Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

--You're right, it does tweak the hot button of some of them,

“BRIC” is a new word that has appeared recently, consisting of the first letters of Brazil, Russia, India and China....

This first “BRIC summit” is held under the pretense of deep development in the international financial crisis....

There are two major things to watch for at the BRIC summit. One thing to watch is how the participating leaders will evaluate the dollar....

Officials from some countries suggest creating a super sovereign reserve currency by using IMF Special Drawing Rights as a basis. BRIC has already begun to increase IMF bonds to enhance the right of speech of emerging countries in the international financial system and to force the U.S. to be accountable for the dollar. As a matter of fact, in many countries’ bilateral and multilateral trade arrangements, the process of moving “away from dollarization” has begun....

In recent world history, any big economic crisis means the restructuring of the world’s economic model and financial order. This is unavoidable and it is independent of humans’ subjective will. People can only act along with it.

Stocks in Vietnam, Sri Lanka and Serbia have outpaced the rest of the world since April, with benchmark indexes for each rising more than 32 percent. That means it’s time to sell equities throughout the developing world, some of the biggest money managers say.

The last time the smallest emerging markets led a rally, in 2007’s fourth quarter, bullish investors predicted that developing economies would break free of the U.S. recession’s shackles. They were wrong.

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“You often see frontier markets outperforming at the end” of a rally, said Arjuna Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which managed $433 billion at the end of 2008. “There’s a chance of a sharp correction.”

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Developing-nation equities already are slipping from this year’s highs after price-to-earnings ratios made them more expensive than any time since December 2007. Investors are pulling money from emerging-market stock funds for the first time since March amid concern that a global recovery will take longer than economists predicted....

A major systemic crisis became unavoidable after the revelation of GSE accounting irregularities ensured that mortgage guarantors Fannie Mae and Freddie Mac would no longer provide the mortgage/MBS marketplace a "backstop bid". Going back to 1994, the GSEs had repeatedly nurtured concurrent booms in mortgage lending and MBS speculation through their aggressive market turmoil-periods of MBS purchases and liquidity creation. Speculators had over the years become quite emboldened, but their source of liquidity in the event of trouble would be nowhere to be found in 2007.

I see ominous parallels to the mortgage/Wall Street finance bubbles with today's government finance bubble. First, the scope of "federal" government marketable debt issuance - approximately $2.0 trillion annually - has quickly reached massive proportions. Especially since little of this ("non-productive") debt is financing real economic wealth creation, there is a rapid deterioration in the quality of debt being sold. There are clear Ponzi finance dynamics in play.

An interesting shift in thinking about the "bailout". Not sure how I feel about it until all details are known, but I like the fact that we're starting to move away from Wall Street and toward Main Street at least conceptually!

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/10/AR2009071003206.html

The Obama administration is developing an initiative to take money from the $700 billion program for the banking system and make it available to millions of small businesses, which officials say are essential to any economic recovery because they employ so many people, according to sources familiar with the plan.

The new effort -- which would represent a striking shift from the rescue program's original mandate -- would direct billions of bailout dollars toward a program that aims more at saving jobs than righting the financial system.

A proposal being floated by senior Treasury Department officials calls for using the bailout funds to expand an existing government program that helps small companies borrow money from banks a low rates to keep their businesses going, the source said. These "working capital" loans would come with few restrictions and could be used for buying inventory, holding onto employees and paying off short-term debt.

We are in the first deflation since the Great Depression, albeit a mild one. In fact, raw materials prices have fallen just as far, but our consumption basket has shifted to items whose prices are slower to deflate.

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It seems quite plausible that the dollar will fall sharply against some other currencies, notably the Asians, and against gold and other commodities. That may not, however, interrupt the deflationary tendencies which predominate, for to have actual inflation, someone has to take cash and buy goods rather than (for example) securities. If everyone hypothetically wanted to buy securities rather than goods, prices of goods would crash.

Something like this is happening, of course. An aging population increases its purchases of securities and decreases its purchases of goods as it saves for retirement. Americans have saved nothing for the past ten years, and the capital gains that they considered savings-substitutes have vanished. That means that an enormous savings deficit accumulated over more than a decade has been exposed, and that Americans must attempt to correct it quickly and under the worst of circumstances.

That creates a deflationary shock that a few trillion dollars’ worth of stimulus cannot begin to mitigate. America may have the worst of both worlds: currency devaluation AND price deflation, as in the 1930s.

Back during Japan’s lost decade of 1990-2000 (the first lost decade, that is), Japan’s population had just began to age dramatically. In 1990 the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000. As the Japanese aged their appetite for savings grew, and as their stock portfolios and home values crashed, they saved more and more. The more they saved, the worse the economy did....

Fast forward to America in 2010, with an elderly dependency ratio of 19%, right around where Japan was in 1990. By 2020, it will rise to 25%, almost as fast as Japan’s....

Savings are deflationary: we don’t spend on current good but on future goods (securities). The government may attempt to substitute for household spending but it never quite works, no matter how many public works projects the government sponsors (again, Japan poured more cement than anyone else)....

country with a preponderance of old people will show strong political pressures against inflation.... ...that’s why the Japanese never objected to deflation. As old people, they benefitted.

"Even as it weathers the worst economic downturn in decades, JPMorgan
Chase said Thursday that it had made a $2.7 billion second-quarter profit as a
result of stellar trading and investment banking results."

This was essentially the same story we got from Goldman. Neither bank made
its money the old fashioned way -- by lending to worthy projects; they made
their dough by "trading" and "investment banking." In other words, they made
billions from speculation.

Anyone who takes this as evidence of a recovering economy should work for
the government. Only a government economist or a mental defective (excuse
us for being redundant) could believe that genuine prosperity can be built on a
foundation of speculating by large financial institutions. You can see why by
asking a simple question: whom were they trading against?

Speculating is a zero-sum game. No matter who wins, the economy is not a bit
better off; it has not a centime more in resources. Goldman and JPMorgan
report earning, together, more than $6 billion. Who was on the other side of
that trade?

There is also something fishy about the whole thing. Trading is not only a
zero-sum game, it's a game of chance. Traders lose money about as often as
they make it. Of course, normally, the traders at the big banks have an
advantage; they are not idiots. They make money by taking it away from the
amateur traders, who are idiots. But what amateur traders put up $6 billion?

Our guess: the fix is in. They are taking advantage of the feds' stimulus
programs...and trading against the biggest patsy in the world, the U.S.
taxpayer.

The Fed’s reckless monetary policy has cost the US government trillions of dollars in bailouts for banks, the automobile industry, and homeowners. More precisely, on July 21, Neil Barofsky, the overseer of the Troubled Asset Relief Program (TARP), estimated in a prepared statement to a committee of the US House of Representatives that the total exposure of the US government to the financial crisis at US$23 trillion to $27 trillion. Fed policies set off commodity price inflation, most notably in oil prices, and exchange rates instability; it aggravated external current account deficits....

Recently two opposing views regarding the structure of the Fed have emerged: a group of academicians have circulated a petition that calls for preserving the Fed’s independence. The opposite view expressed by a group of US Congressmen calls for enacting central banking legislation and reining in the absolute powers of the Fed. Which is the best path for the US?

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he recent debate regarding the role of the Fed is not new and reflects two opposing views of central banking requiring a public debate. A national debate of Fed policies and its possible reorganization has become a pressing matter for the United States.