Wednesday, May 20, 2009

Lots of Topics for Today

First, in the first quarter, Japan's GDP contracted at a 15% annualized pace:

TOKYO (AP) — Japan's economy shrank at a record 15.2 percent annual pace in the first quarter, dragged down by plunging exports, thinner factory output and wary shoppers.

But within the details emerged new hope. Economists said the worst is over for the world's second-largest economy. Many predicted it would grow in the April-June period amid aggressive stimulus steps by the government and signs that companies are boosting production.

"I think the economy has passed the bottom, and the recovery has begun in the current quarter," said Richard Jerram, chief economist at Macquarie Capital Securities in Tokyo.

Government data released Wednesday confirmed what many had been dreading yet expecting. The drop in gross domestic product was the steepest since Japan began compiling such statistics in 1955. Compared to the previous three months, GDP fell 4 percent, in the fourth straight quarter that the economy withered.

This is tremendous, though not unexpected. Japan is a major exporter of goods and an inveterate mercantilist. This is what happens to mercantilists during downturns. I imagine China is in nearly as bad shape, but they are also inveterate liars to boot and I wouldn't trust any numbers coming out of that place. Next, pensions look to be in a wee bit of trouble:
The agency (the Pension Benefit Guarantee Corp. SA), which insures traditional corporate pensions, said Wednesday it had a $33.5 billion deficit for the first half of fiscal 2009, worsening from a $10.7 billion deficit at the end of fiscal 2008. It sees substantial underfunding in plans by automakers, auto parts and other industries.
You are not going to retire. Oh, you'll get your monthly check in the mail, along with your Social Security check, just as you were promised. It might even buy you a Big Mac for the first few years. But if you'd like to do things like eat regularly and sleep indoors, you're going to have to work for it. The government hamster-wheel you're in is just going to speed up, until the day you croak and the government has no more use for your broken, lifeless body. Unless there's a war first. Then you'll probably be exterminated. And, just in case you thought you were prepared, the FED says it is going to get worse:

NEW YORK (CNNMoney.com) -- The Federal Reserve's latest forecasts for the U.S. economy are gloomier than the ones released three months earlier, with an expectation for higher unemployment and a steeper drop in economic activity.

The Fed's forecasts, released as part of the minutes from its April meeting, show that its staff now expects the unemployment rate to rise to between 9.2% and 9.6% this year. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%.

The Fed also now expects the gross domestic product, the broadest measure of the nation's economic activity, to post a drop of between 1.3% and 2% this year. It had previously expected only a 0.5% to 1.3% decline.

It'll be worse than that, mind you. And of course it is the FED's fault. The solution?

The Fed disclosed plans to begin buying $300 billion's worth of such Treasurys in March in order to try and keep long-term rates down and boost economic activity.
Why, print more money of course! It worked so well to get us into this jam, surely it'll get us out of it. And I assure you, it will be far more than a measly $300 billion. Trillions. Quadrillions, maybe. This one is courtesy of Mackay:

BEIJING (Reuters) - China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.

Beijing has been far and away the single biggest foreign buyer of Treasuries over the past year, but this apparent vote of confidence belies how it has turned its back on long-term U.S. debt in favor of shorter maturities.

China's move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the economy recovers from the financial crisis.

I've have blogged on this topic over and over again. I grow weary. China is beginning to take steps to transition out of Treasuries and dollars and into commodities. An excellent summary of their likely strategy can be had here, though I disagree that the Chinese are the sharpest knives in the drawer. After all, they did get themselves into this jam; and if they were that smart, they'd have taken over the world already. I suppose one could argue, though, that the rest of the drawer has gotten duller, and that they have become sharpest by default. At any rate, they will still lose money, but not nearly as much. They appear to be planning on foisting most of their losses onto the idiots who are either accepting Treasuries as collateral or are outright trading for them. As the author suggests, these are probably bankers, who we will no doubt be bailing out with printed money once again. I would note with some irony the inverse relationship between the Chinese and the bullion banks, who have borrowed most of the West's gold and sold it into the market, a lot of it for "interest bearing" instruments like Treasuries. After all, these really smart guys know that gold doesn't pay interest like a bond does, so they stand to make a lot of money, right? So they cleverly borrowed the gold decades ago and sold it at $50-$200/oz, bought Treasuries, and now owe all that gold at ~$900/oz and rising. You didn't really think all that gold was still in Fort Knox gathering dust, did you? And I wonder who's going to be eating that loss? Surely, it isn't the Chinese... (Incidentally, I forgot to include this in my analysis some time ago of the ability of the FED to contract the monetary base. Actually, if they demanded all the gold back to sell, the bullion banks would be forced into bankruptcy. The FED could never collect, so effectively, that gold is no longer backing the currency at all! I suppose even Austrians like me screw up now and again. OK, a lot actually...) Finally, since it has proven such a disaster for Europe, the Middle East has been looking to create a unified currency, but it appears that the UAE pulled out at the last minute:

The United Arab Emirates said Wednesday it won't join a plan to unite the Gulf's currencies, dealing a serious blow to what was seen as a step toward greater economic integration in the oil-rich region.

The official Emirates news agency quoted an unidentified foreign ministry official saying his country has informed the six-nation Gulf Cooperation Council of its decision Wednesday. The government often announces official policy changes through the news agency, WAM.

Like the rest of the world, the Arabs grow suspicious of US cheating on its payments through inflation. Oil is priced in dollars, and this puts them, as sellers of oil, at the monetary whims of US policy. With their own currency, they could demand dollars be converted to whatever units they issue, allowing more open bidding for their "wares." This, of course, hurts American interests. Fortunately for the lying, cheating Americans, Arab governments are even less trustworthy. I can't imagine what central banking policy would be like governed by a committee of these, well, characters. One might become suspicious of this act as a sign of growing Arab unity. However, I have a feeling that with the collapse of the dollar out of the way, and the decline of their collective "rival," the Great Satan, it is more likely to lead to rivalry and bickering over proper monetary policy. This is certainly what has happened in Europe. I doubt that the Arab/Muslim world will ever be able to unite. They just hate one another too much. It won't help that the economies of their customers have collapsed, and they have no domestic economies to speak of. I have a feeling there will be a lot of gnashing of teeth in the region. Populations there have expanded dramatically, but they are dependent on the economies of the outside world. Global shutdown could really put the hurt on. On the other hand, commodity prices as a whole, and oil prices in particular, are likely to stay very, very high, as this is where the inflated money supplies of the nations of the world will flock towards once things really get going. So they may be the richest kids on the block, though it will still be a poorer block. But what do I know... Crazy times, they are a-comin'.

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