Saturday, December 29, 2007

globalization, the end game

In the 1990s, the era of permanent global “free trade”, so called, or globalization, was ushered in. Local production workers everywhere, that is in America and abroad, hated it, and protested. Economists loved it because it was more “efficient”. Global trade's most charismatic promoter was probably Bill Clinton. I don't know where, but I think I read some theorist saying that globalization was a permanent beneficial change to the world's economic system. Maybe it was the same train of logic that led philosopher Francis Fukuyama to declare permanent prosperity and peace for the globe in the form of the “end of history”. History, it turns out, is now proceeding to change things at an accelerating rate. And the era of globalization will end a lot sooner than those ideolouges thought. Three powerful trends will seem to conspire to break up the world trade routes (despite the fact that a lot of wealth is created for a few powerful rich magnates and they will try to preserve this system at all costs):
  • Nationalization of Resources
  • Protectionism
  • Capital Controls
In the first place, we are witnessing an era of resource nationalization. Globalization was predicated on the assumption of efficient worldwide commodity markets, and such markets only function with a relative abundance of commodities. One of the curious and most exploitive of the tenants of the GATT talks (so viscously protested in Seattle in 1999) was the idea that all signatory nations had to agree to produce, and sell in open markets, any natural resources they possessed. Efficient production usually occured alongside the environmental degradation of the less wealthy nation. But that is now changing. Nations such as Bolivia, Russia, etc, are finding that they do have to power to regulate and nationalize oil, gas, and mining production.

There have been no shortages of commodities to slow down global economies for a long time, and some economists seem to think shortages are so obsolete they it couldn't possibly occur in the 21st Century. But the trend is for commodities of all kinds to rise in price and value. Scarcity of resources is the coming dynamic and free markets do not love scarcity. This will not just slow down the global trade in the resources themselves, but also affect trade in such manufactured goods which require non-local resources. China, for example, will be limited in its manufacturing by how much energy and copper it can import, now that it is no longer self sufficient. In time even American precious metal mining and energy production will need to be nationalized, if only to keep them out of the control of our creditors.

The second anti-global-trade factor is a slowly building force in the USA. It is simply the demand by citizens to support their domestic production. Protectionism. Now that the the American economy is obviously stumbling and there will be layoffs, and people losing their homes due to mortgage defaults, the government will need to do everything it can to try and keep as many people employed as possible. Even if it is not economically efficient. Social unrest will be a bigger threat than loss of cheap imports. This is the same force that was protesting against globalization in Seattle, but now they will have a much more sympathetic ear from congress. We will very likely see import quotas, tariffs and other abrogations of our trade treaty obligations.

The third trend will hit the global economy with terrible shock waves in the next two years: capital controls. Why economists assume that currency will remain freely exchangeable is baffling to me. The world now runs on fiat currency managed by central banks. This system was created to finance the gigantic economic expansions of the past half century. It is now teetering on the brink of collapse. The huge structure of artifice convinced people that paper money was as good as gold, and it was very effective in the times of plenty that the world has seen. Now that almost all central banks (Switzerland is the sole exception) are inflating their money supply at double digit rates, and the US dollar is in a death spiral, the system is doomed. The plunging dollar has created a global state of emergency: pretty much everything traded internationally is priced in dollars. If no one knows what, if anything, a dollar is worth, how do they know what anything else is worth?

Nations holding US treasury bills will be forced to sell their dollars and no county, including America, will be happy to take them in. Like destitute refugees, no nation will want to give the dollar a home. I have heard people say that because the dollar is the world's reserve currency, and no other currency will serve, it has to stay. I don't buy it. Within a very few years all fiat currency (unbacked by gold or other assets) will not be welcome in international trade. The euro can not save fiat currency either: the European Central Bank is racing America's Fed to inflate concurrently with the dollar. BTW, If you think you will always be able to own stock in that Australian mining corporation.. well I'm saying maybe not, unless you are in Australia. Soon, capital will have to stay closer to home.

This is not to say Saudi Arabia, China and other exporting nations will no longer export oil or goods. They can't do much else after all. Trade will be negotiated between nations under secret terms in guilded state department halls and embassies instead of open electronic trading bourses. Agreements will be made with armies and navies in the background, always the subtle threat of war (historically, most wars have been fought for control of resources and trade routes). Terms of trade will consist of exchanges of hard assets, military services, manufactured goods, or precious metal bullion. Barter between nations is the future of trade, and will be made to secure strategic advantage, not the best price. No nation will want to trade with its strategic rival, except under threat of war or other coercion.

Wednesday, December 19, 2007

a $700 trillion volcano

This is a fascinating essay by Mike Whitney, published at Whitney explains several key items, the most important of which is how "the markets have been transformed by 'structured finance'."
What's so destructive about structured finance is that it allows the banks to create credit "out of thin air", stripping the Fed of its role as controller of the money supply. David Roache explains how this works in an excerpt from his book "New Monetarism" which appeared in the Wall Street Journal:
The reason for the exponential growth in credit, but not in broad money, was simply that banks didn't keep their loans on their books any more-and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet.

There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized."

So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks' balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt. (Wall Street Journal)
The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed there was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.
Right, money for nothing. Structured finance explains the $681 trillion value of outstanding financial derivatives out there, according to the Bank of International Settlements. Whitney's key point here is that all of this money creation is out of the Fed's control. Adjusting interest rates won't fix the problem. The Fed certainly doesn't want to try to take control of monstrous toxic pile of money either, because then it would surely blow up, not just immediately, but also in their own hands.

If some unscrupulous financiers can come up with a way to generate money out of thin air, they are probably going to choose to generate a whole lot of it, not just a little money. Especially if it is hidden from all oversight and regulation. And in theory this money is risk free. It is insured (via credit default swaps). No doubt. Those insurers will surely pay off, now that the shit is officially hitting the fan. It's not like we have a $700 trillion volcano about to explode or anything..

Monday, December 17, 2007

About time for indictments

I just want to make one simple point, and it is not that complicated. I don't think anything the Federal Reserve Bank can do, this year or in the next six months anyway, can help free up the frozen credit markets. It simply has nothing to do with interest rates.

There is one thing the U.S. Justice Department could do though: a few indictments of fraud would help a lot. I know that white collar criminal cases are never quick to file or prosecute. It took years to bust the Enron executives. I certainly hope we get some soon. Angelo Mozilo of Countrywide Financial would be one good place to start. Definitely the Citibank perpetrators of the sale of the CDOs sold to the three Norwegian townships. That got a lot of press - they should be indicted. There are no doubt hundreds of people who participated in all this fraud. They should do the time. That would restore confidence in credit markets.

Wednesday, October 17, 2007

And now Israel too?

I couldn't believe this! The always sharp Jim Willie has this amazing piece of news in his Hat Trick Letter:
Another sign of the times. The Israeli Govt has requested that all foreign aid payments and loans be delivered in euro currency. US Secy State Rice has confirmed the formal request by Israeli foreign minister Tzipi Livni. The minister cited the rapidly declining USDollar exchange rate and its disfavor. Egypt was denied a similar request recently. Rice said, “In the spirit of Yom Kippur, the United States will not hold Israel to any agreements obligating them to accept dollars as payment for their foreign aid. We will translate our obligations in euros or whatever currency that best fits Israel’s needs. We need to place our Israeli obligations at the top of our national priority list. Israel should not suffer any inconvenience due to currency fluctuations.” So the American people should not expect to receive euro payments for federal pensions or Social Security payments. They can eat cake! As for the request out of Tel Aviv, you gotta admit, that took chutzpah.

Even more astonishing is that we agreed to it. "Israel should not suffer any inconvenience", says Condi. Wow, how far and fast the mighty do fall. See America's Secretary of State grovel. Who is next in line to take pot shots at America? Nicaragua?

Thursday, September 20, 2007

Saudis Say Fuck Off Dollar

Wow: Saudi Arabia just told us to fuck off. Its not like we weren't asking for it. Link goes to Britain's Telegraph:
Fears of Dollar Collapse as Saudis Take Fright
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

When Bernanke drastically cut interest rates, on September 18th, ostensibly to support the American homeowner, but also to support the US mortgage industry (and what do you know it worked out pretty well for the stock market also), it sucked for the rest of the world, which has to deal with our inflation. I thought there would be a backlash, but for it to come from the Saudis first, that must sting. Bernanke is probably saying "I thought you were my friends!"

It pissed me off that we sold the fraudulent mortgage bonds overseas. I mean that we sold these stupid homes for way too much money and then packaged them into crazy bonds, that was bad enough. But then we went and sold them to foreigners - that was rude. I think Wall Street's "collateralized debt obligations" and other such trash have done for American financial credibility what Iraq did for American military credibility. That is to say wrecked it.

I don't know how much US mortgage debt the Saudis bought. But they have, I think, 800 billion in US T-bills. I read somewhere most of it is short term, too. And if we insist on flooding our markets with "liquidity", i.e. printing cash to save our own markets, and driving down the dollar (which is making 14 year lows this week), all those bond holders are going to get annoyed. They may just decide to sell off their dollars. And the Chinese, and the the Koreans and the Brits for that matter (I know Britain could use the cash right now). They may start to think it would be better if they sold first, because no one wants to be the last to sell. It could become a rout. Is it the apocalypse? No: its just the worst recession since the depression. Maybe it will be like the depression, if we don't get it together.

The problem is not just all the foreign owned treasuries, the even bigger problem is the petro-dollar itself. This is why getting the finger from Saudi Arabia, of all places, is so significant. It is a very strong signal that they will sever the riyal from the dollar for good. And if they do that, why would they want to insist on only accepting US dollars for their oil? The petro dollar has been under fierce attack for a year now, fom Russia, which sells oil for euros and rubles now, from Venezuela, from Iran, which sells for yen, and Kuwait, which pegs the dinar to a basket of currencies. The dollar is crumbling, day by day. Saudi Arabia has been one of the pillars that has supported it since the seventies. The business deals that Kissenger put together with OPEC were one of his most long reaching and successful ideas: that oil could only be traded in US dollars, anywhere. And for the most part, except the Soviet Union, this deal has held together, for the immense profit of a few super-rich families and for the American empire.

Until yesterday, that is, when Saudi Arabia said fuck you.

Tuesday, August 21, 2007

just say it: recession

I've been following the ongoing crisis in the credit markets obsessively. This is a fascinating addition to the global picture: China's mortgage quality worse than US.
Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan (S$583 billion) of mortgage lending.
Defaults in the US subprime mortgage market now total about S$200 billion, on some S$1 trillion of loans, according to Credit Suisse.
'The quality of housing loans are much worse than the subprime loans in the United States,' Mr Yi was quoted as saying by the South China Morning Post.

Interesting. I have read elsewhere that England, Austalia and Spain have all had massive real estate appreciation bubbles. So at least we know that Americans are not the only greedy ones. But if we are expecting foreigners to bail us out (see this insightful Asia Times story), that is to say keep on financing our debt, we may have an even bigger problem. Maybe China (and Austalia, et al) will be dealing with their own liquidity problems? At present the Chinese must be relieved that their massive pile of US Treasury bonds are rising in value. But they will have to sell off their treasury book eventually, as the profitability of global trade begins to falter with the coming recession.

Recession. Lets just all say it. We should get used to it. The economy is not going to be "growing" for a while. All those American workers who are losing their jobs in the mortgage industry - are they going to find work anywhere near as well paid as the jobs they had? I don't think so. And see CNN's Job cuts at financial services firms surge. BTW, mortgage brokers also have homes with adjustable rate mortgages (like everyone else on the planet). And the construction workers, the decorators, the realtors.. they too are at risk of losing not just their jobs, but their homes. The Mexican and Latino immigants and illegals who did the unskilled labor? They will no doubt have to go home, and their families will lose their remittances. And the Wal-Marts that fed and clothed them in the USA will not get their dollars either. And there will be layoffs in retail. It is a shrinking pie now. We will all be losing our dessert, and for many, dinner too. It sucks.

I should say something positive and optimistic. Well here is one way forward: the biggest problem is that all the debt, at least coming from the USA, was mis-rated, some of it faudulently. We will need some truth and reconciliation, as well as litigation and prosecution. John Maudlin, a Wise Old Man of finance, is calling for Warren Buffet to step up to the plate:
..the rating agencies need to restore their credibility. Warren Buffett's Berkshire Hathaway owns about 19% of Moody's [a prominent bond rating agency]. I would suggest that Mr. Buffett step in take over the company (much as he did with Salomon years ago) and put his not inconsiderable credibility on the line for all future ratings and the inevitable re-ratings that are going to be done.

Suppose Buffet takes Maudlin's advice. Then all the actuaries and appraisers will have to go over all those bonds and find out what they are really worth (at least it will keep some people employed). Such a process would be slow and very painful because people will simply be told that the value of their home or condo just went down 30%. And that the chance of selling a home or condo, even with a 30% discount, this year, is very small. But it is better to know what things are worth, and then deal.

Tuesday, July 24, 2007

Blame the Chinese for Inflation?

Highly amusing headline: The Latest Chinese Export May Be Inflation. Actually this is a smart article, by Bloomberg's Simon Kennedy and John Fraher, in spite of the flippant headline. It paints a picture of inflation as the product of years of out-of-balance globalization. Now the global economy is slowly and inevitably re-balancing:
Central bankers have harnessed the effects of low-cost production from China and other countries like India to hold down interest rates and stimulate domestic growth. The Organization for Economic Cooperation and Development in Paris estimates that globalization knocked as much as 0.2 percentage point off inflation in rich nations from 2000 to 2005, even as the world economy sped up and buoyed raw-material costs.

Now, when "inflation is above target, the cost of reducing it has been increased," said Robert Lind, chief economist at ABN AMRO Holding in London. Interest rates in Britain and the 13-country euro zone are already the highest in six years, with officials hinting that more changes may be on the way.
China is actually struggling to keep it's own economy under control, and is raising interest rates:
China reported the quickest pace of growth in a dozen years, pushing inflation to 4.4 percent in June. On Saturday, China raised its benchmark interest rate to an eight-year high of 6.84 percent.
Kennedy and Fraher give examples of central banks struggling with inflation not only from China, but also from Britain, New Zealand, and Canada.
The Bank of England's policy makers highlighted import prices as a "growing" inflation risk and one of the reasons for this month's increase in the benchmark rate to 5.75 percent.

It is not just the cost of imported goods that troubles Mervyn King, governor of the Bank of England. On May 16 he said that British house prices were "heavily influenced by what is happening overseas, independent of U.K. monetary policy," as wealthy foreigners purchase property.
New Zealand:
Bollard, of the New Zealand central bank, is expected to raise the official cash rate to a record 8.25 percent this week, in part because overseas orders for butter and milk are pushing up dairy prices.
The Bank of Canada this month increased its main rate for the first time in more than a year to 4.5 percent partly because of surging investment in the western province of Alberta to develop the world's largest pool of oil reserves outside the Middle East.

Thursday, July 19, 2007

Hyperinflation in Zimbabwe. USA next..

This business of the Fed simply printing up cash to buy the stock market is nuts. We are going the way of Zimbabwe. And nobody seems to notice, or care. As long as the stock market goes up, everything else can go to hell.

By the way, the Zimbabwe Stock Exchange is soaring much faster than the mighty Dow:

Here is a chart that shows the hyper inflation of the Zimbabwe Stock Exchange (click for a higher res image). It seems to show the ZSE's Industrial Index going from almost zero to 55 million in one year! A helpful Harare stock analyst, Shumba Seti of the African Banking Corporation, emailed me this chart and the weekly closing prices for this index for the past year. The ZSE was not actually at zero in July 19, 2006, it was at seventy thousand (70,084). One year later this index closed at thirty three million (33,582,892). This gives a year on year percentage rise of 47,818%!!! This is down considerably from its peak at July 3rd at 53,354,792 (a 76,000% rise in less than one year). The reason for the recent downturn is that Zimbabwe's authoritarian president Mugabe imposed price controls in the last week in June, a few days before the ZSE hit its peak. Price contols has had the effect of making almost all commerce other than barter impossible in the country: Zimbabwe Price Controls Wreak Havoc on Economy.

To return to America, it sounds like good news that the Dow Industrials has closed over 14,000 for the first time. Suppose it happened to close above 18,000 by year end? What's not to like? And maybe 25,000 or 30,000 the next year? Wow! But at what point would the celebrations in the NYC ballrooms turn to panic? At what point do we start to suspect there is nothing there, that these "dollars" are becoming increasingly worthless and irrelevent even as they multiply geometrically?

Some people might point out that a soaring stock market could be an inflation hedge. Perhaps. Unfortunately it is also the most un-equal distributer of wealth. This is how it works: the Fed has its Plunge Protection Team (see wiki page). They buy futures in the Dow, the S&P, and other indexes. Brokers and their automated trading programs see a fat spread between the future contract and the underlying stocks, so they buy the stock and sell the future. They get as sure a profit as is possible in this uncertain world. The stocks go up. The Fed sells the contract at a loss. This way the Fed injects money into the economy. Much of it goes directly into broker's pockets. The corporations love the flow of capital.

Does any of it trickle down to those not participating in the market? In a real, and growing economy a little bit would in fact trickle down (not that this method of economic stimulous is in any way justified). Corporations would invest in new plants, new stores, they would hire more workers. That is not happening in the USA. Corporations are buying back their own stock, buying other corporations. The market is simply feeding on itself. This is not growth. It is a dead end. The end result, in an extreme example, is for all to see: Zimbabwe. National economic collapse. There, but for a little common sense, we'll be.

Wednesday, July 04, 2007

USD Painting Itself Into a Corner

The dollar is finding itself in a 'falling wedge' pattern. This is normally a bullish configuration, meaning it indicates that the dollar will likely break out to the upside. If it was a stock it might be a buy. Yet it can also break downwards. Read any article about the dollar, the fundamentals look horrendous. Like this one: Global Exodus From The US Dollar In Motion.
Since the Bernanke Fed discontinued the decades-old reporting of the broad M3 money supply in March of 2006, the growth rate of M3 has accelerated from an 8% rate to a sizzling 13.7% clip, its fastest in more than three decades. The Bernanke Fed is preventing borrowing rates from rising at a time of explosive loan demand for US corporate mergers and takeovers, by rapidly increasing the US money supply.

Just why should we care so much about the dollar? Because it is holding the world's economy together, and by the thinnest of threads at this point. Here is a piece in the British Telegraph: Credit Crunch Will 'Shred Investment Portfolios To Ribbons'
Markets have been wobbly since the surge in yields on 10-year US Treasuries, the world's benchmark price of money. Yields have jumped 55 basis points since early May on inflation scares, the steepest rise since 1994. It infects everything; hence that ugly "double top" on Wall Street and Morgan Stanley's "triple sell signal" on equities.

Wobbles are turning to fear. Just $3bn of the $20bn junk bonds planned for issue last week were actually sold. Lenders are refusing "covenant-lite" deals for leveraged buy-outs, especially those with "toggles" that allow debtors to pay bills with fresh bonds. Carlyle, Arcelor, MISC, and US Food Services are all shelving plans to raise money. This is how a credit crunch starts.

"This is the big one: all investment portfolios will be shredded to ribbons," said Albert Edwards, from Dresdner Kleinwort.

The BIS had warned days earlier that markets were febrile: "more risk-taking, more leverage, more funding, higher prices, more collateral, and in turn, more risk-taking. The danger with such endogenous market processes is that they can, indeed must, eventually go into reverse if the fundamentals have been over-priced. Such cycles have been seen many times in the past," it said.

The last few months look like the final blow-off peak of an enormous credit balloon. Global M&A deals reached $2,278bn in the first half, up 50pc on a year. Corporate debt jumped $1,450bn, up 32pc. Private equity buy-outs reached $568.7bn, up 23pc. Collateralised debt obligations (CDOs) rose $251bn in the first quarter, double last year's record rate.

Tuesday, June 05, 2007

America And Mexico Face Depletion

I've been listening to the debate over immigration and thinking something important is missing here. Basically I think that the USA cannot build a wall separating itself from Mexico anymore than England can separate itself from Scotland. Our two nations' destinies are closely tied together, and no wall can change that.

Anyone who has read my posts knows that I see things from an energy perspective first, and Mexico is no exception. Do Americans realize that Mexico is a major supplier of oil to the USA? In 2006 America imported more oil from Mexico than from Saudi Arabia. We bought 1.445 million barrels every day from Saudi Arabia, and 1.556 million barrels per day from Mexico. Source is the Energy Information Administration. Mexican oil powers our SUVs. Perhaps Americans could be just a little bit appreciative?

Most Mexican production comes from a single huge offshore oilfield: Cantarell, which supplies us with vast quantities of high quality light sweet crude oil. All this oil goes directly to American refineries on the Gulf of Mexico, mostly in the New Orleans area. This has been a very good deal for America. Because the oil was high quality, we were able to process it in our vintage refineries with out the major upgrades it would take to process heavy or sour oil. This means we get the refining profits. The oil is nearby, and not subject to threats or vulnerabilities from hostile nations, like passing through the Straights of Hormuz, etc.

Now the good deal is coming to an end. Cantarell is in decline, and at a rate much faster than even the pessimists anticipated. In 2006 production fell by 20% from 2005's level. This is a catastophic rate of decline, may soon plunge the Mexican state into chaos. Mexico depends on the cash from its oil production to keep functioning.

So, what would be the appropriate action for America? Bolt the door and watch TV, while Mexico has its crisis by itself? I don't think this would work. Remember globalization? Like it or not, the USA and Mexico are practically married. There is no possibility of divorce. We are stuck to each other. Another reason that we can't ignore Mexico is that we need Mexico just as much as Mexico needs us. We depend on that Mexican oil. We depend on Mexican labor. Our southern cities have huge Mexican (and other hispanic) populations, and those millions of Mexican Americans are simply not going to disappear. I simply think America and Mexico will have to face their crises together and solve their problems together. Mexico does have huge natural resources that could benefit both nations. I believe and open border, and work permit program would benefit both nations. One writer who senses the coming crisis is Dan Amoss, editor of an investment newsletter. He sent me a rather hyperbolic pitch by email, trolling for subscribers. I can't find it on his site, but I have taken the liberty of posting it here: The Dominoes of Doom Are Falling South of the Border. I certainly don't agree with all Amoss writes, but at least he does try to tie together the many scary implications of peak oil.

update: here is a news item that confirms my point that America's problems and Mexico's are inextricably linked: Border violence pushes north.
And another one: the current and ongoing housing and mortgage collapse will exacerbate all USA-Mexico tensions. Remittances from Mexican home building workers are way down:
Remittances are the financial lifeblood for millions of Mexican families and a crucial source of foreign exchange for their government. The $23 billion that maids, cooks, gardeners and others sent home last year — almost all from the U.S. — topped the amount that multinationals invested in Mexico. But fallout from the U.S. construction industry, which employs 1 in 5 Latino immigrants, is now rippling south of the border. Growth in remittances to Mexico has slowed to a trickle.
America's and Mexico's economies are fast decending into recession.

Monday, April 16, 2007

Sallie Mae Eaten by Private Equity

I can't see any rationale for Sallie Mae being acquired by a private equity firm. This is a sad example of a business deal that is perfectly legal, raises no eyebrows, and seems completely straightforward to many people. But to me it smells like a corrupt society. Not like Sallie ever did smell like a bouquet of roses.. Sallie Mae is the largest provider of student loans in this country, and it was a publically traded, for profit company with some vauge assumption of government backing. In recent years, Sallie has become more and more expansionist, agressively acquiring non-profit state run student load programs. Now, like most finance corporations that have expanded too fast in boom times and now are facing economic slowdown and recession, Sallie is finding itself over-leveraged. Being vulnerable, it finds itself the takeover target of a private equity group.

I can't think of much justification for for-profit educational loans. We should have non-profit, government sponsored student loan programs. A better educated society brings benefits to the whole nation. By far the most benefit comes from improving the education of the least advantaged populations. I would think this is obvious.

To me this brings up the whole debate between efficiency of government versus private enterprise. The prevailing center-right ideology states that private enterprise is always more efficient, and therefore creates a better stucture for society. I strongly disagree with this one sided view. For an example of non-regulated private enterprise gone berserk, look at our ludicrously bad health care system. IMO, niether business nor goverment is inherently more efficient. But some enterprises are suited for private and some for public ownership. Health care and education top the list of areas that should almost always be government run, sponsored, and regulated. Transportaion would come in third place in fields that benefit from goverment control and support.

A large public sector does of course require an efficient bureaucracy to function. Just as an efficient corporate sector requires good corporate governance to function. We must always expect and demand efficiancy from government and corporations. When we have such debacles as Enron, or the Bush aministration, we must hold the criminally incompetant perpetrators accountable.

Some things just don't lend themselves to fat profits, but are required for a society to function. Could a private enterprise have built the New York subway system? No way. The interstate highways? No way. Public transportation can be a long term asset to society. We should treasure these things.

The case for public education and health care is even more clear. If we require education to be profitable, it will not be long before only the rich will get educated. It is that simple. If health care must be profiable, only the rich will be healthy. We are already seeing this in the United States: we have an enormous gulf between rich and poor. We are a class-divided nation, unhappy, unprosperous and unstable.

Thursday, February 08, 2007

Divide Up Iraq: The Get Rich Quick Scheme

The rising tide of bad news regarding Iraq seemed more like a tsunami yesterday. NPR covered the following stories:
Current thinking regarding Iraq is now saying that we'll need to chop up the country into at least three parts. I admit I've said as much in this blog. I mentioned it as the inevitable conclusion to our debacle. Now conservative investment newsletter writer Ned Humphrey says this in a recent post. To his credit, he does not see this is an easy or safe solution, in fact he sees more and more conflict ahead:
The trouble with this option is there would be no way to control the outcome after the division, any more than we could stop the looting after Saddam was toppled. There are substantial minorities of Sunnis in the Shi'a areas and vice versa. Baghdad is thoroughly mixed and would need to become some kind of internationally protected city-state, as the prospects of disentangling its mixture of residents is about as likely as the Pope converting to Islam.

And the Turks would definitely not be happy with the idea of an independent Kurdish state at their back, as that country's own ethnic Kurds would immediately want to join their brethren and cast off the yoke of Ankara.
The basic problem is that Iraq is not ours to divide, either from a moral or tactical perspective. America will not ultimately decide the fate of the Iraqi conflagration that it started. It is far more likely that Iraqis divide their country themselves, Yugoslavia-style, or with the so called help of Iran or Saudi Arabia. No one knows how the civil war will play out. But America will not be making the decisions.

Humphrey unfortunately goes on to suggest that Americans can make the best of a bad situation by investing in military stocks! I have to say this is a terrible idea, not just from a moral perspective, but also from financial one. The whole "who cares if we are losing Iraq as long as the S&P 500 is going up and gas is cheap" attitude, prevalent these days, astonishes me. Don't Americans know what it means to lose this war? It means we are going to have a market crash and massive inflation. Nations do not get rich by losing wars. Nations rarely get rich by winning wars for that matter. Nations can get rich by looting vanquished nations though, and Iraqis might well conclude that such is our intention, consistently supported by our actions from the beginning. When it come to nations, believe actions, not words.

We are paying some two hundred milllion dollars a day to lose this war. Of course a lot of that will go into the fat-margin profits of corporations like Halliburton, and other "security contractors" and armament manufacturers (one of Humphries' favorites is Force Protection Inc, a vehicle armoring firm) . And maybe the nominal price of stock in those corporations will appreciate. But it will not keep pace with inflation. Not by a long shot. I don't really have data or links to back this up, just a rationale and a hunch. War=inflation. That's the short version. During, and especially after, the Vietnam war we had huge inflation in America. It is coming back now. Britain had disasterous inflation after the second world war, even though they were on the winning side. Iraq was invaded largely to "secure" their oilfields. Now that oil is anything but secure, and that is sure to create inflation. Oil and the fate of our dollar are closely tied together.

I have another reason for not believing military stocks are a good investment (besides the immorality of war profiteering). I don't think there is a culture of honesty in the American corporations these days, and expecially not in corporations whose only customer is the US goverment. The system is rotten to the core. If there is money to be made it is not likely to trickle down the shareholders. I don't believe these are times to buy stocks. Stocks will peak this year and trend down for a long time. Just buy gold or silver instead, OK?