The Japanese Stagnation

This is interesting, and probably an eye-opener for most Western readers.

Most Japanese mortgages are 'recourse' loans meaning that the borrower still owes the full amount of the loan even in the event of foreclosure. One of the reasons for this is that so many Japanese residential buildings are not intended to outlast the 35 year mortgage and depreciate from the day they are bought.

The Japanese government promoted officially backed mortgage programs to keep the economy going, cutting down payments to zero from the traditional 20 percent. This lured in buyers who really could not afford the houses, and are often the first to have their pay cut in an economic downturn.

Japan uses a semi-annual bonus system as part of its pay structure for employees, the bonus portion of which is more readily sacrificed for the company good.

Please consider these things in the context of the governance of Japan which as we have said is semi-feudal, ruled by a few corporations and the wealthy elite in partnership with essentially a one party government.

This will go a long way in helping to understand the "Japanese disease" of economic stagnation. You start by crippling the middle class through debt indebtedness to a corporate elite.

The Japan Times
The only bonus you'll get this summer is the sun
By Philip Brasor
June 28, 2009

One of the cleverest ideas developed by the Japanese business world is the distribution of semiannual "bonuses" to employees. Usually, a bonus is tied to a company's good fortune or an employee's performance. Japanese workers have always deemed them to be part of their salaries and tend to plan their finances accordingly. Employees and employers look at bonuses differently: The former see them as an entitlement, while the latter use them as a safety valve.

With the onset of the recession, Japanese companies have exercised their option to reduce or even cancel bonuses, and for the past month the media has been buzzing with a new term — June crisis — to describe the situation of workers who may not be able to meet mortgage payments as a result.

June and December are bonus months, and 45 percent of Japanese people with housing loans have contracts that require them to pay larger amounts in these months than they do in other months, in some cases as much as five times.

Publications and TV news shows have been filled with human-interest stories about people suddenly faced with the possibility of losing their homes. The Asahi Shimbun tells of a 40-year-old housewife whose husband did not receive a bonus this month and apparently won't receive one in December either. Even worse, his salary has been cut by 20 percent. They have 20 years left on their 35-year mortgage. They pay only ¥80,000 a month toward the loan, but during each bonus month they pay ¥400,000. With one child in university and another in junior high school, they have saved very little. "When we took out our mortgage," the woman says, "it was unthinkable that my husband's bonus would be zero."

According to the Ministry of Internal Affairs and Communications, homeowners now spend an average of 20.5 percent of their disposable income on housing loans, the highest portion ever. Meanwhile, the Japan Business Federation has reported that total bonus payments this June is 19 percent less than the total for last year, the greatest year-on-year drop since they started compiling statistics in 1959.

In the past, company labor unions would protest to employers when bonuses were cut, calling bonuses "life expenses," but recently they have taken management's side and agreed that bonuses should be tied to company performance. But the roots of the June crisis go deeper. Housing has always been the government's main means of economic stimulation. During the 1990s, when the economy was stagnant, housing was pretty much the only sector keeping the economy going thanks to the Flat 35 scheme, which allowed home buyers to take out loans with only 10 percent down payments instead of the usual 20 percent. The government's new stimulus measures eliminate down payments altogether for Flat 35. These loans are guaranteed by a government entity called the Japan Housing Finance Agency.

A person who wouldn't normally be able to buy a home can more easily buy one, and as we have seen with the subprime loan fiasco in the United States, lowering the bar for home ownership can have disastrous consequences. People who bought homes in the '90s under the Flat 35 scheme with "relaxed" (yutori) interest rates are the ones most affected by the June crisis.

NHK illustrated this tendency on the program "Yudoki Network" with the story of a former taxi driver who received a notice from JHFA saying that since he was delinquent for six months he would have to pay the balance of his loan — more than ¥24 million for a ¥36 million condo he bought in 1998 — or the condo would be auctioned off. The man's situation is worse than it sounds, because if his condo is repossessed, he still has to pay off his loan.

Japanese mortgages are recourse loans, meaning the borrower is still liable even after foreclosure. Depending on the state, most banks in America offer nonrecourse loans, which are secured by collateral, usually the property itself. Once they foreclose, the borrower's debts are gone. If you default on a recourse loan, you're messed up three times: you lose your home, you lose all the money you sunk into it, and you still have debt. Wait, make that four times — your credit rating is garbage.

The taxi driver opted to sell his condo before it went on the block (where it would probably sell for about 80 percent of its market value), but the realtor he hired said she could get, at most, ¥25 million for it. With all the fees involved, he'd still end up ¥3 million in the hole. Fuji TV's "Sakiyomi" profiled an unemployed sushi chef facing foreclosure who still owes ¥9 million on his three-bedroom Chiba Prefecture house. All the realtors he's talked to say his property is worth about ¥5 million but the only offer he's gotten is ¥2.5 million. His family has already left him and he's contemplated suicide. These cases are accompanied by advice from financial planners that boils down to refinancing the loan so that monthly payments are reduced. But that means extending the loan period and, as a result, paying more money in the end for a home that will likely be worth nothing, which they rarely mention. Recourse loans are directly related to Japan's infamous "scrap-and-build" housing policy. Banks can't be expected to lend money for houses that start losing value the moment construction is completed if those houses are used as collateral.

There are more than 6 million vacant houses in Japan. Most will never be sold, because they're pieces of crap that were never meant to outlast their 35-year mortgages. Condominiums are no better. On average, Tokyo "mansions" built in 1990, when land values peaked, were selling for half their original prices by 2004.

Interviewed on NHK Radio, economist Akiko Hagiwara said that people who realistically can't afford homes have been suckered into buying them in order to prop up the economy. People in this income bracket are also typically the first to get laid off or have their bonuses cut. "They're victims of the government," she said.

The June Non-farm Payrolls Report

The headline jobs number came out worse than expected, and the paint peeled off the US stocks tape from its recent run into the end of the second quarter.

The trend herd had been looking at the bounce off the bottom and before today's number had some hopes that the leveling off or even a surprise to the upside would confirm a bottom in the economy. The sharp downturn threw cold water on those happy thoughts.



The actuals came in about as expected, a little lower perhaps, and as you can see there was a strong downward seasonal adjustment.



The "Birth-Death" model was in line with the usual swag that the BLS performs at this time of year. As you know this number is added to the "actual jobs number" before seasonal adjustment, so at this time of year it helps to inflate the headline number slightly.

With this regular repetition of the number without regard to the underlying economic activity over the years, and its feed into the actuals, one has to wonder why they don't just roll this number into their seasonal adjustments? Do they feel the need to justify their tinkering with actual number beyond some limit? The Birth-Death model is certainly no viable rationale, but it does serve to employ a few analysts, and is likely some pet project of a past BLS director.



And here is the only chart worth watching, the long term trend. There has been no bottom yet reached in the jobs lost. This is not so much a reflection on the stimulus because of the lag, and the obvious data showing that consumers tended to use the stimulus to pay down their immediate debt which is a worthwhile endeavor, but does not give a quick boost to jobs.

The issue might be a bit of a red herring, because the economic stimulus pales by comparison with the enormous amount of stimulus provided to the banking sector, which is stimulating some operators like Goldman Sachs to pay their employees, on average, a record $700,000 in annual pay. Now THAT is stimulus, but perhaps one that is counterproductive.



We are on the record in the opinion that the Obama economic team is ineffective, backward-thinking, compromised, and possibly corrupt. They are serving the corporate banks and not the people. They should be replaced starting with Larry Summers who is a Greenspan and Rubin crony and the core of failure on the team. Tim Geithner should follow to find better employment for his talents, possibly as a salesman of men's suits.

China Takes A Big Step Forward in Monetary Policy

This news was largely overlooked by the worse than expected US payrolls report, which dampened hopes of a quick economic recovery, a sentiment encouraged by some but certainly not realistic to anyone looking closely at the numbers. I think that little propaganda sound byte served primarily to apply some primer for the end of quarter paint job in US equities.

Despite its strength today as stocks fall and the boys cash in after their most recent pump operation, the dollar is going to be taken down a peg, so to speak. It is a long term trend that is still well in place despite this bear market rally.

How much further? The DX index is increasingly unsatisfying as a measure, and the manipulation of the gold and silver price by a handful of banks who are unbelievably short the metals on paper renders them less reliable.

But another 20% decline from here is where our charts would indicate the dollar is headed overall against the DX.

China Allows Yuan Trade Settlement, Offers Tax Breaks
By Bob Chen and David Yong
July 2, 2009 09:44 EDT

July 2 (Bloomberg) -- China will allow companies to use the yuan to settle cross-border trade and let them keep their entitlement to export tax rebates, seeking to reduce the reliance of importers and exporters on the U.S. dollar.

The People’s Bank of China will encourage banks to offer yuan settlement services from today, the bank said in the regulations published on its Web site. Transactions inside China will take place in Shanghai and four cities in southern Guangdong province, including Guangzhou and Shenzhen, while those outside China will occur in Hong Kong, Macau and the Association of Southeast Asian Nations, it said.

“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s largest foreign-currency trader. “It will protect exporters from swings in exchange rates and boost the yuan’s role in the world currency system.”

China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern that a weakening dollar will cause losses on the country’s holdings of U.S. assets. A Chinese Foreign Ministry official said today he hoped the U.S. currency would remain stable, while reiterating a call for diversification of the international monetary system.

“Companies in China and neighboring countries are facing relatively huge risks of exchange-rate fluctuations because of big swings in the U.S. dollar, the euro and other major settlement currencies,” today’s central bank statement said.

First Settlement

Asean comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Hong Kong Monetary Authority Chief Executive Joseph Yam said on June 29 he hopes the first yuan settlement transactions will start this month after signing an agreement with People’s Bank Governor Zhou Xiaochuan. Companies currently have to convert yuan into dollars or other currencies to settle international trade.

“Hong Kong will be the natural place for arranging these transactions,” Yam said in a statement today. “This is the key to the maintenance of the status of Hong Kong as an international finance centre.”

Tax authorities are working on the proposed rebates for exports settled in yuan, the central bank said. Bank of China Ltd. will be the clearing bank in Hong Kong and Macau.

Stability, Convenience

About 50 percent of Hong Kong’s trade with China may be settled in yuan after the program starts, Stanley Wong, deputy general manager at Industrial & Commercial Bank of China (Asia) Ltd., the Hong Kong unit of China’s biggest bank, said in an interview on May 5. Hong Kong companies want to use yuan in trade because it will probably appreciate against the U.S. dollar more than 3 percent every year, he said.

“We hope companies will like to use yuan because of its stable value and convenience,” People’s Bank of China Deputy Governor Su Ning said in an interview with state-owned China National Radio today.

The yuan has strengthened 21 percent against the U.S. currency since a dollar peg was scrapped in 2005. China has limited the yuan’s advance in the past year as a stronger currency makes its goods less competitive overseas at a time when economic growth this year could slow to 7.2 percent from 9 percent in 2008, according to World Bank forecasts.

Currency Swaps

The People’s Bank of China has agreed to provide a total of 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps to expand the yuan’s usage. China and Brazil in May began studying a proposal to move away from the dollar for trade settlement and use yuan and reais instead.

Malaysia’s government has been calling for reduced dependence on the dollar for “some years” and now that China is supporting yuan settlement it is worth considering, said Tan King Tai, an executive director at Pensonic Holdings Bhd., a manufacturer of household electrical appliances in the northern Malaysian state of Penang that sources parts from China.

“The dollar has become quite volatile and speculative in some ways,” he said. “If the yuan can be stable, it will help companies with their financial budgeting.”

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

The Banking Bubble Began in 1986, Was Like 'the South Sea Bubble' Says Bank of England Official

In retrospect it should become increasingly clear to most that the Federal Reserve and its associated money center banks were responsible for systematically undermining all regulatory restraint and sound judgement for the sake of their private profits, without regard to the resultant destruction visited upon the public and the larger global economy.

To suggest that the regulatory process should now be concentrated in the hands of the Federal Reserve, still opaque and arrogant, is disgraceful and disqualifies the public officials from service who promote such a travesty of common sense and prudence.

Guardian
Banking system like South Sea bubble, says senior Bank of England official
by Ashley Seager
1 July 2009 13.26 BST

'Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,' says executive director for financial stability, Andy Haldane

A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other.

The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.

"Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said.

He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.

"One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent."

He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.

During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel."

He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.

"We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties." (We had a group that were responsible for doing this. They were called The Federal Reserve under Alan Greenspan. And Greenspan became the whoremaster of ceremonies for perversion of finance in the bubble economy. - Jesse)

He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.

"Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole."

A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system. (Perhaps some prohibition of the types of activity that banks can engage in like Glass - Steagall? Oh yes, we had that as well and the banks repealed it with the help of the Federal Reserve. Perhaps we should have regulatory reform and place all the oversight responsibility with one group. Like the Federal Reserve? - Jesse)

"For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics," he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic. (In this case there are a few Typhoid Mary's with names like JP Morgan and Goldman Sachs and Morgan Stanley, and they are still hard at work - Jesse)

"Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these 'super-spreaders' of financial contagion. Historically, financial regulation has tended not to heed that message." (Vaccination is one approach. Wall Street and the City of London really need a dilation & curretage - Jesse)

He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. "This is a bold measure and one which deserves international support."

Haldane's speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.

Gold - Weekly Chart

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

A Final Word on Inflation and Deflation

A serious bout of inflation is rarely caused by normal business activity, such as commercial bank lending and private debt.

In almost every case that I have studied, a very serious monetary inflation is triggered by excessive government debt obligations, and not private debt, that can no longer be adequately serviced by a productive real economy and domestic taxation.

That unserviceable debt becomes 'monetized' and a serious inflation results. It is a form of debt default.

Devaluation of a currency is a form of inflation which specifically addresses external debt obligations, as well as default on bonds which is a form of selective national bankruptcy.

The reason that the output gap is no sure barrier to this type of inflation is that it ironically serves to feed it in the presence of profligate government spending, since it dampens tax revenues and domestic GDP.

Private debt bubbles, asset bubbles, stock bubbles all seem to be the symptoms, the side effects, of an over easy monetary policy from a central monetary authority. In some instances they have been caused by exogenous events, even in the face of a hard monetary standard, by events such as a precipitous decline of the population from disease, or a sudden influx of a new wealth from discovery, such as the influx of silver and gold to Spain from the New World.

But the notion that banks must always lend to create inflation, or employment must be at robust levels, absolutely flies in the face of all historical experience.

And it does raise the issue, despite his protestations of innocence, impotence, and confusion, that Fed chairman Greenspan and the Federal Reserve itself, owns a unique culpability in the creation of several bubbles, from tech to housing, and the eventual outcome.

Sucks to Your Asmar!

A Bank Holiday on Deck?

We've been hearing the same rumours about embassies buying foreign currencies for their own use as cited here, but have not been able to obtain enough confidence to comment on it before this public disclosure in a major news source.

Harry Schulz apparently thinks a bank holiday is in the offing.

We think that if something decisive like this happens it is more likely related to a de facto devaluation of the dollar, a market break, that would be very brief. The Banks would close in order to allow the markets to stabilize. The occasion is therefore likely to be a major failure of a household name in banking, or perhaps even the failure of the State of California. California is the size of a large national economy.

We struggle with the notion of a dollar devaluation. Against what? A continued weakness seems to be in the cards, with some major event precipitating a break in market confidence.

It is obvious that there is a campaign to undermine Ben Bernanke as the Fed Chairman, coming out of the Obama Administration. Bernanke is not willing to monetize debt as aggressively as Geithner and Summers would prefer.

A 'big event' appears to be more a long shot that a bet, but we'll keep an eye on it. It does explain some of the more obnoxious moves by insiders to grant themselves huge bonuses and sell their personal stock holdings now.

A number of people have asked us to comment on this, in addition to the Japanese bond smuggling story out of Switzerland which we suspected was just related to a private fraud of some sort.

A gradual and orderly devaluation of the Dollar is most probable but some exogenous event could trigger a loss of confidence and a slide which could provoke a bank holiday. A decline of 20 to 25% in the dollar index from here is what technical analysis seems to indicate, but the Dollar Index is hopelessly out of touch with the modern realities of global currency exchange.

We have taken some steps in our personal life to guard against this, but think it is unlikely given what we know today.

MarketWatch
Latest Schultz Shock: a 'bank holiday'
by Peter Brimelow
Jun 24, 2009, 1:35 a.m. EST

NEW YORK (MarketWatch) -- The top-performing letter that predicted the Crash of 2008 now predicts a confiscatory Franklin D. Roosevelt-style "bank holiday." But it's surprisingly sanguine about stocks -- in the (very) short term...

In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

Yes, yes, it's paranoid. But paranoids have enemies -- and the Crash of 2008 really did happen.

HSL's suspicion: "Another FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it)."

HSL is still sticking with its 20-year "V" formation forecast, but emphasizes that within the current 10-year downtrend phase there will be rallies that will "last 1-2 years." It attributes its current success to "successfully trading almost daily, especially in commodity stocks (coal/potash/energy/ fertilizer/gold). Take profits constantly and rebuy on mini pullbacks. Prefer non-U.S. dollar companies; many such companies are listed in U.S. & Canada or Australia."

HSL says: "The world is staggering today between stagflation and net deflation right now; it varies widely around globe. Net deflation is a maybe 35% risk, due to toxics and/or deepening depression. Bit more likely, we'll slowly creep up to a dangerous 4.5% inflation on average, medium-term. But the wild card is the currency risk, which has a 50% (?) chance of boiling over and causing literally overnight (i.e. 24 hours) mega inflation in the asset markets."

Nevertheless, in the very short term, HSL's charting leads it to say: "we MAY not get a new bear market decline that many bears are predicting. Likewise, DJIA & S&P500 may build a Head-and Shoulders right shoulder."

HSL's currently recommended allocation:

• 35%-45% Government notes, bills and bonds. (Not U.S.)

• 8%-10% Stocks (non-golds).

• 10%-30% Commodities, via futures, commodity stocks and/or physical assets.

• 35%-45% Gold stocks and bullion.

• 0-5% Bear stock protection via inverse ETFs like ProShares UltraShort QQQ ; ProShares UltraShort Dow30 ("Use to trade/hedge market downturns only.")

The Erosion of the Dollar and the Rise of the East

The outcome of the push for globalization is a severe decline in the median standard of living in the US and an erosion of those individual liberties and freedoms which has made the US somewhat unique on the vast historical sweep of world history.

Few understand this. One cannot be completely sovereign when the push for 'competitiveness' is used to consistently erode the commitment to individual freedom.

David Rockefeller, and Sam Walton, and Bill Gates, looked at the social and economic structure of the People's Republic of China and saw the new American paradigm. Not in the evolution of China to democracy and freedom, but in the subjugation of the United States to huddled masses docilely wearing the yoke of debt subservience to the ruling elite.

Too much speculation in this? The pattern of behaviour of those who promote this canard of globalism is too obvious to ignore.

The banks must be restrained and balance must be restored before a sustained economic recovery can be achieved.


The Korea Herald
'Dollar faces challenge as reserve currency'
Wednesday, June 24, 2009

A leading economist said in Seoul yesterday that the U.S. dollar's supremacy as the world's reserve currency is facing profound challenges as the balance of economic and financial power shifts East amid the current economic crisis.

"There is a slow-burning fuse underneath the dollar," Gerard Lyons, chief economist at Standard Chartered Bank, said in the World Economic Forum.

Underscoring the strengthening role of Asia, Lyons said that the depth of the global downturn drove key emerging economies, such as China and Russia, to cite the possibility of a new global reserve currency.

The forum drew a group of leading figures from business, government and academic circles to discuss Asia's role in helping to overcome the current crisis and shaping a future paradigm for the global system.

"This is not just an economic crisis but also a social crisis," Rajat Nag, managing director-general of the Asian Development Bank in Manila, told participants of the convention, referring to the worsened social conditions stemming from a rise in unemployment. "Asia has to start on a different paradigm," the executive stressed.

He noted that the Asian economy, which enjoyed 9.5 percent growth in 2007, saw the rate fall to 6.3 percent in 2008, while this year it has spiraled further to 3.4 percent. Citing projections of 6 percent growth in 2010 for Asia, excluding Japan, Nag underlined the challenging times ahead.

About 400 of Asia's leading decision-makers from over 35 countries representing various public and private sectors from over 35 countries have gathered for this regional meeting themed "Implications of the Global Economic Crisis for East Asia."

The WEF said the event is designed to facilitate steps toward greater international and regional cooperation. They hope the discussions would inspire a clear direction for building a common agenda for reviving the global economy through new models of growth, technology and corporate practice.

According to the WEF, Asia's share of global GDP and its growing stake in international institutions point to the region's importance in restoring economic growth.

Reflecting the region's importance in rebalancing the international economic dynamics, participants stressed the greater leadership role of Asia's G20 members, as the United States focuses on strengthening trans-Pacific alliances.

Noting that the unprecedented economic crisis offers invaluable lessons, Peter Sands, chairman of the WEF on East Asia and group CEO of Standard Chartered Bank in the United Kingdom, cited the "huge need for coordination in regulation."

"I think it's very important for Asian countries to play a strong role in financial regulation architecture," Sands said, however, noting that proposals for global financial regulations still looked far-fetched.

The executive cited difficulties in striking a balance in tempering excesses of the market and continuing to use markets as a price-setting mechanism. But he also cautioned against too much regulation, stressing that more regulations was not necessary better.

A Postscript on the Question of Inflation and Deflation

First, thanks to the many readers who mailed in a link to the book by Adam Fergusson at the Mises Institute. It is a good read, and free is much more attractive a price than $1,000 which is the price for a hard copy in good condition on Amazon. I purchased my own copy some years ago at a bookstall in Brighton. The online version is available here.

As to the discussion on inflation and deflation, I feel the need to make it clear that that inflation / deflation is a "policy decision" in a fiat currency regime with nothing preordained. In other words, either outcome is possible within a wide range of gradation. Most outcomes in the real world follow a similar pattern, not black and white but many shades of gray.

But not all things are equally possible. "Life is a school of probability."

If the Fed came out tomorrow and raised short term rates to 22% we would see a stronger dollar and the beginnings of a monetary deflation.

This arbitrariness of a fiat currency is intellectually difficult for most people because their domestic money has a natural patina of 'confidence' and objective value to it.

It is an assumption, one of those shorthand beliefs that help us through day to day life without having to intellectualize and analyze every aspect of every decision. It comes from using that currency as a store of wealth and medium of exchange, almost every day of our life (presumably even an American can take a day off shopping occasionally) and assuming that it will hold its value in the short term.

So we tend to invent 'rules' for the creation of money that preclude 'arbitrariness' and help us maintain our assumption set against 'black swan' thinking. When an assumption begins to conflict with the underlying reality it can become a 'prejudice.'

It is this very arbitrariness that is the goal of the central bank and statists whose preference is aggressive financial engineering. The limitation on the Treasury/Fed in a fiat regime is ultimately the value of the dollar and the sovereign debt. While people accept it, they can print it. This is a soft limitation with much more latitude than a hard external standard.

Having added the important caveat of possibility, given that the US is an enormous net debtor, it would be suicidal for the monetary authority to choose deflation as the Japanese did for their own particular reasons. We may experience a brief period of deflation as did the US in the early 1930's in which the money supply actually contracts, but this is much less likely now because the Fed has no external standards with which to contend.

There is a technically possible, rather conspiratorial line of thought that suggests that the wealthy elite who control the central government would opt for deflation in order to enhance their personal cash assets, driving the rest of the US into a form of debt serfdom. The probable response from the public would be in the tradition of the storming of the Bastille or the Winter Palace.

Almost all money issuing entities will choose inflation if they have the option. Sometimes they lose control of the process, the confidence game, and fall into a more serious and pernicious inflation and even hyperinflation. But this is not 'the norm.'

Our own Fed is rather arrogant these days, fully confident they know how to stop inflation given the Volcker experience. This may cause them to fall into a serious policy error on the inflationary side. In many ways our fate is no longer in their hands, but in those of our creditors, such as the Chinese and the Saudis.

Paul Volcker gave the odds of inflation in the current crisis as 99% for, allowing only for a serious policy blunder against it.

I wanted to highlight the Weimar experience to debunk the 'output gap' and the 'bank lending' restraints on the inflationary outcome. Much of what we hear on the financial channels smacks of propaganda, the 'confidence game.'

Yes the Fed faces the headwinds of slack demand and a very low velocity of money, which the Austrians will assert doesn't DO anything, but is rather of the nature of a economic speedometer. Speedometers don't' DO anything either, but their output is certain to be of some interest to the driver and their passengers.

This is less of an issue than one might think, keeping in mind that monetary inflation is the creation of money supply in EXCESS OF DEMAND. As the velocity decreases, so does demand for money, similarly the expansion of credit. So any monetization of existing debt, or government obligations by the Fed, becomes more potent so to speak.

As for the need to create more debt, let us just say that the Fed and Treasury would have yeoman's work to monetize the debt obligations the US already has, which recent estimates put at north of 40 trillions. Even with inflation at their backs, the government will be pressing the default button, selectively but surely, in the coming years.

The most probable outcome is stagflation, perhaps quite serious IF the economy and financial system is not reformed. This could have the vestiges of a monetary deflation were we not a net importer and net debtor.

This is an important distinction between the US experience and that of Japan whose industrial policy is well known to be in the bureaucratic clutches of MITI and the various kereitsu.

Japan sought to stimulate the economy and avoid deflation while aggressively exporting the fruits of their domestic productivity and consumption to support their long standing industrial policy. One cannot have their natto and eat it too. These were conflicting objectives and resulted in a decades long stagnation. This was a policy blunder of the first order.

So, deflation is possible, but not probable. If people understand that, I will feel that I have done a good job in raising the level of understanding about monetary economics.

But isn't all this debate and too often name-calling amongst the bloggers a distraction from the real problem facing the average person, in the same sense as Paris Hilton, Survivor, big time wrestling, the McLaughlin Group and American Idol?

The banks must be restrained, and the economy brought back into balance, before there can be any sustained recovery.

The Harlot's Progress

Or should that be, The Progress of the Harlots?