Roach Says Chinese Officials ‘Appalled’ by Impasse on Raising Debt Ceiling

Senior Chinese officials are “appalled” by the impasse among U.S. politicians on raising the nation’s debt ceiling to avoid a default, said Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd.

“Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw” for China, New York-based Roach, 65, said in an e- mailed note today. He said his assessment was based on visits to Beijing, Shanghai, Chongqing and Hong Kong.  Read more»

Why the System is Doomed

[For an Australian perspective:]

It seems hard to believe that a delay to an increase in US debt levels is causing the financial world so much angst. It just goes to show how twisted, screwed up and debt dependent this ‘modern’ financial system is.

‘Give us more debt or we’ll be ruined!’

Sadly, that statement is not far from the truth. Without an ever-expanding debt structure, the international financial system will start to implode. Consider these figures from the US Fed Flow of Funds Report, released quarterly.   Read more»

Greenspan’s Fatal Conceit

[Editor’s Note: This article is quite academic, but potentially valuable for those with the inclination to wade through it. See highlights near end of the piece.]

In a recent interview for Bloomberg Businessweek, Alan Greenspan was asked about his role in the creation of the 2008 financial crisis. He flatly denied any responsibility.[1] Coming to his own defense, he pointed to his explanation of the financial crisis in a 2010 paper for the Brookings Institution, offering a challenge for others to disprove him.

In the aftermath of the 2008 collapse, Alan Greenspan received a great deal of criticism from almost every direction. Some were wary of Greenspan’s monetary policy, and many became skeptical after his failure to predict the housing bubble and the subsequent meltdown (despite his claims to the contrary). Many more were critical of Greenspan’s support of the “deregulation” of the banking industry during the 1990s and early 2000s. Given his political and economic ideology — he was a follower of Ayn Rand in his earlier years — and the influence he projected over American public policy, perhaps Greenspan made an easy target.  Read more»

GAO audit report shows Federal Reserve issued $16 trillion during recession, Sen. Sanders urges reform

[Your editor notes that he was unable to source from any mainstream news organ. Not one! Much more could be said, and has on alternative sources. We encourage your own search for further analysis.]

Two days after the Government Accountability Office’s one-time audit examining Federal Reserve activities during the economic downturn was published, Sen. Bernie Sanders (I-Vt.) called its lending decisions, “socialism for the rich and rugged.”  Read more»

More on Sovereign Debt Crises

I’ll continue to devote considerable analytical attention to the unfolding European debt crisis.  These debt markets are in the midst of a problematic crisis of confidence, in a marketplace that again elicited an aggressive policy response.  Here at home, and despite obvious risks and politicians content to play with fire, the market is more than fine with Treasurys.  The thesis remains that the sovereign debt crisis that erupted in Greece – and moved to consume Ireland and Portugal before arriving at the door of Spain and Italy – will eventually engulf our government debt market as well.

As I attempted to explain last week, sovereign debt crises have important differences to those impacting private-sector Credit instruments.  For one, sovereign debt problems tend to manifest subsequent to major private debt boom and bust cycles.  They will follow serious expansions in both public sector debt and the government’s assumption of private-sector risks and obligations.   And, sovereign debt crises will likely develop as the markets begin questioning the future efficacy of fiscal and monetary policy measures, stimulus employed with increasing fervor to battle persistent private sector debt and economic woes.  Read more»

Doug Noland’s Credit Bubble Bulletin

July 19 – Dow Jones (Prabha Natarajan):  “U.S. companies have taken out almost $1 trillion of syndicated loans so far this year, an 82% increase from 2010 levels and a return to levels last seen before the crisis. Borrowers are turning to the loan market because that is where investors are migrating, attracted by floating rates, which will rise when interest rates go up; the security of collateral; and a higher position in the capital structure, meaning loans are repaid before bonds if the borrower runs into trouble… ‘Banks are stepping out on the risk spectrum and lending money.’”

July 22 – Telegraph:  “The €159bn Greek bailout is bad news for German taxpayers, the country’s influential Ifo think tank said… Hans-Werner Sinn, the head of the think tank and an open critic of the bailout, said: ‘Germany and France should not make policies that lead to the collectivisation of debts in Europe.’  He told Reuters TV: “The financial markets are reacting very positively to yesterday’s agreements. As this is a conflict of apportionment between Europe’s tax payers and investors, this is bad news for tax payers.”

Read more»

The End of the Growth Consensus

America added 44 million jobs in the 1980s and ’90s, when both parties showed they had learned from past mistakes. The lessons have been forgotten.

This month marks the two-year anniversary of the official start of the recovery from the 2007-09 recession. But it’s a recovery in name only: Real gross domestic product growth has averaged only 2.8% per year compared with 7.1% after the most recent deep recession in 1981-82. The growth slowdown this year—to about 1.5% in the second quarter—is not only disappointing, it’s a reminder that the recovery has been stalled from the start. As shown in the nearby chart, the percentage of the working-age population that is actually working has declined since the start of the recovery in sharp contrast to 1983-84. With unemployment still over 9%, there is an urgent need to change course.

Some blame the weak recovery on special factors such as high personal saving rates as households repair their balance sheets. But people are consuming a larger fraction of their income now than they were in the 1983-84 recovery: The personal savings rate is 5.6% now compared with 9.4% then. Others blame certain sectors such as weak housing. But the weak housing sector is much less of a negative factor today than declining net exports were in the 1983-84 recovery, and the problem isn’t confined to any particular sector. The broad categories of investment and consumption are both contributing less to growth. Real GDP growth is 60%-70% less than in the early-’80s recovery, as is growth in consumption and investment.  Read more»

The Scourge of the Faith-Based Paper Dollar

Jim Grant foresees a new American gold standard despite Wall Street’s stake in monetary chaos.

The Weekend Interview 

Jim Grant’s father pursued a varied career, including studying the timpani. He even played for a while with the Pittsburgh Symphony. But the day came when he rethought his career choice. “For the Flying Dutchman overture,” says his son, “they had him cranking a wind machine.”

The younger Mr. Grant, who can be sardonic about his own chosen profession, might say he’s spent the past 28 years cranking a wind machine, though it would be a grossly unjust characterization. Mr. Grant is founder and writer of Grant’s Interest Rate Observer, perhaps the most iconic of the Wall Street newsletters. He is also one of Wall Street’s strongest advocates of the gold standard, knowing full well it would take away much of Wall Street’s fun.

You might say that, as a journalist and historian of finance, he has been in training his whole life for times like ours—in which the monetary disorders he has so astutely chronicled are reaching a crescendo. The abiding interest of Grant’s, both man and newsletter, has been the question of value, and how to know it. “Kids today talk about beer goggles—an especially sympathetic state of perception with regard to a member of the opposite sex,” he says of our current market environment. “We collectively wear interest-rate goggles because we see market values through the prism of zero-percent funding costs. Everything is distorted.”  Read more»

Doug Noland’s Credit Bubble Bulletin

July 14 – Bloomberg (Vivien Lou Chen):  “Federal Reserve Bank of Dallas President Richard Fisher said central bank efforts to boost the economy have reached their limits and the U.S. faces a ‘fiscal reckoning’ that only lawmakers can resolve.  ‘Our great country now finds itself in a very difficult predicament,’ Fisher… said… ‘Congress can no longer carry on as before, oblivious to the deleterious effect of spending our, and the successor generations’, money with unfunded abandon… There may be some things the chairman mentioned this morning — those are tinkering at the margin… We’ve exhausted our ammunition, in my view’ and expanding the Fed’s balance sheet from about $2.7 trillion to more than $3 trillion ‘might spook the marketplace… I do not personally see the benefit of more monetary accommodation even if the economy weakens further… Again, there’s so much liquidity out there, the question is, ‘What is the trigger to put it to work?’’”  Read more»

Van Eck Hotline on Money and the Economy

…The weekly money supply data lags a bit behind – with yesterday’s report covering activity through the week ending July 4.  That means the $88.7 billion jump in M2 during that latest week reflected some of the Fed’s actions before the QE 2 deadline of June 30.  The activity in the money supply during the next two to four weeks is going to reveal a lot about what Ben Bernanke has planned for the economy during the second half of this year and into 2012.  Unless most of that new money disappears during the time ahead, there is going to be a burst of liquidity hitting the economy and financial system down the road.  Such impacts are delayed by the mechanisms of the marketplace. 

Make no mistake about though – the Fed has released a massive amount of money into the system.  Ben Bernanke has shown once again that he has the same core economic philosophy that he formed in his years as a student at Harvard and MIT.  Bernanke believes that a sluggish economy should be given the lifeblood of commerce and credit – MONEY.  He is not going to throttle back and try to glide the economy along at low levels of growth.  No, Bernanke has opened up the throttle and he has gunned the engine.

…[T]he M2 money supply has expanded by $165.6 billion during the past two weeks.  Let’s put that in perspective.  M2 grew by only $283.2 billion during all of 2010 and $282.2 billion during 2009.  That means the past two weeks have seen M2 grow by nearly 60 percent of the annual growth in money supply during each of the previous two years.  To put it another way, M2 has grown by nearly 30 percent of the entire gain during all of 2009 and 2010 put together.