This is the final piece for my AS art course, a flipbook made entirely out of biro pens. It’s something like 2100 pages long, and about 50 jotter books. I’d say I worked on and off it for roughly 3 weeks.
Song is French Cancan by Jaques Offenbach.
Hat tip boingboing
Be sure to take a look at the President’s Report on the Economy, in handy PDF size here . . .
After reaching a record high last week dating back to its introduction in 1999, net shorts in the euro, according to the CFTC, rose again from a net 44k contracts last week to 57k contracts this week for the week ended Tuesday. In a related trade, net longs in gold and silver both fell to its lowest level since Aug ’09. Net longs in both the Canadian and Australian $’s fell to the lowest since July ’09. Net longs in crude fell by half and are now down 70% after reaching a record high 4 weeks ago. Net longs in corn are at the lowest level since Oct ’09.
The political project of the Euro currency is facing severe pressure in the international markets. With the PIGS economies (Portugal, Ireland, Greece and Spain).
Professor Joseph Stiglitz and Spanish Ambassador to the UK Carles Casajuana argue with a Hugh Hendry (for Electica Asset Management) who is betting on the Euro currency falling and failing.
Part II
“The best answer is to bring in the IMF”
The Economist, February 6, 2010
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The Economist is referring to the Greek financial crisis. Readers of my last piece Privatize the Gains, Socialize the Losses must know what I think of The Economist’s recommendation. It enshrines moral hazard as an operating principle in global finance. Greece, population eleven million, the world’s twenty eighth largest economy, is now too big to fail. The Economist is wrong.
Here are some choice quotes on Greece from the same Economist. “Nothing would encourage reckless spending like the knowledge that other countries would step in. Greece is especially undeserving.” Or, “Blatant Greek fiddling with the national accounts to disguise government borrowing has shot to pieces the country’s credibility.”
How bad does it have to get? What does a country have to do not to deserve a bailout?
In a recent piece about Dubai, The Dismal Optimist offered some unsolicited advice to Abu Dhabi. Essentially that was don’t get rolled by your free spending brother emirate and its bankers. Similar unsolicited advice is hereby proffered to the European Union: Default may not be inevitable but if it comes to this, LET GREECE DEFAULT.
But Won’t the World Come to an End?
There are two interrelated risks that admittedly intelligent people are making in favor of a Greek bailout. The first is that contagion will set in and soon the other PIIG nations – Portugal, Italy, and Ireland—will soon be forced to default themselves. (The acronym PIIG has almost instantly become part of the global financial lexicon but of course is derogatory. This prejudice against pigs is unfortunate. I’m told by a lady whose university was shut down and who was sent to the farm to feed pigs in North China during the Cultural Revolution, that pigs are actually affectionate and warm animals.)
The second risk is that a mass of defaults by the PIIGs will destroy the euro. The naysayers on the euro have been waiting for years for something like the PIIG crisis to happen.
My own view is that these risks are overblown. The euro offers a huge value added and is a masterpiece of productivity enhancing financial engineering. It replaced a gaggle of confusing European currencies and has helped integrate Europe’s capital, goods and tourist markets. It is an international reserve currency, ranking right behind the dollar. It won’t die so easily.
It might be worth looking at another series of defaults from the past that did not result in the breakup of another monetary union.
The Past Is Never Dead. It’s Not Even Past
The above title is quote from William Faulkner. Faulkner was a native Mississippian. In 1841-1842, Mississippi plus Pennsylvania, Maryland, Arkansas, Louisiana, Michigan, Illinois, Indiana and the then Territory of Florida defaulted on their foreign debts. This of course had repercussions for the United States Government itself plus the other non-defaulting states. “You may tell your government,” lectured Baron James de Rothschild to an American in 1842, “that you have seen the man is at the head of the finances of Europe, and that he has told you that they (the US Treasury) cannot borrow a dollar, not a dollar.”
The defaulting states had both borrowed on their own account and guaranteed borrowings for the construction of canals and the funding of new banks. It was a period of infrastructure building for the new country which was capital short and needed foreign capital to augment its own savings. Being shut out of European capital markets imposed a penalty on the United States although in those days the Federal government usually only borrowed for wars. Rumors spread that Great Britain would go to war with the United States if these debts were not honored. The issue of a Federal bailout was debated in Congress. The Federal Government in the 1790s under Treasury Secretary Alexander Hamilton’s direction had assumed the state debts run up during the American Revolution. But the Federal Government did not bail out the defaulting states in 1842. And there was no war. And the IMF was nowhere in sight. Life went on.
It should be kept in mind that in 1842 the pre Civil War United States was a more decentralized place and states’ rights had real meaning. While unlike the European Union the United States was one country, in many ways it was organized in relatively loose fashion with no central bank. Defaults by eight states and one territory could have produced a fragmentation of what was then a still fragile monetary and political union. Of course the foreign debts of the states were payable, not in a fiat currency like today’s euro, but in sterling, or guilders, which were redeemable in gold, or in gold or silver itself.
The fragmentation didn’t happen. Yes the Federal and state governments as well as private companies were shut out of the European markets for several years. Certain states, notably Mississippi, repudiated their debts, leaving bitterness in London– perhaps equivalent to that following the 2002 Argentine bond defaults– which persisted for many years. But other states, notably Maryland and Pennsylvania, remedied their defaults and became current. By 1848 things changed for the better and European investment was flowing in again. Admittedly the United States caught a few breaks. Revolutions in Europe in 1848 generated flight capital looking for a home in the New World. And the US, its territory vastly expanded due to its victory in the war with Mexico, had the good luck of having gold discovered in 1848 in newly acquired California. And the new railroad network being built out to serve the vast new country offered Europeans attractive returns.
The assumption of the worriers has been that a monetary union like the euro couldn’t hold if its weaker profligate members defaulted. The partly analogous experience of the US in the 1840s gives one example where this wasn’t true.
Investment Implications
The financial media seem to be making the assumption that some type of bailout, either by the IMF or Germany and France, will happen. We’ll see. The European Union may not be thrilled about an IMF bailout, with its usual conditions and interference with national sovereignty. But there are no bailout mechanisms set up within the EU. Many are expecting Germany and France to step up and rescue Greece. But that’s tricky. A bailout particularly by Germany might not be welcome in Greece. In a passage bordering on the politically incorrect, The Economist quoted an “unnamed economist” who said, “If Germany steps in, there will be people on the Athens street who will say the Wehrmacht is back.”
Citizens of defaulting countries or states often harbor tremendous resentment against their creditors. Biting the hand that fed them is normal procedure. Bailing out Greece will not win a popularity contest, either for the IMF or Germany. According to economic historian Mira Wilkins, “Mississippi, which once had feted European buyers of its securities, defiantly refused payment of its debt and condemned ‘foreign’ interference. Its governor declared in January 1842 the ‘sacred truth that the toiling million never shall be burdened with taxes to support the idle few.’”(See Mira Wilkins, The History of Foreign Investment in the United States, p71)
The idle few the Governor was referring to were the wealthy nobility of Europe who were major (but not the only) investors and the Rothschilds who had arranged many of these loans. The Governor – who was infelicitously surnamed Mc Nutt — went on to say that the state would not have Rothschilds “make serfs of our children.” (This actually would have been a step up for more than half the children in his state who at that time were slaves.) Today the idle few will be the IMF or any EU government that bails out Greece but insists at least an attempt to bring fiscal discipline.
The markets have been selling the euro and buying the dollar. A bailout if it does happen in the short term will reverse this.
Interestingly, during the crisis the market has been selling gold as well. Despite all of its problems and indeed similarities between the United States and Greece in terms of fiscal profligacy, the dollar – not gold – has been the choice investment of safety. Fiscal problems in California, New York, Connecticut and other states loom on the horizon. They are already asking for bailouts from the Federal government. Perhaps they should go to the IMF.
In the short term, gold might have been overbought anyway. Admittedly, it’s a bad technical indicator when Ollie North is appearing daily on Bloomberg to advise investors to buy gold.
~~~
Peter T Treadway also serves as Chief Economist, CT RISKS, Hong Kong
I love this:
The Dynamite Prize in Economics is to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC), or more figuratively, to the three economists who contributed most to blowing up the global economy.
Here’s the short list:
Fischer Black and Myron Scholes
Eugene Fama
Milton Friedman
Alan Greenspan
Assar Lindbeck
Robert Lucas
Richard Portes
Edward Prescott and Finn E. Kydland
Paul Samuelson
Larry Summers
In a recent WSJ OpEd, Elizabeth Warren chairman of the TARP Congressional Oversight Panel, states “J.P. Morgan CEO Jamie Dimon recently explained this brave new world, saying that crises should be expected “every five to seven years.” He is wrong.”
I agree with the point that Dimon overstates the case — but Warren makes a market history error when claiming “laws that came out of the Great Depression ended 150 years of boom-and-bust cycles and gave us 50 years with virtually no financial meltdowns.”
I am a fan of Preofessor Warren’s, but she is factually incorrect when she claims “virtually no financial meltdowns” over that time period.
Market wise, as the 1968-82 period showed us, we had 5 major boom and bust cycles in the 1970s alone.
And as Jim Bianco points out, there is a long list of financial meltdowns from the 1970s forward:
• Franklin National Bank Failure on 1974
• Penn Square Failure of the early 1980s
• Gold bubble in 1980
• The Nifty Fifty stock market boom on the early 1970s
• The 1958 bond carry trade
• The Steel Tariffs of 1962
• The Stock Market Crash of 1987
• The S&L crisis of the 1980s
• The RTC
• The bond carry trade of 1994
• Mexican Debt crisis of 1982
• Mexican Debt Crisis on 1994
• The Asian Financial Crisis on 1997
• LTCM of 1998
• The Tech Bubble on 2000
• The Credit Crisis of 2006
The history of the 20th century is a tale of many meltdowns. And as we have learned, they have grown increasingly more expensive and dangerous as we have become complacent. We are getting used to collapses, and each one makes us fear the nex a little less . . . Until the big one hit.
http://thatvideosite.com/NTDp
Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.
~~~
We Are All Austrians Now
Things are different this time, as they always are. The great difference between today’s capital markets and those since World War II is that government is taking an overtly active role in them. The consequences of this ongoing political intervention are substantial – on investor expectations, on asset pricing, and on the perception of market risk.
The growing influence of the political element in today’s markets has de-valued the investment experiences of market participants over the last thirty years. As the quote on the Einstein poster that hangs on our office wall says; “imagination is more important than knowledge.” So true. Trying to divine value or even technical trends from extrapolating past market cycles is a risky proposition. Still, the great majority of investors are still trying to do this, which presents opportunities for those willing to break free.
Should we be surprised that 2009 winners were summarily discarded in January? (Precious metal stocks declined about 25% from their December highs through January 31 while base metal futures were liquidated with extreme prejudice during the last week in January.) No, the severity of that correction is not surprising given the magnitude of their previous run. In fact, we should be thankful. Valuable real assets were shaken from weak-handed investors with luke-warm conviction and from cycle-minded momentum players.
We repeat our view that “a return to normalcy” as defined by most contemporary economists, policy makers, market strategists and financial asset investors is not forthcoming. Developed economies are not experiencing the downside of a typical post-WWII cycle, even if one were willing to label the current environment “a deep recession”.
We remain in the early stages of a currency crisis that is being further exacerbated by highly inflationary monetary policies and ad hoc regulatory changes. Confused investors, policy makers and professional chatterers, struggling to recognize familiar economic or market clues, are desperately trying to retro-fit troubling events into familiar patterns.
Voters seem to get it. We think the upset election in Massachusetts, for example, was a continuing revolt of an increasingly angry and politically agnostic public that intuits a disconnection between generally accepted public policies and the lack of sustainable public benefits that would accrue from them. Until they are satisfied, voters of all persuasions will insist that our politicians be as liquid as our portfolios. It was inevitable that fundamental macroeconomic forces would begin to be manifest in the political sphere, and logical that it would show up at the ballot box first. After all, voters are more sensitive to the real economy than politicians and financial asset investors.
We see hefty doses of irony and opportunity in the recent “flight from risk”. We think the majority of investors are wired (or structured) to continue to seek nominal absolute or relative returns above all else, rather than positive real returns within a highly inflationary environment.
As a result, they are unable or unwilling to accurately distinguish between truly safe and truly risky assets in the current environment. This mischaracterization is leading them to poor asset selection, general economic mal-investment and substantial opportunities for investors seeking real returns
We think investors’ knee-jerk compulsion last month towards familiarity will prove costly. We agree that imperceptible future political and economic outcomes should force capital into safe havens. However, the current perception of “risk assets” defines the precise sectors to which we think investors should be migrating during chaotic times.
The long term capital-at-risk spectrum in a global paper money currency system during a period of substantial monetary inflation should generally be:
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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