Muni Bond Crisis Can Only Deepen

44 comments

We often disparage the Wall Street Journal for being too spineless to tell it like it is when reporting on the state of the economy, but with last Friday’s lead story, New Hit to Strapped States, they pulled no punches. You can almost pick a paragraph at random and get a sense of how serious the cities’ credit problems are. This paragraph, for instance “Municipalities borrowed $122 billion of variable rate demand debt in 2008, roughly twice the amount of these types of loans borrowed the year before…”  How did they get in so deep?  The answer lies in the way they navigated the shoals of 2008. While most muni-bond debt is long-term, scads of jerry-rigged credit deals were struck that year to get municipal borrowers past the crunch.  For the most part, this involved the use of so-called letters of credit – guarantees by large banks to backstop municipal borrowers when they were having trouble raising cash via bond auctions. Under the circumstances, noted the Journal, “Many municipalities scrambled to convert the debt into other instruments, including variable-rate demand obligations, which are long-term bonds with interest rates that reset periodically. For a fee, big banks guaranteed many of these deals.”

Now, the letters of credit are expiring, and although borrowers must have believed in 2008 that it would be easy to renew them a few years hence, this has not proven to be the case. In fact, if banks are willing to issue letters of credit at all, it is at prohibitively steep premiums.  For municipal borrowers, the only alternative is to pay increasingly punitive auction rates at a time when they are struggling just to pay their bills.  On Friday, those rates hit 5.01 percent for 30-year, Triple-A general obligation bonds, reflecting a ratcheting up of perceptions of risk. A notable casualty was a New Jersey agency that had to reduce the size of a bond issue by about 40%, and to pay a higher rate, because of soft demand.

Fed Has No Control

The Journal story stopped short of saying the cities are effed, but the implication is unavoidable. After all, this is not a market that the Fed can control, and it therefore seems entirely predictable that market forces will continue to raise the risk premium on municipal borrowing, even as cities struggle to balance budgets with a combination of job and spending cuts and tax hikes. You don’t have to be an economist to see that that those supposed remedies won’t work – that they will only energize a deflationary spiral that eventually will push hundreds of cities into bankruptcy before the furies are spent.

Meanwhile, this is one potential bailout that the Fed cannot propagate in the usual make-it-up-as-we-go-along way. That is notwithstanding the fact that the very phrase “Fed bailout of cities and states” crops up almost casually in news stories about mounting  budget crises at all levels of government beneath the Federal.  But we should be perfectly clear about what it implies; for even the mere hint that the Federal Government is considering backstopping cities and states could trigger a run on the dollar so violent as to topple the entire global house of cards.

In the meantime, not only is the credit crisis for cities and states not about to go away, it can only intensify as the year wears on.  For that reason, we have trouble believing that 2011 will pass without a crisis of such severity that it will make us fondly recall 2008.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • Rich January 20, 2011, 4:38 pm

    Gold down 25 bucks may be signaling a trend change in most markets.
    Time will always tell…

  • mario cavolo January 19, 2011, 11:20 pm

    Well I’ll be a fool. Exactly the same as yesterday after going slowly lower all day long, immediately after the close, the Dow shot up 28 points from 760 to 788 and the S&P popped up 2 points too; like clockwork…geez…

  • C.C. January 19, 2011, 7:53 pm

    The Barter exchange is an excellent, common sense idea. Unfortunately, the Feds would be all over that in a minute.

    Anything that smacks of Individual Liberty/Choice/Self-reliance, or independence from the ‘State’ would be quashed so fast you wouldn’t know what hit.

    In addition, the government/media complex would seize on this as an ‘anti-social’, ‘extremist’, ‘right-wing’, ‘Christian’ fill-in-the-blanks affair, worthy of Armed government Thugs doing a 6 AM raid with weapons that civilians have ‘no need or use for’…

    • Benjamin January 20, 2011, 2:22 pm

      Seems this topic is going to run another day, so I thought this particular sub-topic on barter would be worth posting a reply to…

      C.C.: “The Barter exchange is an excellent, common sense idea. Unfortunately, the Feds would be all over that in a minute.”

      In my view, I think we pretty much have barter already. Whatsmore, it never went away, as another word for barter is, simply, trade. And Rick is quite correct that barter is not illegal. Report it, but they can’t disallow it, for reasons which will be apparent in a moment.

      One has to keep in mind what the government and central bank want to monopolize. They want to retain a total monopoly on the power to steal, via creation of money/credit. Barter deals in tangibles, both goods and services. It doesn’t create money/credit in a way that amounts to stealing. So go ahead and barter. If people didn’t trade, there would be nothing to steal from them.

      So again, I am skeptical that barter alone would save or remove anyone from the corruptions, let alone make them rich so long as government is not restrained. One has to pay any number of taxes (of which there are many), both directly and indirectly from dealing with others who likewise must pay them. And each cashing in on ones store of wealth for currency in order to do so would be a drain on that wealth, and ever after so long as government could get away with this.

      On a side-note, we see why gold and silver would have naturally occurring monetary status in a free society. Being the best and perhaps only means to restrain government theft and intervention, people would naturally want to have at least some in order to exercise their power over government as well protect themselves from the times when government is made richer via the willful action of the people.

      Thus, we see the point of banking. As hard money became scarcer, kept in the Treasury vaults (again by the consent of the governed), borrowing would increase, the debt of which would be retired once the coin was released back to the lenders/citizens. In turn, the debts would disappear, retired by hard coin.

      But this says something about banks, the most important thing being that they really shouldn’t have a need to hold money of any sort. Rather, they would only need to keep contracts, deeds to collateral, and the records in their vaults. No incentive would even exist to rob them, nor would the bank be able to steal/manipulate money from anyone. All they would do is act a service by which lenders and borrowers find each other.

      So banking, in a society where government is restrained according to the promise (and enforcement) to do so, is just another means of barter, only trading/balancing lean times with more fruitful times!

  • DG January 19, 2011, 6:34 pm

    Rick – barter – sounds like a good app for iphone. Except the IRS will track it….no?

    If your blood is not warm enough, maybe this can bring it to a boil: http://www.bloomberg.com/news/2011-01-06/stanford-s-president-hennessy-adds-to-technology-fortune-with-atheros-deal.html

    Do the math on this. Its not the stock that kills me…He makes more money sitting on boards of corporations than working at the university even though he is paid as a full-time President. I think my business partners would have had issue with this arrangement. You cannot serve two masters. He made over $900,000 on boards and a little over $700,000 as President. Huh? You could just work for a dollar like other CEO’s…..
    Is it any wonder that the entire public space feels they deserve “more”? Just look at the leadership and what they give themselves…”where’s mine?” the underlings fairly ask. My sister is a professor and spends at least 2 months a year globe trotting to various conferences. All paid by the education ecosystem. She thinks its great!

    And what great patsies to have on your board! “Is my $20 million stock option package ok with you?”
    “Do you think it is enough? I mean, the trough is pretty deep…how about $200million?”

    It is no wonder education is such a bad ROI in the US. Do your own math…

    Now get back to work, pay your taxes, and support the corruption! Oh, and make sure you shove some more into that 529 account for your kids…..so the fatcat educators can keep up with a lifestyle they have become accustomed.

    I realize Stanford is private, but they are not unique in illuminating the corruption.

    • Rick Ackerman January 20, 2011, 2:47 am

      The feds have no problem with barter exchanges as long as all transactions are recorded properly for tax purposes.

  • Other Paul January 19, 2011, 6:09 pm

    If the banks’ stock prices haven’t suffered from the prospects that municipalities will “stiff” them on the repayment of floating-rate notes, why would the Federal Government’s “stock” (dollar value) suffer from loaning money to municipalities and states?

    The Federal Government doesn’t have to guarantee every debt of the state and local governments.

    The concept that Federal Gov’t has provided “temporary help” to auto companies, banks, etc., has been the modus operandi since the Recession/Depression hit. Hasn’t it worked?

    The Federal Gov’t is operating with trillion dollar deficits lately. What’s another half trillion going to do?

    Although what I write, above, is somewhat tongue-in-cheek, I think that most people have no concept of impact of changes in the money supply. Most people’s money in developed countries is in electronic form. They don’t stand in a payroll line on Friday afternoons and get a payroll stub and cash in hand. They don’t have a figurative or literal sense for money, especially non-fiat.

    As I’ve written before, when the bank runs start and the grocery shelves are empty, people will start seriously thinking about the problems with fiat.

  • John Jay January 19, 2011, 5:44 pm

    mikeck,
    I have often argued that China is better off with tangible “Ghost Cities” than they are with any more nebulous US Debt that pays low interest rates in a depreciating currency.
    They had to do something with all the money flooding in. They seem to have spread it around in foreign debt, commodities, factories, buildings, and infrastructure.
    If push comes to shove, they can at least house some disgruntled citizens.
    Treasuries and FRN’s will make very nice wallpaper sooner or later.

    • mikeck January 19, 2011, 6:46 pm

      I do not disagree, but unless they do something to get someone in there soon, I suspect they may get to rebuild most of them. Maybe they should have paid the workers more so they could build what they wanted and could afford. Ya gotta love central planning.

  • Rich January 19, 2011, 5:40 pm

    Look out below…

  • DG January 19, 2011, 5:36 pm

    If the Fed is anxious and willing to bail out foreign banks AND foreign sovereign debt, I have a real hard time with the logic of telling American municipalities to “shove it.” Weird time to be growing a fiscal conscience.
    Unemployed city workers pay zero federal tax.
    This whole market has been about guessing on how the Fed will act. I guess they will continue to open the spigot until the cost of opening the spigot is too high. We are about a thousand basis points from that.
    Oh, and they will deny that they are bailing out the Muni’s. It will be some mumbo jumbo that it is an investment/ equity swap or some other incoherent doublespeak. But it is just money printing.
    As Jim Rogers said, “buy cotton, its what they use to print money.”

    • Rich January 20, 2011, 4:35 pm

      “Unemployed city workers pay zero federal tax.”

      They also produce less than the private sector, and consume productive assets, the basic problem with neoKeynesian tinkering with the economy that amounts to theft and political destruction with crowding out, red tape and taxes…

  • mikeck January 19, 2011, 5:22 pm

    Mario,

    It seems that China has enough malinvestment problems at home that they do not need to get involved with ours. Do you have any incite into the ghost cities? Twenty are shown here: http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12#heres-chinas-most-famous-ghost-city-ordos-1 If you have addressed this before, could you please direct me with a link.

    Thanks,
    Mike

    • mario cavolo January 19, 2011, 7:35 pm

      Hi Mike, indeed with 800 million people still out in the farm land, the Chinese gov’t has its hands full to continue somehow developing their society in a successfully balanced way.

      On the subject of the ghost towns, well, honestly its such a small thing here relative to everything else. I would not encourage you to give it much weight; say as compared to the fact that every single freakin’ McDonalds, KFC and Pizza Hut, etc. we go to seems to have no tables available every hour of the day. I am not exaggerating and so ask what does that tell us about the state of economics in China more than a handful of busted municipal 4th tier projects?

      Cheers, Mario

    • mikeck January 19, 2011, 10:42 pm

      Thanks Mario,

      Hmm, tells me that soon some of the Chinese will be as unhealthy as many Americans. Seriously, do you know what the Big Mac Index is in your area, i.e. does it take longer to earn a Big Mac than to eat one?

    • Rich January 20, 2011, 4:32 pm

      Most recent BMI shows yuan about -40% undervalued…
      http://www.economist.com/node/17257797?story_id=17257797

  • roger erickson January 19, 2011, 3:51 pm

    ps: This also officially means that the argument over gold vs “modern currency” is also moot. Two thousand years on, two Aristotelian concepts of money have been completely & permanently dissociated.

    Yes, there is value in a commodity such as gold.

    No, there is no link between gold and the efficiency of denominating complex transaction chains. In the 21st Century, the numeraire function of money is now entirely a function of IT. Act accordingly.

  • roger erickson January 19, 2011, 3:47 pm

    Would proliferation of local currencies undercut the pricing power of banksters? & temporarily disrupt the value of buying politicians?

    [I know, I know, it can’t work, will never work, and wouldn’t solve anything … yada, yada; My question is “IS IT WORTH TRYING, AS AN INTERIM TACTIC & STRATEGY?”]

    If every insurmountable task is eventually solved through indirection, we need to start exploring indirect methods, so we can more quickly select unpredictable permutations that work.

    We need Gen. Patton first, THEN academics. Only the combination allows progress. The key is to START disrupting the strategies of banking lobbyists who buy policy, and then accelerate public lobbying as a citizens Public Purpose campaign.

    We overpay bankers ONLY for the supposed complexity of tracking what’s denominated in complex transaction chains. The cost of such tracking has sunk to virtually zero, and can be done for free as an app associated with any email or smart-phone account. We could replace the entire banking system and Federal Reserve with PayPal or GoogleMoney! Tomorrow! All modern currency does is track ongoing transactions. Nothing more and nothing less. In the 21st Century, the cost of computing the information carried in those numbers has fallen to essentially zero. Why are we overpaying bankers?

    Eff the banksters. We do NOT need them to denominate all the transactions we want to make. End of story.

    We’re back to driving the money changers out of the public temple?

    ps: This officially means that you can NEVER go wrong shorting any and all banking stocks. It’s only a matter of time. Transaction denomination has been disassociated from any and all physical media. Currency is well on it’s way back to pure information. In fact, it’s already arrived there.

    • Rick Ackerman January 19, 2011, 5:20 pm

      There is a private-enterprise solution, Roger, but I’ve been unable to coax my wife — or anyone else, for that matter — to try it: setting up a local barter exchange. This is an entrepreneurial idea that will make whoever executes it richer than Croesus. It can’t miss.

    • mario cavolo January 19, 2011, 7:31 pm

      🙂 I love this string Roger and Rick; there’s another enterprise solution here in Asia; trillions of business is still done in the gray market economy the old-fashioned way; cash! To my recollection, back in the states, there are a couple of well-established barter exchange groups…? What could be better than exchanging services for restaurant vouchers, hotel stays, and many other services…bypass the evil “system” in many ways.

    • Benjamin January 19, 2011, 8:27 pm

      @Rick… Wait, I think I detect some ribbing going on here.

      You’re coaxing your wife to do something that would make her richer than Croesus?

      Let me repeat that… You’re coaxing someone else to get richer than a legend, using an idea that you have but for some ludicrous reason haven’t gotten ’round to doing?

      &&&&&&

      Keeping track of a zillion transactions is not my thing, Benjamin. But if you’re skeptical about the idea, then you haven’t thought it through. RA

    • mikeck January 19, 2011, 11:21 pm

      Thanks for the forum Rick,

      I suspect that long before anyone found themselves as rich as Croesus they would find themselves in the same boat as the Liberty Dollar 4. The FBI would drum up some bogus charges and the injustice department would do what they are best at…driving the train down the tracks.

      There are some barter groups around that must not have gotten big enough yet to be of interest to the parasites. I’ve been using some of the items from AOCS recently now that most of my Liberty Dollars are more valuable as collectibles. http://www.opencurrency.com

    • Benjamin January 20, 2011, 7:11 am

      Rick: No, I’m not exactly skeptical. In fact, I thought it was you who was being skeptical, at first, which is why I asked.

      Anyway, I had come up with a similar idea not long ago, but then concluded that we have it already. It’s just that trade is infected with a large number of very cancerous tumors. It’s like how some view capitalism today, saying it’s “unsustainable”, when it is in fact the corruption can’t work (as one would expect, but for some reason not everyone can see that).

      And that’s where I’m skeptical. In another post, Roger said gold is not necessary in the 21st century. He’s wrong. Where governments are allowed to over-step their bounds, efficiency errodes, eventually ending in disaster.

    • Rich January 20, 2011, 4:27 pm

      Some might be forgiven for thinking Craig’s List, EBay and PayPal already set up a barter clearinghouse prequel. The IRS already considers barter a taxable event and either requires taxpayer IDs for checks to be sent from PayPal or Credit Cards provide that info…

  • John Jay January 19, 2011, 3:30 pm

    I think Bernanke has already said the Fed will not bailout the States or municipalities.
    His word, of course, is not worth much.
    But even if the Fed bails it all out, it just shifts it all to the National Debt.
    Our economy is so full of people working for all the layers of government making huge salaries and pensions whose only product is self perpetuation and taxes.
    So now we have a bankrupt police state that sees its own citizens as “the enemy”, 1st Amendment dissent is “terrorism”.
    The DC gang and the military, after decades of sending our factories and technology to China, without a brain in their heads, suddenly are pointing to the monster they have created as if Godzilla just waded ashore.
    Who could have known!
    No one other than the millions who were saying “this is nuts” as the dot com, housing, industry off-shoring, and money printing schemes progressed.
    I am afraid that one morning I will wake up to find the USA has “Gone Tunisian”.

    • Benjamin January 19, 2011, 3:48 pm

      http://www.numberwatch.co.uk/zealots.htm

      March of the zealots: Unstoppable, unwavering stupidity and arrogance. And all one needs to do is look at all the idiots in power to know that BB probably won’t be bailing out anyone, any more than China will.

      First rule of a Ponzi scam: Never mind the damages, as you can’t really do anything about them anyway. And every one of the suckers gets what they deserve for being suckers, besides. So just get outta Dodge sooner rather than later!

  • roger erickson January 19, 2011, 3:04 pm

    The cost of liquidity? When we have our own, freakin’ fiat currency? The clear conclusion is Control Fraud to increase cartel control over our currency supply, and to increase paper income disparity. We’re seeing the same thing Andrew Jackson saw 170 years ago, a banking cartel keeping people totally confused about the utility of currency.

    Manipulation of currency supplies turns into opportunities to buy up real assets at deflated prices … but ONLY if real asset holders acquiesce. see
    http://www.dollarsandsense.org/archives/2011/0111black.html

    One clear alternative is to create & use alternative currencies wherever possible. http://www.ithacahours.org/ comes to mind, as do University implementations like “Buckaroos”
    http://cas.umkc.edu/econ/economics/faculty/wray/papers/ELR.IRRA.01.htm

    In all seriousness:

    Why not suggest to every Mayor, every County Commissioner, and all 50 Governors that they organize & utilize a local currency … at least until the bankster capture of Congress is broken? There are transactions waiting to be denominated in every neighborhood. Who says we lack the means to denominate complex transaction chains? If on any given day, it takes 10-20 transaction steps from selling your used lawnmower to buying a box of oatmeal to helping to provide your local police with uniforms, … so what? Permutations of transaction chains only require bookkeeping. If your nat’l gov is too stupid to grasp available solutions (fire Geithner), just ask any local high school math teacher to provide a local solution. It ain’t rocket science.

    Declaring local taxes to be payable in local currency is the guaranteed way to make that local currency valid. Every airline has a local currency in the form of their “airline hours” – just have every bond-selling public entity do the same.

    for multiple examples:
    “Complementary Currency Resource Center”
    http://www.complementarycurrency.org/

    Tell JP Morgan to take a flying leap, and have communities float their own “coordination bonds” denominated in community effort.

    Eff the banksters. We do NOT need them to denominate the transactions we want to make. End of story.

    • rmsimc January 19, 2011, 9:23 pm

      @”dollars and sense” article…

      What a Pollyanna piece of work. Come on man, peel back another couple layers! These academics really are clueless to actual root cause.

    • Sopa M January 20, 2011, 6:00 am

      roger, which of those alternate currencies have you used? Would you care to share your thoughts about how well they work? How difficult is the spending?

  • Goodsport January 19, 2011, 2:35 pm

    We must not forget that the Feds have been understating real inflation for decades. Shadow Stats suggests that costs have been understated by at least 50% since the Clinton years alone.

    A differential of 4% per year, compounded, eventually adds up. The municipalities can’t print money and are even more dependent on the Feds for handouts, earmarks, etc.

    In return for financial aid, those in power in Washington buy political support back home. So the culprits remain in power, they keep spending and the cycle continues to its ultimate destructive end.

    Thanks Rick for doing your part to educate people through your column.

  • Benjamin January 19, 2011, 12:44 pm

    A bit O/T, but I think it is telling as to what is going on…

    Anyone who’s been to the Chicago area knows that NW Indiana loves its casinos. Well, seems they want to build more of the damn things or expand the existing ones (don’t recall which).

    However, one city alderman has built a resistence to this, and has said he will keep resisting them until his demands are met, which is to ban smoking in them (and thus complete the spreading infection of tyranny in NW Indiana).

    Now, tobacco tax revenues, historically and generously provided in great part by Illinois and Chicago residents, are falling for a number of reasons. Among them are that the tobacco tax increases over the years here in IN pays for crap like that. So the very existence of the casinos brought about their failing support. Add “recession” and rising gas prices (in Chicago in particular), and failure is certain because it’s too expensive anymore to come out here to save and/or risk a few bucks.

    So at first glance, it appeared that some were protecting from any more malinvestment into what is already failing, which would have in turn at least protected the thinning income sources from quickly getting thinner. Given how things are, and not being able to afford losing what little is coming in, how could they seriously want a smoking ban in casinos?

    Actually, they would welcome a zillion bad ideas and bankruptcies if they saw some “greater good” coming from it. And the reason for any of them wanting new/improved casinos at all is because the existing ones are failures. But even if they don’t get to go all hog-wild, for their various, stupid reasons…

    Things are set to fail anyway, being between lunacy and reality as they are. And even if mine isn’t on the certain-to-fail list, it will be soon enough!

  • mario cavolo January 19, 2011, 11:44 am

    No Rick, its going to be ok, its China to the rescue. From my lips to God’s ears, eh?

    Seriously, it may be the case. China investment in America is skyrocketing and they have trillions both publicly and privately to do it with.

    What I’m saying is this: China thinks the U.S. economic bottom is in and they’re stepping in like John Templeton did at the bottom of the Depression.

    That means that potential financial disasters will be avoided in unexpected ways and that is a very good thing considering the economic edge upon which the financial system is teetering on.

    Continuing as not a good thing is that such shifts, the influx of Chinese money and other such trends, are truly reshaping the landscape of U.S. society, culture and business. I have a funny feeling we are going to continue to see alot of damage and alot of the rich just continue together getting richer and richer.

    A point that is not often mentioned in the media and other “thought” spaces is that America and China are both very similar now in that they are both very much creating (ed) a two class society of haves & have nots with the rich, richer than ever across both of these societies. While such socioeconomic trend is occurring in each country from a completely different set of societal, cultural and and government systems, the trend is the same, led by these two world behemoths.

    Let me remind you that China has almost $3 trillion in known government reserves. Let me remind you that the private sector economy, including the gray economy probably has an additional $3 trillion too. In China, such funds are funneled as desired via the rich, via their real estate companies, SOE’s, publicly traded companies, the banks, across to HK and out globally, etc. They can move their trillions as they like and muni-rescues and real estate purchases at 60 cents on the dollar just may be a big part of that, and just enough to save the U.S. from these kinds of disasters…food for thought; if the Chinese have “decided” that the U.S. bottom is in, then that will greatly impact the unfolding of 2011/2012, an unpredictable mix of good and scary developments, we’ll see.

    Cheers all, Mario

    • Benjamin January 19, 2011, 12:56 pm

      Mario,

      I’ve got some bad news as to what the “haves” actually have. Read my post below, for an indication. They have powers, granted to them by their own personal need to order people around, no matter what the price tag (and, ultimately, no matter the body count). As a wise Metallica once sung…

      Then it all crashes down
      And you break your crown
      And you point your finger
      But there’s no one around

      Just want one thing
      Just to play the king
      But the castle’s crumbling
      And you’re left with just name

      Where’s your crown King Nothing?

      Now, China only has so much, and they’ve got their own 300 to 500 million more to raise up, not to mention another billion that could do with much improvement in their living standards still. And let’s not forget that labor is cheaper in other parts of the impoverished world, where they also have resources galore. India also wants in on this, too, because with over a billion people to keep happy, their rulers can’t afford not to.

      And even if they do somehow come to our rescue, it won’t be pretty, as empowering the obsessively-compulsively insane is bad, for obvious reasons. But I think (know) that China would rather tend to its own interests. To stop and help us out means they lose the big race that is soon enough going to begin.

    • Martin C January 19, 2011, 1:58 pm

      Mario, I read a piece the other day which suggested troubles ahead for the Chinese economy based on demographics following the one child policy leading to a shift in balance from younger to older populace. What’s your view?

      They indicated Germany were in an even worse position

    • Rick Ackerman January 19, 2011, 5:05 pm

      I think China is too smart to throw good money after bad, Mario, and that, moreover, they have written off the $1+ trillion already at risk. Nice to have that kind of dough. Even if they were planning on the kind of infusion you’re talking about, what on earth would they be investing in? Practically speaking, they would simply be redeeming America’s unfunded liabilities for Social Security, pensions, Medicare and such. Some investment!

    • mario cavolo January 19, 2011, 7:21 pm

      It is a great point Rick, if I was the guy with the cash I would only be looking for bargains and I’d be negotiating real hard. A key area that remains an opportunity is in exports (the NEI program) to China. This is an area where the U.S. gov has also dropped the ball big time. One of the main reasons the German economy is doing so well is their exports to China; that’s no accident. It was and continues to be a well-orchestrated export campaign aggressively pursued by the Germans. So then, should the Chinese go into the U.S. with funds that create export opportunities back to China…?

      Cheers, Mario

    • mario cavolo January 19, 2011, 7:27 pm

      Hi Martin,

      While the one child policy was instituted in China for reasonable cause, it remains one of those social policies with impacts everyone is still wondering about. Same as the U.S., there will be a proportionate increase in elderly in the population; that’s burdensome in general to any society. On top of that, the one child policy has led to the “little prince” phenomenon here, where one child kids, tens of millions of them have quite the unique attitude of being a single child “spoilt rotten” so to speak. Its a very interesting phenomenon to deal with so many people, who are “Chinese” who are all only children. In this culture, they extended family to include cousins as a social compensation, but its still not the same thing.

      Cheers, Mario

    • Cam Fitzgerald January 19, 2011, 10:49 pm

      .
      Mario, I am always impressed with your level of optimism. On this point though I have to disagree with you.

      Even China does not have sufficient reserves to bail out a standard of living that is falling across all Western nations. The trillions you mention are not adequate to address the severity of what is taking place. Even if they were..,all that would be achieved is that the pain of the ongoing and impending corrections would only be forestalled for a brief time after which the current economic trajectory would continue on too it’s natural conclusion. Bubbles cannot be reflated and this one is no exception.

      Last, we need to stop thinking that the Chinese are fools and they would willingly throw good money after bad in an effort to resurrect that which cannot be brought back to full capacity by cash salvation alone. The problems are much more deeply rooted and as just one example, it is clear that the whole country is now swimming in red tape, paper filing obligations and conflicting regulatory procedures that have all but frozen up the system from end to end.

      More can be achieved at the policy and bureaucratic levels than by dollar infusions alone at this stage of the game. In any event, a natural bottom will be found and the market is dictating that to us every single day despite all the interventions of the Government and the Fed.

      There is no magic pill available Mario, not even China’s wealth can turn back the clock on this correction now. We know it. They know it too.

    • Cam Fitzgerald January 20, 2011, 12:24 am

      Mario,

      I am posting up a three part radio series from CBC Radio (Anna Maria Tremante show)that discusses China’s demographic changes, the one-child policy and ramifications for the future of the rest of the world particularly as implied by rising wages in Asian and a population there that is rapidly aging. It is fascinating listening and has a bearing on todays discussion. (hope this works..)

      http://www.cbc.ca/video/news/audioplayer.html?clipid=1752003737

      http://www.cbc.ca/video/news/audioplayer.html?clipid=1752003736

      http://www.cbc.ca/video/news/audioplayer.html?clipid=1752003735

    • Fred January 20, 2011, 3:35 am

      WTF are you smoking dude? The bottom is in? Why are they acting like the own us? Owners liquidate the captives. If im them im working and praying to my feng shui that I can get my dollars back to yuan or gold or commodities before the US house of cards implodes. The bottom is in, is utterly and completely irrational. Maybe you should try to get a job at the Fed. You’ll fit right in with the delusions.

    • ricecake January 20, 2011, 6:33 am

      I think Mario is right.

      As for Rick’s mentioning the Chinese are so stupid to throw good money after bad….

      Well, what good money are those dollars when the they continue to devalue?

      Besides China’s 3 trillion, still there are other trillion(s) in the holding of the Taiwanese, Hongkongnese, Japanese, and other rich Southeast Asians. Now they all want to put their dollar to use before the dollar are shrinking some more. Commodities trade can only go so far beside the crazy inflation. The hard assets are great but there are soft assets too like services you need etc. You can’t put all your cash in metals and foods because metals have limited use while you can grow foods every seasons every year. You can eat only so much. So the best way to put those dollar to use is still invest in the U.S companies and grow the business for the future. Then whey you invest in the U.S business, you also invest in the U.S society too. I often hear Chinese speak of their desire to invest into the U.S stock market and housing market. They would love to travel in the U.S.

      I see lots of problem ahead but sorry, no more apocalyptic doomdom.

      So no more Apocalyptic doomdom anymore.

    • mario cavolo January 20, 2011, 11:24 am

      Thanks Cam for great comments and links!

      I can confess to a degree of sarcastic wit on the idea that China can help make all well again. I was thinking more specifically about the simple idea that the one with the cash goes in and snaps up distressed assets and loans, and that by investing in the U.S. they are helping to preserve their own risk; the counterpoints are well understood!…and I think they boil to down to the “its simply too late” argument. To whatever degree China invests in America’s distress including the enabling of increased U.S. exports, they will be helping.

      For the record, I remain totally against this USD implosion idea, way over the top. The world will suffer from serious gradual, miserable inflation to wring out the debts and relative to other currencies, the dollar will go down to a new range of 60-70’s from the current 70-80’s, turning hundreds of millions of people’s lives miserably upside down while the rest have the resources to withstand downturns. This is why there is such a difference in reaction to decline in China vs. America. Chinese, I remind you, have been the world’s top savers at over 30%, even with their low wages. While that % is definitely going down against rising inflation, they have socked away plenty of cash for the coming rainy day. Chinese and others from 3rd world/emerging markets know how to suffer daily, how to live with less than the basics on a daily basis and not complain. Even right now here in Shanghai, the local people living in the apts now worth USD $300,000; they don’t turn on the heat in the winter or the AC in the summer. They could but they don’t. They still negotiate to save a nickel on a thirty cent bunch of bananas….different mentality to withstand misery; and plenty of that it seems is coming to neighborhoods around the world.

      Let me finally say how it amazes me how suddenly everyone screams once again “oh here comes the crash, here comes the crash” just because the indexes went down for a day. Again, way over the top. As I said in “Say Goodbye To Yields”, if interest rates clearly and steadily do start ratcheting up, that’s the death knoll. Until then, party on with the POMO supported rally which could, historically speaking easily continue for a couple more years, even though we all know it shouldn’t. We’ll all stay long, riding up the wall of doubt and worry and disbelief. The market will not crash, the USD will not crash, forget that and think $5 gas and $5 eggs, etc. Quiet miserable inflation folks, that’s the ticket to the ballgame, the invisible miserable crash. Lineup. In 5 years or so a currency will buy half of what it can buy now. Rick’s right there will be a helluva deflation as middle-class citizens go more and more broke, give up the things they really need, their 2nd car, even their first car, etc.

      Cheers, Mario

    • Rich January 20, 2011, 10:34 pm
    • Cam Fitzgerald January 21, 2011, 6:19 am

      You have some really good points Mario.

      I understand exactly what you are talking about when you discuss the ability of those in China to absorb shocks from abroad and adjust to the circumstances.

      There are hard lessons from the past that are still very fresh in the minds of many in China to this very day. There is, in other words, a living memory of past hurt and deprivations and this message is still being passed on to the current generation.

      I certainly don’t disagree with all of your ideas after having lived in Developing and Third World nations myself and seeing first-hand how people there respond to hardships that would be unthinkable in North America today.

      Cheers,…. Cam
      ———————————————————–

      To Rich….Oh Lord, I just about split a side watching that video you posted up. Then I worried. Sometimes these animated comedies are just a little too close to the bone.