Is your financial adviser a charlatan?

It seems the experts now agree with my guess that the economic doldrums may continue until at least early 2010, a considerable change from their more sanguine assessment a year ago.

Unlike them, I was warning my clients about US indebtedness in the 90s; about the '98 Far East crash; about the late-bubble tech enthusiasm of '99; and have generally spent the last 10 years or so cautioning clients against making substantial investments. And I first said 2010 in January (in one of my Ol' Blue Eyes farewells - I keep making comebacks because I can't shut up when I hear what "experts" say).

The real difference is, I'm not rich; I simply can't understand it.

I may retrain in astrology. It's less regulated and I can't remember an astrologer being successfully sued. Here's a sample:

ALL SIGNS: house prices will continue to trend downwards in real terms, but because homeowners don't like accepting a loss on their personal real-estate speculation (I've long said that anything you treat as an investment will behave like one), much of the slide will be achieved by long-term stagnation.

Meanwhile, the good news is that to be a contrarian now means to keep your powder dry while looking for promising targets. I wonder, for example, whether a punt into carefully-selected construction firms might prove lucrative in the long run?

That is, unless we manage to deport the people who've come here illegally and start to apply geonomic principles to land use, in which case we'll find out that we have no such thing as a housing shortage in the UK.

Financial experts "miserably bearish"

This report by Jim McTague from Barron's, reproduced on the Cumberland Advisors site, gives an indication of how the money experts were feeling this month, on their annual fishing trip in Maine:

[David] Kotok's diagnosis of the cause of the gloom that permeated the crowd was this: Most of them see more economic downside than upside; we don't have functioning credit markets; banks and big Wall Street credit intermediaries are either dead, wounded or on life-support; housing is a wreck; and the auto industry "is done."

Once the economy stabilizes, it will take many years to fully recover, he said, because no strong growth engines are evident. "That's why people are so gloomy! They see no upside!" He personally is investing client money in agricultural plays because, he says, the long-term price of food is trending up. He likes bio-companies whose products are geared to an aging population. And he likes Asia as an investment destination...and he doesn't like much else.

I conducted in-depth interviews with a dozen of the participants. They all perceive the economy in the early stages of a multiyear recession that will be the most painful downturn since the 1970s. The housing market, which experts once predicted would recover in 2008, may not recover even in 2009. Credit woes on Wall Street will begin to inflict real pain on Main Street.

We're already seeing the impact on housing, though the worst may not have happened yet; and I think stocks and bonds are still in something of a fool's paradise. I'm sticking with my guess that in retrospect, we will see that the upturn began in the Spring of 2010.

Accountability - but not to the citizens

Reuters reports yesterday that a bank in Abu Dhabi is suing Morgan Stanley, Bank of New York, Mellon and the ratings agencies for fraud relating to understating the risks in the complex debt packages at the heart of the credit crisis. (htp: Jesse)

Answerability to the voters is so last millennium, pace idealistic dreamers like Karl Denninger; but money talks.

If voting made a difference, it'd be Paris Hilton for Prez, and do you know, she could be a surprisingly good choice. Much more can be achieved laying on a sun lounger than crashing around the world. A film quote from Lawrence of Arabia:

Colonel Brighton: Look, sir, we can't just do nothing.

General Allenby: Why not? It's usually best.

And what a pleasant change it would be, to have a politician who only pretends to be dumb. I can just imagine her sweetly commanding some tough dudes to go and give the financiers the drubbing they deserve, then turning her attention back to her fashion magazine.

Yes, it's money that talks and the people are dumb. In 1930 Ludwell Denny wrote, "Too wise to try to govern the world, we shall merely own it. Nothing can stop us." America forgot that lesson; rising foreign powers now pay the piper, and will call the tune.

If you can't beat 'em... every dollar and pound you save in your bank account, is a vote in this new electoral system. With luck, one of your descendants will be accepted into the Superclass, while the rest vainly try voting for improved social security and healthcare; when the well is dry, the vote won't fill it. The freedom for which America thinks it stands, isn't founded on supplication. As here in Britain, it would be a hard road back.

Perhaps Chesterton's observation on Christianity may apply equally to the US Constitution: "[it] has not been tried and found wanting; it has been found difficult and not tried."

In praise of the American Constitution

On The Great Depression Of 2006 recently the talk has turned, inevitably, to rich vs. poor. When societies are under stress, the people turn on each other. I think they are forgetting what holds them together.

I hold no brief for American foreign policy (perhaps nations and religions should be evaluated according to how they treat "the others"), but I wish we in the UK had something that guaranteed our international independence and defined and limited the powers of our government. My comment on Jim's piece is as follows:

Would we have to be talking like this if the banks hadn't exploded the money supply?

After much heart-searching (and encouragement from me), my brother recently became an American citizen. He sent me the crib book ("The Citizen's Almanac"). Page 5 ("Responsibilities Of A Citizen"), item one: "Support and defend the Constitution against all enemies, foreign and domestic." The explanatory paragraph ends, "When the Constitution and its ideals are challenged, citizens must defend these principles against all adversaries."

Please don't bridle if I quote the United States Constitution, Article 1, Section 10: "No State shall [...] emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts..."

It's not just about money, but allowing the bankers and politicians to corrupt the money system threatens liberty. We in the UK had a constitution based on civilised understandings that have been thrown out by mad revolutionaries, but you have a clearly expressed founding document more precious than any wretched paper dollars you may have. Lincoln said that the American nation was conceived in liberty and dedicated to equality; "... Now we are engaged in a great civil war, testing whether that nation, or any nation, so conceived and so dedicated, can long endure."

Then as now, you may be the last major nation to hold up that flame. It is not gold and silver that made America admirable, but the principles that bind her citizens. Perhaps excessive material wealth has proved a distraction and a subversion.

After the crash, there will still be Americans, and the American nation. May I humbly suggest that Denninger is right, and the miscreants who have threatened the community with their greed and irresponsibility, should be held to account?

Gold: "reculer pour mieux sauter"

A very interesting, concise post from Mish. He says deflation forces borrowed money out of speculation, so gold and silver will drop while this happens; but then - it could take some time yet - will come the rise: "The reason gold will reassert itself is that Gold Is Money."

Mish's line appears to be consistent (June 2007):"Typically gold is a counter-cyclical asset that does best in real terms when liquidity evaporates."

Gold seems unpredictable - the demand for it as jewellery is unrelated to price - but if his chart below is correct, there is an underlying trend of steadily increasing demand. New gold mined each year is only some 2% of the total still available above ground - gold generally doesn't get used up (though I have drunk Danziger Goldwasser) - so the supply cannot be easily boosted by the State in inflationary times.

Gold, or paper? Your choice.

Judge Mental on broken families

Even though he is a judge, and an expert in dealing with the results of family breakup, Mr Justice Coleridge will be panned for observations like these:

"... almost all of society's social ills can be traced directly to the collapse of the family life."

"I am not saying every broken family produces dysfunctional children, but I am saying that almost every dysfunctional child is the product of a broken family. "

He's not wrong. I'm the last to hug a hoodie, but you have to know why they're like that. Knowing the causes doesn't make them any better; the point is that an ounce of prevention is worth a pound of cure. In years of teaching children in social services care, and children excluded from mainstream education, I don't recall knowing even one case where the child came from a hard-working, addiction-free, two-parent family.

By the way: to what extent is the government fanning the flames, with its tax-greedy promotion of alcohol, its popularity-seeking liberality on drugs law enforcement, and its negligent attitude to employment (especially, I hesitantly suggest - expecting to get it in the neck for saying so - full-time employment for men)?

But it's not just about keeping the parents together. There needs to be a commitment to nurturing the child emotionally: squabbling parents who want the child to take sides make a deep and enduring split in the child's psyche. No law, judge or social worker is going to remedy that; putting the child first should be a screamingly obvious moral point. But who is allowed to make it? "Musn't be judgmental."

Oh yes, we must. Watch the American Judge Judy on Freeview when the subject of children, marriage and responsibility comes up. She did many years in family court, and she doesn't have any time for the mealy-mouthed approach.

The big one is yet to come

Karl Denninger gives his interpretation of recent events: hedge funds have been caught out badly betting against oil and the dollar, and the frantic unwinding hit gold. His prognosis is that sooner or later all the over-borrowing is going to take its toll:

There is a "supercritical" point where all asset values will get hit at once, unless the process runs to exhaustion first, and I don't think there is a snowball's chance in Hell that it will.

Meanwhile, keep your money safe.

Authoritarian governments are winning

From Brad Setser's blog.

I've said before now that 2003 was the year the UK and USA blew it, with reckless credit expansion.

The US owes China a trillion dollars - Setser

"... China’s government already plays a significant role in determining the allocation of credit inside the US economy, not just the allocation of credit inside China’s economy..."

Brad Setser (htp: Jesse's Cafe Americain)

Setser reported to Congress a year ago on the USa's vulnerability to foreign creditors and investors. See my blog here and here.

Down

Mish reckons there will be - is - a global slowdown and credit contraction, savings will increase, and bond yields and interest rates will reduce.

Liberal economics and the Panama Canal: hope?

Read the following article from four years ago by Beth King in Innovations Report, as an analogy with globalization. Do you think it works?

The Panama Canal as a natural biological invasion experiment

Invasive species may cause severe economic losses. Thus the hot debate regarding the ecological mechanisms determining the outcome of biological invasions is of equal interest to scientific and business communities. Do invaders bump residents out by competing with them for scarce resources, or do they merely move in without causing harm to their neighbors?

In one of the first environmental impact studies ever, the Smithsonian Institution’s 1910 Panama Biological Survey provided baseline data for Panama Canal construction, a project creating the largest man-made lake in existence at the time. The Canal, completed in 1914, rerouted the Chagres River on Panama’s Atlantic slope into the Pacific Ocean--connecting watersheds across the continental divide. Since then, fish from the Atlantic and Pacific sides of Panama have intermingled, but the mix has not resulted in extinction of fish in tributaries on either slope according to new research published in the Proceedings of the Royal Society of London (online) by Scott Smith and Graham Bell of Canada’s McGill University and Eldredge Bermingham, Staff Scientist at the Smithsonian Tropical Research Institute in Panama.

At the beginning of the 20th Century, concern about human-induced environmental change was already on the agenda. Faced with the immanent flooding of 500 square kilometers of lowland tropical forest in Panama, the Panamanian government authorized the Smithsonian Institution to conduct the Panama Biological Survey (1910-1912), an extensive biological census of the region to be covered by Lake Gatun, the Panama Canal waterway.

The U.S. Bureau of Fisheries assigned Seth E. Meek from the Chicago Field Museum of Natural History and Samuel F. Hildebrand, his assistant, to census the fish fauna of the Canal area. They made lists of fish in the Chagres River on the Atlantic slope and in the Rio Grande, on the Pacific slope, rivers that would become part of the Canal waterway, a new freshwater corridor between two oceans.

It did not take long for fish to move from Atlantic to Pacific slopes and vice versa. When Hildebrand returned to Panama in the 1930’s many species had already moved into streams on the opposite slope.

In 2002, the authors of the new report returned to the Chagres and the Rio Grande to collect fish. In total, they found that three fish species had colonized the Chagres River and five had colonized the Rio Grande. Both sides of the Isthmus became more species rich as a result of the Canal connection. All of the original species found in each stream in Meek and Hildebrand’s initial, 1916 survey, are still there.

This is a significant contribution to our understanding of biological invasion because it shows that dispersal played a more significant role than local ecological interactions in the structure of the fish communities in these two rivers, even after many generations in this great natural experiment.

If at first you don't succeed - give up.

Think tank Policy Exchange has stirred up a hornet's nest with the suggestion that people in poorer Northern areas should quit backing a loser and head for the South-East, or the Golden Triangle.

Or the Golden Circle:


Isn't this the rational, liberal-economic thing to do? Or is mankind something more than a calculation in money terms? Is there any one measure for Man?

Are liberal economists rational? Do they describe the world as it is, or as they think it should be? Would it be dangerous for us to follow their prescriptions, if others elsewhere took a different view?

An after-thought: would it not be more rational to head for Scotland? Free tertiary education, more money spent on care for the elderly, etc?

Are the poor too rich?

I read a piece in Cafe Hayek a while back, lamenting the rise in the US minimum wage. I left a short quotation: "Qu'ils mangent de la brioche."

I didn't expect much response, even though Americans owe one of their most famous symbols and (in part) their very Revolutionary victory to the French. But I had a glance at the comment thread this morning and there was indeed a riposte:

"Jonah Golberg wrote a really good editorial on this about four years back. Good stuff and good Economics & History lesson, too!"

Can the realtor (estate agent) who posted this, and the salaried economics professor who hosted it, be right? Are the working American poor really so feather-bedded by their £3-something per hour earnings? Does anyone have a different Economics & History lesson?

Does even the slightest concern for the poor make me (the son of a refugee from the murderous ravages of the Red Army in East Prussia) a no-good pinko Commie son-of-a-gun?

I shall read my newly-acquired Sloman's "Essentials of Economics" and then I'll know the answer.

What is inflation?

One answer is to look at alternative currencies. Here's an FT article, originally from 1983, on the Mars Bar Index. Any more detailed updates?

Dearieme says "Mars Bars were 99p per pack of five in our Co-op recently. Bargain!" Is this proof of deflation?

Blogger helps Georgia overcome cyber onslaught

Civil.ge, the Georgian news site, is "under permanent [cyber] attack." So they've switched their operations to one of Google's Blogspot domains, to keep the information flowing about what's going on in their country. (Wired Blog Network, 11 August)

Here's the Blogger site for Civil.ge

Liberty

The greatest liberty is the right to change yourself.

Recently I've put on a few pics of women, the lovely creatures, and get concerned comments from Nick Drew and Pej. This is entirely a natural response, but it is also an example of what I call the homeostatic principle. You know: try to lose weight and people say you're not fat, just pleasantly plump; forswear alcohol or tobacco, and they advise you to cut down a little instead, but just for now go on, have one etc.

We worry (rightly, of course) about the tyranny of big government, but there is also the long, slow, grinding tyranny of the small (and small-minded) community, and the dysfunctional family. And we, too, are so often, unconsciously and instinctively, the oppressors.

Simone de Beauvoir (who was led a dance right royally by her liberated lover Sartre) said that every book is a cry for help. Mostly, that cry will go unanswered, and few will rally to your home-made flag. We enjoy our blogging, but delude ourselves if we think the world will change much as a result, or perhaps should change much.

If you want a major, exhilarating change, go for action direct: change your own life. And if you are a libertarian, watch for how even you try to hold others back.

On me fait tort

In the Post Office just now, I glanced at the leaflet rack and there were all these savings products labelled The People's Instant Saver etc.

I remember watching Tony Blair announce the death of Diana, and how he half-choked on "the people's princess", as though some wiser part of him at the back of his throat was trying to save him from a ghastly, laughable gaffe. He seems to have got away with it, though (as my wife pointed out at the time) she was the daughter of an Earl. (Note, by the way, how his speech began the first two paragraphs with the first-person personal pronoun. Everything was always about him, was it not?)

I suppose this is all part of the Gramscian cultural deforestation in preparation for the Garden of Eden that will be Cool Britannia. I also suppose that when we have become the PRGB, the country will be disunited and the people will have less say than ever.

If, by then, we have enough money (for clearly that's all that matters, now), we may move to Jersey, which at least recognises Her Majesty's rule under her title of Duke of Normandy. When we visited there years ago, we learned that as in ancient times, if you feel you have been wronged, you may make an appeal direct to your ruler: you drop down on one knee, spread your arms and call out "Aro, aro, aro, mon Prince! On me fait tort!" The Jersey Council must then hear your case.

But Her writ does not run here, or will not for much longer, if we continue in this direction.

China dolls

Look at this Chinese website for positive images and news about women in the PRC.

Beauty

Lorna Page is using the proceeds of her first book to spring friends from OAP jail. What a beautiful thing to do. And what a beautiful face.

Britney and Madonna at MTV Awards Ceremony

But her 50th isn't until Saturday...

As my wife points out, it's not their sexuality they're exploiting, it's men's. It's just not fair on me.

By the way, Tarantino is sizing up Britney for a big part. Maybe this stunt (from 2003) gave him the idea.

But is Paris Hilton a NATURAL gold? We deserve to know.

23 years of FTSE growth, RPI-adjusted

At last, education for life (instead of lifelong education)

In the Sunday Express today, Alain de Botton explains why he's opened a School of Life shop-cum-philosopher's-studio-cum-therapy-room in Marchmont Street, London:

"Before I went to university, I imagined it as an extraordinary place where you'd get a chance to escape from commercial pressures and examine the great questions of life in beautiful surroundings with fascinating people, and so become a better, wiser, more interesting person."

So did I, and mostly what I learned was how naïf I'd been.

Good luck with the new venture.

IN- or DE: Denninger reasserts his position

Karl Denninger repeats - in his rather forthright and sexualised way - the simple argument that deflation suits the bankers who run the Fed:

... In a deflationary environment the banker gets as much of your money as he can, and then he also gets the house! [...] The banker makes money in terms of real value in a deflationary environment. You, on the other hand, being debt, get rammed."

In short, cui bono?

And in the Marc Faber interview cited in the previous post, Dr Doom maintains that the drop in the price of oil shows that we're already in recession; the drying-up - the sucking back out - of excess liquidity is what will make the dollar more valuable.

I once read a short story by Brian Aldiss, in which invisible vampire aliens ravage a farmer's livestock - all one can see is the double puncture. The skin is pierced, the innards liquefy and are drained. Sturdily, the farmer accepts that he has a new class of customer.

Is this not like banking and government? Without mortgages and inheritance tax, how otherwise would almost everybody in each generation be forced to buy their living quarters anew?

The view from Agamotto's Eye

Doctor Strange and the all-seeing Eye of Agamotto

Mish relays an interview with Marc Faber, who is a bull on the US dollar (not US stocks) and Japan.

"Europe will have to cut interest rates as well, and their economies are most likely much weaker than perceived...

... We are in a seven year bull market for commodities, so commodities can easily drop 50%. Some have already done that like nickel, lead, and zinc. Others will follow. But after that, I think that the bull market in commodities will reassert itself. But my view was that for the second half of 2008 commodities would go down."

Can we undo the damage of easy credit?

... the [political] system which has for sixty years precipitated the greatest debt cycle in history may be inadequate to address the greatest deflationary cycle in history if it chooses to prescribe the same snake oil which sickened the economy in the first place rather than the balanced (fiscal) diet and (strict economy) excercise we all know would be better for us.

The road back from economic folly will be long, hard, narrow and possibly untrodden, warns London Banker in a masterly essay on the need to re-establish a savings culture.

(htp: Jesse's Cafe Americain)

Paris Hilton: an observation

Speaking of Paris Hilton, there's something odd about her: smooth, featureless, un-angular; as if she were, I don't know, inflated and unstable. One feels it would only take a little prick to make her explode.

Posh tarts and Pop Tarts

How much social disruption is caused by posh people's boredom?

The Grumbler today whines about schoolgirls aping whores to get attention - a survival strategy in today's feckless-male world, I'd have thought - and a Dr Ringrose of London's Institute of Education (they never ask actual schoolteachers, do they) opines that teaching about the history of feminism is "needed to overcome the negative influences of celebrities such as Paris Hilton, Britney Spears and Christina Aguilera".

Paris Hilton is a world-famous millionaire socialite am-porn star and now part-time political commentatrix. Britney Spears is a world-famous millionaire entertainer, and her disastrous private life is a moneymaker for her and a raft of reporters and photographers; besides, her misdeeds and misfortunes are no worse than those of the underclass whose offspring I teach, nor much different from the self-indulgence of many rich and aristocratic women in the first half of the twentieth century. Christina Aguilera ditto - and currently a Google search for her yields nearly 29 million pages.

Emmeline Pankhurst was a rich businessman's daughter, married a barrister, joined the Independent Labour Party, toured North America lecturing on VD and joined the Conservative Party when she returned. Her daughter Adela went to Australia, joined the Communists and then the Fascists. Another daughter, Sylvia, got knocked-up out of wedlock and she and her mother fell out and never met again. The third, Christabel, enthusiastically promoted the First World War and internment of enemy aliens, visited Russia after the Revolution to urge its continuation in the conflict with Germany, became a Christian evangelist in the USA, returned to Britain, was made a Dame Commander of the British Empire in 1936, and fled the country when war broke out again.

Yep, I can just see all that on the syllabus.

The need for civil rights

Professor James Duane explains in shocking detail why, in the USA, everybody should remember to exercise their right under the Fifth Amendment to remain silent. (htp: Obnoxio The Clown, referring to Philip Thomas' post)

"The following is the common Miranda warning used by most law enforcement agencies in the United States today:

You have the right to remain silent. Anything you say can and will be used against you in a court of law. You have the right to speak to an attorney and to have an attorney present during any questioning. If you cannot afford a lawyer, one will be provided for you at government expense."

How about here in Britain?

"You have the right to remain silent. But it may harm your defence if you fail to mention anything that you later rely on in court. Anything you do say may be given in evidence."

"Free legal advice is worth what you pay for it." Having said that, here is a site purporting to give advice to activists being questioned by police in the UK.

How many laws are on the Statute Books in the United Kingdom? Is there anybody in the country of legal age who could not be accused of having broken one of them? Do we not have too much law?

UK worse than USA?

If it's the USA (aka The Great Santa) that's in dire trouble, how come the pound sterling has dropped 5 cents against the dollar, since July 17?

Bill Gates: charity begins at home

The Bill & Melinda Gates Foundation is set up to give away $38 billion (plus another $30 billion pledged by Warren Buffett).

While I'm in the mood for mad ideas, how about sparing some fraction of that (oh, a billion?) to go back to Bill's crazy source code and finally straighten out all the problems with Microsoft's core products, then send out a one-use-only disk to all previous purchasers, to reload everybody's programs with reliable updated versions?

Or should I stick with dreaming up more realistic schemes, like the deposit-free banking idea?

Fractional reserve banking - why bother?

Karl Denninger comments on the unfolding crisis of non-subprime mortgages, where he thinks losses will be even worse.

A question: why bother with any kind of reserve?

Once you've determined that banks can lend a high multiple of deposits, you may as well make deposits entirely irrelevant. In fact, it would save quite a bit on operating costs if you could have banks that specifically didn't take deposits from anybody - no cash in or out, so no tellers, no branches. Let the Federal Reserve or the Bank of England give a handful of providers a total lending limit, and then stand back and watch them pump away.

Insolvency? Loan-to-value not good enough? Raise the limits again, pump harder. Get a punter to overpay for one house and you increase the value of all the others in the street, so making their mortgages safer. And if the bank doesn't have to pay interest to depositors, it can charge as little as it likes for its loans.

I can't see the flaw here, any more than I can see the difference between a banker and a swindler.

I don't know why I didn't think of it before.

House prices underpinned by shortages, boosted by inflation?

The Centre for Economics and Business Research reckons house prices will steady next year and shoot up for three years after that, thanks to housing shortages and building project cancellations - reports The Grumbler.

"Real estate could become a very good investment and inflation hedge once the government starts seriously printing money," commented Jim from San Marcos (who still has a realtor's licence) after his July 27th post.

I hate computers

Currently I use Windows, like most people, and my experience of this is certainly like the picture on the left. No wonder there are so many Bill Gates jokes, e.g. "The president of Lotus walks into an elevator with a gun in his hand. In the elevator are: Saddam Hussein, Timothy McVeigh, and Bill Gates, but there are only two bullets in the gun! Who does he shoot? A: Gates, twice, to be sure."

I also have an ASUS laptop that has a nervous breakdown when I ask it to connect to the Internet and my printer at the same time. In fact, it's now objecting to my mouse as well. I half-suspect the power management system is compromised by some ASUS virus that informs Peking of my every keystroke; put that down to paranoia if you like, but we'll see what the history books say one day.

But is the Mac really as simple and reliable as the middle picture suggests? And is Linux really so powerful and jazzy? Before I throw this computer from some carefully-selected high place, I'd appreciate guidance on its replacement.

By the way, here's Daniel Bozet's original cartoon; I thought the one above looked unbalanced.

And here's some techno comment on BoingBoing, that obviously I don't quite understand.

If telephones were like this, I'd be using liveried runners.

Check memes with Snopes.com

My American brother and his wife put me on to Snopes.com, a service that sources and corrects rumours that spread through the Internet. One example is a very sharp, funny diatribe on the Middle East, allegedly by Dennis Miller, but actually adapted from this 2002 article by Larry Miller.

What have I learned?

• Meme alterations tend to add spite - compare the original with its viral successor
• I should include Snopes and Larry Miller in my blogroll

In the piece concerned, I particularly liked the imagined reversal of position between Jews and Arabs. I'm always grateful for a mental flip that lends me a new perspective.

USA $800 billion subsidy to Asian investors

Read Karl Denninger on how the Fed has been forced to prop up shares of Fannie Mae and Freddie Mac, to please foreign equity holders such as China.

Further comment from Mish.

The taxpayer pays all - and presumably we're looking to do something similar here, to keep the banking show on the road.

This may be the time when those predictions about the Dow hitting 9,000 and gold breaking through $1,200 start to come true.

Gold

Gold now below $900, heading perhaps for the $875 forecast by "Jesse" a couple of weeks ago. Will the second part of the prediction be proved correct, also?

Logical consistency

Also in today's Guardian's G2 section is an article titled "I became a Zen Buddhist nun," at the end of which is the invitation: "Do you have a story to tell about your life? Email it (no attachments, please)..."

Reading the Guardian

It's been years since I tried to read the Guardian. My favourite memory of it is Posy Simmonds' "Silent Three" cartoon strip, which I admire for the artist's control of her line, more than for its social comment.

This morning, on the paper run while the kettle was boiling, I caught sight of its trailer on the front page: "How the wealthy lost touch with the rest of us/Polly Toynbee" (actually, it's also by David Walker, though it doesn't say so there).

I thought, I'll grit my teeth and have a go. There must be some reason why teachers like me read this stuff. Here (in the G2 section) it is.

Fisk it yourself. Note the sly references to (ugh!) the Daily Mail and (ahhh!) how hard teachers work. Then note what isn't said, for example about Toynbee's own high income and wealth, foreign property etc.

And look at the unexamined implicit assumptions in statements like "...others deserve a share of that, too." Unless you are religious (and I include in that category anyone who talks about Man with a capital M), why should anyone care about anybody who's not a blood relation (and the ever-logical Mao didn't even do that)?

So I guess my gripe is that here we have a coldly commercial product pretending to morality; which perhaps I should admire for the artist's control of her line, more than for its social comment.

David Cameron: a flaw?

There was a moment - a minor incident - and I can't track it down. It was either Matthew Parris or Quentin Letts, watching Tony Blair perform in Parliament some years ago. The PM reacted scornfully to something he appeared to have heard from the Opposition benches, yet when the journalist asked his colleagues in the Press Gallery, nobody had heard that something. It seemed that Blair was simply indulging in brazen invention. A tiny incident, but revealing a character trait that has cost the country dearly.

In this week's Spectator, Charles Moore publishes an SMS text from a businesswoman friend, giving her immediate impressions of meeting David Cameron, and although she is clearly struck by the man's looks and personality, one little sentence jumped out at me: "Doesn't really listen." I think I know what she means, because it gels with how I read his body language every time I see him on the news: he is tightly focused on maintaining his grip on the Protean figure of Success, and will not be distracted. That has its dangers.

Breaking radio silence

How much debt does the USA have, compared to its income? According to Ned Davis Research, the previous all-time high was in the Depression of the 30s (265%); NDR's latest estimate is 350%, The Mogambo Guru reports.

So, inflation or deflation? The Mogambo Guru rants that only inflation (which he hates) can save us now. But in the first link above, Louis P. Stanasolovich comments:

High debt levels also have another side effect: disinflation. Because consumers and businesses have limited spending, they must retrench once they reach their saturation points. When the demand for goods and services diminishes due to the over-extension of credit, the result is disinflation.

In other words, we will have to live poorer - no matter what the currency does. We see in Zimbabwe that you can have billions and it won't buy you a square meal. What inflation can do, is disguise the problems for a while (as it did post-2000) - until the system breaks down completely. Who has the public spirit and grit to stop the charade now?

By the way (since The Mogambo Guru loves gold)... Krugerrand = going out to get more champagne.

Inflation, deflation, the world economy and freedom

This article by Matthew Beller on the Mises website tries to show how the US government can't "print its way out" of the present crisis.

The Federal Reserve controls the "monetary base" of physical currency and bank deposits, which represent only 15% of the money supply; the rest is bank lending. Currently, the banks are in a fright, so they are reducing credit, on which the economy depends. But if the Federal Reserve increases the monetary base, the banks' ability to multiply their deposits could lead to hyperinflation and the destruction of the dollar altogether. Hence the attempts to maintain confidence in the banking system instead, even if that means expensive financial support.

This isn't enough for the monetarists. They say the lending in the recent boom went on consumer spending, which encouraged producers to make too much of the wrong stuff and so the economy developed in the wrong way. The econo-Puritans say we should accept deflation because, although temporarily painful, it will rebalance the economy for a more sustainable long-term future.

However, nobody likes nasty medicine, so a political question is whether democracies will allow politicians to take timely corrective action. Past history suggests that we'll only vote for the treatment when we're half-dead, and even then, we'll curse the doctor afterwards.

My feeling is that this tendency to delay means that underneath the business cycle is a fatal linear trend, moving wealth and power to less democratic countries. When the world economy recovers, it may be on very different terms: for although (e.g.) China may suffer a setback as the Western consumer reduces spending, Chinese industrial capacity has been growing over recent years - not only the factories and tools, but equally importantly the skills base. At the upturn, the East will be well-placed to cater for reviving demand, while the West struggles to supply appropriately-skilled labour, and tries to buy back some of the industrial materials it had previously exported. And as the East industrialises, it will generate locally a greater proportion of world demand.

I cannot see how we can avoid becoming poorer, on average, than we have been in past decades, even if an elite in our society grows richer and more powerful (a phenomenon associated with more impoverished economies). We cannot rely on high-end production: China will address its quality issues, as Japan did in the 1950s. Nor can we be complacent about intellectual property rights, in a world where might makes right.

But China itself has deep problems - an growing and ageing population; an increasingly unbalanced demographic structure, thanks to attempts to limit family size; pollution; water shortgages; declining quality of farm land. The Chinese leadership faces a long-term challenge in dealing with unsatisfiable domestic expectations, which will tend to make it intransigent in its relations with foreign powers. The East-West contest may become characterized by desperation on both sides.

And so democracy in the West will come under pressure. In difficult times, people are thrown back on a network of social relationships and mutual expectations, but sudden, unreal access of wealth has tempted us to put our faith in the amassing of cash, and/or government intervention, to the detriment of agreed internal social control and support systems. When the system enters its failure phase, which Fischer ("The Great Wave") thinks may be starting, the social threads begin to snap: inflation, crime, family breakdown, war. The reification of the ties that bind us together tempts our government to maintain the social order through externalised means of surveillance and enforcement. Ultimately, the mismanagement of national budgets is a freedom issue.

Banks: the legal recriminations begin.

I wondered a while ago where bankers would flee when the reckoning came. Looks like the lawsuits are starting already.

For the gold bugs

"Jesse" does a chart suggesting the gold price could drop to $875 before taking off for $1,200 and upwards.

China shakes the steel world

Shen Wenrong, the billionaire who bought Dortmund's Phoenix steel plant and moved it to the Pearl River, is increasing his hold on the privately-owned sector of the Chinese steel industry, as reported in SteelGuru here.

Readers of James Kynge's "China Shakes the World" will recall that Wenrong acquired Phoenix in 2004 partly in order to get into production fast, but also because, having bought it at scrap valuation during the last steel recession, he would not be encumbered with the debts that would wipe out his rivals in the next one.

Which means that he's looking beyond the next recession. And when the recovery comes, where will the West's capacity be found? Those who say that the East's fortunes are bound up with those of the West, had better get new spectacles to correct their short-sightedness.

GSE losses "only $25 billion"

Bloomberg reports on the bailout plan. Only $25 billion? Phew - a couple of Senators were thinking maybe $1 trillion, as The Motley Fool's TMFSinchiruna points out.

Could I please have "only" 1% of the lower figure for my modest needs? You won't miss it - after all, look at what you haven't missed so far. I'd even write you a specially nice letter of thanks.

Mugabe "fighting extradition to the Hague"

I presume that in the wake of his arrest and ongoing extradition battle, the case of a certain Serbian alleged war criminal is sub judice, so I have edited down and altered names, facts, numbers and places in the following Press Association article, using alternatives plucked at random.

Mugabe fights crimes extradition

1 day ago

Former Zimbabwean leader Robert Mugabe is battling extradition from Zimbabwe to the Netherlands, where he faces trial for genocide.

Mugabe's lawyers have been given three days to appeal against the extradition ruling by a Zimbabwean judge.

If the extradition goes ahead he will stand trial at the International Criminal Tribunal in The Hague on war crimes charges - including masterminding the massacre of thousands of Ndebele in Matabeleland during the liberation war of the 1980s.

Meanwhile, the arrest of the former Zimbabwean leader could help pave the way for Zimbabwe finally to join the European Union, Foreign Secretary David Miliband signalled.

Attending a meeting of the EU foreign ministers in Brussels, Mr Miliband said that the actions of the Zimbabwean government "bodes very well for long-term relations".

Mugabe was arrested while travelling on a bus in Harare, Zimbabwe. The one-time education lecturer had been practising as a tutor in legal studies during his period as a fugitive from international justice.

The Financial Times reports British and US intelligence helped trap Mugabe. The newspaper says they co-operated with Zimbabwean intelligence services, using both signals and human intelligence to track him down.

Mugabe's lawyer said his client was in good spirits but was not co-operating with police.

The hunt for Mugabe's right-hand man, Emmerson Mnangagwa, continues.

Now aged 61, his whereabouts are not known, but is believed that he could be hiding in Zimbabwe with the help of hardliners in the police and military and Mashona loyalists.

Mish: "The entire US banking system is insolvent."

Mish gives us a long list of bad news; the last item is, arguably, the worst:

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

Big rewards for corporate failure

Wikipedia reports that chief executive Angelo Mozilo cashed in over $400 million (about a third of it in 2006/7) in Countrywide Financial stock before the failing lender's purchase by Bank of America this month. Karl Denninger's latest dramatic video presentation says, in effect, that bankers looted the system for personal gain and are now trying to get the taxpayer to foot the bill.

Investment wise owl Christopher Fildes has long advocated that, if they expect a bonus when things go well, directors should pay a "malus" when the company suffers. The French already use a bonus/malus system as a stick-and-carrot for car drivers.

Maybe then I'd be more reconciled to gross inequalities of wealth.

New: UK private schools fully-funded by the State

A friend has just sent me this article, originally from The Economist (14 June 2008). It's about the private-school revolution in Sweden, which is now coming here (starting in Richmond).

I've often wondered what the education system does with all the money - £6,000 a head times 30 children (if you're an English or maths teacher) = £180,000, but the classroom teacher's standard pay and pension might only use £30k-£40k a year.

Here's the website for the Swedish outfit trying their luck with a couple of academies in Greater London.

In praise of Patrick O'Flynn

This wide-ranging article by the Daily Express' chief political commentator covers many aspects of the broad crisis that led me to start blogging. My interest is not money per se, but about the fate of our country, and here Patrick O'Flynn unrolls a map of our problems, including:

• The rise of the East
• The growing power of foreign authoritarian regimes
• The purchase of British enterprises by foreign sovereign wealth funds, and the consequent export of our future dividend income
• Increasing foreign-held UK public debt (again, more income exported)
• Our vulnerability to energy repricing, and inadequate energy security
• Inflation in food and fuel
• Our unbalanced national budget, what with the cost of unemployment, and rising costs in other social benefits such as the NHS
• Inefficiency in the public sector
• The UK's squandering of its North Sea oil opportunity (cf. Norway's £300 billion investment fund)
• British economic decline, and our deterioriating manufacturing base

He concludes: "...the decade ahead will be full of challenges. Britain will have to aggressively earn its living in the world once more and those with nothing to offer will be offered nothing in return."

Spot on. But it's still tucked away on page 12 in yesterday's paper edition, well after Madeleine McCann and Amy Winehouse. This stuff should be hitting the front page all the time, because long after we've forgotten the celeb victims of today, we'll be counting the cost of our government's political and economic negligence and incompetence.

Gold fever may return

Gold has been in the doldrums for a while, but we're now getting messages about inflation and if Fannie Mae and Freddie Mac are added to the liabilities of the US Government, we could be back in the paper-money world of pre-Revolutionary France as advised by the Scottish gambler, John Law.

The Mogambo Guru gives value, not just in comic entertainment, but also in his useful references. One of them is to Adrian Ash, who points out that gold is now worth less than 2% of world financial assets, whereas at times of "investor stress" (and as late as 1982) it has risen to 20-25%. It may be time to consider the argument for precious metals, not so much as investments as insurance against the severe loss of value of other assets.

The EU and Radavan Karadzic

ITV's News at Ten last night covered the arrest of Karadzic, making the point that his identity and whereabouts have been known to the Serbs for years.

(The archive footage included an infamously misleading shot of Bosnian Muslims behind barbed wire, hauntingly reminiscent of the Nazi concentration camps; both at the time and again now, it was not explained that it was the camera crew that was penned in. Still, dramatic truth and all that.)

Whatever the terrible crimes of this man, the decision by Serbia's new, pro-EU government to "lighten the troika" looks primarily motivated by the desire to re-establish trade and diplomatic links with "Europe." So to me, the real story is the continuing expansion of the new European Empire.

The Balkans are being knocked into shape, or so the empire-builders think. Kosova declared independence in February 2008 (in the teeth of an attempted legal challenge by Serbia) and has been recognised by the USA and many other countries. The 100,000 Serbs in Kosova make up only 5% of the new nation's population, and compared to the 10 million in Serbia itself they are, presumably, of little account politically there, also. Besides, of course, Kosovans are not wolves.

But the question remains, how much more of Europe's former battlegrounds does the EU have the wealth and power to suborn, absorb and control? What will happen when its money runs low? Can its Babel-army sustain the territorial integrity of a hastily-constructed, ramshackle and heterogeneous empire? Will its gourmet diplomats and bibbed lawyers maintain law and reason under its young, yet complex and fuzzy legal and constitutional codes?

Whose country?

"Citizenship in this nation is is not a spectator sport," says Karl Denninger, as he tries to get more people to sign his petition to stop Fannie Mae and Freddie Mac being made vast burdens of the State.

I hope that is true for the USA, and I wish it were true here. Are we deluding ourselves when we talk of "our" Government?

Worrying signs

Knowing that debt creates extra money and so boosts inflation, The Mogambo Guru notes that the Chinese now have 1.58 billion credit cards! For some reason, TMG thinks we should look at gold and silver.

Karl Denninger points out that short-selling actually acts as a kind of price support in the market, since ultimately the short seller has to buy the shares he's sold to someone else; and so the new ban on short-selling selected financials has removed the floor beneath them. Jim in San Marcos found he couldn't do any short-selling in that sector for three hours yesterday, and doesn't know whether that means we're looking at free-fall or a sudden rally. Either way, it seems to prove the point that banning short-selling increases volatility, the sensible investor's enemy and the gambler's fatal siren.

If two views make a market, does silencing one leave the other free to become a whimsical dictator?

Inequality revisited

"...both the income share earned by the top 1 percent of tax returns and the tax share paid by that top 1 percent have once again reached all-time highs," says Russell Roberts at Cafe Hayek, quoting the Tax Foundation.

As we've seen recently, there's more than one way to interpret the facts. At what point do the rich cease to inspire those beneath them, and begin to squeeze them? Doesn't it take money to make money? If so, shouldn't the lower orders be left with some after paying their bills? Is there an optimum level for the Gini Index?

UPDATE

Trevor Phillips on inequality on Britain: "People can see the economic slowdown coming. Everyone is happy to take some of the pain as long as that pain is shared fairly and what we want to do is to make sure that the burden doesn't fall unfairly on some groups rather than others."

Inequality

An anonymous spam-rant comment on one of my recent posts claimed that 1% of Americans owned 50% of the wealth, and this was destroying the system. Is it really a problem? I've had a quick trawl for information on inequality.

• Gini Index/Coefficient of inequality explained here
• Wikipedia lists countries by inequality here
• The CIA Factbook gives the Gini Index of the USA as 45 (in 2007), the UK as 34 (in 2005)
• Increase of USA's Gini coefficient since 1967 here

Here's some relevant articles and posts:

Richest 2% Own Half World Wealth; Bottom 50% Own 1% - UN Report (5 December 2006)
"the richest 1% of adults alone owned 40% of global assets in the year 2000"

The wealth gap is widening again (Daily Mail, 26 June 2008)

Why is the 'wealth gap' a bad thing? (MSNBC says it's not, what matters is opportunity)

Wealth gap widens (CNN, 29 August 2006)
"In the early 1960s, the top 1 percent of households in terms of net worth held 125 times the median wealth in the United States. Today, that gap has grown to 190 times..."

Wealth Gap Is Increasing, Study Shows (ScienceDaily, 9 August 2007)
"The poorest ten percent of families actually had a negative net worth---more liabilities than assets..."

*** Sackerson's Prophet Prize for this: ***
Globalization Has Increased the Wealth Gap (interview with Nobel prize-winning economist Joseph Stiglitz , author of "Globalization and Its Discontents", posted 15 January 2007)
"I think we are in a precarious position. We might be lucky and wander our way through this mess. There is a significant probability, however, that global interest rates could rise. If that happened, households with a large amount of debt would find it very difficult to meet their mortgage payments, and home prices would go down, which would lead to a reduction in consumption. Last year Americans consumed more than their income, something that is obviously not sustainable. The only way they could get away with it was by taking out money from their houses. But if home prices go down, they won't be able to do that any more. So there is a significant risk of a large economic slowdown. And government, by piling on so much debt and having such a large deficit, does not have much room to maneuver."

Why the wealth gap keeps growing (essay by Paul van Eeden, 17 November 2006)
"The fact is that people all over the world are getting poorer -- not because of free enterprise, open markets or globalization but because government created monetary inflation robs them of their living standards. The only ones who can immunize themselves are those with sufficient capital and that is why the rich get richer and the poor get poorer."

Market manipulation in financials?

Mish refers us to a piece in Minyanville. It suggests a recently introduced selective ban on short-selling is intended to support share prices in financials, so that more money can be drawn in by splitting shares and selling new tranches to the public.

To me, it feels like touting for sucker money. What happens later, when the short-selling ban is lifted? When the government (via regulators) begins to manipulate the market in this way, it looks like a sign that we are in trouble.

Should sterling now decline against the US dollar?

Mish thinks so, now we've decided to borrow our way out of a recession.

Also interesting to hear the discussion on Radio 4's Any Questions, where the assertion that Gordon had stuck to the EU's "40% of GDP" borrowing guideline wasn't challenged by anyone, despite the massive off-book PFI financing.

Conspiracy Corner

Secret Bilderberg Agenda to Microchip Americans Leaked

Thought you ought to know.

Break free

To cut down the rainforest, you need logging roads and rivers, so that you can empty the land. And to extract the wealth and freedom of a nation, you need a money system, banking, credit and debt.

Thanks to iTulip, I'm working my way through a series of YouTube postings of an Argentinian documentary. It describes how banks and multinational companies raided Argentina from the nineteenth century onwards, and how successive betrayals by popular politicians and union leaders have perpetuated the crisis.

Some years ago, I watched a documentary about an old American farmer, trying to make ends meet while crop prices fell and the bank continued sucking up interest from his debts. Finally, he did a brave, bold, heroic thing: he sold. He took the farming equipment he had acquired with a life's work, and auctioned it to his farming neighbours, who were rooting for him. Then he cleared his bank debt entirely, gave the home farm unencumbered to his son, left the big sky and went with his wife to live in a little flat in town.

I don't think I shall ever forget the dignity and restraint he showed when the bank telephoned him with hypocritical words of goodwill.

Pay off your debts, save cash (or whatever will keep its value), and don't put it all in the bank.

M4 up

FXstreet.com reports (htp: Alice) on significant increase in UK M4 money supply and lending (someone please help me with the distinction). Conclusion: inflation.

To put it in context, click here for BoE long run stats on M4.

Saturday smile

Comments, please

I had the last comment here come through tonight, but although it's long and features words in capital letters (usually a bad sign), I read it. Shame it's anonymous, and maybe it could do with editing, but aren't there elements in it with which you could agree? Is he (I assume he, for some reason) right about wealth distribution in the USA?

UPDATE

That rant has indeed been copied and pasted as the author suggests, with slight variations. I've done a little digging via Google (there's about 1,600 instances) and the earliest date-stamped version I can find so far is 26th February 2008 here, though quite likely there's earlier ones.

I don't know what he's got against Oprah.

The "1% own 50%" claim startled me - looks like England in the 19th century. Anybody able to confirm the inequality data? And will the sucking-up of wealth by the rich destroy the economy, as the ranter claims?

Should we let Africa starve?

Wofie's post on the futility of charity in Africa, a rider to Kevin Myers' article in the Irish Independent, gave me pause for thought. Are we wasting our money keeping poor children alive, so that they can grow up to be gangster-soldiers? If abortion is the answer to the criminal classes (not actually advocated as such by the authors of "Freakonomics"), is starvation the solution to civil war in Africa?

"Africa’s peoples are outstripping their resources, and causing catastrophic ecological degradation," says Myers. Perhaps, if they do things as they have done before. But on that basis, one would never have predicted the growth of Europe's population to its current size.

One of my relations by marriage went to Kenya to try his fortune some years ago, and having married a local girl from the Kikuyu tribe, bought a farm. His new wife is clever and sent off for pamphlets on farming, from which she learned that you can multiply the productivity of your land by companion-planting several crops. I wonder how much more food Africa could produce if agricultural skills there were better developed and disseminated.

Even in Europe, there are disparities in efficiency. Up to the end of World War 2, my grandfather had a farm in East Prussia. His 600 acres produced at least as much as the 2,000-acre farms of his neighbours. He compounded this advantage by diddling the taxman, telling the latter that as a simple farmer, he didn't understand finance and would the taxman please assess him on what his land could be judged to yield. You may be sure that he paid his tax bill without argument.

And what about modernising energy supplies, too? As a child, I saw a map of the Congo Basin and fantasised about damming the encircling ring of mountain ranges to make the world's greatest hydro-electric project, supplying the electricity needs for the whole of Africa. Of course, I hadn't considered ecological consequences; but in the Sixties, all I ever (over)heard of "ecology" was an brief, excited discussion between two of my teachers. This doesn't vitiate the argument for looking for efficient energy production that doesn't require chopping down all the forests to cook on wood fires like traditional tribespeople, or middle-class hippies.

Yes, some African countries are spectacularly badly governed; but I don't think we should rush to a money-saving despair for their peoples.

Bubble economy is beyond satire

My brother sends me a link to this article in the internet satire mag The Onion:

Recession-Plagued Nation Demands New Bubble To Invest In

... The current economic woes, brought on by the collapse of the so-called "housing bubble," are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent....

Has the author read iTulip's Eric Janszen on the "bubble economy"? If he has, he'll know Janszen expects the next craze to be alternative energy - full Harper's article here.

Free trade, or shop local?

An essay on the basic argument for trade, at Mises. But the author does admit a problem with externalised costs that aren't taken into account.

A thought: what if we in the UK really don't have much of a comparative advantage in any area, long-term? Once the East has caught up on skills, what do we have that anyone will want to buy?
And what about the monetary distortions in the market? It's like Monopoly with some players cheating by using secret stashes of extra banknotes.

Are the economists misled by an idealised picture of economics?

Will the UK/US trade balance influence the dollar value of sterling?

Here's some trade stats for UK/USA. Last year, we imported $6.6 billion more from the US than we exported to them. Last night, the exchange rate for the pound rose above US$2.00. For some time, we seem to have been shadowing the dollar, but do we have an incentive to allow the dollar to fall further against the pound?

Or will we be more influenced by the desire not to devalue the amount we have loaned to the US via Treasury bonds? And then there is the possible extra unemployment that could result from UK goods becoming more expensive in dollar terms.

Any forex experts care to give a view?

UPDATE: Here's the answer, it seems:

Weak jobs data knocks pound vs dollar and euro (Reuters)

UPUPDATE: ...And here's a different answer:

Sterling up versus dollar, banks support (Reuters)

Wouldn't roulette be more honest, somehow? "Manque! Pair! Impair! Passe! Noir! Rouge! Numero 17!"

How far can the FTSE fall?

The FTSE hit a long-term low at 3,287 at the close of 12 March 2003. If it were to drop to 5,000 now, that would still mean about 8% p.a. compound growth.

Bank deposits are investments, and can go wrong

Karl Denninger takes us back to basics about banks and "your money" (highlighting is mine):

I want to talk about IndyMac for a bit.

The news has covered a few really, truly sad stories. People with $200,000, $300,000, $400,000 or more in there who have seen 50% of their balance over $100k disappear overnight.

Older people who literally have their life savings in these institutions. People who are relatively unsophisticated, but have been told through the years that the government will make it all ok, and who believed it.

It tugs at your heart to see a 70+ year old man pleading for them to let him have his money - money that he worked and saved a lifetime for.

If only it were that easy.

People don't think of a bank as being an investment, but it is.

You are lending your money to the bank so they can make money with it, and they pay your a coupon - interest, or the "safekeeping" in the case of a checking account that does not pay interest - in return!

US banks: uninsured deposits stand at $2.6 trillion

Mish calculates the potential for disaster if depositors lose confidence:

"FDIC Recap

There is $6.84 Trillion in bank deposits.
$2.60 Trillion of that is uninsured.
Total cash on hand at banks is $273.7 Billion."

So 89% of uninsured deposits are not covered by available cash in the bank.

TMS a better measure of the money supply?

What looks like an important idea and discussion of "True Money Supply" in Mish. I shall have to chew on it for a bit, but thought the finance-oriented reader might care to do the same.

Mish says when you look at the situation correctly, we are definitely in DEflation.

Ron Paul and Tibet: is he right?

House and Senate Pass Resolutions on Chinese Crackdown of Tibet

On Wednesday, the House overwhelmingly passed a resolution calling on China to “end its crackdown on Tibet and release Tibetans imprisoned for “nonviolent” demonstrations.” The resolution passed on a vote of 413-1, with ”Rep. Ron Paul, R-Texas, who recently dropped out of the presidential race, was the lone congressman voting against it.”

(Reuters)

This entry is given prominence in Reuters' site (world news section), but is three months old, a point I didn't spot at first. Still, I think the underlying issues are enduring and (given the imminent start of the Games) topical.

The almost-complete unanimity of the vote seems rather suspicious, but although we are used to the army being out of step with Ron Paul in financial matters, is he right in this case? Some might think you cannot have a policy of "liberty in one country", any more than "socialism in one country."

Can't find much in Google News about it, but here's a bit of blog discussion, updated here.

Bear market: Steiff comes home

Chasing lower costs, Steiff outsourced around a fifth of its production to China in 2003 but has now decided to come back because of concerns about quality and staff turnover.

Steiff is one of a small number of German firms which are swimming against the tide and leaving China, despite its cheaper workforce and a burgeoning consumer population. With fuel at record highs, some cite mounting transport costs.

Production of Steiff toys, which include a distinctive long-limbed bear with a melancholy growl, will come back to Germany and other countries in Europe by the end of 2009.

(Reuters)

That's sort of heartening, except that as it continues to develop, China will deal with quality issues. Japan listened to W. Edwards Deming in the 1950s and soon "Made in Japan" meant, not cheap, tinny and shoddy, but innovative, reliable and affordable.

In any case, this is clutching at straws. Tiny companies making high-value toys won't sustain Western Europe. We need major changes if we're going to become globally competitive. For example, health and welfare provision will have to be reassessed as the budgets shrink.

And here's a big debate to come: how much education? How much benefits the economy, how much is positional (Swiss finishing school for your daughter, etc), and how much is luxury consumption, like foreign holidays and Lagerfeld dresses?

How much education is simply an illogical, implicit pretence that the government is doing something to give all children relative advantage, particularly yours? How much is to disguise unemployment? How much is to keep potential young criminals penned-in during the daytime on weekdays? How much is to baby-mind children so that women can be driven out of their homes to do low-paid work?

As the money dries up, there will be an education debate, and it will be messy.

US lending market: Apocalypse Now?

Some points from Denninger's latest (summary in my words):

It's getting hot. The collapse of IndyMac may take 10% - 20% of the FDIC's balance sheet, and that's assuming a savers' panic doesn't start.

If the government underwrites Fannie Mae and Freddie Mac, the Federal public debt doubles (goes up by $5 trillion), the US' credit rating is compromised (it's starting to happen already) and all debts will cost more in interest - maybe 3% extra. KD's recommendation is that the two monster lenders be put into receivership and wound down over time; this means a steep drop in house prices so that they can be afforded on more sensible terms and conditions.

His advice to you: head for the high ground. Get out of debt, get your savings balance below the FDIC's $100k ceiling, think about buying Treasury bonds. "If the government goes down you will need steel, lead and brass, not money."

BUT...

See Jim from San Marcos on the same matter. And someone copied Denninger's piece whole into a comment at Jim's, to which the latter responded:

"There is a very peculiar situation here from a stock ownership position. These two stocks are being shorted en-mass. I kind of get the feeling that neither one is going to zero. I smell a bear trap here. You can be right but still be dead wrong."

Roubini: bailing out government mortgage lenders could downgrade the USA's national credit rating

If we fiscalize all of these losses the U.S. may fast lose its AAA sovereign debt rating and eventually end up like an insolvent banana republic.

Nouriel Roubini, quoted in Mish's.