Xie: Why One Bubble Burst Deserves Another

As always, its all in the timing...

Andy Xie: Why One Bubble Burst Deserves Another
09-28 Caijing

The financial crisis taught crucial lessons about the dangers of bubbles, loose regulation and debt. It's a pity we didn't learn.

Lehman Brothers collapsed one year ago. The U.S. government refused a bailout and warned other financial institutions to be careful. The government felt other institutions had already severed their dealings with Lehman's investment network, and that a collapse could be walled in.

Little did the government realize that the whole financial system was one giant Lehman. The securities firm borrowed short-term money to punt in risky and illiquid assets. The debt market supported the financial sector, believing the government would bail out everyone in a crisis. But when Lehman was allowed to collapse, the market's faith was shaken.

The debt market refused to roll over financing for financial institutions. Of course, financial institutions couldn't unload assets to pay off debts. The whole financial system started teetering. Eventually, governments and central banks were forced to bail out everyone with direct lending or guarantees.

The Lehman collapse strategy backfired. Governments were forced to make implicit guarantees explicit. Ever since, no one has dared argue about letting a major financial institution go bankrupt. The debt market is supporting financial institutions again only because they are confident in government guarantees. The government lost in the Lehman saga, and Wall Street won.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars -- probably more than US$ 10 trillion when we get the final tally -- to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

First, let's look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 -- about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.

Second, financial institutions are operating as before. Institutions led in reporting profit gains in the first half 2009 during a period of global economic contraction. When corporate earnings expand in a shrinking economy, redistribution plays a role. Most of these strong earnings came from trading income, which is really all about getting in and out of financial markets at the right time. With assets backed up by US$ 16.5 trillion in debt, a 1 percent asset appreciation would lead to US$ 16.5 billion in profits. Considering how much financial markets rose in the first half, strong profits were easy to imagine.

Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What's occurring now is another bubble that is again redistributing income from the masses to the few.

Third, financial supervision has not changed. After the Lehman crash, most governments were talking about strengthening financial regulations and regulatory agencies, and possibly establishing an international regulatory body. The developments in the past year have actually made financial supervision worse. To support financial institutions, the U.S. government suspended mark-to-market accounting rules for assets on the books of financial institutions, which has allowed them to report profits.

Revamping the financial system has been reduced to political moves over regulating banker salaries. If this could be done, incentives for financial institutions to manufacture bubbles would be removed. But it can't be done. Financial professionals can be based anywhere in the world, and there will always be some countries willing to host them. Because of such competitive concerns, a global consensus on regulating pay for financial professionals is unlikely.

I think the ultimate objective for financial reforms is to make leverage transparent. There are many reasons that a bubble forms. Debt leverage, however, is always at the center of a property bubble -- the most damaging kind. Leverage within a financial system's assets-to-equity capital ratio is a driving force for an asset bubble. Complex accounting rules and varying treatment of different financial institutions make it difficult to measure leverage. The international standard for a bank's capital is 8 percent, which allows 12 times leverage. How off-balance sheet assets are treated can make a huge difference. A lot of big banks had 30 times leverage at the beginning of the crisis due to off-balance assets.

Other institutions such as finance companies are harder to regulate. Some industrial companies such as General Electric and General Motors took advantage of loopholes and created finance companies that are essentially banks. Hedge funds, mutual funds, private equity firms, etc., are even more lightly regulated. When they purchase securitized debt securities and engage in lending, they are like banks.

One interesting phenomenon is how money market funds wreaked havoc after Lehman crashed. These funds are supposed to be ultra safe for buying triple-A, short-term, liquid debt instruments. The problem was their demand for liquidity. Self-manufactured liquidity provided a false sense of security despite the risks of underlying securities, such as short-term paper issued by investment banks. When that false sense of security was jolted by the Lehman collapse, all rushed to exit at the same time. Without government support, they wouldn't have been able to get their money back.

The problem with financial regulation is not the banking system per se, but the shadow banking system. It provides leverage with much less capital than the banking system. When leverage in the economy is rising, asset prices rise, too. Rising asset prices boost collateral value and, hence, more borrowing. A surge in earnings among financial institutions usually accompanies such a spiral of rising leverage and rising asset prices.

It is extremely difficult for an established regulatory regime to stop such a spiral. Usually new financial institutions or products come on the scene, and then a new leverage game begins. It would be impossible for an existing regime to be comprehensive enough to anticipate future institutions and products. Governments may need to install principle-based, not just rule-based, regulatory agencies that could take action to control new financial creations.

The U.S. government is proposing a consumer protection agency for financial products. Such an agency could at least respond to new financial products sold to consumers and, therefore, could be an effective mechanism for stopping some future bubbles. The proposal has met vehement opposition from the financial industry. It may not get through.

What can we speak for after spending trillions of dollars? Not much. Few major players went to jail. The U.S. government sent many more to prison in the 1980s after the junk bond bubble burst. This bubble is 10 times bigger. Yet, apart from the most obvious criminals such as Bernie Madoff and Allen Stanford, who ran multibillion-dollar Ponzi schemes, none of the big shots have landed behind bars. Indeed, a lot of the big shots who brought down the world are still out there running things. The lesson from the Lehman collapse seems to be, "Take whatever you can and, when it crashes, you get to keep it." How governments and central banks have dealt with this bubble will encourage more people to join bubble making in the future.

Since governments have failed to take advantage of the crisis and build a better financial system, it will become very difficult to push it forward now. The sense of urgency is gone. One may argue that, since markets are stable now, there is no need for radical reforms. This is exactly the wrong conclusion. Trillions of dollars have been spent to buy today's stability. If the money isn't spent in vain, serious reforms should take place to decrease the possibility of a catastrophe like this in the future.

The big change that happened is a rapid increase in the U.S. household savings rate. It happened much more quickly than I expected and has the potential to change the global economy. The economic explanation is negative wealth effect. U.S. household net wealth declined 20 percent, or nearly 100 percent of GDP. The rule of the thumb is that it would lead to a 5 percent reduction in spending. The U.S. household savings rate has increased more than that -- and continues to rise. It could rise above 10 percent next year. Because of rising savings, the U.S. trade deficit has already halved from the peak. It could halve again next year. This is why I have turned positive on the dollar.

Financial markets are still maximum bearish on the dollar. Liquidity is being channeled out of dollar into all other assets. This is why there is such a high correlation between the dollar and other assets. I think this is the most crowded trade in the world. When the dollar reverses, the short squeeze could cause a global crisis.

Because no meaningful financial reforms have occurred, bubble-making rapidly came back in fashion. The drivers are faith in an ever-depreciating dollar and, later, inflation. Stocks, commodities, and even property values in some cities have skyrocketed this year. It is happening amid a synchronous global recession.

Of course, bulls would argue the market recovery is forecasting a strong global economy ahead. I seriously doubt it. With savings and unemployment rising, the OECD bloc is unlikely to stage a strong recovery from the recession. This view is not the market's consensus, which assumes all stimuli will lead to a strong and sustained recovery. As I have argued before, supply and demand become misaligned during a big bubble. When it bursts, the economy must restructure supply and demand before the economy can be fully employed. Government stimulus can't solve the problem. Realignment will take time.

Because policymakers mistakenly think stimulus spending can bring back growth, they are pushing too hard. The eventual consequences are inflation and bubbles along the way. These bubbles will be short-lived. The current boom market is a good example. At the beginning of the year, I predicted such a bubble from March to September. I still hold to this belief. China's stock market peaked in August and the U.S. market is peaking in September. The reason for the shortness of the bubble is its limited impact on real demand.

How long a bubble lasts depends on the size of its multiplier effect on the economy. A large multiplier effect leads to an economic boom that boosts asset returns. Market watchers can make a plausible case that high asset prices reflect a revaluation rather than a bubble. Strong fundamentals and rising asset prices could sustain each other for a period. The dotcom bubble began in 1996 and lasted five years. The global property bubble began in 2002 and lasted five years, too.

A technology bubble can be extended by cutting costs and boosting profits. A property bubble stimulates demand in many parts of demand and can boost corporate earnings, benefiting financial institutions, retailers, construction companies and material suppliers. This large multiplier effect is why a property bubble usually lasts many years.

Only a multiplier effect from the current bubble is stopping financial institutions from going under. However, weighed down by trillions of dollars in non-performing assets, they cannot lend with abandon again, which makes it impossible to revive property bubbles. Besides, American households won't join the "borrow-and-spend" game again. Essentially, the main short-term impact of the current bubble is preventing the financial system from collapsing. It won't lead to substantial demand creation.

Many investors today think a bubble is inevitable and, when it bursts, another can be created quickly to keep on going with life as usual. What has occurred over the past six months seems to validate this viewpoint. History, however, is not kind to this view. Serial bubble making leads to a bigger economic crisis later. What occurred in the United States in the 1930s and Japan over the past two decades are good examples in that regard. If a new bubble were always available for bailouts, we'd have the ultimate free lunch. But there is no free lunch.

Our serial bubble making began 10 years ago with the Asian Financial Crisis. It led to loose monetary policy in developed economies, especially in the United States, and undervalued exchange rates in developing economies. The inflationary force from this loose monetary policy was kept down by excess capacity or capacity creation in developing economies. The environment for tolerating such a loose monetary environment ends when inflation surges in emerging economies first and developed economies second.

When inflation becomes a political problem and policymakers are forced to respond, money supplies will be cut. After that, no more bubbles.

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I watched Andy Xie being interviewed this morning on CCTV and dug out this recent article.

Andy Xie: What We Can Learn as Japan's Economy Sinks
09-16

Japan hasn't sustained growth bounces for decades, nor will it under the DPJ government. Therein lie lessons for other economies.

(Caijing Magazine) Japan has had a political earthquake. The Liberal Democratic Party (LDP) that ruled Japan since the end of the World War II lost most of its seats in the latest election, while the Democratic Party of Japan (DPJ) won 308 of 480 lower house seats, complementing its majority in the upper house.

Now, DPJ is in a strong position to undertake structural reforms. Indeed, a big political change brings hope in any country that's stagnated for as long as Japan. However, DPJ is unlikely to turn around Japan's economy anytime soon. LDP, in the name of Keynesian stimulus, spent all its money over the past decade on wasteful investments, leaving DPJ with no resources for reform. I'm afraid DPJ has an impossible situation on its hands.

Anyone who doesn't believe in the harm of a financial bubble but does believe in Keynesian stimulus magic should visit Japan. A likely dip for the Anglo-Saxon economies next year will underscore these truths. The same goes for anyone who thinks China's latest real estate bubble, asset borrowing and shadow banking system are worthwhile substitutes for real economic growth.

The world including China can learn a lot by looking at what's happened to Japan, and what's in store for DPJ. Since Japan's stock market bubble burst in 1989 and the land market popped in 1992, the LDP government has run up debt equal to nearly 200 percent GDP in hopes of reviving the economy. And its economy has stagnated.

The burst of the global credit bubble in 2008 brought down Japan's export machine. That was its only hope. Now, of all OECD economies, Japan's looks most like a depression. Its nominal GDP declined 8 percent in the first quarter 2009 from the year before. Although its economy rebounded a bit in the second quarter, nominal GDP for 2009 is still expected to decline substantially and will likely be lower than in 1993.

Many analysts blame Japan's problems on corporate inefficiency. This is partly true. Japan has had a hyper-competitive export sector. Domestic, demand-oriented industries are inefficient due to labor market practices. More importantly, sectors that became massively levered during the bubble years have been walking like zombies for two decades, weighing down the economy's overall efficiency. Japan's inefficiencies are largely a consequence of its decision to prop these industries.

U.S. return on asset (ROA) was twice as high as that in Japan. But, in hindsight, higher ROA in the United States was mostly a bubble phenomenon. Much of U.S. corporate profitability was due to financial engineering. In one aspect, the export performance of Japan's corporate sector has done very well -- much better than its U.S. counterpart. Japan's exports doubled in yen terms between 1993 and 2008, and the sector's share of GDP nearly doubled to 16 percent from 9 percent, even though the yen remained strong during the period. The performance of Japan's export sector shows its inefficiencies elsewhere were largely due to shortcomings in the system.

Japan's stagnation has been linked to government handling of debt overhang in the corporate sector -- mainly in the real estate, construction, and retail sectors, and left over from the bubble era. In the 1980s, especially after the Plaza Accord, Japan's corporate sector accumulated a massive amount of debt for financial speculation. Total corporate debt more than doubled to about 900 trillion yen, or 200 percent of GDP, from 1984-'92. After land and stock prices collapsed, the net value of the corporate sector's financial assets switched from about 30 percent of GDP to a minus 50 percent of GDP. If the change in land holding value is included, the corporate sector's net worth may have fallen by 200 percent of GDP. As corporate profits are about 10 percent of GDP in a developed economy, Japan's corporate sector would need two decades to earn its way back.

The Japanese government did choose to let the corporate sector earn its way back, first by preventing bankruptcies and second by stimulating demand. To achieve the first goal, the government kept interest rates near zero and Japanese banks did not pursue mark-to-market accounting in assessing borrower solvency. With a big chunk of the corporate sector zombie-like, the economy, of course, was always facing downward pressure. The government had to run large fiscal deficits to prop up the economy. After the bubble, Japan's economic equilibrium stagnated and the fiscal deficit swelled.

This strategy was flawed in three aspects. First, even as the corporate sector earns profits to pay down debt, the government's debt is rising. At best, it is shifting corporate debt to government debt. In reality, government debt has been rising faster than private sector debt has been falling.

Second, economic efficiencies don't increase in such equilibrium. Existing resources in the zombie sector are essentially unproductive. Bankruptcies improve efficiency by shifting resources from failing to succeeding companies. When rules are changed to stop bankruptcies, efficiency is sacrificed. Worse, incremental resources are sucked up to pay fiscal deficits used to prop up zombie industries. Japan is thus trapped in equilibrium of low productivity.

Third, a long period of stagnation could worsen irreversible social change. A falling birth rate, for example, is one consequence that is wreaking havoc on the Japanese economy. Japan's post-bubble policy was to let property prices decline gradually. Hence, living costs also declined gradually. On the other hand, the economy stopped growing, which caused income expectations to quickly adjust downward. The combination of high property prices and low income growth rapidly pushed down Japan's birth rate. As a consequence, Japan's population is declining two decades after the bubble. The rising burden of caring for the old will lower Japan's ability to pay for anything else.

After two decades, Japan hasn't achieved its main policy goal by letting its corporate sector work down debt. Total, non-financial corporate debt is about the same as it was two decades ago. At 180 percent of GDP, Japan's corporate indebtedness remains one of the highest in the world. Japan's household sector has indeed de-levered. Its debt at 69 percent of GDP is one of the lowest among developed economies. But government debt has increased massively over the past two decades. Its current debt level at 194 percent is the highest in the world. Only super-low interest rates are hiding the debt burden.

DPJ has been handed a poisoned chalice. It won't have the resources needed for a serious restructuring of the economy. Its twin goals are to increase support for the household sector and shift decision-making power to politicians from bureaucrats. The government's debt burden makes it impossible for any meaningful increase in supporting the household sector. LDP wasted all the money. DPJ has no room to finance either new social programs or economic restructuring. To show progress, DPJ is likely to stage a high-profile confrontation with the bureaucracy – a step that may be good for politics but won't do much to improve the economy.

Total indebtedness of Japan's non-financial sector is 443 percent -- probably the highest in the world, and far higher than the 240 percent in the United States. A difference is that the United States owes a big chunk of its debt to foreigners, while all of Japan's is carried by its own citizens.

Most analysts think high government debt is bearable as long as a country has enough domestic savings to fund it – a situation Japan has enjoyed. But the future may be different. Japan's declining labor force is decreasing its export ability. At some point, it may begin to run trade and current account deficits. When that happens, Japan's interest rate may rise substantially, which would cause a fiscal crisis. Such a crisis may occur under the DPJ's rule. It could be blamed for a crisis that LDP had been building for two decades.

We can learn much from Japan's experience. The global economy -- mainly the Anglo-Saxon economy -- is facing the consequences of a massive credit bubble. The remedies most governments have embraced are to keep interest rates low and fiscal deficits high. These are the same policies Japan pursued after its bubble burst nearly two decades ago. How today's bubble economies are treating bankruptcies and bad debt is shockingly similar to what was seen in Japan. The United States and others have suspended mark-to-market accounting rules to let banks stay afloat despite large amounts of toxic assets. It's the same "let them earn their way back" strategy that Japan pursued. The strategy fails to work because it keeps an economy weak, limiting the earning power of financial institutions.

As the global economy is again showing signs of growth in the third quarter, most governments are celebrating the effectiveness of their policies. Yet Japan's experience forces us to pause: Its economy experienced many such growth bounces over the past two decades, but was unable to sustain any of them. The problem was Japan only used stimulus, not restructuring, to cope with the bursting of its bubble. After the demise of any big bubble, serious structural problems that hamper economic growth remain. Stimulus can only provide short-term support that makes structural reform possible. When policymakers celebrate the short-term impact of stimulus and forget structural reforms, economies slump again. I think the Anglo-Saxon economies will dip again next year.

China can learn a lot from Japan's experience as well. Its bubble formed when companies began focusing on financial investments rather than core business. In the 1980s, Japan's corporate sector tapped the corporate bond market and raised massive amounts of capital for asset purchases.

Recently, Chinese enterprises borrowed money and pumped it into asset markets. They essentially provided leverage for asset markets. When leverage was rising, asset inflation occurred, letting companies book profits that were many times greater than operating profits from core businesses. That gave them greater incentive to pursue asset appreciation rather than operating profitability. The corporate sector became a shadow banking system for financing asset speculation.

Thus, China's corporate sector is now behaving in a way similar to what was seen in Japan two decades ago. China's businesses increasingly focus on asset investment rather than core business. When an asset bubble boosts corporate profits, it seems benign at first. Nobody sees the harm. However, when businesses earn profits from the investments in each other rather than their corporate businesses, their operating profitability deteriorates because they don't invest in their core businesses anymore. Accounting profitability is just a bubble.

As I traveled across China recently, it was rare to hear about a business whose officials are enthusiastic about their core business. But everyone seems excited about financial activities. The lending boom in the first half of 2009 seems to have been channeled mostly into asset markets by the corporate sector.

In particular, property seems to have become a main profit source for most big businesses. China's corporate borrowing one way or another goes into the land market. And property development has become the most important source of profit for China's corporate sector. If a manufacturing business is buoyant, odds are it is profiting from property development. The banking sector reports high profitability due to direct or indirect loans for property development. Property development profit is actually from land appreciation. If property development profitability is measured according to land price at sale time, the development itself would not be profitable.

A bubble rises when there is excess money supply. Is the current, excessive monetary growth due to demand or supply? We can argue that point forever. When the former chairman of the U.S. Federal Reserve, Alan Greenspan, said a central bank couldn't stop a bubble, he meant money demand would rise regardless of interest rates. I disagree. If a central bank targets monetary growth in line with nominal GDP growth, a big bubble can't happen. Aside from central bank failure, then, the most important microeconomic element in a bubble is the shadow banking system.

Regulators limit what banks can do by imposing capital requirements. The international standard is 8 percent of total assets, but banks can use accounting tricks to minimize their requirements. But a big accounting loophole can lead to disaster. For example, the loose restrictions on off-balance holdings were major factors in the global credit bubble. Most regulators are now tightening accounting rules for capital requirements.

Shadow banking is a less noticed but more important factor in creating bubbles. Most analysts compare it to the hedge fund industry, which provided leverage for financial speculators with little capital. The shadow banking system is much more because industrial firms engaging in financial activities are more important. Entities such as GE Capital and GMAC provided massive leverage to asset markets with little capital. A shadow banking system is essential to a big bubble.

China's corporate sector increasingly looks like a shadow banking system. It raises funds from banks, through commercial bills or the corporate bond market, and then channels the funds into the land market. The resulting land inflation underwrites corporate profitability and improves their creditworthiness in the short term.

The same thing happened in Japan.

To control China's expanding real estate bubble, the country's regulators must limit monetary growth to nominal GDP growth. Faster monetary growth accommodates and supports the bubble. To understand consequences of ignoring this reality, we need only look at Japan today.

An asset bubble is forming in Spore right now - property. I doubt the PAP gahment has as much foresight as Xie.
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The real S'pore Pledge under the PAP

The truth always hurts...

We, the citizens of Singapore
pledge ourselves to serve the foreign people,
regardless of their backwardness, race, language or religion,
to build a foreigner-dominated society,
leveraging on 66.6% Singaporean stupidity,
so as to achieve happiness, prosperity and
progress for the famiLee, their cronies and their foreign fake talents.

However to feel less bitter, just lap up all the 155th media and newspapers for this weekend hahaha.
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When people enter the market in droves, it is usually peaking

From Andy Xie, and why he expects a second dip in world economy in 2010...

(warning: long read lol)

Andy Xie: Tight Spot for Fed, Blind Spot for Investors

Market chatter over green shoots and rising prices has fueled a bear market rally that won't last, despite policymaker 'noise.'

A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.

Regardless of what investors or speculators say to justify their punting, the real driving force is the return of animal spirit. After living in fear for more than a year, they just couldn't sit around any longer. So they decided to inch back. The resulting market appreciation emboldened more people. All sorts of theories began to surface to justify the market trend. Now that the rising trend has been around for three months globally and seven months in China, even the most timid have been unable to resist. They're jumping in, in droves.

When the least informed and most credulous get into the market, the market is usually peaking. A rising economy and growing income produces more funds to fuel the market. But the global economy is now stuck with years of slow growth. Strong economic growth won't follow the current stock market surge. This is a bear market rally. People who jump in now will lose big.

Over the past three weeks, the dollar dove while oil and treasury yields surged. These price movements exhibited typical symptoms of inflation fear, which is complicating policymaking around the world. The United States, in particular, could be bottled in. The federal government's fiscal stimulus and liquidity pumping by the Federal Reserve are twin instruments for propping up the bursting U.S. economy. The fiscal deficit could top US$ 2 trillion (15 percent of GDP) in 2009. That would increase by one-third the total stock of federal government debt outstanding. Such a massive amount of federal debt paper needs a buoyant Treasury to absorb. If the Treasury market is a bear market, absorption becomes a huge problem.

U.S. Treasury Secretary Timothy Geithner recently visited China to, among other things, persuade China to buy more Treasuries. According to a Brookings Institution estimate, China holds US$ 1.7 trillion in U.S. Treasuries and GSE paper (about 15 percent of the total stock). If China stops buying, it could plunge the Treasury market into deep bear territory. If China does not buy, the Treasury market will get worse. But China can't prop up the market by buying.

In the past few years, purchases by central banks around the world have dominated demand for Treasuries. Central banks have been buying because their currencies are linked to the dollar. Hence, such demand is not price sensitive. The demand level is proportionate to the U.S. current account deficit, which determines the amount of dollars held by foreign central banks. The bigger the U.S. current account deficit, the greater the demand for Treasuries. This is why the Treasury yield was trending down during the bulging U.S. current account deficit period 2001-'08.

This dynamic in the Treasury market was changed by the bursting of the U.S. credit-cum-property bubble. It is decreasing U.S. consumption and the U.S. current account deficit. The 2009 deficit is probably under US$ 400 billion, halved from the peak. That means non-U.S. central banks have much less money to buy, while the supply is surging. It means central banks no longer determine Treasury pricing. American institutions and families are now marginal buyers. This switch in who determines price is shifting Treasury yields significantly higher.

The 10-year Treasury yield historically averages about 6 percent, with about 3.5 percent inflation and a real yield of 2.5 percent. This reflects the preferences of marginal buyers in the United States. Foreign central banks have pushed down the yield requirement substantially over the past seven years. If marginal buyers become American again, as I believe, Treasury yields will surge even higher from current levels. Future inflation will average more than 3.5 percent, I believe. Some policy thinkers in the United States believe the Fed should target inflation between 5 and 6 percent. The Treasury yield could rise to between 7.5 and 8.5 percent from the current 3.5 percent.

A massive supply of Treasuries would only worsen the market. The Federal Reserve has been trying to prop the Treasury market by buying more than US$ 300 billion – a purchase that's backfired. Treasury investors are terrified by the inflation implication of the Fed action. It is equivalent to monetizing national debt. As the federal deficit will remain sky-high for years to come, the monetization could become much larger, which might lead to hyperinflation. This is why the Treasury yield has surged in the past three weeks.

One possible response is to finance the U.S. budget deficit with short-term financing. As the Fed controls short-term interest rates, such a strategy could avoid the pain of high interest rates. But this strategy could crash the dollar.

The dollar index-DXY has fallen 10 percent from the March level, even though the U.S. trade deficit has declined substantially. It reflects the market's expectations that the Fed's monetary policy will lead to inflation and a dollar crash. The cause of dollar weakness is the outflow of U.S. money, in my view. It is the primary cause of a surge in emerging markets and commodities. Most U.S. analysts think the dollar's weakness is due to foreigners buying less of it. This is probably incorrect.

The dollar's weakness can limit Fed policy options. It heightens inflation risks; a weak dollar imports inflation and, more importantly, increases inflation expectations, which can be self-fulfilling in today's environment. The Fed has released and committed US$ 12 trillion (83 percent of GDP) for bailing out the financial system. This massive overhang in money supply could cause hyperinflation if not withdrawn in time. So far, the market is still giving the Fed the benefit of the doubt, believing it will indeed withdraw the money. Dollar weakness reflects the market's wavering confidence in the Fed. If the wavering continues, it could lead to a dollar collapse and make inflation self-fulfilling.

The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.

Oil prices have doubled since a March low, even though global demand continues to decline. The driving forces again are expectations of inflation and a weaker dollar. As U.S.-based funds flee, some of the money has flowed into oil ETFs. This initially impacted futures prices, creating a huge gap between cash and futures prices. The gap increased inventory demand as investors tried to profit from the gap. Rising inventory demand caused spot prices to reach parity with futures prices. Rising oil prices, though, lead to inflation and depress growth. It is a stagflation factor. If the Fed doesn't rein in weak dollar expectations, stagflation will arrive sooner than I previously expected.

Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money's value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can't be fooled three times. Central banks that tried to use stimuli to solve structural problems in the '70s saw their stimuli didn't work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.

Rational expectation theory discredited Keynesian theory and laid the foundation for Paul Volker's tough love policy, which jagged up interest rates and triggered a recession. The recession convinced people that the central bank was serious about cooling inflation, so they adjusted their behavior accordingly. Inflation expectations fell sharply afterward. The credibility that Volker brought to the Fed was exploited by Alan Greenspan, who kept pumping money to solve economic problems. As I have argued before, special factors made Greenspan's approach effective at the same. Its byproduct was asset bubbles. As the environment has changed, rational expectation theory will again exert force on the impact of monetary policy.

Movements in Treasury yields, oil and the dollar underscore the return of rational expectation. Policymakers have to take actions to dent the speed of its returning. Otherwise, the stimulus will lose traction everywhere, and the global economy will slump. I expect at least gestures from U.S. policymakers to assuage market concerns about rampant fiscal and monetary expansion. The noise would be to emphasize the "temporary" nature of the stimulus. The market will probably be fooled again. It will fully wake up only in 2010. The United States has no way out but to print money. As a rational country, it will do what it has to, regardless of its rhetoric. This is why I expect a second dip for the global economy in 2010.

While inflation expectations are causing some in the investor community to act, the rest are betting on strong economic recovery. Massive amounts of money have flowed into emerging markets, making it look like a runaway train. Many bystanders can't take it any longer and are jumping in. Markets, after trending up for three months, are gapping up. Unfortunately for the last-minute bulls, current market movements suggest peaking. If you buy now, you have a 90 percent chance of losing money when you try to get out.

Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.

The return of funds flowing into property is even more ridiculous. A property burst usually lasts for more than three years. The current burst is larger than usual. The property market is likely to remain in bear territory for much longer. The bulls are talking about inflation as the bullish factor for property. Unfortunately, property prices have risen already and need to come down even as CPI rises. Then the two can reach parity.

While rational expectation is returning to part of the investment community, most investors are still trapped by institutional weakness, which makes them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.

This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what's paid in other sector. The key to its survival is volatility. As markets collapse and surge, possibilities for getting rich quickly are created. Unfortunately, most people don't get out when markets are high, as they are now. They only take a ride.

Indeed, most people who invest in the stock market get poorer. Look at Japan, Korea and Taiwan: Even though their per capita incomes have risen enormously over the past three decades, investors in these stock markets lost money. Economic growth is a necessary but not sufficient condition for investors to make money in the stock market. Most countries, unfortunately, don't possess the conditions for stock markets to reflect economic growth. The key is good corporate governance. It requires rule of law and good morality. Neither is apparent in most markets.

It's a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don't last for more than 20 years. How can long term investment make money for you? The bankruptcy of General Motors should remind people that this notion is ridiculous. General Motors was a symbol of the U.S. economy, a century-old company that succumbed to bankruptcy. In the long run, all companies go bankrupt.

Property on the surface is better than the stock market. It is something physical that investors can touch. However, it doesn't hold much value in the long run either. Look at Japan: Its property prices are lower than they were three decades ago. U.S. property prices will likely bottom below levels of 20 years ago, after adjusting for inflation.

China's property market holds even less value in the long run. Chinese properties are sitting on land leased for 70 years for residential properties and 50 years for commercial properties. Their residual values are zero at the end. The hope for perpetual appreciation is a joke. If you accept zero value at the end of 70 years, the property value should only be the use value during those 70 years. The use value is fully reflected in rental yield. The current rental yield is half the mortgage interest rate. How could properties not be overvalued? The bulls want buyers to ignore rental yield and focus on appreciation. But appreciation in the long run isn't possible. Depreciation is, as the end value is zero.

The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.

If you are a speculator and confident you can get out before it crashes, this is your market. If you think this market is for real, you are making a mistake and should get out as soon as possible. If you lost money during your last three market entries, stay away from this one – as far as you can.

oh shit! I betta sell my one lot in Capitaland soon... -_-"

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Stubborn minded people are dangerous

I notice something common between LHL and this woman. They like to start their message using straw man logic.

May 27, 2009
Religion still has its place
By Jeremy Au Yong, Political Correspondent

(Left, daughter of self-claimed Feminist Mentor) Nominated MP Thio Li-ann. -- ST FILE PHOTO



RELIGION and politics should not mix, but that does not mean religion has no place in public life.

Nominated MP Thio Li-ann argued at length in Parliament on Tuesday that secularism, as practised in Singapore, did not exclude religion.

Referring to Deputy Prime Minister Wong Kan Seng's recent reiteration that religion and politics must not be mixed, she said that while this was sound, 'there are difficulties of definition as no bright line demarcates 'religion' from 'politics'.

She added: ' 'Secularism' is a protean, chameleon-like term. What it means depends on the context and who is using it; it can be a virtue or a vice. It is timely to eschew glibness and examine the Singapore model of secularism with precision.'

In the first place no one is excluding religion, or saying religion has no place in public life.

2ndly, she is trying hard to link or blur public life with politics. Bcos if religion has a place in public life, then it should in politics too, since both are legitimate going by her argument.

But she is mistaken. For e.g. it may be my belief that eating sharks fin is a terrible thing and sharks fin eaters are stupid and irresponsible fuckers. This is private and this belief remains within me. My actions in public is also personal, i do not eat sharks fin. I do not vocalise my belief in public or go around getting other people to share this belief. Maybe there are some other people who also believe in the same thing. And the public calls us Sharkists or other stupid names. But that is about it. We don't start to go around invading Chinese restaurants and take over their menu decision.

So that is the difference between public life and politics. Politics affect everyone, not just yourself.

By way of elaboration, she pointed out that during the parliamentary debate a few years ago on whether or not to have casinos in Singapore, many MPs prefaced their speeches by stating their faiths.

'Everyone has values, whether shaped by religious or secular ideologies; all may participate in public discourse to forge an ethical social consensus. This is democratic and cherishes viewpoint diversity,' she said. 'While religion is personal, it is not exclusively private and has a social dimension which is not to be trivialised.'

Prefacing speeches by stating one's faith is perfectly ok to me. But to base their political decisions on faith or values grounded in faith is another thing. The latter will no longer be secular liao. Besides, the casino debate, if i recall correctly, ended up being one of weighing economic benefits against social ills.

Also, this is more of a case where we have PAP MPs who are simply going along with their political boss, appease their constituents or members of certain faiths. It is a no-brainer.

Rather naive for an NMP like Thio not to understand this but instead tries to subtlely reinterpret the facts.

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Andy Xie makes sense

Who is Andy Xie? hehehe



If China loses faith the dollar will collapse

By Andy Xie

Published: May 4 2009 19:28

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America’s problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency. The US can disregard its creditors’ concerns for the time being without worrying about a dollar collapse.

The faith of the Chinese in America’s power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar’s global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar’s unique status.

The Chinese love affair with the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. Memory is long when it comes to currency credibility. The Chinese renminbi remains a closed currency and is not yet a credible vehicle for wealth storage. Also, wealthy ethnic Chinese tend to send their children to the US for education. They treat the dollar as their primary currency.

The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts rather than on dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. The country’s vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out.

The global environment is extremely negative for savers. The prices of property and shares, though having declined substantially, are not good value yet and may decline further. Interest rates are near zero. The Fed is printing money, which will eventually inflate away the value of dollar holdings. Other currencies are not safe havens either. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence, major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.

Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar’s global status. Ethnic Chinese demand for the dollar has been waning already. China’s bulging foreign exchange reserves reflect the lack of private demand for dollars, which was driven by the renminbi’s appreciation. Though this was speculative in nature, it shows the renminbi’s rising credibility and its potential to replace the dollar as the main vehicle of wealth storage for ethnic Chinese.

America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand.

China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

The writer is an independent economist based in Shanghai and former chief economist for Asia Pacific at Morgan Stanley

The name of the Rose

The AWARE saga is coming to a head. It seems to me the new Exco wishes to be martyrs. If the gahmen intervenes, it will play into their hands and their religious backers behind them. To these religious fanatics, if you are not with them, you must be against them.

Their tactic is to stop AWARE, and if they fail they will taint AWARE, tar it, bankrupt it, and drag it down with them.

It is like a napkin. Once a napkin is soiled it can never be the same as before no matter how you try to clean it. In this sense AWARE has been effectively neutered, and that is their purpose.

Whatever the outcome of this saga, the minority fundamentalists have won and society and moderates at large will be the losers.

And so far i see the PAP leaders once again lacking the political will to do the right thing...although I hope i will be proven wrong.




Suddenly I am reminded of this movie watched many years ago.

It is set during the times of The Inquisition, a dark period in Europe of religious fanaticism and oppression.

Mysterious deaths at a mountain monastery is fanning fear and hysteria. The monks attribute demonology as the explanation and proclaim the world is in its last days before the second coming of Christ. A Francescan monk, William of Baskerville (Sean Connery), does not think so and through logic and reasoning proceeds to solve the mystery.

In a pivotal moment, William discovers the real evil responsible - an old monk, Jorge de Burgos, who has been poisoning other monks for reading a forbidden book, a book of comedy and laughter...

Jorge de Burgos: Laughter is a devilish whim which deforms, the lineaments of the face and makes men look like monkeys.

William of Baskerville: Monkeys do not laugh. Laughter is particular to men.

Jorge de Burgos: As is sin. Christ never laughed.

William of Baskerville: Can we be so sure?

Jorge de Burgos: There is nothing in the Scriptures to say that he did.

William of Baskerville: And there's nothing in the Scriptures to say that he did not...

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The not-so-hidden message

What do you think is the real message behind this piece of news?

April 4, 2009
Politics? Not for me

Though Mr Terence Foo studied political science, he is not interested in joining politics as he is 'happy with the way things are'. -- PHOTO

AS A young undergraduate-to-be, Mr Terence Foo chose to study at the University of Michigan as it 'has the best political science programme'.

He later decided, however, to do it as an elective and majored in economics because he is, as he puts it wryly, a 'typical Singaporean, afraid of not being able to find a job with a political science degree'.

Now 38, it is this same pragmatism that leads him to firmly cross out entering politics as a possibility.

'I've never been interested, it's never crossed my mind,' he says categorically.

'A lot of it has to do with contentment. I'm happy with the way things are, there's no reason to be an activist.

'I've benefited from the system, I don't feel that there is anything worth changing.'

Any competitive business that wish to keep improving, they find out what their customers think about them. In fact, they pay more attention to what their critics have to say. Becos there is no point listening to those who only sing your praises. You cannot improve this way, instead you will end up stagnating... sinking into complacency.

So if PAP is keen to improve and recruit someone like this Terence into politics, then it has obviously got its priorities all wrong.

Of cos this may just be one of those propaganda-"credible news" that the State Times does regularly. As election is not far away, it is time to remind Sporeans: "Be contented. The system is at its best. There is nothing to change."

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Lessons from Europe

Aided by Safety Nets, Europe Resists Stimulus Push
By NICHOLAS KULISH
Published: March 26, 2009

VIENENBURG, Germany — Last month Frank Koppe gathered together all 50 of his employees at Koppe-Apparatebau for coffee, cake and the kind of bad news that has lately become all too familiar. He told them the small company’s business, designing and manufacturing custom equipment for industrial plants, had been sliced nearly in half.

But rather than resorting to layoffs, Mr. Koppe asked half his employees to come in every other week. The government would make up roughly two-thirds of their lost wages out of a fund filled in good times through payroll deductions and company contributions.

The program — known as “Kurzarbeit,” which translates as “short work” — and others like it lie at the heart of a heated debate that has erupted on the eve of next week’s Group of 20 meeting of industrialized and developing nations and the European Union, creating a rift between the Obama administration and European governments. The United States is pressing for a coordinated package of stimulus plans by member countries to encourage economic growth, something that Prime Minister Mirek Topolanek of the Czech Republic, which holds the European Union presidency, has called “a way to hell.”

But virtually all European governments, led by budget-conscious Germany, are resisting the American pitch, saying the focus should be on stricter regulation of financial markets.

The Europeans say they have no need for further stimulus right now because their social safety nets, derided in good times by free market disciples as sclerotic impediments to growth, are automatically providing the spending programs that the United States Congress has to legislate.

Europe’s extensive job protections and unemployment benefits are “bad in the upswing, because firms don’t dare to hire people, because then they are glued to them,” said Hans-Werner Sinn, president of the Ifo Institute for Economic Research in Munich. “In the downswing, it’s good if the people are glued to the companies. They keep their jobs. They keep their income. They keep consuming.”

The German Federal Labor Office projects that it will spend some $2.85 billion this year for more than a quarter of a million people who end up on Kurzarbeit. In comparison, the agency doled out around $270 million last year, as the financial crisis first began to bite, and roughly $135 million in both 2006 and 2007.

That is a relatively small amount of money compared with the $787 billion stimulus package passed by Congress, but the Kurzarbeit program’s defenders in the German government say it is carefully calibrated to keep people on the payrolls, where shared burdens mean an efficient deployment of resources.

The big numbers at the top of stimulus bills — promises of future highways, for instance — are not the same as money going into consumers’ pockets right now, and from there into cash registers, economists here say.

“While the magnitude of stimulus has been much less in Europe’s case, the stimulus has been getting much better traction in Europe than in the U.S. so far,” said Julian Callow, chief Europe economist at Barclays Capital in London. He cited a German incentive program that gave consumers around $3,400 to trade in old cars for new ones and that had led to 22 percent more auto registrations in February compared with the previous year.

“Europe can still do significantly more and needs to do it, but the needs for the U.S. have been much more pressing,” Mr. Callow said.

Germany already has generous unemployment benefits compared with the United States. And many German companies give workers the flexibility to save overtime hours, carrying over the pay for a rainy day. In the United States, despite scattered reports of unpaid furloughs and wage cuts, companies still rely heavily on layoffs to control labor costs.

As of July 1, Germany’s roughly 20 million pensioners are receiving an additional 2.4 percent in the former West Germany and 3.4 percent in the former East, the highest increases since 1994 and 1997, respectively.

Germany’s chancellor, Angela Merkel, believes the Americans have underestimated the economic impact of the country’s two stimulus packages, worth a total of about $110 billion. Indeed, in terms of immediate stimulus, according to calculations by the International Monetary Fund last month, Germany has committed to stimulus spending this year equal to 1.5 percent of the country’s gross domestic product, compared with 0.7 percent in France and 2 percent in the United States. According to a report from Bruegel, a research center in Brussels, while Germany churns out 19 percent of the European Union’s economic activity, it accounts for 37 percent of the group’s stimulus spending.

American critics, like Adam S. Posen, the deputy director of the Peterson Institute for International Economics in Washington, say that Germany needs to do more. “As a hugely export dependent economy, they have the most to gain from others’ fiscal efforts,” he said, “and the most at risk if the global trade contracts further — worse if they are accused of free-riding on leakage from others’ programs.”

Mr. Posen and others argue that while Germany may be doing more stimulus spending than others in Europe, it is counseling other European countries — many of which share the euro as their common currency — not to spend their way out of recession either, but to count on their safety nets to do much of the job.

“They’re the ones who basically browbeat other countries into not spending,” he said, “who give intellectual and political backbone to other countries’ conservative leanings not to stimulate.”

Without knowing it, Mr. Koppe’s 25 employees are playing their small part in keeping the German economy afloat. But nearly 70,000 employees of the automaker Daimler have been placed on short-hour status. On the bright side, it means they are able to play with their children, tend to their gardens or — with further government incentives — receive the kind of advanced training that will make them even more skilled when orders pick up again.

Harder times all but certainly lie ahead for Germany. Commerzbank said Monday that it expected the German economy to contract by a shocking 6 to 7 percent in 2009, roughly double earlier projections and the worst decline of the postwar era. Critics of the German government’s cautious approach to stimulus fear that because Germany is feeling the brunt of the worldwide recession last, its policymakers are underestimating its force.

Indeed, to travel between the United States and Germany is to find two countries experiencing the economic slowdown completely differently. The severity of the downturn does not appear to have sunk in yet in for Germans. There was no real estate bubble here, and few people have a substantial portion of their savings or retirement accounts invested in the stock market. The unemployment rate has risen more than a percentage point, to 8.5 percent in February from 7.1 percent last November. But, significantly, the latest figure is still lower than it was just a year ago.

“In contrast to America, our social systems are not on the decline right now,” Mrs. Merkel said Sunday night in a widely watched interview on a television talk show. “Pensions are not cut, unemployment insurance is not reduced. On the contrary, we can register stable and, in some sectors, also rising expenditures, and this makes me hope that our social market economy will enable us to cope with this complicated situation.”

Michael Hartmann, 49, a welder here at Koppe and one of the workers on shortened hours, said he and his wife were trying to save, buying cheaper groceries and driving less to save on gasoline, but doing nothing as severe as they would if he were laid off. “Of course I’m concerned about the reduced wages, but it’s better than getting fired,” Mr. Hartmann said.

In the meantime, he is learning a complicated welding technique at a nearby vocational school, which he hopes will make him more attractive to his current employer, or others looking for skilled workers. (NY Times link)

Social safety nets help cushion the wild market upheavals especially in an export-oriented economy like Spore's.
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Conservative hypocrisy

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Life is easy if you’re a conservative. Even if conservatives fail completely while in power, they can turn around and say, "See — that proves our point. Government doesn’t work!"

- Paul Krugman

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The Biggest Market Failure in human history...

no, is not the sub-prime crisis
no, is not de-regulation or over-regulation
no, is not the Fed's printing of fiat money
no, is got nothing to do with basic human greed





The biggest market failure the world has ever seen is Climate Change.

Simply put, it is the failure of current economic models to include and price externalities.

In the end the costs of inaction in dealing with global warming, will far far exceed the cost of dealing with global warming today.

And the world over, Spore included, governments & their policy makers are still drunk on the traditional economic model of inputs consumption. GDP numbers above everything else, totally ignoring sustainability. How stupid can they be.

Krugman ...

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Revenge of the Glut
By Paul Krugman
Published: March 1, 2009


Remember the good old days, when we used to talk about the “subprime crisis” — and some even thought that this crisis could be “contained”? Oh, the nostalgia!


Today we know that subprime lending was only a small fraction of the problem. Even bad home loans in general were only part of what went wrong. We’re living in a world of troubled borrowers, ranging from shopping mall developers to European “miracle” economies. And new kinds of debt trouble just keep emerging.

How did this global debt crisis happen? Why is it so widespread? The answer, I’d suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. At the time, Mr. Bernanke was trying to be reassuring. But what he said then nonetheless foreshadowed the bust to come.

The speech, titled “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go.

Most of that money went to the United States — hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the United States, were much larger compared with the size of their economies.

Still, much of the global saving glut did end up in America. Why?

Mr. Bernanke cited “the depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth).” Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.

And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.

For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterday’s miracle economies have become today’s basket cases, nations whose assets have evaporated but whose debts remain all too real. And these debts are an especially heavy burden because most of the loans were denominated in other countries’ currencies.

Nor is the damage confined to the original borrowers. In America, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsed — and that has taken a terrible toll on the industrial heartland. Similarly, Europe’s bubbles were mainly around the continent’s periphery, yet industrial production in Germany — which never had a financial bubble but is Europe’s manufacturing core — is falling rapidly, thanks to a plunge in exports.

If you want to know where the global crisis came from, then, think of it this way: we’re looking at the revenge of the glut.

And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So that’s how we got into this mess. And we’re still looking for the way out.

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PAP gahmen will hold elections ASAP...

...instead of later.

A lot smokescreens are being thrown lately, from PAP MPs to the 148th media. This is becos when it comes to politics, the entire gahmen machinery works towards one party's agenda and interest.

The economic woes are unprecedented, and will get worse. Logically PAP will want an unchallenged mandate for another 5 yrs ASAP.

So despite the public denials and pronouncements, all signs point to an election that will be held ASAP, earliest during the March school holidays.

The opposition should gear up NOW.

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Friday nite...

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Deep Psychosis (Daniel Kandis Cure Mix) - Luke Warner & Mat Lock


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PAP just doesn't get it

This time is Lui, again...

Feb 5, 2009
Online attacks from netizens
Minister rues poor conduct
Opportunity lost for online community to regulate itself, says Lui

WHEN MP Seng Han Thong was set on fire by a Yio Chu Kang resident last month, he drew many online attacks that were vicious.

Some were 'downright outrageous', said Senior Minister of State (Information, Communications and the Arts) Lui Tuck Yew in Parliament yesterday.

He was referring to postings that included statements saying Mr Seng deserved to be assaulted and a list of 10 things he should 'be thankful for' in spite of being attacked.

But instead of silencing these attackers, the online community largely bit their tongue.

The tepid response of netizens to the nasty comments disappointed Rear-Admiral (NS) Lui, who said it was 'quite apparent the Internet is not an effective self-regulated regime as some may have touted it to be'.

RADM Lui was replying to Ms Penny Low (Pasir Ris-Punggol GRC), who had asked for his views on netizens' response to the physical attack on Mr Seng, MP for Yio Chu Kang.

He said: 'I do not think the community itself has done enough to rebut some of these unhelpful comments delivered by fellow netizens.

'It is a squandered opportunity for a higher degree of self-regulation.It would have been an example of the genesis, of the first steps, towards a more responsible, greater, self-regulatory regime.

'But many of those responses were not rebutted or answered, and I think it is not healthy for some of this to remain on the Net unchallenged, unquestioned and unanswered.'

RADM Lui also urged netizens to do more to define acceptable online conduct.

So what really is the issue here?

The fact that some PAP MPs are so disliked and therefore not many netizens can empathise? Or perhaps the PAP has become so unpopular these days with young, better educated, and savvy Sporeans that anything unfortunate that happens to the PAP and its members is taken as positive news and something to cheer about? hahahaha the tuth hurts sia!

Of cos the Rear Admirer Lui, being a backdoor MP and parachuted into office as minister, does not or seems unable to understand this. Instead he whines and complains, threatens more regulation to something he knows very well that is near impossible to regulate.

Then again maybe he does not know, which would hardly be surprising hahahaha...


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Red herring

Here is what you do to create a distraction. You create an imaginary issue so that the real issue is obscured.

Feb 1, 2009
Not breaking piggy bank

THE Government is not 'breaking the piggy bank' even as it is dips into its past reserves - for the first time - to help fund a record $20.5 billion spending plan, said Senior Minister Goh Chok Tong on Sunday.

'To break the piggy bank is to allow all the notes and coins to spill out, with no controls over how much is spent. We are not doing that,' he told his Marine Parade constituents at a Chinese New Year celebration lunch.

While Mr Goh said the Government had to take this unprecedented step of seeking the President's approval to use a small portion of Singapore's past reserves to tackle its worst-ever recession, he emphasised that 'our reserves must continue to be protected.'

'We must continue to exercise great discipline and not dip into our reserves at the first sign of difficulties. We should tap it only as a last resort and when there are compelling reasons,' he said.

SM Goh said he he favours putting up three 'No' signs when drawing on the reserves.

First, no use of the reserves to support social assistance programmes.

As a general principle, the Government must continue to fund such programmes out of revenues raised in the current term of government, not past reserves, said Mr Goh.

Second, no draw for permanent programmes. Such programmes like Workfare and ComCare, no matter how meritorious, should be funded by current revenues and reserves.

Third, no draw except under dire circumstances when one-off extraordinary measures are required to ward off catastrophe or prevent irreparable damage to the economy.

Taking pains to drive home the point, he reiterated: 'When this economic recession is over, we must continue our policy of growing our reserves by living within our means and running a modest budget surplus. As the present situation shows, our reserves are the best insurance for our own and our children's future.

'Use them wisely and sparingly. Never break the piggy bank.'

The President has given his in-principle approval to a Government's request to draw $4.9 billion from reserves accumulated before its current term of office.

The money is to fund two measures aimed at saving jobs and keeping businesses afloat in this downturn.

It is doing so even though it has built up sufficient savings during its current term, which began in 2006, in order to have 'full flexibility' to respond to the current economic crisis, Finance Minister Tharman Shanmugaratnam said in his Budget statement on Jan 22.

Also, the two 'extraordinary' measures the draw will pay for are temporary and will not be built into longer-term government programmes, and should therefore be separately funded, he said.

The two measures are the Jobs Credit scheme which subsidises employers' wage bills to the tune of some $4.5 billion, and the Special Risk-Sharing Initiative which will help viable mid-sized companies get access to credit.

Mr Tharman had said that Singapore's past reserves were 'substantial' and 'well in excess of our liabilities'.

The Government has never disclosed the full extent of these reserves. Past estimates by analysts have ranged from $300 billion to $600 billion.

This is the second time the Government had gone to President Nathan. In October last year, it sought his approval for a $150 billion guarantee on all bank deposits here to be backed by past reserves.

During the Asian financial crisis in 1998, for instance, when the economy grew by just 1.5 per cent, Mr Goh, then-Prime Minister, had dismissed suggestions that the reserves be drawn on.

He said then: 'Once foolishly spent, they will be most difficult to build up again. As your trustee responsible for these reserves, I am honour-bound to protect them. We must not fritter them away, whatever the pressures we face.'

In his Sunday speech at the Marine Parade constituency lunch, SM Goh said after Mr Tharman's budget speech, a former Ambassador to Singapore recently teased him that Singapore was finally 'breaking the piggy bank!'

'I promptly corrected him. To break the piggy bank is to allow all the notes and coins to spill out, with no controls over how much is spent. We are not doing that,' he said.

'In this instance, before approaching the President, the Minister for Finance had first to convince the Prime Minister. They then had to convince the Cabinet. After that, the Government had to convince the President to use his second key to unlock the safe.

yadda yadda... The rest of it is here...

The question is:
Are people really concerned whether the piggybank will be broken? (incidentally S$5 billion withdrawn, as compared to US$24 billion thrown into rescuing western banks hahaha)
Or how the miserly S$5 billion is really benefitting workers or businesses?

hehehe...

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Socialism for the rich

Jan 30, 2009
Budget is pro-worker

THE $20.5 billion Resilience Package unveiled last week in the Budget is more pro-worker than employees may realise, said labour chief Lim Swee Say yesterday.

He gave two reasons to support his point.

One, the Jobs Credit scheme to subsidise part of the wage bill of employers, makes Singaporeans more cost-competitive than foreign workers.

But more importantly, it avoids the need to cut employers' contribution to the Central Provident Fund (CPF). This second point, in particular, makes the package 'even more pro-worker than pro-business', he said.

Mr Lim was disputing the view held by some that the measures announced in the new Budget did a lot for businesses, but not enough for workers.

'This is a gross misunderstanding of the Resilience Package,' he told about 500 union leaders and NTUC staff at the labour movement's annual Workplan Seminar to set out its priorities and goals.

In his 90-minute speech, Mr Lim stressed that while it is a steep uphill task to save jobs in this recession, the labour movement 'die die, must try'.

'Never forget, to the worker who is unemployed, the unemployment rate is 100 per cent,' he said as he set out three key targets for the National Trades Union Congress. These are: keep a lid on layoffs so that the number does not breach the 29,000 level of the 1998 Asian financial crisis; ensure unemployment stays below the 5.2 per cent high reached in the 2003 Sars crisis; and work for a recovery that is faster than the global economy's.

Mr Lim acknowledged that the odds are stacked against achieving the layoff targets. Retrenchment in unionised companies is picking up, he noted, from 1,600 in the fourth quarter of last year to possibly at least some 3,000 this quarter.

'If this trend were to continue, I'd say the 29,000 record in 1998 could easily be surpassed within this year,' he said.

But he noted that the Republic has one powerful weapon in the battle against its worst post-war recession. He calls it 'The Singapore Advantage', which is the unity among the tripartite partners: NTUC, employers and the Government.

It is rare elsewhere, he said, referring to the US car industry and Hong Kong: 'We did not point fingers like the case of the US...We did not go on strike like the Hong Kong airport workers.'

Armed with this weapon, Mr Lim urged the tripartite partners to commit themselves to making Singapore the most pro-business economy in the world, the most pro-worker nation, the most united tripartism model and a place with the most caring labour movement.

He explained to union leaders that they can be pro-business by agreeing to a wage cut should the company's situation warrant it and management take the lead with a deeper cut.

'We must be prepared to mobilise the ground as long as the management is prepared to take the lead,' he said.

The approach would lead multinational companies to favour Singapore, he indicated. Following the new Budget measures, Japanese companies are re-submitting their proposals to their headquarters who are looking at downsizing operations in Japan, China or Singapore, he said.

In praising the Jobs Credit scheme, Mr Lim said that until last week, the biggest fear among unionists was a reduction in employers' CPF contribution.

Such a cut would hurt workers who are paying housing loans and saving for retirement. So, the Government's move to use past reserves to finance the $4.5 billion scheme was a big relief, he added.

The temporary wage subsidy - 12 per cent of each month's wages but only for the first $2,500 - is equivalent to a 9 percentage point CPF cut.

'If not for Jobs Credit, many workers will not enjoy the full 14.5 per cent contribution from the employer,' he said.

The president of the Food, Drinks and Allied Workers' Union, Mr Abdul Subhan Shamsul Hussein, told The Straits Times that Mr Lim's explanation clarified for him how the scheme was advantageous to workers.

He confessed that he and some of his union members had felt the Resilience Package was too pro-business as there were not as many direct cash giveaways as they had hoped.

Singapore Inc under the PAP has never been pro-worker. So you believe this sia suay guy? Hahahaa

"五千年历史有屁用"... scamming a living from those living in the past

LKY believes that cultural affiliation will make a difference when it comes to doing business with the Chinese.

Dec 17, 2008
S'pore needs to co-opt 50 Chinese steeped in the culture each year
By Li Xueying, Political Correspondent

As a former China national, Ms Tan knows how to woo clients from her old homeland.

PRIVATE banker Leiny Tan was born in Wuhan city, grew up in Guangdong province and got her university degree in the United States.

But she eventually decided to make Singapore her home after arriving here as a student in 1991.

Now a citizen, the 40-year-old is in charge of the China market for US banking giant Citigroup, responsible for managing the finances of super-rich Chinese nationals based here and in China.

As a former China national, Ms Tan knows how to woo clients from her old homeland. 'Knowing the language is an advantage as we need to be very clear and precise,' she told The Straits Times. 'Understanding the culture is another advantage - the Chinese are very private about their families, but if I ask them the right questions, for instance about their children, they're happy to open up.'

Minister Mentor Lee Kuan Yew wants to see 50 Chinese nationals-turned-Singaporeans like Ms Tan every year, 'co-opted' to help Singapore engage China.

Speaking at a dialogue yesterday, Mr Lee said students from China may come here to master English. But if they come after secondary school, the depth of their Chinese 'can never be shaken'.

'So maybe we can co-opt 50 of them, and then we can bring them back to China to do business on our behalf.'

In 50 years, Mr Lee envisaged East Asia and China 'will be where the action is'. And Singapore needs some 300 talented people a year with the cultural background to connect with those in China.

'Our problem going forward is that our best and brightest do not want to spend their lives concentrating on China,' said Mr Lee. 'They want to go to America, they want to... see greener pastures in the English-educated world.'

So to engage China, Singapore now depends on its older generation who went through Chinese-stream education, and are familiar with Chinese allegories like Romance of the Three Kingdoms, he said.

Younger Singaporeans are conversant in Mandarin, but are lost once the conversation leaves familiar subjects.

Said Mr Lee: 'You (the Chinese) can sit down with the Taiwanese businessmen and while the whole night away drinking because you can talk about so many common things you share in history and culture...But with a Singaporean, it's hard facts, hard facts, and there isn't this cultural background.'

Mr Lee made the point in his reply to a question on how Singapore and China can work together looking forward. 'We are both learning more about each other,' he said. Citing the Suzhou Industrial Park built 14 years ago, he said the initial years were 'truly troublesome'.

Singapore 'must always remember' the experience of one of its officials working on the project, he said.

'One day, the Chinese said to him: 'How old is your country? You want to teach me how to do this? My country is 5,000 years old'. So he decided that you cannot tell them do this, do that. All you can do is (to say), I suggest to you, you examine this and if you think it's a good idea, you pick it up.'

So, Mr Lee anticipates fewer problems with the Tianjin eco-city Singapore is now helping to develop. 'We understand their style and they also understand us.'

My old man is chinese educated. He is one of those stubborn pro-China types who have their hearts in China even though he is born and raised here. And until a decade ago has never set foot on China.

Starting from the late 90s, he began to make holiday trips to China. Every other year or so he and my mom will travel to different parts of China, to visit the China they have read so much about from their early Chinese textbooks and education, the majestic sights, the cultural splendor. And when they return they will speak non-stop and fondly of the middle kngdom.

This went on for years until 2005 when these trips stopped. He has not visited China since, and the former fervour for all things China and Chinese has also died down and completely diminished around the dinner table.

Eventually I asked how come, and he grunted with disgust, "五千年历史有屁用?只懂的捧着历史吃饭!"

That about explains and sums up the 180 degree U turn in attitude toward the "motherland" hahaha.

My father, like most from his generation, voted for the PAP. I remember he used to berate me during dinner when i question the way LKY and PAP goes about suing opposition politicians.

Well not anymore. The past few years have seen another 180 degree U turn in my parents' view on politics. These days my old man is more ept to swear loudly at the TV whenever politicians in white appear, hahaha!

I guess even a stubborn old man like my father will one day stop living in the past and see the reality for what it is. Apparently not for some others, especially a non-Chinese educated ba ba, hehehe.

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Tan Kin Lian's political "ambitions"?

By now everyone knows who Tan Kin Lian is ...

Nov 23, 2008
Tan Kin Lian eyes presidency
Ex-NTUC Income's chief will run if he has 100,000 people willing to support him
By Nur Dianah Suhaimi

HE HAS become a familiar face addressing the crowds of investors at Speakers' Corner.

Standing before Singaporeans and asking for their votes at an election could well be next on the agenda for Mr Tan Kin Lian.

The 60-year-old former chief executive officer of NTUC Income told The Sunday Times he is considering standing as Singapore's next elected president or contesting in the next general election as an independent candidate.

He made no bones about his political ambitions in an interview with the paper.

But first, this king of petitions wants to see at least 100,000 signatures and names of Singaporeans who are willing to give him their support.

'I will only do it if enough people want me to lead. If Singaporeans want change, they must have a stake in it and show their commitment by putting down their names. I cannot do this without strong support,' he said.

Such a petition should be put together by those who are keen to see him become a leader, and not by himself, he added.

.....

And as for his political ambitions, they are not for himself, but for Singapore, he claimed.

'I don't need to be president. I have enough money and I lead a simple life. I travel by bus and MRT even though I can afford a car. So what's the point? I don't need this kind of trouble,' said the father of three.

He bought a Toyota Camry for his wife four years ago and now shares it with her.

His wife, a housewife, fearing a political backlash, is also against the idea of him running for elected president and has even called him 'mad' for harbouring such an interest.

While he has to respect his wife's wishes, it is his dream that Singapore has leaders who represent the people and their aspirations.

'They don't have to be very highly educated. They just need to be the voice of the people.'

Which ward does he plan to contest in at the next general elections as an independent candidate, I asked.

Get the 100,000 signatures first, he replied.

'I need to know that people want the change. If not, then there is no point.'

The signatures of support will also help him convince his wife that he has enough backing to embark on a political career.

Said Mr Tan: 'Actually I prefer to take it easy. I've been working for 40 years. But if enough people want me to lead, then I will.'

If there are 100,000 SGians coming forward asking you to be their leader, how to say no? If 100,000 asked me to be their leader and for a good cause (and not say be terrorist leader or those will die kind lah hahaha!), I will also step up! I dare say anyone will step up. So like this count as ambition?

Sembawang GRC is the largest ward with about 185,000 people. So 100,000 people on your side is already a clear comfortable election win. You will have a clear mandate anywhere in SG.

The ST saying Tan has political ambition is misleading. In giving himself this hard-to-meet condition of 100,000 supporters, Tan shows his ambition is one of reluctance. He will be damn lucky to get half that number or 20,000. And even then he will win a landslide in any single ward contest.

So do you still think Tan has political ambition, as the ST puts it? If not, what then is the ST up to? Hmm...

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