Sunday, September 26, 2010

Race to the Abyss

Just after the September 2008 crash, Ray Dalio, the founder and CEO of the hedge fund Bridgewater Associates {current worth $3.1 billion} gave an interview in The Atlantic magazine in which he predicted a situation whereby existing assets.. real estate primarily.. would go down hard in value and that due to the printing of money worldwide, commodities would soar in value, bringing about a situation he called "DisInflation". We have arrived.

Corn, which was $3.25/bu in June 2010, is now at $5.25. Wheat, which in June was $4.75/bu, is now at $7.20/bu. Gold has finally broke thru the $1,300/oz barrier this week. Copper, which yours truly thought would hit $2.50/lb, went from $2.70 in May to $3.60/lb. Curiously enough, crude has stayed relatively stable in the mid-70s/bbl. Part of the reason for grains was a drought in Russia and the Ukraine, which have banned all exports thru the end of 2011.

The biggest reason is, of course, Ben Bernanke's policy commonly called ZIRP (zero interest rate policy). As we speak, there is no end in sight to this policy; indeed, there are calls for further "monetary stimulus".. ie printing money.. to get the economy going. Lowering the value of the currency makes our own exports cheaper. It's been tried before.

In the midst of the Depression, the US and Britain printed money in heaps with the idea that lowering the value of the currency would lead to a recovery led by exports. The problem was, other nations caught onto this relatively fast and did the same thing; at one point it became a "race to the bottom". In addition, many nations erected trade barriers to protect their own industries. Britain had the "Imperial Preference" policy. Between these currency games and trade barriers, international trade essentially collapsed, making the Depression worse than it already was.

This week, a couple of nations joined the Swiss and Japanese in currency interventions. Brazil's Central Bank began printing money and purchasing US Bonds in an attempt to keep their currency's value down. In addition to this, the US House passed a bill authorizing the President to enact trade sanctions against China, who has for a decade kept the value of it's currency down in order to foster exports. China is also engaging in an economic war against Japan due to Japan's detaining of a Chinese fishing boat captain, who was working the waters claimed by both China and Japan. China retaliated by banning exports of "rare earth metals" to Japan.. some of which are essential in the production of electric and hybrid cars. A protest in China on the anniversary of Japan's invasion in the 1930's did'nt help matters. I also read where the Chinese have been recent buyers of Japanese Gov't Bonds, thus strengthening the Yen against Japan's wishes. I have no doubt that other nations might in some way act to protect (or weaken) their currencies in this most dangerous of games. Throw in things such as national pride and angry electorates and the situation becomes increasingly unstable.

During the Depression, this "race to the bottom" resulted in a debilitating collapse in global trade. But this time, given the vast amounts of debt the industrialized world is in, currency wars can lead to banking collapses, volatile interest rates and other dangerous events. Here in the US, these hikes in grains and metals will lead to higher prices at the grocery store.. and if crude should begin to follow the others, a perhaps drastic hike in gas prices, leading to a host of other problems at the retail level. If interest rates were to spike upwards, the ability of people to purchase homes becomes impaired, leading to less home sales, another leg downwards in home values, and a rise in people who simply give up paying on their underwater home.. thus leading to a huge spike in bank losses and possible failures. In other nations, these games can lead to outright collapse; if Japan cannot halt the rise in the Yen, their exports will become too expensive to be competetive, leading to a contracting economy.. at a time when Government expenses are increasing, the numbers of workers are declining, and savings are near non-existant levels. Despite the appearance to most Americans that all is well, it is far from it. The debt problem is still here, as are derivatives. Our government has to borrow one out of every three dollars it spends. This race to the bottom could have profound consequences.

Update 9/29: "The US House of Representatives has approved legislation designed to combat the manipulation of currency by China that results in unfavorable trade conditions for the United States. As CNN reports, the legislation, which authorizes the Commerce Department to impose duties on imports from countries with undervalued currencies, passed by a vote of 348 to 79"

Sunday, September 19, 2010

Japan's Last Battle

First of all, I've been exceedingly busy with daughters, yard work and work for the last two weeks and so apologize for my lack of attention to this blog. On the good note.. my yard has never looked better !

These last two weeks have seen better than expected numbers from the US; initial claims for unemployment continue to go downwards, a good sign. There was much talk about The Fed doing another trillion dollar QE in the form of "permanent open market operations", or POMO. This means that Bernanke was going to begin purchases of corporate, state, local and foreign sovereign bonds instead of simply purchasing US bonds or MBS. This talk has settled down thanks to the good numbers, though many expect it to get done around the time of the elections. But the talk, coming from "senior Fed officials".. {ie Bernanke telephoning a certain Neil Irwin at the Washington Post}.. had consequences. The USD sunk, especially against the Japanese Yen and Swiss Franc, the favorite whipping boys of currency speculators. One notable event, currency related, is the rise in commodity prices. My idea here is that in the short term, housing prices (and other existing assets) will continue south (deflation) at the same time that the basics of life (grains, metals, softs) are increasing. Go to your local store and check out the price of coffee these days. Bread has also taken a hike. Mercifully, crude has held fast at around $75/bbl.

In Tokyo, where the Yen has already been appreciating to all time levels and where the QE option is limited due to already low yields, Japan's Finance Minister, Yoshihiko Noda, had this to say: "Deflation is continuing, and we are in severe economic conditions. Under these circumstances, recent movements in the yen will have adverse affects on stability of economic and financial conditions. We will continue to monitor foreign currency markets and will take decisive steps, including intervention, when necessary" This followed the August 30th "emergency meeting" that resulted in QE Lite later that day. Sure enough, the BOJ intervened in the currency markets, using Yen to purchase US Treasuries and driving the Yen from 83 to a USD back up to 85.37 at one point, a 3% rise. The Nikkei stock exchange went up as well.

The problem is, these actions were taken by the BOJ alone and not in coordination with other Central Banks, thus making it much more likely to fail. In June of this year the Swiss tried {and failed miserably} to halt the rise in it's currency. Indeed the US actually criticized the move. So far, the BOJ intervention is small.. roughly $10 billion, compared to the $586 billion/day traded in the Yen/USD currency markets. This should give you some idea of the power that currency markets have. The Chinese, rumored to have been recent purchasers of Japanese Bonds, would've also been unhappy at this move by the BOJ as the value of their purchases took a hit. It's likely that this is just the beginning of Japan's battle against deflation's death grip. It's telling, and worrysome, that they are now left without the QE option and are left {all alone apparently} to fight this battle in the currency markets. Should Japan lose this battle and it's currency appreciate to under 75/USD, look for their stock markets.. shortly followed by their economy and ability to pay their debts.. to take a severe hit.

In other news, Ireland neared default this last Friday; apparently the ECB stepped in with a stick save, purchasing Irish Gov't bonds, which had been surging, reaching 6.35%. Anglo-Irish Bank, Ireland's version of AIG, continues to post ugly losses, draining the Irish treasury. Worse, the Irish economy is expected to contract nearly 8% this year. Portugal is also nearing the end; their 10 year bond surged to 6.15%, the same levels of last May when Greece (and the EU) nearly crashed. Portugal's government drafted an "emergency budget", with their high speed train to Madrid being the first casualty. Greece's 10 year bond is still north of 10%. In reality, the only permanent way out of this is debt reduction, which the ECB and European banks oppose because of their own precarious situations. I'm looking for an interesting week in EUtopia.. lets just hope not too interesting.

Saturday, September 4, 2010

Divided We Fall

I'm going to get away from economics today and post an article about something that I see that disturbs me quite a bit. It's the polarization of America, it's implications and possible solutions.

First, what is a nation ? It used to be where a group of people, who are all of the same racial group and who speak the same language usually, happen to be clumped all together in the same geographical area.. but not always. France for example. In other cases, it's different racial groups that speak the same language, same culture, and who are all clumped together in the same geographical area.. Brazil is a good example here.

We in America have always been a polyglot of different groups.. immigration has always been at the heart of our nation. Back in the 1800s, immigrants arriving on Ellis Island aspired to become Americans.. to speak English, to fit in with the majority. Many changed their last names.. they were actually called "Ellis Island names". Also, the vast majority of the immigrants were of the same racial group.. white, and the same religion, Christianity. Whilst there were differences between the groups, there were also similarities and in general a desire to all assimilate.

Today it's very different.. the vast majority of today's immigrants are not white; many are not Christian.. and disturbingly they don't have any real desire to assimilate. The concept of "Multiculturalism" has come about, a concept which believes that all groups can live with each other, to celebrate and learn from each other's differences, and where government is the arbiter of disputes amongst the groups. It's goes as far as wondering whether the old concept of a nation is still relevant. Many envision a world whereby anyone anywhere can live in any nation he/she so chooses and be accepted as a citizen, with all the benefits thereof; a happy world where everyone accepts everyone else and helps everyone else through government meant for the benefit of all. If the vast majority in all of these nations would agree to this, it would indeed be a Paradise on Earth.

The problem is, this happy vision isn't shared amongst the majority of nations receiving these very different peoples. In Europe as well as America, the white majority isn't too thrilled with watching vast waves of very different peoples, who have no intention of assimilating, into their nations and being forced thru government to pay benefits to these multitudes. I would wager my foot that a bill banning immigration would pass here in America and in most of Europe's nations by a large majority; indeed in several European elections, anti immigration candidates have won by large majorities. In short, whites feel that their nations are slowly but surely being taken over by people who are very different and who in general don't like the white majority. They believe that they have lost control of their own borders and are actually being made to pay for these immigrants well being thru taxation. Incidents like the Ground Zero Mosque tend to exaserbate the differences, as to the "militia groups" in the mountain states. Here in Minnesota, Somali immigrant groups are demanding a place in public schools where their Muslim children can wash their feet and worship. Assimilation is not the plan. Adding to the mess, there are some 15 million illegal immigrants in the US.. most are from Latin nations, here to work on farms, in restaurants, etc. Some are criminals.. but the vast majority of these illegals are here to work.

In addition to this, there is the left versus right debate.. but this is, in truth, little more than an extension of the divisions detailed above. Republicans are overwhelmingly white; most minorities are overwhelmingly Democrats. TV and radio personalities like Rush Limbaugh and Keith Olberman fan the flames of this particular division.

Part of the reason for a nation (in the old sense) is that in these nations, the people feel they are one, and are far more willing to defend their nation and their people.. it's their home, their little corner of the world. In the new, multicultural concept of a nation, some soldiers may wind up feeling that they have more in common with the enemy than with the soldier standing next to them. Some argue that people in such nations have no connection or loyalty to the nation and would simply move to another land if a problem arises instead of sticking it out and helping one another. Would a Muslim immigrant soldier be willing to participate in the invasion of Iran, or would he simply go elsewhere ?

As for me personally, I'm not against immigration.. but I do believe that all immigrants should come with their sleeves rolled up, ready to work, and should not be eligible for any government aid for a period of years. Today we have immigrants who arrive at the airport and are driven to the local welfare office, where public housing, cash, food stamps and MediCal are all awaiting them. I also realize the problem of demographics.. we as a nation are getting old, especially the white population, and if we are to provide for the elderly in anything resembling the current levels we will need a lot more young people to do the work and paying of taxes.

And yet here we are.. in America, everyone is mixed in with each other, especially in bigger cities. Los Angeles has Chinatown, Koreatown, the hispanic barrios, the black ghettos and the white suburbs. New York has similar entities.. Little Italy, Harlem, Spanish Harlem, the Jewish section of Brooklyn, etc. Since we are a prosperous nation, these differences are tolerated; we don't really trust or like the different group next to us, but so long as everyone is able to make a living & have a realistic hope for a better future, and the basic services of government all work relatively well, it's all OK. My fear is that slowly but surely (or perhaps very quickly one day) the economy.. and with it our hope for a better future and ability to earn a decent living.. will evaporate. When the prosperity goes, so will the social cohesion. In my opinion, the current path.. economic and social.. could end very badly. When the first barricades go up between communities {a strong possibility} we have, in effect, started on the Road to Bosnia. We would all do well to remember the fate of the other great power of the last century, a nation made up of many different peoples like America is. The Soviet Union collapsed economically, then politically, and ultimately broke apart into a dozen different nations. Yugoslavia was held together by prosperity and a strong leader in Tito. The site of the 1984 Winter Olympics Village in Sarajevo became the site for a good sized battle between Serb & Bosnian militas. It's happened before..

So.. what do we do, considering these factors ? There are many on the Left that believe that white people should "just get over it" and accept the inevitable. But I dare say that a good majority of a heavily armed people numbering 220 million might decide otherwise. This is my worst fear. So.. without further adieu, here's my suggestions:

* Ban immigration except for H1B and Family (spouse/children) Visas.

* Document all illegals with H1B visas & force employers to verify the validity of the visa. {Currently employers don't have to verify the validity of a green card or a social security number}. Forbid any immigrants from working without one.

* Ban all non-citizens from receiving welfare, medicare or food stamps. Unemployment is an earned benefit and should be allowed them. Once their unemployment runs out, their visa is cancelled and they will have to leave.. or get another job.

* H1B immigrants would be allowed to become citizens in seven years time so long as they have committed no felonies.

* Divide the nation into 435 states, now known as Congressional Districts.

* Limit the Federal government to foreign and economic policy and vigorously enforce the 10th Amendment.

In this scenario, the new states would be able to do far, far more in determining how the people live.. for example.. issues like abortion, death penalty, criminal law, welfare & education policies without federal mandates and interference. Conservative states would likely enact the death penalty; many would ban abortion and affirmative action and severely limit welfare expenditures. Liberal states would likely expand welfare & education, enact universal healthcare.. and the taxes needed for them. Some states would be in the middle. The people would be able to choose which state to live in.. and not have to move hundreds of miles to do it. Here in the Twin Cities, there are five such congressional districts. If you are liberal and found yourself in a conservative state, you could simply move to the next one over without even changing jobs. In truth.. this is how the US Constitution was actually designed. The creeping federalization of government in many instances is actually unconstitutional. The millions of illegals in our midst would have a path to citizenship.. and well they should if they are hard working and commit no felonies for seven years.