Of mice and men
While the US dollar is weakening, by design, Greece, Ireland, Portugal and Spain are being bankrupted by a deliberately overvalued Euro.
an unexpected $7.3 billion trade deficit, the biggest in seven years. The nation’s (China’s) exports rose at the slowest pace since November 2009.
For Europe, the grand prix is to replace the dollar as the currency of international trade – especially oil trade. Euro as a international trade-currency-of-choice, will give the Euro region access to more than 1 trillion euros in zero-cost floating balances.
China is expecting the yuan to play a similar role. Such are plans made by mice and men.
Monsieur Murphy says
What can go wrong with these plans? Plenty.
The eternal enemy of currency manipulation – gold. As a million bureaucrats work on the mechanics of their plans,
Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.
The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts, traders and investors shows.
UBS AG, Switzerland’s biggest bank, had its second-best day this year for physical sales on May 9, according to a report the following day. The bank’s sales to India, the world’s top bullion consumer, are more than 10 percent higher than in 2010. (via Gold Coins Show Bull Market Unbowed in Commodities Decline – Bloomberg).
You take free advice …?
Back in late January, as the world’s important people rubbed elbows in Davos, billionaire investor George Soros had some rather definitive thoughts to offer on gold, which he called “the ultimate asset bubble,” according to reports.
However, he neglected to mention that his hedge fund had been buying.
Another report points out that the liquidation (by people like Soros) of investments in public investment vehicles may be replaced by private investments.
The new filings from funds “may show that big names exited ETPs and this news may cause prices to slip in the very short term,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. Some funds switched to holding gold directly so they wouldn’t have to announce it publicly, he said.
Is gold a bubble?
A rather disbelieving journalist writes of the situation in the West
Gold is in a bubble. Anyone will tell you that. They’ve been saying it since gold was about, oh, $500 an ounce. But it’s a funny kind of a bubble. It’s the only one I’ve encountered where so few people seem to own the asset in question.
During the dot-com bubble, you met lots of people with tech stocks. Taxi drivers told you what dot-coms they owned. During the housing bubble you met normal, ordinary people who were trading up to expensive homes using adjustable-rate mortgages, buying new condos off plan to flip, and cashing out their fictional “equity” through a refinance mortgage.
But who actually owns gold? I keep hearing about the gold bubble, but every time I ask people if they own any themselves, they say, “no, no, of course not, it’s a bubble.”
Central banks around the world are printing more dollars, euros, pounds and yen. Gold may simply be a less awful currency than all the others. Banks can’t print any more of it, so its price should probably rise while other currencies fall.
For this year, the question in India seems to be, “Will gold cross Rs.25000, by 2011 Diwali?”
- Gold Coins Show Bull Market Unbowed in Commodities Decline (businessweek.com)
- Soros Sells Most of Gold ETP Holdings During First Quarter (businessweek.com)
- A closer look at George Soros’ big quarter of selling gold (financialpost.com)
- Why is George Soros selling gold, but John Paulson not? (theglobeandmail.com)
- China Is Now Top Gold Bug (online.wsj.com)
- Gold Investment Demand in China (lonerangersilver.wordpress.com)
- Chinese set new standard in buying gold (ft.com)
- Gold grand prix – The Chinese challenge (quicktake.wordpress.com)
- Shanghai Planning Gold Exchange-Traded Funds as Demand Jumps (businessweek.com)
- Oil, gold back in demand (news.theage.com.au)
Fat and lazy
Between 1875-1935, Britain was dependent on India for gunpowder, on USA and Iran for oil, on Malaya and India for rubber. British economy had grown fat and uncompetitive – unlike Italian, German and Japanese economies.
Even though Britain won WWII, their economy was a lost cause. Though Germany, Italy and Japan were losers, with their economy in shambles, they could make a brilliant recovery and vastly out-compete Britain.
The story of Middle East oil is similar for USA and West. The Welfare State, built on a diet of cheap oil, easy dollars, is now too expensive for the West to sustain. The above book extract gives an excellent snapshot of the oil industry in the 20th century.
And the shadow of oil on the 21st century.
- Onward, American Soldiers! Another million await death. (quicktake.wordpress.com)
- Out with the old? (bbc.co.uk)
- UK economy trailing (thesun.co.uk)
- Skidding Oil Prices: A Blip or a Trend? (green.blogs.nytimes.com)
India and Honest Brokers
There is this Buddhist Jataka story which we have all heard.
Two cats go to a monkey for help in dividing some eatable equally. End result – the monkey gets everything. The cats, nothing. ‘Honest’ brokers are the monkey which leaves nothing for the cats.
Hillary Clinton assured a nervous gathering of Foreign Policy analysts that the world is counting on the USA today as it has in the past. When old adversaries need an honest broker or fundamental freedoms need a champion, people turn to us. When the earth shakes or rivers overflow their banks, when pandemics rage or simmering tensions burst into violence, the world looks to us. (via Remarks on United States Foreign Policy).
In real life
What is left of Pakistan after US finished with brokering Pakistan’s future? After the West carved up the Ottoman Empire, and divided the Turkish possessions among their puppets, what is left of the Middle East? With oil, Big Oil, oil politics, oil-dollar, oil prices at stake, can the US be a honest broker.
Tell that to the birds.
Can there be a ‘honest’ broker?
This idea that there cannot be ‘honest’ brokers, made Buddhism so popular all over the world. Not pretty statues and musical chants. In the last 200 years, भारत-तंत्र Bharat-tantra has gone into regression. But, in this period, the world has also learnt more about the limitations of the Desert Bloc ideology.
People get ready!
- Foreign Policy: Clinton’s Wake Up Call On Mexico (npr.org)
- United States is ‘best hope’ in a troubled world: Clinton (alternet.org)
- The Hill Poll: Most voters say Arab unrest bodes ill for the US – The Hill (news.google.com)
- A Salient Fact About US-Israeli Relations (Several Billion, in Fact) (outsidethebeltway.com)
- Barack Obama agrees to form joint national security body with UK (guardian.co.uk)
- A call for change – Obama has ‘failed,’ Pawlenty says (politico.com)
An Indian problem
Now one of the problems of India, having English as an important language, is the amount of swill, garbage and propaganda that we are subjected to.
In spite of being less than anybody, British media can be pretty biased.
One example was a post by Ian Campbell on Japan’s economic problems. He says,
Japan has … has the worst debt to GDP ratio among major economies … But the interest yield on Japanese government bonds is … not much more than 1 per cent, so the debt is not yet so problematic – and might not seem an obstacle to still more spending. … In just five years, even assuming the economy grows, debt might climb to 230 per cent of GDP … the hideously large debt would finally drive the fiscal deficit far higher and become intolerable.
Japan’s only route then would be drastic fiscal reform or, more probably, huge resort to the printing press, as Latin America did in the old days and Zimbabwe in more recent times. (via Nokia’s billion-dollar man).
Sad Brits …
Campbell, a British journalist, compares Japan with Latin American and African Governments who have printed a lot of money.
But surely he knows that Western Governments – under the leadership of Ben Bernanke printed much more than Africa and Lat-Am could and did! Why is Campbell not talking of British, European and American printing presses?
Is there a racial smell and smear somewhere? Did I hear him say ‘These irresponsible Blacks, Latinas, Browns, Yellows …’
Now Japan’s problems are minor – because they have solid, well run, high tech companies, whose products are in demand all over the world.
Off their peaks, these Japanese firms still have mean clout in business world. Japanese interest rates being so low will not change Governmental economics by much. So, why compare Japan with Latin America or Zimbabwe?
Of course, you cannot compare Japan to Spain – where prostitution is a national industry. Or Ireland, or Greece, which have lived on handouts for the last 100 years.
Maybe you should look at British debt my dear sir!
Is it wishful thinking Mr.Campbell? Balanced your judgment is not. Or is it just plain malarkey? Methinks, it is ‘White’ noise!
Ian Campbell, who has “recently returned to the UK, where he is writing a book on rural Mexico.” could utilize his time much better writing about rural Britain, which depends on huge subsidies from a nation groaning under 500% Gross-National-Debt (GND-that is Govt.+Corporate+household).
Now British GND (no hindi puns intended) is a much-more-hideous. Than Japanese at 500%. We both know that British exports are going nowhere!
Let us look at British economy
First the biggest sector of British corporate sector is about digging, extracting and selling natural resources.
A historical legacy – with little value-addition. Royal Dutch Shell, BP, North Sea Oil, XStrata, Anglo American, Rio Tinto Group, BHP Billiton, BG Group, National Grid, Scottish and Southern Energy, Centrica. That is 10 of the top 30 British companies. These companies mostly have their assets abroad – and if push comes to shove, you know these companies will go where their bread is buttered.
The second leg on which British industry stands today is cracked leg of banking and insurance – HSBC, HBOS, RBS, Lloyd’s TSB, Barclays, Standard Chartered, Aviva and Prudential. The British part of the business of these 8 financial firms is in mess. The international business is subsidizing the British business. How long do you think this will last?
The third wobbly leg is pharmaceuticals made up of two companies. Glaxo-Smithkline-and Astra Zeneca. Both are in doldrums due to competition from generic Indian companies – and may look good to beery British journalists boozed in a pub. Now these are the three legs of British economy. We know that three legged stools are always prone to topple over.
That was lesson No.1 for you Campbell.
Lallu has a few things to say here
Lesson No.2 is what our colourful former Railway Minister said, “इस हमाम में सब नंगे हैं” (meaning “everyone in this bathhouse is naked”).
No offense to colour black, but then black pots must not call yellow kettles names.
It is plain bad journalism!
- Our Government Is Now So Huge That It’s Choking The Private Sector (businessinsider.com)
- Dollar hits 15-year low vs yen, jumps vs euro (seattletimes.nwsource.com)
- China Buys More Japanese Debt Than Ever Before (businessinsider.com)
In the last few years, the Chinese economy and administration has changed – unannounced and in a very subtle way. There is an interesting openness and candour, which are new elements in the China-mix.
Instead of the usual three themes of real-estate bubble theory, the mega infrastructure projects and the impending dollar-yuan revaluation, this post will look at four other elements. These four elements are usually ignored in most China analysis – which this post will address.
China opens up
In March 2010, China appointed three economic advisors to ‘help’ the People’s Bank Of China. Drawn from academic backgrounds, the names of the advisors were leaked to the press.
Zhou Qiren, Xia Bin and Li Daokui will replace Fan Gang, formerly the sole academic member of the committee, the People’s Bank of China said in a statement on its Web site today, citing decisions by the State Council, the top cabinet. Zhou and Li have spent much of their careers in teaching and academic study, while Xia has worked as a researcher at government agencies.
Li Daokui has been a forthright and hawkish tone in flagging China’s problems! What gives. The way it seems, these economists are talking down the yuan! An orderly devaluation of the yuan and a negotiated recapitalization awaits Chinese banks.
“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,” he said in an interview. “It is more than [just] a bubble problem.”He was speaking ahead of Monday’s announcement by the State Council that it had approved a plan to reform real estate taxes, the clearest indication yet that the government will for the first time impose an annual tax on some residential housing in order to rein in rising prices. The news sent shares in China down 2.4 percent. (via China Property Risk Is Worse Than in US – CNBC).
EU is the largest market for Chinese exports.The change in the Euro-yuan equation in the last 6 months has made Chinese exports to the EU more expensive. This will still not take US pressure off yuan revaluation – and anyway there was no much pressure from EU for a Euro-yuan reset!
Chinese leaders reached a consensus in early April to break the renminbi’s peg to the dollar. That ended a dispute that had spilled into public view in March when Commerce Ministry officials warned in speeches and interviews in Beijing and Washington about the dangers of any change in the renminbi’s value. The ministry halted those warnings immediately after the consensus was reached, and Chen Deming, the commerce minister, even reversed himself publicly by saying that China’s trade deficit in March was nothing to worry about.
Trade finance out of China
A few quarters ago, China’s trade froze due to lack of trade credit. Chinese banks were unable to get intra-bank limits – and in turn were unable to fund letters of credit for Chinese exporters.
A hiccup in the Chinese realty markets could freeze wheels in China – freezing trade wheels in Asia. As reported earlier in April 2009,
China’s exports rose 7.6% in March from February, after six straight months of contraction. “While exports growth is likely to remain weak in the coming months,” Goldman Sachs economists Yu Song and Helen Qiao commented about China, “we believe the worst sequential slowdown probably is behind us now.”
Some of the revival is due to the greater availability of trade finance, which had dried up as banks clamped down on lending in late 2008, hamstringing global trade.
The Shanghai Composite
In 2010, even as global markets recovered or stabilized, the Chinese Shanghai Composite Index is in bad shape.
In the rankings of the world’s worst-performing stock markets this year, nations drowning in debt feature heavily. Greece is number one, closely followed by Slovakia, Cyprus and Spain. But then, in fifth place, there is China.
Shanghai’s decline – the index is down 16 per cent since January – has caught many investors by surprise, since China is widely seen as a beacon of growth in a world that is still reeling from the financial crisis.
Having fallen to a eight-month low on Thursday, the Shanghai Composite is this year’s worst performing index in Asia.
Is the Chinese catastrophe overstated
Mass media usually ends-up following, herd-like, some high-profile ‘opinion makers.’
The China Bubble theory has been pushed by people like Jim Chanos, who cut his teeth by predicting Enron and Tyco. In January this year, he made a widely reported prediction that China is “Dubai times 1000″ and is likely to burst any time soon. Chanos’ Biblical imagery and descriptions about China’s, “Treadmill to Hell’ gives the game away. Marc Faber is another boom-and-doom theorist, who has predicted a China bust up! Another economic commentator, Hugh Hendry, in a similar vein, says,
“They suggest a new era reminiscent of Protestant Capitalism. They want us to believe the atheist Chinese are prepared to work harder and defer their gratification for longer.”
These commentators are seemingly painting this economic scenario with theocratic hues! A modern version of the medieval crusades?
The logic of China-busters is very well refuted by those who who are closer to China market and economy – unlike some American Sinologists, who talk to other Sinologists, whose ‘unquestioned’ expertise is based on other Sinologists’ opinion.
The Chinese economic ‘bubble’ may yet burst. But, methinks, the causes, effects and intensity will be, well …
Some other China posts by 2ndlook
The dollar and euro need to be devalued by 25%-50% which means yuan must appreciate another 20%-35% from it record high (update on 26th August, 2011)
Can Europe be far behind
Doing business with bankrupt customers
- Empty building blocks combined with inflated real-estate prices
- Bloated banks loan ledgers with ballooning bad debts
- Low entrepreneurial levels with foreign ownership of Chinese businesses
- Aging population with a dominant public sector
- Increasing foreign exchange reserves of depreciating currencies
As for the Rest of the world
- ‘Black Death’ of eurozone crisis will hit exports – China (telegraph.co.uk)
- Any euro zone solution requires pain: Stiglitz (theglobeandmail.com)
- German Leaders Reiterate Opposition to Euro Bonds (nytimes.com)
No-one shouts louder than American politicians over the value of China’s currency. But other countries may be ready to speak up too. Five G20 leaders this week called for a more “consistent” approach to exchange rates — with fingers implicitly pointing at China. The yuan is a matter of global concern. But widening the debate might not help the US cause.The euro zone is China’s largest trading partner and the yuan is pegged to the dollar, so euro companies should have more reasons to complain than their American competitors. One dollar, and thus one yuan, is worth quarter less in euros now than in November 2008. (via Group-think needed).
Europe ain’t complaining about the Yuan
Greece, Ireland, Italy, Portugal, Spain, are on the verge of a sovereign default. Eurozone is upto its gills in debt. The Euro is being called names. And they are not snivelling about the Yuan and China.
There are three separate reasons for this … The reasons refer to the broad determinants of economic growth — capital, labour and productivity.
On the first, India is investing at the same rate as China (approximately 40 per cent of GDP), on the second, India’s labour force growth is about 1.8 per cent per year faster than China, and on the third, China has outpaced India by about 2 per cent per annum (for the last five years).
Most of this outpacing has had to do with the deep and deeper currency undervaluation practised by the Chinese authorities which led to two unsatisfactory outcomes: the great financial crisis of 2008, and now the largest and fastest growing polluter of the world.
For how long will the international community stand idly by? Not very, and this is the first big forecast for the ensuing decade: China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level. (via Surjit S Bhalla: India’s Shining Decade).
Plausible! Probable … Possible?
Surjit Bhalla outlines a plausible scenario – with China needing to adjusting their exchange rate upwards – much like other US client-states had to! Europe had to in the 70s, Japan in the 90s, Asian Tigers in last 10 years. As examined earlier in some detail by 2ndlook. One question is settled. There will be economic mayhem.
However, Bhalla assumes that the Dollar-Yuan revaluation will happen smoothly – without any significant disruption. And that is one, big, huge assumption – which is based on really, really slippery slope.
Bhalla would do well to remember that last time when China had a problem, it resulted in the India China War of 1962. Just after the disastrous Great Leap Forward and before the equally disastrous Cultural Revolution.
The Great Leap Forward began in 1957-58, saw famine and hunger across China. After the Communist takeover of China, land seized from land owners, was given to peasants in 1949. Ten years later, in 1959, the Chinese State took away the same land from the same peasant. Food shortages, starvation followed. Western (questionable) estimates are that 30 million people died during this period. War with India followed in 1962 – a diversion from the domestic Chinese catastrophe.
What will it be this time?
The approaching mayhem
The next few years will be tumultuous for China.
Much like, when Europe was weaned off the low exchange rate crutch in 1967-1974 period. Stagflation, oil shock, the Nixon Chop followed. How Japan had to live with endaka, the Plaza accord, with S&L crisis in the US. Or the Asian Tigers had to reset to a higher exchange rate and higher foreign reserves, that accompanied the 1997 (Asian Crisis) to 2000 (The Tech meltdown).
What will follow the Chinese moment in the sun? What will set off economic mayhem in China?
Will the Chinese Government be able to ride this storm? Without a war with India? Which side of the fence will China fall? Answers to these questions will be worth waiting for! And prepared with!
Signs of coming troubles?
When the Soviet Union imploded, one of the unexpected fall out was the Russian mafia. Recent troubles in China, with the underworld creates a spectre of yet another mafia creating global disturbances. One more element in global trouble spots. To understand this better, turn to Chinese cinema.
Most films that have any Chinese element in it, (actors, directors, characters, locations) end up having the Chinese underworld as an important part of the storyline. Is it that the Chinese are morbidly fascinated by criminals and the underworld – much like Europe was with English pirates and murdering Spanish Conquistadors.
Ranging from Jet Li in Kiss of the Dragon, (Jet Li takes on the French mafia) or Chow Yun-Fat in The Corrupter (exposing police-underworld nexus and corruption in the USA), or Jackie Chan in Rush Hour series or the Chinese Ric Young in The Transporter, Jet Li in Lethal Weapon 4.
All have two elements in common.One is the pervasive Chinese underworld. Across Europe, in the USA. In drugs, fake currency, in smuggling boat people, the Chinese are there – everywhere. Many of these movies have Chinese stars, directed by Chinese directors or even partly funded by Chinese studios .
The second is the absence of the Buddhist monk.
India – the loose cannon!
Now, India is one box which defies description. By any global and historical standards, the country should not even exist – much less prosper, or be a significant global player. Too many languages, too much poverty, too much freedom, too many political parties, too many languages, too many religions, too many racial types are the common factors going against India (so goes the Desert Bloc narrative).
In such a situation, even in India, for the Westernized types or the remnants of the Desert Bloc admirers, India remains a failure waiting to happen.
Unfortunately, for these doubting Cassandra’s, India has proven them wrong for more than 5000 years now!
nine Latin American nations said Saturday they plan to use a new currency dubbed the ”sucre” for trade among themselves starting in January.
No sucres will be printed or coined, but the virtual currency will be used to manage debts between governments while reducing reliance on the U.S. dollar and on Washington in general. (via Leftist LatAm Bloc to Begin Using Its Own Currency).
A Gulf monetary council will be tasked with deciding on the peg of a proposed single currency among Saudi Arabia, Bahrain, Qatar and Kuwait and timeline to launch the currency … The launch of the currency will be preceded by coordination of monetary and fiscal policies and the creation of a regional Central Bank, Kuwait’s foreign minister said … The United Arab Emirates, the second-largest Arab economy, pulled out from the project in May, citing dissatisfaction over the choice to base the regional central bank in Saudi Arabia … The U.A.E. is the second Gulf state to abandon the monetary union plan after Oman’s exit three years ago. Kuwaiti officials have said they will work toward convincing the United Arab Emirates and Oman to rejoin the project. The monetary union project, which has been in the works since 2001, has been dogged by delays and debates over technical issues such as the currency peg.
To start with, full and complete success should neither be expected, planned or projected. The aim should be for a ‘half-success’ – just like ‘half life’ in physics, for radioactive substances. Just like half-life can continue, technically, to nearly infinity, so also, currency systems will need to innovate and modify continuously.
What will be a half-success, for the ‘Sucre’ /GCC Currency, is if these :-
- Last for five years.
- Are used on at least 50% of intra-Latam /GCC transactions.
- Currencies are regularly traded – even if, initial volumes are low.
- Other trading blocs, banks, currency exchanges start offering futures and options contracts, trades and settlements.
- Initiatives ‘inspire’ other blocs to start work on another similar currency.
They got da jaundice
2ndlook had proposed a global virtual currency which would work on trading platform, based on weighted exchange value of all member currencies. The ‘sucre’ and the ‘Khaleeji’ is good first step in that direction – even if it fails. Western press has seen it with a jaundiced view.
Anything surprising with that?
… on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.
He then addressed where demand for that debt would come from.
“The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to an audio recording of his remarks. “Double the holdings? It is definitely impossible.”
“The U.S. current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the U.S. is supplying fewer dollars to the rest of the world,” he added.
“The world does not have so much money to buy more U.S. Treasuries.” (via China central banker says harder to buy U.S. Treasuries | Reuters).
Reuters slips in a dud
Interestingly, Reuters tried talking up the dollar by making out as though China was scrambling for dollars which were not available. Post the Lehman-collapse, after initial panic over the dollar has subsided – and most economies have continued on the dollar bearing – with a slight change in course. Unlike Britain (or most of Europe), US debt and deficit are still well within ‘reasonable’ limits.
Where did all this money go
The deficit for the fiscal year 2009 came in at more than $1.4 trillion-about 11.2 percent of GDP, according to the Congressional Budget Office (CBO). That’s a bigger deficit than any seen in the past 60 years-only slightly larger in relative terms than the deficit in 1942 … having the fiscal policy of a world war, without the war … war in Afghanistan and Iraq … are trivial conflicts compared with the world wars.
According to the CBO’s … projections, (US) federal deficit will decline from 11.2 percent of GDP this year to 9.6 percent in 2010, 6.1 percent in 2011, and 3.7 percent in 2012 … (and) stay above 3 percent … Meanwhile, in dollar terms, the total debt held by the public (excluding government agencies, but including foreigners) rises from $5.8 trillion in 2008 to $14.3 trillion in 2019-from 41 percent of GDP to 68 percent.
While the above picture is not rosy, it’s not a cause for alarm. For any peace-loving nation, that is. For the Empire of the USA, seeking to maintain its hegemony. This is a bad financial situation to be in.
If war is what USA wants!