Saturday, July 11, 2009

Further down the road...

Greetings good citizen,

To me, little is more disturbing than the um, ‘abrupt’ abandonment of long held business practices.

Worse is the apparent ‘planned’ nature of the events that lead to the current crisis. Risky credit vehicles that were branded AAA and then sold for cash to the world’s pension funds, risky loans that themselves violated every aspect of sound underwriting practices yet the rating agencies were paid to mark them AAA…or else. Then they were promptly unloaded upon cash rich pension funds.

Instead of ‘going down’ as they should have, the perpetrators of this fraud have instead been propped up using US tax dollars and the Fed stepping in to provide them with ‘liquidity’ via multiple ‘loan facilities’ where the banks could trade these same useless securities for cash.

While we’ve heard a few ‘squeaks’ about the FBI investigating fraudulent practices in the loan origination process, there have been no indictments or investigations focussed on the larger operators.

To date, the whole fiasco has been treated as an ‘organic’ occurrence rather than one of the largest global criminal enterprises in history.

Or at least so it appears.

Without further adieu let is proceed to tonight’s offering purloined from Jesse’s Crossroads Café

The China Bubble and the Convergence of Oligarchies

This is an interesting story from a source that we will be consulting regularly for their news items and insightful analysis.

Regular readers of this blog will notice that we strike the same recurrent themes.

Some years ago Mr. Bill Gates traveled to China, and liked what he saw. This was the model of capitalism which he favored: a small but powerful elite centrally planning an economy peopled by semi-feudal serfs, and living large on the backs of the many.

With all deference to Jimmy Rogers, China is a bubble. The central government will grow increasingly repressive and manipulative as the people improve in education, health and material means. Propaganda will grow more sophisticated and remain as pervasive as it is today.

When the bubble bursts, the iron fist will be unveiled and there will be popular uprisings, and those who believe they are in elite positions now may then find themselves on the docks piled on their baggage waiting for the next ship to take them to safer destinations.

This is certainly nothing new. After the collapse of the first Federal Reserve credit bubble in the late 1920's, the West turned to Soviet Russia and the fascist countries of Italy and Germany for the answer to the 'failure' of Western free market capitalism. Hitler and Mussolini were heavily favored by Wall Street, having a firm hand to rein in the mob.

On the optimistic side, freedom wanes, but still and in remarkable ways, never seems to die.

The Daily Bell
Chinese bank announces bombshell
Issue 343 • Friday, July 10, 2009

Yesterday on their website, the People's Bank of China announced a shocker. New Chinese bank lending for June was 1.53 trillion yuan ($224 billion), double the lending in May. The total already for the year is an astounding 7.4 trillion yuan when the target for the entire year was 5 trillion.

Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP. As I wrote earlier this week, Chinese regulators are getting concerned that this lending is going towards poor credit and bleeding into commodity market speculation.

As most know, bank lending is high powered monetary stimulus due to its high velocity. This is the key difference between fiscal stimulus vs. monetary stimulus. Actually, monetary stimulus will only work well if the banks receiving the funds lend them out. In the US, this is clearly not happening due to banks loan losses and caution over new lending (expanding balance sheet.) In China, this is not the case and new loans are flowing. - CNBC

Dominant Social Theme: China is heating up.

Free-Market Analysis: We've written about this before. China backed into "capitalism" about 30 years ago and the impetus for where it is now was increased by the problems with Tiananmen Square. The Chinese leaders are not interested in political theory at this point (if they ever were). Their currency is power and the way to maintain power is to create an apolitical system where citizens "can grow rich." Western systems work a good deal better than communist systems in this regard. And thus China has built a facade of a Western system.

Yes, it is really only an imitation of a Western system (from a political and big business perspective anyway) in our opinion, just as its banks are only imitations of Western banks and its stock markets are only imitations as well. In fact, to grow rich by investing in the Chinese stock market one apparently simply has to listen intently to the noises coming from the government as to what companies will grow and what companies will not. (And this is different from the US now in what way? – Jesse)

As far as the banks go, the system is probably even more basic than in the West. The central bank prints as much money as it can, and the commercial banks disseminate it. These banks may act as independent entities, but they still have a foot in state government as do many large companies in China.

It is all fairly well jury rigged. China has incorporated a façade of Westernism but to cast China as the world's financial engine is to understand how desperate the West has become. China's economy grows by 10 and 15 percent a year, and now appears be heating up even more. This is not normal growth but central banking generated growth. The same clique still runs China, but the economy has been supercharged by additional printing.

China is said to be turning inward now, as Western countries cannot afford to buy its products. But whether China will be able to maintain its growth by using its own huge population as a purchasing pool remains to be seen. What will certainly happen sooner or later is that the supercharged money being used by the Chinese will create the same boom-bust cycle as has happened elsewhere. Only when it ends in China after so many years, it will be the mother-of-all blow-offs.

Conclusion: It is difficult to see what Chinese leaders expect to happen once the bubble busts. Maybe they are gambling that they can control the unrest that will come in its wake. Maybe they assume the bubble will not bust for many years. (And this is different from the US now in what way? - Jesse)

But articles like the one excerpted above show us that sooner or later China's overheated and pseudo-Western economy will implode, and likely even more violently than Western economies ever have. And here's a thought: The Chinese in the meantime are said to be big buyers of gold on a government level and also personally. Perhaps what is going to eventually happen is better known in China than the West.

Here’s someone that is clearly looking further down the road than the average pundit. Now that the currencies of the West have turned to sand, China will no longer be able to, er, undercut the wage structures of the ‘Developed nations’.

Is this recent flurry of ‘currency pumping’ a desperate attempt to devalue Chinese currency?

It’s going to look mighty strange to the ‘victims’ of globalization when goods produced in China and elsewhere start commanding some serious coinage to obtain.

Is this situation truly an ‘accident of short-sightedness’ or is it just part of a grander plan?

Oligarchs (freshly minted billionaires) have sprung up around the world.

Many from positions of ‘public trust’ while others have appeared out of ‘nowhere’, which is to say from ‘shadier’ sources.

The veneer of ‘respectability’ is thin and wearing thinner good citizen.

We are rapidly approaching the ‘end game’. I suspect we won’t have to wait much longer for the ‘other shoe’ to drop.

Thanks for letting me inside your head,


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