The "F" Word?

Is the Democratic party becoming a socialist workers party? Andy Stern, former head of the union that represents government workers-SIEU, wrote this is an op ed piece in the Wall Street Journal: 

The conservative-preferred, free-market fundamentalist, shareholder-only model -- so successful in the 20th century -- is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA's results -- a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1% -- are pathetic.

This should motivate leaders to rethink, rather than double down on an empirically failing free-market extremism. As painful and humbling as it may be, America needs to do what a once-dominant business or sports team would do when the tide turns: study the ingredients of its competitors' success.

Stern is a frequent visitor to the White House and no doubt his views receive a warm welcome there. 

There are many problems with the article. Stern does not know what a free market system is. Blaming the economic performance of last decade on the free market is like blaming the rape victim. We have no free market. Both candidates in the last presidential election were unadmitted socialists. Maybe the better term for what they were is the "f" word. 

I am old enough to remember all the countries that were supposed to be the big monster we were told to fear. In the 70's it was Europe. (Although there were books that argued to a European readership that the challenge for them was America like Jean-Jacques Servan-Schreiber The American Challenge.) Later it was the supposedly evil Japanese who would buy America on the cheap. I even remember the Sean Connery movie called Rising Sun which played to these fears. Now it is the Chinese we are supposed to fear-or in Stern's case follow. 

Click on Picture for explanation of this photo. The society that Stern is praising in the article is China-yes, China. The country that forces every woman to have an abortion if she has more than one child. The country that forced 1 million people to leave their homes with minimal compensation to build the Three Gorges Dam. The country that has few environmental laws. The country that rigs the currency system to shaft the American worker. The country that has no freedom of speech. That country. 

Maybe you look at things differently than me, but I have no desire to have America imitate China. 

The "f" word I mentioned earlier is a word that describes our system that no one will admit to being accurate. The "f" word is fascism. None Dare Call it Fascism. 

Max Keiser Reports

I like Max Keiser. He seems to understand things that elude most commentators. 

Euro Collapse?

This current news reminds me of an old Paul McCartney song. "The Pound is Sinking." Now it is the Euro:

As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.

But it gets worse:

Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.

Greece has seen several outbreaks of civil disorder as its government struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses.

Why is this happening? 

The balance sheets of European banks are piled high with legacy assets -- mortgages, real-estate, and other loans--that are tying up precious capital and constricting the banks' ability to make new, more productive loans.

At the same time, the banks' traditional sources of funding--other banks and institutional investors--have begun drying up as the European crisis intensifies.

This leaves the banks desperately needing to raise cash to survive.

The first plan was to sell off the crap assets.

The Banks are surprised when no one wants the "crap assets" at a price that will keep the banks solvent. 

How many banks are at risk? No one knows. Here is a list of european banks that are probably already bankrupt. 

20 - Royal Bank of Scotland Group (UK)

• PIIGS Exposure as % of Common Equity: 175%

19 - Landesbank Berlin (Germany)

• PIIGS Exposure as % of Common Equity: 179%

18 - Barclays (UK)

• PIIGS Exposure as % of Common Equity: 189%

17 - Landesbank Baden-Württemberg (Germany)

• PIIGS Exposure as % of Common Equity: 230%

16 - DZ Bank (Germany)

PIIGS Exposure as % of Common Equity: 239%

15 - KBC Bank (Belgium)

• PIIGS Exposure as % of Equity: 247%

14 - Credit Agricole (France)

• PIIGS Exposure as % of Common Equity: 293%

13 - Deutsche Bank (Germany)

• PIIGS Exposure as % of Common Equity: 327%

12 - BNP Paribas (France)

• PIIGS Exposure as % of Common Equity: 358%

11 - Commerzbank (Germany)

• PIIGS Exposure as % of Common Equity: 462%

10 - Dexia (Belgium)

• PIIGS Exposure as % of Common Equity: 552%

9 - Banco Santander (Spain)

• PIIGS Exposure as % of Common Equity: 953%

8 - Unicredit (Italy)

• PIIGS Exposure as % of Common Equity: 1,070%

7 - Bank of Ireland (Ireland)

• PIIGS Exposure as % of Common Equity: 1,385%

6 - BBVA (Spain)

• PIIGS Exposure as % of Common Equity: 1,566%

5 - EFG Eurobank Ergasias (Greece)

• PIIGS Exposure as % of Common Equity: 1,601%

4 - Intesa Sanpaolo Group (Italy)

• PIIGS Exposure as % of Common Equity: 1,638%

3 - Banco Popular Español (Spain)

• PIIGS Exposure as % of Common Equity: 1,927%

2 - Banca MPS (Italy)

• PIIGS Exposure as % of Common Equity: 4,666%

1 - Allied Irish Banks (Ireland)

 PIIGS Exposure as % of Common Equity: 33,352 

What these figures mean is that it will not take much of a "haircut" to bankrupt many European banks. No doubt the countries in which these banks are doing business will make sure that they will stay afloat. Oh, wait, these countries are basket cases too. 

Bubble, Bubble, Toil and Trouble

The "powers that be" are like the witches in MacBeth, stewing a nasty concoction for us all to drink. I see Bernanke, Geithner et all, wearing the stereotypical witch's costume, stirring their monetary cauldron, and cackling away incoherently. Everyone is going to drink, no matter what country you live in. 

China is a good case in point. I have an acquaintance who is moving there. His grandfather and my father were good buddies back in the day. No doubt there are many opportunities there. However, they are economically a basket case. (I am well aware that this is not the usual view.) 

Hedge fund investor  Jim Chanos has this to say about China: 

“The Chinese banking system is built on quicksand and that’s the one thing a lot of people don’t realize,” said Chanos, who is shorting the shares of Agricultural Bank of China. “Everybody seems to think it is a free and clear open checkbook. It’s not. The banking system in China is extremely fragile.”

Bloomberg provides us with reasons Chanos might be right:

China spent 3.5 trillion yuan ($550 billion), equal to a fifth of its 2005 gross domestic product, bailing out and recapitalizing state-owned banks since 1998 as their lending to unprofitable state-owned businesses turned sour, according to an estimate by Moody’s Investors Service in 2007. Since September 2008, Chinese banks doled out $3.8 trillion in new loans to offset the impact of the global financial crisis, according to the International Monetary Fund.

Hedge fund investors, or business pundits like Bloomberg have been wrong before. What do the notoriously tight lipped Chinese say? 

China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse.

Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. He coined the phrase: “In China, every province is a Greece.”

The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not post his speech online, or “everyone will look bad,” in the audio that is now on Youtube.

How exactly will China crumble? Lang offers these weaknesses:

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 51.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

I am not sure I would want to be a foreigner in China, or anywhere else, when the coming crisis finally hits. 

Ron Paul On Face the Nation

As a follow up to yesterday's blog post, here is Ron Paul on Face the Nation. While I would not cut defense as much as Paul, I am in general agreement. We have little choice in the matter. We do not have the money. Letting the Bush tax cuts expire will enable us to not cut as much, but these cuts will happen as current trends can not continue. The cuts can happen now in a fair and rational manner, or they can happen latter in a crisis in an unfair and irrational manner. There is no third option.