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November 09, 2010

Financial Briefing: A funny thing happened on the way to the bankruptcy hearing

The barbaric yellow metal is now trading above $1400/oz. Near a peak? In a bubble? Who knows? Given the recent news, I doubt it. I have a feeling that gold has quite a bit of room to run yet.

You want some scary chart-fu? Here's some scary chart-fu for you.

Yes, Virginia, States can indeed go bankrupt. They won't call it that, of course, but simply reciting a law that says a State can't go bankrupt doesn't magically dispel the problem. The big question is whether Uncle Sugar will allow a big state to feel the inevitable effects of insolvency: beginning with bond-debt default. Any solution (beyond the obvious one of forcing the insolvent states to liquidate their assets, discharge their debts and obligations via the courts, and restructure) is likely to be ugly and satisfying to absolutely no one.


Some sicknesses are like that: you've been feeling cruddy for awhile, but then you feel a bit better one morning and decide to eat a big breakfast of bacon, eggs, hash browns, toast. You feel a strong urge to get back to normal, back to the way things were before the sickness fell upon you. You polish off the repast with high enthusiasm, but when you're done...an ominous tide of queasiness. You think, "Was that unwise? Was it too soon to be eating a bunch of greasy fried food?" Then you lean forward and vomit all over your shoes. Too soon. A valuable life-lesson, as your mom might put it right before ordering you to clean up the mess you just made.

It looks like Ireland is about to have their very own mortgage crisis soon. The problem in Ireland is not subprime lending as in the US, but the general insolvency of the country and the Irish banks. The Irish mood? Positively tea-partyish.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.
Another drink from the bitter cup:
As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.
It bears repeating: the problems of the downturn are not unique to America. To some extent, every developed nation in the world is suffering from them, especially the highly-indebted nations of the western world.

The glut of shipping is sending the BDI (Baltic Dry Index) down again. It's not as bad now as it was back in July, though. To my mind, the huge shipping glut is indicative of a deeper overcapacity in the export nations like China, which is why this worries me. If demand stays slack for much longer, we're going to incur some structural problems in world trade that are going to be very difficult to solve. (Like a trade war with China, for example.)

More on QE2 as a "bankless financial war with China". A linked quote by Dick Bove is fairly alarming:

I just do not understand it. In my view, the processes that must be put in place do not stimulate growth by debasing the currency; ignoring the traditional modes of credit creation; and relying on consumption of foreign goods rather than production of low cost American made goods to restart the economy. In my view the Fed will find relatively quickly that to avoid a liquidity trap, it must utilize the American banks to make loans.
If the Fed is expecting China to blink, they're probably going to be disappointed.

Editorial comment: Remember this about "credit creation" -- "credit" is just another name for "debt". If your only hope of stimulating the economy is larding it up with vastly more debt...you are well and truly boned. Bear this in mind when some pundit starts yammering about "consumer spending" being the salvation of the economy. What they're really talking about is consumers saving less and spending more -- with borrowed money. You cannot spend your way out of debt.

Ben Bernanke: The apostle of unsound money.

Even Sarah Palin is lining up to punch Ben Bernanke in the junk: "Cease and desist!", quoth Sarah.

VDH on Barack Obama's economic worldview: Stay worried.

A global gold standard? If you read the article...no, not so much. But I do expect to see a huge push in the years ahead to set some standard international monetary "unit of measure" -- not a currency, per se, but a peg around which actual currencies circle. I expect it to be some sort of basket of commodities, but given how inept the IMF and World Bank have been over the years, I don't expect this effort to gain much traction. The sovereigns have too much to lose if their chicanery is brought to light. (If you think of it a certain way, gold already is the global standard; that's why it's over $1400/oz as I write this.)

The evidence that QE2 was actually a gun pointed at China gathers steam.

The death of the welfare state may be slightly exaggerated. Never underestimate the inertia and stubbornness of entrenched bureaucracies. The number one bureaucratic imperative is always to protect itself; everything else (and I mean everything else) comes second. Pull quote:

The US, bizarrely, is running at least 10 years behind in this process, having elected a government which chose to embark on the social democratic experiment at precisely the moment when its Western European inventors were despairing of it, and desperately trying to find politically palatable ways of winding it down.
I think Ms. Daley rather overestimates Europe's willingness (or ability) to part with their cradle-to-grave entitlements.

Ambrose Evans-Pritchard is one of my favorite limey economics writers, and this article is a good example of why that's true. Pull quote:

In the end, America is a resilient nation, with far healthier demographics than China, Japan, Korea, Germany, Italy, or Russia. The storm will blow over just as it did after President Nixon closed the gold window in 1971, smashed the Bretton Woods system, and let the dollar go to hell.
I'm not an optimist, but sometimes I like to hear from optimists to stave off utter despair. It's nice to hear a good word from the cousins in the old country.

A wizened little dwarf straight out of a Brothers Grimm fairy tale Teh Krugman pronounced himself highly displeased that Helicopter Ben's QE2 adventure wasn't even more ruinously huge. Then he did a gay little dance, and the villagers tossed some coppers at his feet. Their amusement at his antics was mixed with pity at the low state to which the jester had fallen.

Peter Schiff is a China bull and I am not (to put it mildly), but he is a smart guy and a fellow goldbug, so I found his thoughts on what the currency war portends for gold pretty interesting. Pull quote:

As the Fed seeks to blow up the global monetary system, I take comfort in the fact that gold cannot fight a currency war because it is not a currency. Gold is money. Currencies used to be backed by money until the global fiat system was introduced under President Nixon. Fiat currency can be printed at will until the economy collapses, as has happened many times in history. Money is impossible to devalue at the whim of politicians because it is naturally scarce. Even in the ruins of Europe after the Second World War, when there was no central authority and chaos reigned, an ounce of gold was worth what it always had been.

This counts as financial news for the damage it does to the economy, as well as to the moral and cultural fabric of the nation: Blacks struggle with 72 percent unwed mothers rate. That is a demographic calamity, a disaster of unprecedented proportions, and yet it remains all but taboo to discuss in public for fear of being labled a racist. The economic implications alone are staggering -- the monetary costs of social-welfare for both mothers and children, and the long-term damage to the children themselves (and hence to the country of which they are citizens). 29% of white children are born out of wedlock, and 53% of hispanic children; this calamity is not bound to any single demographic, but it is most advanced among the black community. Children are the inheritors of the world that will be, and we're doing our best to ruin that world through selfishness, ignorance, avarice, and simple stupidity. Makes me wanna holler. (Pay particular attention the woman interviewed for the story, Sherhonda Mouton: four kids, three different fathers, no plans to get married.) A successful country needs to have children who grow up to be smart, driven, ambitious, and ethical adults -- yet this situation is almost guaranteed to produce the exact opposite results.

And now for a word from the new Financial Services Subcommittee on Domestic Monetary Policy, Dr. Ron Paul.

Got this one from Andy in the sidebar: California pays $40 million a day (in borrowed money) to pay unemployment benefits. California reminds me of the old joke about the man who falls off of a tall building -- as he plummets towards the ground, people shout "How are you doing?" as he passes their window; "So far so good!" he hollers back. (It's not the fall that kills you, remember. It's the sudden stop at the end.)

Part of why California is so boned may have something to do with the mind-boggling number of publicly-funded programs and offices. Every single one of them draws from the public treasury. And employ public servants whose salaries, pension, and healthcare benefits are currenly bleeding California dry. (Celebrity simile? Lindsey Lohan. From fresh-faced rising star to drug-addled trainwreck to dead-pool candidate. Sounds about right.)

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posted by Monty at 07:18 AM

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