Scared

‘The problem with the Euro is not the absence of a fiscal union but its non-convertibility into Gold.’ (Read here)

Investors sell stocks in Macau Gaming operators’ stocks, fearing loss of revenue, from a slowing Chinese economy. They should know something.

Democracy fails to deliver.

Wolfgang Muenchau says that he has never seen the European leaders so scared as now. At least, they got that one right.

Economic Cycle Research Institute’s Achuthan Lakshman says that the US economy is entering into a recession. Last year, he did not, even when ECRI Growth Indicator cratered. I thought he was going to be proved wrong. I was and he was not. So, I take him seriously now.

A friend alerted me two weeks ago of the launch of ‘India Ink’ – a India-centric blog at NYT. Here is the link.

America vs. Eurasia

Price-keeping operations in the global stock markets continues, if not directly (hard to prove) but indirectly via orchestrated news flows – press conferences, summits, announcements, exaggerated coverage of decisions already foregone (Bundestag vote on EFSF). Check out Ambrose Evans-Pritchard’s piece on the exact import of the Bundestag vote.

Nothing else is needed to convince ourselves that lessons have not been learnt. People are at their old games. They need a bigger shock to be shaken out of their bad habits. That is coming.

In the meantime, western media have begun their campaign against Russia now that Putin is going to be the President of the country in 2012. Just read the FT coverage since the day he was ‘nominated’ to contest.

In case you wonder why such vicious coverage of Russia takes place, two recent pieces by Stratfor provide the answer. One is ‘The Geopolitics of the United States, Part 1: The Inevitable Empire’ Some excerpts from it:

That leaves only the lands of northern Eurasia — Europe, the former Soviet Union and China — as candidates for an anti-American coalition of substance. Northern Eurasia holds even more arable land than North America, but it is split among three regions: the North European Plain, the Eurasian steppe and the Yellow River basin. Although the developed lands of the North European Plain and the Eurasian steppe are adjacent, they have no navigable waterways connecting them, and even within the North European Plain none of its rivers naturally interconnects…..

There is, however, the potential for unity. The Europeans and Russians have long engaged in canal-building to achieve greater economic linkages (although Russian canals linking the Volga to the sea all freeze in the winter). And aside from the tyranny of distance, there are very few geographic barriers separating the North European Plain from the Eurasian steppe from the Yellow River region, allowing one — theoretically — to travel from Bordeaux to the Yellow Sea unimpeded…..

Among these three northern Eurasian regions is the capital, labor and leadership required to forge a continental juggernaut. Unsurprisingly, Russian foreign policy for the better part of the past two centuries has been about dominating or allying with either China or major European powers to form precisely this sort of megapower…..

And so the final imperative of the dominant power of North America is to ensure that this never happens — to keep Eurasia divided among as many different (preferably mutually hostile) powers as possible…..

The United States’ repeated interventions in Eurasia have been designed to establish or preserve a balance of power or, to put it bluntly, to prevent any process on Eurasia from resulting in a singular dominating power. The United States participated in both world wars to prevent German domination, and then bolstered and occupied Western Europe during the Cold War to prevent complete Russian dominance. Similarly, the primary rationale for involvement in Korea and Vietnam was to limit Russian power…..

Ongoing efforts to hamstring Russia — Ukraine’s 2004-2005 Orange Revolution, for example — should also be viewed in this light. [The full article – a very long one – is worth a read]

The second piece titled, ‘Obama’s dilemma: U.S. Foreign Policy and Electoral Realities’ ties in neatly with the conclusions of the piece cited earlier (see extracts above):

Obama has to hold together a coalition that is inherently fragmented by many different understandings of what his presidency is about. This coalition has weakened substantially. Obama’s attention must be on holding it together. He cannot resurrect the foreign policy part of it at this point. He must bet on the fact that the coalition has nowhere else to go. What he must focus on is domestic policy crafted to hold his base and center together long enough to win the election.

The world, therefore, is facing at least 14 months with the United States being at best reactive and at worst non-responsive to events…..

….All of this creates opportunities for countries to build realities that may not be in the best interests of the United States in the long run. There is a period of at least 14 months for regional powers to act with confidence without being too concerned about the United States.

The rest of the world knows this, of course. The question is whether and how they take advantage of it. [Full piece here]

The solutions – purportedly being cooked up by Timothy Geithner for Europe – would involve a big loss for Germany as they would result in a Central Bank in Europe that resembles the Federal Reserve, that abandons its commitment to price stability and one that would consequently engineer a massively weak Euro. This hurts Germany and China which holds a lot of Euros in its foreign exchange reserves and also via loss of trade competitiveness. See the piece by Ambrose Evans-Pritchard for more details

So, now the contours of American foreign and economic policy are becoming clear. Aren’t they? However, the odds are long that they would succeed.

Production or Distribution

Gulzar in ‘Urbanomics’ cites approvingly Mark Thoma’s comments on the distribution weakness of the present-day political economy. Then, he goes on to analyse the causes of such an anti-re-distribution bias that the system has come to feature now. I have no particular quarrel with Gulzar’s analysis but I do have difficulty in accepting that production is not the problem and that only distribution is. The distribution problem has been compounded by the fact that production has become more difficult, more resource-intensive and hence, less efficient.

Output has slowed in the US and in Europe – as they should. Even if productivity is rising and can rise further in the developing world, the demand side too over there is a lot bigger. Agricultural yields are declining. Air and water are polluted and the reserves of all kinds of under-ground assets are declining. OR, at best, we have no idea of how much we have and how long will they last. The latter depends on the growth in demand too.

This declining output is one of the reasons why job creation has become an issue in the West. The elites, sensing the production problems, have begun to garner the remaining output for themselves, making the distribution problem more acute. There is both absolute and relative inequality in many parts of the West now.

For a time, policymakers and elites sought to fool the rest of the public with leverage and low interest rates. The public got suckered into it and the result is the global financial crisis for which the bill is being presented to the same innocent public by the elite.

This is a social time-bomb and it would explode and soon.

G-20 farce

Financial markets needed an excuse to exhale and they got one in the form of an empty and banal G-20 statement. They pledged a strong and co-ordinated international response to address the renewed challenges facing the global economy. Statements are easy to type in word processors. How would the response be co-ordinated? Will everybody agree to print money and will every government spend its way out of trouble? More amusing than these charades is the naive belief in these charades. Short-covering on these charades is logical from an individual investor’s profit-preservation or loss minimisation goals but individual investors should not let their savings follow these charades.

Republicans forced Fed hand?

Thanks to Paul Kedrosky’s Infectious Greed, I came across the letter written by Republicans ‘warning’ Mr. Bernanke against any adventurous monetary policy move ahead of the most recent Federal Reserve Open Market Committee Meeting. I wonder how much of an influence that letter had on the Fed deliberations, on top of the continued dissent of three FOMC members themselves. Not that it is going to deter an eventual launch of QE3. But, that is a subject of topic for another occasion and I propose to deal with it in my upcoming MINT column.

Again, thanks to ‘Infectious Greed’, one came across this succinct response by Professor James Hamilton to Daniel Yergin’s piece on peak oil. I have not read the Op-Ed. piece by Daniel Yergin. But, I know for a fact that he has consistently forecasted falling oil prices. One day, he might be right and for a while. Check out the case for ignoring Yergin on the price of crude oil.

Well, as Yves Smith writes in her blog, ‘Naked Capitalism’, the paper by Claudio Borio and Piti Disyatat of the BIS on the role of imbalances in the global financial crisis was not so much blacklisted as ignored. I had downloaded the paper and it still remains in my ‘TO READ’ list. The authors debunk the role of current account imbalances and the consequent excess saving theory that Mr. Bernanke has been peddling for quite some time now, with varying degrees of eloquence.

But, the ‘non-technical’ summary of the paper to be found in this blog post in ‘Naked Capitalism’ is a great read and a MUST READ.

Kedrosky links to a great observation that Nicholas Nassim Taleb had made in a recent Wharton Goldstone Memorial Lecture. That is the virtue of non-action. I have not checked out the video of his talk but these comments are worth thinking about, particularly by the pundits in the US and in the media who cannot have enough of Keynesian interventions:

There’s something called action bias. People think that doing something is necessary. Like in medicine and a lot of places. They don’t understand: you live long by not dying, you win in chess by not losing—by letting the other person lose. So negative investment is not a sissy strategy. It is an active one.

Menzie Chinn has a long post on his blog, ‘Econbrowser’ (co-hosted with Professor James Hamilton), previewing, summarising the conclusions of his book co-authored with Jeffrey Frieden titled, ‘The lost decade – the makings of America’s debt crisis’. One can largely agree with the conclusions on the causes of the crisis that the authors have reached. However, TGS strongly believes that without a mention of ‘hubris and overconfidence on the part of policymakers that they have tamed the business cycles’, no account of the factors that caused the crisis can be deemed complete.

This overconfidence stemmed from overestimating their own abilities while underestimating and ignoring the role of a long decline in commodity prices in ushering in a non-inflationary economic expansion. That was a fortuitous outcome – a combination of several factors. Labour pressure on wages declined as unionisation declined. Policymakers dismissed these factors and exaggerated the role of monetary policy in fine-tuning the amplitude of business cycles. Thus, they transmitted their overconfidence to the financial community with whom they had forged a symbiotic relationship. They took on more leverage and more risk because the cycle had been tamed. Doubtless, regulatory neglect, regulatory arbitrage, forbearance all played a part in this. These are political economy factors.

Also, one cannot fully agree with Menzie Chinn and Jeffrey Frieden that monetary policy was not loose in the period 2002-04. Without recourse to Taylor’s rule, one could easily say that real short-term interest rates during that period were exceptionally low compared to their long-run average. That was led by the US and forced on others who had to do that largely because of the impact on their currencies had they not followed suit. Monetary policy was hence not tight in the Eurozone or in the UK as they write.

As long as we ignore the role of simple and yet all pervasive, universal and eternal human frailties in the crisis and come up with mechanisms that account for these human frailties, we would be doomed to repeat the lost decade.

It’s Mostly Futile

Reading this article would make you feel happy that you are not in the shoes of Ms. Lagarde. Reading this article would make you feel happy that you are not a IMF forecaster. The Fund forecasts 4% GDP growth for the world economy this year and next, despite all their much publicised downward revisions and warnings. These forecasts are meaningless but their risk statements are more meaningful. These official institutions cannot forecast a dire scenario as their central case. The Research team would be pilloried if they did so. But, the world paid a heavy price for chasing 4+% growth between 2002 and 2007. The Fund would be doing a yeomen service for world economic stability if it pointed to the trade-offs involved in shooting for such a rate of growth amidst deleveraging, commodity shortages, climate change and political uncertainty in the Middle East. Putting a 4% number as its central forecast, in that sense, is a mockery of the reality.

Their China growth forecast too is excessively optimistic.

who is paring losses?

If credit market spreads widen, Euro depreciates and if funds are being withdrawn from markets, why are stocks not falling by more? Who is holding them up? This is a recipe for prolonging the pain and not for ending it.

U.S. Stocks Pare Loss on Greece Bailout Talks

  • Bloomberg
  • 09/19/2011 02:49 PM

Euro Depreciates on Region’s Debt Crisis Plan Concern as Dollar, Yen Gain

  • Bloomberg
  • 09/19/2011 02:50 PM

Euribor-OIS Spread Widens as Greece Concerns Boost Lending Costs

  • Bloomberg
  • 09/19/2011 12:08 PM

Fund Withdrawals Top Lehman as $75B Pulled

  • Bloomberg
  • 09/19/2011 04:22 AM

Pulling the wool

Been away from the base station in Singapore for the last nine days. Left on Sept. 8th for India and been in South Tamil Nadu, first visiting temples in Tanjore – Kumbakonam – Mayavaram belt and then spending time with parents in Madurai. Hence, the all-quiet on the blogging front. Tamil Nadu continues to shine with its creativity in sycophancy, scaling unprecedented highs.

Yesterday, I caught up with some of the headlines on the website, http://www.prudentbear.com.

Inflation in August Is Above Forecasts

  • Bloomberg
  • 09/15/2011 08:15 AM

U.S. Jobless Claims Rose to Highest Since June

  • Bloomberg
  • 09/15/2011 08:14 AM

Manufacturing in New York Fed Area Contracts at Faster Pace Than Forecast

  • Bloomberg
  • 09/15/2011 08:13 AM

Mortgage-Default Filings Jump 33% in U.S. as Bank Foreclosure Logjam Eases

  • Bloomberg
  • 09/15/2011 05:15 AM

Flat retail sales keep U.S. on recession watch

  • Reuters
  • 09/14/2011 07:56 PM

Obama-Boehner summer deficit talks not a template for president’s debt taming plan

  • Washington Post
  • 09/15/2011 05:31 AM

Zoellick: World economy in new danger zone

Yet, the stock markets have been rallying. Investors are being fed fairy tales and make-believe stories. This whole issue of the European Central Bank tapping other central banks for US dollar liquidity is actually a sign of distress. But, somehow, it has been made out to be a grand success story and, for now, investors have lapped it up. Or, alternatively, the investors are central banks themselves and their Sovereign Wealth Fund cousins.

Good friend Jim Walker has sent a great missive on this to his clients.

Post-script: I agree with Martin Wolf that UBS has done reformist oriented regulators (very few of them, though) a huge favour that no amount of rational arguments had succeeded in making.

Infectious but not greedy

Looks like Paul Kedrosky has abandoned his brief flirtation with blogging in Bloomberg. May be, I am wrong. But, the last blog post by him in Bloomberg is from mid-June. I caught up with his Infectious Greed last night. It was time well spent. I came across a link to Michael Pettis’ forecasts for the rest of the decade where he walks the fine line between predicting China GDP growth falling to 3% by the end of the decade and not predicting a collapse of either the Chinese economy or society, consequently.

I also came across a link to a paper by Prof. Dani Rodrik presented at Jackson Hole where he questions the logic of automatic economic convergence of developing nations with that of the developed world.

Both Mr. Pettis’ post and Dani Rodrik’s paper resonate well with TGS. Indophiles would find plenty of references to India in the paper by Dani Rodrik.

Mr. George Magnus’ article in Bloomberg with the tantalising title – Give Karl Marx a chance – led me into the article. But the contents were disappointing. I doubt if they would address the problem of low employment and stagnant-to-declining wages in the US and in much of the rest of the developed world. How about asking all the Fortune 100 executives to abandon their bonuses and stock options and turn them over to workers and promising them GDP or employment warrants spread over the next decade, in return? You restore confidence through inspirational acts of heroism, selfless and moral leadership and not through Keynesian pump-priming in a debt-heavy society.

The point on the limitations of Keynesian intervention has been well made by the Chief Executive of Tullett Prebon in his blog post – which reproduces the letter he had written to the FT (ht: Zero Hedge). He correctly reminds people that Keynesian solutions did not solve the problems of the Great Depression (World War II ended it).

Brave new world

Verbatim text of the press release by the Swiss National Bank (SNB). Press release here.

Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

Just this morning, I read a brief at VoxEU by Richard Baldwin which said that the solution to the Eurozone debt problem was to authorise unlimited, open-ended purchase of Eurozone sovereign paper by the European Central Bank while governments credibly pursue fiscal policies. Obviously, that would entail a much weaker Euro.

How does that square with the Swiss National Bank balking at Euro weakness against the Swiss franc? Ceteris paribus, this move of the SNB does not help the Eurozone.

Further, the market’s reaction is unthinking. The withdrawal of one safe-haven alternative means the value of other safe-havens must rise. Therefore, the knee-jerk selling Gold is irrational.

Next to fall will be Japan. Then, there is open currency war. Welcome to the brave new world of 2012.

Update: Check out this blog post in zerohedge. It captures all the issues rather well.