Treasuries Walk, Talk Like an Old-Time Bubble

This article gives a good summary of asset bubbles with the latest most evident in Treasuries. The question will be how long can the USD maintain the status to be a flight to quality and when will the sell off begin. I pick mid Q3/09.
Bloomberg.com: Opinion

The Reckoning - Chinese Savings Helped Inflate American Bubble - Series - NYTimes.com

An article from the New York Times to support my claim of scapegoating that will happen. It is not the fault of the US to borrow and spend so much but the fault of the Chinese to lend so much. Historically tiger economies could maintain low currencies as their pool of human resources was seemingly endless. In addition productivity growth allowed to provide goods with limited upward pressure on currencies.


The Reckoning - Chinese Savings Helped Inflate American Bubble - Series - NYTimes.com

The Ponzi economy

This article was sent to me by my dear friend and great mentor Tibor.
Thank you!

He very rightfully contested that the biggest Ponzi scheme in the US is social insurance and the pension scheme and not Mr. Maddoff. The common belief is that money is deposited into a pension fund and as one retires the income that comes from the funds will pay for a retirement pension. The truth however is that there is no money in the pension funds and everything that is paid in is directly paid out to pension beneficiaries. This means that the people who are paying in now will depend on more people paying for them once they retire, hence a Ponzi scheme. Some (e.g. government) are more equal than others - as polticians do not go to jail for their schemes.

Please read the article below...


Taki’s Magazine, edited by Taki Theodoracopulos

Starship Enterprise or World War III

Starship Enterprise or World War III

I have recently posted a link to an article about evil Russians who extend their power grab and want to nationalize key industries. This is however dwarfed by the over USD9 trillion that the US public entities have used so far to take control of the economy. Funny enough they are talking about an auto czar who takes control and oversight of the Detroit 3. Scary to imagine that one government official will be in control of the whole automotive sector.

Anyway, my point that I want to make now is that it is not so much about the economy any more as it is about ideology and that is where the danger lies. It is like in cold war times. Russian propaganda pictures the US as an abuser of civil rights and sees a loss of individual freedom under corporate capitalsim and US propaganda alleges state control and lack of individual property in Russia. It is the same form of enemy making on both sides. We are doing everything to save the economy the enemy is doing it because of a selfish and evil power grab. That’s where the DANGER lies.

This is the beginning of the creation of consensual paranoia. I want to quote from a book by philosopher Sam Keen who describes paranoia in his book “Faces of the Enemy” (1986, Harper Collins Publishing Inc.) as follows:

“Paranoia involves a complex of mental, emotional, and social mechanisms by which a person or a people claim righteousness and purity and attribute hostility and evil to the enemy. […] Paranoia reduces anxiety and guilt by transferring to the other all the characteristics one does not want to recognize in oneself.”

Practically, the economy will become a secondary issue as the demise will start from a politically induced polarization of ideologies between the ones that have and the ones that have not, between socialism and capitalism, between Keynes and laissez faire. This will be the breeding ground for different forms of nationalism and fascism all intended to create consensual paranoia and to optimize the enemy building.

Let me take a step back now and give a historic review of recent economic events and the run up to the current economic crisis. I trust that my readers agree with Milton Friedman’s definition that inflation is always and exclusively a monetary quantity problem. Meaning that if I have more money for the same goods prices will rise to adjust for the increase in money supply. Ergo the cause of inflation is an increase in the money supply and its effect is the increase in prices. The effect we have seen over recent years in the form of asset bubbles which appeared in equities, housing prices, commodities, shipping rates, etc. The cause was a rampant increase in the money supply through unlimited lending which was brought about through manipulation of interest rates. Who is in charge of interest rates? Let’s not fool ourselves and admit that it is ultimately government. In order to finance a war and keep the economy running interest rates were kept too low for way too long. Other problems like the failed vision of the US ownership society and laws that demanded to lend to non-creditworthy creditors aggravated the problem. Main point here is that every cause points to government as the culprit.

What now? Will the politicians say “Sorry we screwed up. We had the best intentions. And by the way the current power grab and extension of influence on the whole economy was unintended but is for the better of society”. If we take a look at history a more probable scenario becomes evident from the last great depression. In post World War 1 Germany was going through an economic boom which was the result of an increase in the money supply and eventually resulted in rampant inflation. Of course the inflation was not the fault of government but of evil and conspiratorial Jews. This is the best example of enemy making and outward projection of the own dark (shadow) side, paranoia as described above. It became obvious who was in effect evil and conspiratorial.

From the current crisis I see 2 possible extreme scenarios that can plan out. Both of them are based on the premises that deflation will lead to a depression and attempts to re-inflate the economy will create inflation.

Scenario 1, World War III:

The depression will be global so every country will be hit. This provides the ideal breeding ground for mutual enemy making and paranoia. Americans will blame evil communist Chinese for depreciating their currency, Chinese will blame American capitalist greed as the root of the crisis and evil. Within the EU countries nationalistic demagogues will blame the EU, the EU will blame individual governments. Jews and Christians blame the Arabs for inflation from rising oil prices (the inflation fallacy outlined above) and Muslims blame the rest of the world for robbing them and being infidels. Socialist South America will project the reasons for their failures onto capitalist North America. Propaganda about one’s own purity and right values and the imperative to fight external evil will serve to convert the act of murder and war into an act of patriotism.

Scenario 2, Starship Enterprise:

“Space... the Final Frontier. These are the voyages of the starship Enterprise. Its five-year mission: to explore strange new worlds, to seek out new life and new civilizations, to boldly go where no man has gone before.” This is the famous title sequence of the original television series Star Trek, which had been invented by Gene Roddenberry, one of the greatest optimists. In his vision all countries and all planets were joined peacefully in a federation of planets to explore and go where no man has gone before. This is exactly what it takes, not only outside in exploring the world but also inside in the individual and collective (society, countries, organizations). This means looking at the enemy within and seeing through projections. This will go along with an increase in awareness, a reorientation to virtues and values and a psychological and spiritual revolution. Am I dreaming of an impossible utopia? If you see that books like Eckhart Tolle’s “A New Earth – Awakening to Your Life’s Purpose” and similar books are leading bestseller lists this scenario might at least have a bit of probability and support. It will need a shift of paradigm effecting the economy (away from growth mantra to new measures of wealth and happiness), psychology (integration of the enemy), spirituality, etc.

I really hope for the Star Trek Scenario and I am convinced it will come even if it needs to be preceded by the world war 3 scenario. The last big shift in paradigm happened after the 2^nd world war. We’ll see what happens, meanwhile I enjoy the winter and get a bit nostalgic about Star Trek and Captain Kirk and I close with a bumper sticker. Nostalgia ain’t what it used to be.

How to Pay for National Health Insurance | The Big Picture

How to Pay for National Health Insurance | The Big Picture

New American car ad

Socialism equals pragmatism???

It is really upsetting that despite the kluster screw up of the US the USD stays the main reserve currency. It is perceived as the save haven, which fundamentally does not make sense. It is purely an issue of market dominance I find.
How else would it be possible that the Treasury can sell debt at such discount prices?
http://www.ft.com/cms/s/0/fe71a61e-c585-11dd-b516-000077b07658.html

And once everyone has loaded up on dollars they will cut their debt down through inflation. I would find some Asian currencies like the Singapore dollar a much saver bet. Fundamentals are much stronger and those economies benefit much more from the falling commodity prices.
http://www.financeasia.com/article.aspx?CIaNID=90696

Socialism is now sold under the word pragmatism and every leader who does not pour out money is considered heartless and stupid. Yes, I admit that is what socialists always say about people who think differently. But this time the argument comes from people of whatever couleur as long as it means an expansion of power. My respect for Germany's chancellor Merkel who does not fall victim to herding (just yet).
http://www.iht.com/articles/2008/12/08/business/summit.php

Bail out in comparison - great article
Bankers in the US are not squeezing their banker friends to badly it seems.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20081207/REG/312089971/1009/TOC

Evil Russians and other stuff

I am currently reading a great book by the title, Meeting the Shadow - The hidden power of the dark side of human nature. The basic concept based on G.G. Jung is that to define the ego in the process of development and individuation certain aspects of the self need to be repressed due to personal environment, ethics, morals, etc. The unwanted parts are in us as well but repressed. Too much repression or denial of the dark side make them develop a life of their own and the dark side appears in "irrational" or evil acts. Or another mechanism is to project the evil onto the outside. Especially prevalent in Christian (the pure good) culture, the evil is projected to the outside such as axis of evil or Iraq in recent history or the holocaust. There is an individual and a collective shadow and as history has shown individuals can take on the collective shadow and lead it to destruction and terror.

A good example of how the projections (mostly unconsciously) work is the following article. Communist, power greedy Russians are looking to nationalize companies. They bad - we good. They only see it outside because they have it but deny it inside not even noticing that exactly the same thing happens at home.
http://www.iht.com/articles/2008/12/07/europe/08kremlin.php?page=1

The same thing can happen with Obama. Someone has to be the scapegoat for the depression. I would think it will be the Chinese more than Arab countries. It all happend because the Chinese depreciated their currency.
http://www.telegraph.co.uk/finance/economics/3546471/Chinese-economy-1930s-beggar-thy-neighbour-fears-as-China-devalues.html

Who will be buying all the USD if the petro dollars need to be used to bail out neighbours and the Chinese are spending their trade surplus on their own stimulus and want to reduce their USD holdings?
http://www.spiegel.de/international/business/0,1518,594368,00.html

And if the US can source all the funding they need how much will there be left for developing countries?

http://www.ft.com/cms/s/0/7b29a13e-c22a-11dd-a350-000077b07658.html

And in Europe?

Trichet thinks the Euro will hold up against hitting a bump disputing Friedman's predictions. I beg to agree with Friedman and see the problem starting in Austria. The exposure of Austrian banks to Eastern European countries is 85% of its GDP (Euro285bn in 2006) and leverage in the vicinity of 1:40. Loans are largely in USD and Euro with local currencies depreciating and faltering economic growth. I wonder whether countries like Greece, Portugal or Spain are willing to bail out Austria, while they will be needing money for themselves. We have not hit the bump yet. Good night and good luck.

http://www.bloomberg.com/apps/news?pid=20601087&sid=arCqnv0hrrpc&refer=home

And why do people think that the worst is over because the USD is now stronger. This only aggravates the situation and will prompt more inflationary policies. And a strong dollar is not going to last anyway.

http://www.reuters.com/article/newsOne/idUSTRE4B36WI20081204

There is an Austrian saying "Pride goes before the fall". The new self assumed gods of finance, Ben Bernanke and Henry Paulson will learn that their presumed salvation to the detriment of the individual will go down in history as the greatest act of hubris ever committed in American history.

Really like this cartoon about how swift economists are:

Quantitative easing

The fed's discount rate has lost part of its significance in light of the rising number of programs targeted at reestablishing lending. As the first oversight committee comments show reestablishing lending unfortunately does not work.

Bailout Monitor Sees Lack of a Coherent Plan

http://www.nytimes.com/2008/12/02/business/02tarp.html?_r=3&ref=business

I guess using the same strategy that created the mess in the first place (expansion of credit) is not a good remedy.


Nevermind, we increase our efforts through quantitative easing, simply meaning printing more money.
Bernanke Says Fed May Buy Treasuries to Aid Economy
http://www.bloomberg.com/apps/news?pid=20601068&sid=ajcLVDMwN5To&refer=economy
The way it works the Treasury issues Treasuries, the Fed prints money and buys the treasuries. The Fed created the bubbles which are now deflating and causing trouble so Ben says let's inflate them again. Inflating the money supply by trillions of USD will inevitably create inflation.

Of course the fed charges interest for their printed money. This money is paid to the shareholders of the fed. It is important to note that the fed is privately held by the very individuals who benefit most from the bank bailouts as can be seen at the links below.

Ownership of the Federal Reserve
http://land.netonecom.net/tlp/ref/federal_reserve.shtml
http://www.fdrs.org/federal_reserve.html

Introductory Video
Here's a short video that seems to me to be a good first post to my blog.
http://www.youtube.com/watch?v=jpEnFwiqdx8

Where will all the money come from?
Where will all the money for stimulus packages come from. In Italy, bond issuance could rise to €220bn next year, with €100bn in redemptions in the first 6 months. In Germany, a bond auction failed in November, something virtually unheard of until this year, while in the US some analysts say yields could start to rise because of about $1,000bn in bonds in the pipeline next year.
http://www.ft.com/cms/s/0/eb690be2-bf0f-11dd-ae63-0000779fd18c.html
Did I mention that China will be spending their own money for stimulus and not be able to buy Treasuies as they used to. If you think petro dollars, please be informed that Dubai had to turn to Abu Dhabi for an intial funding bail out with more to come.

Did someone think that $306bn would be enough?
Have we seen the end of money being poured into Citi, I don't think so. In addition to USD314bn in bad mortgage loans Citi also has about $790 billion in credit card receivables, non-U.S. consumer loans, corporate loans, derivatives and other assets. Some $91 billion in credit card receivables could be particularly vulnerable.
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081130/REG/811249957/1003/INSURANCERISKMANAGEMENTStay tuned for the next episode of: "How the US government steals from tax payers".

Effective government stimulus?
Here's an interesting article on just how well the government's strategy works to boost lending by injecting billions of funds into the banks.
Credit Card Industry may cut $2 Trillion of lines
http://www.nytimes.com/reuters/business/business-us-finance-research-oppenheimer.html?_r=3