Global Economy in 2008

2inquisitive,

Newsweek had an article that says there really isn:t much corporate debt, a lot of companies have money in reserve, if we don`t count financial institutions.

That said, the article also said it may not be enough to weather the comming storm.

M

 

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Paul Krugman's NYT article of 1Dec08, in part, and compressed:

"... Tight fiscal policy when the economy is depressed is exactly what happened in two important episodes in history:

In 1937, Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, … and also raised taxes. The result was a severe recession, and a steep fall in private investment.

In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. Again the recession that followed led to a steep fall in private investment. ...

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were the governments pulled back in the face of a liquidity problem. Monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.

And we’re in the same situation today, which is why deficit worries are misplaced. Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run. {Billy T comment: Hey- that sounds like Obama's plan.} ...

Right now we have a fundamental shortfall in private spending: consumers are rediscovering the virtues of saving at the same moment that businesses, burned by past excesses and hamstrung by the troubles of the financial system, are cutting back on investment. That gap will eventually close, but until it does, government spending must take up the slack. Otherwise, private investment, and the economy as a whole, will plunge even more.

People who think that fiscal expansion today is bad for future generations have got it exactly wrong." ...

Read full article at: http://www.nytimes.com/2008/12/01/opinion/01krugman.html?partner=rssnyt&emc=rss

Billy T comments:
I agree fiscal expansion is badly needed now, but it can be: (1) poorly done; (2) better done, or (3) very well done with "red dollar" innovation.

(1) The FED is setting forth on the "poorly done" approach:
FED will buy corporate and Treasury paper, especially longer term bonds in the open market. This will force their price up (and lower their interest rate, which is the stated* objective); thus, encouraging private investment with longer pay-back periods.) Also corporations getting dollars from government are not making loan demand in the open market. (Less demand does make lower interest rates.)

Effectively printing press money floods the money supply, creates fear of inflation, so unlike now with deflation, people are anxious to spend. I.e. not only does the amount of money in circulation increase but the "velocity of money" does also. This can easily get out of control and is very hard to "sterilize" to avoid run-away-inflation; especially if China and oil exporters cease to buy the Treasury paper that must be sold to soak up some of the excess money supply.

(2) Obama's (and China's) plan is the plan Krugman argues for. I.e. instead of only getting Treasury paper (that can become nearly worthless in run-away- inflation) the flood of money America gets new bridges, roads, green energy systems, health care, etc. - Real assets that make for a more completive, stronger USA (or China).

(3) Same as (2) except paid for by new "red dollars" that are valid only in the USA. Gleason's Law will take the old "green dollars" out of circulation, so US gets the new jobs, people get salaries so they can return to the US stores as shoppers with, etc. but green dollar velocity drops to essentially zero so there is much less increase in the money supply than either (1) OR (2).

Note also that the red dollar plan makes importation of hard drugs, without leaving a trail for the police, essentially impossible. (I have long advocated that US stopping the export of money that pays for drugs is much easier and more effective that trying to interdict the importation of these drugs.) Is there ANY honest need for a suitcase filled with hundred dollar bills? For whom is the US printing them, if not for criminals, including tax evaders and bribers?

See more details and advantages of the Red Dollar plan in my letter to Obama dated 18 Nov08 at:

http://www.sciforums.com/showpost.php?p=2095292&postcount=11

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*IMHO, an unstated, obvious objective is for the FED, as ‘buyer of last resort,” to buy the Treasury paper that China and oil exporters will not even completely roll now that they have “sovern funds” for buying REAL ASSETS, instead of PAPER ASSETS. US’s huge and rapidly growing debt is a great problem when no one wants to buy Treasury paper at less than double digit interest rates. High interest rates surely lead to depression from the current recession. FED is putting a “pretty face” on a necessity.

 

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Yes I am. See "red dollar" plan at:

http://www.sciforums.com/showpost.php?p=2095292&postcount=11

Note also there is a thread on the red dollar plan, in which I respond to some concerns and misunderstandings about it.
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Perhaps we need new thread "Global Economy 2009" now. Here is just released text I would put there and comment on:

"... The world’s largest economy will contract 1.5 percent this year, a half percentage point more than projected last month, according to the median of 59 forecasts in the survey taken from Jan. 5 to Jan. 12. The slump will push inflation below what some Fed officials consider price stability, the survey showed.

“It’s very hard to get anything into place to change the course of the economy in the first half of this year,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “We’re in the middle of something very deep here.”

How quickly the U.S. will pull out of the slide may depend on the $775 billion stimulus package that President-elect Barack Obama is pushing lawmakers to enact next month. The projections indicate he’ll be seeking to halt what may be the longest recession since World War II. ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aTv0Xmo40wr8&refer=home

My "red dollar" plan can help - permit the flood of a trillion or more printing press dollars, and yet significatly limit the inflation effect (by Gresham's law, not government trying to soak up dollars with even more issue of bonds by The Treasury)

Even with my plan and a lot of luck, and great leadership in the white house, back-up by some people who helped balanace the budget under Clinton, I still tend to think that the worse depression ever in US and EU is unavoidable now. (GWB's dug the economic hole too deep.)

By "depression" I mean great contraction in GDP as many no longer have jobs but with rapid inflation erroding at least 20% of the dollar's purchasing power for several years, as China et al (oil exporters mainly) cease to roll Treasury paper and instead demand green dollars for their maturing bonds.

 

The Chinese have put forward a plan to use the SDR as a reserve currency. If this pulls through, it has the added effect of getting the IMF out from under the US veto and hence will affect all the structural adjustment policies they monitor.

A massive overhaul of the global economic system.

http://www.pbc.gov.cn/english//detail.asp?col=6500&ID=178

 

From the taxpayer’s POV, capitalism may destroy Geithner’s Plan by “success".”
Here is how (and exposes the flaw of having anyone, especially the bidders, set a price on the toxic assets – my plan* avoids this flaw as no price is ever set.):

Let Ac & Ab be two toxic trash packages, each worth $100 face offered for sale under Geithner’s Plan. (Add more zeros everywhere if you like) First might be owned by Citi and second by Bank of America, (hence the subscripts c & b) which will be called C & B to keep discussion more general.

It will not be done as obviously as I now describe for ease of understanding, but here is what can happen (in a numerical example):

C bids $140 for Ab and (JUST BY CHANCE, OF COURSE,

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) B bids $140 for Ac. And both C & B accept these “over face value” bids.

Now by Geithner’s Plan, the US government will provide $120 in loans (or loan guaranteed – same thing from Taxpayer’s POV when the default occurs). Also Government as investor puts up $10 to match the private buyer’s $10. (120+10+10 = 140)

Let just look at how C makes out as B gets the same assured profit:

C collects $140 in sale of its Ac and pays only $10 to buy half interest in Ab. This is an immediate upfront cash influx of $130 for the asset that was definitely worth much less than $100. Just to close out the deal, lets assume that years later when Ab is sold, it brings a sales price of $90, even though the economy has recovered – This is a loss of $50 for the public private investment fund, PPIF, but C only absorbes $25 of the loss.

Thus for many years, C has the use of $130 from it $100 face value asset sold and when the deal is finished a net profit of $5 more than even if every mortgage in the package was paid in full! – I.e. a better deal for C than a zero default rate on all mortgages would be. Especially when one recognizes the “time value of money. (Getting dollar now is more valuable than getting it years later.)

Now let’s look at total deal from Tax payer’s POV:
Government put in total of $130 and gets back, years later, half of the $90 sales price for net loss of $40.

If you believe Geitner’s claim that government and private investors will share equally any profits and losses,
then I have a bridge in Brooklyn I will sell you cheap.

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* see my plan in recent summary at:
http://www.sciforums.com/showpost.php?p=2197527&postcount=66

 

What did I predict in post 206? Well here it begins:

" Banks Are Buying Toxic Assets: Bank of America (BAC) and Citigroup (C) have been actively buying toxic mortgage assets, according to the New York Post. And they are placing higher bids than other would-be buyers.... Much of the distressed debt has not been selling because nobody knows how to value it. Furthermore, the major banks are fearful that if they sell the toxic assets in the open market, they will be forced to take additional, large write-offs. Such write-offs would adversely effect the various ratios used to measure their financial health.

Why are BAC and C doing this? A spokesman for BAC told the newspaper that they are trying to "increase liquidity in the mortgage market allowing people to buy a home".... There have been reports of private investors who are willing to buy the toxic assets, but have been rebuffed by the banks. The reason is that the banks don't like the price. "

From: http://www.zacks.com/stock/news/18588/

 

Billy T,

The 'scenario' you posted in 206 was complete malarky. Banks would stamped to sell their MBSs' at face value. No fool would ever pay 40% over face value for a security that has lost value. If you would Billy, let me sell you my truck that had a sticker price $40,000 for $60,000.

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What BOA and Citigroup are attempting to do is establish a price for the MBSs' that they think is reasonable, not face value or above, but more than some of the vultures on Wall Street (Hedge Funds) would like to steal them for. Like my truck that is no longer worth sticker price, let alone over sticker, I still would not accept a low-ball offer for it from a salesman bleating about a down market. The truck is low-mileage and I will simply keep driving it until the used car market improves, probably much longer. That is the real reason new vehicle sales are down, most Americans already have nice vehicles and refuse to trade them in at give-away prices. The banks will hold on to the Mortgage Backed Securities until a decent price is established for them on the market, not face value but not 30% of face value either. It really is simple as shit.

 

I will be glad to buy your old broken down truck for $60,000 if I get a government loan I can later default on of $50K plus you putting up 5K and me also 5K in our 50/50 partneship to buy it AND IF you make the same sort of deal to buy my $60,000 cat.

We each get $50,000 from the government and we trade $5,000 checks twice. (Once on the truck and once on the cat sale.)* Net effect is we screw the US tax payers out of $100,000. - Where should we meet to finalize this deal? It is very much like the one I described in my post. - You must not have read it carefully as you are usually quick to understand.

*Hell because I like you, I will even throw in for free a half used up tube of mange cream.

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Today’s Email report from investment adviser Robert Hsu:

"...I've been traveling around China for the past week, visiting the great cities of Beijing and Shanghai. And today, I'm writing to you from Shenzhen.

My tour group consists of some China Strategy subscribers, and we've been doing a little boots-on-the-ground research over the past week. And what we've discovered has been truly eye opening for many of them. That's because people just don't realize that the economic recovery is already happening in China—unless they see it firsthand. ...

Over the past week, we observed the current state of the Chinese economy, and let me tell you, there's no doom and gloom here. ... Good restaurants are filled to the brim with patrons. Traffic on main roads is still congested. And shopping malls are crowded with shoppers.

In addition, we're seeing new roads, buildings and stores popping up all over the place. So, there's no denying that Chinese consumers are spending, and business owners are profiting. ..."

Billy T notes Hsu has a pro invest in China bias, so he will tend to see thing there thru rose glasses, but many less biased observers do agree. He takes groups of heavy hitter investors to China several times annually and does have connections with both industry and government leaders, it seems. They in turn are pleased with his promoting investment in China.

BTW 2inqusitive, exactly what I said would happen - is happening. The highest bids for toxic assets have come from other banks holding toxic assets. One senator has introduced a bill which would prevent banks from both selling and buying toxic assets. Thus what I predicted in post 207 is NOT "complete malarky" but your rebutal of it in post 208 is "complete malarky"

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PS please lets soon complete my purchase of your old broken truck for $60,000 as my $60,000 cat your are to buy under the post 209 deal (also with US government loans and help) is getting sicker.

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See: http://www.sciforums.com/showpost.php?p=2236674&postcount=71 That is the "You know times are tough when _____________ " thread.

It is supposed to be a source of humor etc. thread, but I just posted there the FACT that the IMF is asking to BORROW money FROM Brazil!

See my comments at above link and /or read Bloomberg's article at: From: http://www.bloomberg.com/apps/news?pid=20601087&sid=ai8Eko7vcXBk&refer=home

 

Billy T,

"Investment advisers" are akin to used car salesmen, just not as honest.

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No, Billy T, you said banks would buy MBSs at over face value. Do you understand what face value (par value) is? That is the value of the security at maturity, not the market value which is always less than face value at any date before maturity. The banks are buying the MBSs at an increase over market value in an attempt to raise the market value, as I stated in another post. I am correct, your posts are malarky.

So? The US, even with its budget problems and recession, has already loaned the IMF many billions and the Obama adm has pledged an additional $100 billion. The IMF has asked countries with international reserves to loan money to them from the reserves for redistribution to developing and third-world countries in dire straights. Brazil refused. The IMF suggested selling bonds to Brazil as an investment. Again Brazil refused, saying it was premature. Brazilians are greedy, only interested in themselves, not anyone else. Remember the mantra "the oil is ours"? Brazilians seem to think that way about money too, "the money is ours", screw any other country that needs a loan. It just shows that 'developing' countries will suckle IMF's tit when in need, but will do nothing to repay the favor in better times. I say desolve the IMF, it is just a burden on advanced countries.

 

Of course I know what face value is and that it can even change in issues like TIPs. Did you know that? (If you want to play the "I know more than you" game.) BTW, I think that in some cases the par value can differ from the face value. I think the par value is always the stated value at issue of the security, but in the case of TIPs with the face value (or principle, more correctly) increasing with inflation, I think the par value on the government's books remains unchanged. - Not sure of this, but it would seem very inpractical, if not impossible, to change the par value every month. If that is correct, then par vlaue and face value are not always the same.

No I did not say that. In fact I said the opposite in post 206. See the part of it below I have now made bold.

One of the reason Banks will not bid more than face value is that the Democrats are now in control of the government. The GWB attitude of "Let bankers take care of banking / no need to regulate them etc." is over (but the damage lingers on). Banks are ever now rushing to give back TARP funds to reduce the governments growing control and regulations of them. GWB would more likely fly to the moon than subject banks to the recently completed "stress test" or cap the CEO's bonuses etc.

SUMMARY: I never said that. Again you are putting words in my mouth. I said it was only a numerical illustration example. That it would not happen that way! - Exactly the opposite of the words you stuff in my mouth.

PS the reason I chose the numbers I did to ILLUSTRATE the concept was that 140 is divisible by 7. The latest toxic asset plan has the government putting up as loan and it 50% purchase about 6 parts of the price and the buyer only 1 part. Thus, my ILLUSTRATION, clearly called a numerical example, which would not actually be done!!!! has only simple sums of $120, and $10 appear in the analysis.

 

I quoted Hsu as he goes to China often (Just return a day ago.) and has good connections (both in industry and Government). He often has news in his Emails weeks before Bloomberg etc have the same thing, but here is his same "China is growing and locking up supplies of raw materials" story from Reuters and the Australian affilate of the WSJ and another investment firm which has also just returned from an inspection tour (and claims their leader is widely recognized "expert" on China):

“… For cash-rich China, however, the financial crisis is shaping up to be a major opportunity, with payoffs that will last for decades. …
China continues its global shopping spree, spending money to lock in supplies of crude oil, mined minerals, and all sorts of other commodities that will become quite scarce when global growth resumes – as it most certainly will. At a time when most nations (and their corporations) are being forced to retrench, and save money, China and its companies have the cash to create these captive suppliers, which will put it in a great competitive position later on. …
Chinese Academy of Social Sciences, China’s economy will advance at an 8.3% pace this year. That’s a prediction, incidentally, that falls smack into the most recent range highlighted by both Standard Chartered Bank PLC and UBS AG (UBS) of 6.8% to 9% in 2009. The latest figures show that approximately 43% of that growth in gross domestic product (GDP) will result from national account expenditures, while consumption will contribute about 36%. …”
{Billy T notes: 43+36 = 79 implying exports are only 21% of China’s GDP growth now*, and dropping as domestic consumption grows faster than exports due to both rising Chinese salaries and falling purchasing power in US & EU.}
Quote from: http://www.moneymorning.com/2009/05/01/china-profits-from-financial-crisis/

“…{China’s} State Reserve Bureau has begun building up government reserves of metal, buying around 300,000 tonnes of aluminum and 30 tonnes of indium and starting negotiations to add to its zinc and copper inventories. …”
From: http://www.reuters.com/article/ousivMolt/idUSTRE5051EO20090106

“…South Australia-based iron ore explorer Centrex Metals sold a 50 per cent interest in two of its Southern and South Central magnetite deposits for $180 million to China's third-largest steelmaker, Wuhan Iron & Steel.
Mount Gibson Iron brokered a rights issue and share placement to Chinese interests, with two major companies taking a stake of up to 40 per cent in the miner and securing discounted off-take agreements.
Gindalbie Metals was given a $162.1 million boost from AnSteel, China's second-largest steelmaker. The move increased AnSteel's stake in the company from 12.6 per cent to 36.28 per cent.
Grange Resources also looked to China and is set to merge with Australian Bulk Minerals, which is majority-owned by a Chinese steelmaker. Ian McCubbin, leader of Deacon's China group in Australia, said 2008 saw some "aggressive" investments from Chinese enterprises in Australian resources.
"It was not only aggressive in terms of volume but also in terms of the mode of investment," Mr McCubbin said. The aggressive moves included Chinalco's raid on Rio Tinto, when it took a 9 per cent stake in the global mining major in February {08}. It has also since been granted Foreign Investment Review Board approval to lift its hold to 11 per cent. {Billy T notes: This is Jan09 text. China has now 19.9+%, the Australian limit is 20%}
Sinosteel firmly pushed its way into the mid-west iron ore region in Western Australia with its hostile $1.4 billion takeover of Midwest. It also gained approval to take its holding in Murchison Metals to 49.9 per cent.
Mr McCubbin said that not withstanding the reduction in commodity demand, China would still have a long-term approach to investing in Australia, though 2009 would see a move towards more quality and strategic plays.
"China has the capital and capability to invest where others don't," he said. …”
From: http://www.theaustralian.news.com.au/business/story/0,28124,24892707-643,00.html
(They are closely tied to the WSJ.)

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* Because so much of China's exports are re-export of components that were imports now in higher-value final products, the 21% of GDP is not all Chinese economic activity. I would guess less than 12% is "100% Made in China" exports. Rest is just pass thru from cheaper component suppliers.

China is not now a low cost producer. It make high value goods like cars, cell phones, computers, airplanes (with Brazil's Embrarae help in joint venture), cameras, TVs, Li-ion batteries, weapons, satellites & moon rockets, etc. China is getting out of the low value added business, like toys, shirts and shoes, etc.

 

"... Chrysler’s non-TARP lenders, in reference to the Troubled Assets Relief Program, seeks to block the proposed sale to an alliance led by Fiat SpA, as well as a request by the U.S. automaker for approval of a $4.5 billion Treasury loan to finance the reorganization. The group said secured lenders who agreed to the Fiat deal, such as JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., were conflicted because they had also accepted TARP funds.

The process is “tainted” because it was dominated by the government, the lenders argued in papers filed today in U.S. Bankruptcy Court in Manhattan. The group also said the short period of time given to evaluate the sale was improper and the hearing on bid procedures that began today should be delayed. The judge delayed the hearing until 2:30 p.m. tomorrow, ordering the members of the lender group to reveal their identities.

The sale “improperly attempts to extinguish their property rights without their comment,” attorneys for the objecting lenders wrote in court papers. “The sale motion should be denied because it seeks approval of a sale that cannot be approved under the bankruptcy code,” they argued, adding “the court should not permit a patently illegal sales process to go forward.” * ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aLI_HoCr38DA&refer=home

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*Fiat may learn that getting 20% plus 15% more later of Chrysler for zero cash is not such a good deal after all. Daimer paid $200,000 into the UAW's health care fund just for the right to walk away free and clear from the 19.9% of Chrysler it owned. Clearly owning 20% "free ain't cheap" in their POV.

 

As it is 2009, now this post is on theme, if off key at times:

See what I mean at:

http://www.newsday.com/media/flash/2009-04/46217527.swf

 

Interesting read your Newsweek article titled "Boom Times Are Back - Just not here in the United States." Published May 30, 2009 but not much new to me.

Yes, the sovern bonds of Brazil are doing well - last time I looked you had to pay 13% over face value to buy the longer term to maturity ones.* No one but the FED appears to be buying US Treasury bonds now. China stopped at least last November. I noticed this just from the steepening yield curve data more than a couple of months ago and now often see it in print.

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*They tend to have higher than current interest rates, but that alone does not justify 13% over face. They are also a long term "call" on the Real. With Brazil a creditor nation, a positve trade balance, lots of FDI, only 37% total** government debt to GDP ratio (vs the US's 70% and growing), net exporter of oil energy, fleet of cars running on alcohol, etc. it is easy to understand why many think the Brazilain Real is a better bet than the dollar now.

** Federal, state, all local levels, plus all borrowing by government owed business. I bet California alone is deeper in debt than all levels of Brazilain government are. The US's ratio of 70% is only federal debt, I think.

 

I just want it known that I do not believe that Geithner, who speaks Mandarin and has great experience in China and now is in China is defecting from a sinking ship,

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not planning to return to the US, etc. At least I think not. :shrug:

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