What comes after agencies...

The Fed's hammer struck the anvil again yesterday after they announced the new asset managers for their agency purchasing program.

Now the question is: what's next? What asset class has been utterly gutted and left for dead? What asset class, if inflated, will help reduce the cost of funds and have an effective multiplier effect on the US economy? What asset class can most efficiently help stimulate local economic activity and actually create jobs rather than help pay down debt?

Well, Obama answered the question himself, really. From Dear Leader's change.gov site:

"Barack Obama and Joe Biden propose that the Federal Reserve and the Treasury work together to design a facility to provide a funding backstop to the state and municipal government debt market similar to the recently announced program for the commercial paper market. The Federal Reserve should determine whether it has sufficient legal authority to establish such a facility on its own -- if not, it should work with Treasury and the Congress to achieve this goal. This new facility should be designed to protect taxpayer resources while ensuring that state and local governments can continue to provide vital services to their residents."

http://change.gov/agenda/economy_agenda/

My advice: a speculative interest in some munis can't hurt. Trying to figure out which issues stand to benefit the most is beyond me, though.

Hank Paulson on capital flows...

Apropos the theme recently pursued here, I decided to sniff out some sources. This was the most insightful one I found:

"These concerns are misplaced. Like many countries accumulating large foreign exchange reserves, China is simply looking for profitable places to invest them over the long term. China invests its reserves in U.S. securities, including U.S. Treasuries, but there is little Chinese direct investment in the United States. This is largely because Chinese companies are just beginning to invest in their export markets and are unsure whether they are welcome. In any event, the United States would do well to encourage such investment from anywhere in the world -- including China -- because it represents a vote of confidence in the U.S. economy and it promotes growth, jobs, and productivity in the United States."

from

http://www.foreignaffairs.org/20080901faessay87504-p40/henry-m-paulson-jr/a-strategic-economic-engagement.html

Some are more equal than others...

After speaking with an older and wiser friend of mine, the "way out" has become very clear to me:

Foreign CB holders of treasuries NEED to be coerced to sell their treasuries. If there is a concerted effort to purge treasuries from the hands of foreign CB's, the Fed can't allow interest rates to rise.

This imperative is actually an opportunity to, you guess it, depreciate the US dollar.

The Fed will use its agency debt intervention model(recently validated) and create reserves to buy the entire curve, if necessary, to keep yields down. This gaming of the yield curve will create the inflation expectations necessary to move money again.

This isn't very insightful. What IS more fun is HOW the Fed will execute this, and more precisely, WHOM the Fed will execute in the process:

The US has two main creditors: China and Japan. Notice that in ALL the recent media, no effort has been spared to excoriate China or threaten their exports to the US. Curious, though, is the omission of any blame on Japan... What does this imply if the Fed offers to call treasuries held by the BoJ?

Japan gets to sell first! Why? Because Japan plays ball. Japan then gets fresh USD from the Fed which, acting as a tractable trade partner, Japan invests in the US (what else to do with it?). Japan, being our friend, gets to sell at the top of the bubble and gets the most valuable cash, before the Fed really starts intervening in the T-market and driving up inflation.

As a result, China and even shitty Russia will start selling off their treasuries for cash, and, if they're lucky, they'll buy the grisly portions leftover from the Japanese.

What have we done? We've completed the capital transfer from Japan to the US and entrenched inflation expectations. We have kept yields low using QE, thus forestalling a treasury market dislocation, and creating a bid for risked assets using repatriated foreign capital.

Expect a recovery in the housing market, too, once the 10 yr hits 1.x%: mortgages will become cheaper than rent. The US won't need to articulate "full faith and credit" for agency paper, either: the hunt for yield will solve that.

Longer-term, Japan can shift manufacturing capacity to the US, and the US can become the low-cost, low-carbon manufacturer of choice. Of course, this transition will prove painful, and overcapacity in commercial real estate and other sectors will continue to stress DI's.

edit:

For those who demand a source:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aycqRH9ENL5Q&refer=home

A brave new world of dwindling trade

The global bubble false economic growth based on vendor financed exports has popped.

Hints of this major change started to arrive lately from various sources, but it seems there is little effort to put them in a clear context. Asia's exports are falling across the spectrum:
http://www.ft.com/cms/s/0/e54ad35e-c544-11dd-b516-000077b07658.html

Taiwan’s exports last month fell by almost a quarter compared to a year ago, the sharpest drop since September 2001 and an indication of the accelerating downturn hitting export-oriented Asian economies.

The severe contraction in the island’s exports comes after South Korea reported last week that its November shipments dropped 18 per cent from the previous year.

Smaller mercantilist economies are also feeling the drop:

http://old.thejakartapost.com/detailbusiness.asp?fileid=20081222.(10&irec=9

As expected, the global economic recession has started to hit Indonesian exports. Exports in October dropped by 11 percent from September, reaching the lowest level since April this year. The year-on-year growth of non-oil exports was still a healthy 22 percent, but this is well below the 28 percent recorded in September.

And all indications point to continuing weakening of our exports in the coming months as the world economy worsens.

Exports to the United States and China fell in October, but it is only a matter of time until exports to other countries fall as well. According to the World Bank, world trade will shrink by 2.5 percent in 2009, the first contraction of its kind since 1982.

Japan is getting hit hard too, and Toyota is expecting the first annual loss in .... 71 years... :

http://news.bbc.co.uk/2/hi/business/7794888.stm

Japan's biggest carmaker Toyota has forecast its first annual loss in 71 years due to plummeting sales and a surge in the value of the yen.

The firm said it expected a loss of 150bn yen (£1.1bn) in yearly operating profits - from its core operations. [...]

Japan posted a trade deficit in November of $2.5bn (£1.7bn) as exports fell at a record rate. The rising yen saw export levels down 26.7% from a year earlier, the ministry of finance said.[...]

Honda last week cut its annual profit forecast by 67% and outlined a list of counter-measures such as putting off non-urgent investments to prop up its profitability[...]

Japanese exports fell sharply to all areas but those to the US were worst-hit, plunging 33.8% - also a record drop.

Shipments to the European Union were down 30.8% while those to China fell 24.5%, the biggest fall since 1995, said Reuters news agency.

Exports to the rest of Asia declined 26.7%.

Imports were also down - 14.4% overall - due in part to lower oil prices.

An interesting comparison between China and Germany. with respect to their trade surpluses. comes for one of the latest entries in "China Financial Markets" blog:
http://mpettis.com/2008/12/germany-is-fighting-with-europe-can-china-be-far-behind/

In light of the latest news.concerning the investment practices of Bernie Madoff, I think it's useful to identify another wide practiced flavor of Ponzi scheme: the export growth engine based on currency manipulation.

Things are quite simple. A country decides to subsidize exports by artificially depressing wages (through an artificially lowered currency) and the subsidies are provided by Foreign Direct Investment (FDI) inflows.

In any Ponzi scheme, the new investment inflows have to be larger than the dividends payed to the current investors, otherwise the whole scheme collapses at the first wave of withdrawals. Exactly the same happens with a currency manipulation scheme: the net capital flows (mostly FDI) have to be larger than the sum of subsidies for the export sector and the net trade surplus that has to be sterilized in order to maintain a currency peg. A clear sign that such a currency manipulation Ponzi scheme is "profitable" and able to attract new investors, is the continuous increase in foreign reserves (denominated in the pegged currency) which happens at a higher rate of increase than the export surplus.

The currency manipulation scheme has abnormal unhealthy effects on a national economy:
-artificially depresses internal consumption
-creates domestic asset bubble
-generates an oversized and unprofitable economic sector dependent on exports.

As in any Ponzi scheme, the moment the new investment inflows (FDI inflows, or currency speculative "hot money" capital, in China's case) becomes smaller that the amount required to pay the dividends of existing investors (profit margins of Chinese companies are dwindling) the whole scheme unravels.

This is why I'm surprised about a piece of news receiving very little attention from the commentators of global economic trends:

http://uk.reuters.com/article/marketsNewsUS/idUKPEK29524820081222

BEIJING, Dec 22 (Reuters) - China's foreign exchange reserves, the world's largest stockpile, shrank in October to less than $1.89 trillion, their first monthly fall since December 2003, a source familiar with the situation said on Monday.
[...]
The reserves stood at $1.906 trillion at the end of September, the last date for which official figures have been reported, meaning they fell by at least $16 billion during October.
The source, who wished not to be identified, declined to say whether the reserves continued to fall in November. The only other month since the start of 2000 during which the reserves fell was Dec. 2003.
[...]
China's trade surplus hit consecutive record highs in October and November, of $35.2 billion and $40.1 billion respectively, as the slowdown in import growth outpaced that of exports.
[...]
A fall in the reserves would mark a drastic contrast to their rapid accumulation over the past few years, as the People's Bank of China, in an effort to keep the yuan stable, has bought up many of the dollars coming into the country through the large trade surplus and inflows of foreign investment. The reserves rose by $280.6 billion in the first half of 2008 to $1.809 trillion. For all of 2007, they rose by $461.9 billion, compared with increases of $247.3 billion in 2006, $209 billion in 2005 and $207 billion in 2004.
In the third quarter of this year, the last period for which figures are available, they increased by less than the sum of the country's trade surplus and foreign direct investment inflows during that period -- a very rough benchmark for gauging whether the country has witnessed capital inflows or outflows.

Suddenly, another piece of news that got little attention, starts making a lot of sense. Back in September, there was a small notice about People’s Bank of China, looking embarrassed for a modest IMF loan (Main Bank of China Is in Need of Capital)

Maybe China got already its Madoff moment in October...

Considering I'm a rank amateur...

My prior post was shockingly prescient!

From the FT:

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

---

This is an effort, by the Fed, to close spreads in the consumer debt markets. I think it actually MIGHT work reasonably well, and here's why:

The Fed knows hedge funds better than hedge funds know themselves. They know that funds are desperate for yield, and that Wall St. continues to desiccate under its current iron ration of fees. Hence, the Fed merely needs to provide cheap capital to funds to get at least SOME yield, and hopefully the risked-return will prove compelling enough (and trust me, the Fed has already done the math to know it is) for private capital to take risk again.

Couple THIS with some federal guarantees and a massive economic stimulus plan, and I think you may have a value proposition.

Although, we should recall that the Fed has found a greater fool: note they are the custodians of the noxious "Maiden Lane" portfolios. This is the Fed intending to discretely de-risk their balance sheet, and I suspect at a high profit, too.

One should NOT confuse this, though, with any recovery of the retail madness exhibited these past few years. Buying a distressed debt for yield does not imply a return to boon times: it merely implies a less atrocious expectation than currently priced into the security.

However, I believe the Fed knows that there still exists some overcapacity in the economy, especially in commercial real estate, and so do not expect a uniform response to distress.

It should be noted that this effort is a response to the "broken" yield curve, i.e. one can no longer borrow short and lend long profitably.

Das Kapital

In light of the recent Madoff expose, I think we need to meditate a bit on why hedge funds and large pools of unregulated capital exist in the US in the first place.

First, let us consider the present situation:

If Bernanke wanted to close spreads on AAA CMBX, he could go out and buy a hojillion dollars worth of AAA CMBX, consuming massive amount of either Treasury capital or far, far more dear(to those that matter) Fed capital.

Or...

Bernanke could allow a risk-averse atmosphere environment to persist over the capital markets, leaving these eager Kapitalists bereft of safe returns for their hapless investors. Bernanke, of course, obliges das Kapitalists: he transmits the intention to buy up AAA CMBX by the truckload. Let us turn back to Sun Tzu:

"Do not thwart an enemy retreating home. If you surround the enemy, leave an outlet; do not press an enemy that is cornered. These are the principles of warfare."

Bernanke is now providing an outlet for private capital: surrounded on all fronts by baleful economic prospects, there is little hope for returns of capital, let alone returns on capital. However, instead of letting capital sharpen its spears and form an impenetrable, deflationary phalanx, Bernanke gives capital an outlet.

Anvil, meet hammer, and be gentle to the skittish private capital in between.

edit:

I omitted foreign central bank capital: clearly foreign CB's are pouring money into a t-bill hole, which the Fed exploits to finance various activities. Will foreign CB fear soon turn to greed? Will foreign CB's be coaxed into buying agencies??? It is posssible...

Anvil, meet hammer

The Fed will soon lower the FFR to 25bps.

The implication of this is that the reserves they currently hold for DI's will soon pay almost 0% interest.

This is the anvil.

The hammer will be Obama's risk-free returns due to his "stimulus" plan: soon, money will flow again to various sectors: materials, energy, civil EPC's, and perhaps defense contractors if our dual wars get more sporty.

The question is, will more money flow to these "chosen" industries, or will the credit markets remain so disfunctional that only outcome is a dollar decline as a result of the credit risk imposed upon the treasury/fed balance sheets'. Perhaps we'll get some horrible bastard that has stagflation as a mother and deflation as a father, with credit spreads crippling the credit markets that don't have explicit government backing, and each successive new instance of government backing only further over-reaching the NPV of that issue of debt known as the USD.

CDS', Eurodollars, and deficits...

What I find very amusing about the credit crisis is how one-sided the media's attention is: everyone focuses on the AIG's, Citi's etc blowing up on CDS' bets gone wrong.

Since every CDS or CDO is, ultimately, bilateral(thanks to TriOptima), we have the recall that for every "blow-up" there is a smart speculator/insider/brahmin popping another bottle of his own vineyard's champagne(proper oligarchs make their own brew).

So why isn't anyone asking the obvious question: why not defer or default on the CDS? What is compelling the counterparty to pay?

There are several legitimate reasons to this, one of which is that CDS' were used by many firms to hedge against default risk, and a collapse of this default risk management would only induce FURTHER failures, since then MORE capital would be needed in reserve at banks, and we'd have a banking holocaust(that means people in America starving, btw).

Because of the systemic risk inherent in abjuring CDS', we have to live with them. Hence, the smart money can rest assured that they will get paid.

Now, let's compound this a bit: Eurodollars. Recall that in all transactions involving dollars abroad between banks and companies, both foreign and domestic, dollar reserves NEVER leave the US: they are only credited/debited from various ledgers abroad. Unless you withdraw the cash physically(and at great opportunity cost!), the reserves remain with the Fed.

Now, because of how the Fed keeps reserves at home, we can understand WHY China has been compelled to build massive reserves of its OWN. Lately, we've seen massive deleveraging crises abroad, with a shortage of dollars.

It gets even better...

The US suffers a systemic problem: a massive trade deficit. Were the US to engender an unjustified capacity expansion abroad from her trade partners, a "credit crisis" would in fact strangle the foreign banks far more severly than the domestic banks, and as a result, US banks could, perhaps, and here I speculate, gain market share or concessions that otherwise would not be possible.

In addition, a collapse of a credit bubble and a loss of access to dollars would force exporters to consume their own dollar reserves, UNLESS they decided to increase domestic consumption.

Strategically, i.e. long-term, the CDS/CDO bubble-burst, if managed well, could actually be the savior of the US. Yes, it is harsh medicine, but in fact, it may prove to be the shock that killed the US trade deficit.

Perhaps those who orchestrated this crisis, if one were to take a "tinfoil" look at the issue, are really far more patriotic than anyone else can fathom...

When did it go wrong?

The answer to that question should be obvious: long time ago ... right at the beginning.

Here is a extraordinary and foretelling Charlie Rose interview from 1994, with Sir James Goldsmith and Laura Tyson (Chair of the US President's Council of Economic Advisers during the Clinton Administration).

The interview is not only prophetic, but presents the voice of reason and truth (Sir James Goldsmith) dismantling the unnatural globalization illusion, perpetrated with the sole obsession of increasing corporate profits by any means (Laura Tyson). It is very difficult for me to figure out if, at that time, when she was saying that in ten years the GATT globalization would result in huge American exports on the Chinese markets, Laura Tyson was naive, had no clue what she was taking about or she lied on camera with a straight face.



The rest is history.... The Uruguay Round (against which Sir James Goldsmith tried to warn us) was adopted in December 1994. Moreover, on January 1, 1995, GATT itself (which was just a framework for establishing rules of international trade) was transformed into a stand alone, independent international organization: the WTO (aka, the Trade Pipe-Dream Golem)

Quick self-test/experiment: please state, of the top of your head, the five major stumbling blocks of the current WTO Doha Round. If unable to do that, you are free ("free" like in "free trade") to find out what are those five stumbling blocks by searching in Wikipedia. If you are still unable to find that information on Wikipedia, you are free to search the WTO site. If, after reading, for an hour or so, the documents on the WTO site, you are still unable to find out what are the five real/main stumbling blocks of the Doha Round, then ...
Congratulations ! Now you understand what WTO really is.

Some 20 years later, the results are obvious. No need to comment or to present any charts. Just direct your bowser to the business section of Google or Yahoo.

So far, the "globalization" which has been twisted to maximize corporate profits, has produced only disasters, both in the West and in the Third World. The disasters in the so called Emerging Markets, are just around the corner. Paradoxically, this distorted corporate vision of globalization proved to be disastrous even for those players who wrote its rules and were supposed to be its main beneficiaries... I'm talking about corporations themselves.

Today, GM, which has been a spearhead for outsorcing manufacturing to China, needs a bailout by the American taxpayer (actually the bailout is granted by the Congress, with taxpayer money). There are no more investment banks today, and their supposed modern replacements (hedgefunds) don't look too healthy either, in the Age of Deleverage and Redemptions.

In the video clip above, at about 38:10 , Sir James Goldsmith says something very important:

"[...]we are destroying the stability of our societies because we are worshiping the wrong god: Economic Index.[...] The economy, like everything else, is a tool which should be submitted to the fundamental requirements of the society.

What amazes me is that almost nobody goes to the core of the problem, identifying what the "globalization" we have had and known for the past 20 years really is: an unsustainable productivity/profitabity fraud.

In a comment, here on this blog, quadi said:

As a matter of fact, one can directly map the repeal of glass-steagal with the decline of net interest margins: banks weren't making enough money doing the usual C&I lending and vanilla underwriting: commercial paper had taken a chunk out of their wallets! Since G-S was repealed, earnings soared (until recently).

The securitization has been nothing else than a profit reporting scam, cloaked in deregulation, veiled in irresponsible leverage and hidden in risk representation fraud.

The same is with the whole corporate vision of globalization:

• There was no global increase in farming productivity. The poor farmers in less developed countries are not obtaining higher yields. They are just unable to compete anymore with cheap food imports from developed countries. The globalization in agriculture has resulted in Africa in a class/cast of destitute people completely dependent on international food aid, in slums and favellas growing at the outskirts of developing-world cities or even in peasant uprisings (as in Chiapas). Moreover, farmers in developed countries have no real benefits, being more and more swamped in debt, while the big agroindustrial business, which was supposed to be the main beneficiary of the "globalization" in agriculture .... now, after the commodes bubble, is in free fall.
• There was no real global increase in manufacturing productivity. Most of the manufacturing outsourced to developing countries has not become more productive after relocation. By the contrary, but the productivity decrease has been artificially compensated by lower wages and local government subsidies, obtained usually through currency manipulation schemes of various Ponzi flavors.
  
• There was no real global increase in trade profitability. For that I have just three words: Dry Baltic Index. If I pretend I have money to spend and you pretend you can make the products cheaper, that doesn't bring a real benefit from commerce. That is just an Enron-style trade fantasy.
• There was no significant or real increase in the profitability of services in the developed world: Indian call centers and landscaping by illegal immigrants.
• There was no real increase in the profitability of the financial sector on the global level and not even in the developed world (please, just don't get me started here).

What we were sold as "globalization" has been nothing else than a Dark Age for Productivity and Profitability, in which corporate profits have been extracted in an unsustainable and wasteful drive. This will end now, one way or the other. The current model is not even good for corporations anymore.

The big question is: will the current "globalist vision" be replaced by a sound, common-sense and non-distorted economic model, or will we be fooled again into another twisted and disastrous pipe-dream sold to us by incompetent corporate leaders?

Banque d'Amerique

Most have probably heard the news out of Chicago regarding BoA's "obligation" to lend to an insolvent client. The reaction of the government was to ban BoA from lending in the state of Illinois until they opened a new LoC for the insolvent factory.

I fear we have just cast a new die.

In a deflationary environment, the cost of funds SURGES as does credit risk, forcing low IRR opportunities to defer financing. Unfortunately, much of the American economy was built with an 8 or even 6% discount rate in mind, and so a collapsed commercial paper market coupled with cost of funds for banks implies extortionate interest rates from banks(to have some positive net interest margin) that are willing to lend at all.

Not only have the commercial paper and C&I lending markets collapsed(see BIS link at bottom of the post for data), but our uber-cheap financing via securitization remains utterly gutted.

We have a serious problem here: we are one bad day away from another collapse in the money markets, although central banks around the world have probably set up swap lines in case of collapse, and many CDS contracts are being renegotiated to reduce gross risk.

That said, the trend is clear: cost of funds up, banks have to pass along the cost, borrowers are insolvent, cost of funds goes higher, etc etc. There's only one way to end this positive feedback loop: "fix" the cost of funds by nationalizing the banks.

Mitterand nationalized the banks in France in 1980 to foster lending to unprofitable and insolvent enterprises, since, without the full faith & credit of the government, lending to a factory which has marginal operating margins and negative earnings is impossible.

There is now an expectation that the banks, having been bailed out, have an obligation to lend to marginal or compromised borrowers. This attitude, now officially endorsed by the government, can, if unchecked, lead to the ultimate nationalization of the largest banks in the US.

http://www.bis.org/publ/qtrpdf/r_qt0812b.pdf

Falling down

The old world order is falling apart fast and the particular mechanism of collapse should give a pretty good indication of the new world order that is supposed to replace it. I'm not talking here about the famous New World Order, that is present in the globalist mantras of top level politicians or in the more or less tinfoil hat culture of conspiracy theorists.

The truth maybe somewhere in the middle and may have nothing to do with it's perception at the two ends of the spectrum (high level government bureaucrats vs tinfoil hat conspiracy buffs). I believe Globalization is bound to happen anyway being, regardless the push from top levels of government or the opposition from more or less organized groups of concerned individuals. It's a natural process determined by:

• the information revolution (global interconnectivity in various forms);
• the strengthening of the state organizational/control structures and their increase role on economic activity;
• and, last but not least, the inexorable drive for productivity that is the engine determining the evolution of human civilization.

I believe the worst fears of the conspiracy theorists are true: "Resistance is futile!" One cannot oppose a natural process of transformation and the anti-globalist stance of some anti-NWO activists is as futile and illogic as oppose the grass growing in spring time. Of course, a determined anti "green-spring" person can scorch his lawn with chemicals or fire, or cover his lawn with asphalt or concrete, but that would solve nothing, because the grass will keep growing green in spring on other lawns and fields and everybody knows that eventually concrete and asphalt are bound to develop cracks which are bound to be the places where green grass will appear.

What I found more astonishing is that few people realize that in fact both sides of the New World Order (NWO) debate are actually working against the natural process of globalization.

The so called NWO elites, are trying to influence the process in order to preserve the same privileges they enjoyed in the old moribund world in a new, carefully managed, but completely artificial and unviable construct. An interesting example of this mindset can be found in this Foreign Affairs paper:
http://www.foreignaffairs.org/20070501faessay86308-p50/benn-steil/the-end-of-national-currency.html

Well, ... wouldn't it be nice if the same private banking interests that control and have been controlling the Central Bank of the United States of America (the Federal Reserve System) would also control the only three global currencies of the New World Order? Wouldn't be nice if those three global currencies would be controlled by a private issue, gold-standard uber-currency for which the same private banking interests would have a (global) government enforced issuing monopoly?
It would be nice for them to continue to enjoy the benefits of monopoly of usury and fractional reserve lending on a global scale, but that simply ain't gonna happen.

Such a move is reminiscent of the efforts made by big feudal landlords to take control of the medieval cities, and transform them into urban manors at the time when the feudal world order was in it's final stages of decay.

On the other side of the spectrum, the anti-NWO activists oppose the change on the grounds of fear for further exacerbation of the wrongs of the present day societies. Here is a good example of this mind set:

Their reason for opposing globalization is the unfounded fear that it will lead to a super-state structure where statist control over individual would be complete and crushing, without realizing that statism has no place in the true new world order, mainly because it would be bad for business and a productivity drag, a true relic of the old world order. The world will not and cannot become a single global farm run by on single farmer. Farming makes no sense if a farmer cannot find somebody to buy his products

The new world order would not be worse than the old world order that they actually oppose. It will certainly be different. The question is if it would be better than what we have now. That it is highly debatable. Was slavery better than the tribal-communal system? Was feudalism better than slavery? Is capitalism better than feudalism? The answer to these question is not trivial.

After this detour through the New World Order debate, let's return to the current economic evolution that are characteristic to the dusk of the old world order.

We are witnessing now the collapse of global trade/development imbalance kings. This is beginning to be obvious by looking to the latest developments that affect the surplus kings. There are two distinct categories of surplus kings:

A) Mercantilist/manufacturing-export countries. The best example is China due to a blatant currency manipulation policy that creates an artificial competitiveness of the Chinese exports and that sometimes creates the image that China is the only one in this category, forgetting about South Korea, Japan, Taiwan, and other smaller actors such as Singapore, Vietnam etc which are dependent on exports.

In an excellent piece in the RGE monitor, the notion of the huge advantage offered by China's foreign reserves is put in an interesting perspective:

Where did all the money disappear? – Liquid Fantasies

Reserve Illusions

In recent years, there has been speculation about the amount of capital or liquidity available for investment globally. The substantial reserves of central banks and, their acolytes, sovereign wealth funds were frequently cited in support of the case for a large pool of "unleveraged" liquidity, that is "real" money. In reality, the available pool of money may be more modest than assumed.

For example, China has close to $2 trillion in foreign exchange reserves. The reserves arise from dollars received from exports and foreign investment into China that are exchanged into Renminbi. The central bank generates Renminbi by printing money or borrowing through issuing bonds in the domestic market. On China’s "balance sheet", the reserves are essentially "leveraged" using domestic "liabilities".

In order to avoid increases in the value of the Renminbi that would affect the competitive position of its exporters, China undertakes " currency sterilisation" operations where it issues bonds to mop up the excess liquidity. China incurs costs – effectively a subsidy to its exporters - of around $60 billion per annum (the difference between the rate it pays on its Renminbi debt and the investment income on it reserves).

The dollars acquired are invested in foreign currency assets, around 60% in dollar denominated US Treasury bonds, GSE paper (such as Freddie and Fannie Mae debt) and other high quality securities. China is exposed to price changes in these investments and currency risk because of the mismatch between foreign currency assets funded with local currency debt.[...]

It is also not easy to tap this liquidity pool. Given the size of the portfolios, it is difficult for large investors like China to rapidly mobilise a large portion of these funds by liquidating their investments and converting them into the home currency without substantial losses. This means that this money may not, in reality, be available, at least at short notice.

If the dollar assets lose value or cannot be accessed then China must still service its liabilities. It can print money but will suffer the economic consequences including inflation and higher funding costs.[...]

There is an apocryphal story about a disgraced rock star who ended up in bankruptcy court. When asked what happened to his fortune of several million dollars, he responded: "Some went in drugs and alcohol, I gambled some of it away, some went on women and the rest I probably wasted!" Financial markets have "wasted" a staggering amount of money that ironically probably did not exist in the first place.

Everybody awaits with anxiety what will be China's next move. I believe the best indicator of what is going to happen in China next is the faith of less significant currency manipulators which have an integrated manufacturing chain with mainland China, such as Taiwan:

Taiwanese exports fall sharpest since 2001

Taiwan’s exports last month fell by almost a quarter compared to a year ago, the sharpest drop since September 2001 and an indication of the accelerating downturn hitting export-oriented Asian economies.

The severe contraction in the island’s exports comes after South Korea reported last week that its November shipments dropped 18 per cent from the previous year.

China is expected to release its November data on Tuesday. While its exports have held up much more strongly than most economists had expected, increasing by 19 per cent in October, a Chinese newspaper reported at the weekend that preliminary figures showed exports last month declined from 2007. This would set off alarm bells in Beijing if it proved to be a true picture of export performance. [...]

Exports have fallen for three consecutive months, from $20.8bn (€16bn, £14bn) in October to $16.8bn last month. The 23.3 per cent year-on-year decline in November almost tripled the pace of October’s fall.

The sharpest drop in exports was to China and Hong Kong, together Taiwan’s biggest market, which shrank by 38 per cent. Electronic products and components led the decline, suggesting a likely drop in China’s own exports of electrical goods. Taiwanese components are often sent to China for assembly into finished products for re-export.

So far the only clear answer of the Chinese authorities is the ramping up of state propaganda in order to convince the Chinese citizens that there would be a positive outcome of this crisis.


B) Resource exporting countries. These countries are also interested in maintaining an overt or undeclared dollar peg, but in the direct opposite direction of the mercantilist players. In order to obtain the maximum profits from the export of raw materials (energy, minerals and agricultural raw materials) the countries in this category are interested in maintaining overvalued national currencies with respect to the medium of international monetary exchange (US dollar or Euro).

The typical exponents in this set are Russia and OPEC countries. Russia's status of reserve king is collapsing fast:

Russia's Losing Game

Russia's costly currency defense just got costlier.

Standard and Poor's lowered its rating for Russia's foreign currency sovereign rating, valuing its long-term debt to Triple-B from Triple-B Plus, and gave the country a negative outlook. It said the move--the first downgrade for Russia in nearly a decade--reflected the "risks associated with the sharp reversal in external portfolio and other investment flows, which has increased the cost and difficulty of meeting the country's external financing needs."[...]

Fearful of the impact that a devaluation of the currency would have on Russian companies, Russia's central bank has been spending billions on propping up the currency, allowing it to de-valuate gradually by tricking in a series of 1.0% devaluations. (See "Russia's Ruble Defense Slips On Oil.")

However, that defense has come at a price. Since August, Russia's international reserves have declined from $583.0 billion to $455.0 billion, or 74.0% of its external financing needs for next year. The support for the currency has failed to prevent the Russian public from moving their money into international currency, such as dollars, and putting further pressure on the currency.

The situation got so bad, that, recently, the Russian government has begun to use the old soviet arsenal of controlling imports, and especially food imports:

U.S. Pork Blocked for Failing To Meet Import Regulations

CHICAGO -- Russia has halted pork shipments from six U.S. sources, including a Smithfield Foods meat-processing plant, saying their products failed to comply with import requirements, according to the U.S. Department of Agriculture.

Russia, the fourth-largest buyer of U.S. pork, will not accept shipments from the plants after Dec. 15, the USDA's Food Safety and Inspection Service said in a Dec. 2 statement. The suspensions follow visits by Russian government officials in October as part of an annual audit, said Amanda Eamich, an FSIS spokeswoman.
[...]
Last month, Russia said it planned to cut pork imports by 200,000 tons next year in an effort to boost domestic production. The country imported 162.2 million kilograms of U.S. pork this year through September, more than twice as much as a year earlier, USDA data show.

From the OPEC side somehow similar news. Reserves are used to prop government spending on the background of a drop in oil price. At least some OPEC countries are expected to begin running deficits:

Good bye, petrodollars …
[...]
Formally, the Saudis expected to spend 410 billion Saudi Riyal — or $109 billion — in 2008 (more here). That incidentally is less that the 443 SAR ($118 billion) the Saudis actually spent in 2007, as actual spending ran a bit over the 380 billion SAR ($101b) in the formal budget. I don’t believe for a second that the Saudis are really going to spend less in 2008 than in 2007. Rachel Ziemba — who watches the local press closely for RGE — thinks the Saudis actual 2008 spending will come in around 532b SAR ($142 billion).
[...]
Moreover, Saudi spending has been growing at something like 15% a year, if not a bit more — remember, the Saudis had to increase their budget substantially just to assure that salaries kept up with inflation. And the Saudis probably aren’t going to scale back spending immediately. They don’t want the Saudi economy to come to a sudden halt. Projecting existing spending patterns out, I wouldn’t be surprised if the Saudis spent 585 SAR ($156) in 2009 — a spending level that produces a crude estimated break-even price of the Saudi blend of around $57. For sweet light, that works out to an oil price of $60 or more ..

Looking at these bits of news an interesting question arises: if countries like China, Korea, Taiwan, Russia, Saudi Arabia (and the, whole plethora of surplus kings) are expected to start running deficits, then who will have to run the corresponding financial and trade surpluses in the next cycle of transformation?

HOLY CRAP!

THEY( the cool-club of DI's) are BRILLIANT! Using .gov's cheap cost of capital and a bit of fraud to refi on the cheap! If true, I must amend my thesis: the Fed is merely jawboning to enable the brokerages to commit fraud, but of course for the "greater good".

See below(from tickerforum):

by Susanne Trimbath 11/26/2008

The “credit crisis” is largely a Wall Street disaster of its own making. From the sale of stocks and bonds that are never delivered, to the purchase of default insurance worth more than the buyer’s assets, we no longer have investment strategies, but rather investment schemes. As long as everyone was making money, no one complained. But like any Ponzi Scheme, eventually the pyramid begins to collapse.

For the last couple of months trillions of dollars worth of US Treasury bonds have been sold but undelivered. Trades that go unsettled have become an event so common that the industry has an acronym for it: FTD, or fail to deliver.

What’s the result? For the federal government, it’s an unnecessarily high rate of interest to finance the national debt. For states, it’s a massive loss of potential tax revenue. And for the bond buyers, brokerage houses, and banks, it’s yet another crash-and-burn to come.

First, a primer: The Federal Government issues as many bonds as Congress authorizes (the total value is an amount that basically covers the national debt). Many are purchased by brokers and investors, who then re-sell them in “secondary” trades.

The way the system is supposed to work is that the broker takes your bond order today and tomorrow takes the cash from your account and ‘delivers’ the bonds to you. The bonds remain in your broker’s name (or the name of a central depository, if he uses one). If there is interest, the Treasury pays the interest to your broker and he credits your account for the amount.

What is happening today that strays from this model? Because the financial regulators do not require that the actual bonds be delivered to the buyer, your broker credits you with an electronic IOU for them, and, eventually, with the interest payments as well. But the so-called “bonds” that you receive as an electronic IOU, called an “entitlement”, are phantoms: there aren’t any bonds delivered by your broker to you, or by the government to your broker, or by anyone.

The significant result of the IOU system is that brokers are able to sell many more bonds than the Congress has authorized. The transactions are called ‘settlement failures’ or ‘failed to deliver’ events, since the broker reported bond purchases beyond what the sellers delivered.

Since all of this happens after the US Treasury originally issues the bonds, the broker’s bookkeeping is separate from US Treasury records. That means there is no limit on the number of IOUs the broker can hand out...and there are usually more IOUs in circulation than there are bonds.

The ramifications are far reaching for the national budget. Wall Street, by selling bonds that it cannot deliver to the buyer — in selling more bonds than the government has issued — has been allowed to artificially inflate supply, thereby forcing bond prices down.

These undelivered Treasuries represent unfulfilled demand by investors willing to lend money to the US government. That money — the payment for the bonds — has been intercepted by the selling broker-dealers. The subsequently artificially low bond prices are forcing the US government to pay a higher rate of interest than it should in order to finance the national debt.


The market for US Treasury bonds has been in serious disarray since the days immediately following September 11, 2001. Despite reports, reviews, examinations, committee meetings, speeches, and advisory groups formed by the US Treasury, the Federal Reserve, and broker-dealer associations, massive failures to deliver recur and persist.

Somehow, government, regulators and industry specialists alike believe that it’s OK to sell more bonds than the government has issued. It shouldn’t take a PhD-trained economist to tell you that prices are set where supply equals demand. If a dealer can sell an infinite supply of bonds (or stocks or anything else for that matter), then the price is, technically-speaking, baloney. And the resulting field of play cannot be called a “market”.

If regulators and the central clearing corporation would only enforce delivery of Treasury bonds for trade settlement — payment — at something approaching the promised, stated, contracted and agreed upon T+1 (one day after the trade), there would be an immediate surge in the price of US Treasury securities.

As the prices of bonds rise, the yield falls. This falling yield then translates into a lower interest rate that the US government has to pay in order to borrow the money it needs to fund the budget deficit and to refinance the existing national debt.

This week’s drop in the yield on US Treasuries was accompanied by a spike in bond prices. The data won’t be released until next week, but you can expect to see that a precipitous drop in fails-to-deliver occurred at the same time. Don’t get your hopes up, though. One look at the chart above will tell you that the good news won’t last until real changes are made to the system.

As a bonus insult to government, consider the $270 million in lost tax revenues to the states. This is because investors (unknowingly) report the phony interest payments made to them by their brokers as tax exempt; interest earned on US Treasury bonds is not taxed by the states.

For the bond buyer, the situation poses other problems and risks. As an ordinary investor, you’re not notified that the bonds were not delivered to you or to your broker. Of course, your broker knows, but doesn’t share the information with you because he or she plans to make good on the trade only at some point in the future when you order the bond to be sold.

The electronic IOU you received can only be redeemed at your brokerage house, and no one knows what will happen if it goes under, although I suspect we’ll find out in the coming quarters as more financial institutions get into deeper trouble.

You’re probably not aware that, in order to cash in that IOU when you’re ready to sell, you depend not on the full faith and credit of the US government, but on your broker being in business next month (or next year) to make good on the trade. In other words, you’re taking Lehman Brothers risk, and receiving only US Government risk-free rates of return on your investment.

Your broker, meanwhile, enjoys the advantages of commission charges for the trade, maybe an account maintenance fee and – more importantly – they use your money for other purposes. Wall Street is not sharing any of this extra investment income with you. In my analysis of Trade Settlement Failures in US Bond Markets, I calculate this “loss of use of funds” to investors at $7 billion per year, conservatively.

Despite this, rather than require that sold bonds be delivered to the buyer, the Treasury Market Practices Group at the Federal Reserve Bank of New York merely points out FTDs as “examples of strategies to avoid.”

Now for the really bad news. The tolerance for unsettled trades and complete disregard for the effect of supply on setting true-market prices is also responsible for the "sub-prime crisis," which everyone seems to agree on as the root of the current global financial turmoil. You see, there are more credit default swaps — CDS — traded on mortgage bonds than there are mortgage bonds outstanding.

A CDS is like insurance. The buyer of a mortgage bond pays a premium, and if the mortgage defaults then the CDS seller makes them whole. CDS are sold in multiples of the underlying assets.

A conservative estimate is that $9 worth of CDS “insurance” has been sold for every $1 in mortgage bond. Therefore, someone stands to gain $9 if the homeowner defaults, but only $1 if they pay. The economic incentives favor foreclosure, not mortgage work-outs or Main Street bailouts.

In the same process that is multiplying Treasury bonds, sellers are permitted to “deliver” CDS that were not created to correspond with actual mortgages; call them “phantom CDS”. According to October 31, 2008 data on CDS registered in the Depository Trust & Clearing Corporation’s (DTCC) Trade Information Warehouse, about $7 billion more CDS insurance was bought on Countrywide Home Loans than Countrywide sold in mortgage bonds. That provides a terrific incentive to foreclose on mortgages.

Countrywide is the game’s major player: The gross CDS contracts on Countrywide of $84.6 billion are equivalent to 82% of the $103.3 billion CDS sold on all mortgage-backed securities (including commercial mortgages) and 90% of the total $94.4 billion CDS registered at DTCC sold on residential mortgage-backed securities.

General Electric Capital Corporation is the fifth largest single name entity with more CDS bought on it than it what it has sold; someone is in a position to benefit by $12 billion more from consumer default than from helping consumers to pay off their debt. Only Italy, Spain, Brazil and Deutsche Bank have more phantom CDS than GECC, according to the DTCC’s data.

The US auto manufacturers also have net phantom CDS in circulation: $11 billion for Ford, $4 billion for General Motors, and $3.3 billion for DaimlerChrysler (plus an additional $3.5 billion at the parent Daimler). Of course, these numbers change from week to week and only represent CDS voluntarily registered with the DTCC, so the real numbers could be much greater.

Who stands to gain? There is no transparency for CDS trades, which means that we don’t know who these buyers are. But in order to get paid on these CDS, the buyer must be a DTCC Participant… and that brings us to Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley – all Participants at DTCC and instrumental in designing and developing CDS trading around the world.

By the way, these firms are also in the group that reports FTDs in US Treasuries; the top four firms represent more than 50% of all trades. You can do the math from there.

The US government and regulators are in the best position to end these fiascos, turn us away from casino capitalism, and return our financial industry back into a market. It won’t require any new rules, laws or regulations to fix the situation. If someone takes your money and doesn’t give you what you bought, that’s just plain stealin’, and we already have laws against that.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

The Yield Curve and the Art of War

(NB: My theories are just theories and totally unfalsifiable)

The Fed(and the ROW, too) is at war with deflation. Hence, expect them to use the most efficient method to combat it:

From Tsun-Tzu's, "Art of War"

4. When an invading force crosses a river in its onward march, do not advance to meet it in mid-stream. It will be best to let half the army get across, and then deliver your attack.

How is this relevant to the yield curve?

When the Fed announces it's going to buy the long-end of the curve to stimulate consumption and ameliorate the credit markets, it's important to realize that this is, in fact, a ruse.

The markets want to punish the long-end of the curve: everyone and his brother KNOWS that the 10 year shouldn't yield 2.x%: it makes no sense, right?!

Until this past week, deflationary expectations did not suffice to force the long end down: the Fed decided to intervene, and it did. The expectation that the Fed may, at a moments notice, crush the long end of the curve should discipline those seeking to punish the US gov for its improvident ways.

And so, here we are, astride the great river between deflation and default: the Fed attacks right when the long-end shorts think they have successfully crossed, and where do they go? They run away, in a panic, their capital lost and their confidence shattered. The government's and consumer's ability to roll their debt is preserved, and there is much rejoicing.

It gets even better: the Fed is defining another, "safe haven". Previously, it was short-term treasury debt. Now, they're "protecting" the long-end. The salutary benefits for AD are obvious, and hopefully the "herd" will pile into the long-end upon further negative news regarding AD, thereby ultimately helping attenuate FURTHER collapse of AD, if that makes any sense!

It is another brilliant coup by the Fed, where they "fight without fighting". Quite Taoist, isn't it?

edit: Apparently, Obama also remarked, "we cannot go on printing money". Clearly, he got his marching orders from someone who appreciates what's at risk here!

edit2: IT GETS WORSE: now the treasury is talking about fixing mortgages at 4.5%. Mortgages are the ULTIMATE canard: by using the "mortgage market" as an excuse to intervene in the treasury market, the Fed trying to extend and deepen the rally in the long-end of the curve to give the banks plenty of time to recapitalize. Unfortunately, the sentiment impact of such policies make it very difficult for the market to realize its "true" value.

This is a desperate attempt to push more private capital into DI's, nothing more!

No good option

It seems that the most heated debate these days is what is China going to do. A lot of people feel compelled to express more or less qualified opinions and sometimes the debate borders the surreal.

In order to join the crowd (I hope not the surreal one), I'll throw in my two cents... again.

In a previous entry (Sate of Denial) I tried to argue that the $2 trillion in Chinese foreign reserves are not a decisive advantage (since they were accumulated through a flawed economic model) and China is in no position to make any demands.

It is very important to keep in mind that the leadership of the Chinese Communist Government is dominated by two factors:
a) the old Confucian mentality of defending maintaining the unity of the Han heartland of China. A excellent backgrounder of this subject is The Geopolitics of China (I highly recommend reading it), which has also an interesting take on the current economic conundrum:

The problem of China, rooted in geopolitics, is economic and it presents itself in two ways. The first is simple. China has an export-oriented economy. It is in a position of dependency. No matter how large its currency reserves or how advanced its technology or how cheap its labor force, China depends on the willingness and ability of other countries to import its goods -- as well as the ability to physically ship them. Any disruption of this flow has a direct effect on the Chinese economy.

The primary reason other countries buy Chinese goods is price. They are cheaper because of wage differentials. Should China lose that advantage to other nations or for other reasons, its ability to export would decline.
[...]

The interests of the coastal region and the interests of importers and investors are closely tied to each other. Beijing's interest is in maintaining internal stability. As pressures grow, it will seek to increase its control of the political and economic life of the coast. The interest of the interior is to have money transferred to it from the coast. The interest of the coast is to hold on to its money. Beijing will try to satisfy both, without letting China break apart and without resorting to Mao's draconian measures. But the worse the international economic situation becomes the less demand there will be for Chinese products and the less room there will be for China to maneuver.

The second part of the problem derives from the first. Assuming that the global economy does not decline now, it will at some point. When it does, and Chinese exports fall dramatically, Beijing will have to balance between an interior hungry for money and a coastal region that is hurting badly. It is important to remember that something like 900 million Chinese live in the interior while only about 400 million live in the coastal region. When it comes to balancing power, the interior is the physical threat to the regime while the coast destabilizes the distribution of wealth. The interior has mass on its side. The coast has the international trading system on its. Emperors have stumbled over less.

b) the need to maintain legitimacy of the current leadership. The old Communist Party had it's legitimacy derived from the Marxist populist ideals of social justice for the poor and from its national liberation role. Calling the current one Party monopoly structure Communist is a sad joke. The only source of legitimacy for China's leadership today is the improvement of living standards for ordinary Chinese and improving of China's economic power as a source of stability and security:
http://news.bbc.co.uk/2/hi/asia-pacific/7739245.stm

Professor Joseph Cheng, of Hong Kong's City University, said the legitimacy of the Chinese government was built on economic growth.

"If people see that economic growth can no longer be maintained, then the very basis of the government has been eroded," he said.

He added that the widening gap between rich and poor in China could exacerbate current economic problems.

"Because of this, the hardships of those who suffer might become unbearable," he said.

Therefore, the only priority for the Chinese Government is to maintain internal stability at any cost, and that means to avoid any rise in unemployment.

The most efficient way for China to survive the current economic crisis would be, IMHO, a sudden turn towards internal development in a no-nonsense approach, focusing on infrastructure investment and increasing the productivity of the economic activity in the interior. Bringing electricity and phone (probably cellular) services to every interior village would be a great start, for example. The Chinese reserves would be put to a good use for importing raw materials, energy and technology for this internal development drive.

Unfortunately, that would mean massive lay-offs in the factories producing all kind of cheap and useless consumer goods for the West. Therefore, the Chinese leadership is in a scramble for maintaining stability. I believe they will:
1) try to start an infrastructure development campaign (as they did with their $580 bil over five years package), but what they are doing now is too little and too late, probably more is to follow.

2) keep the Chinese exports as "competitive" as possible by further undervaluing the yuan and promoting a subsidy fest, in order to keep employed the workers of the Walmart industry. IMHO opinion this is a terrible waste of hard earned currency, a wasteful indirect subsidy of raw materials and energy imports, and due to the fact it will generate a global deflationary effect it will have a backlash effect by hitting hard their non-Western export markets. I recommend again reading the China Financial Markets blog for more on this subject:
http://mpettis.com/2008/12/china-isnt-losing-its-competitive-edge/

and

http://mpettis.com/2008/11/rising-unemployment-increases-the-pressure-for-misguided-trade-policies/

3) Starting a misguided soviet-style internal consumption campaign by coercing ordinary Chinese to use their savings or to take debt in order to buy domestic production that was meant for export. There are signs this is already happening:
http://www.chinastakes.com/story.aspx?id=879

A joint home appliance promotion, by the Ministry of Finance and the Ministry of Commerce, covering TVs, refrigerators, washing machines, and cell phones, was launched in rural areas in 14 provinces yesterday. The two ministries are planning to add computers into the rural promotion list, and are now contacting key PC manufacturers.

The "Appliances to the Countryside" campaign is slated to last four years, starting as a test in 14 provinces from December 1 and being formally launched nationwide on February 1. It is planned to sell 480 million units and generate 920 billion yuan domestic consumption. The government will subsidize China's appliance giants for selling at a discount to farmers.

I just cannot realize how a farmer, who makes $2000 a year (a fairly rich farmer), would benefit from buying a plasma TV, a computer, a fridge, washing machines (even if we assume his village is connected to the power grid). Such a program is not only a poor stop-gap measure but $920 billion yuan over 4 years is insignificant compared to the contraction of the export markets.

4) Replace the investment capital flow with more debt and more leverage. It seem that has started too:
http://www.forbes.com/afxnewslimited/feeds/afx/2008/12/02/afx5770367.html

China's bank regulators are expected to allow overseas banks to issue yuan-denominated bonds on the mainland or Hong Kong, the official Shanghai Securities News reported, citing sources.

The report, citing a regulatory source, said talks are ongoing with foreign banks' Chinese subsidiaries, with the venue for potential issues yet to be determined.

The newspaper, citing a separate source from the central government, added that the central bank is studying a yuan bond issue plan for such banks, with Hong Kong the venue for their issues. These banks will be cleared to pursue an issue after domestic banks complete similar fund-raising exercises.

This approach cannot have good chances of success considering that the deleverage produced by the collapse of the Chinese real estate bubble has already started:
http://www.bloomberg.com/apps/news?pid=20601109&sid=ay7HZbCLGLEA&refer=home

Construction of homes, offices and factories fell at least 16.6 percent in October after rising 32.5 percent a year earlier, according to Macquarie Securities Ltd. That's squeezing an economy already slowed by recessions in the U.S., Japan and Europe that have cut demand for exports. Building is the biggest driver of China's expansion, contributing a quarter of fixed- asset investment and employing 77 million people.
[...]
“The real estate sector has seen a particularly pronounced slowdown,” said Louis Kuijs, a senior economist at the World Bank in Beijing. “Real estate investment growth is now close to zero.”
[...]
The slump in residential and commercial building may undermine efforts to buoy the economy. “The global financial crisis won't get China to zero percent growth and neither will recession in developed economies,” said Tao Dong, chief Asia economist at Credit Suisse in Hong Kong. “If there's a collapse in the property market that might do the job.”

Therefore, I believe there is no good option for the Chinese leadership and the economic stress leads them to more misguided policies. The $2 trillion of forex reserve cushion is not enough to rescue China if the current incompetent policies are continued further. Considering the geopolitical implications of a Chinese economic collapse, if the Chinese deciding factors don't get their act together fast, we shouldn't be surprised if soon, pro-Tibet western protesters would find in Beijing large banners made by the government with a very interesting offer:

Free Tibet ! (with the purchase of another province of equal economic problems. Terms and conditions apply.)

100 year t-notes

Ah, we've a solution to our financial crisis: epochal debt.

I need to dig into this more.

Simple Russian Arithmetic

Four bits of news offer an interesting picture:

1) From Brad Setser's blog about Russia's financial state in June:

"[...] at the end of June 2008, Russia’s government has about $600 billion in foreign assets and less than $50 billion in foreign debts. Russian banks and firms by contrast had about $450 billion in foreign debts."

2) Bloomberg sees more throwing good money after bad and at double speed:

Dec. 2 (Bloomberg) -- Russia’s central bank probably doubled spending of foreign reserves to defend the ruble from its biggest weekly plunge against the euro in more than four years, according to the median of 10 analyst estimates.

Bank Rossii may have sold $5.75 billion of foreign currency last week, based on the average of predictions ranging between $2 billion and $6.5 billion. That’s likely to contribute to a decline of about $6.25 billion in Russia’s overall cash pool, compared with $3.6 billion in the previous week, the survey by Bloomberg shows.

Russia lifted interest rates twice last month and drained $148 billion from the world’s third-largest reserves since August to stem a 16 percent currency slide against the dollar. BNP Paribas SA estimates that investors withdrew $190 billion since August as oil prices below the $70-a-barrel average needed to balance the 2009 budget triggered Russia’s worst financial crisis since the government’s default a decade ago.

3) Russian banking and manufacturing (oligarch) sector bailout machine is in place:
http://finchannel.com/index.php?option=com_content&task=view&id=25569&Itemid=13

The FINANCIAL -- According to RIA Novosti, Russia's national development bank Vnesheconombank (VEB) has made a decision to refinance foreign liabilities of commercial banks, Central Bank First Deputy Chairman Alexei Ulyukayev said on November 30.
[...]
In particular, the Central Bank has granted $50 billion to VEB to extend subordinated loans to domestic businesses to help them refinance their foreign liabilities.

In October, VEB granted around $10 billion to refinance the foreign debts of energy companies, metals producers, and construction, transport and communications firms.

4) Capital controls are tightened:
http://www.lse.co.uk/MacroEconomicNews.asp?ArticleCode=fpfzh0j7h32mpeh&ArticleHeadline=russia_daily_cbank_swap_limit_at_10_bln_roubles

MOSCOW, Dec 2 (Reuters) - Russia set the daily limit for currency swap operations with the central bank at 10 billion roubles ($357.9 million) on Tuesday, the same as in the previous trading session.

Limits on how much foreign currency banks can swap for roubles in the central bank were introduced from Oct. 20 in a bid to hinder currency speculators. Operations which do not involve the central bank are unaffected. ($1=27.94 Rouble)

If Bloomberg's assertion about Russia's central bank doubling the spending of foreign reserves in support of the ruble is true and oil doesn't climb up very soon to above $80/bbl (which doesn't look very probable), a simple and crude math would tell that Russia:
a) has already passed the point of no return;
b) has only about about 3-6 months until a 1998 style collapse.

Actually this time it may be far worse than the 1998 collapse, but that's a subject for another blog entry.

OPERATION TWIST IS IN EFFECT

yeeeeeeeeeeeeeeeeeeeeehhhhhhhaaaaaaaaaaaaaaaa

don't fight the fed

Fed wants to lower the cost of capital.

This means .gov acts to insure new injections of capital into banks, and it also entails a simultaneous attack on the long end of the curve.

Even I nibbled at the 10yr a bit...

If the banks aren't lending and are having the Fed pay them interest on their deposits, then why do you need positive slope on the yield curve? It just hurts the consumer that much more.