bubble. A world economy deserves a global banking system.
Copyright JM Hamilton Publishing 2013
Saturday, February 16, 2013
The True Axis of Evil (Part I)
The True Axis of Evil (Part I)
“… the Reagan administration has failed to
promote free trade. Ronald Reagan by his actions has become the most
protectionist president since Herbert Hoover, the heavyweight champion of
protectionists.”
- The Reagan Record on Trade, Rhetoric versus Reality,
by Sheldon L. Richman – Published by the Cato Institute.
By J.M.
Hamilton (Originally Published 10-10-10)
George
Bush first used “axis of evil” on January 29, 2002, during a State of the Union
address, to describe the primary threats to U.S. and world stability: Iraq,
Iran, and North Korea. We now know that Iraq was not a threat
(nobody is looking for WMDs, anymore). And North Korea’s Kim Jong-Il,
dictator of death’s twilight kingdom, when he’s feeling fine, only pokes his
head up long enough to extort aid and financial assistance from the West.
For the moment, Iran’s nuclear ambitions are being sidetracked by a computer
virus named Esther (who needs standing armies, the U.S., probably, has computer
geeks writing malware code). So much for the threat to the West
poised by President Bush’s axis, instead we have two very serious threats to
U.S. national security and world stability, and J.M.H. aims to take them both
on.
The
threats identified in this two part piece are, possibly, far more frightening
than Islamic fundamentalist bent of global jihad, or rogue petrol states
seeking nukes…. For the threats offered up cut to the core of the American
economy, and have already begun to carry out the American dream.
A Slam Dunk
for Bipartisan Support
Of the two
threats, by the far the easiest one to target, politically, is China. For
Democrats, attacking this job draining succubus appeals directly to its core
constituency, unions and labor. By pegging the Yuan to the U.S.
dollar and exploiting a limitless labor pool of impoverished Chinese, China
literally exports its demographic problems and political unrest right onto
America’s shores; and it holds with an iron fist the U.S. dollars, utilized to
purchase China’s products. Otherwise, the Yuan, if allowed to float,
would naturally rise in value, making American products more affordable in the
global market. Therefore, the pegged Yuan, and the vast stores of U.S.
dollars retained, gives China an unfair trade advantage over U.S. products.
For
Republicans, taking on the People’s Republic of China harkens back to the days
when the G.O.P. nearly ruled the known U.S. political universe. For
inspiration, think of the glorious commie bashing days of Eisenhower, Nixon,
and Reagan! What could invigorate the Republican base more than
resurrecting the arch-nemesis of God, country, mom and apple pie? Who
said Reagan’s evil empire was defeated? Why it’s alive and well, and
kicking our economic ass; but not because of any superiority over American
labor or American ingenuity, but rather, because of unfair trade practices and
a U.S. government that has allowed this to happen.
Together,
Democrats and Republicans can unite to defeat an economic foe, for entirely
different political and ideological reasons.
Trade-o-lanche
In making our case, the U.S. Bureau of Economic Analysis provides
us with some cold hard facts:
Period
|
Balance
|
||
Total
|
Goods
|
Services
|
|
Annual
|
|||
1992
|
-39,212
|
-96,897
|
57,685
|
1993
|
-70,311
|
-132,451
|
62,141
|
1994
|
-98,493
|
-165,831
|
67,338
|
1995
|
-96,384
|
-174,170
|
77,786
|
1996
|
-104,065
|
-191,000
|
86,935
|
1997
|
-108,273
|
-198,428
|
90,155
|
1998
|
-166,140
|
-248,221
|
82,081
|
1999
|
-264,239
|
-336,310
|
72,072
|
2000
|
-378,780
|
-446,233
|
67,453
|
2001
|
-364,393
|
-421,980
|
57,586
|
2002
|
-420,524
|
-475,345
|
54,821
|
2003
|
-494,183
|
-541,544
|
47,361
|
2004
|
-609,345
|
-665,631
|
56,286
|
2005
|
-714,176
|
-783,801
|
69,625
|
2006
|
-759,240
|
-839,456
|
80,216
|
2007
|
-702,099
|
-823,192
|
121,093
|
2008
|
-698,802
|
-834,652
|
135,850
|
2009
|
-374,908
|
-506,944
|
132,036
|
From the
table: U.S. International Trade in Goods and Services: Exports, Imports and
Balances
We can
project from this table that the advocates of “free trade” have provided
America with trade deficits that, if left unchecked, could ramp up to a
trillion dollars, annually, very soon.
One sees
from the BEA’s figures that a whole lot of jobs are being exported outside the
United States.
We now
know there is nothing free about “free trade,” when it costs Americans jobs,
erodes the U.S. tax base, and leads to tremendous drain on our government, in
the form of social payments and unemployment insurance. “Free trade” also
directly feeds our national debt – by cutting America’s taxable income base and
increasing the aforementioned social service expenditures; and “free trade”
further feeds the U.S. jones for easy debt financing, both
private and public, as net Exporter countries send some U.S. dollars back to
America in the form of debt financing.
And the
single largest contributing nation to the U.S. trade deficit (?), well this
very same Bureau of Economics will tell you that would be China.
Slave Trade
To fight
this true force of evil, the U.S. should leverage its preeminence as a world
market to assist China in bringing about necessary societal reforms, so that
China can become a global market that aids America in driving the world
economy. As it stands now, an elite cadre of communist party leadership,
and a handful of crony capitalists, surfs a massive wave of Chinese
humanity that is exploited daily as inexpensive labor; moreover, this
leadership employs all, or nearly all, of the tools designed to curtail U.S.
exports to China: from tariffs and taxes to insisting that American business,
wishing to operate on China’s shores, partner with Chinese business.
In the
worker’s paradise, Chinese labor does not enjoy the basic social services or
safety net that Western democracies provide for its citizens; instead, the
average Chinese worker, operating in an economic gulag, is paid a
fraction of his American counterpart, and must save to provide for catastrophic
medical care, and retirement. So that by allowing China to carry on like
this, we not only do America and American labor a tremendous disservice, but we
allow Chinese leadership to continue to exploit nearly 20% of world’s
population for communist elite enrichment.
If the
Chinese government had any sense of morality at all, it would take some of
its profits, and foreign reserves, and invest them in setting up a social
safety net that would allow Chinese workers some semblance of dignity and
discretionary income. The result: a Chinese consumer society, and a self
sustaining market for China’s massive productive capacity, and a rising middle
class; of equal importance, it would take the monkey off America’s back to be
the engine of global economic consumption, help prevent global currency and
trade wars, and give the world’s exporters a new market with exceptional
potential.
The Fear
Card
China’s
Red Leadership is no hurry to adopt these reforms, for they like things the way
they are – with an elite fraction of society on top, reaping incredible
profits, and more than a billion citizens beneath them, operating at a near
sustenance level. Setting up a safety net for China’s population will,
undoubtedly, prove expensive in the short to intermediate run, as the cost of
China’s labor rises; but in the long run profits should soar, as China
transforms into a consumer society, and, ultimately, a preeminent world
market.
To be sure
some Western multi-nationals, of a manufacturing focus, may not like such an
economic and social transformation, as the rising cost of labor increases the
costs of goods sold, or erodes fat and rich profit margins on consumer
electronics and other products. Not to pick on Apple, whose products we
all know and love, but does this company really need to enjoy a greater than
50% profit margin on iPhone, courtesy of suicidal Chinese labor and the
predatory Chinese company, Foxconn?
No,
unfortunately, in order to assist China’s Red Aristocracy to move forward,
America is going to have to pull out every stop in the economic and political
play book to leverage China into doing the right thing. Trade sanctions
and taxes on Chinese imports are a great beginning. Labeling China a
currency manipulator is another step. Or worst case, by simply freezing
China’s imports out of the U.S. market, we tap into the communist party
leadership’s greatest fear: political and societal unrest.
If you
think the fat cats in Beijing and Hong Kong are tough, just think what hundreds
of millions of angry and hungry Chinese workers looks like moving en-masse.
And will
China actually dump its massive stockpiles of U.S. currency reserves, the
scenario U.S. leadership fears most? Not likely, for such an act will
only serve to devalue China’s own holdings, remove their leverage card, and
make American goods and services that much more competitive, globally.
The Long
March!
A myth has
sprung over the last couple of decades that China and the Chinese
government are this warm cuddly capitalist bear, who means the world no
harm. Mr. Alan Abelson, of Barron’s, a financial weekly, over the course of many Saturdays, has
eviscerated this fantasy that China is some sort of free market Disneyland,
when nothing could be further from the truth. Mr. Abelson’s weekly
editorial, Up & Down Wall Street, gives us a clearer picture (e.g. IPOs and stock market to the
contrary, the majority of China’s largest businesses remain under the control
and watchful eye of the state; the economic planning of this command economy,
and the infusion of funds into these large Chinese companies, is directed by
technocrats within the big red machine; and the captains of Chinese industry
who run these large companies work side by side with communist party cadres).
Chairmen
Mao wrote in 1935: "The
Long March is a manifesto. It has proclaimed to the world that the Red Army is
an army of heroes, while the imperialists and their running dogs, Chiang
Kai-shek and his like, are impotent. It has proclaimed their utter failure to
encircle, pursue, obstruct and intercept us. The Long March is also a
propaganda force. It has announced to some 200 million people in eleven
provinces that the road of the Red Army is their only road to liberation.”
Chinese
leadership today, under threat from few if any countries, seems to have chosen
a different path to “liberation,” one of crony capitalism and command economy;
but the world should make no mistake that China’s leadership remains on that
long march, even if it means a short run detour into faux capitalism. American
leadership has nothing to fear from an exploited and humble Chinese people, but
should be highly weary of the goals, ambitions and designs of China’s communist
party leadership, who appear bent on economic and political hegemony.
Perhaps a less sinister, but ultimately naïve read of the situation is: This
same leadership is just trying to stay one step ahead of 20% of the world’s
population?
This
blog’s greatest concern is that China has, for the last couple of decades,
lulled America into a sense of economic calm and a consumer opiate haze, as
U.S. jobs have been shipped overseas, and America and the American
government has become addicted to cheap debt financing. Meanwhile,
Federal deficits spiral out of control, from over consumption, lack of national
savings, and a shrinking tax base, and the need for ever increasing
unemployment benefits. And to what end (?): A weakened,
declining and debilitated United State of America.
Who also
benefits by a diminished manufacturing base within America? Why
that would be U.S. banks and the shadow banking industry, who have become one
of the larger employers in America, and who can in turn leverage this fact
against our own government to pay for Wall Street’s financial disasters.
“You will
never find a more wretched hive of scum and villainy. We must be cautious.”
Without
firing a shot, China, and in this country a band of free market zealots (like
some fifth column working its evil from within), has done more to harm and
damage America, economically, than the Red Army ever could have
done. Why merely check out this nation's unemployment and
underemployment rate of 20% or greater. Look no further than
Federal and State budgets and a government debt that is spiraling out of
control; and glance at the last gasps of Federal Reserve policy, with yet
another round of bank bailouts under the auspices of QE2, wearing the mask of
monetary stimulus.
To be sure
righting the balance of trade is not the answer to all of America’s economic
ills, but it’s a good start; and to be sure, China is not the only nation who
has exploited America’s “free trade” dogma for their
economic betterment.
But what
is absolutely sickening are the elites at the Chicago school of economics who
still tout this faded catechism as some absolute, when they are surrounded by
the decay “free trade” has wrought, in Cleveland, Pittsburgh and Detroit.
There is no such thing as utopian “free trade,” only wealthy industrialist
and manufacturers seeking out labor, tax and regulatory arbitrage, in order
to maximize profits (and governments who in turn profit, or lose, but nearly
always – at the expense of its people).
America’s
share of the world economy has shrunk over time, but approximately 24% of
global GDP still resides within U.S. borders, and we must leverage this fact in
establishing U.S. trade policy. We owe it to ourselves, and ultimately
for the betterment of the citizens of the world, to insist upon fair trade and
U.S. trade policies that mitigate the advantages of labor, regulatory and tax
arbitrage. It’s good for America and it forces some developing countries
to catch up with the American economy, by creating their own, internal,
markets to rely upon. Once these self sustaining markets are established
globally, in the so-called BRIC nations, and when the differences in tax codes,
regulation and the cost of labor are mitigated, then fair trade and the global
economy can take off as never before.
But until
then, the U.S. should insist upon fair and equitable trade from its global
partners, all the better to protect against predatory trade policies.
The True
Axis of Evil, Part II, coming soon.
Copyright JM Hamilton Publishing 2013
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