It's going to be bad...

Mike Morgan, quoted in Mish's, is now convinced that we are headed for outright economic depression. Builders, banks and the rest of us are going to be hit very hard. This is, of course, the view of a real-estate expert in Florida, but he sees this as hitting the whole country.

We in the UK will not be immune from the general economic malaise to follow, even if unregulated immigration and a slower past housebuilding program help keep our housing assets from falling quite so far.

Any room for dissent?

I was listening to BBC Radio 4's "Any Questions?". The first audience question was on China's "media-savvy" handling of the Szechuan earthquake.

And with a disgraceful click, the supposedly diverse panel closed ranks behind China, despite some attempt by the chairman to generate at least a little debate. We heard that we have been indulging in "China-bashing" lately, and now that this earthquake has happened, we should stop all this nonsense about China's human rights and/or ecological violations.

I began to wonder whether there might be some business and party-political interests to declare, for I've rarely heard such a combination of unanimity and superficial reasoning. The message seemed to be, "Stop talking about Tibet, look at this crisis instead."

That's imposing a false perspective. China's own news media currently reckon the death toll from this terrible quake to be under 29,000; but "According to various estimates, up to 1.2 million Tibetans have died due to the Chinese occupation and various political campaigns since the Dalai Lama fled his homeland in March 1959." So in cold mathematical terms, Tibet has suffered a death toll 40 times as great - and far more avoidable. Why should a recent misfortune be the pretext for ignoring a long-standing injustice?

And as for rubbishing ecological concerns, there will come a time (and quite soon) when we have forgotten in which year this quake happened, but we will be dealing with the multifarious fallout of China's economic, demographic and ecological problems. For China is a distressed giant thrashing about in the small house of this world.

China's population last year was estimated at about 1.3 billion, and in the next ten years or so is expected to increase by maybe another 100 million. Over the last 60 years, life expectancy has more than doubled and infant mortality has reduced. So despite the one-child-per-family policy (not universally applied in China), the population continues to grow.

And, as time goes by, it is becoming a demographically unbalanced population. Thanks to the preference for sons, there is a disparity between male and female. Should China decide to become warlike in the conventional manner, she will have an almost limitless supply of expendable single men. (Meanwhile, Russia's population threatens to decline to such a degree that reversing the trend was "a key subject of Vladimir Putin's 2006 state of the nation address".)

Less frightening for us, but surely very worrying for the Chinese, must be the growing imbalance of numbers between young and old. Imagine a young Chinese couple who have their one child, but face supporting four elderly parents. And when that child grows up, perhaps up to 6 parents-cum-grandparents (up to 12, after marriage). And the healthcare costs!

And with a smaller proportion of girls surviving to breeding age, the demographic waist will be pinched further. Perhaps the one-child policy will eventually be abandoned.

Meanwhile, China's burgeoning populace must be fed, but how? Changes in diet and the progressive loss of arable land, and reducing yields from such land as is still fertile, have been a serious concern for a long time (see e.g. here).

Then there's the demand for water, and energy, and how to have breathable air while exploiting China's giant coal reserves and rapidly expanding heavy industry.

It's far too simple to make China into a villainess, but she faces enormous difficulties on the road away from her past abject poverty and suffering. These translate into mighty pressures that the rest of the world will feel. We must find a way to assist China in the solution of her problems - but self-censoring discussion of her external relations will not help us find realistic answers.

Check your bank deposit security

A cautionary story from Michael Panzner here. An American nearly lost most/all of $400,000 deposited with his bank, despite taking great care to set up the account in a way that brought it under the FDIC deposit protection scheme.

An intriguing detail is the reluctance of the bank to let the account be titled appropriately - failure to do which could have cancelled the FDIC protection. Another, is the bank's reluctant and misleading response when the depositor tried to exercise his right to withdraw his cash.

And the $15,000 interest was lost, anyway.

Where is your account? Make sure it's not dead money.

Oops

For more detail and comment, see Karl Denninger.

The sky is dark, wings are flapping

Some, like Don Boudreaux of Cafe Hayek, call the doomsters Chicken Little. Well, many Chicken Littles make a Chicken Big, and she's coming home to roost. Or maybe the pessimists are all wrong, and everybody will live happily ever after. At least, everyone who matters.

Karl Denninger notes that in both the US and Japan, there are moves to force full disclosure of the banks' poor-grade assets; Jim in San Marcos reprises some observations of what happens when mutual funds (collective investments) are told by worried investors to "switch to cash" or simply pay out.

Look out for a hole in the henhouse roof, and a cloud of feathers.

Nationalism and internationalism

"James Higham" joins his voice to those who detect a revival of the nationalist spirit.

I don't think nationalism will be confined to losers in the game, or rejected by those who claim to love all mankind. Once there was Bukharin/Stalin's "Socialism in one country"; soon it'll be "China first". I can't blame the latter - they have worked so hard for what they've got, and won't understand why we think we can whinge it all back from them.

Speaking as the man in the street, my perception is that we have had a long period in which global businesses and a carpetbagging international managerial class developed and made fortunes. The liberal economists say this system is great for all of us, and should stay that way; perhaps so, if we had honest money and sound national budgets, so the correction mechanisms could steer the course of international trade more steadily.

But thanks to criminal negligence, incompetence and greed by those who could have maintained the integrity of the economic system, I think the aspirant working class and lower middle class in the developed world are paying heavily, and will pay more heavily. As they give up on their aspirations, we shall see a ballooning underclass, increasing the drag on national economic performance; but the situation may prove impossible to change for electoral reasons in a sort-of-democracy. The gap between rich and poor in our countries has widened, but will widen further: "Devil take the hindmost."

At the same time, on both sides of the Atlantic, people suspect a sell-out by the political class, which is intertwined (professionally and often maritally, or extra-maritally) with the business, media and public relations people. I have often said that I think we are seeing the reconstruction of the aristocracy in Europe. Many Americans also fear that their society is moving away from its historic and constitutional foundations.

The implications for democracy, social cohesion and international relations are worrying.

Bust - or false boom and mega-bust?

Ron Paul and others discuss the state of the American economy here. Don Boudreaux (the economist who writes the Cafe Hayek blog) agrees with Ron Paul that the central bank should stop "doing something".

This also chimes with what Marc Faber said last year: the crisis should be allowed to burn through and take out some of the players. Of course, those who are in a position to "allow", are part of the club that includes the players, and there's the rub.

Still room for wonder

Just watched Patrick Moore's "Sky at Night" programme - number 666 in the series - and been fascinated by how much we still haven't firmly established, in fact we're conjuring up theoretical matter and energy that dwarf everything we can directly observe.

It's a little early but the programme should soon appear online here.

UPDATE - now online here (requires RealPlayer to view).

Quote of the day

This global credit bust is going to astound practically everyone, including the bears.

says Mish, daringly criticising Warren Buffett, who has declared a $billion-plus loss on short bets in the market.

The system does not care

Please read this - and pass it on. More and more, the services of the State seem to serve only as a way to employ people, not to achieve.

Not all the individuals can be blamed - you can lose your job for going beyond your brief, or shortcutting protocol.

But don't expect a pantomime horse to win the Derby, and don't expect compassion and commitment from these reified functions that we used to perform for ourselves.

Maybe only embarrassment will make a difference. Please pass on the link to Callum's site.

http://calumcarr.blogspot.com/2008/05/those-who-read-yesterdays-post-nhs-mega.html

Brummies

James Higham writes how the nation likes to look down on the humble Brummie. Having lived here for over 30 years, I should like to say something in reply, as no doubt he knew I would:

First, I think the affected contempt for Brummies is a displaced scorn for industrial labour perhaps impermissible to express so baldly in relation to Yorkshiremen and Lancastrians. Imagine such contempt shown for miners!

This is not universal: German engineers put Ing. in front of their names, and may have a kudos similar to that of the medical profession; but British engineers are treated with patrician condescension. Think squaddies in oil-stained Khakis. No place for officers there.

Or picture Repton-educated (though expelled) Jeremy Clarkson, cheerfully displaying his ignorance as he drives the latest wonder constructed by "four blokes bashing metal in an industrial unit". Decades of regarding going into industry as the wooden spoon in life's competition, has brought Britain to our current sorry pass.

Thickos associated with Birmingham include Matthew Boulton, James Brindley, Sir Arthur Conan Doyle, JRR Tolkien, John Baskerville, Sir Edward Burne-Jones etc.

But mostly, Birmingham was too busy making its own and the nation's prosperity - the "cheap tin trays" of Masefield's "Cargoes". Ugh, the proles. Who also made the chain, the anchors, the presses, the lathes and so on that liberated us from guarding sheep as we read our Bibles with frozen fingers.

There may be a London-centric jealousy because Birmingham is not Britain's Second City, but, technically speaking, its first in geographical area and population. It is the largest local authority by a country mile (the "Mayor of London" controls a larger budget, but that "London" is an sort of urban conglomeration imprecisely related to the City of London, the surrounding boroughs, and other local authorities in the greater metropolitan area).

As to accents, few outsiders could pass for Brummies. Attempts to imitate the accent usually sound like a Scouser being strangled; and what is often thought of as a Brummie accent (say, Timothy Spall's Barry in "Auf Wiedersehen, Pet", or Julie Walters' Mrs Overall in "Acorn Antiques") is more like West Bromwich.

The Black Country abounds in accents; when I first came to Birmingham a Black Country-born history teacher told me that it was once possible to identify by his speech not only the village of the interlocutor, but sometimes even his street.

My personal preference is Sedgley, an exceptionally musical tone. Their pronunciation of the word "flowers" makes me think there must indeed have been a Golden Age in which men sang rather than spoke.

The newt got up and slowly walked away

I didn't think it plausible.

Pay up, or default

Karl Denninger says it's time to settle accounts. Here's his estimate of the tab:

We have recognized $300 billion of losses but it has all been derivative loss. The $2.5-$3 trillion in credit loss from housing is still to come, plus all the credit card and other debt that cannot be paid down, likely a couple hundred billion more - at best.

= c. 20% of US GDP.

The system is now out of control

Recently I seem to be an annexe for Karl Denninger's blog, but that's the way it is. Here he figures that public and private debt in the US are so massive that with an average 8% interest rate, debt servicing is now equivalent to 22.4% of GDP. He thinks the system must soon explode and those holding cash will be safest.

The pocket calculator reveals the truth

A spendidly indignant Karl Denninger explains how the $600 "stimulus cheque" sent to American taxpayers will be more - much, much more - than paid for, by higher borrowing costs.

Where are the forthright Cassandras on this side of the Atlantic? Are they silent because nobody here believes in our country?

The "little hand-mill"

Official figures going back to 1963 show that bank lending has NEVER stopped increasing.

Lowest: 1.1% annualised, for the quarter ending 31 December 1966.
Highest: 44.9% annualised, for the quarter ending 30 June 1972.

Median: 11.9%
Mean: 13.45%

Is it my imagination, or does the graph spike regularly before stockmarket crashes and recessions?

Original BoE data here.

In the late 60s, my school magazine carried a major bank's advert, for 16-year-old school leavers to join them. I aimed at a degree instead. Perhaps I'd have chosen differently if the ad had read "39 thieves looking to recruit trainee".

Do recessions lead to inflation?

Robert Murphy thinks so, and produces a graph that to him suggests prices go up during a recession, not down:

However, this picture suggests to me that recessions follow periods of higher inflation, and maybe where that inflation continues during the recession, it could be put down to a sort of residual momentum. Why should prices fall at precisely the moment the NBER says a recession has started? Even a cut flower will maintain its bloom for a while.

On the other hand, it seems clear from the above graph that prices do generally seem to fall after a recession. Perhaps this is because of the recently reinforced lesson about thrift, so people become less keen to spend too much on stuff they don't need.

But it's also possible that the recession has cleansed certain inefficiencies in the use of capital - businesses that should have folded faster - and as that capital gets better employed elsewhere, it does its work of improving productivity.

Which it needs to, when people have become more cost-conscious. I recall reading about an American who found a way to sell dresses for a dollar in the Great Depression - he used a machine to stamp out the outline of 100 at a time, so only the machine sewing was needed, not the measuring and cutting. So it was still possible to buy a dress for your sweetheart when money was tight.

But the little hand-mill of monetary inflation continues to grind...

Tibet and China: clash of cultures

I’d long been interested in Tibet and had a romantic vision of the Land of Snows, but I’d never been there. Now I learned that the Tibetans have a different way of seeing the world. My classmates were Buddhist and had a strong faith, which inspired me to reflect on my own views about the meaning of life. I had been a materialist, as all Chinese are taught to be, but now I could see that there’s something more, that there’s a spiritual side to life.

[...]

The Chinese protesters thought that, being Chinese, I should be on their side. The participants on the Tibet side were mostly Americans, who really don’t have a good understanding of how complex the situation is. Truthfully, both sides were being quite closed-minded and refusing to consider the other’s perspective. I thought I could help try to turn a shouting match into an exchange of ideas. So I stood in the middle and urged both sides to come together in peace and mutual respect. I believe that they have a lot in common and many more similarities than differences.

But the Chinese protesters — who were much more numerous, maybe 100 or more — got increasingly emotional and vocal and wouldn’t let the other side speak. They pushed the small Tibetan group of just a dozen or so up against the Duke Chapel doors, yelling “Liars, liars, liars!” This upset me. It was so aggressive, and all Chinese know the moral injunction: Junzi dongkou, bu dongshou (The wise person uses his tongue, not his fists).

Read the rest of Grace Wang's Washington Post article here.

GloomBoomZoom vs. GloomBoomDoom

Not only do we have the Great Debate about 'flation (In- vs. De-), but selective quotation can make the same expert give evidence for both sides.

Here it looks as though Dr Marc Faber is expecting inflation:

Dr Marc Faber has argued that even in the United States, where property prices are in decline, in an environment of high inflation he would rather own a US$1 million home than hold the same amount of cash or bonds, because the house would better preserve value.

... but here, its extreme opposite:

The view Marc is putting forward is the opposite one - that deflation will be the clear winner, dragging the whole world economy into a slump, with lower prices for commodities as well as stocks and property...

...In a real downturn, the United States (and other developed nations) would stop importing so much oil...and so much merchandise from China, which would have the consequence of reducing energy consumption by China too. Result: lower energy prices and a worldwide recession...maybe even the worst worldwide depression in history.

I think the giveaway in the first, is in the qualifying phrase "in an environment of high inflation". All I've read so far about Marc Faber indicates that his real position is represented by the second.

In my (amateur?) view, we're heading for a bust, and unless it can be avoided (which would be wonderful news), then the sooner, the better. Ideally, it would have happened in 2000 - in fact, it did, but we then got the reckless monetary reflation of 2003-2007.

Why soon? Because the longer it goes on, the more the transfer of productive capacity to the Far East, so that when recovery comes, we in the West won't be equipped to restart.

Empathy test - infallible

Off topic

Cure, effect, cause

A paper from the Levy Economics Institute is arguing (at least theoretically) for an extra US fiscal stimulus of 4% of GDP. That's $600 billion.

The authors say that the effect would be better if this reflation came in the form of additional direct government spending, though they acknowledge that it still wouldn't immediately halt the economic decline:

It is somewhat discouraging to see that even a relatively large stimulus plan will fail to prevent a substantial loss of output. But over the medium term, as the devaluation of the dollar and reduced spending begin to exert a moderating effect on the current account deficit, foreign trade will boost output and employment, providing the impetus for renewed growth.

Karl Denninger begs to differ (though in his case, he's still talking about transfers of money, rather than direct government expenditure):

But now we have reached the point where we need $5 in debt to create $1 worth of GDP. As debt levels rise this ratio goes parabolic and ultimately becomes impossible to sustain. That we have reached a 5:1 ratio means that the game is basically up, and the rapidly rising rate of defaults across all areas of consumer debt mean that this "engine" to fuel "growth" simply can't find any more fuel, despite the desires of the bankers and merchants to "make it so."

The Levy paper has echoes of FDR's 30s rescue, but Denninger is more concerned to compare the present mortgage bubble with the one that led to the Crash of '29:

...we've done this before... We saw, in fact, nearly the exact same pattern of practice, fraud and theft that were featured in the housing bubble during the years just before The Depression, and those "standards" in fact were a primary causative factor OF The Depression!

So maybe both parties are correct.




It's also possible that the Uk has got it wrong even worse than Uncle Sam. $600 bn is about £300 bn sterling, but adjusted for relative population size that's only equivalent to £60 bn pumped into the UK economy. We're already talking about a possible £100 bn-worth of mortgage garbage being swapped by HMG for government bonds - and our current fussing over Gordon Brown's crumbling reputation suggests that Prudence wouldn't dare try to reflate with even more direct government spending.

Besides, we are starting with a higher debt-to-GDP ratio than the USA, a State that consumes a bigger proportion of the economy, and a populace that suffers a significantly lower level of personal income on a Purchasing Power Parity basis.

Maybe that's why the pound is matching the dollar in its downward trajectory, and may even overtake it.

I've been wondering recently whether the ordinary investor of the future will be more interested to play in the foreign exchange markets, rather than stocks whose value is lied about, manipulated by rumour and sovereign wealth funds, and nibbled half to death by fees, commissions, taxes and inflation.

UPDATE - Karl Denninger is emphatic that it can't work:

Sack, no.

You can't spend $600 billion in deficits without it coming back SOMEWHERE.

Government spending is not a net positive. You can't only get to a net positive via growth in GDP.

Debt-initiated spending only returns $1 for every $5 taken on in debt.

Mortgage bond re-rating: reversing the rescue?

Karl Denninger notes that Moody's have re-rated previously "AAA" packaged mortgage products, and points out that since the Federal Reserve only accepts AAA, it may be forced to send much of this stuff back and demand better collateral. The banks' headache returns.

Second blow

TV ad tonight: Woolworths children's jeans £2. I said, you wouldn't have got a zip for £2 a few years ago. (So many Birmingham kids I used to teach years ago thought school didn't matter, they'd be getting a job at Tucker Fasteners anyway. That or Lucas' - now joining the list of nostalgia subjects.)

Then a thought: when the recession really bites, the price war will be unrestrained. I don't know what is still manufactured in Britain, but in the second phase, when the poor become acutely cost-conscious, I can't see domestic manufacturers staying in business.

Of course, with social benefits still generous, we're not there yet (they're still buying their kids Xboxes and Lacoste trainers, while SoSecurity lay on taxis to take the tearaways to school-for-the-expelled); but wait for the tax and benefit reviews when public finances finally unravel.

And if I ever do get another new car (the Fiat Brava is kept going on a radiator refill every Saturday), maybe it's the Tata Nano for me.

I'm looking at checkmate and trying not to believe it. But that's my problem; the difference between Western waster education and Chinese school is too clear. And we'll be a sort of nationwide museum of once-were-workers. But I don't want to live in the past.

Quality down, as well as prices up

Good article in iTulip about the symptoms of inflation to watch out for.

£50 billion liquidity injection - what does it mean?

£50 000 in £50 notes weighs about 1.3kg. So £50 bn = 1,300 tonnes, or 1,279.46 British long tons, of paper.

In 1936, the Aga Khan was presented with his weight in gold, then 220 lb, or c. 100 kg. Gold currently sells for £14,891.58 per kilo, making the Aga Khan's weight in gold worth £1.49 million in today's prices. However, 100 kg of £50 notes is worth £3.85 million. The £50 notes would weigh as much as 13,027 Aga Khans, but would be worth 33,576"gold-priced Aga Khans".

Or, in pre-crash property terms: it is reported that Sheikh Hamad paid £100 million last year for a penthouse overlooking Hyde Park. Mervyn King has just pledged 500 "Hamads" (or over 700 "Updown Courts", if you prefer).

Or, in height terms:

1 ream of paper (500 sheets) is 5.4 cm thick. So 1 billion £50 notes would make a pile 108 kilometres, or 67.1 miles, high.

Were the Aga Khan of that time to have been the height of the average British man of today (5 ft 9 in, or 1.753 metres), £50 billion would equate to a stack of "gold-priced Aga Khans" (without shoes) almost 59 kilometres high. *

The lowest layer of the Earth's atmosphere, the troposphere, varies from 8km at the poles to 16km over the equator; the ionosphere starts at an altitude of about 80 km, and the US Air Force considers "space" to begin at 81 km.

Perhaps it would be simpler to use a new unit: the "government fudge", one box of which costs £50 billion.

By the way: hands up all those who believe the Prescott bulimia story, of which up to now there was not one breath? Now, hands up all those who have an explanation as to why this story should appear this weekend?


* I think this shows that the Aga Khan was worth twice his height in £50 notes.

Trade deficit, undesirability of

(Click to enlarge.)

On freedom

Freedom is not a solitary journey through a desert, where every error and deviation may be fatal; it is found between the hedges and walls of a populous land, defining sovereign islets that combine in mutual defence and succour.

Like a musical string, its harmony relies on bounds. It is the tension between tyranny and anarchy, a common land affording refuge from public and private oppression. It is not lawless. Liberty is to defy another's rule; freedom, to obey one's own; free doom, the "freo la3e" of La3amon's Brut. No law, no freedom.

And now, confusedly and perhaps too late, we must begin to defend our freedom. Here in the once United Kingdom, our self-rule is fragmenting and being sold piecemeal to an unlicked bear-whelp of an aggregated foreign power; in the United States, many of the people and a handful of their representatives are calling for a rally around the principles of the Constitution, while the government becomes forgetful of its foundation. In both, there is economic mismanagement and perilous concentration of wealth. The Big Brother of a political power cutting itself free from popular franchise has his arm round the shoulder of Big CEO, whose business no longer depends on the community from which it sprang. The land will be cleared or peopled at its masters' pleasure; they will move us between their pastures for their profit. The movement will show us that the earth is not ours. We shall be rootless. We shall be dispossessed, wanderers, desperate hired men, like the landless Gregora of Scotland.

This is where we were some two centuries ago. It must all be fought for again, but perhaps, like the valiant tailor, we shall again find a way to overcome the rich and powerful who ravage our lands. Long before the battle, the American Revolution began to assemble its forces among a rabble of pamphleteers, philosophers, dissident clergy, smallholders, inventors, dreamers and adventurers. Every voice, however small, adds to the chorus.

My brother became an American citizen yesterday. Part of the ceremony was a homily, in which the presiding official said (was it a quotation from Jefferson?) that liberty was not passed down to one's children by nature, but by one's actions.

Although my brother has his own views on religion, and although I feel that America has, and has always had, much to learn in its foreign relations, it is without irony that I wish a blessing on America and the American people, and my newly American family.

UPDATE

Not Jefferson:

"Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children's children what it was once like in the United States where men were free."

Ronald Reagan 40th president of US (1911 - 2004)

Denninger calls for a borrower's strike

It lifts your heart a little to read someone who still believes in his country and is unafraid to express moral indignation. Here Karl Denninger advocates getting a home safe for your hard-earned - something the Japanese went into in a big way when their deflation hit.

Speaking of Japan, the Nikkei shows that the stockmarket can disappoint for long periods:

Hi ho-ho, hi ho-ho

It's stagflation, obviously, says Lance Lewis. And he expects gold to resume its climb. Good news for China: "The world’s largest producing nation with 276 t was [in 2007], for the first time, China", says 1read's Weblog.

For the playful, you can join the game here.

China sponsors African dams, for minerals

See this blog on Chinese support for foreign hydropower projects - and their growing responsiveness to ecological issues nearer home.

Tibetology

The New York Times on China, museums and winner's history.

But is it possible that some of our own museums have an agenda or two?

Big Brother has a thin skin

A nightmarish account by a Swedish lawyer, of how the State in her country snatches children from perfectly OK parents, partly because there's a good living to be made from it, and sometimes for squalid emotional revenge. Nurse Ratched unleashed on the family, a much wider target than the mentally ill. But I suppose this is what we get as the State expands.

htp: Schadenfreude