Ode to a Grecian Urn

So broke ... and so little glue?

Leaders of the 16-nation euro region endorsed a Franco- German proposal for a mix of IMF and bilateral loans at market interest rates, while voicing confidence that Greece won’t need outside help to cut Europe’s biggest budget deficit.“It’s an extremely clear political message,” European Union President Herman Van Rompuy told reporters after the leaders met in Brussels late yesterday. “It’s a mixed mechanism but with Europe playing the dominant role. It will be triggered as a last resort.”

After objecting to a possible IMF intrusion on the $12 trillion euro-region economy, the ECB endorsed the package, with President Jean-Claude Trichet saying that European governments will remain in control of the process.Trichet, who told France’s Public Senat television earlier that surrendering control to the IMF would be “very, very bad,” held his own press conference after the summit to revise the comments. (via EU Steers Greece to IMF, Pledges Loans in Last-Resort Update1 – BusinessWeek).

The genesis

On January 9, Standard & Poor’s announced that Greece, Spain and Ireland were on review for a possible downgrade, indicating that a Euro-zone country could default. The Greek situation acquired some urgency, as redemptions are due soon. Greece cannot be left to fend for itself, without reducing the credibility of the EU among its own member states – and may turn out to be the acid test for the EU and the Euro. But EU-Zone economy is contracting now for the last 18 months.

Enter IMF

Britain and Sweden are suggesting that IMF is better suited to handle the Greek situation – rather than the ECB. Germany and France, being the economic and political leaders of the Euro-pride brigade, are worried about IMF entry into Europe.

The gross debt (government, private, corporate) of the Greece, Hungary, Ireland, Italy, Portugal, Spain, UK, US are all above 200% – going upto more than 1000% in case of Ireland.

Straw in the wind and reading tea leaves

The current Great Recession is forcing Europe to rethink many of its assumptions and move out of its comfort zone.

After a Nobel .. a grateful Obama was the least that Europe expected …

Coming to terms

fter much hand-wringing, chest thumping, indignation, there is the ‘the truth dawns’ moment.

Long used to effortless Anglo-Saxon collaboration with the US, Britain is lost in trying to define and prepare itself for this change.

stepping into a Blockbuster video shop, I found myself walking past aisle after aisle of Hollywood movies. Then I came across a tiny section labelled “foreign”, which contained about a dozen European films. Either Hollywood’s hegemony was such that the US was no longer perceived as another country, or Blockbuster had adopted the US definition of foreign and imported it 4,000 miles into the UK. The same confusion governs this country’s defence policy. The other side of the Channel is forrin. The other side of the Atlantic isn’t. (via Only America can end Britain’s Trident folly).

The change in calculus

Instinctively, and habitually, Britain rejected the French offer to share costs, control, benefits of its nuclear patrol – turning down benefits of a US$ ‘x’ billions.

Last week the government slapped down a French offer to reduce the costs of our submarine patrols by taking turns to prowl the same seas rather than duplicating the effort and occasionally crashing into each other. This proposal, it said, would cause “outrage”, on the grounds that it’s an unacceptable erosion of sovereignty. Using a system leased from the United States, on the other hand, presents no such difficulty. When the government says our sovereignty is threatened, it means that another nation might disrupt the orders it receives from Washington.

At Copenhagen, the British and the Euro-zone were in for a rude shock. The US ploy of Obama+BASIC meeting, ensured that the “only breakthrough was the political coup for China and India in concluding the anodyne communiqué with the United States behind closed doors, with Brazil and South Africa allowed in the room and Europe left to languish in the cold outside.”

At Pittsburgh G-20 Summit, it was reported that Barack Obama refused a meeting with Gordon Brown, five times. The worst for the US-Britain ‘special relationship’ was the day when Paris Hilton made Gordon Ramsay the British Prime Minister. Long smarting under the label of US poodles, British MPs reacted. With so much happening, a report from a group of British MPs followed. It called for a review of ‘special relationship’ with the USA.

There is an excruciating ritual that dates back at least to Thatcher: lobby journalists accompanying her on a trip to Washington would ask the president of the day or his officials about the “special relationship”. Briefed in advance by the British embassy or US state department about this peculiar cultural tic, the Americans would happily confirm it was still in place. It did not cost them anything. To this day, any deviation is treated by the British media as a snub.

Fluid world, unprepared Europe

Europeans in general themselves seem to have a high regard for Barack Obama.

U.S. President Barack Obama is so beloved in Europe that he was nominated for a Nobel Peace Prize (which he later won) just 12 days after taking office for his “extraordinary efforts to strengthen international diplomacy and co-operation between peoples.” A Pew survey this summer found that 93 percent of Germans, 91 percent of French people, and 86 percent of Brits believed Obama “will do the right thing in world affairs,” a stunning turnaround from their views on the last administration. Yet, this perception belies the reality that Obama has done much less for Europe than his predecessor.

The Wall Street Journal had some interesting anecdotes about Obama’s approach to Europe and Britain.

It is alleged that his paternal grandfather, Hussein Onyango Obama, was tortured by the British during the Mau Mau rebellion in Kenya in the 1950s, when it was controlled by Britain.

Soon after his inauguration, he sent back to the U.K. a bust of Sir Winston Churchill that had been loaned to President George W. Bush after the 9/11 attacks. The sculpture had enjoyed pride of place in the Oval Office.

There is also an important ideological reason that Britain’s leading policy makers find themselves increasingly shunned by the U.S. Key foreign-policy advisers to Mr. Obama are keen advocates of a federal Europe, one in which the European Commission based in Brussels is the main center of power and influence, rather than the individual capitals, such as London, Paris and Berlin. In this context, Britain’s dogged attachment to a “special relationship” with America is regarded as an embarrassing relic of a previous era.

Before taking office Mr. Gordon wrote that America should “support the European project” and warned that Britain’s historic resistance to closer European integration could seriously damage London’s standing in Washington. “Fully in Europe, Britain has every chance to remain America’s preferred and privileged partner,” he said. “Marginalized from the EU [European Union], Britain could find itself less influential in Washington as well.”

Wobbling orbit

Across the world, there is yet another ripple. Was the Euro a bad idea? Paul Krugman, a weather-vane of US status-quo thinking says,

Long before the euro came into being, economists warned that Europe wasn’t ready for a single currency. But these warnings were ignored, and the crisis came.

Now what? A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley’s Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger “the mother of all financial crises.” So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.

But that’s not going to happen anytime soon. What we’ll probably see over the next few years is a painful process of muddling through: bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by the grinding deflation I already mentioned.

It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.

Real politik

Reluctant Euro-media starts on anti-Obama campaign | 2009 Cartoon by William Warren

For the next 2-3 decades, international equations are likely to be fluid. There is no room for congratulations, surrender or gloating. Symbiotic relationships will be the new model – and exploitative-confrontationist models may no longer be possible or feasible.

The US change in attitude towards Europe, can be said to be permanent, if the next US President were to continue the cold-shoulder.

Till then, play it by the year. Keeping your ears to the ground may also help.

Related Articles

• David Cameron plan to opt out of EU policing laws ‘will allow criminals to run free’ (telegraph.co.uk)
• Monumental deceit: How our politicians have lied and lied about the true purpose of the European behemoth (dailymail.co.uk)
• Plot to make Britain second-class EU state (express.co.uk)

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China and U.S. soften tone on yuan

The poor will pay a price ... as usual.

Amid harsh rhetoric, Chinese Vice Commerce Minister Zhong Shan and U.S. Treasury Secretary Timothy Geithner sounded some conciliatory notes on Wednesday.Mr. Zhong, making a 30-hour visit to the U.S. to try to ease bilateral tensions, expressed confidence that politicians from the two countries “have the wisdom and ability to resolve existing problems.“Mr. Geithner said he be- lieved China would allow its currency to appreciate over time, according to a CNN interview transcript. While the U.S. “can’t force them to make that change…I think we can work through the tough things we have together,“ Mr. Geithner said.The stakes are high for both sides. The U.S. and China are among each other’s biggest trading partners, and numerous U.S. companies have investments in China. The U.S. is increasingly looking to China to cooperate on international strategic issues, such as nuclear nonproliferation and the fight against terrorism. (via WSJ ON YUAN – China and U.S. soften tone on yuan).

Let the games begin!

Rousing 'macho' WASP voters!

The Dragon and the Eagle are squaring off! An experienced US stalks China, waiting behind high walls of US$2500 billion foreign exchange reserves.

The US-China game has started in earnest. US, egged on by ‘macho’ voters and a cheering media, will:-

1. Act tough
2. Behave in a morally outraged and indignant manner
3. Commentators will prescribe a trade war and sanctions

In parallel, analysts, academics, think-tanks, journalists will talk-up China. Like Greenspan talking-up the US dollar or Dow Jones. They will: –

1. Hold up China an nation-exemplar
2. Write books analysing on China. Such books will start pour out of our ears
3. Make movies and novels about the ‘dominant’ Chinese in the US
4. Study, extol Chinese culture /tradition /history, and hold forth as a shining example.

And China will be ‘uncompromising’! Act as though, they have a choice.

A certainty

The change in dollar-yuan exchange ratio will happen. Peacefully, or with violent side shows. Assuming that the dollar-yuan revaluation will happen smoothly, is fraught with risk. That it will happen, without any significant disruption, is one, big, huge, slippery assumption. What will follow the Chinese moment in the sun?

Economic mayhem?

What remains to be seen

What could set off economic mayhem in China? Crime in China (a simmering threat), terrorism in Xinjiang (remote possibility), real estate bubble (a real scenario)?

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!

Last time …

It 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 Great Recession – Outlines of Round 2

Is the global economy staring at a double-dip? Round-II of the Great Recession coming your way?

Gross Indebtedness - Some sample countries | Image source & courtesy - livemint.com | Click for image.

The next tsunami

Gross debt (government, private, corporate) of the Greece, Hungary, Ireland, Italy, Portugal, Spain, UK, US are all above 200% – going up to more than 1000% in case of Ireland.

These leaves the governments with a tough choice.

Analysts are already pointing to a policy dilemma: If these countries cut back on government borrowing, growth will suffer. But if they don’t prune their deficits, the bond market, spooked by the higher borrowing, will push up interest rates, which, in turn, will impact growth.

For the banks, much depends on what happens to the housing sector. US analyst Meredith Whitney has said the US is sure to see a double dip in housing, which will force credit writedowns in banks and impair capital. Bank lending in the US has still not picked up, which means that the US consumer is wary of taking on more debt. That is not difficult to understand, given the job losses and the fact that household debt to GDP ratios are still very high.

Societe Generale SA economist Albert Edwards, admittedly an unabashed bear, points out: “Household leverage has returned to 94% of GDP from its peak of 96% in both 2007 and 2008. But consider this: At the peak of the Nasdaq bubble, household leverage was just shy of 70%. There is a very, very long way to go.” (via Round 2 of crisis in developed world to mar global recovery – Economy and Politics – livemint.com).

The lure of a welfare state

So, what happens if a borrower(s) default on repayment? There is insurance for non-repayment.

Going insurance rates for repayment risk, knowwn as credit default swap (CDS) are indicative of the market perception. What exactly do CDS rates signal?

Explains a journalist,

Higher spreads on credit-defaults swaps indicate sellers have raised the price of guaranteeing protection because they perceive the likelihood of a default as higher. A spread of 97 means it would cost about $97,000 to buy protection on $10 million in U.S. government debt. (from U.S. sovereign-credit spreads rise sevenfold in year, By Laura Mandaro, MarketWatch, San Francisco).

The ratings game

The second patch of quicksand in money-markets is the ratings business.

Ratings game is a very curious business. India, a US$1 trillion economy, growing at 7%, with a gross debt of 129%, has a rating of BBB-. Look at Ireland, where according “to the most recent World Bank data, Ireland’s number stands at a staggering 1,267%” – has a rating of AA-, after a recent rating downgrade in November 2009.

Brazil, India, Russia and South Africa are missing | Image & courtesy - paul.kedrosky.com | Click for image.

Or a situation where,

China swaps cost 66 basis points, down from 297 on Oct. 24. That’s cheaper than Greece and Ireland and within 9 points of Austria, Italy and Spain.

Obviously, such artificial pricing and manipulation can only be ‘sustained’ for short bouts.

And when does that short bout end?

It is obviously true that market perceptions of sovereign default risk in the eurozone (as reflected in CDS rates) are rising across the board and are now very high indeed by historical standards.  According to Markit, on 12 January 2009, Germany’s 5-year  CDS rate was 44 basis points, France’s 51 basis points, Italy’s  155 basis points and Greece’s 221 basis points.  The same is true, of course, for the US, with a CDS rate of 55 basis points and and for the UK, with a 103 basis points CDS rate.  Sovereign CDS markets may not be particularly good aggregators and measures of default risk perceptions because issuance is patchy and trading is often light, but the numbers make sense.

Engines of growth

EU’s economy is contracting now for the last 18 months. The burden of the Welfare State is not reducing. EU’s populations are not scaling down their expectations. Who will pay for these gold-plated services, that Europeans consider is their birthright.

The Chinese+ASEAN economies depend on exports to US and European markets for growth. With these bankrupt economies as customers, the outlook for China+ASEAN is questionable. Middle East depends on US+EU for security, banking, monetary and fiscal management.

That leaves the global economy with Brazil, Africa India and Russia as engines for growth

Debt-GDP Ratio's - Major economies | Image source & courtesy - visualeconomics.com | Click for source image.

The Russian conundrum

After decades of boycott, machinations and confrontation, the Russian Government is in  a strong position of being low on debt.

With the lowest levels of Government and private debt, it is the Russian corporate sector which is the main debtor. Russia is in a league of its own, with debt levels ranging between 2%-20%.

Russian crisis and default are ‘artificial’ and opportunistic creations of Western bankers, trying to squeeze a recalcitrant country. Russia managed the “budget deficit to hit 6.8% of GDP this year and wants to lower that to around 3% by 2012.”

Never have so many depended on so few – for economic growth. Thin gruel to go round.

arch 10, 2009, 7:19 p.m. EDT · Recommend (31) · Post:

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The looming Yuan-Dollar currency crisis

No dearth of pretenders - EU, Japan ... and now 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?

'Get to heaven by climbing the terraced fields'. Great Leap Forward poster, Artist - Yang Wenxiu, Published - 1958, September, © Stefan R. Landsberger

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?

Crime in China (a simmering threat), terrorism in Xinjiang (remote possibility), real estate bubble (a real scenario), dollar-yuan exchange ratio (significant risk)?

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?

Great Leap Forward © Stefan R. Landsberger; Source - Zhongguo meishuguan (ed.), 中国美术年鉴 1949-1989 (Guilin: Guangxi meishu chubanshe, 1993). Designer: Zhang Xin'guo (张辛国); Liu Duan (刘端); 1958, October; Put organizations on a military footing, put actions on a war footing, put life on a collective footing; Zuzhi junshihua, xingdong zhandouhua, shenghuo jitihua (组织军事化，行动战斗化，生活集体化); Publisher: Hebei renmin meishu chubanshe (河北人民美术出版社).

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!

What kind of ending will we see ...?

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!

equally

Ben Bernanke’s version of history blames the victims

For Bernanke, central bankers were the heroes. In the face of irrational hordes, they offered liquidity and a host of innovative policies, ensuring that financial panic did not lead to a new Great Depression. In Bernanke’s word, “the outcome could have been decidedly worse”.

His assessment isn’t exactly wrong. But as a historical record it is incomplete and far too generous to central bankers. (via Ben Bernanke’s version of history is incomplete – Telegraph).

Blame the Chinese!

It ain’t the first time

Helicopter Ben has a way with history. Earlier he created the concept of ‘savings glut’ – thinly blaming China ( and others) for saving money! He explained how,

“a significant increase in the global supply of saving–a global saving glut–which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.”

This time around he was congratulating Central Bankers and policymakers

“in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation.”

Awesome! The man is so brazen! He has no shame!!

Of course, he makes no mention how the current Great Recession first came about by printing too much money – and then keeping interests low. Edward Hadas is right in one thing at least! He says, “Those who spread kerosene should not take too much credit for putting out fires.”

Benny Boy – That is good advice. Take it.

‘Frothy’ Alan and ‘Helicopter’ Ben

The Great Recession – The Start, The Beginning, The Blame and The Game.

Helicopter Ben just wont stop ...

Running and hiding …

In the last 5 years, more than US$10 trillion (lowest estimate) were printed and pumped into the world economy. Now the world is awash with dollars.

Where did this money go? How was this used?

“Lendings by US commercial banks in the period 2000 to 2004 soared by altogether USD 1,500bn to USD 6,750bn. In the European Monetary Union lending to the private sector by monetary financial institutions (MFI) climbed from roughly EUR 6,200bn end-1999 to not quite EUR 8,700bn at the end of last year.” – Allianz Report, Dresdner Bank. (Links mine)

The recipients of this largesse, mainly Western banks made (it was whispered) bad loans worth 300-400 billion dollars.

Actual figures coming out now are about 20 times as much.

Much higher.

The Other Story

The loans story does not end there. These loans were in turn sold and re-sold, then packaged and mortgaged, derived and contrived – finally ballooning into the ‘sub-prime’ crisis.

Are these welfare payouts by another name?  US Consumers are not repaying their housing loans.

Who will pay for this “lending”? Some one has to!

Back to basics

And that is the root of the problem.

The West is trying to make Asians pay! And people like Ben Bernanke, Alan Greenspan et al are paid hacks to create a logic by which the West will try and make the poor pay.

Nothing less!

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005. (via Alan Greenspan Says the Federal Reserve Didn’t Cause the Housing Bubble – WSJ.com).

Poor Al! Credited - and then blamed for almost all things good and then bad with American economy. | Book cover; source & courtesy - imagesbn.com | Click for larger image.

Nobel prize … slipping away

Poor Al!

He can see the Nobel Prize slipping away from him. What can he do?

Blaming Asians is good start point.

Alan Greenspan is not below using Ben Bernanke’s rubbish ‘theories’ to save his sagging hide. So … Who really is responsible for this Great Recession?

The truth? You want the truth?

The Real Culprits … mea culpa

…the true culprits lie halfway around the world. High-saving Asian households and dollar-hoarding foreign central banks produced a global savings “glut,” which pushed real interest rates into negative territory, in turn stoking the US housing bubble while sending financiers on ever-riskier ventures with borrowed money. Macroeconomic policymakers could have gotten their act together and acted in time to unwind those large and unsustainable current-account imbalances. Then there would not have been so much liquidity sloshing around waiting for an accident to happen. (Dani Rodrik: Who killed Wall Street?).

Ben Bernanke or his printing press and helicopters are not mentioned. Even once. The evasion of Federal Reserve on M3 figures is not mentioned. At all. China which funded the US to the extent of US$2 trillion is not mentioned. Not once. Japan which funded the US to the extent of US$1 trillion is ignored. Alan Greenspan is mentioned once.

But Asians countries who are facing a meltdown in forex reserves, due to dollar depreciation, are instead mentioned as culprits. A new level in being brazen.

Wow.  Keep it up Dani boy.

Blame Bush, Greenspan, Bernanke

Looked at with 20:20 hindsight, this crisis originated in a macro sense with the US Federal Reserve and the Bush administration. Since the dot.com bubble burst in 2000, and in the aftermath of 9/11/01, the Bush administration ran unprecedented fiscal and current account deficits to finance: bizarre wars, tax cuts and egregious public over-consumption, all fuelled by debt bought by the rest of the world. Such insane profligacy was financed by a massive Fed-blown bubble of liquidity. Estimates of the cumulative excess liquidity bubble blown by the Fed to finance these and other private follies range from $8 trillion to $12 trillion. The US Congress was equally culpable, for letting government borrowing limits expand so elastically. So one should be sceptical of the righteous indignation of posturing politicians. The US administration, Congress and Fed were the three main macro-culprits in blowing the money bubble.(via Percy S Mistry: Blame Bush and Greenspan, not just the bankers).

Percy! If you can see this far …

Percy Mistry, a veteran of the Wall Street and the Western financial system, analysed this rather well. Yet, he cant go further than analysis. His prescriptions have been to say the least disappointing.

Percy, what stops you you from taking that leap of imagination! Why not be bold enough to start working on a non-Western model of global financial structure. Why do you persist with the insane desire that developing world (especially India) should dive headlong into this Dollar-Euro cesspool, which is designed basically to suck out wealth from the poor countries of the world.

Does it matter ... what pricked the balloon ...

Hide the Big Truth

One man whose voice is heard much, on the subject of Great Recession, is Stiglitz.

Joseph Stiglitz. Ex-chief economist of the World Bank, (96-99), who resigned one month before his term expired.

Stiglitz published his resignation in the New Republic, portraying himself as a dissident,  the champion of the Third World, anti-World Bank crusader, etc, etc.

Stiglitz portrays himself as a giant, against whom Lawrence Summers and Wolfenson conspired, as he chose “not to circumscribe my thoughts. So I chose to resign.”

How brave!

His targets were (as he chose to describe) “third-rank students from first-rate universities.” Stiglitz knows his media. Too well, some would say.

His article in New Republic, his interview in Financial Express were all excellent ploys to build his reputation. And after all this media management, he did get a Nobel Prize. And after gaining our confidence, he slips in the Big Lie!

Pushing the case for the Big Stimulus, Stiglitz claims that the Big Stimulus

– Is being paid for by the American taxpayer (Godzilla-Sized lie)

– Is something that Big Business in America desperately needs to survive (small truth)

– The Chinese and Japanese are footing this bill (The Big Truth)

– As also are Russians, Indians and ASEAN countries (medium-to-big-truth).

To his credit, what Stiglitz has done is, tell us. A lot of little things.

Little known and little truths about little things.

When economists talk ...

We have been told the truth …

Two more people have told us the ‘truth.’ Ben Bernanke and Lawrence Summers.

Ben Bernanke announced to the world, before the National Economists Club, Washington, D.C. November 21, 2002, that he would print money.

In March 23, 2006, Ben Bernanke further decided not to tell the world how much money he was printing.

Thus Spake Ben Bernanke

Remarks by Governor Ben S. Bernanke, before the National Economists Club, Washington, D.C. November 21, 2002 (ellipsis mine)

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press … that allows it to produce as many U.S. dollars as it wishes at essentially no cost. … …the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities … If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

A terse announcement by the Federal Reserve Board said,

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Al ... going from from respect ... to infamy

On November 10, 2006 Ben Bernanke justified,

As I have already suggested, the rapid pace of financial innovation in the United States has been an important reason for the instability of the relationships between monetary aggregates and other macroeconomic variables.

Ben Bernanke has given ample (and more) indications about what he will do. In fact, more than indications, he was brazen enough to say, what exactly he would do!

How can the world blame Ben Bernanke now?

And then came the coup de grace. He went right ahead exploded a propaganda bomb. He decided to inform the world that the cause of the global financial crisis was the Asian ‘savings glut.’

Bindaas. No hesitation. They let it all hang out.

Chiming in

Lawrence Summers described this situation to the RBI, correctly, as “balance of financial terror.” In a speech on March 23, 2004, at the Institute for International Economics, Lawrence Summers described the US strategy as a “balance of financial terror”. Again on March 24, 2006, at the Reserve Bank of India lecture, he repeated his message.

These two, Ben Bernanke and Lawrence Summers, threw down the gauntlet, and challenged central bankers of the world. Seemingly saying, “We are doing this! Stop us if you can! Let us see what you can do about this.” And the central bankers decided to do nothing.

Except whine, beg, plead and cry.

Terrified Al ... might miss out on his Nobel for Economics

What does this mean

An Indian economist explained this rather well.

Suman Bery, writing for a direction towards Toward a robust globalisation, explained,

In a famous speech exactly four years ago, Fed Chairman Bernanke represented the US as responding passively and benignly to the global “savings glut” which had developed following the East Asian crisis of 1997-98.

Even though most closely associated with Chairman Bernanke, this formulation is widely shared by respectable economists and commentators, such as Martin Wolf of the Financial Times, Professor Richard Portes of the London Business School and the Centre for Economic Policy Research, and Professor Max Corden of the University of Melbourne. The task of recycling these imbalances fell on the sophisticated financial systems of the advanced countries. In the event, for a variety of reasons, even they proved unequal to the burden placed upon them.

The trigger ...

The Asian ‘savings glut’ was the problem …

Ben Bernanke joins a long list of Western propagandists, who find ‘specious’ ways to blame others for Western problems. His most recent propaganda gem was to blame Asia for a ‘savings glut.’

a satisfying explanation of the recent upward climb of the U.S. current account deficit requires a global perspective that more fully takes into account events outside the United States. To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving–a global saving glut–which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.

After Ben Bernanke opened the flood gates of such logic with ‘helicopter drop of dollars’ and ‘printing press technology’, and now the ‘savings glut.’

Others such ‘economists’ have rushed in, to do another tom-tom dance around this logic.

Americans are saints because they are shopping ...

Eureka! It works …

The US and the World economy is suffering from a surfeit of printed money which was channeled into ’supply side’ economics. The model worked exactly as it should have!

The Chinese ‘worker’ and Indian ‘coolie’ worked his backside off. The American ‘consumer’ bloated up debt – and bought all the goodies. The debt mountain became just way too-oooo wobbly.

It crashed.

The Chinese (and Japanese, Indians and the Russians) have been left holding these pieces of paper, called American dollars.

The US has been evading transparency by not revealing M3 figures (on dubious grounds), printing money 24 x 7 x 365 and creating toxic assets. Now when the muck has hit the fan, they are acting coy.

China was right that the US is now looking after its own – and not bothered about the problems the US has created for other countries. Like this news article shows, India is unlikely to get seriously affected – which is possibly creating complacency in India about what needs to be done.

Kojak - we will all need to take a 'haircut'.

India – Poised for stagflation(from InfoChange India News & Features development news).

Why has the dollar been falling steadily? Quite simply, because US-based firms have less and less to sell to the world, though the world has a lot to sell to American consumers. America has lost competitiveness in recent decades, largely to China and East Asia. This growing imbalance in world trade (present for over two decades now) has meant a ballooning trade deficit (excess of imports over exports) for the US. It has paid for this by selling US Treasury Bonds (perhaps the most sovereign, reliable financial asset hitherto) to foreigners. Increasingly, however, the realisation has grown that the US is not in a position to redeem its $10 trillion external debt. This is almost tantamount to saying that in order to pay for goods produced by China the US has merely been printing the required quantity of dollars. Clearly, this is not a sustainable state of affairs.

The World Full Of Kojaks

The 10 trillion dollar external debt is most likely a conservative figure. It is possibly two-or three times that much. Internal debt is of course another matter. The cost of re-floating the US financial system is another US$5 trillion. So, what figure are we talking about?

US$50 trillion? Take that and try digesting it.

The only way, this can happen if the world is asked to take a massive haircut. In fact, we may have to become Kojaks for the next 20-30 years.

For the truth shall set you free …

The current crisis happened for one simple reason.

The US printed too much money, during Alan Greenspan’s tenure – and later Ben Bernanke started hiding these figures. That is all. The Emperor has no clothes at all. The US is bankrupt.

Effete, decadent and declining. Finito. Completo. Terminato. Endlich. Eindig. ändlig.

The (Western) Need For Vengeance

They hadn’t suffered yet but were preparing to, and they were perplexed by their inability to figure out who had the idea for this game. “If I knew more I could find someone to blame,” said Linda Burke, a 57-year-old service consultant at AT&T Inc. in Atlanta, speaking, no doubt, for the American people. (via Let’s start by finding some people to behead – Money Matters – livemint.com).

During the tech meltdown, it was Bernie Ebers (Worldcom) and the Enron guys who were made the fall guys. In 1989, it was Mike Millken. How about indicting Alan Greenspan and Ben Bernake?

These ‘incidents’ also talk about the a Western need for vengeance.

“The scale of this problem has been unprecedented and I expect the response will be, too,” said Robert Mintz, a former federal prosecutor and now a partner at the law firm McCarter and English. Someone is going to have to pay for sending the financial world into a panic and wiping out the savings of millions. (The hunt begins to punish the culprits – Times Online).

Or am I reading too much into these posts!

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