XGOP4Hillary

(http://research.stlouisfed.org/fred2/series/TWEX

If one read realclearmarkets.com one is bombarded almost daily with blather about how every possible economic ill is from the collapse of the dollar. Read the chart and read the source. Dollar has quite a ways to go merely to get back to 1995.

The problem of course is that as usual East Asia is not taking the hit so Canada and Europe are taking the entire load which in turn throws the balances between the Euro and dollar as international trade and investment vehicles off. However let us take the most likely reaction to this, which is that more of the petro block follows Iran and Russia to pricing in Euros. This in turn runs up the exchange value of the Euro relative to the dollar. Europe is already slowing up from a relatively good 2007 [one of the few years in modern memory they beat the US. The Club Med countries [Spain and Italy especially] are holding the Euro zone back. Spain and UK [which is not Euro currency but is EU] are both facing property bubble implosions worse than that of the US. Absent some major change the Euro could rise to $2 if all oil trade is switched to Euros which in turn could put the continent as a whole [and all the economies except a few little giants such as Denmark and Eire]into a fairly severe recession.

The core issue is that the ability of the planet to all get rich by running a trade surplus with the US has about run its course. World is choking on unwanted dollars but no one wants to give up exports. World needs an alternative economic model to the Washington Consensus and there is none in sight. Should be an interesting year. Government bonds look better all the time. LOL.

(http://www.ft.com/cms/s/0/4d19518c-df0d-11dc-91d4-0000779fd2ac.html)

The above is FT's idea of the ultimate credit nightmare. $1 trillion in direct losses and $6 trillion in loss of household wealth. Two years of recession. Compared to 1996-2008 it is 'the end of the world as we know it'. The Washington Consensus would be overthrown and we would return to regulatory liberalism [social democracy in a mild form which is where we were trending in the 70's before Carter blew up the economy]. This is so not the worst case I do not know whether to laugh or cry.

Fact is we have not a clue as to how bad worst case is. We really don't know the total dollar value of the pyramid schemes that financial engineering has created. We don't know what a run on the dollar in the manner that there were runs on the lire or pound or that would look like. We haven't a clue as to what the legal ramifications of major financial institutions defaulting on the daisy chain of engineered exotics out there. We simply don't have the architecture of what a 29-33 level seize up of the credit markets would look like or even where the trip points are.

So what do we know? We know that even predicted crisis situations [Thailand, Argentina, subprime mortgages] actually go bad faster than anyone allows for. We know that the ripples spread faster than anyone allows for. We know that no one is charting the interconnections and stress points in the system. We know the system is mutating faster than we can track it. We are fated to live in interesting times. That cannot be helped. The technological, demographic and strategic changes to the old Order [the world of 1945-89] are built into the system at this point. We know that the so-called American Hegemony, the 90's End of History, was a brief interlude between the end of an old world [the three round struggle over Europe that began in 1914] is over and that the new world will see the rise of Asia. It is not built into the system that we run our economy our polity to maximize the gains for a small class of financial buccaneers and leave the risks to an apathetic electorate that finds the details too boring until it slams into them with hurricane force.

We saw this movie happen 911. There were a small band of people saying there was a worldwide systemic problem. But it was messy and icky and had few good options. Everything had major downsides, major immediate costs and no promise of easy victory without pain or bother. So we rationalized it all. It was happening over there. It was just about Israel/Palestine. It was age old conflicts on the other side of the world. We laughed off the Kahane assassination as NYC tribal politics. We laughed off the first WTC and the conspiracy trials that followed as Keystone Kops by ethnics in NYC which really isn't America. And after three decades of assassinations, embassy bombings etc. the war came home. And most Americans sat in shock and said they never saw it coming. Uh huh.

We are dancing on the edge of a financial volcano. The volcano rumbles every so often. More rarely there is ash and a bit of lava flow. But the whole thing is complex and boring. Better to watch Dancing With the Stars. Now it may never blow. I have been called Cassandra before. My batting average is much less than 1000%. However the volcano is rumbling again. We have been warned.

(http://www.ft.com/cms/s/0/66db756a-de5d-11dc-9de3-0000779fd2ac.html)

So the new Fed facility has been used for $50 billion in credits against assets that weren't good enough for the discount window. The US isn't at Northern Rock (http://www.northernrock.co.uk/) level yet but we are tip toeing down that road. The good news is that the Fed has enough basic market sense to keep liquidity from imploding [which is what killed us 29-33]. The bad news is that there is no bottom in sight. No one knows how bad the pyramid schemes were, how many of these so-called securities have any real assets behind them etc. We are in uncharted territory here and neither party is proposing a serious regulatory regime to force adaquate audits or disclosure. We may well skate through this time but we are dancing on the lip of a rumbling volcano. To avoid relatively minor short term pain we are yet again papering over and hoping the entire system doesn't implode so fast that no one can cope. Remind me agains whereby a system that says heads Wall Street wins and tails Main Street loses is such a good idea. Yet none of the so-called populists running this year is dealing with the nightmare beyond ritual condemnations. Then again it has taken 30 years to get one party finally willing to pretend to say that free trade with Asia is a bad notion so maybe by the time my quasi-niece Sarah has her children we will be ready to deal with financial engineering. Let us all pray it doesn't kill us all off first. GAH!!!!

(http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/02/16/the_perils_of_a_weak_dollar/)

If you ever wonder why even educated Americans go into MEGO when asked to discuss economics and exchange rates read this article. It could more aptly be entitled a herd of cliches and half-truths seeking a clue.

This is a supposedly intelligent article that a good web site [realclear markets.com] directed me to. And it is gibberish.

Let us try reality: the so-called booms of the late 90's and this decade are built on the mercantilist logic that running a trade surplus with the US equals prosperity. In the short run it does. We are living in the medium run of that short run. The world is awash in dollars from those surpluses. No nation really wants more dollar reserves. However no nation wants fewer exports as they have no way to replace the US market. So while everyone agrees that a US trade imbalance of $3 of exports to $2 of imports is not sustainable no nation or block wants to take the hit.

The commodity exporters [mainly oil but the commodity block in general] are the first to bail out of dollars. This is not a full dump but for reasons of political risk [when the US is pissed at a nation we freeze dollar balances where ever we can] it is simply safer to hold Euros [or quasi-Euros such as Sterling or Swissies]. As they dump their dollars for Euros they run up the price of the Euro to the dollar. The East Asians use various cheats to keep this from hitting their exchange rates much. They have managed to do this since the 70's [the exceptions being Japan at the Plaza and Louvre - as Japan has yet to recover from that debacle it is scarcely shocking that no one in Asia is particularly keen on a replay].

So absent someone getting off the amusement park ride through the fun house we are to balance the US current account solely on the backs of Europe [and to a much lesser extent Canada]. This is what is happening but the question is can an aging Europe stand the strain?

The system is broken. Everyone knows it. No one wants to be the one to say unpleasant truths in public. Does this remind anyone of subprime mortgages, dot com stocks or Bangkok real estate?

This blog was supposed to be a chronicle of my migration from a safe Republican presidential vote to someone who was going to reregister and vote for Hillary out of tactics and rage. It was a protest against Amnesty, the ingratitude of the country club and establishment Republicans leadership and globalized postmodern finance capitalism. It was also supposed to have been started in the summer of 07.

Life intervened. I am now a registered Democrat. I stood up in the Iowa caucus for the Ice Bitch whose campaign implosion began there because she is now too conservative for the new era. Instead of her inevitable coronation we are now on track to elect a President whose only noticeable accomplishment of his adult life was to decide he was no longer named Barry but really wanted to be a Barrack Hussein and worship at a church that seems to hate white people.

So I will leave the pure politics for my other blog. (http://senilecow2345.blogspot.com/). Will make my partners happy as my politics are quite my own and NOT those of the other partners or of the company. So this is going to be a place where I largely talk to myself / rant at the sky about political economics.

My rants other places about financial engineering and transnational finance capitalism seemed quaint and somewhat weird even to my fellow political junkies on LidlessEye and elsewhere. Then came the subprime meltdown and suddenly my threads were a trifle more interesting.

We have tens of millions of people worked up about hypothetical human caused global warming. Yet only a few people notice that the financial structure that undergrid our 21st century world have been mutating faster than atmospheric carbon levels and with far less thought or study. As the subprime crisis showed, the supposed masters of the universe on Wall Street and elsewhere had thought absolutely nothing through beyond how to squeeze the biggest annual bonus check out of their company. Everyone saw this one coming same as Thailand and Argentina had been predicted for two years before they happened. But yet again the markets were caught short and left like a deer in the headlights when the actual tidal wave began.

With that in mind read Samuelson's article [http://www.newsweek.com/id/109610]and then look for what is missing. This is a typical pundit's appeal for civic virtue. Civic virtue does not exist in media driven democracies. The same way the financial masters of the universe didn't look beyond today's profit and the year end bonus, politicians and political parties live on two news cycles, one of 24 hours and the other of 7 days [Sunday talk show to Sunday talk show]. It used to be they lived from one election cycle to the next but we are now in the age of the permanent campaign [the 2008 Presidential election cycle started as the polls were closing in 2004] and a mostly disengaged electorate who treat political news as either entertainment or a bother. The voters live in a world of magical thinking where government and institutional money is somehow 'free'. Beyond work and family they have little idea of how the actual world works and no desire to learn. It is all too complex and they have been taught that things that aren't entertaining to them can be ignored or left to specialists.

Given these pressures to spend on every democratic first world state how have we mostly avoided implosion from overspending on bread and circuses? By what I have postulated every democracy should end quickly in some version of Weber's Dolist Haven. What prevents this is countervailing pressures from people who do know how the economy works and spend a lot of effort and money lobbying the politicians on the consequences of their behavior. Politicians that ignore this to pander for votes see their polity implode. NYC in the 70's is a classic example. It came back from the dead under Koch and then [after the inept Dinkins interregnum] under Guliani and Bloomberg. The cities that defy this [Camden, Newark etc.] serve as reminders to the rest of the perils of pushing the envelope too far too fast.

The same thing happens on a national scale. Argentina and Thailand each lost a decade of growth to reckless economic policy. Japan lost more than a decade to a succession of policy errors. So the question is why the US seems able to violate the rules. And this brings us to the 800 pound gorilla in the room. In a normal nation the bond market acts as the angry parental voice of reason restraining the political class pandering to voter stupidity, laziness and childishness. The US hit a spot of this under Carter but in the main we have essentially been allowed to coin money. Why?

Meet the 800 pound gorilla: the world runs on having a permanent trade surplus with the US. The US imports $3 for every $2 it exports. The rest of the world treats these dollars as if they were money and then has to do something with them. This creates a giant pool of funds that invest in US financial instruments. This keeps the US bond market from providing any sort of fiscal discipline to our political class. The last time the world did a serious bailout on the dollar was after the Plaza accords. Dollar went way down and so did the trade deficit. Clinton found himself constrained to actually take the budget seriously. Congress actually exercised a bit of fiscal discipline. World found the pain of living with a US that lived within its means too high and stopped pushing. (http://www.census.gov/foreign-trade/statistics/historical/gands.pdf). Until we tackle the trade and exchange rate side of the puzzle the budget battles are hopeless. The pundits are arguing logic to people who only see that they are being asked to swallow bitter medicine. There will ALWAYS be some in politics and the media to claim the pain can be avoided. So without the countervailing pressures virtue does not happen.

The core problem is a world of excess production chasing finite consumption. The myth constructed to avoid this is that first world currency equals real money. As in most 'the emperor's new clothes' fairy tales it works only as long as everyone keeps to the myth. You now see all the major players looking to get out from under their piles of dollars without giving up their trade surpluses with the US. They each want someone else to take the hit. And into this witches's brew we have allowed the finance industry to create new products with essentially zero regulation and no accounting rules that have any teeth. The entire derivatives house of cards may not fall but the sad fact is we haven't a clue as to how many of these bizzare creations have any real value or indeed whether any of the creators and sellers are actually able to pay their hypothetical obligations. Welcome to the Fun House.