Elite Education in the US of A

Something is very wrong with how the American elite gets educated by all those top ranked universities when famous alumni who went on to become leaders make the same stupid mistakes over and over again. Read this well-written op ed here by one of the most informed writers on the Muslim world on Afghanistan that is so vivid and heart wrenching you want to throw your computer out of the window.

Moral Quagmire in Afghanistan

So Prez Obama was just in Kabul days ago pressing Prez Karzai to crack down on corruption knowing full well his brother is a drug king. Guess what? Nothing is done. On the contrary US officials are saying, as they did in Vietnam, such drug runners are essential to the war's effort. Really? Didn't work then, wouldn't work now.

Read Prez Kabul's de facto response here to Obama's visit.

Bad Movie in Kabul

So Obama wants Karzai to crack down on corruption in Afghanistan? Read the lead story on Obama's unannounced trip to Kabul prior to touch down in this paper here.

I would be more appreciative if we had been spared of this embarrassing display of tiresome PR to placate the uninformed back home in good old US of A.

Asking Karzai to crack down on corruption is about the same as asking Don Corleone is tame mafia crimes in Brooklyn in Coppola's immortal movie Godfather.

Is there anyone in this world who keeps up with the news who still does not know Karzai's brother is the number one opium overlord in Afghanistan? Furthermore, have we not read that none other than the US military has pleaded with Washington not to crack down on that business because they need local tribal support?

Ok. To give "face" to Obama Karzai will do something about crimes. What is likely to happen is for his henchmen to crack down on all his brother's competition eliminating (and I don't mean just economically) those who do not submit to Karzai bro's orders. There will be relative peace because after the crackdown there will be just one monopoly of crimes standing that goes all the way to the palace of Kabul where the president sits.

Mr Obama, please spare us the theatrics. Get your troops out and let the Afghans deal with each other. What do your want to betray your own core values to defend opium and crime bosses? Is that worth losing thousands of American soldiers and civilians and suspending one's basic beliefs about drugs and violent crimes/

Afghan Policce & US Folly

Interesting article from Newsweek here.

US has spent $6 billion since 2002 on training up a police force of 98,000. An effective force is a central part of Obama's exit strategy. US experts admit less than 12% of the force is "effective". What does that mean? Not able to even catch thieves and police the streets "effectively". We are not talking about going to the mountains to catch Al Qaeda fighters, for chrissake.

Let's do the math. $6 billion on 98,000 police = $61,200 per head. Per capita income is $800. Al Qaeda or the Taliban don't have that kind of money let alone spend only on the "police" force. Yet these enemies have been able to hold off the mighty US military.

What does that tell you? To me it is senseless to fight in a country where your supposed allies are not motivated even if you show a fortune on them. They are mostly likely laughing their head off at your naivete and stupidity and are crying all the way to the bank. Cynical? Read the latest on how the US is helping the opium business in Afghanistan.

In case you have been avoiding the news for sometime, the opium business is monopolized by the brother of the president of Afghanistan, the "ally" on whom the US effort depends.

So, how could you motivate the police when everyone and his brother in law knows the US is in bed with the opium king?

Yoiu tell me.

Opium and USA

If you are caught with heroine and opium on US soil, you can look forward to many years in jail. It's a big federal crime. When it comes to foreign wars, beginning with the Vietnam War, USA abandoned all pretense to the values the nation had held dear.

During that war, the Americans not only tolerated opium cultivation they created a US run airline, called Air America, to transport opium from difficult hills up country to facilitate distribution on behalf of those hill tribes the failing US military wanted to win over to help fight the communists. Never mind the opium would end up in Los Angeles or New York. In war all is "fair" right?

But of course what the US did in Vietnam was illegal, but who cares, right? In the end the war failed to win hearts and minds.

Now, we are seeing the same tiresome movie. The US military is now openly in support of opium trade again. We are condemned to watch this B movie all over again. Never mind what the US used to stand for: the rule of law, respect for humane values and all that. They read well in textbooks. It's sad to see the decline of moral values in the USA.

You want to win hearts and minds in Afghanistan? Imagine you are a young Afghan. You grow up watching GI's supporting opium in your own backyards. You then get a scholarship to Yale. Would you have much respect for Washington leaders telling the world how to behave? I doubt it.

Read this heart wrenching report on the US involvement in Afghan opium trade here.

The "Mountain" has moved

In the classic Kurusawa movie "Ren", a rising warlord patiently watched the action of the dominant warlord of all warlords (WOAW) before he pounced. Finally he saw the opportunity when WOAW moved the bulk of his troops out of his impregnable fortress to attack the patient usurper. He uttered those simple words to his generals: "The Mountain has moved".

It's so zen. Mountains do not move. When they move it means the center of gravity, gravitas, the solidness has become "light" and vulnerable. In the movie the WOAW lost. It had lost its mind, it had lost its strategy, it had lost its "gravity".

This is how I read this article (here) about Applied Materials, the Rolls Royce of semi conductors in Silicon Valley is building in China its largest ever plant, and the largest of such plants with not only cutting edge technology of today, but putting down deep roots in China the platform for tomorrow's technology. This exercise is headed by one of the most important techies in the entire semi conductor business.

I do not argue that US companies should not invest abroad. They should indeed do so. However, what been happening is nothing short of moving the "Mountain". It's hollowing out of the core of what once made USA great.

Applied Materials and many other cutting edge firms are saying by their action they have "seen" the future, and it is in China. This is still a country of limited intellectual and political liberties, right? Yet, they see the future there?

Should that raise several red flags in the US of A? Do we see, hear serious debates and then actions to remedy the situation?

The issue is not really even about China. It is about the US of A. Why has it become what it has become, a place that a firm like Applied Materials no longer sees the company future in the nation's future?

We do know a lot of about some of the structural problems. Many blame China's "slave" labor wages attracting investments.

Relative wages play a part, but only up to a point. Go to MIT, Caltech, Berkeley or Princeton and visit their PhD programs in physics, electrical engineering, math and their cousins and you meet more Asian, particularly Chinese, students than "locals".

The "best and the brightest" young Americans all want to become investment banks and consultants. Money, do we not know, is galactic. Engineering? Physics? Too hard, too boring. No money. Civil Engineering? Who in their right minds want to work on building better roads, airports or dams?

The proverbial message is no longer just on that wall. It is not even a message anymore.

The story of Applied Materials in China is yet another floodgate being lifted. Another dyke widened.

The balance of global power, both soft and hard, is shifting so rapidly away from the US it pains to see the amount of low quality political debates in the main US media, especially on Fox News, where repeated assertions of USA being number 1 has become substitutes for intelligent analyses; that only the Democrats or anyone who is not Republican could fail to see that USA is a country blessed personally by God.

If anyone needs to be reminded how regressive USA can become, just read the latest on textbook changes in Texas as mandated by backward looking Republican stalwarts.

Long gone are the days of traditional Republicanism: fiscally conservative, culturally liberal and enlightened. The Rockefellers were Exhibit A.

Hubris and ignorance are lethal ingredients in all the falls of empires in the past. USA has an oversupply of both right now among its ruling elite in the Congress, in the media and in State politics.

China may have its cyclical comeuppance in another asset bubble that would take the market cap of its stock markets down a few pegs, but the underlying structural change is as amazing as the head in the sands of the Republican Party, the party which should be promoting growth and technology, but now spending its energy on backward looking rhetoric.

The final paragraph of the article is not a journalist trick to overstate in order to impress. Any frequent travelers to China who have talked to the young and the bright could recognize that voice.

China - The Mother of All Black Swans

This presentation here is too good not to be widely read.

Casino Greece

I am lured back from my "sabbatical" to this blog by the more revelation of how "credit-default swaps" derivative products designed to help Greece to "hide" its true indebtedness have come to bite its bottom. Read the full report here.

The following excerpts deserve a few of your minutes:

..."These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich....

...But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations....

...there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.

So who or what's to blame? Swaps or Greek fiscal irresponsibility?

The primary problem has to be the latter. If Greece had been fiscally strong, no "hi-tech" derivatives could produce a financial calamity. Those CDS prices would not have gone haywire creating a momentum of their own.

What is not clear to most outside the financial business is how that industry has morphed into a hydra-headed weapon of destruction if you are on the wrong side of the trade.

And the mathematical complexity of those WMD is simply beyond most mortals. Not just WMD, the global financial game itself is beyond the knowledge of most politicians and legislators who are, in theory, there to protect the stability of the society which elected them.

Unless you understand this point, you cannot understand how Wall Street has been able to run circles around Washington in the current financial crisis getting away with the metaphorical murder.

Of course Wall Street has been and is still aided by its intellectual allies in Larry Summers, Geithner and Bernanke who have a natural tendency to think like Wall Streeters.

However, even they, without spent any meaningful time in the trenches on Wall Street, trading day in day out, playing with billions, making and losing in seconds, don't really appreciate how quickly Wall Street can spot an opportunity faster than you can say: "Can you explain this to me, please, slowly?"

two cases in point. When Wall Street understood Washington got scared by the prospect of Great Depression V2.0, the honchos immediately got Washington DC to grant them a banking license to gain access to zero cost funds plus federal guarantees on loans.

With these two de facto cost less blank checks, Wall Street quickly amassed financial assets priced for Armaggeddon. Any surprise their 2009 profits and bonuses were off the chart? They played DC for fools.

Take Greece. Of course the good folks at Goldman Sachs knew what they were doing selling derivates to Greece to postpone its inevitable days of reckoning. Of course they didn't want to hold any Greek papers unless they could quickly off load them to someone else. So Wall Street did two things: they helped create a market for those instruments by financing a new company, Markit in London, to produce sovereign risk indices: iTraxx Sovereign Index.

With that Index and its sub-indices covering Western Europe, Asia and so forth Wall Street created, out of thin air, derivative products that bet on movements of those products. Hence a giant Sovereign Risk Casino came into existence.

Wall Street could then hedge against whatever positions they may have held in whatever sovereign papers in their own accounts. Or for that matter bet against any sovereign risk on a net basis.

Goldman Sachs, according to earlier reports, also sold back to the Greece Central Bank, some of the Greek papers they were holding.

It is not far fetched that Wall Street has been running and managing a global casino for some years. Goldman Sachs and others have been not merely financial intermediaries taught in universities, they are principals themselves by holding positions for their own accounts.

If Uncle Sam had come to its rescue, that global casino's ownership and management would have looked very different today.

But politicians in general and Washington in particular don't understand modern finance. Wall Street has successfully led them to believe the world needs this "casino" and only they, the same crew, can manage it, thank you.

One can be cynical and say politicians are only too ready to be corrupted without knowing how to make an honest living let alone a living on Wall Street, and Wall Street is only too willing and able to lead them by their nose. But is that cynicism too far-fetched?

Back to my sabbatical, friends.

Summing Up and a Sabbatical

Just about a year ago on March 1 I started this blog.

I said: "...There is much confusion and unhappiness all around regarding what is being done to bail out overpaid financial "geniuses" who got us into where we are.

Perhaps some straightforward thinking is in order devoid of patronizing and obfuscating technical terms preferred by those who run our system.

This blog hopes to contribute to that effort so that we, those who pay taxes and mortgages on time, may know what to do to make the system a little better in the future.

Towards this end all of us need to be a little more vigilant of future misdeeds committed by those we usually consider as our leaders or pillars of society: bank presidents, Treasury Secretaries, Central Bankers and elected officials.

Perhaps our vigilance will result in advance warnings before the next perfect storm could ever gather sufficient force to engulf us all as this one is doing right now"...

These days It is rare to find anyone who is not aware of how Wall Street went over board, how Washington DC has failed to put in rudimentary checks and balances reigning in Wall Street in exchange for a blank check; and how, as a politician, Obama has been self-destructing as a man whose promised changes one can no longer believe so readily.

After Obama compared multi-million dollar wages and bonuses paid to Wall Street leaders with those of baseball players, one can say for a high degree of certainty that Obama is essentially a "Chicago School" convert. Only alumni of that "Cathedral" could compare Wall Street pays with those of sports. Obama, as it turned out, ain't what many thought he was when they cast their vote for him as FDR V2.0. He is turning out to be "just another" politician.

Paul Krugman said it well, "Oh My God". He also said in conclusion: "He is clueless". To which I sadly concur.

The weight of money in influencing how public policies are formed in Washington, DC, indeed in so many other countries of varying degrees of political liberty, is perhaps the trend of the 21st Century.

If you detect a touch of helplessness and futility in what I have been trying to do, you are not wrong.

Here is what has happened:

The Great Depression V2.0 has been averted by the Fed and other major Central Banks printing money. However, due to the blanket no-question-asked way of doing so, a base is formed for another bubble down the road.

The unevenness with which public money has been spent lays bare how strong interest groups representing numerically small number of people, but numerically large sums of money, have managed to capture Washington DC.

USA is supposedly a true democracy. But in my view it is moving ever closer to a Third World Crony Capitalist model once dismissed in the land as corrupt and "Third World" with a barely disguised pinch of racist superiority. "We in the West don't do this sort of thing". "That" could only happen in "Asia".

Sure, mate. Whatever you wish to believe it's fine with me. We still live in the free world and we are all entitled to our opinions however stupid and wrong they maybe.

I am going to take time off to focus on other things including writing columns for publications, something I used to do far more regularly before I began this blog.

www.sinmingshaw.com lists most of my articles.

I want to add to that list. To do so, I will blog less frequently. So, it is not "adios", rather it is "hasta luego". See you soon.

Every now and then I could write something if I am so moved. But I shall not be writing everyday here. I hope you are not too disappointed.

If I publish something, I will alert you on this blog. So, check back every now and then.

Thanks to you all for being my regular readers. Until next time, keep well and keep alert for volatility in financial and other markets.

Ciao

Goldman Sachs and Global Financial Stability

An intriguing thought proposed by Simon Johnson at MIT:

"A rogue trader could destabilize a firm, such as Barings, and a rogue firm such as Goldman Sachs"?

Johnson's argument is well worth your time:

Goldman Goes Rogue – Special European Audit To Follow
Posted: 14 Feb 2010 06:22 PM PST

At 9:30pm on Sunday, September 21, 2008, Goldman Sachs was saved from imminent collapse by the announcement that the Federal Reserve would allow it to become a bank holding company – implying unfettered access to borrowing from the Fed and other forms of implicit government support, all of which subsequently proved most beneficial.

Officials allowed Goldman to make such an unprecedented conversion in the name of global financial stability.

(The blow-by-blow account is in Andrew Ross Sorkin’s Too Big To Fail; this is confirmed in all substantial detail by Hank Paulson’s memoir.)

We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November.

These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets. When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings. But a single rogue bank can bring down the world’s financial system.

Goldman will dismiss this as “business as usual” and, to be sure, a few phone calls around Washington will help ensure that Goldman’s primary supervisor – now the Fed – looks the other way.

But the affair is now out of Ben Bernanke’s hands, and quite far from people who are easily swayed by the White House. It goes immediately to the European Commission, which has jurisdiction over eurozone budget issues. Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients.

This audit should focus on ten sets of questions.

1) Which eurozone governments have worked with Goldman, and on what basis, over the past decade? All actions prior to and after the introduction of the euro need to be thoroughly reexamined.

2) What transactions has Goldman facilitated and how has that affected the reporting of European government debt? (Under the Maastricht Treaty, eurozone government debt is not supposed to exceed 60 percent of GDP.)

3) In the case of Greece, the accusation is that Goldman deliberately and in a premeditated manner conspired to hide the true degree of government debt. Is this true, and to what extent has Goldman helped other countries engage in similar transactions, e.g., countries now seeking entry to the eurozone?

4) What is the full extent of Greek and other government liabilities, if these are accounted for properly? Without this reckoning, it is impossible to design a proper level of European Union (or any other) support for weaker eurozone countries.

5) Are there non-eurozone countries that have also been aided and abetted by Goldman in this fashion? For example, are the UK and Switzerland implicated – and thus endangered?

6) Has Goldman extolled the virtues of government debt in Greece, or other countries, while at the same time helping to deceive investors on the true risks inherent in those debts? What were Goldman’s own holdings of these securities?

7) Is there evidence that Goldman has structured similar transactions for the private sector – enabling companies to conceal the level of their true indebtedness? Have securities issued by such firms also been endorsed by Goldman to the buying public?

8) Were Goldman’s US-based supervisors aware of Goldman’s activities in Greece and other eurozone countries? Did they condone activities that undermine the integrity of the European Union?

9) Where was the European Central Bank while all of this was happening? Has the ECB become dangerously enraptured with the new Wall Street and its “techniques”?

10) Did any responsible official really think that what Goldman was constructing was really some sort of productivity-enhancing financial innovation – as opposed to a sophisticated form of scam?...

...If the Federal Reserve were an effective supervisor, it would have the political will sufficient to determine that Goldman Sachs has not been acting in accordance with its banking license. But any meaningful action from this direction seems unlikely.

Instead, Goldman will probably be blacklisted from working with eurozone governments for the foreseeable future; as was the case with Salomon Brothers 20 years ago, Goldman may be on its way to be banned from some government securities markets altogether.

If it is to be allowed back into this arena, it will have to address the inherent conflicts of interest between advising a government on how to put (deceptive levels of) lipstick on a pig and cajoling investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a fundamental question: For how long does it wish to be intimately associated with Goldman Sachs and this kind of destabilizing action? What is the priority here - a sustainable recovery and a viable financial system, or one particular set of investment bankers?

To preserve Goldman, on incredibly generous terms, in the name of saving the financial system was and is hard to defend – but that is where we are. To allow the current government-backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible.

The credibility of the Federal Reserve, already at an all-time low, has just suffered another crippling blow; the ECB is also now in the line of fire. Goldman Sachs has a lot to answer for.

By Simon Johnson

How likely would any of the above 10 items be taken up by EU authorities? Good question.

Global Banking Compensation

Absent is Goldman Sach's Lloyd Blankfein compensation because it would be outside of the box on the left hand side. He reportedly took home over $80 millions versus "only" $19.7 millions by Jamie Dimon. Obama still didn't get it that these guys were grossly overpaid compared to the "market".

Greek Offensive

When your back is up against the wall the best defense is often a good offense. This is exactly what the besieged Greek Prime Minister is doing. Blame your domestic trouble on foreigners, even if they are in fact your fellow members of the same eurozone club, the club Greek begged to join as a symbol of its "developed" status when in fact it was and is still run like a banana republic.

What is Mr. Prime Minister doing?

FT reports:

..."In a harshly worded speech to the cabinet the day after the summit, which was televised live, Mr Papandreou claimed Greece was being used as a “laboratory animal” in a test of strength between the eurozone and financial markets.

“The EU’s own credibility is being tested,” he warned. “It must correct the mistakes it made over Greece, so it will be especially strict with us.”

Analysts said the speech was intended to rally trade unionists, who are threatening to increase strike action, as well as the governing Socialist party’s hardline faction"...

This is another example of how the bank is held hostage by a borrower of billions unable to pay. The bank needs him more to survive and the borrower can then play the bank like a fiddle.

That "harshly" worded speech was clearly intended also to shift national anger towards outsiders.

Greece will not wage war. But often in the past governments waged wars to divert domestic attention to somebody else. Today the Greek government is doing exactly that.

So predictable. So tragic.

The Greek Economy - A Glance

From the CIA FactB Book 2009:

- Greece violated the EU's Growth and Stability Pact budget deficit criteria of no more than 3% of GDP from 2001 to 2006, but finally met that criteria in 2007-08, before exceeding it again in 2009 by 12.7%. Public debt, inflation, and unemployment are above the euro-zone average; debt and unemployment rose in 2009,
- GDP - real growth rate: -2.5% (2009 est.)
- nvestment (gross fixed): 15.6% of GDP (2009 est.)
- Budget: revenues: $108.7 billion expenditures: $145.2 billion (2009 est.)
- Public debt:108.1% of GDP (2009 est.) 97.4% of GDP (2008 est.)
- Exports: $18.64 billion (2009 est.) $29.14 billion (2008 est.)
- Imports: $61.47 billion (2009 est.) $93.91 billion (2008 est.)
- Reserves of foreign exchange and gold: $NA (31 December 2009 est.) $3.473 billion (31 December 2008 est.)
- Debt - external: $552.8 billion (30 June 2009 est.) $504.6 billion (31 December 2008 est.)
- The public sector accounting for about 40% of GDP

You don't need a PhD in economics from MIT to conclude Greece is flat broke.
Wny is it broke? There can only be one answer: years of mismanagement by the "leaders" of the country voters kept electing to public office.

What is a "Free Lunch" Greek style?

The Germans without whose help Greece will fall further down a deep hole have this to say, reported by the FT:

..."The mood in the German Bundestag is strongly opposed to any significant financial package.

“We have a big problem,” said Hans-Peter Friedrich, deputy leader of the largest Christian Democrat-Christian Social Union group in the parliament. “Four years ago we increased our pension age to 67. In Greece it is 55. We cannot persuade our people that we will give the Greeks money to finance their state spending when they have not carried out their most urgent reforms"...


55 is the age of retirement or when the pension is collectible? If this ain't a "free lunch", I don't know what else it could be.

So, any wonder Greece is going broke? How to fix it is not an economic issue. You can see it is deeply political.
Once folks are used to "free lunches" they expect that to be their right. Who promised them initially? You don't need a PhD from Oxford to figure that one out.

Greece vs European Union

Fingers are pointing this and that and every which way. They might as well be daggers. What a pathetic scene.

The FT reports: "Greek Prime Minister Mr Papandreou blamed the European Commission for failing to crack down on the previous conservative government’s “criminal record” in falsifying statistics. “This has undermined the responsibility of the European institutions with international markets,” he said".

Ah, so a domestic issue of lousy governance is a foreign responsibility?

You can bet your bottom dollar, or euro, that if indeed foreign authorities had taken a strongly worded public position there would have been a major uproar about violation of sovereignty.

Will stronger members of EU help out? In particular Germany, the largest of them all?

FT reports: "Mr. Papandreou's outburst is likely to infuriate the very leaders whose help Mr Papandreou needs. It came as it emerged there would be no more talk of financial assistance until Athens had persuaded the EU that it had a sustainable austerity programme in place.

Germany is insisting Athens bears initial responsibility for restoring confidence in Greece. Angela Merkel, German chancellor, resisted French efforts to come up with an explicit bail-out package at Thursday’s summit of EU leaders in Brussels"....

What would constitute a "sustainable austerity programme"?

Good question. The Greek government has just announced a series of measures: higher taxes on more people, no cash transactions of over 1500 euros after jan 1, 2011, higher VAT taxes, capital gains taxes and cut in earnings of public servants.

Ummm. Good luck. Expect social turmoil, if you asked me.

The economy has been in recession.

FT reports : "...a deepening slump which has been worse than reported, with the fourth quarter of last year seeing another turn for the worse – raising more doubts over whether it can meet its targets of cutting public-sector deficits. Greek gross domestic product contracted by 0.8 per cent in the final three months of last year, by far the sharpest decline reported so far by a eurozone country.

That followed declines of 1 per cent, 0.3 per cent and 0.5 per cent in the first, second and third quarters of the year.

Previous estimates had shown falls of 0.5 per cent, 0.1 per cent and 0.4 per cent. The pace at which Greek GDP dropped last year could also cast doubt on the government’s prediction that GDP will fall by just 0.3 per cent in 2010"...

Given this background and the history of free lunches, the history of a "shadow" market where cash transactions have been a normal fact of life to get around punishing taxes that have been misspent by incompetent and wasteful governments, no one would want to pay higher taxes.

Students of economic development are usually forced to read dense, mathematical economic models. I have always thought that's silly.

No economy can prosper without quality public governance. Countries are poor not because the leaders do not understand mathematics or economic models. They do and they don't care. Most economic problems are created by corrupt leaders.

Greece is yet another example of how those leaders have led the country down to a dead end. To revive it would take herculean effort -- not by leaders who are on top, but by the people who have to pay the price.

Now, people are willing to suffer, even die, if they believe in a just cause. Unfortunately, leaders, or the ruling elites, of declining economies have long lost their legitimacy as trustworthy. It will take a miracle for the Greek people, or for that matter, for the Argentinian people, or name any African people to voluntarily agree to an austerity program when they do not have trust in their leaders. In those poor countries "austerity" measures are usually enforced by force. Many people have died in protestations.

This is going to be a real Greek drama. Watch your headlines. I smell big trouble. Even blood.

Wall Street & "hidden" Sovereign debts

The real story not told by the scary headlines about Wall Street "hiding" Sovereign debt to help borrowers to report legally but not truthfully is how ignorant the various regulatory authorities are about modern financial tools.

The first layer story is about Wall Street designing derivative products that allow borrowers, including governments around the world, to legally report less than what it should.

Sovereign can legally make its debts "go away" because there are insufficient reporting requirements with respect to derivatives. Contingent liabilities appear to belong in a parallel and uncharted universe.

So, should we be upset now to realize Greece, among others, is in far more serious indebtedness than we knew of? That there is now at a minimum a meaningful risk that some major financial blowout may happen? We thought we had seen the worst, yes? So, whom should we blame?

We cannot really blame Wall Street since it had done nothing illegal, right?

So, do we blame government officials?

Well, not quite, since they are not as qualified and smart as those who run around them in circles, namely, their former smarter classmates who went on to work on Wall Street to maximize their incomes and wealth while the more publicly spirited blokes went on to work for the government, namely, to become "public servants" of you and me. We cannot realistically blame people for being dumb. They are what they are. Besides public servants are downright "cheap" compared to what their bankers receive as wages or bonuses.

Perhaps we should blame ourselves. We don't want to pay taxes but we expect public servants to be as savvy as Wall Street bankers. More than that, my recent postings tried to show, we, the taxpayers, expect free lunches wanting the government to foot all kinds of bills, but we pay the officials a pittance.

In Singapore, public servants are paid as well as most senior private sector jobs. And if they are then caught with a greasy palm, they end in a long jail sentence.

In the United States Senators, Congressmen can be "bought" with a pittance by lobbyists. When the government was deep in ideological navel gazing, as in the last Bush Administration, not even smart public servants dared to take a harsh look at funny business on Wall Street let alone propose new regulations to enforce more transparent reporting.

So, while the world is horrified by what Greece had managed to get away with hiding its debts with the help of, yes you guess it, Goldman Sachs, let's think about the deeper problem of how to regulate Wall Street without strangling it.

The full report of how Goldman Sachs helped Greece is here.

The "Cradle of Western Civilization"

Simon Johnson says: "...Greece is well down the path to becoming regarded more like Argentina – a country that struggles over many decades (and whose leaders frequently rail against the world) and for which episodes of reasonable prosperity and new economic models are punctuated by gut-wrenching crises, most of which do not shake the world.

Will the EU save Greece? Much will depend on how bad the situation could become in other “related” (in the eyes of the financial markets) places"...

Source: http://www.huffingtonpost.com/simon-johnson/greece-derails-is-europe_b_461090.html

Argentina was once one of the five richest countries on this planet ahead of France even. Now, through a mind boggling history of serially mindless, cynical, corrupt, incompetent governments the country is now just another Exhibit A of a mismanaged Third World banana republic.

Sad. Argentina was at one point as advanced as a continental European country. It has produced as many Nobel prize winners as Spain, winning the first among all Latin American countries. The country's name, Argentina, was derived from the world silver in French: Argent, now commonly used in French to mean money.

Greece. Ah the Glory that was once Greece: Aristotle, Plato, Homer, Acropolis, that Greek myths and plays, the art, the architecture, and of course the thoughts behind the big D for Democracy that defined the concept of the West is now another tiresome exhibit of a nation badly governed serially run by cynical, incompetent, corrupt politicians who are only good at promising free lunches to a people grown up expecting "manas" from heavens without having to work for it.

As the West continues to expect "government" to do this and that for them, the West will no doubt continue to decline relative to those peoples elsewhere who, after years of painful lessons, know you cannot get rich without working your ass off, day in day out, without handouts.

Yes, many such countries' leaders are also corrupt, but the saving grace is their national economic development policy is growth oriented and not protectionists and not based on handouts.

The Greek "tragedy" or farce in PIGS

PIGS in current economic jargon stands for Portugal, Italy, Greece and Spain. Why lump them together? Lots of debt.

So what's wrong with that? Well, if you owe enough money and if cannot pay the creditors, something has to give. As a footnote, many argue PIGS may sound good, but the acronym misses out Ireland. PIGS should really be PIIGS. OK, PIGS does sound better, so let's go with the convention.

Why is PIGS now a hot topic? The immediate answer is Greece. The larger issue is Debt in general, now especially in the West.

The case in point is the particularly odorous case of Greece the government of which has been lying to the world through creative accounting and selective reporting for some years (6 is the figure used) about the true sizes of its national deficits.

Right now EuroZone governments, mainly Germany and France, the two largest economies in Europe, are scrambling to find a solution to the Greek "problem".

The problem arose from essentially 2 sources, reducible to one.

1) EuroZone imposes strict quantitative limits on how much deficits (ergo national debt) a member country can run up.

If these limits are breached, the government in question must remedy the deficit situation. Ergo, cut, cut and more cuts to bring the deficits down to statutory limits. A grace period is given, but clearly specified.

2) Government spends more money than it should to placate social and economic demands (I want what "they" have and I want them NOW) and to "buy" off political opponents or to "solidify" domestic allies. In short, many folks outside the government want a free lunch. Irresponsible government officials gladly oblige. They don't have the leadership and the spine to say NO.

This second reason is now a Western phenomenon. The US is a prime example of that.

Ironically those Asian "third world" economies, themselves lectured at and battered by too much debt a while back had swallowed hard, tightened belts and now have by and large sterling national balance sheets. Thailand, Malaysia, not to mention Singapore, Hong Kong, Korea and of course China. All have abundant (some say too much) reserves, trade surpluses and high savings rate.

Greece, among others, has been living a good life on borrowed funds and the time to pay up has come.

What to do? Good question.

EU cannot really afford to let Greece get off the Euro as speculators are betting on. Recorded shorts on Euro has never been so high. Once Greece went, then like the Lehman Brothers case, the "signal" is that all weak Euro economices, the PIIGS, will have to leave the Euro. That means a total collapse of the European Union each going back to one's own national currency. IT would be a godsend to currency speculators.

I am sure the German Bundesbank and France are loath to bail out Greece, but what's the alternative? Switzerland is the second largest creditor to Greece.

I think these 3 countries will have to do what the Western countries have been doing for decades to African countries: just forgive the debt Greece owes. Or print more money to buy off the debt.

Who are the major creditors: See this chart



If you have 10 minutes the following 2 clips are worth your time: Stiglitz, Spanish official vs a sarcastic, no holds barred hedge fund manager on Greece.

http://www.youtube.com/watch?v=i-de7q3fbn0
http://www.youtube.com/watch?v=E4MAifsp-8E

Whither US interest rates?

Is there a global bond bubble or are we blinded by old habits?

The author of "The Black Swam" recently said on TV that it was "100%" certain bond prices would collapse. Interesting statement from someone whose punch line in that famous book was about the unpredictability of the future. The book was published before the Wall Street bailout and the author became famous precisely he was warning about the uncertain future in the middle of a huge bubble no one saw bursting.

The case for a bubble is straightforward: just look at all the money printed by the major economies, including China, to save the world from Great Depression 2.0.

Yet, interest rates are close to zero. Long bonds have barely moved.

Paul Krugman argues strenously that those, like me, are blinded by simplistic quantity theory of money: more money printed, all others being equal, results in higher inflation.

Krugman believes we are more like Japan in the "lost decade" of the eighties where zero cost money didn't do much, if anything. Economy was stagnant because Japan found itself in a liquidity trap where easy money was irrelevant, What the world needed then and now is more stimulus, forcibly pulling the world economy out of a deep ditch.

To support his argument, there is indeed excess capacity all over the major economies. Stories of mega ultra modern factories in China abound. Savings rates in the US have been moving up, meaning folks are not spending. No wonders. A large number of Americans, save a handful on Wall Street, are flat broke.

Feeble private demand and excess capacity do not an inflation make. Hence, there is no bond bubble, if you follow this logic.

So, what gives?

Niall Ferguson, a fabulous English writer, a celebrity multi-millionaire talking-head on TV and a respectable historian, now a professor at Harvard B School, is not an economist. In fact, definitely he is not one of my favorite economists either.

However, sometimes it pays to listen to someone with a historical perspective even though Krugman, the Nobel winner and august professor at Princeton, has only contempt for Ferguson, the "fake" economist properly schooled only in historiography.

Trained as an economist myself, I am among the first to admit economists do not always have the correct answers on economic issues even if they speak with the air of authority honed by years of precision, mathematical logic.

This is why I want you to think about this particular excerpt by Ferguson here:

..."For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

Read the entire article here. It provokes thought, if nothing else.

Don't you just love Goldman Sachs?

..."Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit...

...the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

...At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005"...

Source: Read Der Spiegel here