Accounting Onion Almost Makes Me Cry

Tom Selling's 15 June 2010 post at Accounting Onion applies SFAS 52, Foreign Exchange Accounting, giving an absurd result. He slams the SEC, FASB and Big 87654 all at once for this. Good show Tom. Here's a link:

http://accountingonion.typepad.com/theaccountingonion/2010/06/asu-2010-19-when-a-dollar-of-cash-is-more-than-a-dollar-on-the-balance-sheet.html. Thank you Hugo Chavez for creating this anomaly. In rereading Tom's post I got an idea for Citigroup's treasury department. Incorporate a Venezuelan subsidiary; put $50 billion USD in it and presto, instant profits. Well Vikram Pandit, whaddayasay? I figure this idea is worth 1%. I'll expect my $500 million check within 30 days. Tom: If I get the $500 million, half is yours. I'll let you know.

Mother of All Bubbles

Jesse has a 16 June 2010 post as Jesse's Cafe Americain, calling the US dollar, "The Mother of All Bubbles". No argument here. Here's a link: http://jessescrossroadscafe.blogspot.com/2010/06/us-dollar-last-bubble.html.

Greece Today, America Tomorrow

"Are Europe and America headed to where Athens is today? ... Protected by the [US] through a half-century of Cold War, Europe cut back on defense and ratcheted up spending for La Dolce Vita. ... As the cradle-to-grave welfare states rose, an ever-increasing share of the labor force left the private sector for the security of the public sector. ... The fertility rate of Greece and every European nation fell below 2.1 births per woman needed to replace an existing population. Greece's birth rate has been below zero population growth for three decades. ... Were Greece a company, the solution would be bankruptcy. ... Because, should Greece decide not to take a chainsaw to her welfare state, but walk away from her debts and default, she would blow a hole in the balance sheets of the biggest banks in Europe. ... Rather than savage their welfare-state programs, and risk riots in the streets and a massacre at the polls, Madrid and Lisbon, too, might look ageeably at default. ... For how much longer will Greeks work longer, retire later and live on smaller pensions, so holders of Greek bonds can get their interest payments right on time? ... But the crisis will return. For the nations of Europe have made commitments beyond their capacity to keep, given their growing debts and aging population. ... And the unfunded liabilities of Social Security, Medicare and federal pensions rival those of Western Europe. States like California and New York, larger than Greece, look a lot like Greece. ... While the temptation is great for Washington to bail them out again, the [US] government itself has now begun to attract the concerned notice of holders of US debt", my emphasis, Pat Buchanan at World Net Daily, 6 May 2010, link:

http://www.worldnetdaily.com/index.php?pageId=150649.

"Crisis--from the Greek word 'Krisis'--is one of the many English words we owe to the ancient Athenians. Now their modern descendants and reminding us what it really means. ... So serious was the situation that it took a European version of the 2008 TARP bailout of US banks to save the euro. ... If fully implemented, it will be the mother of all bailouts--and one of the biggest admissions of error in modern financial history. The design of the European currency has been fatally flawed from the outset. It just took the Greek crisis to expose it. .... It would end forever the exchange-rate volatility that has bedeviled the continent since the breakdown of the Bretton Woods system of fixed exchange rates in the 1970s. ... A single European currency also seemed to offer a sweet deal. Countries with excessive public debt would get German-style low inflation and interest rates. And the Germans could quietly hope that the euro would be a little weaker than their own super-strong Deutsche mark. ... But the worst defect in the design of the Economic and Monetary Union (EMY), we argued, was that it united Europe's currecies but left its fiscal policies completely uncoordinated. ... The design of the EMU illustrates a profoundly important truth about human institutions. Just because you don't create a formal procedure for something you would rather not happen, that doesn't mean it won't happen. ... Problem solved? Unfortunately not. ... For one thing, it's simply not credible that the Greek government will be able to deliver the fiscal tightening it has promised at a time of deep recession. ... It will surely be at least a year before investors wake up to the fact that the fiscal predicament of the [US] is actually worse than that of the euro zone", Niall Ferguson at Newsweek, 24 May 2010, link:

http://www.newsweek.com/id/237645.

In about 1985 I remember reading a Fortune interview of Barton Biggs (BB). The substance of what BB said was, "The notion of 250 million South Americans slaving away in the hot sun to repay some New York banks does not comport with my notion of political reality". Well said BB Mine neither. Between now and 2017 I expect the "Venezuelanization" of most of Europe and the US. Got bonds? Sell while there's still time.

I disagree with NF. The Greek bailout did not save the euro. It saved banks holding Greek paper. It will kill the euro. There is nothing any European country could have done with respect to taxing and spending before the coming of the euro it couldn't do after. The euro was and is a "whole lotta nuttin". The euro was sold as a piece of financial engineering!

Where is Eugene Fama on Portugal?

"More than a decade ago, the low interest rates that came from the euro's imminent creation were supposed to propel investment and efficiency gains. Instead, they created the appearance of prosperity. Underlying problems, such as low productivity and a bloated public sector went ignored. ... The cautionary lesson from the euro zone's 10th-largest economy--that monetary union and a common currency are no substitute for a skilled and productive work force and budget discipline--is apparent here amid the once-busy clothing factories and fabric mills in the hills outside the coastal city of Porto", my emphasis, Brian Blackstone at the WSJ, 28 April 2010: http://online.wsj.com/article/SB10001424052748704471204575210533489119748.html.

The Los Angeles investment group I was a member of debated the euro's significance when it was created. My opinion was the euro was not important. That over the long run, only real forces matter. This reminds me of a tenet of "Fama-Miller" finance, investment and financing decisions are separable. Why be surprised Portugal's new numeraire did not affect its real economy? The US should study Portugal's plight. Zimbabwe Ben can print all the dollars he wants. Without government spending decreases the US will continue capital decumulation and American living standards will fall. This article was titled: "Euro Masked, Amplified Portugal's Problems". Amplified? How? If a carpenter measures wood in meters instead of yards, how is that a problem?

Iowan Thinking In Greece!

"Greek Prime Minister George Papandreou met President Obama in Washington yesterday, hoping to win US support for a crackdown on speculative traders. 'Unprincipled speculators are making billions every day by betting on a Greek default,' the Prime Minister said Monday, adding yesterday that Mr. Obama's response was 'very positive.' ... These days, of course, any purchase of Greek debt is a form of speculation--a fact reflected in the 320 basis-point spread over German bonds that Greece was forced to pay. ... As soon as Athens presented its latests E4.8 billion austerity package last week with across-the-board spending cuts, the pressure on the euro and Greek bonds eased. ... Unfortunately, this demonstration that the markets could be assuaged by some more-vigorous belt-tightening did not put Greek conspiracy theories to rest. ... These protests do real real economic harm and thus reduce government revenues, and Mr. Papandreou also does his economy no favors by railing against the very 'speculators' he needs to buy his debt. ... The bets against Greek solvency are the result, not the cause, of Greece's debt problems. The way to turn speculator profits into losses is be reining in government and reviving private growth", my emphasis, WSJ Editorial, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704784904575111233555121958.html.

"'It has dawned on investors that solvency is a major issue--not a minor issue,' says Stephen Jen of the hedge fund BlueGold Capital Management. ... European Union President Herman Van Romply told several European newspapers on Friday that the bloc 'will be ready to step in if the Greeks ask.' French President Nicolas Sarkozy and Italian premier Silvio Berlusconi echoed those remarks, saying at a news conference that their countries were ready to help. ... The country's debt load totals more than 113% of its annual economic outpout and is rising. ... If Greece needs to restructure its debt, bondholders would find themselves sitting on big losses. ... The fundamental problem is that Greece is adding to its debt every year because of its big annual budget deficits. ... If that situation persists, Greece will never be able to pay off its debts without creditors agreeing to cut the amount they are owed. ... A big package could give Greece time to do a 'real devaluation'--a painful program of wage and price cuts, and a sharp drop in economic output, that could put it in a better position to pay off its debt, says Uri Dabush, director of the Carnegie Endowment for International Peace. ... But restructuring comes with a downside: A country that reneges on its debt would likely be shut out of global markets", my emphasis, Charles Forelle & Marcus Walker at the WSJ, 10 April 2010, link: http://online.wsj.com/article/SB10001424052702304703104575174203024119926.html.

Government officials frequently blame "speculators" for causing their problems. No. Speculation against Greek debt results from Greece's imprudent policies. Is Papandreou so stupid as not to understand that price stabilizing speculators make money. Price destabilitizing speculators lose money absent government bailouts. Now it's time for a war story. In 1974 I was auditing a subsidiary of a Midwestern utility for a Big 87654 firm. The subsidiary manager complained of a "cabal" of "Jews and speculators" who made the price of copper rise. Copper hit $1.44 in 1974, about $10 per pound today. I didn't have the heart to tell him, if the "Jews and speculators" were wrong about future copper demand they would lose their shirts. Does His Obamaness understand this? Who cares?

Why is Greece a worse credit than Uncle Sam? Because Unc issues debt in his own currency. Now. Got gold? Get more. Got any government bonds? California, Ireland, Greece, Unc, even Germany, yes Germany. Sell now! Now people realize Greek solvency is an issue. Where were they for years? Does Unc add to his debt annually? Greece will never pay its debts. Unc defaulted on his obligations to pay gold for dollars in 1971. So? Imagine, some people think Unc is a better credit than Exxon. They probably also believe in the Tooth Fairy and Easter Bunny. See my 15 November 2008 post: http://skepticaltexascpa.blogspot.com/2008/11/forbes-capitalist-fool.html.

Whose Reserves?

"Argentine President Cristina Kirchner on Monday sidestepped stiff Congressional resistance to spending foreign reserves for debt payments, issuing a pair of decrees shifting about $6.6 billion from the central bank to the Treasury. ... The first decree allocates $2.2 billion in foreign reserves to pay international organizations, while a second orders the central bank to hand over $4.2 billion for other public-debt payments. The moves will help Argentina make the estimated $13 billion due in debt payments this year", Shame Romig at the WSJ, 2 March 2010, link:

http://online.wsj.com/article/SB10001424052748704358004575096010595724960.html.

There is no law anywhere when it comes to governments. Governments are the worst of all debtors to collect from. To do so, you need your own army.

China Buys Dollars?

"China's chief foreign-exchange regulator suggested the country's appetite for further gold purchases may be limited and offered soothing words about China's role as an investor in US Treasurys. 'Gold is not a bad asset, but currently a few factors limit out ability to increase foreign-exchange investment in gold,' said Yi Gang, director of China's State Administration of Foreign Exchange. ... China rarely revels its thinking on investment of its foreign-exchange reserves, which at $2.4 trillion are the world's largest. ... Mr. Yi said the past 30 years have shown that the return on gold hasn't been that great and that given China's heft as a gold buyer, any move it makes to purchase the precious metal would 'certainly' increase gold prices. ... China is the world's largest producer of gold and the second-largest consumer behind India, based on data from the World Gold Council", Aaron Back at the WSJ, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704869304575110621920790934.html.

Suppose Yi is buying gold? Would he tell us? Got gold? Get more. Got bonds? Sell 'em to Yi. If he'll take them.

China's Real Estate Bubble

"Jack Rodman has cashed in on property busts from Los Angeles to Tokyo, buying and selling soured loans and counseling other investors. Now he's convinced the Beijing real estate market is about to tumble. ... Much of the $1.4 trillion in loans made by Chinese banks last year--with considerable encouragement from officials aiming to boost growth--was spent on skyscrapers and other commercial property. Now empty buildings are sprouting across the mainland. Beijing had an office vacancy rate of 22.4% in the third quarter, the ninth-highest of 103 markets tracked by broker CB Richard Ellis (CBRE). ... 'There's a monumental property bubble and fixed-asset investment bubble under way,' says James Chanos, founder of New York hedge fund Kynikos Associates. ... 'The Chinese authorities are clearly trying to bring excessive bank lending under control,' says Stephen Roach, the chairman of Morgan Stanley Asia. ... Now some economists are speculating that the government could allow China's currency, the yuan, to appreciate against the dollar for the first time since July 2008. ... If Beijing can't cool things off and the property boom turns to bust, there could be a surge in nonperforming loans. ... Builders, meanwhile, continue to build. ... In eastern Beijing, officials are hoping to double the size of a vast development called the Central Business District, even though the vacancy rate is 35%", Michael Forsythe and Kevin Hamilton at Businessweek, 1 March 2010, link: http://www.businessweek.com/magazine/content/10_09/b4168018737687.htm.

Shades of Houston during the 1982-87 oil bust when office vacancy rates hit 28%! Here we go again! Is Alan Greenspan running China's central bank?

Greece Now, California Next?

"While I have long predicted the collapse of the euro and eventually the European Union, I have to admit that Greece was not even on the periphery of my radar as a potential economic flashpoint. ... The response of the European Commission and the European Central Bank has been to take a page from Henry Paulson, former secretary of the Treasury in the Bush administration, and attempt to bluff the markets. ... State bankruptcies and monetary exits from the euro may not have been envisaged, but both are going to happen anyway. ... And it should be kept in mind that this is not an abstract exercise in American schadenfreude, as the more serious question is if the [US] financial system is itself strong enough to survive further economic pressure, since a number of US states, including Illinois and California, are now facing situations very similar to Greece. There is no known mechanism for a sovereign American state to declare bankruptcy", Vox Day at WorldNetDaily, 14 February 2010, link:

http://www.worldnetdaily.com/index.php?pageId=125098.

So the states won't file bankruptcy. They just won't pay their bonds.

BusinessWEAK vs. Pat Buchanan

"They are called the PIGS--Portugal, Ireland, Greece, Spain. What they have in common is that all are facing deficits and debts that could bring on national defaults and break up the European Union [EU]. Who brought the PIGS to the edge of the abyss? All are neo-socialist states that provde welfare for poor people, generous unemployment, universal health care, early retirement and comfortable pensions. Most consume 40 percent to 50 percent of their gross domestic product annually, a crushing burden on the private sector. ... For 30 years, the fertility rate of Europe has been below the 2.1 children per woman necessary to replace a population. In Russia and Ukraine, a million people disappear yearly. In Western Europe, the passing of the native-born goes on quietly, as Third World peoples come to fill the empty spaces left by the aborted and unconceived. ... These newcomers have neither the education nor the skills of the Europeans. Hence, they earn less and contribute less in taxes, but consume more per capita in social benefits. ... Thus the burden of pensions and health care grows steadily and the need for higher taxes and larger worker contributions increases. ... Greece is the first European nation to hit the wall. ... The EU'c crisis would then be like a crisis in the [US] should California default on its state bonds and interest rates on other municipal bonds surged to double digits. ... In every Western nation, government is growing beyond the capacity of taxpayers to bear", my emphasis, Pat Buchanan at Vdare, 9 February 2010, link:

http://www.vdare.com/buchanan/100209_pigs.htm.

"The [EU's] experiment with a single currency is deep in crisis because Europe failed to learn from the Greeks. ... Today's Sirens are the investors and traders of the global bond market, who lure nations into tapping abundant credit at low rates when times are good. ... Greece has fallen into precisely that trap. It got low-interest loans by promising to behave responsibily and keep its budget deficit low. ... At this point, Greece and the [EU] have no good choices left. It's hard to see how Greece can muddle through on its own. ... Yiannis Kelekis, 68, a retired construction worker who joined a demonstration in rainy Athens, complained: 'The people that caused the crisis are now asking for others to make sacrifices.' ... If the EU] refuses aid, the government could find itself unable to issue $26 billion worth of debt as scheduled this spring. ... Trouble is, extending aid isn't a great choice, either. ... For now, investors are pouring money into the US Treasury market as a safe refuge. ... When Greece joined the euro zone, its borrowing costs fell to near-German levels because bond investors bought into the theory that Greece had finally become fiscally responsible. ... According to economists Kenneth S. Rogoff of Harvard University and Carmen M. Reinhart of the University of Maryland, Greece has been in default for half of the time since it won independence from the Ottoman Empire in 1829. ... Greece and the EU wouldn't be in this no-win situation if they had followed their own rules from the start. But coming up with a failsafe mechanism that forces sovereign nations to do what's right when they feel like cheating is pretty much impossible", my emphasis, Peter Coy (PC) at Businessweek, 22 February 2010: http://www.businessweek.com/magazine/content/10_08/b4167018421438.htm.

Gary North's (GN) 17 February 2010 post at Lew Rockwell is about the PIGS: http://www.lewrockwell.com/north/north814.html. GN asks, "How wise is to to lend to wicked people? Not very". Consider what this implies for Treasury paper.

Obamacare anyone? California anyone? What's controversial about this?

PC is PC. He never suggests Greece reduce spending. Anyone who buys sovereign debt does it at his peril. The article was titled, "The Bond Vigilantes Who Left Greece in Ruins". Imagine, the bond market did it, not Greek government spending. Failsafe mechanism? Try the gold standard. "Lure nations"? Is Greece a naive 14-year old girl being seduced by Casanova?

What Moral Hazard?

"Any deal by European officials to guarantee the debt of Greece and other troubled nations might keep the crisis from worsening, but it raises another big problem: moral hazard. ... One of the strengths of the euro was the idea that when a country joined the European Union it was a one-way trip that came with strict fiscal responsibilities. A loan-backstop program could change that perception. ... If a loan bailout became necessary and was imposed with the kind of harsh measures that would eliminate moral hazard, it could do significant damage to local economies, especially already-fragile banks. ... Given signs that the troubles in Greece and other Mediterranean countries were beginning to infect markets in the relatively healthy core of Europe, the lack of a debt-guarantee program could set the marets tight back on the path to contagion. ... In the short run, a guarantee plan plan is seen by many as a positive for the euro. Amid fears that the problems in Greece would spread, investors had been pulling money out of European financial markets and buying US dollar or yen. ... 'A bailout implies "moral hazard",' analysts at BNP Paribas wrote last week. 'Lack of market-driven discipline due to the [European Monetary Union] umbrella' has certainly been one of the factors contributing to the buildup of imbalances in Greece and elsewhere. Bailing out Greece would give a signal to other countries, limiting the incentives to undergo the needed adjustments as they gain fiscal "impunity".' ... 'It's a Catch-22,' says David Gilmore, economist as Foreign Exchange Analytics. The recent declines in the euro 'are doing wonders for European competitiveness at a time whne they are crawling out of recession.' ... Others, hoiwever, say that hthe currenct circumstance, the benfits of a bailout won't necessarily come with the unwanted baggage", Tom Lauricella at the WSJ, 11 February 2010: http://online.wsj.com/article/SB10001424052748704140104575057631234463158.html.

Why not bail out Greece? The US bailed out the Vampire Squid (VS)? Is Greece less impoortant to the EU than VS to the US? Guarantees have cost? Really now?

Argentina Shows America How-2

"Argentina is enduring its biggest inflation surge to start the year in two decades, posing a challenge for the government's newly named central bank president who is viewed skeptically by financial markets. ... Economists blame the price spiral on chronic overspending by the government of President Cristina Kirchner, as well as interventionist policies such as price and export controls on beef, which they say have discouraged investment and reduced the supply of cattle. ... In her comments about inflation prior to taking office, Ms. Marco del Pont often placed emphasis not on monetary policy, but on monopolistic business practices, which she said gave a few Argentine companies excessive pricing power. ... Economists are concerned that gaining access to the reserves would encourage Mrs. Kirchner to maintain aggressive public spending, which has been growing at a rate of around 30% the past year, and has helped to propel inflation. Ms. Marco del Pont's positions suggest 'she views the priority of the central bank isn't defending the value of the peso, but helping to finance the government,' says Aldo Abram, an economist at the Higher School of Economics and Business Administration in Buenos Aires. ... For her part, Mrs. Kirchner blames rising meat prices on Argentine ranchers, who she says aren't bringing enough cattle to market. ... Agrarian economists say government meddling has been so disruptive that many ranchers have liquidated herds and turned to farming. A drought last year also hurt ranchers. ... Private economists also say the government has been trying to sweep inflation under the rug by manipulating official inflation statistics, keeping them at one-half to one-third the true level", my emphasis, Matthew Moffett at the WSJ, 20 February 2010, link:

http://online.wsj.com/article/SB10001424052748704511304575075960541144400.html.

President Obama, are you listening? Price controls? What say you ghost of Richard Nixon? I'll never forget George Stigler's Industrial Organization class at Chicago. "Stiggie" told of an encounter with Harvard's Alvin Hansen. They discussed monopolistic business practices as a source of "inflation". Stiggie said the thought was nonsense. Hansen disagreed. Stiggie said assume "monopolists" exist on day one. What lets them raise prices on day two? Why didn't they already extract all their monopoly profits on day one? What changed from day one to day two to let the "monopolists" raise prices? Hansen had no response. Go Stiggie.

The Coming Currency Firestorm

"Already, the euro is counted as the dollar's dominant challenger, while China's central bank governor, among others, has suggested establishing an alternative (some might say, rival) 'super-sovereign reserve currency.' ... Will we witness a rapid coup (in currency time) occurring over the next ten years, as some commentators believe (see Chin and Frankel, 2008)? Or will we see a much more gradual process owing to the built-in inertia of the dollar's prominent role? ... We report new cross-country evidence of the determinants of substitution to dollar banknotes and find that in developing countries substitution hinges more on historical than an recent experience. ... While there is considerable interest in the determinants of currency substitution--defined as the use of multiple currencies in a given country--there are few established empirical results. The primary reason is that the amount of hard cash in circulation is often unkown. ... Our data come from the [Fed's] international cash distribution operations and include all wholesale shipments of dollars to and from the US between 1990 and 2007. ... We find that the demand for dollars is, above all, about memory. The highest inflation rate recorded over the past 30 years has significant explanatory power in our model--the demand for dollar banknotes goes up for a generation after an inflation shock--while the recent inflation rate has none. ... Assessing the country-level determinants of the use of dollar banknotes may also have important implications for the [Fed's] balance sheet going forward, as the seignorage it earns from currency in circulation is a major source of its revenue", my emphasis, Rebecca Hellerstein (RH) at Voxeu, 6 February 2010, link: http://voxeu.org/index.php?q=node/4565.

RH, Fed economist, welcome aboard. About 1830 Lord Overstone said it takes about two generations for all traces of financial folly to be wiped from the market's memory. That's about 50 years. Keep looking. RH's seignorage comment is a fancy way of saying the Fed's cost of capital is zero, my 31 January 2010 post:

http://skepticaltexascpa.blogspot.com/2010/01/junior-on-fed-profit.html. As long as the dollar is seen to hold its value better than other paper currencies, it will continue in use. When it and all other paper currencies are seen as no better than Venezuela's bolivar, worldwide hyperinflation will result. RH, we salute your exposing the source of Fed "profit". The coming inflationary storm will sweep away the euro too. The Fed has an opportunity here, i.e., to encourage other countries to increase their inflation rates, so more people overseas will hold "wealth" in the form of dollars.

Argentina's Continuing Crisis

"For the better part of a decade, overseas investors have viewed Argentina as a pariah: After a currency collapse in 2001, the country suspended payments on some $95 billion in foreign debt--the largest sovereign default in history. Then in 2005, the government offered creditors, ranging from Italian pensioners and American teachers' unions to Wall Street hedge funds, just 30 cents on the dollar if they agree to swap their old bonds for new notes. about three-quarters of the debt holders grudgingly accepted the deal. ... The goal is to resore [Kirchner's] government's access to financing and tap into the global demand for debt that pays higher yields than US and European treasury bonds. ... Kirchner has lavished billions of dollars on subsidies for food, fuel, and electricity, sending state expenditures up by some 30% annually since she took office two years ago. The problem is, tax revenues have been rising just 12% annually, so a comfortable fiscal surplus has become a deficit equivalent to 2.5% of [GDP] over the past two years. To make up the shortfall, Kirchner tried in 2008 to raise export taxes sharply on soybeans and other grains", Geri Smith at Businessweek, 25 January 2010, link:

http://www.businessweek.com/magazine/content/10_04/b4164024478278.htm.

Obama, are you watching?

Debt Bomb

"Kyle Bass has bet the house against Japan--his own house, that it. ... 'Japan is the most asymmetric opportunity I have ever seen,' he says, 'way better than subprime.' ... If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke. ... National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceeding five years. ... Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. ... America is a nation of spendthrifts, addicted to easy credit and dependent on the kindnesss of savers overseas to keep us comfortable. ... The personal savings rate has climbed from negative 0.4% in 2006 to a positive 4.5% rate now, but that it still a pathetic figure for a nation whose government is un-saving all that and more with its budget deficit. ... If the GDP doesn't expand at 'normal' rates of 3% to 5% coming out of this recession, wrestling down the debt will be very tough, indeed--perhaps impossible without drastic cuts in spending and higher taxes of many fronts. ... US corporate tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion. ... If Congress and the Obama Administration don't trim spending [Benn Steil] says, 'we will get to the point where credit is much more expensive in the US than it has been in the past.' ... 'US states are like emerging markets,' says Reinhart. 'They spent a lot during the boom years and then were forced to retrench during the down years.' ... But Brian Coulton, head of global economics at Fitch Ratings in London, warns that once rock-solid economies like the US and UK could join shakier nations like Japan and Ireland in losing their AAA ratings if they don't get their bad habits under control. ... Most investors seem to believe, as the late Citibank chairman Walter Wriston put it, that 'countries don't go bust.' The opposite is true. ... Even if countries don't stiff creditors outright, they can sometimes accomplish the same thing through inflation", Daniel Fisher at Forbes, 8 February 2010, link:

http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb.html.

"In 2009 investors were warned about bubbles: a bubble in Treasuries, a gold bubble, and, finally, warnings of a rapidly expanding bond mutual fund bubble forming. It's brought to us by the [Fed's] 0% interest rate policy. Whether the flood into bond funds of all types was an intended consequence or not, it's now a flood that could go just as quickly the other way. ... There is a lot of unsophisticated money in bonds now, and I'm not sure investors understand how miserable things can get when the low interest rate party ends", Marilyn Cohen at Forbes, 8 February 2010: http://www.forbes.com/forbes/2010/0208/finances-junk-bonds-yield-interest-capital-markets.html.

If you have any type of bonds, no matter in what currency, sell! As for Walter Wriston, see my 30 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/book-review-walter-wristons-bits-bytes.html.

I agree, the bond market is a disaster waiting to happen.

WSJ on Chavez

"To the short and brutal list of life's certainties, let us add that socialism invariably leads nations to economic ruin. ... Behind the crack-up of Mr. Chavez's utopia is the fact that he's running out of money because Venezeula's oil production is plunging", WSJ Editorial, 30 January 2010, link:

http://online.wsj.com/article/SB10001424052748704362004575000922680308014.html.

No. Chavez's problem is that of Arnold Schwarzenegger and David Patterson, i.e., neither controls the world's reserve currency. Chavez can print all the money he wants, but it is only usable in Venezeula.

Pravda on 401(K)s

"As the [US] moves into a new decade of military overreach abroad and national bankruptcy at home, Washington is in a desperate search for more revenue and a solution to the future financing of the trillions in national debt obligations currently held by foreign central banks and investors. ... Although the historical government solution to unsustainable government debt loads has always been the destruction of the debts by currency depreciation and eventual hyperinflation, there is always an intermediate step used to buy more time for the politicians in power. ... The largest source of liquid private wealth remaining in the [US] are the $15 trillion in private retirement funds and the ultimate ownership, control and future of these funds have already been compromised and exchanged for the favorable tax treatment of private retirement plans. ... The retirement trap I'm writing about is only a proposal at the present time and since it may well begin in the latter years of the Obama Administration assuming the Democrats can somehow maintain their majorities in Congress, I'm calling it the "Obama Retirement Trap'. But make no mistake, the government need for current revenue and their frenzied search for a short-term fix to fund the backstop of liquidity to buy future government debt obligations when no credible investors will buy them is an unspoken quest of both political parties. ... The protoype for their plan was devised in 1991 by Alicia H. Munnell, then Director of Research for the Federal Reserve Bank of Boston. She presented the idea in a paper entitled 'Current Taxation of Qualified Pension Plans: Has the Time Come?' ... After years of deficits, the greatest hazard to our economy is a run on the dollar and on Treasury securities by foreign investors", Ron Holland at Pravda, 15 January 2010, link:

http://english.pravda.ru/opinion/columnists/111678-retirement-0.

Pravda is a far-right, wing-nut publication. Welcome aboard wing-nut. Theresa Ghillarducci, you've been found out. Even in Russia!

Hugo Chavez Shows America How

"President Hugo Chavez's decision to devalue Venezeula's bolivar and impose a complicated new currency regime may paper over some growing cracks in the economy, but it is also setting the stage for bigger problems down the road for the country's oil-rich nation and its populist leader. ... At Caracas's middle-class Sambil shopping mall, lineCarmens at cashiers reached 50-deep. Blanco, a 28-year old accountant, waited to buy a 42-inch flat-screen television she doesn't need because she already has one at home. 'It doesn't make any sense to keep my savings,' Ms. Blanco said Saturday. 'I'd love to see how things work in a normal country.' ... Chavez ... vowed to 'seize any businesses and shops that are participating in speculation.' ... In order to protect the poor, his main constituency, from the move Mr. Chavez announced the creation of another exchange rate of 2.6 bolivars per dollar for imports of food, medicine and other essential goods. Those rates will compete with a black-market rate, where the bolivar had plunged, forcing the official devaluation. On Friday, that black-market rate stood at 6.25 per dollar. ... Rising oil prices granted Mr. Chavez a huge economic war chest to smooth out economic problems during most of his presidency. But with oil prices off record levels, inflation soaring and the economy stuck in recession, the era of easy choices appears to be over", my emphasis, John Lyons and Darcy Crowe at the WSJ, 11 January 2010, link:

http://online.wsj.com/article/SB126316619465423909.html.

Right on Mish who likens Chavez to Obama, 11 January 2010, link: http://globaleconomicanalysis.blogspot.com/2010/01/chavez-threatens-to-seize-businesses.html.

This is the fate I expect to befall America. Not hyperinflation like in Zimbabwe, but Latin Americanization, i.e., high inflation, price and exchange controls, subsidies and who knows what else? In the US we steal people's savings through interest rate suppression. Venezeula's current inflation rate is reported at 27% annually. Televisions are better "stores of value" than the Bolivar. Governator, take note.

Argentina's Lock Box

"Argentine President Cristina Kirchner's [CK] political troubles turned into an open standoff Wednesday, when the country's central banker rejected her request to resign following his refusal to transfer billions in foreign-currency reserves to pay the country's debt. ... Mrs. Kirchner, along with her husband and predecessor Nestor Kirchner, have tried to assert more control over the economy--nationalizing pension funds and an airline--even as their popularity has declined among Argentines. The latest conflict puts the couple on a collision course with both the central bank and a newly invigorated congressional opposition. ... Mrs. Kirchner announced the creation of the 'Bicentennial Fund for Stability and Reduced Indebtedness,' [BF] to be funded with central-bank reserves, on Dec. 14. ... Financial markets had welcomed the creation of the fund, coming as Argentina plans to start borrowing again after eight years of being largely frozen out of markets in the wake of a massive 2002 debt default", my emphasis, Matt Moffett & Matthew Cowley (M&C) at the WSJ, 7 January 2010, link:

http://online.wsj.com/article/SB126282620632718915.html.

"Argentine President [CK] said she was firing the country's central-bank chief Thursday, escalating a battle over foreign-currency reserves into a nascent constitutional crisis. ... Some Argentine legal specialists also said the president doesn't have the authority to unilaterally dismiss the top banker, saying the dismissal decree is unconstitutional. ... The announcement came after markets closed Thursday. It was unclear how the opposition-dominated Congress would respond, but some if its leaders called for Mr. Redrado not to comply with the decree. ... Argentina's decree, signed by all cabinet members and issued late Thursday afternoon, followed two days of mounting government pressure on Mr. Redrado to transfer $6.57 billion in reserves to a fund Mrs. Kirchner unveiled in December to conver some of Argentina's debt payments. ... The opposition maintains Mrs. Kirchner and her husband and predecessor, Nestor Kirchner, are trying to steamroll the central bank, as they already have the media, the national statistics bureau, agribusiness and other institutions to seize foreign-currency reserves so they can boost patronage spending and sustain their power", my emphasis, Matt Moffett at the WSJ, 8 January 2010, link: http://online.wsj.com/article/SB126289800502920289.html.

"A federal judge blocked President [CK] from using foreign-currency reserves to pay Argentina's national debt and revoked the dismissal of the central-bank chief who opposed that policy. ... On Friday morning, federal judge Maria Hose Sarmiento granted an injunction request by two opposing parties barring the central bank from transferring money into the so-called [BF], which Mrs. Kirchner had hoped to create with $6.57 billion from the reserves. A few hours later, Judge Sarmiento ordered the reinstatement of the bank president, Martin Redrado, whom Mrs. Kirchner dismissed on Thursday for refusing the make the transfer. ... Earlier in the day he defended his action in defying Mrs. Kirchner. 'The reserves belong to all Argentines and if they are to be used for some purposed besides backing the currency, ther matter should go before Congress,' he said. ... Underlying the dispute is the Kirchner administration's need for funds to sustain the Peronist patronage machine. Last year, public spending grew at three times the rate of revenue. ... Now the whole idea of the [BF] may have boomeranged, revealing the fragility of Argentina institutions. ... Roberto Sifon Arevalo, a director in the Latin America Sovereign Ratings Group at Standard & Poor's said compromising central-bank authority is disturbing to investors. 'There is a conceptual reason why people focus on the independence of the central bank,' he said", my emphasis, M&C at the WSJ, 9 January 2010, link: http://online.wsj.com/article/SB126296529801421655.html.

"Few Argentine politicians are prepared to pay the political cost of spending cuts or tax rises to pay off bondholders. As it is [CK] may have turned the Central Bank chief into a martyr for the cause of integrity in public policy", Economist, 9 January 2010, link: http://www.economist.com/world/americas/PrinterFriendly.cfm?story_id=15213761.

My idea: let's swap Redrado for Zimbabwe Ben (ZB) and Robert Schiller! What idiocy, to welcome creating a paper fund instead of reductions in Argentine spending. This fund would have as much substance as the Social Security "lockbox". CK wanted this fund to further her confidence game.

Bienvenidos a Argentina. Was this article really about Argentina, or the Obama administration?

How closely are ZB and Peter Orzag following this?

I await ZB's following Redrado's lead.

Assignats for America!

"Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt. Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national 'profit,' as measured by gross domestic product. ... Although GDP numbers still aren't perfect--they are subject to periodic revisions, for example--the basic problem has been largely solved. So why not issue shares in GDP now? Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economics stimulated and protected from the threat of a truly serious recession. In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We'd like our countries to issue securities we call 'trills,' short for trillionths. ... Each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation's quarterly nominal GDP. ... Trills would be issued with the full faith and credit of the respective governments. ... There are indications that officials in China are starting to worry about threats to their huge investment n [US] debt from a possible outbreak of high inflation. The trills, tied to nominal GDP, would protect them. Right now, TIPS, ... are offering disappointingly low yields, which may have to be raised to attract more investment. ... The [US] government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, becasue the government's dividend burden would automatically decline in tough times, when GDP declined. ... These imbalances--exempliifed by the massive Chinese holdings of [US] government debt--might not be so worrisome if the investments were financed better. ... Proposals for securities like trills have been aired many times over the years", my emphasis, Robert Schiller (RS) at the NYT, 27 December 2009, link:

http://www.nytimes.com/2009/12/27/business/economy/27view.html.

RS is a Yale economics professor. I would normally say "big deal" to a proposal like this. A New York City CPA buddy of mine, suggested these type of securities 30 years ago! Trills appear to pay "interest", but pay nothing. As long as Uncle Sam (US) will not run a budget surplus, trills can't be "paid" in real terms. Anyone buying trills should remember, "interest is what the government promises to pay you to steal your principal". Trills look like an ideal security for Teresa Ghillarducci to stuff in people's IRAs without their consent. For their own good of course. I'm sure Argentina's Madame Kirchner will consider issuing trills. RS forgets "Miller-Modigliani" finance, i.e., investment and financing decisions are separable. No matter how US finances his debt, absent budget surpluses, it can't be paid. Will a trills owner get multiple votes? One vote per million trills? Will trill-owning foreigners vote? Will Saudi Arabia control our Congress more obviously than today? Trills facilitate deficit spending! RS said it! RS does not suggest US reduce spending. He is now another "house economist". Well RS, make it official and move to Princeton! "Full faith and credit"? Hahahahahaha. If TIPS yields are too low, tell Zimbabwe Ben (ZB). ZB could increase interest rates. Disagreeing RS, US will default on his debt. Explicitly, or through higher inflation. "Financed better"? Let's call Vampire Squid to sell trills and Moody's to rate them AAAA, quadruple A! Professor Fama, we need you. Try to kill trills. Trills remind me of France's assignats and mandats issued in the 1790s. They became worthless. Here's a link to an article about French inflation: http://www.usagold.com/gildedopinion/assignats.html.