Hasta La Vista Baby

Here's a green shoot for you to chew on in your happy place...

This news item merited a thirty second mention on Bloomberg Television with an immediate resumption of rally jubilation and feel good news. And on the personal interest side, poor Karl Malden has died at age 91.

I wonder if there are credit default swaps on California? Woo hoo. Bring on those records bonuses for the boys in the back room.

Bloomberg Wire.... Governor Arnold Schwarzenegger declares "a state of emergency" for the State of California in its budget crisis.

As of 2007, the gross state product (GSP) is about $1.812 trillion, the largest in the United States. California is responsible for 13 percent of the United States gross domestic product (GDP). As of 2006, California's GDP is larger than all but eight countries in the world.

China Requests Debate on Reserve Currency at G14 Summit

China is proposing a new reserve currency regime less dependent on the dollar, along with other BRIC countries, and the US and its financial allies in the status quo will resist change because it is in their short term interest to do so.

China can take 'pre-emptive' action by diversifying its holdings ahead of any change, and there are some indications that it is doing so already. But while the dollar is the prime medium of international trade, China must buy dollars to support its mercantilist industrial policy. Its own alternative is to boost its domestic consumption and 'grow a middle class' which in some minds erodes the power of the narrow political elite which rules the country.

The US needs to stand firm in some areas, and acquiesce in others. Standing firm with regard to the yuan being free of a peg and currency controls is one area that ought to have been sine qua non when first Clinton and then Bush gave China its openings as a preferred trading partner even while maintaining de facto industrial subsidies through its currency and markets.

The first line of negotiation will be to agree on a dollar substitute, which will probably be the SDR. The US will resist and delay this as long as is possible.

The fallback position then will be the composition of the SDR, and a long phasing of the change in the primacy of the dollar and a few G7 currencies. China will seek more diversity and the inclusion of gold and silver, which is anathema to the Wall Street banking cartel.

The US must change or face more seismic, involuntary dislocations. As Britain surrendered its far flung colonial Empire, so the US must downsize its financial sector, restore balance to its own economy and its place in the world economy, and relinquish the primary reserve currency status which has become a powerful instrument of manipulation by the Wall Street banking cartel.

The dollar is the last, the mother of bubbles. Few understand this even now.

The epic US credit expansion was enabled by the preferred position of US debt instruments as the reserve currency of the world. The bond and the dollar are the absolute foundation of that debt pyramid.

Those days are undeniably over. What comes next and in what order and timing remains open to question for sure, but that substantial change is occurring is not.

The difficulty is that the financial institutions are a powerful influence over many key politicians in Washington and London and thought leaders and media outlets around the country, and in some parts of the world.

The military-industrial complex of which Eisenhower warned has become a real impediment to freedom in the US, but ironically it is not the manufacturing sector but the service, or FIRE sector, which has its grip on US political decision-making.

Obama could have changed this and there was hope that he would, but all that he has does so far appears to demonstrate that he and his advisors are fully compromised by the potent financial interests controlling their country.

What comes next, no one can say. But change is in the wind, and with that change comes the rise and fall of powerful but all too human institutions which many still believe can last for a thousand years, even as they are on the brink of der untergang, their downfall.

Reuters
China requests reserve currency debate at G8
Wed Jul 1, 2009 11:58am EDT

July 1 (Reuters) - China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.

One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.

This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.

A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit." (China is not just 'any country' these days - Jesse)

"But whether there is a specific mention in the communique remains open," said the European source, adding that sherpas would discuss this further in preparatory talks on Friday.

The debate centres on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency, to reflect the shifting balance of power in the globalised economy.

China's central bank governor said in March the world should consider using the International Monetary Fund's Special Drawing Rights (SDRs) as a super-sovereign currency. The SDR is an international reserve asset allocated to IMF members and its exchange rate is determined by a basket of dollars, euros, sterling and yen. (China also wishes to modify its composition - Jesse)

But the Chinese proposal failed to gain ground after several world leaders, and officials from the IMF, backed the dollar as the global reserve currency. (Reporting by Reuters bureaux)

End of Quarter

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.

But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security..."

The US markets will be closed on Friday July 3 in holiday observance of the anniversary of the American Declaration of Independence from the rule of England.

The rest of the world will somehow manage to muddle through on its own as best it can, and continue to consider its options and alternatives to the US Dollar as the prime measure of international trade and sovereign wealth.

Premium to Net Asset Value of Certain Gold and Silver Trusts and ETFs

Government Bails Out General Electric

"But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE...Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government's actions have been "powerful and helpful" to the company."

That fact that public money is being used to support General Electric, through their GE Credit group which chartered two small Utah banks raises several issues.

When people argue for state sovereignty in issues like banking and credit cards this is of course appealing to states rights people like this blogger. But when those regulations cross over the lines of interstate commerce and federal funds, the answer should always be 'no' as it merely opens the door to regulatory manipulation and state corruption. The experience with credit card debt limits and state regulation has been a blot on the regulatory landscape for many years.

There is nothing wrong with GE owning a financing operation. There was and needs to be the appropriate regulation of it, and that should include the ability to fail and take down part of General Electric shareholder value.

This 'behind the scenes' and 'under the table' decision-making has become far too common in Washington. And recent reports of Congressional 'insider trading' are alarming, not because of smoking guns discovered, but because of the official reluctance to speak out against even the appearance of such impropriety. Members of U.S. House Financial Services Committee traded bank stocks as bottom fell out of market

The banks must be restrained, and balance restored to the system, before there can be a sustained economic recovery.

Washington Post
How a Loophole Benefits GE in Bank Rescue
Industrial Giant Becomes Top Recipient in Debt-Guarantee Program
By Jeff Gerth and Brady Dennis
ProPublica and Washington Post Staff Writer
Monday, June 29, 2009

General Electric, the world's largest industrial company, has quietly become the biggest beneficiary of one of the government's key rescue programs for banks.

At the same time, GE has avoided many of the restrictions facing other financial giants getting help from the government.

The company did not initially qualify for the program, under which the government sought to unfreeze credit markets by guaranteeing debt sold by banking firms. But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE.

As a result, GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government's actions have been "powerful and helpful" to the company, GE chief executive Jeffrey Immelt acknowledged in December.

GE's finance arm is not classified as a bank. Rather, it worked its way into the rescue program by owning two relatively small Utah banking institutions, illustrating how the loopholes in the U.S. regulatory system are manifest in the government's historic intervention in the financial crisis.

The Obama administration now wants to close such loopholes as it works to overhaul the financial system. The plan would reaffirm and strengthen the wall between banking and commerce, forcing companies like GE to essentially choose one or the other.

"We'd like to regulate companies according to what they do, rather than what they call themselves or how they charter themselves," said Andrew Williams, a Treasury spokesman.

GE's ability to live in the best of both worlds -- capitalizing on the federal safety net while avoiding more rigorous regulation -- existed well before last year's crisis, because of its unusual corporate structure.

Banking companies are regulated by the Federal Reserve and not allowed to engage in commerce, but federal law has allowed a small number of commercial companies to engage in banking under the lighter hand of the Office of Thrift Supervision. GE falls in the latter group because of its ownership of a Utah savings and loan.

Unlike other major lenders participating in the debt guarantee program, including Bank of America, Citigroup and J.P. Morgan Chase, GE has never been subject to the Fed's stress tests or its rules for limiting risk. Also unlike firms that have received bailout money in the Troubled Assets Relief Program, or TARP, GE is not subject to restrictions such as limits on executive compensation.

The debt guarantee program that GE joined is administered by the Federal Deposit Insurance Corp., which was reluctant to take on the new mission, according to current and former officials who were not authorized to speak publicly. The FDIC also initially resisted expanding the pool of eligible companies, fearing it would add more risk to the program, the officials said.

Despite those misgivings, there have been no defaults in the loan guarantee program. It has helped buoy confidence in the credit markets and enabled vital financial firms to raise cash even during the darkest days of the economic crisis. In addition, the program has raised more than $8 billion in fees.

"The TGLP program has been a moneymaker for us," FDIC chairman Sheila C. Bair has said. "So I think there have been some benefits to the government and the FDIC."

For its part, GE said that it properly applied for and qualified for the program. "We were accepted on the merits of our application," company spokesman Russell Wilkerson said...

The Particularity of Japan from an Economic and Demographic Perspective

Since Japan is so often, and as we think incorrectly, cited as a likely deflationary pattern for the US in monetary outcomes, and since so few who discuss this subject have an understanding of Japanese culture and social structures, I thought it would be timely to point out a basic fact that should be reasonably well known but is so often overlooked.

Japanese population growth is flat, and the percent of the population that is no longer economically productive is growing rather quickly.

So would we be so suprised that Japan's GDP is flat, and that their money supply growth is sluggish? One should not be, unless they are not bothering to look at the data.

America also has an aging population as do many countries, but Japan is unique because of its extraordinarily low rates of immmigration due to the very homogenous nature of Japanese society.



Japanese population is now estimated at about 127.7 million people with a very nominal immigration rate of about 20,000 people per year and a negative birth-death rate.



When one mixes a negative native birth-death rate and very low immigration due to a rigid approach to race and citizenship, it should be no suprise that Japan has an unusually high level of elderly citizens.



The charts seem to suggest that countries with significantly aging populations with low population growth will experience a natural slow growth in GDP.

As you know we tend to like to view money supply growth and GDP in relation with each other and to per capita variables.

When one adds to this demographic mix the Japanese cultural bias to low domestic consumption and a high savings rate, and a bureacratic bias to a mercantilist industrial policy, the reasons for Japan's economic status become rather obvious.



I am not suggesting that Japan must change. I have spent many happy moments in Japan, and spent a great deal of time to learn the language and understand the culture, albeit with results inadequate to my hopes.

I have had many Japanese friends, and find great enjoyment in their art and music and social personality. I regret that I have not been to visit there in some years, and have forgotten so much and miss so many old acquantances. And I am particularly at a loss for their wonderful cuisine which I find fascinating, uniquely refreshing and delightful.

It is important to understand a country in its context, and with some attention to detail and its particulars, if one is going to perform an economic analyis and then perform broad comparisons and construct models.

Demographically speaking, Japan is an outlier with some unique characteristics. If one does not consider this, it can be a source of false conclusions.

Tax Revenues Slump as the US Budget Deficit Soars

Income Tax revenue is taking a drop commensurate with the kind of slump which we are experiencing in domestic GDP.



But there is a bull market in government spending. This does not include much of the support being given to Wall Street banks and other 'off balance sheet' shenanigans.



Thanks to Escape From America Magazine for these charts.

Jesse's Question for the Day

The expansion of credit in a fractional reserve banking system seems to be geometric.

The spending in the wage - price function, as captured by the velocity of money, seems to be more arithmetic, on the order of 2 or so.

Can money creation then fail to overcome the output gap if monetization is permitted and government spending has been and continues to be robustly in excess of tax receipts?

A refusal of banks to lend would tend to dampen the geometric power of credit expansion and a potential source of money creation. It also would tend to dampen velocity of money.

An undeveloped thought which this blogger is just beginning to consider, offered in the hope that someone might offer some useful data or existing theory on the subject.

And on a separate but somewhat related topic, the flip side of deflation is not hyperinflation as it is an extreme. People who based their risk portfolio only for the extremes of an outcome cannot consider themselves hedged since they are likely to be killed in the middle, the most probable, over a reasonable investment horizon.

Our Current Bear Market in Context: Four Bad Bears and the Current Situation

From dshort.com