Sunday, February 7, 2010

Links - What Others Are Saying in Fast Moving Times 2/7/2010

I normally use links to substantiate or provide other views in my posts, but events are moving very fast and I want to follow up to my last post on Greece and Spain, China, AIG/Goldman, and the need for financial regulatory reform.

China:  This past week saw the US and China butting heads over trade restrictions and the whether the yuan should be allowed to appreciate or remain pegged to the US dollar.  Just recently, President Obama said he wanted to double US exports within five years.  Just which other countries of the world would have to contract their exports to accommodate the United States?  China is the obvious target.  Given labor costs and other competitive cost constraints, the United States cannot possibly double its exports in five years, but it can initiate international protectionist trade wars.

On China's asset bubbles, inflation expectations, and cash reserves.
On China's currency.
On China's price pressures and tightening of bank reserve requirements.
On China's loan rate's and new loan restrictions.
What to watch for in China -- the risks.

As I said on the Radio Show yesterday, you have to have been watching China for some time.  The connection to Latin America, particularly Brazil, is obvious and Latin American mutual funds and ETFs are showing the danger.  The recent refusal of the Australian central bank to raise interest rates a fourth time citing a need to evaluate the past raises and what is going on in China was significant.  Australia has developed China as an Australian export market.  Even if China does everything right going forward and does it slowly, the global impact of even that soft landing will be shuddering, just as we have begun to witness in the last two weeks of China's preliminary tightening moves.

Greece and Spain will continue to come under derivative trading attack and it will continue to be a potentially larger European problem.  Our last post, "Greece, Spain, and the Euro Trojan Horse", documented the multiple causes, the need for financial reform, a more effective monetary policy, and the need for the EU and ECB to formulate a program of EU bonds.

Greece and why the IMF will not be the answer.
While the failure of Greece to provide accurate economic data in the past and its corruption are widely known, the problem of the losses on Spanish banks books has been relatively muted.
The market pressure will continue.
While bailout doomsday scenarios abound and demands for budgetary cuts grow, the real problem is the need for financial regulatory reform and the economic impact of the euro on the 16 countries which use the euro.
While budget cuts are necessary to remove ineffective accumulation of public debt, targeted spending and the effective accumulation of public debt to spur economic growth and job creation is the most fiscally responsible governmental path, but the 16 EU countries which use the euro do not have the monetary and fiscal policy options of countries which have their own currency.  
The risk remains that the speculative attack of the derivative traders could create a European and global debt contagion.
Meanwhile 10 billion euro have been pulled out of Greece.

The connection between Goldman Sachs and AIG continue to simmer and escalate, because it goes straight to what was wrong with the bank bailouts and how that bailout actually made the sources of the current global financial crisis larger, more powerful, and more systemically dangerous.

How Goldman Sachs pushed AIG to the edge and profited.
Just how much did AIG not understand the true market values, credit rating, and risks of its CDOs?
If the relationship between AIG and Goldman Sachs been fully disclosed publicly, should the United States government have nationalized AIG and then dealt with Goldman Sachs?

Economic Solvency:  What we do now will have a direct impact on whether we have an economic crisis twenty or thirty years from now.  When you look at China, Japan, Australia, the United States and other countries with respect to population growth and immigration, some have started to ask if there is a population growth solution to sovereign solvency.
Another example is the relation of savings in China to population growth and the one child family.

Economics to be properly applied needs a very multidisciplinary approach.

Financial regulatory reform: We have in the past listed the failure of the US Congress to move real financial regulatory reform forward and the role of financial lobbyists in neutering, gutting, and making proposed "reforms" actually less effective than the one's currently on the books.  Greece, Spain, etc have shown the need for financial reform in their countries also.  Some have tried to delay financial regulatory reform by calling for coordinated global financial reform regulations.  Each country needs to act now.  Global coordination should be pursued, but it is not an acceptable excuse to delay needed reforms in individual countries.  One only has to look at Canada to see how financial regulations there significantly controlled the impact of the current global financial crisis.  In fact, a case could be made that past global coordination agreements are directly inhibiting financial regulatory reform. 

I have repeatedly stressed that these, as well as other, macroeconomic issues not only have a direct effect on economic and political decisions but investment decisions and portfolio management.

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