In this handout photo released by Nasa Earth Observatory on June 7, 2011 and taken from Nasa’s Solar Dynamics Observatory, sunspot complex 1226-1227, shows the Sun unleashing an M-2 (medium-sized) solar flare, an S1-class radiation storm and a coronal mass ejection resulting in a large cloud of particles mushrooming up and falling back down giving the impression of covering an area of almost half the solar surface. An unusual solar flare observed by a NASA space observatory on June 7 could cause some disruptions to satellite communications and power on Earth over the next day or so, officials said. The potent blast from the Sun unleashed a firestorm of radiation on a level not witnessed since 2006, and will likely lead to moderate geomagnetic storm activity by Wednesday, according to the National Weather Service. (NASA)

Here Comes The Sun, 22 June, 2011

Category: Weekend

The Contagion Risk of Europe

The Contagion Risk of Europe By John Mauldin June 25, 2011 ~~~ The Contagion Risk of Europe Will the Euro Survive? A Greek Coup? No Good Deed Goes Unpunished Home Again, Home Again I am back from Europe. The last three weeks I spent quite a bit of time talking with money managers and investors…Read More

Category: Think Tank

Weekend Reading List

Some reads for the rest of the weekend: • Taking wrong lessons from the banking crisis. (David Olive’s Everybody’s Business) • The Great Corn Con (NYT) • Whither Greece? (Truman Factor) • Austerity Is Already Here, and It’s Killing the Recovery (The Atlantic) see also Mr Keynes and the moderns (Vox) • Madoff Trustee Demands…Read More

Category: Financial Press

JPM’s Saul Doctor on Greek CDS

Saul Doctor, JP Morgan research analyst, walks Tom Keene and Ken Prewitt through the complexities of credit default swaps on Greek government debt and why some short Greek paper may actually be a good buy. Q: Tell us the distinction between actual government bonds and credit default swaps. What is the the relative size of…Read More

Category: Derivatives, Think Tank

World’s Wealthiest Richer Than Before Credit Crunch!

click for ginormous graphic > ~~~ > Source: World’s wealthiest people Jill Treanor Guardian, 22 June 2011

Category: Bailouts, Credit, Really, really bad calls

Source: Kurt Vonnegut Interviewed on NPR Inside Second Life

Category: Weekend

7 life lessons from the very wealthy

This is last weekend’s Washington Post column, originally published: June 18 ~~~ 7 life lessons from the very wealthy By Barry Ritholtz, Published: June 18 | Updated: Friday, June 17, 9:45 PM > “Money won’t buy happiness, but it will pay the salaries of a large research staff to study the problem.” -Bill Vaughan > Please excuse the…Read More

Category: Apprenticed Investor

Inside the Accountants’ Playbook

Background on four strategies that American companies use to reduce their taxes.

Category: Taxes and Policy, Video

The Moral Hazard of Money Market Fund Madness

Here we go again: Forget for a moment the IMF, and instead direct your gaze upon the MMF: Money Market Funds. These are a type of mutual fund that is, according to the SEC, required by law to invest in low-risk securities. They pay dividends that are supposed to reflect short-term interest rates. They are…Read More

Category: Bailouts, Credit

Why Is the Chinese Economy Sputtering?

Is the Chinese Economy Sputtering for the Same Reasons as the American Economy?

It was tempting to believe that China was different.

With its command and control economy with some of the trappings of free market capitalism, trillions in reserves, and abundant natural resources, many thought that China would “decouple” from the Western world’s problems and sail into a prosperous future.

However, despite its long history, exotic names and seemingly strong position, China cannot avoid the rules of economics which have applied to all countries throughout history.

Corruption and Phony Bookkeeping

Corruption and the failure to follow the rule of law is one of the main factors which has dragged down the American economy.

The fact that – according to the Chinese central bank – Chinese officials stole $120 billion and fled the country does not auger well for China.

Scandals among various Chinese companies are not helping, either.

And then there are the made up statistics. As Warren Hatch of Catalpa Capital Advisors notes:

As Li Keqiang, the vice premier and heir-apparent to Wen Jiabao, laconically remarked to the US ambassador a few years ago, most of the statistics in China are “for reference only.”

And Charles Hugh Smith argues:

Despite their many differences, the economies of China and the U.S. share a number of key traits: both are corrupt, rigged, crony-Capitalist, rely on phony statistics and propaganda and operate with two sets of rules: one for the Elites, and another for the masses.

Despite their many differences, the economies of China and the U.S. share a number of key traits: both are corrupt, rigged, crony-Capitalist, rely on phony statistics and propaganda and operate with two sets of rules: one for the Elites, and another for the masses.

Can We Trust You?

The credit crisis hit in 2008 largely because American banks lost trust in one another. Specifically, top economists say that each bank had so much bad debt on its books (in the form of mortgage backed securities and derivatives which worth the paper they were written on) which made them essentially insolvent that they assumed that all of the other banks must be in a similar situation … so they stopped lending to each other.

This drove the price which banks charged each other for loans (libor) skyrocket, and the whole credit market froze up.

The same thing is now happening in China. As ZeroHedge reports, Chinese interbank lending is freezing up and “shibor” – the prize which Chinese banks charge each other for loans – is skyrocketing.

Bloomberg notes:

China’s money-market rate climbed to the highest level in more than three years as a worsening cash crunch prompted the central bank to suspend a bill sale.

The seven-day repurchase rate, which measures interbank funding availability, has more than doubled since June 14, when the People’s Bank of China ordered lenders to set aside more money as reserves for a sixth time this year. The central bank suspended a sale of bills tomorrow, according to a statement on its website today.

“Banks have to hoard cash to meet the regulator’s capital or loan-to-deposit requirements by the end of every quarter,” said Liu Junyu, a bond analyst at China Merchants Bank Co., the nation’s sixth-largest lender. “So we won’t see the shortage easing.”

(Admittedly, there may have been temporary factors leading to the rise in shibor, which might be smoothed out in the future. But the point is that China is not immune from credit squeezes.)

Less Bang for the Buck

Each dollar of debt incurred by the American government creates less and less benefit. For example, Jim Welsh points out:

Since 1966, each dollar of additional debt has given the economy less of a boost. In 1966, $1 dollar of debt boosted GDP by $.93. But by 2007, $1 dollar of debt lifted GDP by less than $.20.

Karl Denninger notes:

What is this chart? Why, the history of our idiocy. It’s quite simple; this is the multiple that each dollar of debt (anywhere in the economy) has returned in GDP looked at on a quarter-on-quarter basis, net of the debt increase itself. That is, if the multiple is “1″ then for each dollar of debt added to the economy there was one dollar of output in the form of GDP added as well during the same period of time. If it’s “0″ then the debt itself produced no additional output, but did fund itself. If it’s negative, well, into the black hole you go. Since this is a quarterly number it’s quite noisy but there’s no mistaking what it tells you.

If you pay attention you’ll note that since 1980 this has never been positive – not even for one quarter – and it was only rarely positive before that time!

Similarly, Martin Wolf of notes


Dwight Perkins of Harvard argued at the China Development Forum that the “incremental capital output ratio” – the amount of capital needed for an extra unit of GDP – rose from 3.7 to one in the 1990s to 4.25 to one in the 2000s. This also suggests that returns have been falling at the margin.


The thesis advanced by Prof Pettis is that a forced investment strategy will normally end with such a bump. The question is when. In China, it might be earlier in the growth process than in Japan because investment is so high. Much of the investment now undertaken would be unprofitable without the artificial support provided, he argues. One indicator, he suggests, is rapid growth of credit. George Magnus of UBS also noted in the FT of May 3 2011 that the credit-intensity of Chinese growth has increased sharply. This, too, is reminiscent of Japan as late as the 1980s, when the attempt to sustain growth in investment-led domestic demand led to a ruinous credit expansion.

As growth slows, the demand for investment is sure to shrink. At growth of 7 per cent, the needed rate of investment could fall by up to 15 per cent of GDP. But the attempt to shift income to households could force a yet bigger decline. From being an growth engine, investment could become a source of stagnation.

And if you think that bailouts as an attempt at stimulus are solely a Western game, think again.

China is bailing out local governments, giving cash for clunkers, and trying just about every possible type of bailout.

Consumer Spending Declines

Consumer frugality is obviously slowing the American economy. But the Chinese consumers are picking up the slack, right?

Actually, Bloomberg reports that consumer spending is down:

At the Haiyang Zhuangshi Co. hardware store in Beijing, sales of paint and aluminum window frames are slowing, one sign of a diminished role for consumer spending in China that’s foiling government objectives.


Hu’s loss underlines the dilemma for Premier Wen Jiabao: his campaign to control inflation is undermining attempts to make consumers a bigger driver of the world’s second-largest economy. Failure to lessen dependence on exports and investment spending leaves the nation more vulnerable to swings in external demand and subject to asset booms and busts.

Government data this week showed retail sales growth slowed to 16.9 percent in May, less than the average of the past five years and a figure that’s inflated by soaring prices for food. By contrast, spending on fixed assets such as factories and property climbed 26 percent, excluding rural households, in the first five months, the fastest pace in almost a year.

Analysts at Capital Economics, a London-based research group, estimate that private consumption may have fallen to 34 percent of gross domestic product last year, the lowest level since China began opening its economy to market mechanisms more than three decades ago. Just 10 years ago, the share was 46 percent, Capital Economics calculates.

“Just at a time when the government in China and a lot of people elsewhere are hoping to see Chinese consumers step up to the plate, actually they’ve been staying away from shops,” said Mark Williams, an economist in London with Capital Economics and a former adviser on China to the U.K. Treasury. “The trend over the past couple of years has been relentlessly downward.”

All Bubbles Eventually Burst

I noted in July 2009:

One of the top experts on China’s economy – Michael Pettis – has a[n] essay arguing that China is blowing a giant credit bubble to avoid the global downturn.

Pettis documents reports and statistics from modern China, of course. But he ends with a must-read comparison to ancient Rome:

Let me post here a portion of Chapter 15 from Will Durant’s History of Roman Civilization and of Christianity from their beginnings to AD 325

The famous “panic” of A.D. 33 illustrates the development and complex interdependence of banks and commerce in the Empire. Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business. They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased. Tiberius rebounded to the opposite theory that the most economical economy is the best. He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury.

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Category: Think Tank