Buffett’s Warning Of “Dangerous Business” Grips Bond Insurers
Posted By thestatedtruth.com on February 21, 2010
Buffett’s Warning Of “Dangerous Business” Grips Bond Insurers
By Christine Richard and Darrell Preston
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Feb. 19 (Bloomberg) — Forewarned bankruptcies linked to infrastructure projects from Las Vegas to Harrisburg, Pennsylvania, may prove Warren Buffett’s conclusion that insuring municipal bonds is a dangerous business.
Ambac Financial Group Inc., the second biggest bond insurer, faces as much as $1.2 billion in claims if a judge in Nevada allows Las Vegas Monorail Co., which runs a train connecting the city’s casinos, to reorganize in Chapter 11 bankruptcy. The City Council of Pennsylvania’s state capital shelved a plan to sell taxpayer-owned assets to meet payments on $288 million of debt used for an incinerator funded in part with bonds insured by a unit of Bermuda-based Assured Guaranty Ltd. Harrisburg is weighing a possible bankruptcy filing.
With state tax collections last year through September showing the biggest drop since at least 1963, as measured by the Nelson A. Rockefeller Institute of Government in Albany, New York, local governments are seeking concessions from creditors of public projects, including bond insurers. The moves further threaten companies backing $1.16 trillion of public debt that already face $11.6 billion of claims on collapsed securities backed by mortgages.
“It is a worst-case scenario if the dynamics of the municipal bond market change, said Rob Haines, an analyst who covers the bond insurance business at CreditSights Inc., an independent research firm in New York. The companies have modeled in virtually no losses.
Local governments are struggling with depressed property values and sales, 9.7 percent unemployment and a slowdown in consumer spending that has cut tax revenue.
Last year, 183 tax-exempt issuers defaulted on $6.35 billion of securities, according to Miami Lakes, Florida-based Distressed Debt Securities Newsletter. That’s up from 2008, when 162 municipal borrowers failed to meet obligations on $8.15 billion of debt. In 2007, 31 of them defaulted on $348 million of bonds.
“In the past, things had a way of getting worked out,said Jim Ryan, an insurance analyst with Morningstar Inc. in Chicago. States might have stepped up and helped out, but bottom line is that the states are in trouble.
Ambac sold the industry’s first insurance policy on municipal debt in 1971, for a $650,000 bond of the Greater Juneau Borough Medical Arts Building in Alaska. The business thrived, with a handful of companies obtaining the top AAA credit rating needed to guarantee debt of state and local governments and their agencies that seldom defaulted. About 8.5 percent of the market for new municipal debt was insured in 2009, down from 55 percent in 2005, according to Thomson Reuters.
For more than three decades bond insurers paid few claims, allowing them to back bond payments that were 140 times their assets. Insurers described their business as one of zero-loss underwriting, meaning that each guarantee was expected to result in no claims under the worst probable scenario envisioned by their models.
That track record was shattered when credit markets seized up during the worst credit crunch since the Great Depression. After rating companies warned they might strip bond insurers of their top rankings in late 2007, some companies averted a takeover by regulators by tearing up contracts on their worst- performing structured finance securities and freeing up reserves against those contracts.
Rising municipal claims may deplete the remaining regulatory capital of some bond insurers and speed intervention by regulators, said Haines of CreditSights.
Any regulatory takeover may trigger termination payments on billions of dollars of credit default contracts written by the bond insurers, a scenario that forced a government bailout of American International Group Inc. in September 2008.
Battles over debt payments were anticipated by Buffett, chairman of Berkshire Hathaway Inc. The billionaire investor set up a municipal bond insurance company in December 2007, as competitors were being threatened with the loss of their top ratings.
In early 2008, Omaha, Nebraska-based Berkshire Hathaway’s bid to take over $800 billion in municipal debt guarantees from the three biggest bond insurers, including Ambac, was rejected by the companies.
A year later, he reversed course, telling shareholders in his annual letter that municipal bond insurance has the look today of a dangerous business.
“If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow, Buffett wrote. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far away bond insurer?
“One of the unspoken benefits the bond insurers provided to the municipal bond market was access to capital to refinance bond issues that were threatening to default, Ciccarone said.
That strategy isn’t being used now.
Last Updated: February 19, 2010 16:35 EST
California Governor Says Economy Shows Signs Of A Slow Comeback
Posted By thestatedtruth.com on February 21, 2010
As saying goes, it starts in California and moves east……I would think we can hang in there until the long term cycles take us back down to a more lasting bottom between 2012 and 2014. Interestingly….. President George Bush’s Treasury Secretary Hank Paulson in his new book “On The Brink” (worth reading for everybody by the way) says Goldman Sachs thinks that about every 5 or so years on average the markets and the economy will encounter some kind of major disruption. So lets see……2008 add 5 years, hmm puts us right about due for a new problem around 2013 and that’s right in the middle of the long term cycle ending between 2012 and 2014. The old problems are known and prepared for so it will likely be something no one  is worried about.                       The Stated Truth
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California Governor Schwarzenegger Says Economy Shows Signs Of A Slow Comeback
By Alison Vekshin
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Feb. 21 (Bloomberg) — California Governor Arnold Schwarzenegger said the economy shows signs of a comeback.
“I believe that the worst is over, the Republican governor said on ABC’s This Week program. But it’s very clear that the comeback is not going to be as quick as we’ve seen in the past.
Creditable Solutions To Reviving The U.S. Economy Without Tax Increases.
Posted By thestatedtruth.com on February 21, 2010
IF YOU WANT CREDITABLE SOLUTIONS ……to our nation’s fiscal problems, go to a creditable source. Indiana Gov. Mitch Daniels gives his ideas for restoring our economy — which can be done, he says, without tax increases.
- Daniels is a man of deep thought and bold action. His state has one of the strongest balance sheets in the country, largely because of his stewardship. Most states have huge deficits; Indiana has none. Daniels eradicated a $1 billion shortfall, beginning in 2005 and built up an even bigger rainy-day fund — $1.3 billion. He pared government spending, sold a toll road to private investors at an enormous profit, and attracted new business to the state. Revenues are off steeply, so he will use $300 million of the surplus in fiscal 2010 so that taxes won’t rise in a recession. Revenues, which are below 2007 levels, aren’t expected to recover soon. Could Mitch Daniels cure America’s deficit problem, as he did Indiana’s?
- Unlike Indiana, the federal government can’t rely on cuts alone to achieve meaningful deficit reduction because the hole, at 10% of GDP, is too deep, says Daniels, a Republican who served as President George W. Bush’s head of Office of Management and Budget for two years. Lawmakers must help maximize economic growth, he says.
- The administration and Congress immediately should cancel the TARP program aiding troubled financial institutions and return both this money and the unexpended portion of last year’s $787 billion fiscal stimulus to the Treasury, “as a demonstration that we as a country are serious about deficit reduction,” he says. This will help to keep interest rates low.
- Then the administration should reform the Social Security system. This would be “the single, best, first step” towards achieving higher rates of long-term growth, Daniels says. “We need a new compact that preserves all of the old promises, but makes a newer, affordable compact with younger citizens,” he says.
- A health-care fix would come next and focus on individual responsibility, not the creation of a huge federal bureaucracy. “We won’t have cost containment until all of us are cost containers,” says Daniels. He would provide individuals with a tax credit for purchasing health insurance, putting them on the hook for lifestyle and coverage decisions.
- To trim more money from the budget, Daniels proposes a full examination of the nation’s international commitments, including defense. They should be replaced with a more forward-looking, affordable strategy.
- He applauds Obama’s decision to subsidize new nuclear plants. However, he thinks the administration should be bolder and promote all sources of domestic energy, including offshore oil and gas. “This is a matter of survivability. We are paying the worst persons in the world for their oil and gas,” he observes.
- The governor embraces “green power” and boasts that Indiana leads the U.S. in the growth of wind energy and ethanol production: “But do the arithmetic. These two sources of power are at the edges of what we need.”
- Daniels says that curbing entitlement spending by Congress is a pipe dream. One solution would be for Congress to restore the power of impoundment to the President, a power Daniels has in Indiana. Simply put, the chief executive isn’t required to authorize the Treasury to transfer every cent appropriated to various agencies by the legislature. Had Daniels not applied impoundment in his current budget, increased spending would have eaten the state’s reserves by the end of this fiscal year. Congress scrapped impoundment in the wake of the Watergate scandal, angry that Nixon had used it to block $12 billion in spending.
- Tax simplification would boost growth, he says. He is attracted to Wisconsin Republican Rep. Paul Ryan’s revival of an old GOP idea — giving taxpayers a choice between the current filing system and a new tax form simple enough to fit on a post card. “That would remove a lot of loopholes,” he says. He also views Ryan’s proposal to replace corporate taxes with an 8.5% consumption tax as pro-growth. And, as for the President’s deficit reduction commission, “It’s worth a try.”
Citigroup Warns Customers It May Refuse To Allow Withdrawals……Then Relents And Says It Was Accidentally Included On Customer Statements Nationwide.
Posted By thestatedtruth.com on February 20, 2010
Citigroup Warns Customers It May Refuse To Allow Withdrawals
John Carney  Posted February 20, 2010
The image of banks locking their doors to keep customers from making withdrawals during a bank run is what immediately came to mind when we heard that Citigroup was telling customers it has the right to prevent any withdrawals from checking accounts for seven days.
“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change,” Citigroup said on statements received by customers all over the country.
What’s going on? It seems that this is something of an error. The seven day notice policy only applies to customers in Texas, Ira Stoll reports at The Future of Capitalism. It was accidentally included on customer statements nationwide.
“Whatever the explanation, it doesn’t exactly inspire confidence in Citi,” Stoll writes. “But it’s hard to believe a bank would be sending out a notice like that on its statements.”
US Bank Lending Falls At Fastest Rate In History……Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.
Posted By thestatedtruth.com on February 20, 2010
By Ambrose Evans-Pritchard, International Business Editor
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Posted February 20, 2010
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David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline,” he said.
Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature,” he said.
The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed’s “Monetary Multplier” has dropped to a record low of 0.81, evidence that the banking system is still broken.
Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.
“It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money,” he said.
Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit “continues to contract” in their latest statement.
However, regional Fed “hawks” appear to have gained the upper hand. This has echoes of mid-2008 when the Fed talked of tightening, arguably setting off the chain of events that led to the collapse of Lehman Brothers later that year. China has also been calling for a halt to QE, accusing Washington of “monetizing” its deficit in a stealth default on Treasury bonds.
The bank has already wound up its main liquidity operations. Concerns that the Fed may soon reverse quantitative easing altogether have caused a sharp rise in credit spreads in recent weeks.
Fed chair Ben Bernanke first made his name as an expert on the “credit channel” causes of slumps. It is unclear why he has been so relaxed about declining bank loans this time.
“The reason the Great Depression became ‘great’ was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this,” said Mr Ashworth.
Gene Inger Reviews The Bernanke Hike Of Feds Discount Rate
Posted By thestatedtruth.com on February 18, 2010
Gene Inger’s Daily Briefing . . . for Friday February 19, 2010:
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Good evening;     On top of the market’s cyclical roof . . . sits tradition. Perhaps not Zero Mostel but a ‘Fiddler on the Roof’ nevertheless (and there is a slight resemblance with Bernanke I’d say; minus a couple hundred pounds). Tradition holds that a ‘discount rate hike’ is a shot across the bow for longer-term monetary policy changes, if reasonably and for sure not violently, accepted by the marketplace. How to play it? You already know for we have forewarned this was coming; and interestingly just a week ago noted how all the daily financial ‘noise’ failed to emphasize that China had increased their reserve requirements for a second time, with a likely discount rate hike in the U.S.A. on-tap.
For sure, in that same discussion, I opined that the Fed was likely going to ‘gamble’ a bit; by stoking the illusion of recovery with a ‘discount rate hike’, reserve requirement increase or some similar move. The Fed’s timing is interesting, as they likely know at least a couple things: a) that the stock market is extended and ready to correct in any case; and b) that this is a good time to see if they can ‘psyche’ people into believing a recovery of more than minimal proportions is taking place. And by the way if it really is (meaning beyond the demand engendered by bottom fishers, tax-credit extension buyers, and the like); then all the more reason for the Fed to reign things in a bit. As for business, rates are and will remain so low that it’s tantamount to meaning nothing when credit
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Now, do not assume this step closer to monetary policy shift is irrelevant. While most will say you have a minimum of 6-9 months before it effects ‘consumers’; that’s what is always said (to wit: regardless of policy shifts or implied changes, many marketers of assets, whether stocks or other assets, will always spin it as just something to get ‘out of the way’, and minimize the impact such shifts will have. That may actually let us ‘buy’ rather than sell, the first purge in the market (on a trading basis); but clearly not do so with any longer durations, given the prospect that we’re very much in what we have termed the ‘swan song’ of an old extended rebound (from last month’s break of the market) and that what you are looking at is not a sufficient anomaly justifying a change in strategy. The light volume and ‘grinding’ nature of the recent life was not at all unexpected in this nominal Expiration week; believing it would persist at the start of the abbreviated 4-days of trading; and diminish as the week persisted.
Today’s hit in the post-close futures market is indicative of how the market views the Fed action as theatre more than structural; as hours earlier some technicians tried to rationalize further upside based on the nominal corrections seen in recent months as somehow suggesting another (based on average gains) 15-20% market gain. Hardly say I; in-part because in an extended move, light volume rallies aren’t unprecedented but they tend to be below average performers once the overall move is extended. As to this particular picture; what you will likely see is that this was (weekly basis charts; not daily basis) just a ‘B’ wave that was doggedly-persistent because of Expiration; in a pattern that should now proceed to challenge and take out the preceding lows very much as we’ve outlined, while cautioning patience during the stubborn recent ‘grind’; simply because we knew (and said) that this could likely occur into if not through the Expiration. Friday could easily be a down-up-down session by the way, aside some late shifting that may be related to positioning ahead; not only in this Expiration. Did anyone I know use this week’s extended periods of rallies for ‘bets’ on the downside into March? Yup; which is no assurance; but makes sense given probabilities that of course favor the next meaningful move being to the downside, as noted yesterday.
More at www.ingerletter.com
Now What ? Back-Up Plan B Or C
Posted By thestatedtruth.com on February 18, 2010
WASHINGTON (AP) – The government said Tuesday that foreign demand for US Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.
The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.
The Treasury Department reported that foreign holdings of US Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.
The big drop in China’s holdings meant that it lost the top spot in terms of foreign ownership of US Treasuries, dropping to second place behind Japan.
Japan also reduced its holdings of US Treasuries, cutting them by $11.5 billion to $768.8 billion in December, but that amount was still more than China’s December total of $755.4 billion.
The $53 billion decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell by $52.3 billion. The holdings of foreign private investors fell by $700 million during the month of December.
For all of 2009, foreign holdings of US Treasuries dipped by $500 million. In 2008, foreigners had increased their holdings of US Treasuries by $456 billion as a global financial crisis triggered a flight to the safety of US government debt.
Let’s see, China is cutting back on US debt purchases. So is Japan. And so are the big bond funds, such as PIMCO, the biggest in the world. Who will buy US bonds? Where will the US get the money it needs to squander on wars for the young and pills for the old?
Chris Hunter, who runs the research department at our family office, says the number of potential buyers is getting dangerously low…to the point where an auction of Treasury debt could fail for lack of interest.
What this seems to mean…on the surface…is that treasury yields will rise. Less demand. More supply. Prices fall. Yields rise. In fact, that is what seemed to be underway yesterday. Prices on 30-year Treasury debt fell.
If yields rise significantly you can say goodbye to any hope of a recovery. Rising yields make it harder for investors and businesses to make money. New projects will be cancelled; new workers will be fired even before they are hired, and investors will move their money out of investments that are ‘risky.’
Especially hard hit will be Japan.
From ….Bill Booner of www.thedailyreckoning.com
The Developed World Is Driving A Crooked Road
Posted By thestatedtruth.com on February 18, 2010
What is astonishing is the fact that America is funding a large portion of its newly issued debt by direct purchases from the Federal Reserve. In other words, as private-sector demand for US Treasuries wanes, Mr. Bernanke is creating new money so that Mr. Obama’s government can bail out insolvent financial institutions. Strangely, the American establishment is quite content to pledge the economic fate of its future generations in order to protect the bondholders of dubious ‘too big to fail’ corporations. Hmm, talk about change…
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Apart from the world’s largest economy, various other nations in the ‘developed’ world are also following such misguided policies. For instance, UK’s national debt is exploding and is forecast to reach GBP1.1 trillion by 2011. At present, its national debt is worth GBP891 billion and this equates to GBP14,304 for every man, woman and child in the United Kingdom!
Elsewhere in Europe, the situation is equally dire in nations such as Ireland, Spain, Greece and Italy. Furthermore, various countries in Eastern Europe are on the verge of economic doom.
Given the precarious state of so many economies in the West, we are amazed that the respective government bond markets have not fallen apart at the seams. Perhaps, they are all heading down Japan’s route, where national debt is now above 170% of GDP, yet the yield on Japanese government debt is pathetic. But then again, perhaps they are not…
In our view, in the not too distant future, the interest payments on the outstanding national debts in the overstretched ‘developed’ nations will become so large that their central banks will need to create money just to keep the Ponzi schemes going. When that happens, the game will be up and we will probably experience a total breakdown of the fiat- money experiment. At this stage, we do not know when the day of reckoning will arrive but we do know that all Ponzi schemes ultimately collapse under their own weight and this one will be no different.
 From www.thedailyreckoning.com
Comtock Partners Says Economic Momentum May Have Already Peaked
Posted By thestatedtruth.com on February 18, 2010
More at   http://www.comstockfunds.com/screenprint.aspx?newsletterid=1511Â
European Credit Markets Flash Hottest Warning Signal Since Crisis
Posted By thestatedtruth.com on February 18, 2010
Yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months.
By Ambrose Evans-Pritchard, International Business Editor
Published: 7:21PM GMT 16 Feb 2010
Jitters over Chinese credit tightening and default risks in Greece and Dubai are causing bond vigilantes to batten down the hatches across the world, bringing the most dramatic credit rally for a century to a shuddering halt.
The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. “This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit’s credit analyst.
“The index is a leading indicator so it is a warning signal. This is being driven by volatility in sovereign debt, with Greece being the biggest issue at the moment but tightening in China could be a bigger negative catalyst in the long-term,” he said.
The rating agency Moody’s said market ructions have led to a “material” rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy’s Snai betting group, and the UK’s Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada’s Bombardier.
Dr Suki Mann, a credit specialist at Societe Generale, said stronger companies should weather any squall but concerns are mounting. “The world has woken up to the real possibility of a double dip. These are nervous times,” he said.
BusinessEurope, the EU-wide lobby, warned this week of a “very worrying situation” as it become harder to raise money at a viable cost, if at all. The group called on the European Central Bank to send a “clear signal” about its collateral policy. Fears of tougher ECB rules are a key factor causing market flight from Greek debt.
The sudden halt in bond issues is disturbing since companies have been relying on capital markets to raise money as an alternative to Europe’s fragile banks. The ECB said on Tuesday that 42pc of small businesses in the eurozone had reported worsening credit conditions in the second half of last year, despite the emergency stimulus of the authorities.
Conditions appear to be deteriorating. Bank loans to companies contracted at an annual rate of 1.9pc in November and 2.3pc in December. Consumer credit also fell. The Bundesbank fears that disastrous earnings last year will cause scores of German companies to breach loan covenants, triggering a wave of downgrades that further damage German banks and potentially setting off a second wave of the credit crisis.
New Basel III rules intended to force banks to raise risk-adjust capital levels may be making matters worse. The rules are causing weaker banks to cut lending, throwing the ‘credit multiplier’ into reverse.
Andrew Sheets, a credit expert at Morgan Stanley, said corporate bond spreads have not spiked as far as Greek or southern European sovereign yields, so they may rise higher as the price of risk comes back into alignment. “What’s changed over the last two weeks is that valuations have become too rich compared to broader sovereigns,” he said.
Credit rallied far ahead of stocks last year, creating the chance of a “equity carry trade”. Dividend yields on Telefonica are 8.2pc while yields on the company’s five-year debt are 3.8pc, comparable to Spanish state debt. Likewise for France Telecom at 8.5pc against 3.3pc.
This is an extreme aberration by historical standards. Either equity prices must rise a long way, or credit spreads must widen.
Tongue Twister
Posted By thestatedtruth.com on February 18, 2010
If today is Tuesday, what is the day after the day before the day before tomorrow?                Â
                                                   Answer Spelled Backwards = yadseuT
Fast Company Ranks Its Top Ten Most Innovative Biotech Companies
Posted By thestatedtruth.com on February 17, 2010
Fast Company
10 Most Innovative Biotech Companies
by Elizabeth Svoboda (Additional Reporting By Erica Westly)
1. Novartis
H1N1 put a spotlight on Novartis’s success with vaccines based on cells, a process that’s faster and more reliable than the traditional method of growing viruses in chicken eggs. Novartis won EU approval to sell cell-based flu vaccines, and FDA approval is pending. Top 50 No. 8
2. Synthetic Genomics
Craig Venter’s baby has teamed up with ExxonMobil to develop microbes that produce biofuel. Exxon’s $600 million stake signals that algae fuel is going mainstream. Venter’s business acumen, combined with Exxon’s production and marketing power, positions Synthetic Genomics to dominate the market long-term. Top 50 No. 26
3. Cytori Therapeutics
Given the difficulties associated with embryonic stem cells, adult stem cells look like the therapeutic wave of the future, and Cytori is out in front. Its Celution system harvests adult stem cells with maximum efficiency, and its regenerative therapies have shown promise in trials.
4. Roche/Genentech
Roche was the talk of the health-care world this year when it acquired biotech giant Genentech for $46.8 billion — a high-risk move that seems likely to be high reward. Genentech has three of the five best-selling biotech drugs.
5. Human Genome Sciences
As we noted in “The Gene Bubble” (November 2009), decoding the human genome has not produced miracle cures. But this year, Human Genome Sciences announced that its lupus drug, Benlysta, had produced substantial improvements in clinical-trial participants — a conspicuous success since so many lupus treatments have flopped.
6. Osiris Therapeutics
Like Cytori, Osiris is at the vanguard of the stem-cell revolution. According to Osiris, its marquee drug, Prochymal — a preparation of adult stem cells from connective tissue — may work for ailments as varied as diabetes and graft-versus-host disease.
7. Amyris Biotechnologies
Amyris is engineering yeast molecules to churn out hydrocarbon-based biofuels. It says it’s on target to bring its fuels to market by 2011, giving it an initial edge over renewable-fuel stars like Synthetic Genomics.
8. Biogen Idec
Biogen shrewdly responded to concerns about side effects of its drug Tysabri, a leading treatment for people with relapsing multiple sclerosis, by launching a Web tutorial, teleconferences, and a mentor program for patients. Biogen boasts 20 drugs in Phase II clinical trials or beyond.
9. Novavax
Novavax develops vaccines using proprietary virus-like particles (VLPs) rather than live viruses. The particles trigger the same immune response as a virus but cannot cause infection. In December, Novavax released the results of Phase II clinical trials of a VLP vaccine that proved effective against three kinds of flu, including H1N1.
10. Regeneron Pharmaceuticals
Big Pharma heavyweight Sanofi-Aventis has promised Regeneron an additional $1 billion over seven years to broaden its drug-development efforts. Regeneron’s pipeline of human antibody products, now in clinical trials, treat rheumatoid arthritis, gout, chronic pain, and cancer.
U.S. vs. China…..A Dangerous Phase Has Begun
Posted By thestatedtruth.com on February 17, 2010
U.S. vs. China: A dangerous phase has begun ……China is a formidable adversary whose ultimate strength is not its military hardware but its economic prowess, and whose diplomatic weapon is not saber rattling but great patience. Â
By Martin Jacques / February 17, 2010
The spats between the United States and China appear to be getting more numerous and more serious. The Chinese objected in strong terms to Washington’s latest arms deal with Taiwan and threatened to take sanctions against those firms involved. President Obama recently accused the Chinese of currency manipulation. At Davos, Larry Summers, the director of the White House’s National Economic Council, made an oblique attack on China by referring to mercantilist policies.
The disagreement between China and the US at December’s Copenhagen climate summit has continued to reverberate. The Chinese government reacted strongly to Google’s claims supported by the US administration that cyberattacks against it had originated in China and its statement that it would no longer cooperate with government censorship of the Internet. The US has been increasingly critical of China’s unwillingness to agree to sanctions against Iran. And finally the Chinese government is accusing the US administration of interference in its internal affairs by insisting on the meeting this week between Barack Obama and the Dalai Lama in Washington.
The issues of contention have come thick and fast. For the most part, however, they are hardly new. The Chinese reaction to the Taiwan arms deal was entirely predictable, the only novelty being the threatened sanctions. Taiwan remains the most important priority for Chinese foreign policy. Their response to the Dalai Lama in Washington is equally predictable.
Obama’s and Summers’ statements about currency manipulation and mercantilism, respectively, are a little different. True, they are not entirely new; Treasury Secretary Timothy Geithner accused the Chinese of currency manipulation in January 2009. But since Mr. Geithner’s ill-judged remark, the US administration has until now chosen to be more discreet.
Google and climate change are relatively new bones of contention. But we should not be surprised by these disputes. China’s rise means that it is now involved in areas of the world and on issues where previously it had little or no stake. As China increasingly becomes a global power with interests to promote and defend around the world, it is bound to come into conflict with the United States on a growing number of subjects.
Drowning In Debt…..What It Means For You!
Posted By thestatedtruth.com on February 17, 2010
Drowning in Debt: What the Nation’s Budget Woes Mean for You
Economists Predict Cutbacks, Tax Increases That ‘Aren’t Even Imaginable’
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By DEVIN DWYER
WASHINGTON, Feb. 17, 2010
American political and economic leaders have sounded the alarm for years about the red ink rising in reports on the federal government’s fiscal health.
But now the problem of mounting national debt is worse than it ever has been before with — potentially dire consequences for taxpayers, according to a report by the nonpartisan Peterson-Pew Commission on Budget Reform.
“It keeps me awake at night, looking at all that red ink,” said President Obama in Nashua, N.H., on Feb. 2. “Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities.”
Obama will sign an executive order tomorrow that establishes a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how to reduce the country’s debt.
Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country’s entire economic output, or gross domestic product.
4 Million U.S. Homeowners Are 90 Days Or More Delinquent
Posted By thestatedtruth.com on February 17, 2010
New wave of foreclosures by end of 2010 is feared
About 4 million U.S. homeowners are 90 days or more delinquent on their loans or in foreclosure proceedings, Moody’s Economy.com says. A federal loan modification program is helping a relative few.
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By Jim Puzzanghera and Don Lee
February 17, 2010
Reporting from Washington – Experts fear that a new wave of foreclosures will hit this year as prolonged unemployment makes it difficult for millions of homeowners to pay their mortgages — and many of them aren’t likely to get much help from a federal program aimed at keeping them in their houses.
Banks participating in the Home Affordable Modification Program, announced a year ago this week by President Obama, have been slow to turn temporarily reduced mortgage payments into permanent ones.
“The overarching sense is that the mortgage modification process has not worked that well,” said Bert Ely, an independent banking consultant.
Obama administration officials acknowledge that the $75-billion program, which offers banks cash incentives to reduce payments, has had growing pains, and they said they were considering revisions to make it more effective.
Still, the program is expected to show continued progress when data from January are released Wednesday after a strong push by Treasury Department officials to get banks to make more of the modifications permanent.
Commercial Real Estate And The New Normal
Posted By thestatedtruth.com on February 16, 2010
Commercial Real Estate Collapse Bigger than Subprime Implosion – Why is the Market Ignoring the $3.5 Trillion Commercial Real Estate Market Implosion? Pricing in Another Bailout.
Posted: Sat, 13 Feb 2010 18:41:28 +0000
Most people that follow real estate even at a cursory level have heard of the problems in commercial real estate. The enormous $3.5 trillion market in commercial real estate (CRE) has deep and profound problems. At the peak CRE was estimated to be valued at $6.5 trillion. Today the value is closer to $3.5 trillion or closer to the loan amount outstanding. This market is now sitting in a zero equity position. In fact from market trends it is very likely that much of CRE bought during the last few years is significantly underwater. This trend is a few years behind the residential housing bust that shocked the markets into record declines. Why is the market not reacting as negatively to the bust in CRE as it did to residential housing?
Commercial and construction loans combined are bigger than the entire subprime market and CRE values have now fallen by 43 percent from their peak across multi-family units, hotels, and retail space. And with the CRE collapse there is a harder time selling off this space if there is no economic demand for certain spaces. You also have a smaller pool of borrowers looking for retail space. Take for example retail space near empty suburban housing divisions. With the busted homes if you lower prices enough, there will be a market created at a certain point. Yet this takes time. But with commercial real estate you may have no market at any price. Much of the CRE space is used as a business. With no business there is no need for CRE. So we have a giant $3.5 trillion market of loans that are largely toxic but the market seems to be ignoring this. Take a look at the combined CRE collapse from data collected by MIT:
And the worst isn’t behind us. It is still to come:
“(Moody’s) The delinquency rate on CMBS conduit and fusion loans increased by more than 50 basis points in January, bringing the total rate to 5.42%. The total delinquent balance is now more than $36 billion, a $3 billion increase over the month before. By dollar and basis points, this is the largest increase in the delinquency rate thus far in the downturn, as measured by the Moody’s Delinquency Tracker (DQT).â€
Source:Â Calculated Risk
So the speed of value declines in CRE is still deep and troublesome. Why is it then that the market is ignoring this data? Part of it has to do with the banking system bailouts. It is now assumed that any large and significant problems are going to be handled by the U.S. Treasury and Federal Reserve. In 2008 when the market was pricing in reality based risk and valuing companies on their own ability to succeed, countless firms were going to zero because that was their actual value. Today, with the entire banking sector bailed out the market is now pricing in no failure and subsequently even companies with enormous amounts of commercial real estate seem to be doing well. Take a look at one of the larger holders of commercial real estate in Simon Property Group (SPG):
This institution is now up by 159 percent since the March lows. Has CRE really changed that dramatically in the last year? And this is one of those areas being hit extremely hard:
“(Reuters) Simon’s Mills properties portfolio is comprised of two types of assets: regional malls and Mills properties, totaling over 45 million square feet of gross leasable area. A Mills property typically comprises over one million square feet of gross leasable area and has a combination of traditional mall, outlet center and big box retailers and entertainment uses, all focused on delivering value for the consumer. These assets are located in major metropolitan markets. The Mills is Simon’s fifth retail real estate platform.
Simon’s Community / Lifestyle Center Division consist of more than 70 centers comprising over 20 million square feet in size. These properties range in size from 30,000 square feet to over 900,000 square feet. All of the properties in the Community Lifestyle Center Division are an open-air format and offer a range of merchandise opportunities in a well located and convenient setting. These daily-need centers operate with the who’s who of big box anchor stores and many national, regional and local small store operators.â€
Giant holding of retail space in a time when retail spending is collapsing. We have seen consumers pulling back usage of credit cards and discretionary spending. The only reason for this enormous price increase is the market is now highly mispricing risk because of the enormous moral hazard embedded in the entire system. We went from having a bank failing causing the market to react to now, we need an entire country to reach collapse like in Greece to yield any reaction to the markets. And this notion that companies are no longer at risk is naïve and at worst, problematic for our entire system. We took systemic risk and digested it to the entire network of our economy. The risk is now directly linked to taxpayers through various bailouts and Federal Reserve programs aiding banks. Yet the problems are still there. Unemployment is still at its peak and we’ve been losing jobs for 25 straight months. Prices on residential real estate and CRE have yet to come back because people no longer have access to loans that don’t verify their income or ability to pay the loans back. The market is mispricing risk yet again believing that these trillions in loans at risk will simply be back stopped by the entire country.
Japan gives us an example of what happens when a country turns their banking system into a zombie like nation. The big banks like hungry alligators demand more and more money and this sucks away from the productive economy. You also have a rise in part-time employment (Japan has one-third of their workers on part-time status). We now have seen a massive rise in this part of our underemployed economy, the largest ever.  And Japan spent trillions in trying to stimulate their economy and here they are two decades later with little to show for their massive financial bailout. Instead of facing the music at once it was spread throughout the Japanese citizens to pay over decades. The outcome is the same, someone has to pay for the bad bets. Will it be the institutions or the people? The United States with their bailout policy has decided that it will be the people who pay for this mess.
So when you look at the CRE market, don’t be deceived that things are suddenly better. In fact, they are as bad as they ever were. The market is simply assuming that the taxpayer will make all these bad loans whole like Goldman getting protected via AIG and taxpayer funding. In the end someone will pay and true values will eventually have to be reflected.
Get Out Of Debt….That’s The (New) Secret To Success
Posted By thestatedtruth.com on February 16, 2010
The Only Certain Bet in this Market is paying Down Debt. Credit Card Rates Rise as Other Interest Rates Drop. $866 Billion in Revolving Debt Still Remains.
Tue, 16 Feb 2010
The global economy remains on unstable footing as we see debt problems slam the European markets with Greece in the current spotlight. Yet the problem of debt is not unique to Greece itself and it is fascinating that the world is only focusing on one country. The average American over the past four decades has taken on so much debt that household debt outstanding is now equivalent to the U.S. annual GDP. The biggest amount of debt is with mortgage debt. Yet with mortgage debt you are securing the mortgage to ideally a property that will reflect the amount of debt linked to the home. Part of the housing bubble problem stems from the hyper inflated values of homes and now we are seeing the ramifications of this with millions of homes being foreclosed on. But another large part of this bubble was around the usage of credit cards that hit their apex during this crisis:
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For nearly four decades Americans’ love affair with credit cards grew unabated. The amount of credit card debt outstanding hit an apex in 2007 at the height of the bubble reaching $975 billion in debt (to put this in perspective Greece’s GDP is $367 billion and their current deficit is 12.7 percent of economic output). Unlike mortgage debt or even auto debt, there is nothing securing credit card debt. This can be someone going to a club and buying $300 in drinks for friends or taking a trip to Antigua and spending thousands and charging it up on easy plastic. It can also be in the form of consumer goods consumption like buying a new television set or additional appliances. Yet for the first time since data on revolving debt has been kept we have now seen it contract on a yearly basis. And part of this contraction stems from the Great Recession but also more people are paying down extremely expensive debt:
The above data comes from an interesting article from the St. Louis Federal Reserve. The author William T. Gavin examines the low interest rate and its impact on consumers. As his chart above highlights, even with the Federal Reserve lowering funds to record lows the average interest rate on credit cards has crept up even higher than in 2000 when the Fed funds rate was at 6.5 percent. With interest rates on savings accounts so low, it is definitely appealing for many consumers to pay down high interest rate credit cards down since this is a guaranteed return of 13, 15, 20, and even 79 percent on some credit cards. This low interest rate environment is creating some asymmetrical dynamics in the market. While the above shows interest rates on credit cards as being high, rates on savings accounts are extremely low:
A 90 day certificate of deposit is currently yielding 0.19 percent, or slightly above the rate you would get by sticking your paycheck in the mattress of your bedroom. So even as we see the amount of revolving debt outstanding decline, there is still $866 billion in credit card debt outstanding. Credit card companies are losing money on charging off accounts as bankruptcies across the country rise. Many times credit card companies are hiking up the fees whether they are annual payments or jacking up interest rates on even good paying customers. In this environment it is rather clear that if you have high interest credit card debt, forget about the stock market and focus all your energy on paying down that high debt.
This interest rate spread on debt and savings is enormous. And as average Americans move their money to safer deposits as the stock market now reflects a speculative casino, many are wondering how they will do with such low rates:
In this current environment it would seem that the best course of action is paying down high interest debt and more importantly, not spending beyond what you can reasonably afford. Unfortunately many Americans are now realizing that they do not have access to the same lending window banks have with their central bank. The bailouts were largely a method of shoring up the troubled assets within banks, not a bailout to help the balance sheet of average Americans. If banks had any faith in their customers you would see lending pick up once again. But this Great Recession has created a smaller number of quality borrowers. Or to be more accurate, there weren’t many quality borrowers to begin with over the past decade but that didn’t stop banks from making loans earlier in the decade. Once banks gained consciousness they slammed shut the door and they went into survival mode primarily by focusing on government support to keep them solvent.
Banks have very little desire to loan money when they are dealing with large imbalances on their internal accounts:
You don’t need the above chart to tell you that credit has contracted massively during this grand economic calamity. Just look at the amount of credit card solicitation you now receive in the mail. Long gone are those zero percent offers for 12 months. You might get a six month balance transfer offer at zero percent but you will find out in the small print the enormous 5 percent fee for moving any amount over. Or you might soon come to realize that your annual fee free card now has a service fee. These are the ways banks are trying to go after additional revenue streams from their customers (or if you like, taxpayers that saved them from extinction).
Until our system is reformed, these are the rules we have been given. If you have outstanding credit card debt ($866 billion tells us many do) start paying it down. Forget about the stock market for the moment. The stock market is highly volatile and with no real reforms yet, we are in for another crisis in the short-term since the same games that got us here are once again being played out. By paying down your credit card debt you are assured a fixed return for a defined set of time. In this current market, that is as close as you will get to any sort of guarantee.
This insightful article came from……http://www.mybudget360.com/
The “Baby Boom” Generation, It Came And Now It’s Going
Posted By thestatedtruth.com on February 15, 2010
The “Baby Boom” generation consists of people born from 1946-64, which is that big bulge in the birth rate near the center of the chart. When the 1980s arrived, those boomers were in their prime working years, and helped to push up both economic growth and stock prices. They also caused the birth rate to peak again in 1990.Â
The chart below shows that bulge in the population in another way, as measured in the 2000 Census. The bars show how many people there were in the US in each age group.
The reason why this age demographic profile is important now is because the boomer generation is now starting to retire. So their population bulge is transitioning from the production/saving age group into the non-producing portion of the population. Along the way, those boomers are going to want to sell their big houses and their investment portfolios to the younger people, and there are not as many of the younger people. For the sellers of assets to compete for the attentions of the smaller number of buyers, the sellers are going to have to accept lower prices.Â
That imbalance of sellers to buyers is going to have a depressing effect on investment asset prices for a long time. Starting in the 2020s, when the “echo boomers” hit their productive years, things should start getting better again, but until then the combination of boomers retiring and echo-boomers still being young and in school will keep people out of the “producers” portion of the population.Â
And that likely means we are in for a sideways market during the 2010s, much like what we saw in the 1970s and 1930s.
Tom McClellan
Rick Ackerman….No Easy Way Back For U.S. Economy
Posted By thestatedtruth.com on February 15, 2010
No Easy Way Back For U.S. Economy
Rick’s Picks
Monday, February 15, 2009
“Phenomenally accurate forecastsâ€Â Â
We wrote here the other day that once the bailouts and misguided stimulus attempts fail, the U.S. will have to start from the gound up to rebuild the economy. “But what mechanism can be used to bring back all the manufacturing jobs lost to China, Mexico, Taiwan over the last twenty years?†a reader asked in the forum.  “It seems 80 percent of the population wants common-sense solutions, but the political meat grinder has its own agenda.† We replied as follows:
We’ll need to find our way back by producing services and goods that yield a comparative advantage for U.S. labor globally. That advantage would exist today if, since World War II, we had saved and invested most of our capital rather than consumed it and borrowed heavily to live beyond our means. With Japanese levels of savings and investment, U.S. manufacture of steel, cars, clothing and such would be competitive with the most efficient producers in Asia and Latin America, much as our ability to grow and process corn — a business that has received huge investment — has remained competitive with the lowest-cost producers in the world.
Two economic factors suggest it’s going to be a very long road back — not mere years, but decades. First, we’ll need to discharge our current debts, whether through inflation or deflation, so that we can begin to accumulate savings once again. It is pointless to talk of the existence of U.S. household savings when they have effectively been offset by inestimably larger fiancial liabilities now on the books. The liabilities include, most signficantly, Social Security and Medicare programs that have been run as Ponzi schemes and which will continue to rack up future costs that have grown almost beyond reckoning. To get on sound financial footing, we will also need to gut overly generous pension and healthcare plans at all levels of government that are on track to bankrupt the nation one city, county and state at a time.
Screwing Creditors
Since it is far more likely that hyperinflation rather than deflation (i.e., bankruptcies and forced liquidations) will be used to wipe out our debts, we shouldn’t count on the rest of the world, particularly that of a resurgent Asia, to be eager to lend us the money to rebuild. And even if foreign lenders should forgive us the screwing we’re about to give them and back America’s comeback to a significant extent, their loans are unlikely to come with Marshall Plan forgiveness, and so a substantial portion of any wealth that grows from such investments will necessarily be exported.
If we get lucky, Yankee know-how could help shorten the time it will take for Americans to enjoy genuine prosperity once again without having to go deeply into hock. We could conceivably solve the world’s energy problems with a radical new source of power, such as cold fusion. Or we could achieve breatkthroughs in health care that would revolutionize the way the world treats the sick. Innovation and risk-taking have always been America’s strong suit, and our ability to raise capital to launch promising new ideas is unmatched by any other country in the world. But will the politicians have the guts to change the tax code so that capital investment and resarch are favored as investments over residential real estate? It’s hard to be optimistic about this, given the heavy skew of bailout incentives so far toward the goal of artificially propping housing demand and a too-clever banking system. It’s quite possible that only a deep crisis — a Second Great Depression — can force the changes needed to make America’s economy robustly competitive once again.
***
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts.  Rick’s Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick’s Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers†initials will be used unless express written permission has been granted to the contrary. All Contents © 2010, Rick Ackerman. All Rights Reserved. www.rickackerman.com
John Mauldin’s Frontline Thoughts
Posted By thestatedtruth.com on February 14, 2010
Thoughts from the Frontline Weekly Newsletter
Between Dire and Disastrous
by John Mauldin
February 12, 2010
February 12, 2010
Path dependence explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant. In essence, history matters.
With regard to the future, the choices we make determine the paths we will take. As I have been writing for a long time, we have made a series of bad choices, often the easy choices, all over the developed world. We are now entering an era in which our choices are being limited by the nature of the markets. Not only are we in a path-dependent world, but the number of paths from which we may choose are becoming fewer with each passing year.
Our economic future is more and more a product of the political choices we make, and those are increasingly difficult. We have no good choices. We are left with choosing the best of bad options. Some countries, like Greece, are now down to choices that are either dire or disastrous. There is no “easy” button.
While German Chancellor Merkel has indicated a willingness to help, the German finance minister and other politicians are suggesting German cooperation will either not be forthcoming or only be there at a very high price; and the price is a severe round of “austerity measures,” otherwise known as budget cuts. Greece is being told that it must cut its budget to an 8.7% deficit this year and down to 3% within three years.
For my American readers, let’s put that into perspective. That is the equivalent of a $560-billion-dollar US budget cut this year and another such cut next year. That would mean huge cuts in entitlements, Social Security, defense, education, wages, subsidies, and on and on. And repealing the Bush tax cuts? That would just be for starters. No “let’s freeze the budget” and try and grow our way out of it, as we effectively did in the ’90s, or gradually cutting the budget a few hundred billion a year while raising taxes. That combination of tax increases and budget cuts would guarantee a US recession. Unemployment, already high, would climb higher.
Now, here is where it actually gets worse. If Greece bites the bullet and makes the budget cuts, that means that nominal GDP will decline by (at least) 4-5% over the next 3 years. And tax revenues will also decline, even with tax increases, meaning that it will take even further cuts, over and above the ones contemplated to get to that magic 3% fiscal deficit to GDP that is required by the Maastricht Treaty. Anyone care to vote for depression?
And add into the equation that borrowing another €100 billion (at a minimum) over the next few years, while in the midst of that recession, will only add to the already huge debt and interest costs. It all amounts to what my friend Marshall Auerback calls a “national suicide pact.”
Normally, a country in such a situation would allow its currency to devalue, which would make its relative labor costs go down. But Greece is in a currency union, and can’t devalue. Or it would restructure its debt (think Brady bonds) to try and resolve the problem.
The dire predicament is the one where Greece cuts its budgets and more or less willingly enters into a rather long and deep recession/depression. The disastrous predicament is where they do not make the cuts and are allowed to default. That means the government is plunged into a situation where it has to cut the entire deficit to what it can get in the form of taxes and fees, immediately. As in right now. And defaulting on the interest on the current bonds wouldn’t be enough, although it would help.
Why not just let Greece go under? Part of the argument has to do with moral hazard. If Germany bails out Greece, Ireland, which is actually making such cuts to its budget, can legitimately ask, “Why not us?” And will Portugal be next? And Spain is too big for even Germany to bail out. At almost 20% unemployment, Spain has severe problems. Its banks are in bad shape, with large amounts of overvalued real estate on their books (sound familiar?) and a government fiscal deficit of almost 10%. While Spanish authorities say they can work this out, deficits will remain high.
“It turns out from the BIS [Bank of International Settlements] numbers, that the largest holders of Greek debt are French, followed by the Swiss, although my guess is that a lot of that is hedged, and I don’t know that the BIS picks that up, and then the Germans. The numbers as of last June were France €86 billion, Switzerland €60bn, and Germany €44 billion. I have seen more recent numbers of France €73b, Switzerland €59b, and Germany €39b. In terms of GDP, for Germany it is minimal – just over 1%. Of more concern, for France it is nearly 3%, and for Belgium 2.5%. For Germany, the debts of Ireland, Portugal and Spain are much bigger problems. They may, however, worry that if there is a contagion, they will have to take marks on that debt. That would be a real problem – nearly 15x the size of the Greek issue.”
The recent credit crisis was over a few trillion in bad, mostly US, mortgage debts, with most of that at US banks. Greek debt is $350 billion, with about $270 billion of that spread among just three European countries and their banks. Make no mistake, a Greek default is another potential credit crisis in the making. As noted above, it is not just the writedown of Greek debt; it is the mark-to-market of other sovereign debt.
That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen. Just as the Fed (under Volker!) allowed US banks to mark up Latin American debt that had defaulted to its original loan value (and only slowly did they write it down; it took many years), I think the same thing will happen in Europe. Or the ECB will provide liquidity. Or there may be any of several other measures to keep things moving along. But real mark-to-market? Unlikely.
The entire EU is faced with no good choices. It is coming down to that moment of crisis predicted by Milton Friedman so many years ago. And there is no agreement on what to do.
Ultimately, this is a political decision for the Greek people. They have roughly four options. They can accept the austerity measures and sink into a depression for a few years. This would mean the total amount of debt would go up rather significantly, putting a very large crimp on future budgets. Debt is a constraint on growth. Debt-to-GDP is already over 100%. A recent paper by Reinhart and Rogoff (authors of the book This Time It’s Different) shows that when government debt-to-GDP goes over 90%, it reduces future potential GDP by over 1%. That locks in a slow-growth, high-unemployment future in an economy already saddled with government spending at 50% of GDP, which is by definition a drag on GDP growth.
The second option is that they can simply default and go into a depression for more than a few years. This would have the advantage of reducing the debt burden, depending on what terms the government settled on. Would bond holders get 50 cents on the euro? 25 cents? Stay tuned. But it would also most assuredly mean they would not be able to get new debt for some time to come, forcing, as noted above, severe cuts in government spending. From one perspective, it has the potential advantage of reducing government’s share of the economy, which is a long-term good but a short-term nightmare. But it also keeps Greece in the euro zone, which does have advantages. However, it does little to deal with the labor-cost differentials.
The third option is that they could vote to leave the European Union. While this is unthinkable to most Europeans, it is an option that may appeal to some Greeks. They could create their own currency and effectively devalue their debt. It would make their labor and exports cheaper. They would still be shut out of debt markets for some time. Any savings left in Greece would be devalued overnight. Those on pensions would find their buying power cut by a great deal. It is likely that inflation would become an issue. And it would be a full-employment act for legions of attorneys.
Most people scoff at this notion, but money is flying out of Greek banks into non-Greek ones, and to my way of thinking that is a suggestion that some Greeks think secession might be a possibility. It is also causing severe stress at Greek banks.
The final option is to promise to make the budget cuts, get some form of guarantee on their bonds, and borrow enough to make it another year – but not actually cut as much as promised; just make some cuts and then promise more next year if you will just bail us out some more. That just kicks the problem down the road for another year or two, until European voters (mostly German) get tired of taking on Greek debt.
The market is not going to let Greece continue to borrow without showing some serious efforts at cutting their deficit, and probably not even then without some external guarantees. The history of Greek debt is not a good one. They have been in default 105 years out of the last 200.
The lesson here? This is not just a Greek problem. Debt and out of control deficits are a problem all over the developed world. The Greeks are just the first. As Niall Ferguson wrote this week in the Financial Times, the contagion is headed to US shores unless we get our budget house in order. You cannot spend your way out of a fiscal crisis. The current path is simply unsustainable. At some point, we can become Greece. Yes, we have the advantage of having our debt denominated in dollars, but that is only an advantage up to a certain point.
Whether it is Japan or Portugal or the US or (pick a country), the body of evidence clearly shows that there is a limit to the amount of debt a sovereign country can handle without a crisis developing. That limit is different for each country, but there is a limit that the bond market will impose. And there are many countries in the developed world that are approaching that limit.
We are in the fullness of time approaching the End Game. In country after country, the choices that have been made over the last decades will yield a Greek situation, where there are no good choices. And the longer the hard choices are put off, the more difficult they will become.
Read the full article at www.frontlinethoughts.com
The Euro May Be Working Its Way Into A Corner
Posted By thestatedtruth.com on February 12, 2010
Jim Sinclair’s reply to the SocGen opinion of a Euro breakup is reviewed at the end of the article below.
                                                  ~~~~~~~~~~~
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Euro Area Headed for Breakup, SocGen’s Edwards Says
By Alexis Xydias
Feb. 12 (Bloomberg) — Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the breakup of the euro bloc, according to Societe Generale SA’s top-ranked strategist Albert Edwards.
The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,†London-based Edwards wrote in a report today. Even if governments “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable breakup of the euro zone.â€
Tommaso Padoa-Schioppa, a former European Central Bank executive board member and Italian finance minister, said today there was no possibility of a partition of the euro-zone.
“I don’t think there is any prospect for such an event and I don’t think it makes much sense to talk about it,†he said in an interview on Bloomberg Television.
Edwards was voted second-best European strategist in the 2009 Thomson Extel survey after his then-colleague James Montier and is known for his bearish views on equities. In 1996 he angered southeast Asian governments by predicting the currency meltdown that struck the region a year later. The poll also named Societe Generale as the top economics and strategy research firm for a third straight year.
Portuguese and Spanish bonds also declined earlier this month on concern those countries may also need to cut spending.
Prime Minister George Papandreou’s drive to get Greece’s ballooning budget under control is being challenged in the streets by striking schools, hospitals and airline employees.
“Unlike Japan or the U.S., Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain,†Edwards wrote. Consigning the countries in southern Europe with the weakest finances “to a prolonged period of deflation is most likely to impose too severe a test on these nations.â€
The budget crisis in Greece may escalate in the way the Asian currency meltdown of 1997 paved the way for the Russian default and the collapse of Long-Term Capital Management LP in 1998, Edwards added.
This is “a different chapter in the same book,†he wrote, adding that the need to tighten deficits is a “particular issue for the U.S. and U.K.†“There will be more crises to follow Greece, both inside and outside of the euro-zone.â€
Last Updated: February 12, 2010 08:12 EST
Complete article at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.DhVdgUJ6nA
                                         ~~~~~~~~~~~~~~~~~~
Jim Sinclair’s Reply
Will the Euro be the vehicle to increase the floating exchange rate system or the vehicle for the next step in the devolution of paper money?
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What you are presently witnessing is the unwind of sovereign entities as a product of their adventures into OTC derivatives and disregard for economic law.
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Greece is the Lehman Brothers of the euro, making it harder to accept Soc Gen’s position today that the euro is about to break up.
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I see this as a crisis situation by design for the establishment, in time, of a single Western currency and a single Western central bank of central banks. Gold will then be attached at the hip in the inverse to this single Western world currency with the single western currency trading lower against Asian currencies or a single Asian currency.
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In that situation gold emerges as the only real storehouse of value.
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My feeling is that this well publicized event today of sundering confidence in the euro will simply accelerate the devolution of paper money as any storehouse of value, upgrading gold in the final analysis as the most trustworthy currency form.
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It is unlikely that central bankers would want to have history record them as the caretaker when a system dissolved. They would much more likely prefer to be known as the architect of something new.
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Trichet certainly wishes he kept his mouth shut when the euro was at $1.52 as the decline thereafter to his verbal intervention set the stage for the attack that followed.
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Think about this for a moment. A collapse of the euro would retrogress to the dollar trading against a host of currencies, opening up each currency to a successful attack on whatever was deemed to be the weakness, picking off each country’s debt one at a time. The dollar will be in more, not less, danger when it is valued second to second, not against the simple euro, but rather a host of other Western currency units. It would set the stage for a Western world collapse of confidence in money as a storehouse of value.
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Consider the implications if the Korean press is right about a common asian currency amongst the strongest asian nations.
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We have created so much paper in the world that it is now considered kindergarten to attack individual stocks when you can bankrupt countries.
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To assume the dollar is insulated against this “Art of War” approach to planetary destruction is silly. That would mean you accept the December hog wash of a sustainable US recovery.
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The US is headed towards the same economic conditions of the second leg of the Great Depression. A 1933-1934 type unwind is coming. The only argument for a sustainable equity market in the Western World is the Weimar case.
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All currencies are headed in one direction: down in storehouse of value character.
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Gold is the only storehouse of value. Gold has demonstrated that clearly even in the face of the Crimex and the gold banks fighting it.
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Respectfully,
Jim Sinclair
Rick Ackerman Checks In With Some Timely Thoughts About Fed Chairman Ben Bernanke
Posted By thestatedtruth.com on February 11, 2010
A Cautious Bernanke Finally Gets It Right
By: Rick Ackerman, Rick’s Picks
|  — Posted Thursday, 11 February 2010 Rick’s Picks Thursday, February 11, 2009 “Phenomenally accurate forecastsâ€Â  Very simply, the Fed plans to replace the federal-funds rate as its main policy tool, relying instead on adjustments in the interest the Fed pays to banks on excess reserves. Here’s how the Wall Street Journal explained it:  “Raising the excess-reserves rate would give banks an incentive to park more funds at the Fed instead of lending them out to companies or households. In this way, the Fed would be able to restrain an economy that risks overheating and sparking inflation. Moving this rate would pull up other short-term rates, including the federal-funds rate, long the Fed’s main tool for steering the economy.†Deflation Bonus Excess reserves currently earn 0.25%, but in today’s deflationary environment, with nominal rates at historical lows,  it’s not hard to imagine banks turning into hard-core “savers†if the incentive to park funds risklessly at the Fed were raised even a skoach. What’s more, the process makes tightening sound more like a reward than a punishment. Instead of raising interest rates to throttle credit, the Fed would be raising them indirectly by giving the banks a greater incentive not to lend. The very word “tightening†always scares hell out of investors, but yesterday’s subdued reaction to Mr. Bernanke’s speech suggests he has found a way to say what needs to be said without causing a stampede. Although we don’t expect the Fed to attempt tightening in any way, shape or form for the foreseeable future, it’s mildly comforting to know that there may be way to at least talk about it without bringing the whole house of cards tumbling down. *** Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts.  Rick’s Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick’s Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2010, Rick Ackerman. All Rights Reserved. www.rickackerman.com |
Four Banks Make Up 55% Of FDIC Backed Assets……Now They Really Are To Big To Fail!
Posted By thestatedtruth.com on February 11, 2010
Thu, 11 Feb 2010
The FDIC provides deposit insurance at 8,099 institutions. Collectively the FDIC overlooks $13.247 trillion in assets at these institutions. Instead of feeling protected you should feel weary because the FDIC deposit insurance fund is insolvent. Now the assets at these institutions range from softer side financial instruments like CDs and regular deposits but keep in mind that saving accounts are actually viewed as liabilities on the balance sheet of banks. This is money owed to you, the typical American saver. What is more nefarious is that these banks label high flying “assets†like commercial real estate loans and home equity lines as assets. In other words banks are optimistically pretending that many of their toxic assets are worth more than they claim they are really worth. And what is even more disturbing is the too big to fail banks make up the bulk of the FDIC total asset pool. Out of 8,099 institutions 4 banks in Bank of America, JP Morgan Chase, Wells Fargo, and Citibank make up 55 percent of that total asset pool:
Source:Â FDIC, Bank Financial Statements
In the last couple of weeks, there has been much scolding being thrown at Greece for their spendthrift ways. Yet has anyone really even looked at the balance sheet of our banks and country? In fact, Americans are carrying nearly as much household debt as our annual GDP. This is the so-called assets on the banks balance sheet:
The big four banks have been pushing households for over three decades at a blistering pace to go deeper into debt. The middle class has been sold a bill of goods with the faux prosperity of the last few decades. Certainly we have been able to consume more and purchase more goods but where has this led us? We are now witnessing the highest foreclosure rate since the Great Depression. Unemployment and underemployment has now pushed the rate up to levels unseen in generations. Banks have become pushers of debt to the middle class and in reality, it was all a front to consolidate power in their corporatacracy. The fact that only four banks control 55 percent of all banking assets is simply amazing. It is an oligarchy in the banking sector. And the troubled bank list keeps growing but the bigger banks will have no chance of failing (their risk is now transferred to the public):
Now why would there be a growing number of problem banks if the economy were truly recovering? Your typical banks has to deal with the real world just like most businesses. They don’t have the luxury of expecting bailouts for every misstep that they take. They also interface with the middle class of America that are seeing their ability to keep up become harder and harder. Everyone is being sold that “we need to tighten our belts†while these big banks are dolling out billions in taxpayer bonuses and somehow are adding no actual benefit to the real economy. This is the conclusion of 40 years of irresponsible growth in the banking sector. Finance was never intended to be a big part of our economy but that is what we have gotten over the years:
The trend is rather unmistakable. Manufacturing topped out in the 1970s and the financial sector has grown nonstop and only this gigantic financial mess has slowed its growth. Yet keep in mind where this slow down has occurred. There are many more efficient and better run smaller banks and they have had to tighten their belts like everyone else but the too big to fail have gone on shopping sprees acquiring toxic mortgage outfits and investment firms like Bear Stearns or Merrill Lynch. How is this part of the cutting back plan? It is more of a coup from the corporatacracy to cement their concentrated power.
The big four are also part of the biggest issuers of credit cards. As you may have noticed these banks while speculating on Wall Street and turning enormous profits in their investment units have done very little in advancing the cause of the middle class. Instead, they have now gone after good credit standing customers to ring out every penny in absurd fees and gimmicks. Some argue that people should simply not spend. Well, if the American public had the same access to the U.S. Treasury and Federal Reserve I assure you that the playing field would be very different yet some of these people have the inability to see the macro picture of what is occurring. You can’t tell the public to act one way while so much money is funneled back to the top.
The biggest propaganda fraud is how big banks try to confuse the public that they have actual choice in the various credit cards they have to offer. Just because you can put a puppy on your card doesn’t mean a big bank won’t gouge you for every penny you have. Take a look at the top credit card issuers:
*In Billions of $USD
The big four banks show up in the top six institutions. As you can see our banking system is largely concentrated in a few hands and the Federal Reserve is merely concerned in protecting these gigantic institutions even if it means using middle class Americans as cannon fodder in this economic battle. Even with mortgage rates, we keep hearing how wonderful rates are. Well of course because we are destroying our U.S. dollar to allow banks to borrow at near zero percent! And this is sold to the public as good? Why not let the average American borrow directly from the Federal Reserve and get the same terms at near zero percent?  We are then told that banks need to verify the actual data. How well did that turn out in this massive housing bubble decade?
The bottom line is the big banks are getting bigger in this current structure. This is unhealthy for the system. Why? Banks that ran inefficiently and took on too much risk should fail. That is the nature of business. If you run a horrible restaurant you will lose customers and ultimately fail. With banking, as long as you serve enough crap throughout the system you will eventually rise to the top and then become part of the corporatacracy that is somehow unable to fail. To the contrary, they have expanded and grown while every other business has to compete with tougher restrictions. Even a basic definition of capitalism is sufficient to show us that banking is operating in a socialistic handout from D.C. to Wall Street. In the end it is the middle class that suffers from this concentration of power in a few banks.
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TARP Panel: Small Banks Are Facing Loan Woes
Posted By thestatedtruth.com on February 10, 2010
Nearly 3,000 small U.S. banks could be forced to dramatically curtail their lending because of losses on commercial real-estate loans, a congressional inquiry concluded.
The findings, set to be released Thursday by the Congressional Oversight Panel as part of its scrutiny of the Troubled Asset Relief Program, point to yet another obstacle for the slow-moving economic recovery. The small banks being threatened by loans they made for shopping centers, offices, hotels and apartments represent a major cog in the U.S. credit system, especially to entrepreneurs.
“The banks that are on the front lines of small-business lending are about to get hit by a tidal wave of commercial-loan failures,” said Elizabeth Warren, a law professor at Harvard University who heads the TARP oversight panel.
From 2010 to 2014, some $1.4 trillion in commercial real-estate loans is coming due. But for nearly half of those loans, the borrower’s debt is more than the property value, the panel said.
“The banks most at risk were never stress tested,” Ms. Warren said. “Their ability to withstand a coming storm has never been examined.”  In September at a congressional hearing, Treasury Secretary Timothy Geithner said it hadn’t been feasible to stress-test thousands of banks
Complete article at the www.wsj.com
Traders Make Biggest Bet Ever Against The Euro Currency…. This Likely Will Be Bad For The Dollar In The End
Posted By thestatedtruth.com on February 9, 2010
Traders Make $8 Billion Bet Against Euro
Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency.
Figures from the Chicago Mercantile Exchange, showed investors had increased their positions against the euro to record levels in the week to February 2.
The build-up in net short positions represents more than 40,000 contracts traded against the euro, equivalent to $7.6bn. More at www.ft.com
What’s A Hundred Years Between Friends
Posted By thestatedtruth.com on February 9, 2010
     Russia Vows to Defend Rights        Â
     Czarist Creditors Seek Lawsuit
By Helene Fouquet and Lyubov Pronina
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Feb. 9 (Bloomberg) — The Russian government vowed to defend our rights after French holders of czarist bonds valued at as much as 100 billion euros ($137 billion) threatened to sue the Kremlin and seize property it owns in Paris.
“May God help them, Viktor Khrekov, a spokesman for the Kremlin Property Department, said by phone today from Moscow, after the Paris-based International Federative Association for Russian Bond Holders, or AFIPER, pledged to sue to recoup part of the century-old debt.
“We have experience defending our property abroad, said Khrekov. Russia and France settled this debt a long time ago, so if they are planning to sue they will also have to deal with the French government. But they’re welcome to file a lawsuit; we will defend our rights.
AFIPER’s announcement yesterday came after the French Budget Ministry said Russia had purchased the Meteo France building near the Eiffel Tower in Paris for an undisclosed sum.
France was a key market for Russian bonds before the 1917 Bolshevik Revolution, with royalty to workers buying them for savings. Holders of czarist debt have clamored for a better deal since 1996, when Russia made a $400 million payment that France said definitively settled debt incurred to it before 1945.
Creditors Clamor
Some creditors accepted about 50 euros per bond as part of that agreement while others held out, saying the bonds should be valued at as much as 10,000 euros each.
“The Russian state owes the French people a lot of money and there is no date limit for that, even if some of this debt is more than 100 years old, said Eric Sanitas, director of AFIPER, which estimates that as many as 10 million czarist bonds may be in French hands.
Sanitas said AFIPER can only take legal action if Russia doesn’t designate its Paris land as diplomatic property. The Kremlin says it will build a cultural-spiritual center on the site of the meteorological institute on the banks of the Seine river.
“A church can’t be a diplomatic territory — well, not usually, Sanitas said in a telephone interview.
The new plot will be used to build an Orthodox cathedral, said Khrekov, who declined to comment on financial details of the property sale. Construction will begin after Meteo France vacates the building in 2011 and may take two years, he said.
Orthodox Cathedral
“The construction of an Orthodox cathedral will become a symbol of friendship and spirituality between the two countries, Russian Orthodox Church spokesman Fyodor Ryabikh said. This means the French government is paying special attention to the development of relations with our country.
The Budget Ministry declined to comment on the plot sale or AFIPER’s plans. A spokesman at Russia’s embassy in Paris wasn’t immediately available when contacted by Bloomberg News.
Sanitas said a recent French court ruling that handed Russia ownership of an Orthodox cathedral built in the coastal city of Nice on the orders of Czar Nicholas II may play to his organization’s favor.
The onion-domed Cathedral of St. Nicholas, the largest Russian church outside the country, and its contents including hundreds of precious religious icons belong to Russia, a Nice court ruled on Jan. 20. The Kremlin had argued that the czar bought the land for the state and not his family.
Sanitas said AFIPER will sue to seize the Nice church if an appeals court upholds that ruling.
“Russia says czarist-era problems are no longer its problem, but seeing as they want the Nice cathedral back, it seems czarist property is theirs, Sanitas said. Well, their non-refunded debt will be their property, too.
Last Updated: February 9, 2010 08:50 ESTÂ Â Â www.bloomberg.com
CPI Components And How Housing Controls It
Posted By thestatedtruth.com on February 8, 2010
In the past few decades Americans have seen more and more of their income being eaten up by the housing sector of the economy:
Rash Of Retirements Could Push Social Security To Brink
Posted By thestatedtruth.com on February 8, 2010
And many thought we were out of the deep poop………the government will just borrow more money, there will be a new deal, not as good as the old one for social insecurity….. the dollar will fall further and China will get even more control of the U.S.,  without ever firing a shot. Who needs nuclear weapons when one has financial weapons of mass destruction.The impact of the recession is likely to hit the giant retirement system even harder this year and next. The Congressional Budget Office had projected it would operate in the red in 2010 and 2011, but a deeper economic slump could make those losses larger than anticipated.
Rash of Retirements Pushes Social Security to Brink
         By Richard Wolf, USA TODAY
WASHINGTON Social Security’s annual surplus nearly evaporated in 2009 for the first time in 25 years as the recession led hundreds of thousands of workers to retire or claim disability.
The impact of the recession is likely to hit the giant retirement system even harder this year and next. The Congressional Budget Office had projected it would operate in the red in 2010 and 2011, but a deeper economic slump could make those losses larger than anticipated.
“Things are a little bit worse than had been expected,” says Stephen Goss, chief actuary for the Social Security Administration. “Clearly, we’re going to be negative for a year or two.”
Since 1984, Social Security has raked in more in payroll taxes than it has paid in benefits, accumulating a $2.5 trillion trust fund. But because the government uses the trust fund to pay for other programs, tax increases, spending cuts or new borrowing will be required to make up the difference between taxes collected and benefits owed.
Experts say the trend points to a more basic problem for Social Security: looming retirements by Baby Boomers will create annual losses beginning in 2016 or 2017.
The Power Of Ones Debt Held By Another Can Be Enormous
Posted By thestatedtruth.com on February 8, 2010
The fall of great empires have one thing in common……Too much debt!    America presents unsettling parallels with the disintegration of Rome – a decline of moral values, a loss of political civility, an overextended military, an inability to control national borders, and a growth of fiscal irresponsibility by the central government. Do these sound familiar?  A superpower that is financially reliant on others can be vulnerable to foreign influence. The British Empire learned this in 1956, when Britain and France were contesting control of the Suez Canal with Egypt. The Soviet Union was threatening to intervene on Egypt’s side, turning the regional dispute into a global showdown between Moscow and Washington. The Eisenhower administration wanted to avoid that, and the United States also happened to control the bulk of Britain’s foreign debt. President Eisenhower demanded that the British and French withdraw. When they refused, the United States quietly threatened to sell off a significant amount of its holdings in the British pound, which would have effectively destroyed Britain’s currency. The British and French backed down and withdrew from Suez within weeks. Our dollar is now getting into a similar situation, only now China may have the ability to control us!
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What the Past Tells Us
      By David Walker
Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time. Nations, like corporations and people, can lose discipline and morale. Economic and political vulnerability go hand in hand. Remember, without a strong economy, a nation’s international standing, standard of living, national security, and even its domestic tranquility will suffer over time.
Many of us think that a superpowerful, prosperous nation like America will be a permanent fixture dominating the world scene. We are too big to fail. But you don’t have to delve far into the history books to see what has happened to other once-dominant powers. Most of us have witnessed seismic political shifts in our lifetime. In 1985, Mikhail Gorbachev settled into his job as the Soviet Union’s young and charismatic new leader and began acting on his mandate to reenergize the socialist empire. Seven years later that empire collapsed and disappeared from the face of the Earth. Gorbachev runs a think tank in Moscow now.
In a sense, the larger world is starting to resemble the nasty and brutish life that long has characterized the corporate world. Just ask Jeffrey Immelt, chairman and CEO of General Electric. Of the twelve giants that made up the first Dow Jones Industrial Average in 1896 – all of them once considered too big to fail – only GE remains. The other towering names of the era – the American Cotton Oil Company, the US Leather Company, the Chicago Gas Company, and the like – all have faded away. And as GE stands against the winds of today’s financial challenges, ask Immelt whether there is such thing as a company that is too big to fail.
I love to read history books for the lessons they offer. After all, as the homily goes, if you don’t learn from history, you may be doomed to repeat it. Great powers rise and fall. None has a covenant to perpetuate itself without cost. The millennium of the Roman Empire – which included five hundred years as a republic – came to an end in the fifth century after scores of years of gradual decay. We Americans often study that Roman endgame with trepidation. We ask, as Cullen Murphy put it in the title of his provocative 2007 book, are we Rome?
The trouble is not that we see ourselves as an empire with global swagger. But we do see ourselves as a superpower with global responsibilities – guardians if not enforcers of a Pax Americana. And as a global power, America presents unsettling parallels with the disintegration of Rome – a decline of moral values, a loss of political civility, an overextended military, an inability to control national borders, and a growth of fiscal irresponsibility by the central government. Do these sound familiar?
Finally, there is what Murphy calls the “complexity parallel”: Mighty powers like America and Rome grow so big and sprawling that they become impossible to manage. In comparing the two, he writes, one should “think less about the ability of a superpower to influence everything on earth, and more about how everything on earth affects a superpower.”
A superpower that is financially reliant on others can be vulnerable to foreign influence. The British Empire learned this in 1956, when Britain and France were contesting control of the Suez Canal with Egypt. The Soviet Union was threatening to intervene on Egypt’s side, turning the regional dispute into a global showdown between Moscow and Washington. The Eisenhower administration wanted to avoid that, and the United States also happened to control the bulk of Britain’s foreign debt. President Eisenhower demanded that the British and French withdraw. When they refused, the United States quietly threatened to sell off a significant amount of its holdings in the British pound, which would have effectively destroyed Britain’s currency. The British and French backed down and withdrew from Suez within weeks.
The US dollar has never come under a direct foreign attack (though its vulnerability is growing). A direct foreign attack would result in a dramatic move away from the dollar. That would lead to a significant decline in its value, as well as higher interest rates. This is often referred to by economists as a “hard landing.” In lay terms, it’s more like a crash landing. Still, Americans have become intimately acquainted with the shocks of financial instability. Americans of a certain age still vividly recall the depths of the Depression in the 1930s and the chaos of inflation and long gasoline lines during the oil shock of the 1970s. We will also remember the financial collapse that began in 2008, and we pray for nothing worse. Some of our smartest financial thinkers are praying right along with us. “I do think that piling up more and more and more external debt and having the rest of the world own more and more of the United States may create real political instability down the line,” investor Warren Buffett has said, “and increases the possibility that demagogues [will] come along and do some very foolish things.”
Regards,
David Walker
for The Daily Reckoning
John Mauldin’s “Outside The Box”….Simon Hunt’s Long Wave Theory Of Cycles
Posted By thestatedtruth.com on February 8, 2010
This summary from John Mauldin’s “Outside The Box”, is from Simon Hunt, based in London. Simon travels to China many times a year, is an authority on copper and the Long Wave theory of cycles. Points below are summarizd and well taken in my view.
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In summary, global economic recovery will disappoint as set out below:-
- Growth will slow in the first half of this year
- It should recover late this year with a modest recovery likely in 2011.
- The seeds of the next credit crisis have been sown by soaring government debt and monetary largesse. It may well be the need for a huge issuance of government loans that will cause the next credit crisis, starting around 2012 and reaching its apex in 2013.
- A new global recession, part of the ongoing depression, will begin that year and last at least two years.
- The world is unlikely to begin a new period of sustainable growth until 2018 at the earliest.
- Until then markets will remain volatile and should be traded rather than now making long-term investments.
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In summary, global economic recovery will disappoint as set out below:-
- Growth will slow in the first half of this year
- It should recover late this year with a modest recovery likely in 2011.
- The seeds of the next credit crisis have been sown by soaring government debt and monetary largesse. It may well be the need for a huge issuance of government loans that will cause the next credit crisis, starting around 2012 and reaching its apex in 2013.
- A new global recession, part of the ongoing depression, will begin that year and last at least two years.
- The world is unlikely to begin a new period of sustainable growth until 2018 at the earliest.
- Until then markets will remain volatile and should be traded rather than now
The Volcker Rule…….It’s Also Called Having Skin In The Game
Posted By thestatedtruth.com on February 8, 2010
Volcker Rule Unabridged
By David Weidner, MarketWatch
NEW YORK (MarketWatch) — Not since Lady Gaga was slated to appear at the Grammys has there been this much anticipation about a performance.
With Paul Volcker expected to visit Capitol Hill on Tuesday, Wall Street will get its first detailed glimpse into the former Federal Reserve chairman’s thinking about the Volcker Rule, the controversial reform plan for the financial industry.
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To say that the rule, unveiled Jan. 21 by President Obama, is vague is like saying that J.D. Salinger enjoyed a little private time. Though the rule outlines new restrictions on such businesses as proprietary trading, hedge funds and private equity, it’s unclear how the reforms would treat products at the heart of the financial crisis.
Something seems to be missing, but there shouldn’t be. Volcker has been clear about his disdain for many Wall Street practices. He’s spoken candidly about structured securities and other financial innovations, famously saying that the best innovation of the past two decades was the automatic teller machine and that there isn’t a “shred of evidence” that financial innovations have helped the economy. See earlier column on Volcker Rule.
And now, Volcker, chairman of the president’s Economic Recovery Advisory Board, is suddenly in the limelight.
So, in an attempt to clarify and buttress the reform plan, here are some suggestions. Consider them talking points, Mr. Volcker — a fantasy page two, if you will — of the flimsy one-page document that introduced us to the rule that bears your name.
- Start by saying mortgage securities dealing would be curtailed. The primary buying source would become Fannie Mae and Freddie Mac . . Banks would no longer be able to sell mortgages to be sliced and diced in Wall Street’s factories unless they keep 50% of those loans on the books. The explosion of these securities created the housing bubble; shrinking the market will help bring it back in line with historic pricing.
- Conforming loan standards would be strengthened. For instance, Fannie and Freddie would only buy a single-family loan under $400,000 that has a 20% or more equity stake by the borrower. Subprime loans would be phased out. See current loan limits at Fannie Mae.
- A Consumer Protection Agency must be formed to ensure that junk isn’t being passed on to the government, banks or investors.
- Ratings-agency reform is needed. An investor-paid model would be built to eliminate conflict of interest.
- Banks will not be allowed to short securities that they underwrite. Call it the Goldman Sachs Group Inc. rider to the rule.
- The credit-default-swap market would be moved to an exchange where prices, bids and offers, are transparent. CDS sellers would be required to carry the same level of reserves as insurance companies. Naked CDS positions would be outlawed. Banks could buy CDS protections for their bond investments, but could not be CDS underwriters.
- Counterparty risk would be nearly eliminated from commercial banks. Prime brokerage units would need to be spun off or shuttered.
- Mark-to-market accounting would be reinstated to pre-April 2009 standards, erasing lingering doubt about balance sheets since accounting rules were relaxed.
- The Federal Reserve would be the main bank regulator in the U.S. market.
It isn’t a stretch to say that Volcker is on board for some of these proposals. Indeed, some of them, including the role of the Fed and the treatment of derivatives, come from statements he made during the six months before the Volcker Rule was unveiled.
As Volcker told CNBC in November, banks should focus on “taking deposits, making loans, moving money around, helping people invest their money, do some underwriting. They’ve got plenty of things to keep them busy.”
Volcker hasn’t chimed in with specifics when it comes to mortgage derivatives, but he clearly feels the market doesn’t need the volume these securities now support. Mortgage securities make up nearly a third of the $30 trillion U.S. bond market, five times the level they did in 1999.
‘Skin in the game’
To achieve bank safety, Volcker could make banks more vigilant about risk by making them eat their own cooking. It’s what Wall Street calls keeping skin in the game.
That means more mortgages on the balance sheet, tougher underwriting standards, less interconnectedness between banks and other financial institutions.
Volcker also needs to convince Washington and Wall Street that he understands risk has a place in the market. Goldman and Morgan Stanley can shed their bank-holding company status. Then, they can trade and pay bonuses to their hearts’ content.
J.P. Morgan Chase & Co. and Citigroup Inc. have harder decisions to make. They’ll have to shutter, unwind or sell businesses. Shareholders will own both, so they can choose between boring old bank stocks and their brokerage spin-offs, or keep both.
The Volcker Rule won’t be easy or pretty. Everyone from consumers to banks will feel some pain. These suggestions are just a starting point, and they’re certain to fuel a debate. So let it begin.
David Weidner covers Wall Street for MarketWatch.
More at http://www.marketwatch.com/story/what-volcker-should-tell-wall-street-2010-02-02
David Weidner covers Wall Street for MarketWatch.
The Return Of The Aspirational Consumer…..The Drift Between The Haves And Have Nots Is Bigger Than Ever!
Posted By thestatedtruth.com on February 7, 2010
U.S. Shoppers Splash Out On Luxury
By Jonathan Birchall in New York
Published: February 7 2010
More prosperous American shoppers seem to be defying continuing high unemployment levels and economic uncertainty to renew their spending on luxuries such as jewellery, fashion and cosmetics.
That is the picture emerging from the current round of US earnings and sales reports.
Tracey Travis, chief financial officer of Polo Ralph Lauren, said last week that the fashion brand and retail company had “slowly begun to see the gradual return of our core luxury customerâ€, including buyers of couture dresses that sell for more than $4,000.
Fabrizio Freda, chief executive of Estée Lauder, has said that sales of its beauty products at “prestige†stores – such as traditional department stores – had grown faster than at “mass†drugstores and discounters during November and December, reversing the trend seen earlier in the year.
“We view this as a return of the aspirational consumer,†he said.
Sales of cognac in the US had jumped 19 per cent by volume during the fourth quarter compared with the same period last year, according to BNIC, France’s trade association of cognac makers.
Last week’s January sales figures from leading US chain stores reinforced the picture of growing readiness to spend, with Neiman Marcus, Saks, ÂNordstrom and Bloomingdale’s – the top upmarket US department stores – reporting strong sales growth, albeit from the depressed levels of a year ago.
Neiman Marcus, which operates about 43 luxury fashion stores serving the most affluent US consumers, said that its strongest categories included women’s couture clothing and precious jewellery.
Abercrombie & Fitch, the youth retailer known for its $60 polo shirts, reported that comparable sales had risen 8 per cent, its first monthly increase for 20 months, in spite of teenage unemployment running at about 26 per cent.
The evidence of greater readiness to spend comes in spite of continuing high unemployment, with about 20 per cent of the US population unemployed or working casually or part time.
More at   http://www.ft.com/cms/s/0/0cfbe50c-1420-11df-8847-00144feab49a.html
Household Debt…..A Long Way Down To Go!
Posted By thestatedtruth.com on February 7, 2010
So……if the Fed can create money out of thin air through their banking web why is the economy still faltering? In boom and bust cycles we see a love and revulsion towards debt. Banks can be willing to lend out money but you can’t force average Americans to borrow. This past decade we saw the absolute disregard for prudent debt lending and now, many Americans are averse to taking out loans. In fact, now that banks are actually checking and verifying incomes it turns out that many middle class Americans really don’t qualify for additional debt.
This brings us to our next chart looking at household debt:
Even after the stock market recovery, it is estimated that average Americans have seen their household net worth decline by $11 trillion since the peak of this bubble. Yet take a look at the chart above. Household debt still remains near the peak. And keep in mind that real estate was the biggest item of net worth for Americans and this has fallen by roughly $6 trillion. Yet the loans remain the same. And that is largely a reason for the flood of foreclosures and bankruptcies. While banks still have mortgages valued at peak levels the actual market value is much less. The U.S. Treasury and Federal Reserve made a troubling bet during the early days of the crisis that things would correct quickly. Actually, I tend to believe that the Fed knew all along that when push came to shove, the entire banking sector would be bailed out by the U.S. taxpayer since the Fed is simply the lender of first and last resort for member banks.
So this leaves Americans contenting with debt amounts that no longer reflect the value of their underlying asset. Yet the banking sector is now fully supported by the taxpayer. So with the current system in place, if banks do fail taxpayers are on the hook. The Fed has setup the perfect trap for middle class Americans. If average Americans decide to walk away from their underwater mortgages then the bill will be paid by taxpayers. After all, we are already told that the too big to fail by definition won’t fail. And the other option is to continue paying a mortgage on a home that is no longer worth its value. Many Americans simply cannot afford to do this. Do you notice how in no scenario the banks lose? This is another characteristic of the corporatocracy. And the FDIC which insures bank deposits is essentially insolvent:
And the FDIC backs $13 trillion in total assets with a fund that is insolvent! Now that is maximum leverage.
More at http://www.mybudget360.com/
Mortgage Bankers Association Sells Headquarters At Huge Loss
Posted By thestatedtruth.com on February 6, 2010
The emperor has no clothes……….. Like millions of American households, the Mortgage Bankers Association found itself stuck with real estate whose market value has plunged far below the amount it owed its lenders. On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA’s 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase.
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More at  www.wsj.com
Secret Summit Of The Worlds Top Bankers Meet In Australia
Posted By thestatedtruth.com on February 6, 2010
Hmm……secret summit of top world bankers in Australia. We’ll hear more on this next week.
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Secret summit of top bankers
- By George Lekakis and Fleur Leyden
- From: Herald Sun
- February 06, 2010 12:00AM
- World’s top bankers fly in
- To meet at secret location
- Trouble on the horizon
THE world’s top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets.
Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.
Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.
Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.
The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.
The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.
Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.
Australia’s ASX 200 slumped 2.4 per cent, to a its lowest close since November 5, echoing a sharp fall on Wall Street.
Asian share markets were also pummelled, with Japan’s Nikkei 225 down almost 3 per cent and Hong Kong’s Hang Seng slumping 3.3 per cent.
The damage was also being felt by European markets last night with London’s FTSE 100 down sagging 1 per cent in early trade.
Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night.
“This does feel like ’08 and ’07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,” said H3 Global Advisors chief executive Andrew Kaleel.
“Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.”
It wasn’t all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.
The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.
The outlook for global growth is likely to be a key theme of the high level central bank talks.
The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.
A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.
Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.
Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.
Total Rail Traffic, As In Railroad………
Posted By thestatedtruth.com on February 5, 2010
Measures Of Real Output
Here we review a number of measures of real economic output that are distinct from FIRE Economy measures.
Total rail traffic in the U.S. in 2009 was below 2008 levels, and trended down into the 4th quarter of 2009 as during 2008, curiously in a quarter when GDP numbers were robust.
If the economy is truly recovering we’d expect to see a climb in rail traffic to 2007 levels in Q4 2009 not a collapse to Q4 2008 lows.
Kessler: Bernanke’s Exit Strategy
Posted By thestatedtruth.com on February 4, 2010
Kessler: Bernanke’s Exit Strategy
~~~~~~~~~~~~
ANDY KESSLER, The Wall Street Journal (02/04/10): We can end bank panics
forever by limiting the ability of lenders to create money out of thin
air.
Â
Last week, voting 70-30, the Senate confirmed Federal Reserve Chairman Ben
Bernanke for another four year term. So now what will he do?
Â
Phase one of the recovery is certainly complete. Since September 2008, the
Fed has bought mortgage-backed securities and Treasurys, and increased the
monetary base to $2 trillion from $850 billion.
The flood of dollars has bank profits booming.
Â
Sadly, banks still have all those underwater mortgage-backed securities
and derivatives, but Mr. Bernanke is assuming they will just earn their
way out of this problem. Banks also are not lending enough to get the
job-creation engine rolling again—though sooner or later they will, at
which point inflationary pressures will build tremendously. So every
currency trader, bond buyer and man on the Street wants to know one thing:
“What’s the exit strategy, Ben?” Raise interest rates, shrink the money
supply and risk cratering the economy, or keep rolling along and risk a
collapsing dollar?
Â
My guess? Mr. Bernanke will leave the money out there but restrict banks’
ability to create more out of thin air. He’ll be called crazy. Crazy like
a fox.
Â
The Fed has a once-in-a-millennium opportunity to do away with banking
panics. Investors will rejoice, but Wall Street firms are not going to
like it one bit.
Â
Our banking system has changed little since the days of Elizabethan
goldsmiths writing more gold receipts (aka banknotes) than they had gold
in their vaults. This “fractional reserve banking” system has caused every
major panic in this country—I’ve counted at least 16 of them since 1812.
Â
Whatever the era, the story is always the same. Banks keep small reserves,
and then invest in supposedly safe “sure things” to generate profits
beyond the interest paid to depositors.
Â
Sure things can be real-estate loans, home equity, credit card and
commercial debt. But bankers are terrible investors. There are no sure
things.
Â
Thus modern banking is protected by the twin pillars of the Fed and the
Federal Deposit Insurance Corporation (FDIC). The Fed, founded in 1913 out
of the failure of Knickerbocker Trust when it tried to corner the copper
market, finally learned after the banking crisis of 1930 that it is the
lender of last resort. And the FDIC was established in 1933 to insure
depositors against losses in case the bank is so bad at investing that
there is nothing left for the Fed to lend to.
Â
The end of bank runs? Mostly. Panics? Hardly. And Paul Volcker’s proposal
to restrict proprietary trading won’t change a thing. Banks write bad
loans at the top and dump them at the bottom.
Â
Here is some recent history. The 1988 Basel accords set minimum bank
capital at 8%, meaning banks could leverage their capital at ratio of 12.5
to 1. As long as their investments didn’t fall by 8%, they stayed solvent.
In 2001, U.S. minimum capital was set at 10%, more or less, but banks were
allowed higher leverage if some of their capital was AA or AAA rated
mortgage-backed securities. The rationale was that these instruments could
never possibly drop more than 5%, let alone 10%. Oops.
Â
Under the 2004 Basel II accords, so-called shadow banks (which don’t take
deposits) with $5 billion in capital were exempt from these regulations.
So institutions such as Goldman Sachs, Morgan Stanley, Merrill Lynch,
Lehman Brothers and Bear Stearns regularly used 20 to 1 or even 30 to 1
leverage. This allowed these firms to effectively print money, inflate the
housing bubble, and then watch those same AA and AAA mortgage securities
fall by 70%-90% in value.
Â
To sum up, the Fed creates a monetary base and the banks can create $10
for every $1 of monetary base. Wall Street firms created $20 for every Fed
$1. In other words, the Fed only seeds the market. Beyond crude
instruments like interest-rate policy, it has little control over how much
actual money supply exists. In good times banks lend too much. And in bad
times, such as today, they don’t create enough money because they lend too
little.
Â
Perhaps the lesson Mr. Bernanke drew from 2008-09 is not that we need more
regulation but that financial firms should not be allowed to generate
money out of thin air to write soon-to-be-bad loans ….
Â
Read On:
City Of Los Angeles Says We Have Eliminate 1,000 City Jobs, City Council And City Union Says Not On Our Watch……..So What Do You Do? Uh, May Have To Give Everyone A Raise
Posted By thestatedtruth.com on February 4, 2010
February 4, 2010Â
Can you believe this……….The city of Los Angeles budget shortfall is $212 million this year and will be at least $484 million in the fiscal year that starts July 1. Los Angeles Mayor Antonio Villaraigosa moved Thursday to eliminate 1,000 city jobs and begin planning layoffs of city employees, one day after the City Council failed to muster the votes to do so to deal with an ongoing budget crisis. Victor Gordo, a lawyer for the labor coalition, warned that the city would face financial consequences if it tries to lay off his organization’s members starting July 1. That’s because the coalition’s agreement requires the city to give long-delayed raises in the event of layoffs, he said
                                                             ~~~~~~~~~~~~
 Los Angeles Mayor Antonio Villaraigosa moved Thursday to eliminate 1,000 city jobs and begin planning layoffs of city employees, one day after the City Council failed to muster the votes to do so to deal with an ongoing budget crisis.
“We’re living beyond our means, we have difficult choices to make, we must protect our economic future,†Villaraigosa said during a late afternoon news conference. “Unfortunately, instead of making progress, we are headed in the wrong direction. That ends today.â€
“If you think I’m not going to move ahead, you don’t know me well,†Villaraigosa told reporters. “I don’t do this because I want to, I do this because I must.â€
Â
A day after the City Council delayed action on the job cuts for 30 days, Villaraigosa sent a letter to department heads stating he would first use powers provided within the City Charter to eliminate jobs, moving as many employees as possible to other vacant positions.
Villaraigosa’s budget team believes that at least 360 workers can be cut by moving them into other posts not affected by the budget crisis. Those jobs would be in agencies such as Los Angeles World Airports and the Department of Water and Power, which are not part of the cash-strapped general fund, which pays for basic services.
Two city officials said the mayor’s layoff action would most immediately apply to members of the Engineers and Architects Assn., which represents roughly 6,500 city employees, as well as workers who are not represented by any union.
The city’s labor agreement bars Villaraigosa from laying off workers with the Coalition for L.A. City Unions, which represents another 22,000 civilian employees. That process cannot occur until July 1 at the earliest.
The city’s budget shortfall is $212 million this year and will be at least $484 million in the fiscal year that starts July 1. The actions are expected to save up to $50 million this fiscal year, said Villaraigosa Deputy Chief of Staff Matt Szabo. Between that savings and the major’s push to privatize city parking garages by the end of June — which the Villaraigosa administration predicts would raise between $100 million and $200 million — the vast majority of the city’s budget shortfall could be covered, he said.
“The No. 1 priority here is protecting the reserve fund. It’s unacceptable to have a reserve fund at or near zero at the end of this fiscal year,” Szabo said.
Victor Gordo, a lawyer for the labor coalition, warned that the city would face financial consequences if it tries to lay off his organization’s members starting July 1. That’s because the coalition’s agreement requires the city to give long-delayed raises in the event of layoffs, he said.
“We believe that’s too costly to the city†to carry out, he said.
— Maeve Reston, Phil Willon and David Zahniser at Los Angeles City Hall
George Gilder Has A Strong Opinion On Relations With China
Posted By thestatedtruth.com on February 4, 2010
GEORGE GILDER, Gilder Telecosm Forum …… In my view, the United
States is making what could be a fatal blunder with regard to China.
Liberals who applauded every move toward appeasement of the monstrous
Maoist regime now are relentlessly hostile toward the new capitalist
leaders who have liberated more people than any other regime in history.
Â
No they are not perfect Democrats, but they are far more realistic and
practical capitalists than are the Obama administration leaders who are
relentlessly undermining the U.S. economic base and potential. The Chinese
are not submissive to America’s suicidal global warming and dollar debauch
campaigns and thus follow policies more favorable to the United States
than does the Obama Administration.
Â
No, the Chinese do not conduct national democratic elections. The
communist regime is still brutal toward political resistance. They do not
indulge the fatuous claims of the Dalai Lama and his religious cult,
though they feed Tibet. They are repressive to Christians in some parts of
the country (though they harbor some 30 million of them). But China’s
revitalization of Asian capitalism remains the most important positive
event in the world in the last thirty years, releasing a billion people
from penury and oppression, and it dwarfs in importance the civil
liberties infractions that they commit.
Â
The fact is that the U.S. cannot win the war against the Jihad without the
support of China. The fact is that U.S. conflict with China over Taiwan
would probably result in the destruction of the U.S. economy and
devastating attacks from the Jihad. China is nearly as threatened by the
Jihad as we are. We must bring this country to our side or we are doomed
to decline and defeat in the world.
Â
In order to have a positive relationship with China we must stop revving
up the old coterie of Taiwanese politicians with dreams of resistance to
the mainland. We cannot possibly defend Taiwan. The entrepreneurs of
Taiwan have already acquiesced to the mainland regime. Some three quarters
of Taiwanese investment already now goes to the mainland.
Â
Because of Taiwan, China essentially is the world’s leading chip and
computer producer. Without Taiwan, the U.S. computer and microchip
industries would be drastically weakened and our defenses gravely
impaired. Because of Taiwan and Chinese manufacturing (and the Chinese
monopoly in production of rare earth materials needed for advanced
electronics), the U.S. is dependent on China for our economic and military
health and growth.
Â
The Obama Administration’s adversarial posture against China, supported by
Google and even by many conservatives, is ultimately nothing short of
suicidal for the United States.
.
Copyright 2009 Gilder Publishing LLC
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