Monday, March 30, 2009

March 30 2009 1: Don't be misled

Harris & Ewing Don't be misled 1925
F.W. Grand store.Washington, D.C.

Ilargi: I’m going to try and shake up things a little around here. It's all getting clogged up too much in my view with too many articles in one go. Today, I’ll do two posts, a lunch and a dinner version, so one around 12.30 pm and another around 5.30 pm. I’m hoping it’ll make TAE more accessible, and if I think it works, it stays. Both posts will be on the frontpage for the duration of the day.

Ilargi: So Obama, Larry Summers and Tim Geithner have kicked Rick Wagoner out of GM. Can we see the severance package please? Does it matter? I doubt it. Let the president explain in plain terms to the people why Wagoner was guillotined while Lloyd Blankfein, Vikram Pandit and Edward Liddy and all those chaps are still in their plush seats. If he doesn't, his troubles will keep growing. People have an inalienable right to know what their trillions are being spent on, and why. Increasingly, they'll demand to know. What's happening in Detroit lacks any and all transparency, which leaves one impression only: nothing has changed. Washington wants Chrysler to merge with Fiat, but it doesn't yet like the terms, since Fiat would profit too much when a turnaround happens. Don't worry, guys, there won't be any. And Fiat is nuts if it agrees to any merger, but I guess there's far too many short term dollar signs in the Italian eyes to see clearly.

It'll all end in tragedy and bankruptcy regardless, just 10 years and hundreds of billions of dollars too late. In their present state, US carmakers need 12 million vehicle sales per year in the American market. They’ll be lucky if 5 million are sold in 2009. Not that anyone would publicly admit it, not the industry nor the government. That 5 million number will mean additional losses up to the carmakers, and the taxpayers', eyeballs. When the first Detroit bail-outs happened last year, it was estimated that a 50% cut in production capacity in the industry would lead to as much as 2 million job losses in the overall economy. Well, that 50% will have to be cut, and probably more. That won't look good on Obama's rap sheet, losing 2 million more jobs. Too little and too late. And no, "green cars" won’t make any difference. that's like the nutty notions behind the weekend's Earth Hour. Tickling the ego's of the clueless.

Internationally, the president risks losing a lot of political capital as well. I don't for a moment believe that the US is prepared for the erosion of its clout and power that it will be confronted with; it prefers the hold on to the illusion. Europe will not follow the American banking rescue plans, which add up to more than $11 trillion to date. The status of the greenback as a global reserve currency has become so unstable that it's merely a matter of time before it's cut down from its pedestal. Talk about turnarounds and recovery at this point in time is hollow inflated lukewarm air. Economic growth as a foundation for the world's markets is gone forever, yet nobody is willing to even consider it. There's one reaction in case the plans fail: more of the same. As Geithner said again over the weekend: the biggest risk is not doing enough. Which is nonsense, the biggest risk simply remains doing the wrong things. All this turns the entire multi-trillion dollar operation into one huge gamble with no plan B. And no seat at the table for the ultimate victims.

Global markets dive as Obama rejects carmakers' plea
Global stock markets dived today after the White House denied General Motors (GM) and Chrysler multi-billion dollar bailouts and threatened to push the ailing carmakers into bankruptcy if they do not implement aggressive restructuring plans. The Obama Administration effectively seized control of the companies – ousting General Motors’ chairman and chief executive and pushed Chrysler toward a merger – after finding that the carmakers’ own restructuring plans “did not establish a credible path to viability”. The Dow Jones industrial average tumbled 215.37 points to 7,560.81 within minutes of opening while in London, the FTSE 100 index of leading companies fell 104.59 points to 3,794.26. In Germany, the DAX declined 145.88 points and in France, the CAC fell 89 points to 4,057.67.

In a document released at midnight last night, the White House set out its key findings on the two companies after more than a month of intensive talks between the President's auto taskforce, GM and Chrysler's managements and other stakeholders. GM last December received a $13.4 billion bailout and had asked for a further $16.4 billion, while Chrysler got $4 billion and wanted up to $6 billion more. However, the President refused to grant the full loans based on the companies’ current restructuring plans, which the White House document said were insufficient to justify a substantial new investment by taxpayers. Instead, the Government will provide GM with funding for 60 days to give it time to develop a more aggressive plan and a strategy to implement the plan.

In return, the White House demanded that Rick Wagoner, the chief executive and chairman who has led the company since 2000 and overseen an $82 billion loss over the past five years, step down. Mr Wagoner was replaced by Fritz Henderson, its current president and chief operating officer. Long-time board member Kent Kresa will step in as interim chairman. The Government also said that the majority of the board would be replaced over the coming months. “The Administration does believe that there is a path to a viable GM and is confident that the company can emerge from this crisis as a strong, competitive business,” the Government said. But it took a swipe at Mr Wagoner, saying in a more detailed document on GM that the automaker's turnaround over the past few years had been far too slow, which allowed it to “lag the best-in-class competitors.

It also slammed GM’s current restructuring plan as too optimistic on its assumptions of market share, pricing, brands and other issues. The White House had previously told GM to cut its unsecured debt of about $28 billion by two-thirds but some bondholders have held out against a deal. The White House threatened last night to put GM into a “court-supervised process to extinguish unsustainable liabilities” if the company cannot get agreement from its creditors. Chrysler had proposed a partnership with Italy’s Fiat, in which the US company would manufacture fuel-efficient vehicles using Fiat’s technology. But the original deal would have handed Fiat a 35 per cent stake in Chrysler, which the Government complained gave the Italians first dibs on the benefit from a turnaround at the company.

The White House made clear that Chrysler cannot stand alone, criticising its current restructuring plan as containing a “number of assumptions that are unrealistic or overly optimistic. “The Administration does not believe that on its own Chrysler can achieve the scale or debt of product mix necessary to compete in the twenty-first century global auto market,” last night’s findings read. Instead, the Government will give Chrysler 30 days worth of capital in which to strike a deal with Fiat and other stakeholders. The Italian and US companies have already agreed with the Government to protect taxpayers’ investment in the venture. Chrysler must also hit a number of other targets – getting rid of all of its unsecurity debt and most of its outstanding secured debt, agree greater concessions with auto workers’ unions, come up with better financing options for its dealers and customers and with Fiat put together an operating plan that shows meaningful profits.
Failure to meet these demands will end in almost certain collapse for the company.

White House questions viability of GM, Chrysler
President Barack Obama is sending a blunt message to Detroit automakers: To survive -and win more government help- they must remake themselves top to bottom. Driving home the point, the White House ousted the General Motors chairman as it rejected GM and Chrysler's restructuring plans. Obama is set to elaborate on that message Monday when he announces what his White House told reporters over the weekend: Neither GM nor Chrysler submitted acceptable plans to receive additional federal bailout money. GM chairman Rick Wagoner became the most conspicuous casualty of that decision, forced out Sunday as the White House indicated Detroit must make management and other changes if it hopes to survive and that the Obama administration will have a hands-on role in those changes.

Michigan Gov. Governor Jennifer Granholm said Wagoner "clearly is a sacrificial lamb" who stepped aside "for the future of the company and for the future of jobs." She spoke on NBC's "Today" show Monday. Obama said the companies must do more to receive additional financial aid from the government. "We think we can have a successful U.S. auto industry. But it's got to be one that's realistically designed to weather this storm and to emerge -at the other end- much more lean, mean and competitive than it currently is," Obama said on CBS' "Face the Nation" broadcast Sunday. Frustrated administration officials, speaking on condition of anonymity ahead of Obama's announcement, said Chrysler has been given a 30-day window to complete a proposed partnership with Italian automaker Fiat SpA. The government will offer up to $6 billion to the companies if they can negotiate a deal before time runs out. If a Chrysler-Fiat union cannot be completed, Washington plans to walk away, leaving Chrysler destined for a complete sell-off.

For GM, the administration offered 60 days of operating money to restructure. Officials say they believe GM can put together a plan that will keep production lines moving in the coming years. New directors will now make up the majority of GM's board. Fritz Henderson, GM's president and chief operating officer, became the new CEO. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., was named interim chairman of the GM board.
"The board has recognized for some time that the company's restructuring will likely cause a significant change in the stockholders of the company and create the need for new directors with additional skills and experience," Kresa said in a written statement. The Obama administration move comes amid public outrage over bonuses paid to business leaders and American International Group executives - set against a severely ailing economy.

GM failed to make good on promises made in exchange for $13.4 billion in government loans. Chrysler, meanwhile, has survived on $4 billion in federal aid during this economic downturn and the worst decline in auto sales in 27 years. In progress reports filed with the government in February, GM asked for $16.6 billion more and Chrysler wanted $5 billion more. The White House balked and instead started a countdown clock. Two people familiar with the plan said bankruptcy would still be possible if the automakers failed to restructure. Those officials spoke on condition of anonymity because they were not authorized to make details public.

An exasperated administration official noted that the companies had not done enough to reduce debt; in some cases, it actually increased during this restructuring and review process. GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in first- and second-term debt, mainly to banks. GM owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion. GM and Chrysler employ about 140,000 workers in the U.S. In February, GM said it intended to cut 47,000 jobs around the globe, or almost 20 percent of its work force, close hundreds of dealerships and focus on four core brands: Chevrolet, Cadillac, GMC and Buick.

Wagoner Is Ousted to Maintain GM's Lifeline
General Motors' longtime CEO falls on his sword to appease unions, bondholders, and the Obama Administration in a bid to keep the automaker afloat. He's out. General Motors (GM) Chairman and CEO G. Richard Wagoner Jr. has been asked by President Barack Obama's Administration to step down in advance of GM's getting any further funds from the federal government. Treasury officials said Wagoner was asked to leave and agreed to quit. Wagoner's ouster will be the first in a series of moves that Treasury will make as it forces GM and Chrysler to restructure. Without a change in the way they do business, Treasury officials say, those companies aren't viable and won't get more funds to avoid bankruptcy.

Wagoner's ouster won't surprise many, and plenty of critics have been calling for his head. True, he was dealt a tough hand when he became CEO in June 2000, inheriting a raft of management missteps that included lavish worker contracts and retiree benefits the company had accepted in fat times. But Wagoner never made the tough decisions to reduce union labor costs, cull GM's bloated family of brands, or get the company to make money on anything but a handful of trucks and SUVs that guzzled fuel. Wagoner was pushing slowly to change GM, but the company wasn't prepared for the fuel-price spikes that started in 2005 or the recession that hit the auto industry like a hurricane in 2008. "He deserves it," says longtime industry watcher Maryann N. Keller. "Obama doesn't want to be seen giving money to someone who has had so many bad years."

Wagoner began to push harder to remake GM over the past several years. And the company has been putting out better passenger cars. The Chevrolet Volt electric car, due to hit the market in 2010, shows that GM understands how important fuel economy has become. Wagoner also scored a union contract in 2007 that cut wages in half for new hires and would have given the union $36 billion in cash to set up a health-care trust, extricating GM from high employee medical costs. But all of that happened much too late. GM was thrown into crisis in 2005, when the company lost $10.5 billion. Oil jumped above $50 a barrel and sales of GM's money makers—full-size SUVs like the Chevy Tahoe—tanked. GM, bleeding cash, bought out thousands of union workers and cut health-care costs.

Wagoner's restructuring moves got the company to roughly break even on an operating basis in 2006 and 2007, but GM lost $31.5 billion in 2008 amid a deep recession and financial crisis. Altogether, since Wagoner took over in 2001, GM has lost $72.8 billion, if you include a $38.7 billion paper loss in 2007 due to lost tax credits. To his credit, Wagoner has shrunk GM's payroll by nearly 70,000 jobs since 2005. He has restructured the company to the point where analysts estimate it could break even in a market of about 12 million annual car sales. (Americans buy 15 million or more vehicles in a typical year.) And he did drop the Oldsmobile brand in 2001. But Wagoner still tried to make eight brands work when health-care and retiree costs claimed too much cash to support them all.

The outgoing Bush Administration agreed to extend a $17.4 billion lifeline to GM and Chrysler in December, with a Mar. 31 deadline for the companies to meet cost-cutting and debt-reduction goals. Before the new Obama Administration was willing to extend that help beyond Tuesday, however, it needed a scalp to show the American public that the government wasn't throwing public funds to the same executives that failed. "He's being tarred as the architect of a strategy that didn't succeed," says President Jeremy Anwyl. Wagoner's ouster is more than just public relations, however. One of President Obama's Auto Task Force advisors, former United Steelworkers negotiator Ron Bloom, often used to push companies to change management if the USW was agreeing to make big concessions, notes Leo Gerard, the union's president and a close friend of Bloom.

Says Gerard: "We always had the philosophy that the people who got a company into the mess won't get you out." While GM moved methodically to address its legacy costs, Japanese rivals such as Toyota, Honda, and Nissan were blitzing consumers with new vehicles and marketing them hard. As a result, GM's market share on Wagoner's watch plummeted from the 28.1% it held in 2000 under retiring Chairman Jack Smith to less than 20% so far this year. "He was incrementally moving the company forward," says Anwyl. "He just ran out of time."

Wagoner made other big mistakes. GM was paying $1 billion a year in shareholder dividends until 2006, even as the company needed to borrow $14 billion to shore up its pension fund and cut new-product spending. Wagoner also got GM into a deal with Italy's Fiat Auto that ultimately cost $4.5 billion. While he was chief operating officer, GM bought Hummer, which now needs to be divested. The Obama Administration Obama will turn GM over to Wagoner's groomed successor, GM COO Frederick A. "Fritz" Henderson, who will be CEO, and GM board member and former Northrop Grumman CEO Kent Kresa, who becomes interim chairman. GM will be rocked hard. Wagoner is out just as Vice-Chairman Bob Lutz is set to retire at the end of April, when he becomes an adviser. Both leaders were liked and their departures will usher in an era with new management, deep cuts, and strong government oversight. However GM emerges from this crisis, it will be a very different company.

G20 unity spells end of Brown’s 'New Deal’
Gordon Brown’s plans for a $2 trillion (£1.4 trillion) “New Deal” to revive the global economy have been quietly dropped to preserve the facade of unity as world leaders gather in London for the G20 summit. The US and Britain have both backed away from spending proposals worth 2pc of global GDP, accepting that each country must find its own way. White House officials confess that there is no chance of a deal that entails further public debt. “Nobody is coming to London to commit to do more right now. No single number is sacrosanct,” said Michael Froman, the US deputy national security advisor. British Foreign Secretary David Miliband disowned a leaked draft retaining talk of a $2 trillion boost, insisting that it was an old document that merely lists spending packages already under way across the world. “This G20 summit was never about writing national budgets.

Let us not hear that somehow the Anglo-Saxons are for fiscal policy and the other Europeans are somehow for regulation – you have got to do both,” he said. The text reiterates the traditional pieties, calling for an “an open world economy based on market principles” and a determined effort to “resist protectionism”. It comes as the World Trade Organisation predicts a 9pc fall in global shipments this year following a violent plunge in the last quarter of 2008. The pledge to uphold free trade has already been cast into doubt by China, which announced a raft of export tax rebates on Friday to shore up exports. The protectionist move is likely to irk Washington. There is grumbling on Capitol Hill that the US stimulus is leaking out to surplus states in east Asia and northern Europe which seem to be counting on American demand to rescue the world again. But the two sides are so far apart in their diagnosis of this crisis that no real agreement seems possible.

German Chancellor Angela Merkel said over the weekend that the “German economy is very reliant on exports, and this is not something you can change in two years. It is not something we even want to change”. Czech premier Mirek Topolanek, holder of the EU presidency, attacked the US fiscal plan last week as the “road to Hell”. Europe’s leaders insist the region is already doing enough since generous unemployment payments – starting at 80pc of earnings in Germany – act as an automatic stabiliser. The problem is that job losses lag the downturn by several months. By the time the stimulus kicks in, it may be too late. Washington believes that this emergency calls for a radically different approach.

A new plan needed as the cycle grows vicious
by Wolfgang Münchau

So you think you can see the green shoots of recovery? You draw comfort from the recent stabilisation of forward-looking indicators such as new home sales in the US? Or you think the stock market rally marks the end of the crisis? Of course, economic growth rates are bound to improve soon for technical reasons. Otherwise, not much would be left of the global economy by the end of the year. Even if a recovery were to start early in 2010, as some optimistic forecasters believe, most of the pain of the recession is still ahead of us: unemployment and default rates will rise sharply everywhere. Most of the pain in the financial sector is also still ahead of us. This will feel like a depression long after it has ceased to be one.

I am more worried now than I was a month ago. The main problem is that the feedback loops between the real economy and the banking sector are truly scary. Remember that all the public and private sector forecasters are still busy adjusting their 2009 economic projections downwards. The latest downward revision for Germany came from Commerzbank last week, which now projects 2009 growth at a negative 6-7 per cent for this year. At this rate of contraction, the number of private and corporate defaults is likely to increase massively beyond some of the stress-test assumptions made by the banks themselves. After the crisis caused by toxic securitised assets, the financial industry is now hit by another crisis of potentially similar magnitude. This looks to be one of the worst credit cycles in living memory.

Economists and policymakers who wonder how much it will take to recapitalise the banking sector are discovering that rescuing the banks is a much more dynamic exercise than they thought. Whatever you think it costs – and there have been widely different estimates – it is likely to end up costing you a lot more for that precise reason. The economy is trapped in a vicious circle where credit crunch and recession mutually reinforce each other. By the end of December, global banks had written off about $1,000bn (€752bn, £699bn) in bad assets, approximately half of that in the US. Since the onset of the crisis, the writedown of assets in the US has exceeded the provision of new capital. Even the Geithner public-private partnership plan is not going to reverse the expected deterioration of capital ratios at sufficient speed and on sufficient scale.

In Europe, new capital exceeded writedowns by a small amount, but on the recent projections I have seen, this trend could reverse sharply this year, unless governments introduce new recapitalisation plans. In the absence of such plans, the banking sector will continue to contract its balance sheet by cutting lending. This is a totally rational response by the banks. To unfreeze the global financial market therefore requires significant increases in bank capitalisation, not just to the status quo ante, and not just to account for the toxic securitised assets themselves, but to adjust for the stuff that is getting toxic right now and tomorrow. The estimate by Alan Greenspan, the former chairman of the Federal Reserve, that one needs to push the ratio of banks’ equity capital to assets from 10 per cent to 13 or 14 per cent seems plausible to me. After a long period of undercapitalisation, you need a period of overcapitalisation just to get back to normal.

In other words, you have to do quite a bit more than you think you need to do, rather than quite a bit less. This is the main reason why the Geithner plan is not an optimal policy response. It is a very smart plan in terms of the way it is constructed. It provides no-brainer incentives for private investors to buy toxic assets. But it will not produce sufficient recapitalisation, let alone sort out the problem to such an extent that banks start lending again. For all its technical ingenuity, this plan is at best insufficient – and more likely an expensive distraction that delays the inevitable policy response of a government-led recapitalisation programme. Europeans think they have less of a problem because they already put bank rescue packages in place last October. This is one of the many misjudgments of European officials in respect of this crisis.

The current rescue packages are not doing the job. They were emergency measures only. But we have moved beyond the immediate emergency, and need a strategic response. Europe, too, will have to start to address the problem, by forcing banks to write down their assets in exchange for new capital. And not all the banks should survive. We must allow the sector to shrink while we recapitalise. This means many painful and unpopular decisions have yet to be taken. I have no hope that this week’s Group of 20 summit will provide a solution to this problem. In fact, the old Group of Seven would be a much more appropriate group to discuss a co-ordinated approach about crisis resolution, as most of the world’s most important financial centres are located in these countries. But it matters less who does it than what is being done. The Europeans need a new plan. And the US needs a better plan.

New Task Seen for Fannie, Freddie
The regulator of Fannie Mae and Freddie Mac is considering giving the government-backed mortgage companies another role: helping to finance small mortgage banks. A spokeswoman for the regulator, the Federal Housing Finance Agency, said it is looking at ways that the two companies might help revive the market for so-called warehouse loans, which are loans made to mortgage banks. This possible role for Fannie and Freddie is the latest sign of how they are being used increasingly as instruments of government policy rather than corporations focused on shareholder returns.

Demand for mortgages is surging as low interest rates prompt millions of Americans to refinance. New U.S. first-lien home-mortgage loans granted this year will surge to $2.78 trillion, up 72% from 2008's depressed level, the Mortgage Bankers Association predicts. But mortgage banks have been hobbled in recent months by a dearth of credit, making it hard for them to respond to that demand. Partly as a result of this credit crunch, giant full-service banks like Bank of America Corp. and Wells Fargo & Co., which don't need warehouse funding, are increasing their dominance of the mortgage market. Consumers will face higher interest rates and slower service if mortgage banks can't get enough credit to compete with the giants, mortgage bankers argue.

The regulator has asked representatives of mortgage banks, including the Mortgage Bankers Association, to come up with a detailed plan for Fannie and Freddie to help mortgage banks get credit. John Courson, chief executive officer of the association, said in an interview that the plan should be ready to be presented to the regulator within about a week. One possibility is that Fannie and Freddie will guarantee debt issued by warehouse lenders, making it easier for them to provide financing to mortgage banks. When mortgage bankers complained about the lack of warehouse funding, officials in the Treasury and Federal Reserve urged them to seek help from the regulator of Fannie and Freddie.

Last September, the regulator took over management control of the two shareholder-owned companies as surging defaults depleted their thin layers of capital. They are now being propped up by funds from the Treasury. Under regulatory control, they have shifted their focus to the prevention of foreclosures, even though that may delay their return to profitability. The Treasury also has said that Fannie and Freddie may play a role in supporting state housing-finance agencies. Mortgage banks typically are small, family-owned companies. Unlike commercial banks or thrifts, they aren't licensed to take deposits and so don't have that source of money for their loans. Instead, they borrow money from warehouse lenders, which often are units of larger banking companies. The mortgage banks use the short-term credit to provide loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to investors such as Fannie or Freddie.

Until credit markets froze up in 2007, Wall Street investment banks and many large mortgage lenders were eager to provide these warehouse lines of credit. Now, many of those big institutions have stopped making warehouse loans or have cut back on that business. Warehouse Lending Project, a group of mortgage bankers seeking to revive the market, estimates overall money available for warehouse loans has dropped nearly 90% since 2006, to about $25 billion Mr. Courson said he believes the regulator can give Fannie and Freddie temporary authority to help fund warehouse loans and that it won't be necessary to seek congressional approval for this expansion of the two companies' role. "We just don't have the luxury of time for going through the legislative meat grinder," he said.

Ilargi: Alan Wheatley is China Economics Editor for Reuters. Reading him, however, you'd think he's on intimate terms with Hu Jintao. Wen Jiabao and the rest of the party crowd. Wheatley tries hard to create the impression that he happens to know exactly what China wants.
"On the chess board of currency politics, China has disclosed its endgame..." "Beijing's ultimate goal is to replace the globally dominant dollar with a beefed-up Special Drawing Right..."

Of course, he's simply guessing, which makes this article a piece of crap reporting. We can all take guesses at what China’s goals are. For now, if you ask me, they're throwing some trial balloons into the ether, and enjoying the confused effects these have in the west. Undoubtedly, China is in a position to make more demands now than it has been in centuries, and it will make them. That will mean the end of the US dollar's hegemony sometime down the line. To suggest that China has "disclosed" its endgame is rubbish. It makes way more sense to suggest that China holds a lot of trump cards and plays them close to its chest.

Pundits invariably claim that China will not use its dollar reserves to sink the dollar, since that would hurt China itself. As I’ve said before, I think that is a narrow and potentially dead wrong view. A boxer volunteers to go into the ring, even though he knows he’ll take a few hits, because he's confident he’ll get hit less than his opponent. If China feels dumping dollar reserves will hurt the US more than Beijing, it might see it as a very viable move. The US is vulnerable, and it shouldn't expect any pity, if only because it hasn't shown any. China may see its reserves not as a financial, but as a power tool.

Watch China's FX swaps, not just super-currency plan
On the chess board of currency politics, China has disclosed its endgame in a striking show of confidence ahead of this week's Group of 20 summit in London. Just as significant, it is already advancing its pawns. Beijing's ultimate goal is to replace the globally dominant dollar with a beefed-up Special Drawing Right, the International Monetary Fund's in-house unit of account, which would become a "super-sovereign reserve currency". The plan, laid out a week ago by central bank governor Zhou Xiaochuan, is bold, thoughtful and visionary. It is also magnificently unrealistic.

The political intent of Zhou's message could not be clearer: as the crisis of capitalism erodes U.S. influence, China is losing faith in the dollar and sees the time ripening for the yuan to assume its rightful role as a major world currency. "It has the potential to lead to one of the most profound reforms of the global monetary system in the coming decades," Jun Ma, Deutsche Bank's chief China economist, said of Zhou's blueprint. However, with 5,000 years of history behind it, Beijing is ready for a long game. Zhou knew his trial balloon would immediately be shot down, save for backing from Russia. Hence his acknowledgement that creating a new international monetary order would require "extraordinary political vision and courage".

Translation: Beijing realizes that a currency does not lose its global domination overnight. Even after the United States overtook Britain in economic size in the late 19th century, it took two world wars that drained Britain's Treasury and its military might before the dollar supplanted sterling. The American grandmaster will not surrender his title lightly. "It's not a feasible or workable monetary measure," Zhong Wei, an economics professor at Beijing Normal University, said of Zhou's proposal. Rather, he said, the central bank chief was simply rueing the unfairness of today's global financial order.

"The paper should be read as a complaint from Chinese officials -- and that's all," Zhong said. Perhaps. But Zhou's essay takes on a different complexion if read in the context of a flurry of moves by China in the usually dull arena of trade finance. Since mid-December, China has sealed currency swap accords totaling 650 billion yuan ($95 billion) with the central banks of South Korea, Malaysia, Indonesia, Hong Kong, Belarus and, in a deal announced on Monday, Argentina. These are pawns that are not being moved at random, and financial diplomats say more agreements are in the pipeline. The proximate purpose is to grease the wheels of trade, which have been gummed up by the global credit crunch. Importers in the six countries will be able to pay for Chinese goods in yuan instead of in dollars, the principal export-import currency.

But the potential repercussions for global currency politics are more far-reaching: if Asia got accustomed to the practice, the yuan could evolve into a regional currency, giving Beijing the status and influence that goes with it. A former senior international monetary official said the pacts were in keeping with what he said was China's greater assertiveness in global forums over the past two years or so. "They want to play a stronger role, and these small steps such as giving bilateral swaps to Indonesia, Malaysia and Korea are a lot more important than the SDR proposal," said the official, who declined to be named as the issues are sensitive.

Getting comfortable with the internationalization of the yuan for trade should, in turn and in time, make Beijing more willing to move toward capital account convertibility -- a precondition for the yuan to become part of a revamped SDR. Now, there is no sign China wants to speed up the opening of its capital account -- even though the yuan, if it could be bought and sold for non-trade purposes, would be more attractive for central banks as an alternative reserve asset to the dollar. But, as some economists see it, pricing and settling trade in yuan will inevitably lead to greater use of the Chinese currency offshore for financial and investment purposes. "The swaps should be seen as a political statement with the intention of turning the yuan into a regional reserve currency," said Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong.

Take the scheme, due to be launched soon, that will allow trade between Hong Kong and the mainland province of Guangdong to be settled in yuan rather than in U.S. or Hong Kong dollars. The 200 billion yuan swap that Beijing signed with Hong Kong in January will provide an initial pool of Chinese currency needed for paying export and import invoices in yuan. But imagine if the experiment takes off: banks would eventually need access to the mainland interbank market for funding, according to a financial diplomat in Beijing. And should banks in Hong Kong -- and other centers -- be allowed to adjust their positions with each other? If so, an offshore interbank market in yuan would sprout. "We must understand that it is an inevitable trend that an overseas yuan investment market will grow after foreign trade settlement in yuan becomes widely accepted," Ye Xiang, a co-founder of VisionGain Capital, a Hong Kong investment management firm, wrote in Caijing magazine.

Hong Kong is already a test bed for liberalization of the yuan. In the past few years Beijing has permitted the issuance of yuan-denominated bonds in the city, as well as the establishment of Chinese currency accounts for Hong Kong residents. Many pieces will need to be moved around the board before China is in a position to force a draw with the dollar, let alone declare checkmate. But Beijing, thinking strategically, is unlikely to be too perturbed if Zhou's gambit founders in London. "Whether or not the reserve currency question progresses beyond an intellectual debate, it is clear that China has decided the time is ripe to become proactive in the debate," Stephen Green and David Mann, economists at Standard Chartered Bank, said in a report. "The crisis which started in the West is helping to accelerate the ascendancy of economic superpowers in the East."

World Bank warns of social discontent in Russia
The World Bank has given warning of serious social discontent in Russia after delivering a bleak assessment of the country's economy. Scotching optimism that the world's largest country may already be in recovery, the bank predicted that Russia's economy is contracting far more sharply than the Kremlin has acknowledged. According to revised government forecasts, the Russian economy will shrink by 2.2pc this year. But it its latest economic report on Russia, the World Bank predicts that Gross Domestic Product will actually contract by 4.5pc. The assessment comes as foreign investors focussed on emerging markets again start to flirt with Russia after months of record capital flight in the wake of last August's war with Georgia and a collapse in the price of oil. The Russian stock exchange's benchmark RTS index has gained over 30pc this year alone, outpacing most emerging markets, after a modest recovery in oil and metal prices.

But Zeljko Bogetic, the World Bank's lead Russia economist, cautioned against such optimism. "As the crisis continues to spread to the real economy around the world, initial expectations that Russia and other countries will recover fast are no longer likely," he said. Mr Bogetic also warned the Kremlin that it faced popular discontent, especially among Russia's large working class, if social spending was not dramatically increased. "The social situation has worsened so rapidly and so unexpectedly that it is important to shift the focus of the anti-crisis policy to the population," he said. "Since there is a threat of significant social pressure, it would have been clever to pay attention and assign funds for social protection." With the World Bank predicting a rise of unemployment to 12pc, Mr Bogetic called on Russia to raise unemployment subsidies by 70pc and child welfare benefits by 220pc.

Russia's fiscally conservative finance ministry has so far been reluctant to raise social spending so dramatically, fearing inflationary pressure. Even so, Russia's budget is expected to run a deficit of over 7.0pc this year, against a 4.1pc surplus in 2008, thanks to falling oil revenues, an ambitious stimulus package and a reluctance to cut back on planned infrastructure spending. Despite the size of the deficit, Russia should have little difficulty financing the budget thanks to substantial foreign currency reserves and a healthy oil windfall fund. While the World Bank's forecast is gloomy, it remains more optimistic than the predictions of some government officials who have privately warned that the economy could shrink by as much as 10pc in 2009. The World Bank's assessment is predicated on oil prices of $45 a barrel. Russia's Urals blend of crude is hovering at about $50, up from a low of $35 last year. Some strategists predict oil could continue to recover over the next few months thanks to greater discipline in enforcing production cuts by the Organization of Petroleum Countries, of which Russia is not a member.

Russia backs return to Gold Standard to solve financial crisis
Russia has become the first major country to call for a partial restoration of the Gold Standard to uphold discipline in the world financial system. Arkady Dvorkevich, the Kremlin's chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund. Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.

Mr Dvorkevich said it was "logical" that the new currency should include the rouble and the yuan, adding that "we could also think about more effective use of gold in this system". The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending. It collapsed in the 1930s when the British Empire, the US, and France all abandoned their parities. It was revived as part of fixed dollar system until US inflation caused by the Vietnam War and "Great Society" social spending forced President Richard Nixon to close the gold window in 1971.

The world's fiat paper currencies have lacked any external anchor ever since. It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible - or less likely - under the discipline of gold. Russia is a major gold producer with large untapped reserves of ore so it has a clear interest in promoting the idea. The Kremlin has already instructed the central bank of gradually raise the gold share of foreign reserves to 10pc. China's government has floated a variant of this idea, suggesting a currency based on 30 commodities along the lines of the "Bancor" proposed by John Maynard Keynes in 1944.

Ilargi: Reading Robert Reich, I have an urge to just give up. Anyone who uses terms like "sustained economic growth" and "sustainable growth " in a serious fashion needs to take a vow of silence and go back to the books, since he hasn't gotten the picture at all. As long as the people in high places don't figure out that "sustainable growth" is an oxymoron and an empty feel-good propaganda slogan, we will as societies keep on making the same mistakes, all the way until the moment when one ultimate inevitable disaster or another of our own ignorant making will finish off the mess that our impaired brains have created.

Obamanomics Isn't About Big Government
Twenty-eight years ago, Ronald Reagan used the severe economic downturn of 1980-82 to implement an economic philosophy that not only gave force and meaning to a wide range of initiatives but also offered a way back to sustained economic growth. Is there a similarly powerful animating idea behind Obamanomics? I believe there is -- and it's not a return to big government. The expansive and expensive forays of the Treasury and the Federal Reserve Board into Wall Street notwithstanding, President Barack Obama's 10-year budget (whose projections may prove wildly optimistic if the economy fails to rebound by early next year) presents a remarkably conservative picture. In 10 years, taxes are expected to fall to around 19% of GDP, a lower level than the late 1990s. Spending is expected to drop to around 22.5% of GDP, about where it was under Ronald Reagan -- including nondefense discretionary spending at about 3.6% of GDP, its lowest since data on this were first collected in 1962.

The real distinction between Obamanomics and Reaganomics involves government's role in achieving growth and broad-based prosperity. The animating idea of Reaganomics was that the economy grows best from the top down. Lower taxes on the wealthy prompts them to work harder and invest more. When they do so, everyone benefits. Neither Reagan nor the apostles of supply-side economics explicitly promised that such benefits would "trickle down" to everyone else but this was broadly understood to be the justification. Reaganomics surely marked the beginning of one of the longest bull markets in American history and generated enormous gains at the top. But its benefits were not widely shared. After the Reagan tax cuts, growth in the median wage slowed, adjusted for inflation.

After George W. Bush's tax cuts in 2001 and 2003, the median wage dropped. Meanwhile, an increasing share of total income went to the top 1% of income earners. In 1980, before Reagan took office, the highest-paid 1% took home 9% of total national income. By 2007, before the economy melted down, the richest 1% was taking home 22%. Obamanomics, by contrast, holds that an economy grows best from the bottom up. The president proposes to increase taxes on the highest 2% of income earners starting in 2011. Those tax increases will fund more Pell grants allowing lower-income children to attend college, better pay for teachers that show they're worth it, broader access to health care, improved infrastructure, and more basic research. These and related expenditures are designed to help Americans become more productive. You might think of it as "trickle up" economics.

The key is public investment. Reaganomics did not view any public spending as an investment in the future except when it came to spending on the military. Hence, since 1980, federal spending on education, job training, infrastructure and basic research and development (apart from defense-related R&D) have all shrunk as a proportion of GDP. And apart from a modest expansion of health insurance available to poor children, there has been no significant attempt to make health insurance broadly affordable to Americans. Obamanomics is premised on the central importance of public investments in the productivity of Americans. The logic is straightforward. Capital no longer remains within the borders of a nation where it is saved. It moves to wherever around the globe it can get the best return. Some of it flows as highly liquid investments that slosh across borders at the slightest provocation, as we're witnessing in the current financial crisis. But much takes the form of direct investments in new plants and equipment, telecommunications systems, laboratories, offices and -- most important of all -- jobs.

Such capital goes to nations that can deliver high returns either because labor is cheap and taxes and regulations low or because labor is highly productive: well educated, healthy and supported by modern infrastructure. In this way, every nation faces an implicit choice of whether its strategic advantage will lie in low costs or high productivity. For the better part of the last three decades America's job strategy has tended toward the former. But this inevitably exerts downward pressure on the real wages of a larger and larger portion of our population. Only those Americans whose parents can afford to give them a high-quality private education and health care, and who can situate themselves in locations with excellent infrastructures of telecommunication, transportation, public health and safety, have been able to link up with global capital on more positive terms. But not even they are entirely secure economically, because they face growing shortages of talented people they can rely on within easy reach, and can't entirely avoid the disadvantages of a deteriorating public infrastructure, such as ever more congested roads and airports.

Obamanomics recognizes that the only resource uniquely rooted in a national economy is its people -- their skills, insights, capacities to collaborate, and the transportation and communication systems that link them together. Public investment is the key to attracting long-term private investment so that a nation's people can prosper. Bill Clinton understood this but failed to do much about America's deteriorating public investments because he came to office during an economic expansion, when the major worry was excessive government spending leading to inflation. Mr. Obama comes to office during the biggest downturn since the Great Depression, and his plan represents the largest commitment to public investment in 30 years. Regulation, done correctly, is also a form of public investment because it enables consumers and investors to be confident about what they're receiving, and ensures that the side-effects of trades don't harm the public.

Reaganomics assumed that deregulated markets always function better. They do in many respects. But when they don't, all hell can break loose, retarding economic growth. Energy markets were deregulated and we wound up with Enron. Food and drug safety has been neglected, resulting in contaminated products that have endangered consumers and threatened whole industries. Financial markets were deregulated and we now have a global meltdown. Obamanomics, by contrast, views appropriate regulation as an essential precondition for sustainable growth. Under Reaganomics, government was the problem. It can still be a problem. But a central tenet of Obamanomics is that there are even bigger problems out there which cannot be solved without government. By building the economy from the bottom up, enhancing public investment, and instituting reasonable regulation, Obamanomics marks a reversal of the economic philosophy that has dominated America since 1981.


Anonymous said...

2 edisions might be a good idea..the huge wash of grim news is getting overwhelming.I am not surprised at O-mans useing a club w/the auto co.The entrenched management/union structure is not easily changed,as a consequence.[First cut the head off,then dismember]

It occured to me that as a student of history,The o-man might have been aware of Roosevelts decideing to enforce the idea of the primacy of the president..there is no one more powerful than the company head..ect.
In that case the meeting he had with the bankers ...he described as pleasent,was pleasent for him...not the bankers..

Had to shift computersmine got ill..


ccpo said...

Re: China

Agreed. The very first thought that came to mind many months back when the issue of China, et. al., dumping the dollar/treasuries was that it would almost certainly happen at some point for the very reasons you cite: Anyone who doubts Chinese desires for supremacy are sorely mistaken. Anyone who doubts they are willing to sacrifice the comfort and well-being of their own people to achieve this knows nothing of ancient or recent Chinese history. The Great Wall, after all, could just as easily be called the Great Wall of Death for all the workers that died building it and were buried within.

I've no real doubt this will happen at some point. How and when I will leave to brighter and better informed persons than myself.


Stoneleigh said...

I should point out that just because the market is falling today does not mean a rally is over. Just as declines never unfold without rallies, rallies never unfold without pullbacks. Moves counter to the larger trend are guaranteed on all scales simultaneously, as such is the nature of fractals. I would strongly suggest not making a significant move in anticipation of a resumption of the larger decline.

Ahimsa said...

Ilargi said:

"If China feels dumping dollar reserves will hurt the US more than Beijing, it might see it as a very viable move. The US is vulnerable, and it shouldn't expect any pity, if only because it hasn't shown any. China may see its reserves not as a financial, but as a power tool."

Good point!

Ahimsa said...

Economic Meltdown: The "Dollar Glut" is What Finances America's Global Military Build-Up"

by Michael Hudson

Anonymous said...

China reported exports were down but imports went down faster, leaving their balance sheet relatively intact.

Exports were $7.28 billion, down 6.9 percent.

Exports fell only a small amount.

Imports were $17.57 billion, down 44.6 percent.

In other words, Imports fell a lot more than export which means China is weaker but not collapsing at all, quite the contrary their books are still in the green.

And they still have a huge forex reserve to help fund their stimulus packet instead of faux funny money which is all the Fed can conjure up.

China's heavy industrial exports (steel etc..) actually went UP so far this year!

The US is way into the Red. On almost every count.

Suprise, surprise

cowpoke said...

Love the early edition nibbler. Checking TAE at lunch time (MST) helps me keep the consensus trance at bay for the rest of the day. Also, I'm more alert during the day to take in what you guys are throwing down.

Thanks for what you do. Remember, sometimes(often) less is more.

D. Benton Smith said...

Sovereign nations speak to each others' populace (and the world at large) in esoteric code, the second-most important of which is silence.

Silence translates as "We do not approve or agree in any way whatsoever with what you are proposing, but we are still williing to listen and will give you a little more time to come up with something that warrants a reply."

The most important code is complaint, which has levels of severity. Least severe is private communique between diplomats of equal rank. More severe is formal missive, delivered on official channels, but MOST severe is public statement in the opponent's press.

It's comparable to a slap in the face in front of witnesses, and means pretty much the same thing: "Cur! I impugn your honor publicly to show everyone what a despicable coward you are. This is your last slim chance to make ammends before I snip the buttons off the front of your shirt with a rapier. What are you going to do about it?"

That is precisely what China and Russia have just done, with their suggestion of a non-dollar reserve currency.

They just told the world, "If this 90 pound weakling has any guts at all, then why do they tolerate us kicking sand in their face in front of their girl friend?"

The U.S. responded with silence.

Anonymous said...

The US public is so severely handicapped in the world awareness department, they would need weeks of 're-education' at the hands of their Ministry of Propaganda (the MSM) in order to even understand the insult and the challenge that has been issued to their government.

The US government does not want the public to perceive how weak America actually is right now, on top of being Dead Broke and about to slide into a severe Depression.

It's just One More Bit of Bad News for the Homeland.

Not Gonna Do It.

D. Benton Smith said...

China dumps its foreeign reserves. Value of their dollar holdings falls by half. 1 Trillion dollars.

China buys up choicest US assets at deep discount and loans back the operating capital it's new possession (the United States of America) now needs just to stay alive... loan repayable in Yuan, of course. Priceless.

Submit your advice said...

Most of China's imports are raw materials or manufactured parts, either used to build their infrastructure or as components of goods assembled in China for export. Thus a drop in imports really means they are cutting back on infrastructure development and manufacture for export. That's the way I would interpret it. Also, the largest exporter to China is the European Union, and there is a great deal of importing of electrical components from Japan, so the big pain in this would be felt by them. And the Chinese, of course, who are making fewer goods for export.

Anonymous said...

Summary of Nightly Summary:

Overpopulation leads to unrest and life-long farm-work under the remnants of a failed democracy where aliens and humans intermingle using terra preta which grows food and rabbits in a nonsustainable, yes, nonsustainable society ruled by no one except for the chosen religion of each individual and entertainment is provided by linking web photos to disgraceful one-liners.

(not to worry--this is not intended to be a regular feature)

Greenpa said...

Ilargi: "Let the president explain in plain terms to the people why Wagoner was guillotined while Lloyd Blankfein, Vikram Pandit and Edward Liddy and all those chaps are still in their plush seats. "

um- because somebody had to be first?

I really do not comprehend all the folks whimpering about "it's not fair!".

If you were Vicious Bandit- would you now be paying attention a little more? Oh, yeah.

And I will predict- other bad plumbers will now also be let go.

Kiddies- if you're going to change a practice- that means, at some point, you stop doing it the old way, and do it a new way. No, you can't just alter the entire world in one whack.

GM got lucky; they're first. They will not be the last.

Anonymous said...


Today's selloff doesn't mean the rally's over, but there's a good technical argument to be made that it is over if we mirror what took place, chart wise, during GD1.

Look at the $trillions thrown at this crisis and we struggle to get above Dow 8k. Why? Think GD1.

Good charts over at Market Ticker explaining this correlation. At any rate I think this bull run has run it's course. IMHO the gates of hell beckon.

Greyzone said...

Greenpa, I disagree.

The entire effort by Bush, Paulson, Bernanke, Geithner, and Obama has been aimed at protecting the bond holders of the big financials from taking any loss whatsoever. Any removal from people at the top would be a signal that such a policy is changing and Obama can't afford to make that change. He owes these people, completely, utterly, with his entire soul.

The CEOs of the major financials will remain untouchable... until the common man touches them... more directly.

Dan said...

OK, so the DOW is down 300 points right now. Check this out:

BAC BK OF AMERICA CP 6.17 2:15PM ET 1.17 (15.94%) 323,066,876
C CITIGROUP INC 2.37 2:15PM ET 0.25 (9.54%) 336,277,012

On Thursday of this week the House is going to move to supend mark-to-market accounting standards for the likes of BofA and Citi. This means that the accountants at these institutions will be able to valuate their assets however they so choose. When this happens, all of a sudden these banks are going to appear far more solvent than they in fact are because a s**tload of assets that are currently marked down to zippo will magically be revalued to BILLIONS!! Well, just before the glorious vote goes down in the House FC (the move to legislatively suspend MTM), the short-sellers will hit the BUY button en masse---along with lots of other investors who will see the price rising due to all of the "short covers"---and bingo, we're talking banks shares up over 100% in a day!! Yippee!!!

As a matter of fact, I am quite confident that Timmy Geithner and Mr. O are putting the full court press ("Do it, or else...") on Congress to lift mark-to-market because they know that a whole galaxy of gamblers and bettors is looking to short sell the banks---and recalcitrance on the part of Congress could precipitate the very bank run that our fearless leaders fear.

But the fraud and the charade persist, because having an accountant cook the books by virtue of mark-to-whatever the heck you want does not change the underlying value of the assets. And the short sellers of today who make billions off of the suspension of mark-to-market will, like the rest of us, watch in bemused amazement as the mark-to-magic balloon bursts a few weeks or months down the road, because the banks are still completely insolvent and because ain't no one gonna invest in worthless assets that are clearly being tweaked to look yummy on the outside.

Greenpa said...

Ilargi: "Reading Robert Reich, I have an urge to just give up"

I understand the urge; but remember Planck's Other Constant, cited here recently - academic change mostly has to wait for the old boys to die off, before new ideas can actually take hold.

Reich definitely qualifies as an "old boy". IQ just doesn't have much to do with it.

Chaos said...

The fall of GM has been extensively documented (in amusing fashion) over at The Truth About Cars.

Some good writing over there...

Rototillerman said...

Weird moment last night. I was putting the garbage can and recycling bin out at the curb in our middle-class inner-city Portland neighborhood when I notice a large Ford Expedition creeping down our block in the twilight. What the heck is going on, I wonder? As I watch, the SUV pauses, a young man jumps out of the rear passenger door, and he rattles through the bottles in a yellow recycling bin. Grabs a few beer bottles, jumps back in the Expedition, slams the door, and the slow creep down the block resumes. All I could think was, wow, does he get enough bottles to even pay for gas to put in that beast?!?

BobE said...

I've just got a terse letter from Barclaycard cutting my credit limit by 30%.

They just said they had 'reviewed how I used my card'. I wonder what discussions they had in their PR department about the correct phrase to use.

They certainly didn't say 'In view of the current world financial catastrophe, we are doing our bit to reduce the unsustainable level of unsecured global credit'.


Anonymous said...

Dan W:

Nothing wrong with revisions, but today, after months of constant warnings predicting near term societal and economic collapse, you write it will take years, perhaps even decades for any collapse to occur.

Why the sudden change of opinion?

Starcade said...

GM's a zero.

Chrysler's a zero.

If I had any money in the markets at all, I'd short them at basically any price at this point.

GM's a goner in 60 days.

Chrysler's either part of Fiat or gone in 30.

Their death warrants were signed last night.

Starcade said...

ccpo: Last year's Olympics were the coming out party of China as the new Greatest Nation on Earth.

What they did, at whatever cost to their own people, put the USA to shame. And I'm not talking medals, necessarily -- I'm talking _presentation_.

There will have to be a lot of luck to even have a USA by London 2012.

Starcade said...


There's one big problem with that statement about whether the rally is over or not:

One of the major possibilities as to when TEOTWAWKI (which has already occurred) becomes TSHTF (which is going to) is the death of the US car industry and the job losses which must result.

We now have a timeframe as to when that death will happen.

Dan said...

@ anon

good question...

I've been catching up on my history a bit...and while when we are IN IT "it" seems imminent, but history seems to indicate that things (per se) get drawn out over time. Unless there's some huge wild card type of incident (terrorism, earthquake, etc.) I could see yeas and years of decline.

Anonymous said...

Dan W,

Most of the assets on banks balance sheets are already marked near 100% (go to zerohedge's web site for clarification). MTM suspension won't change much other than increasing distrust. It's a big nothingburger.

Starcade said...

Anon 1603: They have to lie through their teeth to have any value in their companies at all.

Stoneleigh said...

Anon @2:56,

Today's selloff doesn't mean the rally's over, but there's a good technical argument to be made that it is over if we mirror what took place, chart wise, during GD1.

Look at the $trillions thrown at this crisis and we struggle to get above Dow 8k. Why? Think GD1.

Good charts over at Market Ticker explaining this correlation. At any rate I think this bull run has run it's course. IMHO the gates of hell beckon.

IMO the bear market began in 2000 with 2000-2002 as the first phase down, 2003-2007 as a major interval, and 2008 onwards being the next major decline. This would correspond roughly to 1929-1932, 1933-1937 and 1938 onwards. The difference is that last time the first down phase was the largest, whereas this time the second one would be. If this parallel holds then we would be uncomfortably close to major conflict.

I think (on balance of probabilities) that the rally is not yet over. When it is, I agree that the gates of hell beckon, to use your phrase.

Anonymous said...


You might be correct, and we push SP, say, 1000 before the gates of hell. If it plays out this way I think the gates commence this fall.
A lot of potential tape bombs, however, could make the gates appear anytime along the way though.

Anonymous said...

To be fair (I use that term loosely), Wagoner did more for GM in his tenure as CEO than any in the previous 30 years. That also speaks volumes about the sorry state of the company. Rick was a bean counter, but to his credit he recognized his weaknesses and hired Bob Lutz to fix P.D., but ol' Bob has now jumped ship.

Ford is not far behind the others, but (former Boeing) CEO Alan Mulally is putting in a valiant effort. Ford has changed as much in the last few years as it has in the last few decades, but it looks like Mulally will run out of time.

By the way, Rick's severance was worth $20.2 million - he had made $63 million in his decades with GM until now.

scandia said...

I don't believe the US will allow itself to be without a car maker as the Pentagon needs those skills.
My guess is that there are those waiting in the wings to pick up the pieces cheap after bankrupcy. No way will the US become dependent on importing vehicles.

Phil said...

Will that Italian car maker pay for Chrysler in Fiat currency?

Anonymous said...

As an addendum to previous Anon comment re: Wagoner/Mulally

Toyota has reportedly burned as much as 70% of cash reserves already. Anybody who thinks Toyota, Honda, Hyundai, VW, PSA aren't swirling down the toilet bowl due to years of optimistic/idiotic management are deluding themselves. GM & Chrysler were just the weakest. IMO there are only a handful of automakers who can weather this, nevermind what shape they'll be in on the other side, and who will buy their cars.


el gallinazo said...

Re great suckers' rally

The question of whether the rally is over for the moment and separate from the GSR to come is, to a degree, dependent on definitions. Do we need a new low below 666 between the rallies to separate them?

Bigelow said...

Greenpa said...

"...but remember Planck's Other Constant, cited here recently - academic change mostly has to wait for the old boys to die off, before new ideas can actually take hold."

Reminds me of something similar, I had a thought regarding Nixon: yes it is bad, but at least we will outlive these crooks. That has been subject to a bit of revision since.

VK said...

Twice a bite of TAE lite daily sounds good to me!

@ Dan W

We're accelerating history here, isn't it a fact that in the past 2,500 years the lifespans of empires have declined considerably from about 450 years to 250 years.

As stoneleigh says, Deflation requires a tipping point. Once we crossover into the tipping point, it can all go downhill very fast.

Bigelow said...

el gallinazo said...

"Do we need a new low below 666 between the rallies to separate them?"

We need to touch 550-580 before the next multi-year "rally".

VK said...

This is what Wolfgang Munchau wrote in his article today,

The economy is trapped in a vicious circle where credit crunch and recession mutually reinforce each other.

Kinda sounds like what TAE would say.

@ El Galizano

Regarding the spiritual journey you have undertaken, why is that the Earth is considered to be the "toughest"? In many religions, earth is thought to be an entry point to heaven.

I reckon we're spiritual beings experiencing a human journey. I don't know if you're familiar with Dr. Jill Bolte Taylor, in this fascinating video - - she talks about how "nirvana" or a higher state of consciousness could exist in our right brain.

We might have the hardware to experience this legendary form of "inner bliss" i.e. transcend.

DrChaos said...

Ilargi, you used to do extra posts on topics of interest rather than just the main "debt rattle" - maybe you should do those again (time allowing).
On Robert Reich - we have a word here in Ireland (BTW we just lost our AAA status woohoo!) for people who talk through their arse: a gobshite
It's a great word

VK said...

A few tidbits from Orlov's latest smackdown,

As the federales grow weak in the US and Mexico, the battle lines will advance north of the border, leaving Mexico a quiet and largely intact backwater.

Life in the USA gives everyone a pain that is for many people simply not survivable without drugs: either alcohol, pharmaceuticals or illegal drugs

The downside of all this is that it will be hard to find anyone sober enough to operate a light switch

The upside to that is that the national electrical grid will go away, so there will be little need of that.

I've said it before and i'll say it again, no one does doomer humour better than Orlov. :-) (Kunstler comes close)

ca said...

Ilargi/Stoneleigh --

In a post today, Dan W. writes that collapse could take far longer than he first thought. How likely do you think it is that collapse could take several years or more beyond your current projections?

Submit your advice said...

el gallonazi, either way Stoneleigh is correct, but if in the next, say, 2 months or so S&P goes sub-antichrist then Stoneleigh Classic was correct .ELSE. Stoneleigh v. 2.0 is correct.

Anonymous said...

To those who think China will be hurt more by the global unravel than say, the U.S., I have an old joke that 'bares' repeating.

Two guys are about to embark on a wildness hike through the mountains of Montana. Being Grizzle Bear turf, the more experienced hiker tells his partner that a confrontation with a grizzle bear is always fatal.

"They can outrun anyone, they can out swim anyone and they can climb trees and grab anyone"

All was going well with the wilderness adventure until the fateful day they turned a corner and came face to face with a gigantic grizzle. The less experienced hiker turns to his friend and says,"What should we do?!"

The more experienced hiker says, "I'm gonna run like hell!"

His friend says, "I thought you said a grizzle can out run anyone, why would you even try to get away!"

The more experienced hiker says, "Because all I have to do is out run you."

Stoneleigh has said many times that currencies the world over will collapse, at different rates, a race to the bottom of sorts.

The multi trillion dollar derivative monster of bets not backed up by any reserves is going to eat up and destroy just about all remaining assets in the world.

But China only has to out run the US, not the derivative Grizzle Bear.

Stoneleigh said...

El G,

Do we need a new low below 666 between the rallies to separate them?

If we made a new low below the previous one then the rally would be over. As long as we stay above the previous low, the larger rally is still alive. I think it still has legs.

A pullback should retrace at least 38% of the preceding advance, and 62% would be more typical. It wouldn't happen in one step though. The simplest corrective pattern would be down-up-down, but they can easily be more complicated.

el gallinazo said...


"Regarding the spiritual journey you have undertaken, why is that the Earth is considered to be the "toughest"? In many religions, earth is thought to be an entry point to heaven. "

Yes, I have watched Jill Bolte Taylor's video a few times. In the 1950's, the novelist Aldous Huxley took a mescaline trip. He wrote a long essay about the trip called "The Doors of Perception" and later an analysis of what he thought was going on in the brain which he titled "Heaven and Hell." Taylor's presentation led me to believe that Huxley got it right without the last 50 years of advance brain research to aid him. But with all the advances, theories of how memories are related to the physical structure and chemistry of the brain are all just wild supposition. And how the late and lamented Alex Pepperberg, with the brain the size of a shelled walnut, can function cognitively at the level of a three year old human child is also quite a mystery.

As to your other questions, Ilargi has made it pretty clear over the last year that he believes that the idea of consciousness divorced from a physical, living body is a load of horse crap, so in deference to our exalted host, why don't you email me and I will respond directly?

Anonymous said...

One of Dmitry Orlov's funnier observations on collapse is his point on the psychological implications of a culture going from high expectations to much lower expectations.

He said that the Russians had very low expectations for 'lifestyle' and the high life.

When collapse came, it was like falling out of a first floor window to the ground.

China has higher expectations now than the USSR did then, but they still live much lower to the ground than the U.S. Maybe it will be like falling out the 3rd floor window, very hard with much pain and injury, but doable.

For Americans, the dramatically lower lifestyles that await most of them will be like falling out the 10th floor window.


It's not the falling that hurts you, it's that sudden stop.

el gallinazo said...

Anon 7:46 PM

Though it has nothing to do with the moral of your story, but a piece of misinformation that could cost someone their life. Grizzlies cannot climb trees. Black bears can. Evolutionary biologists suspect that despite their greater size and strength, the reason that grizzlies are far more aggressive than black bears is that they can't climb trees to flee. Flee from what? North America had a lot of very large nasties up until 14,000 years ago when the glaciers melted. Sabertooths and dire wolves for a start.

el gallinazo said...

Anon 8:06

But didn't the Russians have to abandon their McDachas?

Hombre said...

With regard to why GM will not go away anytime soon. Billions are being tossed around in an industry that has no long term future at anything like previous levels.

It seems clear to me that there are at least four powerful folks making the point behind the scenes, the joint chiefs of staff. The auto industry is also the military vehicle/production industry.

Greenpa said...

el Vulturo :" but a piece of misinformation that could cost someone their life. Grizzlies cannot climb trees. Black bears can. "

Yep, watch that misinformation, oh dweller in the Caribbean. JUVENILE grizzles can, and do, climb; up to age 2 or so.

"Evolutionary biologists suspect that despite their greater size and strength, the reason that grizzlies are far more aggressive than black bears is that they can't climb trees to flee"

lol. As a dead serious evolutionary biologist who has worked extensively on mammals, I don't. I suspect the reason they're more aggressive is because they're grizzlies. Flee, my ass. They and their ancestors, back to cave bears and short faced bears haven't fled from anything, for a long long time. Except each other. You don't want to be a juvenile griz in the territory of an old male. But then- they CAN climb.

Persephone said...

If I may interrupt the Grizzlie dispute, first for the record may I say though I believe in the importance of organized labor, I am glad to see that the USG is not making ongoing payments to Cerberus.

I also wanted to point out for those outside the US, there is a rather large multi-city protest planned for April 11. Let's hope it not a Kent State situation.

VK said...

President Sarkozy yesterday threatened to wreck the London summit if France’s demands for tougher financial regulation are not met.

France will not accept a G20 that produces a “false success with language that sounds good but contains no commitments”, his advisers said.

Asked if this meant a possible walk-out, Xavier Musca, Mr Sarkozy’s deputy chief of staff for economic affairs, said: “A basic rule with nuclear deterrence is that you do not say at what point you will use the weapon.”

el gallinazo said...


"Yep, watch that misinformation, oh dweller in the Caribbean. JUVENILE grizzles can, and do, climb; up to age 2 or so."

Thanks. If I am ever up in the NorthWest and encounter a grizzly, I'll be sure to inquire as to whether it has had its second birthday before I devise a strategy.

As to grizzlies always being on top of the food chain, I'll will bow to your area of expertise. But there is some evidence that Smilodon fatalis hunted in packs, so in hard times, taking down a bear might not be inconceivable.

The climbing tree thing was told to me by an Ph.D. evolutionary biologist, though now I vaguely remember him excepting juveniles, and I am a sucker for Ph.D. lore, particularly economists.

Chaos said...

Re: the first article posted (GM, Chrysler bankruptcies in order to shed bond obligations, but mostly health care costs for union workers)

The US healthcare system is its Achilles heel. It gives the lie to the assertion that the US is the greatest nation on earth, when 50 million are uninsured, and millions more are on the verge of bankruptcy should a major or minor health issue occur. None of this is new, or different, but in the economic waterfall we're in, it's just more glaring.

Anonymous said...

I once told an auto mechanic I was hearing funny noises in my engine; he said wait a little while and it won't be funny anymore.

Many have been hearing noises from under the national hood for a few decades now. And the apologists acting as mufflers for the status quo no longer sound so appealing or charming. And why are they laughing, there is nothing funny about 600,000 lost jobs each and every month.

Back in 1983, the last official 10%unemployment rate, (or at least according to calculations of the time) there was still a skeleton of real industry left in the country. What aspect of the economy is strong enough to rescue unemployment and lead the country out of a deep slump this time around?

And then there is the aging population. If people think universal healthcare is expensive, wait until the costs of 40% uninsured are tabulated. And yet, there appears to be no money left for new and expanded social programs.

Persephone said...

@ chaos
U.S. healthcare is about to get worse - Medicare will disappear before Social Security.
If you are under 50 y/o now, the USG will not be able to afford either.

redcatbiker said...

A Crack in Capitalismo's Facade

Adopting the slogan "life before debt," Ecuadorian President Rafael Correa announced that his government will default on $3.9 billion in foreign commercial debts.

Anonymous said...

Anecdotal story. I was having a brewski awhile ago at a local biker bar at lunch time, it's much more tame then.

Guy next to me, after several mugs, got to rambling about having no health care coverage at work. Says if he gets something fatal that could have been treated when it was in the early stages because of no health coverage, that he really would not have anything to loose by 'taking a few choice dickheads with him to the hereafter'.

Sounded like the beer talking until he opened his jacket so show a shoulder holster with a very large revolver and gave a big Jack Nicholson grin.

I sign of the times?

The Duke of Earl

Starcade said...

Kunstler said that it is becoming more apparent that the oncoming destruction will reduce Americans' way of life 20-50%.

If that's the case, so will the population go by about that same fraction.


If they really want to save GM then someone is going to smack down Obama on that level too -- after yesterday, I can't see how GM even survives the 60 days it has left.


Remember, the one thing you have to keep in mind is that Obama is not in charge of the show unless he can assure his own safety when he makes decisions like yesterday's.

el gallinazo said...


"If you are under 50 y/o now, the USG will not be able to afford either."

We should be so lucky. I think 60 would be an optimistic number.

Thanks for the Timesonline link, but I got lost in the spouses of the G20 slide show next to the featured article. Notably absent were the 300 for the Saudi King.

Ventriloquist said...

@ VK

I've said it before and i'll say it again, no one does doomer humour better than Orlov. :-) (Kunstler comes close)

One of Illargi's greatest weaknesses

a seemingly total lack of humour.

Which is why nobody touches Jon Stewert on this blog.

Sorry, had to say it

and Stoneleigh,

marginally better, but not by a huge amount




Sorry to say it but it's the truth

Starcade said...

Duke of Earl: Rule by the gun. Sign of the times.

Persephone: And, at that point, the massive population reduction begins.

el gallinazo said...


"Remember, the one thing you have to keep in mind is that Obama is not in charge of the show unless he can assure his own safety when he makes decisions like yesterday's."

Yeah, for once I agree with you. There hasn't been a shadow government hit on a president for 46 years. I am not a big fan of The Manchurian Candidate, but I thought Biden was an exceptionally bad choice in a sort of Shakespearean tragedy way. He is overwhelmingly ambitious and corrupt, and his stupidity may place him below Sarah Palin in terms of human evolution, but I will once again defer to Greenpa on that score.

Anonymous said...

the second comment section looks like an orphan, join the party

el gallinazo said...

Anon 10:35

Your link gives me a blogspot error message. Suspect that it got cut off in the posting. Where did you get it? Comment link of part twp leads to the same page as part one.


Yeah, not only does he rarely reference Jon Stewart, but "America's finest news source," the Onion News Network is **never** referenced. And in an amazing burst of Jungian synchronicity, their last video settles the entire grizzly attack controversy:

RC said...

I think the comments for the day need to be corralled under the second post of the day. OR, it should be easier for the dial up persons like myself to get back to the first set, but it just seems like the introduction of another aggravating circumstance. I do think that the one comment section per day concept has worked well here and should not be altered.
My terminal irritation syndrome {TIS} will probably cause me to just stop reading comments and commenting too, but I harbor no delusions that anyone would care.
I do like the extra daily photos.
Is D. Benton going to explain if there is going to be a duel and who the girlfriend is? Thanks, D.

RC said...

Thanks El G, I wish I had seen your comment before I posted.

Ilargi said...

you guys are about 5 hours behind the curve of two posts a day

Crazy Joe DeVola said...

Isn't my moniker a good addition to the sock puppet list?

I really like Knutty Knitter, which inspired me to think of that crazy character on Seinfeld -- Crazy Joe DeVola.

He disguised himself as a mean old clown in one episode. He's well spoken, appears to be knowlegeable in many different subjects, has a big ego, and is quite disturbed.

I salute my fellow clown(s) on this board, including the Anons, because they have a right to be noticed too.

Mugabe said...

Ilargi says --
"Real wealth has been sinking for decades, as is easily seen by looking at the development of the costs of education and health care"

Not to defend the old system, but I think this particular diagnosis is not correct.

It's a well explained phenomenon in economic theory (pardon my language) why the cost of health care and education should rise relative to other goods over time -- because most other goods are subject to improvement in design and productivity in production, but education and healthcare are mostly not. Cars that were once assembled by hand are now assembled by robots using fewer, more standardized parts. A computer 100x more powerful than 15 years ago costs less in nominal terms because of Moore's law plus scale and efficiencies in manufacture. It would be expected a priori that the price of education or health care should rise over time relative to cars or computers. This is natural, not the sign of a systemic defect.

Where attempts are made to increase the efficiency of production in healthcare (larger facilities, shorter more mechanical appointments, less-trained providers) or education (larger class sizes, less trained providers a.k.a. grad students, less personal interaction) people complain, not unreasonably, that the quality suffers. There is a close correlation between what we perceive as quality in education or healthcare and inefficiency of delivery. So the price of "good" healthcare or education should tend to rise relative to goods for which increased efficiency of production and delivery does not reduce utility. That is not a failure or conspiracy of TPTB.

Submit your advice said...
This comment has been removed by the author.
Anonymous said...

I can see the calls for a complete re-structuring of our entire society soon.But I doubt if folks are going to like how this ends up.

The USA is losing its empire,and going to just be a regular country soon.If it hangs together.When the regular folks see how bad we have been screwed...when ssn and medicare is gone...
Watching it happen will be surreal...its the case now..."reality" is starting to get a lot more fluid at the company I am "sort of"employed at...all these pronouncements



APC said...

"It will let President Obama go into history as the man responsible for 2 million jobs lost and counting."

I don't see how you come to that conclusion. Seems to me the industry did it to itself, and Obama has been pres for only a couple months now. Don't think he'll be forced to own this fuckup.

Bryan McNett said...

>cost of health care and education
>should rise relative to other goods >over time -- because most other
>goods are subject to improvement in
>design and productivity in >production, but education and >healthcare are mostly not.

education was more expensive than today in 1900, and was cheapest in the 1950s and 1960s. your theory applies only to the period from the 1970s to today, which coincides with declining real standard of living. Which concides with peak oil America.

Aldabra said...

Thank you for the new posting schedule. It works much better in my timezone (England).

Thank you also for the collation work. It is much appreciated.

el gallinazo said...
This comment has been removed by the author.
el gallinazo said...

The next bailout for The Weasel:

Divorced wives of banksters. Employment opportunities in the trophy wife market must also be encountering hard times. See

Heard on This American Life that shark attacks have hit a five year low due to the recession. I can also state anecdotally that barracudas seem to be more amiable lately when their privacy is encroached upon.

I also like to listen to the NPR Planet Money team. Reminds me of how much fun it used to be when I would watch over for my five-year-old son's play group. Kids say the darndest things.

Stoneleigh said...

El G,

There is a separate comment thread for the newer post, but as there are now two threads on the front page at once, link to the comment thread for the newer one is somewhere in the middle of the page rather than at the bottom. The comment link at the bottom is for the first post of the day. The easiest way to find the newer comment section without scrolling up and down is to click on the title of the newer post, so that only that post is on the page. Then the comments will show at the bottom of that page.

Unfortunately, it isn't possible with the blogger format to have one comment section for more than one post. I would imagine Ilargi will play around with parameters such as number of posts on the front page to see what works best for people. The idea of having two posts was to break things up a bit so that reading posts is less of a marathon effort.

Greenpa said...

"Unfortunately, it isn't possible with the blogger format to have one comment section for more than one post."

I too am finding the new format more work than I like.

What COULD be done here is - make the first post; then create the second post as a separate entity, but rather than hitting "post" - copy the entire thing from the "edit Html" edit mode; and then paste it, at the top of the first post, in the same edit mode.

Then there would only be one post, one comment section (which I would love) - but the work would be cut into two halves.


Anonymous said...


IBM Files Patent for System that Calculates How to Offshore Jobs While Maximizing Tax Breaks

Whoa whadda surprise! I thought they would keep this sort of thing quiet, like they did with some of the punch card use in Hitler's Germany.

Anonymous said...

Anon 10.35:

And there you have it. Is there also a program that can calculate how many trillions of dollars worth of American jobs have been farmed out to other countries ? As for the contention that this practice saves the American consumer money, Bullshit. These companies minimize labor costs and maximize profits. Classical, textbook capitalism.

A friend of mine moved his production shop to India. At the Friday night cocktail parties he speaks with the liberal forked tongue; come Monday morning, he is a cut throat businessman.

Capitalism without conscience is simply cannibalism. It's practitioners picked the meat off the bones long ago, and now the skeleton of a once thriving middle class is having its marrow sucked dry in order to pay for the greedy avarice of the carnivores who devoured the economic carcass a long time ago. Kenneth Rexroth below:

A Memorial for Dylan Thomas


They are murdering all the young men.
For half a century now, every day,
They have hunted them down and killed them.
They are killing them now.
At this minute, all over the world,
They are killing the young men.
They know ten thousand ways to kill them.
Every year they invent new ones.
In the jungles of Africa,
In the marshes of Asia,
In the deserts of Asia,
In the slave pens of Siberia,
In the slums of Europe,
In the nightclubs of America,
The murderers are at work.

They are stoning Stephen,
They are casting him forth from every city in the world.
Under the Welcome sign,
Under the Rotary emblem,
On the highway in the suburbs,
His body lies under the hurling stones.
He was full of faith and power.
He did great wonders among the people.
They could not stand against his wisdom.
They could not bear the spirit with which he spoke.
He cried out in the name
Of the tabernacle of witness in the wilderness.
They were cut to the heart.
They gnashed against him with their teeth.
They cried out with a loud voice.
They stopped their ears.
They ran on him with one accord.
They cast him out of the city and stoned him.
The witnesses laid down their clothes
At the feet of a man whose name was your name —

You are the murderer.
You are killing the young men.
You are broiling Lawrence on his gridiron.
When you demanded he divulge
The hidden treasures of the spirit,
He showed you the poor.
You set your heart against him.
You seized him and bound him with rage.
You roasted him on a slow fire.
His fat dripped and spurted in the flame.
The smell was sweet to your nose.
He cried out,
“I am cooked on this side,
Turn me over and eat,
Eat of my flesh.”

You are murdering the young men.
You are shooting Sebastian with arrows.
He kept the faithful steadfast under persecution.
First you shot him with arrows.
Then you beat him with rods.
Then you threw him in a sewer.
You fear nothing more than courage.
You who turn away your eyes
At the bravery of the young men.

The hyena with polished face and bow tie,
In the office of a billion dollar
Corporation devoted to service;
The vulture dripping with carrion,
Carefully and carelessly robed in imported tweeds,
Lecturing on the Age of Abundance;
The jackal in double-breasted gabardine,
Barking by remote control,
In the United Nations;
The vampire bat seated at the couch head,
Notebook in hand, toying with his decerebrator;
The autonomous, ambulatory cancer,
The Superego in a thousand uniforms;
You, the finger man of behemoth,
The murderer of the young men.

Anonymous said...

IBM deserves the title Corpronazi

They made it possible for the Third Reich to efficiently ID it's adversaries and 'neutralize' them.

Nice work Big Blue.

from Mish:

"Q: What Makes IBM Special?

A: Filing for an outsourcing strategy patent twice in 17 months only to withdraw the application when it was publicized."

Are blue arm bands with the company logo really mandatory at IBM?

Just asking