Sunday, January 23, 2011

Belly Up

The state of Illinois is flat broke. So is California. There are in fact half a dozen states close to the edge. All the states except North Dakota are bleeding red ink. It's so bad that some in Congress are writing up legislation to allow states to declare bankruptcy.

The state of Illinois owes creditors 6 billion dollars. The state comptroller in Feb 2011 is paying the bills for Aug 2010. Drivers of state vehicles are seeing their state issued credit cards being rejected when they try to fill up the gas tank. Everyone is tired of not getting paid. No one want's to do business with Illinois. The legislature in Springfield believes the solution is raising tax rates. A huge tax rate increase for individuals and businesses that recently passed has neighboring states salivating. Wisconsin is aggressively wooing businesses to hop the border and enjoy lower taxes and a shiny new business friendly climate.

California is most likely the reason DC legislatures are crafting a bill to legalize bankruptcy for states. The state is billions in debt and there's no light at the end of the tunnel. Is it somehow poetic justice that the man most responsible for the decline of the Golden State is now faced with the carnage his policies have wrought? Is Gov. Jerry Brown at least a bit humbled by what he found oh so many years later? Possibly. California's suffering in the current economy is exponentially greater than almost every other state. The housing bubble hit the state especially hard. Public services for illegal aliens are a massive drag, but it is the state pension system that is killing California. Bankruptcy would allow the state a way out of the pension nightmare.

America basically has it's own Greece in California. Except that instead of a small minor economic power California has an economy the size of Italy. If California gets a Federal bailout then watch the floodgates open wide. The Cloward/Piven Strategy to overwhelm the government with social obligations will be complete.

One has to wonder if what's happened to America was the inevitable result of blind fate or of cynical manipulation. Probably both. A true unplanned capitalist free market society is equally as impossible as a successful totalitarian communist society. American capitalists see a billion consumers in China and a billion more in the neighborhood. With visions of cheap labor and selling product dancing in their heads coupled with encouragement from the governments in DC and Beijing a massive jobs migration was inevitable. So far the reality of an enormous consumer driven middle class in China has failed to materialize. Maybe it will someday...

In the meantime American's are losing their jobs and the government is forced to borrow billions from China to pay pension and unemployment benefits. Seems crazy, but what do I know?

In a catch 22 situation we realize that a growing, robust American economy would help fill both state and federal coffers, but that's not going to happen if the jobs keep going overseas while the government squeezes the remaining producer class even harder. The current paradigm is unsustainable. How long before the whole thing goes belly up?


Sunday, January 16, 2011

2012 Disaster? The China Bubble

For years we have been hearing two tales about China. The obvious one that China will overtake the U.S. as the dominant economy on the planet and eventually even hold the world' s default currency. Not to mention China's expanding military and its ambitious goals to lead in space exploration among other likely conquests. Who's to stop it? The other tale is the specter of the grand daddy of all "bubbles".

If you have been listening and reading you will have seen the occasional China bubble story. While it seems impossible in the back of your mind you wonder to yourself what will it mean to me...

I've relied on one of my favorite bloggers for specific information, that would be Al Fin of While I find Al Fin extremely credible it doesn't hurt to see evidence in main stream publications. Take a minute to read this article in The Times of London called "Hedge funds bet China is a bubble close to bursting".

We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.”

He is not alone. Hugh Hendry, a former star of Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management.

He follows Mark Hart of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the “key engine for global growth”, China is an “enormous tail-risk”.

There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.

One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.”

More analysts are becoming bearish too. Last week, Lombard Street Research put out a note warning of China’s “already dangerously home-grown inflation”.

The analysts said figures showing the continuing boom in China were far from welcome: “On the contrary, Chinese policymakers have to slam on the brakes.” The financiers are warning that rather than depending on China as the prop of the recovery plan, Britain needs to be braced for another shock.

The housing bubble in The U.S. and to some degree in Europe has caused a near global economic meltdown. It's hard to say what havoc the bursting of the China bubble will do. Nothing good I'm sure.

If one thinks about it the very fact that China became an economic powerhouse is intrinsically tied to the American housing bubble. Through the 80's and 90's technology, computers, the Internet and the digital device revolution helped keep the U.S. economy afloat. First it was the manufacturing of the devices and later, when the manufacturing went overseas, the servicing of the technology culminating in the Y2K economic boom. Thereafter it was the housing market and the wildly inflating real estate prices forged by bad government policy and ridiculously low interest rates that fed the economy the equity capital that would float the economy for a few more years. All the while the jobs flooded out of the U.S. and into China with the blessing of the multi-nationals as well as the Federal government. U.S. consumers flush with all that home equity money bought a lot of Chinese manufactured goods.

Let the good times roll, right?

Where does that leave us now. Well, does a sustained (official) unemployment rate of nearly 10% ring a bell? Does record bank foreclosures sound familiar? Do bankrupt state governments and multi-trillion dollar Federal deficits come to mind? Bad, yes, all bad, but thank God we have cheap Chinese imports at WalMart!!!

If the Chinese bubble bursts we could actually see shortages of some basic supplies since they are not made here anymore, but that would be the least of our worries. Many companies would be hurt and it could cascade into more job losses here, maybe even enough to send us into a deep recession or even a global depression.

No one really knows what might happen. These hedge fund managers, some of whom were ringing the warning bells about the U.S. housing bubble, will point out the canaries in the coal mine for us - we should listen this time.


Saturday, January 15, 2011

REVIEW: Decision Points

Decision Points is George W. Bush's memoir. In it he highlights major decisions he faced as President. It is not a chronological look at his two terms in office. His was a consequential presidency on many levels, good and bad and I suspect this format served him well as he recounted his days in the White House.

Overall I didn't find anything revelatory in the book. Most of the subjects and his positions on them were well known and were endlessly hashed out in the public discourse at the time. This to me was a little disappointing. I had hoped for more, I guess.

There's little point in recounting the "decision points" chapter and verse here since we all lived through them. What I can do is give an impression. I had supported President Bush, voted for him twice. I definitely bonded with him in the aftermath of 9/11. I was ultimately disappointed with his presidency on the whole, but I continue to like the man.

The one thing that becomes clear in Decision Points, and its no small thing, is that Bush is a very thoughtful man. He is neither the evil genius nor the blithering dunce he was alternately portrayed as in the hostile media. President Bush was acutely aware that his job was to make decisions on difficult and consequential matters. He took the job very seriously and not with some cliched shooting from the hip cowboy style.

Bush was profoundly affected by the events of 9/11 as you would imagine. Protecting the country from further attack became the central tenant of his presidency. In his every waking moment and I suspect even in his dreams he was waging a war on terrorism. Obviously this overshadowed everything else and the consequences of the actions the administration took to protect the nation cluttered everything inside the White House as well as inside the newsrooms.

The cacophony of dissent once the immediate shock of 9/11 wore off colored every single topic and poisoned the airwaves and headlines for the remainder of his term. He was determined to proceed on the course he had chosen, knowing quite well that it was going to have to be historians fifty years hence that would have final judgment on the decisions he made - including invading Iraq and taking out Saddam Hussein.

The other thing that come out in this memoir was that Bush did not hate his critics, he actually understood their vitriol. Much to the chagrin of his supporters he did not lash out at his attackers or defend himself from the scurrilous lies. This attitude I suspect was deep in his Texas heart and it was not in his nature to feel the need to defend his own honor. Did it serve him well? It's hard to say. Letting your worse critics define you without correcting the record now and then is a tough bet.

Even in his private life he continues to turn the other cheek. He is respecting a time honored tradition that former Presidents shall not criticize their successor - even as he endures his successor trashing his presidency at every turn. There is not one negative reference to President Obama or even President Clinton is this book. He makes it clear that in a 235 year old nation of hundreds of millions people that less than 50 men stood where he stood. Only a few people have ever had that unique understanding of what it took to be President of the United States. He is not about to make President Obama's job harder.

Decision Points was worth reading, but it probably won't change anyone's mind about the man or the President. I came away with the impression that Bush is an intelligent, thoughtful, honorable and yes, also a stubborn man. He made big decisions, some right, some wrong. He admits his mistakes openly and explains (rather than defends) the things he believes he got right.


Sunday, January 09, 2011

It's Bush's Fault

Hey, I'm just trying to be first.

Not to make light of the horrific tragedy that took place in Tuscon AZ on Saturday, but the drive-by media and their minions are already painting conservatism and conservatives as the guilty party in all of this.

Rep. Gabrielle Giffords has somehow miraculously survived a gunshot to the head. Several others were not as lucky. It is a senseless tragedy. The gunman Jared Lee Loughner is clearly deranged. The anti-gun left, so eager to pin this on Sarah Palin and conservatism, have wasted no time making such dubious links in public. It's not even known if this nut-burger has any particular political allegiances or influences.

Remember the massacre in Fort Hood, TX? Or, the murder at the Arkansas Army recruitment office that took place last year? Hard right conservatives got zero traction throwing multicultural tolerance up against the wall. These were hate crimes if you want to call them that, Muslim hatred for the American military, nonetheless few blamed liberalism or specific leftists. Why? Because it was ridiculous to do so. It's just as ridiculous to blame right-wingers and especially Sarah Palin for this. Sorry, but people can be convinced of anything if it is repeated enough. Lies and smears can be embedded far easier than they can be removed. When they find that there wasn't any connection whatsoever between Jared Loughner and any aspect of the conservative movement will that be remembered? Probably not.

God Bless Giffords and the other innocent souls, my heart breaks for them. Let's not go blaming the sky for the darkness...