We thought the inflationistas would back off now that global deflation has ravaged just about every asset class save bullion and T-Bonds for the last couple of years. Actually, they’ve been pretty quiet lately, even if there are still a few money-supply nuts who believe not only that inflation is, or will be, a concern, but that the deflationist somehow have the big picture wrong. To all of you we say once again, Wake us when Americans can sell their homes for a quadrillion dollars, give or take a few zeros. Meanwhile, with CPI inflation sinking rapidly toward zero, check out this link to an essay by Puru Saxena, who raises some of the weakest anti-deflationist arguments we’ve heard so far. It’s good for laughs, but not much more. A reader sent us the link after we’d promoted a Wall Street Journal report earlier this week that some major-league financiers have finally copped to the reality of deflation. We’re talking about guys whose opinions count: Bill Gross, Jeremy Grantham, and hedge-fund managers David Tepper and Alan Fournier, to name a few of the best-known converts. “Deflation isn’t just a topic of intellectual curiosity, it’s happening,” said Gross, who runs the $239 billion Pimco Total Return Fund.
Lo, no sooner had we published the link than we heard from our old friend Zane B., who continues to push the intuitively appealing argument that inflation is about to take off because of a weakening dollar. (What’s about to take off is marginal tax rates, as far as we can surmise, and surely no one would argue that that is inflationary.) Zane used to work for a foreign auto manufacturer, and he asserts that foreign autos, for one, will need to become pricier in dollars if their makers are to turn a profit. We would argue that the makers’ assembly lines will grind to a halt unless they are able to continue selling at cut-rate prices to an increasingly down-and-out American market. How many Lexuses and Benzes would they be able to unload here if prices were to rise by 15 to 20 percent or more? Keep that question in mind as you ponder Zane’s argument:
Wal-Mart’s Role
“[Earlier this week], the dollar was 132.27 against the Euro, 85.8050 against the yen and 1.5948 against the pound. This is very significant, especially for the yen (another support level gone; the Japanese Postal Service had unofficially pledged to keep the yen at 90+). It is an exponential/logarithmic thing (like the Richter Scale) in that 89 to 90 is much more significant than 225 to 224. When I worked at Subaru in the early 1980s, the yen was 225-230 against the dollar. Anyway, this signals (at least temporarily) that inflation, now slowly accelerating [Oh, really?], will come roaring back soon. The above nations aren’t just major trading partners; their (relatively) low-priced production and wholesale prices are what help keep domestic prices in check. I also point to the now-floating yuan, as Wal-Mart alone accounts for five percent of all Chinese exports. Worse still, oil is slowly rising. This incomplete picture, when viewed in its entirety, seems to point to something major, really major, brewing both in the worldwide foreign exchange markets — possibly a widening of the ‘basket of currencies’ some oil producers sometimes demand as payment rather than Yankee dollars). It could also point to the fact that NOW, right now, is the time to get out of fixed-income investments. As you’ve undoubtedly noticed, utilities (especially) and bonds have now reached what some, perhaps, would call unsustainable levels.”
Zane, if it will help put your troubled mind at ease, we’re not the least bit worried about, for one, $100-a-barrel oil. Not that a speculative blowoff couldn’t push crude to that level or higher – only that the market could not sustain such prices for long, especially with the world economy teetering at the edge of a deflationary abyss. Crude at $100 a barrel would kill the global-recovery hoax faster than anything else we can think of, but it would also kill the demand for oil. Come to think of it, cap-and-trade legislation is designed to achieve the same end – a big increase in the price of energy to dampen demand. Is there anyone who believes that that would be inflationary?
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China’s Shark Loan Ponzi Finance- Former Microsoft CEO in China is Under Investigation for Shark Loan Activities and Faking Commercial Real Estate Contracts.
For those of you who are not familiar with the subject here is a quick summary:
From Special Report- The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance
This is how this Ponzi scheme works:
Local governmental officials that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yanking city, in She Kiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. Every scheme has a ring leader whose job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.
Most of the funds that are collected in this classic ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.
In China’s Shark Loan Ponzi Finance- Understanding China’s Shadow Banking System we also covered the subject of fake real estate contracts:
A larger percentage of China’s real estate sales are in reality fake since they are made with the purpose of obtaining the flow of bank loans before real sales happen. Through this arrangement, the developer and the shark lender make sure that the bank will bear the ultimate risk.
Western investors doubt this criminal activity since they do not understand the true nature of China’s society, or any totalitarian regime for that matter. But China is not a democracy; it is semi communist, semi fascist regime that is running a planned economy.
The reality is that more loan growth can benefit the borrower, the banking executive, and the local government officials. The return of capital and the potential loss of the principal is always a secondary consideration, especially when the loans are issued to the state owned enterprises or well connected “too big to fail” private businesses. Who cares? The banks are state owned banks, and the capital is state capital.
Today’s 21st Century Economic Report, published an amazing story of former Microsoft China CEO, Jun Tang.
He became famous recently due to the exposure of his purchase of a fake PHD diploma from Western Pacific University. He also claimed to have a PHD degree from California Institute of Technology in his Bio and numerous occasions. There is a hot debate on the Chinese web regarding Mr. Tang, who used to be a role model, and is now exposed to be a crook. On the other hand, in the fake goods capital of the world someone line Mr. Tang may as well be a role model.
According to the report, Mr. Tang is under police investigation for an alleged criminal corporation with real estate developers in Suzhou City. The police suspect that they faked a commercial real estate sale contract, which enabled him to receive a 112.8 million Yuan mortgage loan from a bank. Later, the loan has been lent out by the real estate developers and to loan sharks.
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