all kinds of ugly

[solarbird]

First: Senator Reid and the Democratic caucus are still very angry at Senator Dodd for his filibuster of retroactive immunity for telecommunication company lawbreaking in domestic spying. Some of that is discussed here; more is being discussed here. The Democratic leadership in the Senate - Reid, et al - are largely going to re-run the December process again, to, and I keep restating this, cut off the only functional line of investigation to the mass, warrantless, and illegal spying on Americans by the Bush administration and its allies. (Read here for a previous catch-up post I wrote on this issue; also, here, and here. All semi-recent political posts can be browsed separately here.) This isn't going again yet, except that Senator Dodd needs to get letters of support - see the first link above for where and how.

I was in this fight in December, and before, and I'll be in it again this time. Last time we had 10 Democratic Senators out of 50 standing up for dead old concepts like law, no "independent Democrat," and, of course, no Republicans. Let's see what we get this time - it'll be another filibuster, of course. Oh, and last I heard, Senator Reid continues to honour GOP holds, while ignoring Senator Dodd's. Contemptible.

Now, to economics! That's ugly too.

Minyanville has two articles, covering why the American deflation experience could be worse, not better, than the Japanese "Lost Decade", and why deflationary cycles take so damned long to beat. One of the reasons (of many) is how crazy risk-adverse lenders (and borrowers, both) get. Now, given all that, here's some speculation to throw out into the mix - and this is purest speculation, which is to say 100% bullshit without any indication whatsoever that anything like it would happen.

China has on the order of US$1.4T in "sterilised" reserves. It's set up a sovereign wealth fund to manage some of this, but most of it is, frankly, sitting around not doing anything. What if it buys the first bank to go under, waits as the American economy tanks - let people suffer a bit - then comes in and starts lending at crazy-low rates. Risk-free rates, or nearly so.

How much of the banking sector does the Chinese government end up owning?

If China's hypothetical bank can overcome risk aversion through this method, and jumpstart the American economy after a year or so of severe pain, that'll earn it a lot of friends. Some of these might be political friends. What do you think they might want in return for their investment?

Finally, in the panic section, here's something unpleasant; we've got out first financials jumper, a former mortgage executive. I'd feel sorry for him, but the asshole shot his wife before jumping to his own death, so fuck him. More substantially, over on CNBC, you've got Cramer on Stop Trading (and again on Mad Money, and reportedly also Kass and Kudlow on other shows) talking about how the Federal government needs to nationalise the monoline insurers to avoid a market crash. He's a blowhard and his previous rate-cut solution wouldn't have solved much of anything, and I think he's wrong about the degree of insolvency in the banks and how much good this'll do. (Part of that is that he's underestimating the bank debt by severely underestimating the scale of the derivatives market. You're talking more like $2T or more in derivatives, not $500B.) But he's right about the monoline insurers being insolvent, and that this is very bad. Hello, 1929; sucks to see you!

Comments

[baba-o-reptile.livejournal.com]

Yaknow, it's funny you brought up openly the Chinese angle. As this whole subprime mess piles on 'till it's hurtling towards the Chandrasekhar limit, I figured that places like China, Saudi Arabia, Dubai & others with asstons of liquid capital would let the hurting go on for a year or two, and then be happy to throw us a life preserver...

...for a price. :/ I don't like the idea of owing any of them...

[wrog]

I'm still trying to figure out why they keep talking in terms of deflation when everything that's happening or being proposed to deal with what's happening (default on loans, massive federal deficit to bail out banks, purposefully low interest rates, rising energy costs and commodity prices) points to massive inflation.

[solarbird]

The only thing of these for me that's really sure - and the thing that's keeping me have an eye out on sustained inflation - is the rising energy costs. Ironically, that might save us! I'm hoping it will. I think the current 10% drop in oil prices is entirely temporary.

The reason that we're pretty much in a deflationary cycle is that the total actual money supply (in the form of M3 plus private debt, which is as fungible as money) is contracting. That's why all these banks are fucked. And the general amount of total contraction is somewhere around $2T, and possibly even north of that. The question is whether that deflationary cycle will last long enough to bring down actual prices.

And it's a good question. In my (I remind other readers entirely and purely speculative) China bailout scenario, I think it probably doesn't, much. But if we get to the point where it does, then we're in for a Japanese-style slog.

[baba-o-reptile.livejournal.com]

Don't get me wrong, I know you were speaking entirely hypothetically about the whole foreign bailout thing. Mind you, I think it's a disturbingly _plausible_ hypothetical...

I've been too scared thus far to look up "Lost Decade", and all that it entails. [sigh] I have a hard enough time getting employed & keeping myself sane as it stands. I shudder to think what's gonna happen when the flush handle gets pulled on this one. :/

[solarbird]

None of which is to say that I don't agree that all these things are inflationary. I absolutely do and I think that's quite intentional. (Similarly, I think all the talk about "fighting inflation" is rhetorical bullshit, to keep the idea that inflation is the bigger problem in the current psychology.) I've just become dubious that these will have enough of an impact to work. If you look at those reserves numbers, you're seeing that US$43B in stimulus (in the form of liquidity injection) has been only enough to keep the banks in operation. All joking aside, that's a big number - but it's not nearly big enough.

The other problem is that the dollar is in very bad shape, as you well know. The Fed (et al) are desperate to keep this from becoming a huge, huge problem. Most of the things they could do to reverse the deflationary pressures will crush what confidence is left in the currency, and you'd end up with the end of the petrodollar in fairly short order, and possibly lose the dollar as a reserve currency entirely outside of a few countries either ultrapooched (China) or which have survival interests with US military forces (Saudi Arabia). So their hands are tied.

[mathmuffin.livejournal.com]

This week's New Yorker magazine (January 21, 2008, issue) has an interview with Director of National Intelligence Mike McConnell by Lawrence Wright. In the interview, among many other topics, McConnell talks about how he goofed up in the political negotiations over the Protect America Act and about that he wants the retroactive immunity for the telecommunication companies.

[backrubbear.livejournal.com]

I find it incredibly likely that a significant number of American businesses and various large concrete assets will eventually become owned by foreign countries with large stores of American cash. However, there's an interesting feedback loop in here: They can't get rid of their reserves quickly since it'll destabilize world currency - half the reason they have it in the first place. They have to spend it at a pace that lets them buy up assets before they're devalued. They have to do it while the dollar is still a benchmark currency.

I've always been shocked that having foreign countries holding so much in dollar reserves wasn't considered a national security problem.

[baba-o-reptile.livejournal.com]

Some of us _do_ (consider it a national security problem). It's just a question of getting enough people who make & execute policy to feel similarly... :\

[zarq.livejournal.com]

I just want to thank you for mentioning and linking to those articles from Minyanville. I haven't come across the publication before. Fascinating reading.

[solarbird]

Minyanville is entertaining and sometimes quite informative. They got bought by Fox, so I am nervous, but have not seen an editorial shift yet.