An interesting New Yorker article on pricing in our Internet era.

http://www.newyorker.com/arts/critics/books/2009/07/06/090706crbo_books_gladwell?currentPage=all

It opens the discussion for the economy of new ecosystem service credits….credits represent environmental ’stuff’…and our society has a scarcity of the environmental ’stuff’ we need to restore Earth’s atmosphere. What is the best model to reap the greatest ’social willingness’ to participate in credit markets?

A graphic of how the stimulus is being spent.

http://yglesias.thinkprogress.org/archives/2009/03/this_is_what_a_recovery_act_looks_like.php

An interesting approach to economic development for green industry in Tennessee.

http://www.google.com/hostednews/ap/article/ALeqM5ixKbL9_bhtol-3qKKtiV6E05H5ggD96LEUCG1

The Spectacular, Sudden Crash of the Global Economy

By Joshua Holland

The worldwide economic meltdown has sent the wheels spinning off the project of building a single, business-friendly global economy.

Worldwide, industrial production has ground to a halt. Goods are stacking up, but nobody’s buying; the Washington Post reports that “the world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores.” A Hong Kong-based shipping broker told The Telegraph that his firm had “seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster.” The Economist noted that one can now ship a container from China to Europe for free — you only need to pick up the fuel and handling costs — but half-empty freighters are the norm along the world’s busiest shipping routes.  Global airfreight dropped by almost a quarter in December alone; Giovanni Bisignani, who heads a shipping industry trade group, called the “free fall” in global cargo “unprecedented and shocking.”

And while Americans have every reason to be terrified about their own econopocalypse, the New York Times noted that everything is relative:

In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.

Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.

Chinese manufacturing declined in each of the last five months; according to the Financial Times, “More than 20 [million] rural migrant workers in China have lost their jobs and returned to their home villages or towns as a result of the global economic crisis.” The UN estimates that the downturn could claim 50 million jobs worldwide, prompting Dennis Blair, the U.S. National Intelligence Director, to warn Congress that, “instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.”

Riots, strikes and other forms of civil unrest have become widespread the world over; governments have fallen. In Europe, parties of the far right and left have seen their fortunes rise.

The model of economic globalization that’s dominated during the past 40 years is, if not dead, at least in critical condition. Few progressives will mourn its demise — it was both a proximate cause of the economic meltdown in which we find ourselves today, and one of its victims. But if we are reaching the end of an era, questions arise about not only what will replace it, but also how we’ll finance the government spending that most economists agree will be required to stave off a long, painful depression.

Always a Flawed Model

For almost 40 years, smooth-talking snake-oil salesmen in well-tailored suits have pitched the wonders of a globalized economy. Politicians and pundits alike insisted that the wealthy states at the core of that worldwide economy could shift labor-intensive production to the poorer countries at the edges, in search of a cheaper pair of hands and less nettlesome regulations, and that ordinary working people would benefit. Whatever pain Americans might feel as a result of the project was merely temporary “displacement,” they argued, and anyway those cheap toys at Wal-Mart more than offset any problems that might come along with the decimation of America’s middle class. After all, a little lead never hurt anyone.

The same hucksters sold a similar bill of goods to the developing world. Look outward, they said, build export economies and turn those peasants into factory line workers. Sign treaties forcing governments to let multinationals move goods and capital freely, keep their regulators out of the way of Big Business’s profits and prosperity will surely follow. Most governments adhered to this pro-corporate orthodoxy, slashing taxes on foreign companies and scrapping various controls on foreign investment. Largely unregulated “free trade” zones proliferated along the world’s significant shipping routes.

The result was an explosion in international trade and a distinct increase in economic inequality in both poorer and richer countries.

Among the wealthy countries, nowhere was this truer than in the United States, with its fealty to a mythic “free market” and its elites’ scorn for a robust safety net. After union-busting, global trade deals have done the most damage to workers’ bargaining power. Whereas companies used to negotiate with their employees in relatively good faith, those negotiations are now overshadowed by the threat — ubiquitous in labor disputes today — to simply move the whole plant to Mexico or China.

The result was an illusion of prosperity. Corporate profits rose (in 2004, corporate profits took the largest share of national income since they started tracking the data in 1929 and wages took the smallest), and high earners did very well too. When the oil shock hit in 1973, those in the top one percent of the income ladder took in just over 9 percent of the nation’s income; by 2006, they grabbed almost 23 percent. In the intervening years, their average incomes more than tripled (Excel file).

The rest of us didn’t do as well. In 1973, the bottom 90 percent of the economic pile — most of us — shared two-thirds of the nation’s income; by 2006, we got half. If you take off the top ten percent of the income ladder, the rest of the country in 2006 earned, on average, 2 percent less than they did 30 plus years earlier, despite the fact that the economy as a whole had grown by 160 percent over that time.

But we continued to buy; it’s become almost a cliché to say that American consumerism is the engine of the global economy.

How did we do it with incomes stagnating? First, women entered the workforce in huge numbers, transforming the “typical” single-breadwinner family into a two-earner household. (Between 1955 and 2002, the percentage of working-age women who had jobs outside the home almost doubled.)

After that, we started financing our lifestyles through debt — mounds of it. Consumer debt blossomed; trade deficits (which are ultimately financed by debt) exploded and the government started running big budget deficits year in an year out. In the period after World War Two, while wages were rising along with the overall economy, Americans socked away over 10 percent of the nation’s income in savings. But in the 1980s, that began to decline — the savings rate fell from 11 percent in the 1960s and ‘70s, to 7 percent in the 1980s, and by 2005, it stood at just one percent (household savings that year were actually in negative territory).

After the collapse of the dot-com bubble and the recession that followed it, the economic “expansion” of the Bush era was the first on record in which median incomes never got back to where they were before the crash. Fortunately for Wal-Mart shoppers, a massive housing bubble was rising. Americans started financing their consumption by taking chunks of equity out of their homes. The result: in 2005, long before the housing bubble crashed, the average amount of equity Americans had in their homes was already the lowest it had ever been.

We hear a lot of chatter about a “credit crunch” being at the root of our economic woes — that banks aren’t lending to otherwise qualified individuals and businesses. The truth, however, is that before the housing (and stock) markets crashed, the average American household already had 20 percent more in debt than it earned in a year.

Already deeply in the hole, when the markets crashed, consumers stopped spending, and that’s fueled millions of layoffs, led to a mountain of foreclosures, and left state budgets decimated. The connection between decades of false prosperity, the piles of household debt that resulted, and the degree to which that left American families vulnerable to the bubble’s crash is not difficult to see.

Global Illusion of Prosperity

During the “era of globalization,” massive increases in trade created a similar illusion of prosperity, masking a long-term decline in real economic growth worldwide.

Much of Asia has become a huge production platform for the West. It’s been said, half-jokingly, that the modern global economy works something like this: the U.S. produces pieces of green paper, which it trades to China for the goods lining the shelves of Wal-Mart and Target, the Chinese trade those pieces of paper to the oil-producing states for energy, and the oil producers exchange them with Europe for Mercedes and foie gras.

Economist Robert Brenner described a “long downturn” in the world’s wealthiest countries, noting that their economies grew by a steady rate of 5 percent or more each year from the end of World War II through the 1960s, but in the 1970s their growth fell to 3.6 percent, and it has averaged around 3 percent since 1980.

But as the social scientist Walden Bello pointed out, even those anemic numbers are misleading. “China’s 8-10% annual growth rate has probably been the principal stimulus of growth in the world economy in the last decade,” he wrote. Without China’s (and to a lesser degree India’s) consistent growth rates, global economic expansion has been all but nonexistent.

China became an export engine by keeping wages down through repressive union-busting and by drawing on an almost endless supply of poor rural peasants to work its production lines.

While global trade flows have exploded, much of that trade has been between multinationals based in the advanced economies and their own offshore units. They ship production overseas, but the goods produced end up back in domestic markets; it’s a means of avoiding “first-world” wages, public interest regulations and environmental restrictions.

China and the U.S. have developed a precariously symbiotic relationship. As Walden Bello wrote, “With its reserve army of cheap labor unmatched by any country in the world, China became the ‘workshop of the world,’ drawing in $50 billion in foreign investment annually by the first half of this decade.” To survive, firms all over the world, “had no choice but to transfer their labor-intensive operations to China to take advantage of what came to be known as the ‘China price,’ provoking in the process a tremendous crisis in the advanced capitalist countries’ labor forces.”

It was always an unsustainable model; the United States’ annual trade deficit with China — financed by debt — was $6 billion as recently as the mid-1980s; by last year it had exploded to $266 billion.

Defenders of the global trade regime have long argued that China’s currency will rise in value against the dollar, the trade deficit will shrink, and there will be significant “decoupling” between the two economic powerhouses as a new generation of middle-class consumers in the East Asian countries begin demanding a greater share of all those manufactured goods.

On the surface, it appeared that at least the last part of that was indeed happening. As Bello noted, “To satisfy China’s thirst for capital and technology-intensive goods, Japanese exports shot up by a record 44%, or $60 billion. Indeed, China became the main destination for Asia’s exports, accounting for 31% while Japan’s share dropped from 20% to 10%. China is now the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia.”

But Bello went on to describe that this “decoupling” was also an illusion:

Research by economists C.P. Chandrasekhar and Jayati Ghosh, underlined that China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, “if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession,” they asserted, “this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries.”

The collapse of Asia’s key market has banished all talk of decoupling. The image of decoupled locomotives — one coming to a halt, the other chugging along on a separate track — no longer applies, if it ever had. Rather, U.S.-East Asia economic relations today resemble a chain-gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed middle-class spending in the United States, which has collapsed.

We often hear that U.S. consumer spending accounts for 70 percent of the economic activity in the country. Do the math: with 20 percent of the world’s economic activity, U.S. consumers — most weighed down with stagnant wages and maxed-out credit — make up about 14 percent of the planet’s economic demand. Add the other affluent countries (which were also heavily invested in our real estate market and related securities), and it’s easy to see why the economic meltdown has grown to global proportions. The dominoes are tumbling.

What’s Next?

International trade existed long before the era of economic globalization, and will continue after its demise. The so-called “free trade” agreements championed by both Democratic and Republican lawmakers, liberals and conservatives alike, for the past few decades was always less about trade than constraining the policy options of governments through treaty.

The one likely bright spot in all this is that the cookie-cutter, one-size-fits-all economic orthodoxy lies in ruins. What will replace it is a question for the long-term.

The more immediate question is two-fold. First, in a global economic crisis such as the one we’re experiencing today, where is the engine of rapid growth that might pull the world’s economy out of the doldrums? Recessions of recent years — in the early 1980s, the early 1990s and the early 2000s — weren’t global in nature; rapidly developing economies in Asia and Eastern Europe, and later the rise of the U.S. housing market, pulled the world out of the doldrums. It’s difficult to see where that kind of growth might be found today.

And then there is the question of how long foreign investors will continue to run our tab. As Americans’ demand for just about everything has tanked, economists from across the political spectrum have called on the government to take up the slack. So we got a big stimulus package — probably the first in a series — which will be tacked onto a budget that was already deeply in the red. The hole is cavernous, and we have little choice to dig deeper. In 2008, the official deficit was around $500 billion; the most optimistic projections are deficits averaging around $1.35 trillion in both 2009 and 2010.

In 2006, economist Barry Bosworth testified before Congress that “net foreign lending” had been almost $800 billion in the red — a negative 7.2 percent of national income. “This degree of reliance on foreign financing is unprecedented,” he explained, “but has been achieved with relatively few strains because foreigners perceive the United States as offering safe and attractive investment opportunities.”

Right now, foreign investors are still snapping up American debt — the dollar is seen as a safe haven in turbulent seas. But how long, and to what extent they will continue to do so are crucial questions.

China, with the world’s largest foreign currency holdings — about 70 percent of which is in U.S. treasury bills — is still buying, at least for the moment. Luo Ping, director-general of the China Banking Regulatory Commission, recently asked, “Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven,” he explained. “For everyone, including China, it is the only option.”

But the Chinese are concerned about the stability of their investments. If the U.S. government needs to raise the interest rates on its securities to attract enough foreign investment to cover our shortfall, the value of those T-bills China and other central governments are holding will drop.

Last week, Secretary of State Hillary Clinton acknowledged that the world economy is anything but decoupled, all but begging the Chinese to continue to buy our debt. According to Agence France Presse, “Clinton and Chinese Foreign Minister Yang Jiechi largely agreed to disagree on human rights,” while “she focused on the need for China to help finance the massive 787-billion-dollar US economic stimulus plan by continuing to buy US Treasuries.”

In a moment of clarity — one that shone a light on the rot of the global economic system that has prevailed for the past 40 years, Clinton explained to the Chinese media, “We have to incur more debt … the US needs the investment in Treasury bonds to shore up its economy to continue to buy Chinese products.”

Ray Dalio, Chief Investment Officer, Bridgewater Associates
By SANDRA WARD  | MORE ARTICLES BY AUTHOR
AN INTERVIEW WITH RAY DALIO: This pro sees a long and painful depression.
NOBODY WAS BETTER PREPARED FOR THE GLOBAL market crash than clients of Ray Dalio’s Bridgewater Associates and subscribers to its Daily Observations. Dalio, the chief investment officer and all-around guiding light of the global money-management company he founded more than 30 years ago, began sounding alarms in Barron’s in the spring of 2007 about the dangers of excessive financial leverage. He counts among his clients world governments and central banks, as well as pension funds and endowments.
No wonder. The Westport, Conn.-based firm, whose analyses of world markets focus on credit and currencies, has produced long-term annual returns, net of fees, averaging 15%. In the turmoil of 2008, Bridgewater’s Pure Alpha 1 fund gained 8.7% net of fees and Pure Alpha 2 delivered 9.4%.
Here’s what’s on his mind now.
Barron’s: I can’t think of anyone who was earlier in describing the de-leveraging and deflationary process that has been happening around the world.
Dalio: Let’s call it a “D-process,” which is different than a recession, and the only reason that people really don’t understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn’t live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.
Why are you hesitant to emphasize either the words depression or deflation? Why call it a D-process?
Both of those words have connotations associated with them that can confuse the fact that it is a process that people should try to understand.
You can describe a recession as an economic retraction which occurs when the Federal Reserve tightens monetary policy normally to fight inflation. The cycle continues until the economy weakens enough to bring down the inflation rate, at which time the Federal Reserve eases monetary policy and produces an expansion. We can make it more complicated, but that is a basic simple description of what recessions are and what we have experienced through the post-World War II period. What you also need is a comparable understanding of what a D-process is and why it is different.
You have made the point that only by understanding the process can you combat the problem. Are you confident that we are doing what’s essential to combat deflation and a depression?
The D-process is a disease of sorts that is going to run its course.
When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?
The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the ’90s, that occurred in Latin America in the ’80s, and that occurred in the Great Depression in the ’30s.
Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.
As goes GM, so goes the nation?
The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.
This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.
We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.
It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.

Isn’t the process of restructuring under way in households and at corporations?
They are cutting costs to service the debt. But they haven’t yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.
What are you suggesting?
An example is the Federal Reserve, which has always been an autonomous institution with the freedom to act as it sees fit. Rep. Barney Frank [a Massachusetts Democrat and chairman of the House Financial Services Committee] is talking about examining the authority of the Federal Reserve, and that raises the specter of the government and Congress trying to run the Federal Reserve. Everybody will be second-guessing everybody else.
So where do things stand in the process of restructuring?
What the Federal Reserve has done and what the Treasury has done, by and large, is to take an existing debt and say they will own it or lend against it. But they haven’t said they are going to write down the debt and cut debt payments each month. There has been little in the way of debt relief yet. Very, very few actual mortgages have been restructured. Very little corporate debt has been restructured.
The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.
However, the reason it hasn’t actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece — banks and investment banks and whatever is left of the financial sector — that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.
Is a restructuring of the banks a starting point?
If you think that restructuring the banks is going to get lending going again and you don’t restructure the other pieces — the mortgage piece, the corporate piece, the real-estate piece — you are wrong, because they need financially sound entities to lend to, and that won’t happen until there are restructurings.
On the issue of the banks, ultimately we need banks because to produce credit we have to have banks. A lot of the banks aren’t going to have money, and yet we can’t just let them go to nothing; we have got to do something.
But the future of banking is going to be very, very different. The regulators have to decide how banks will operate. That means they will have to nationalize some in some form, but they are going to also have to decide who they protect: the bondholders or the depositors?
Nationalization is the most likely outcome?
There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?
Let’s say we are going to end up with the good-bank/bad-bank concept. The government is going to put a lot of money in — say $100 billion — and going to get all the garbage at a leverage of, let’s say, 10 to 1. They will have a trillion dollars, but a trillion dollars’ worth of garbage. They still aren’t marking it down. Does this give you comfort?
Then we have the remaining banks, many of which will be broke. The government will have to recapitalize them. The government will try to seek private money to go in with them, but I don’t think they are going to come up with a lot of private money, not nearly the amount needed.

To the extent we are going to have nationalized banks, we will still have the question of how those banks behave. Does Congress say what they should do? Does Congress demand they lend to bad borrowers? There is a reason they aren’t lending. So whose money is it, and who is protecting that money?
The biggest issue is that if you look at the borrowers, you don’t want to lend to them. The basic problem is that the borrowers had too much debt when their incomes were higher and their asset values were higher. Now net worths have gone down.
Let me give you an example. Roughly speaking, most of commercial real estate and a good deal of private equity was bought on leverage of 3-to-1. Most of it is down by more than one-third, so therefore they have negative net worth. Most of them couldn’t service their debt when the cash flows were up, and now the cash flows are a lot lower. If you shouldn’t have lent to them before, how can you possibly lend to them now?
I guess I’m thinking of the examples of people and businesses with solid credit records who can’t get banks to lend to them.
Those examples exist, but they aren’t, by and large, the big picture. There are too many nonviable entities. Big pieces of the economy have to become somehow more viable. This isn’t primarily about a lack of liquidity. There are certainly elements of that, but this is basically a structural issue. The ’30s were very similar to this.
By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% — and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today’s TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.
At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn’t get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.
In the U.S., a Democratic administration replaced a Republican one and there was a major devaluation and reflation that marked the bottom of the Depression in March 1933.
Where is the U.S. and the rest of the world going to keep getting money to pay for these stimulus packages?
The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.
Are you a fan of gold?
Yes.
Have you always been?
No. Gold is horrible sometimes and great other times. But like any other asset class, everybody always should have a piece of it in their portfolio.
What about bonds? The conventional wisdom has it that bonds are the most overbought and most dangerous asset class right now.
Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn’t mean necessarily that the bond market is bad.
I can easily imagine at some point I’m going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won’t go down a whole lot, at first.
Ideally, creditor countries that don’t have dollar-debt problems are the place you want to be, like Japan. The Japanese economy will do horribly, too, but they don’t have the problems that we have — and they have surpluses. They can pull in their assets from abroad, which will support their currency, because they will want to become defensive. Other currencies will decline in relationship to the yen and in relationship to gold.
And China?
Now we have the delicate China question. That is a complicated, touchy question.
The reasons for China to hold dollar-denominated assets no longer exist, for the most part. However, the desire to have a weaker currency is everybody’s desire in terms of stimulus. China recognizes that the exchange-rate peg is not as important as it was before, because the idea was to make its goods competitive in the world. Ultimately, they are going to have to go to a domestic-based economy. But they own too much in the way of dollar-denominated assets to get out, and it isn’t clear exactly where they would go if they did get out. But they don’t have to buy more. They are not going to continue to want to double down.
From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency.
But there is a basic structural problem with China. Its per capita income is less than 10% of ours. We have to get our prices in line, and we are not going to do it by cutting our incomes to a level of Chinese incomes.
And they are not going to do it by having their per capita incomes coming in line with our per capita incomes. But they have to come closer together. The Chinese currency and assets are too cheap in dollar terms, so a devaluation of the dollar in relation to China’s currency is likely, and will be an important step to our reflation and will make investments in China attractive.
You mentioned, too, that inflation is not as big a worry for you as it is for some. Could you elaborate?
A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation — and that will last for as far as I can see out, roughly about two years.
Given this outlook, what is your view on stocks?
Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century.
Thanks, Ray.

An interesting perspective in the Wall Street Journal about the Bush tax rebate and the potential for the stimulus plan.

http://online.wsj.com/article/SB121798022246515105.html?mod=opinion_main_commentaries

Below is a link to the stimulus bill….647 pages. Last week I was becoming a “Republican” about stimulus money…thinking broad tax reductions are better than trying to get huge spending in place. Then I read the Act. First, I’m impressed…with the breadth and complexity of it. If nothing else, it is an amazing concentration of work. Second, I’ve been a skeptic of the ability to not have it become a huge ‘pork’ bill for the ‘connected’ government service providers. I’m still a skeptic, but the nature of the spending is perhaps worth the risk. Third, when you break $800bn into a lot of small pots, the pots are still very large….definitely enough to make a very positive impact on the environment and energy.

It’s worth reading…you’ll find something for you!

http://big.assets.huffingtonpost.com/HR1.pdf

I received a comment from the fellow who transcribed and first published the 2005 letter to the SEC about Bernie Madoof …and decided (at 4am in the morning…) to review his blog site.

Came across this interesting graphic which compares two Ponzi scheme liabilities…Madoff’s and the Social Security, Medicare, Medicaid Ponzi scheme. Wait a minute!…Social Security, Medicare, Medicaid isn’t a Ponzi scheme is it?….it’s just ‘unfunded liabilities’….now I feel better!

Is America about to become a societal dinosaur?…trying to sell vinyl records in the Internet era.

http://www.vanguardist.org/index.php?/archives/1246-Ponzi-Schemes-Compared.html

Here is a link to the letter that Harry Markopolous sent to the SEC in 2005 about Bernie Madoff. Not only does it give you insight into the nature of the world in which Bernie Madoff was living…..it also gives you insight into the quality of thought…and the underlying ethic…of financial markets in the last 10 years.

http://finances.unanimocracy.com/money/2009/01/07/harry-markopolous-markopolos-letter-to-the-sec-2005-against-madoff/

This article states “Strategic investment in infrastructure produces a foundation for long-term growth.” I agree. I am also concerned the stimulus planning that appears to be going on in Washington is not being driven by any plan to create sustainable national assets.

For the article:

http://www.huffingtonpost.com/roger-mcnamee/obama-needs-to-think-bigg_b_156126.html

In the 1980s, farmers were going broke…and the banks that financed farmers were failing. The Administration and Congress at that time decided to begin USDA conservation subsidies as a way to get farmers money.  The early protocol for evaluating the conservation impacts were rushed…and USDA has been ‘catching up’ on its’ environmental protocol since that time. Yes, those conservation programs had (and have) tremendous conservation impact….but they were not part of any larger strategy….they were a quick ’stimulant’ to the farm economy.