Links 10/11/10

Index shows global hunger growing BBC

Picture: unknown carnivore discovered in Madagascar lake Wild Madagascar

Jump in whale deaths blamed on krill, ship traffic PhysOrg

County home sale record Press Democrat (hat tip reader Louis S) Sandy Weill and his wife spend ill gotten gains $31 million on Sonoma estate.

How Hank Paulson’s inaction helped Goldman Sachs McClatchy (hat tip reader Glen)

Michelle Obama is not the most powerful woman in the world Guardian

FORECLOSUREGATE AND OBAMA’S ‘POCKET VETO’ Web of Debt (hat tip reader John D)

S&P: 60% of countries will be bankrupt within 50 years Raw Story (hat tip reader John D) This is completely silly. Seriously. Do you think S&P can credibly forecast anything out 50 years, particularly given its great record on house prices? Demographers got the US in the 1990s completely wrong, they though we’d have a declining population and instead it increased. That single forecasting error rendered a lot of projections invalid. Not sayin’ things will be a bed of roses in 50 years, but that this sort of exercise is spurious (and why is S&P bothering? Does ANY country have 50 year bonds outstanding? This looks like bond vigilante agitprop).

Unanticipating The Great Depression and the Great Recession Mike Kimel, Angry Bear

Hey, Small Spender Paul Krugman, New York Times

A radical pessimist’s guide to the next 10 years Globe and Mail (hat tip reader Sundog). Gee, makes me look cheery by comparison!

The Final End of Bretton Woods 2? Tim Duy. Today’s must read.

Antidote du jour:

Picture 5

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  1. Park

    Sonoma estate for $31m… hedgies and banksters are scooping up prime real estate on both coasts for their second third and fourth homes. It’s a good thing the average American in flyover country can’t even begin to comprehend the kind of lifestyles their tax dollars and 0% interest on their savings are paying for.

  2. Roberto Lupi

    Regarding S&P and 50 years predictions, I do agree they are futile but there are some countries with >50 years bonds. Just three days ago, Mexico issued a 100-year bond and UK has issued even some “perpetual bonds”.

    1. Yves Smith Post author

      I stand corrected, thanks!

      Nevertheless, 50 year+ bonds are barely a drop in the capital markets bucket, but are not a non-event as I erroneously stated.

  3. steve from virginia

    Tim Duy is always a good read and he makes a not- uncommon point that the dollar is indeed too strong even as other countries manfully attempt to devalue their own currencies against it.

    However, energy is not mentioned: the dollar is a hard currency in the classic sense being freely exchangeable for a valuable physical good (crude oil) on demand at a more or less fixed rate of exchange.

    Foreign exchange rates do not matter here, they are artifacts of currency speculation. What matters and nothing else is the price in dollars of crude oil.

    The central banks can do what they wish with the remains of Bretton Woods but the upper bound represented by the crude oil price in dollars that constrains output is what sets the limit on dollar revaluation.

    In this light the Fed is an appendix, an organ with no function other than to be a spectator to the great deflationary unwind that decreasing oil supplies along with an excess of debt mandate.

    Sorry about the early morning bad news …


    1. auskalo


      The real money is crude oil, not the dollar.

      It’s funny that Tim Duy does’t speak about that, because Brad Setser was clear saying that a 70 dollar barrel worked well for sellers and buyers, but an $85 barrel was very dangerous for the US economy.

      The Fed’s QE 2.0 will collision with a too expensive barrel and accordingly, they forget unemployment.

      Not all is just imbalances, it’s important to distinguish between noise and need.

      The upper class will soak the rest, but they can’t survive without blood.


  4. Ina Deaver

    Ok, that had an apocalyptic whiff to it. Or is it just that I had tequila and fried food for dinner last night?

    I am with Ms. Dent on the depressing persistence of mistaking marriage for achievement. I would even tolerate some of the ugliness that “the future” holds if it would finally involve valuing women quite apart from whether we can get some man to agree to purchase us in perpetuity. And yet women who do accomplish things in their own right are viewed as some kind of quaint (but sexless) token by one group, and a threat to the very fabric of society by another. And of course, women in both groups are the most vocal and aggressive in attacking achieving women. . . .

  5. john bougearel

    Tim Duy contends that “an excessively high dollar is the explanation for the simultaneous existence of a sizable current account deficit and excessive unemployment.” I hadn’t thought of that before but it intuitively makes sense.

    He then goes on to claim that “foreign central [banks] repeatedly acted to limit dollar depreciation.” Yes, Most notably with Mexico 1994, Asian tigers 1997 and Russia 1998.

    Duy states all of these observations with the dollar now below 80 cents. The only time the dollar has ever been below 80 cents was in the the first half of 2008, the 2nd half of 2009 and 2H 2010. 80 cents is the level at which the dollar repeatedly found support in the 1990s (1991,1992,1995) following the 1985 G-5 Plaza Accord and once again in 2004. The strengthening of the dollar in 2005 came about roughly 9-12 months after jobs began to be created in the US.

    The dollar had to persistently decline from 2001 through 2004 before jobs began to be created following the last recession.

    Duy continues: “Currency depreciation – of substantial magnitude – is a mechanism by which economies recover from financial crisis. But we shouldn’t underestimate that challenges that accompany such an adjustment. If it happens to quickly – a sudden stop of capital – the most likely short run outcome is that the current account deficit will be resolved with import compression via a sharp drop in demand. This would be painful, to say the least.

    Neither, though, is the current path – a painstakingly slow Dollar depreciation. The result so far is persistently high US unemployment, with no relief in sight.”

    QE2 is coming with a vengeance on Nov 3. Notes Duy, taht is the date the Fed is positioning “to declare war on Bretton Woods 2.” QE2, Duy asserts, will be a de facto “attack on the strong dollar policy.”

    That attack (war) is already well underway. It began when the Fed announced its QE2 intentions on Aug 10 2010. The announcement was akin to broadcasting to the rest of the world that you had a bazooka in your pocket and were preparing to launch a few rounds from it. They telegraphed their intentions and are giving mkt participants about 3 months to get positioned for it (assuming Nov 3 is when QE2 gets underway).

    I myself have been underestimating the impact and aim of QE2. I dismissed it as just another QE1. But I probably underestimated the aim of QE1 to drive the dollar down as well. The aim of QE1 to drive the dollar down you see, was disrupted by the series of potential sovereign default crises in Dubai and throughout Europe at the end of 2009 and the first half of 2010.

    Fact of the matter is this: QE1 was announced on March 18 2009. The dollar decline from March 2009 to Nov 2009 (dubai world interrupted the dollar decline)was not quite disorderly but it was the most rapid decline I have ever seen and was worse than the dollar decline following the 1985 G5 Plaza Accord.

    The dollar destruction that got underway in March 2009 resumed in June 2010. And guess what? The dollar decline following the June 2010 high is even more rapid than the dollar decline following the March 2009 high. The dollar decline off the June 2010 can not yet be characterized as disorderly either. However, we can observe that the potential for a disorderly decline in the dollar is greater than anytime since the Smithsonian Agreement of 1971.

    From Wiki: “On December 17 and 18, 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement, which devalued the dollar to $38/ounce, with 2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized at the time, and was by design a “temporary” agreement. It failed to impose discipline on the U.S. government, and with no other credibility mechanism in place, the pressure against the dollar in gold continued.

    This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.”

    Duy continues: “Bad things happen when you fight the Fed. You find yourself on the wrong side of a whole bunch of trades. In this case, I suspect it means that Bretton Woods 2 finally collapses in a disorderly mess. There may really be no other way for it to end, because its end yields clear winners and losers. And the losers, in this case largely emerging markets, and not prepared to accept their fate.”

    Bad things you might say are already underway, and is already threatening to become disorderly. Recent spikes in commodity prices and foreign currencies are an indication. The Swiss and the Aussie dollar set record highs last week, the Yen is positioned to set record highs itself in the weeks ahead despite BOJ interventions.

    Gold has been making record new highs almost on a daily basis since finding a floor on July 29 2010. Other commodities have begun to take flight as well. Grains and cotton were limit up on Friday, in response to the USDA supply demand report. Corn, beans and cotton were roughly limit up on Sunday night as well. Corn has risen 15% in less than 2 sessions and Soybeans 10%.

    Funny thing about that limit up day in soybeans on Friday however, The USDA confirmed soybeans would achieve a record harvest (albeit 2% below last months record harvest forecast). Think about that for a moment. Why would soybeans go limit up on confirmatory news of a record harvest?

    Might something be afoul and distorting the soybean and other commodity mkts? Yves Smith and many other mkt participants raised this very question two years ago in the following posts:

    These articles attribute much of the increased volatility in the commodity mkts to the the recent securitization of the commodity mkts, made possible by the commodity modernization act of 2000 to circumvent the regulatory framework, limits and oversight of the CFTC.

    Some quoteworthy highlights from these Naked Capitalism articles

    Rising prices and a widespread bull market in commodities should indicate that there is a growing scarcity of hard assets. However, traditional forces of supply and demand cannot fully account for recent prices.

    To be precise, the normal price-inventory relationship has been altered. This is the assertion of an expanding list of bona fide hedgers, commodity professionals and economists. Specifically, dynamics have changed because securitized commodity-linked instruments are now considered an investment rather than risk management tools. Of late, this has been causing a self-perpetuating feedback loop of ever higher prices.

    That means a bubble. Back to Frankfurter:

    In a statement to the CFTC, Tom Buis, president of National Farmers Union, testified, “If [farmers] can’t market their crops at these higher prices, we’ve got a train wreck coming that’s going to be greater than anything we’ve ever seen in agriculture.” Billy Dunavant, head of cotton merchant Dunavant Enterprises, was more blunt, “The market is broken, it’s out of whack—someone has to step in and give some relief.”

    “The system is really beginning to break down,” Mr. Grieder said. “When you see elevators start pulling their bids for your crop, that tells me we’ve got a real problem.”

    “I can’t honestly sit here and tell you who is determining the price of grain,” said Christopher Hausman, a farmer in Pesotum, Ill. “I’ve lost confidence in the Chicago Board of Trade.”

    David D. Lehman, director of commodity research and product development for the C.B.O.T.’s owner, the CME Group, said: “We know that the current global environment is creating challenges for many of the traditional users of our markets, and we are very concerned. But there are a lot of things that are changing and there is no silver bullet, in terms of a solution.”

    Mr. Fletcher does not blame the big institutional investors stampeding into the market. “But they have contributed to the problem by making these markets so much larger — so large that they have outgrown their delivery system,” he said. “And that has detached the futures market from the cash market.”

    Unfortunately, this thinking is a self-fulfilling prophecy which ultimately may feed into a negative economic cycle where legitimate commercials are squeezed out of business thereby reducing supply, protectionism gains traction, trade breaks down, hoarding ensues, riots occur and wars erupt over access.

    This may sound alarmist, but industry insiders are not buying into the one-size fits all answer that emerging economies are the primary factor driving up prices from the demand side, reinforced by supply-side shocks and peak production fears. In a slowing global economy hit by a major credit crisis and reeling from a falling dollar, it is likely that money flows seeking safe haven in hard assets is the key driver of recent volatility…..

    Read that last sentence over. “In a slowing global economy…reeling from a falling dollar, it is likely that money flows seeking safe haven in hard assets is the key driver of recent volatility.”

    This means the world at large began adopting an “anything but dollars” policy back in 2008, and that same policy is reemerging with a vengeance in 2010 as QE2 gets underway.

    Tim Duy’s suspicions appear to be spot on, this is beginning to feel like the beginning of a disorderly mess. From Duy again:

    “The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US.”

  6. Roger Bigod

    I happened to arrive at the proper moment to get the lead slot for commonts on the so=called Nobel overfunded Prize in Economic Pretension. Too bad Ms Smith couldn’t have written it, for I could never approach her level of snark.

  7. MyLessThanPrimeBeef

    Today’s antidote, proving animlas are smarter than Homo Not-So-Sapiens Not-So-Sapiens, particularly the pre-revolution French aristocrats, knows the importance of blending in, thus the greenish-coat in that greenish environment.

  8. chris

    “Lac Alaotra, Madagascar’s largest lake, was the country’s rice bowl, responsible for feeding a large part of the island’s population. At one time the vast lake was surrounded by tropical forest, but today this has been cleared for agriculture, and the hills are now bare and riddled with “lavaka,” deep, red, eroded gullies. With rain – the soil left unprotected without forest cover – tons of red earth bleed into the lake, leading it to disappear. Today the lake has a maximum dry season depth of only two feet (60 cm) and the region can no longer produce enough rice to supply the growing population.”

    Any day now, there will be a call from the U.N. for “emergency food distribution” to these people. Move them or let them starve.”Calling Mr. Malthus…”

  9. Hugh

    Tim Duy’s piece gave me a headache. It is what I hate about economics articles. Ignore the kleptocracy, forget about the extreme concentration of wealth, act as if the paper economy and all its bubbles never existed. And then talk about the value of the dollar and balance of payments issues as if they existed in a well performing system, except they aren’t.

    Unemployment in this country is about 30 years of devaluing labor and about the transfer of wealth away from them to wealthy investors and corporations, in recurring cycles, who then used that wealth to eliminate jobs in this country entirely by shipping them to cheaper labor markets abroad. It is about loading ordinary Americans up with debt until that debt finally imploded on them in the housing fiasco where so many saw the value of their primary asset, their home, go into the crapper. And suddenly their debt situation, already precarious, became untenable.

    Duy misses all this. He misses that our failed elites are mirrored by equally failed elites abroad. Of course, any kind of international agreement was going to be ignored or ditched. All are engaged in individual extend and pretend schemes: in beggar thy neighbor/ export our way to prosperity, and protectionist policies.

    All that is happening now is that the US and Team Obama are finally getting on the same train as everybody else. In the absence of any real reform or leadership, it was inevitable. With the world’s reserve currency, we just have a bigger stick than anybody else.

    But even if a devaluation could be “smoothly” managed, let us not kid ourselves. The real question here is would decreases in unemployment, if indeed there were any, offset the reduced purchasing power of ordinary Americans due to their devalued currency. I tend to doubt it. Mostly because nothing Duy says addresses wealth inequality. What we would likely end up with is just a further impoverishment of the middle class.

  10. Roger Bigod

    I should have included the info that this was on the NYT comments to the “Nobel Prize” news. They rejected one of my followup comments mentioning the most tangible product of the Chicago School is a pile of bodies in a soccer stadium.

    I guess sometimes truth is unfit to print.

  11. Jimbo

    You ask if any country has 50-year bonds outstanding. Well, last week Mexico sold 1B in 100-year bonds, yield-to-maturity of 6.1%, coupon of 5.75%.

  12. Paul Tioxon

    Robert Pape, a University of Chicago political science professor and former Air Force lecturer, will present findings on Capitol Hill Tuesday that argue that the majority of suicide terrorism around the world since 1980 has had a common cause: military occupation.

    Laying the ground work for getting out of Af/Pak conflict? Wiki

    1. Kevin de Bruxelles

      There is a slight problem with that article. It is certainly not “terrorism” for any local citizen to launch a suicide attack against an occupying army. A major part of any correct definition of terrorism is that it must target “non-combatants”. By definition, occupying soldiers cannot be considered “non-combatants”.

  13. svg

    Krugman: “The answer to the second question — why there’s a widespread perception that government spending has surged, when it hasn’t — is that there has been a disinformation campaign from the right, based on the usual combination of fact-free assertions and cooked numbers. ”

    When I read this, I just felt embarrassed for Krugman. Really. How sad (and juvenile). I’m not sure about his economic advice, but his obsession with the right/Republicans borders on derangement. BTW, I’m a Canadian liberal, in case you’re wondering.

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