Putin Calls for the End of the Dollar's Reserve Status

From the BBC:

Russian Prime Minister Vladimir Putin has told the Davos economic forum it is dangerous for the world to over-rely on the dollar as its reserve currency.

He called for a range of reserve currencies and said he envisaged the emergence of several strong regional currencies in the future.

The emergence of regionally based reserve currencies would create more political instability, not less. It would beget trading blocs, which would lead to the kind of economic rivalries that capitalist powers had during the first half of the 20th century, ending with World War 2. Capitalism is not a very stable economic system to begin with, as its components seek constant expansion and productivity growth. Without the unifying backdrop of dollar-based assets, there would be an intensifying of rivalries and trade disputes.

One Consequence of the Equity Crash

Private foundations have drastically cut back on their grants and donations. A local arts organization I work with had their annual allotment cut by 70 %.

Only A Week,

but it looks like the Obama administration is making some significant errors, which may ultimately derail the success of his first-term. Incrementalism, as expressed by an $ 800 billion economic stimulus package, will not help enough people get work. Compromise with a weak Republican minority will not shield Obama from blame if the stimulus fails. He should just go all-in, if this is what he believes in, and forget the Republicans. Krugman writes:

Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.

On the flip side, Obama has discarded incrementalism in Afghanistan. Troop strength is set to increase by 30,000 in the "Graveyard of Empires", with more probably coming later. In conjunction with this, are the repeated missile strikes into Pakistan. A good number of people are getting killed in these strikes, with seemingly little operational damage being done to the leadership of the Pashtun-oriented resistance. Juan Cole writes, regarding Pakistan :

If he thinks the drone attacks on FATA are a painless way to signal to the world that he is no wimp, he may find, as Lyndon Johnson did, that such military operations take on a momentum of their own, and produce popular discontents that can prove deadly to the military mission.

Prosperity is Not Just Around the Corner

From David Rosenberg, Chief Economist for Merrill Lynch:

"My sense is that many clients are totally underestimating the extent of the trauma that exists on the household balance sheet from this credit collapse and asset deflation,” said Mr. Rosenberg.

In a report that came the same day as widespread layoff notices, Mr. Rosenberg said: “We now have 30 per cent idle capacity in the manufacturing sector, which we've seen only one other time in the past five decades. That means that spare capacity in the economy is now so big that it would take six years of 4 per cent real GDP growth or alternatively three years of 5 per cent real growth just to get the economy back to full employment.”

The market's rapturous celebration of a dip in housing inventory shows that too many believe "prosperity is just around the corner". It was the housing bubble which fueled what little economic growth there was, from 2001-2007. The collapse of this bubble, and the resulting loss of equity and jobs, will leave the U.S. consumer deep in the hole for a long time. The permanent scar will be a lack of confidence in an ever-improving American standard of living. We have had two spectacular bubbles crash in less than a decade and economies just don't bounce back from that in short order. Couple this with an erosion of the social safety net, under the mantra of "shared sacrifice", and the U.S. consumer is going to become a lot more like their savings-minded counterpart in East Asia.

The Pressures for Protectionism

What is often missed during academic debate on the matter, is that there is a substantial constituency in the U.S. that favors protectionism. Actually, they would not even call their policy ideas protectionism, but rather, Fair Trade. They include labor unions, and a broad swath of domestic manufacturers who are under the umbrella of NAM , or National Association of Manufacturers.

The opinion piece, "Depression is Already Here", can be placed in the context of this constituency, and outlines their arguments well. (Although other aspects of the article are more speculative, such as its analysis of the New Deal and wage equity.)

Excerpts:

If President Obama is not willing to take tough steps to redress the trade imbalance with China and reduce oil imports, together the Persian Gulf oil exporters and China’s sovereign wealth funds may be able to buy the New York stock exchange eight years from now. Americans, outside those working for the New York banks that facilitate this sellout, will find their best futures waiting on tables for Middle East and Chinese tourists.
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The dollar is too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government intervenes in foreign exchange markets to suppress the value of the yuan to gain competitive advantages for Chinese exports, and the yuan sets the pattern for other Asian currencies. Similarly, Beijing subsidizes fuel prices and increasingly requires U.S. manufacturers to make products in China to sell there.
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The choices for the new president are simple. It’s either recovery or depression. Fix the banks, trade with China and energy policy or become America’s Nero.

As Goes California,

So goes the nation ?

California's unemployment rate surged to 9.3 percent in December as employers cut 78,200 jobs, pushing joblessness to a level not seen since 1994, the state Employment Development Department said Friday.
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"Economically we're in uncharted waters," Haveman said. "We haven't seen anything like this certainly since the end of World War II and maybe since the Great Depression."

Besides being ground zero for the housing bubble, California is essentially ungovernable now. Tax raises require a 2/3 vote , and state finances are tied up in a number of proposition measures that were passed by referendum.

Plans to Use Military During 'Civil Unrest'

Persistent stories about deploying the U.S. military on American soil. If I didn't know better, I would say it almost feels like the rollout of a product, or floating an idea to get the public's reaction.

The stories have been published , or based, in the border regions of the South West - and often center around Mexico's spiraling drug war and its potential for spillover. Yet their origin, an Army College report titled "Known Unknowns", places a military deployment in the context of civil unrest. That sounds more like protests, or rioting, not crime. Incidentally, crime in U.S. is way down now, on a per capita basis, from the early 1990's.

AP: "Feds Plan 'Surge' If Mexican Drug War Spills Over"

If Mexican drug violence spills across the U.S. border, Homeland Security officials say they have a contingency plan to assist border areas that includes bringing in the military. "It's a common sense extension of our continued work with our state, local, and tribal partners in securing the southwest border," DHS spokeswoman Amy Kudwa said Friday. Link

El Paso Times: "Unrest caused by bad economy may require military action, report says"

A U.S. Army War College report warns an economic crisis in the United States could lead to massive civil unrest and the need to call on the military to restore order. Retired Army Lt. Col. Nathan Freir wrote the report "Known Unknowns: Unconventional Strategic Shocks in Defense Strategy Development," which the Army think tank in Carlisle, Pa., recently released. Link

Arizona Business Times : "Ariz. police say they are prepared as War College warns military must prep for unrest; IMF warns of economic riots"
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Nick Dranias, director of constitutional government at the libertarian Goldwater Institute, said a declaration of marital law would be an extraordinary event and give military control over civilian authorities and institutions. Dranias said the Posse Comitatus Act restricts the U.S. military’s role in domestic law enforcement. But he points to a 1994 U.S. Defense Department Directive (DODD 3025) he says allows military commanders to take emergency actions in domestic situations to save lives, prevent suffering or mitigate great property damage. Link

Yuan and Dollar

Obama has long signaled his unhappiness with the valuation of the Yuan relative to the Dollar, and his Treasury nominee further emphasized that today.

Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency.

As I wrote in an earlier post, Obama's political power base is different than other recent presidents, being geographically located in the Upper Midwest and Chicago. Economically, this means agriculture, domestic manufacturing, and unions. Protectionism does not have a negative connotation in these circles.

It does seem there is a power struggle among the political class in regards to the American - China relationship. An editorial by the war-criminal Kissinger represents the view that "the Sino-American relationship needs to be taken to a new level". However, if Kissinger is writing editorials, it indicates that he is on the outside looking in.

If international trade curtails substantially, I think it's quite likely that China will attempt to establish a regional trading bloc, with the Yuan as the dominant currency. It seems to be starting this process with the ASEAN countries, who surround a strategic choke point to the Indian Ocean. Kissinger mentions this in his editorial; "A frustrated China may take another look at an exclusive regional Asian structure, for which the nucleus already exists in the ASEAN-plus-three concept."

The unwinding of the current over-leveraged, unbalanced model, means that many countries will be looking twice at 'globalization'.

No One Could Have Known

About the housing bubble, and the over-leveraged U.S. consumer.

The Coming Financial Tsunami

By George Mullen
June 9, 2005
World economies, including that of the United States, have been built not only on a house of cards, but on a foundation of beach sand as well. The tide, which had been going out for some time, convinced us of the soundness of our financial structure and the brilliance of our government stewardship and individual decisions. However, the tide is now coming in again (via the Federal Reserve), and we are failing to grasp the magnitude of the danger before us. It is a tsunami.
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According to the National Association of Realtors, 36 percent of all new homes purchased in 2004 were secondary homes either for investment (23 percent) or vacation (13 percent). This is evidence of rampant speculation.

I knew many middle-class people in California that were buying houses as 'investments', using cheap credit and the equity on their primary residence.

Over the three years of this "supposed" economic recovery, wages have increased a meager 4 percent, a startling 10 percentage points behind the 14 percent average wage gain of the five preceding cyclical recoveries.
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By February 2005, Americans were carrying a record $803 billion in revolving credit card debt, up $40 billion in the past year alone. (Note: debt levels typically do not increase in economic recovery periods.)

Long-term wage stagnation is one of the key factors to this unwinding. The only way to grow an economy with stagnant wages is to make credit cheap and accessible. But eventually, if the money is not paid back, there will be a period of liquidation to cleanse the system.

This article is still one of the best primers for explaining the housing collapse and its domino effect on an over-leveraged consumer, and economy. Not a surprise that it was written from San Diego, which was probably the first housing market to peak and begin crashing.

Clean Up Crew for the Inauguration

After the party ...

For those serving the general public, however, this author found that poverty-wage day labor is being used to clean up the massive outdoor events. The job description recruiting for this work, seen through the window of a Labor Ready temporary staffing office in Richmond, Virginia, is worth quoting in full:

Time to be in branch: Will know Friday (Probably 5 am)
How Long Job Lasts: With travel time—15 hours plus / Please be aware travel time is not paid
Pay: $7.55 an hour
Job Duties: trash pickup / horse manure pickup (no joke!)
Dress Attire: Must dress warm—gloves/hats/scarves/extra liners/jackets. You will not be able to go if you don't dress warm.
LONG HOURS / TEDIOUS WORK / OUTSIDE IN FREEZING WEATHER / HIGH SECURITY / NO BAGS ALLOWED / PLEASE BE AWARE

I have actually worked for the above organization, but thankfully, not for long. In my experience, they were bottom-of-the-barrel for temp agencies, in terms of wages, conditions, and how the workers were treated.

The New President

The inauguration of Obama is a milestone in the history of the United States. One does feel a relaxing of racial tensions, and an enthusiasm for the country and the political process that has been absent for the last number of years. His presidency gives a measure of esteem and respect to people of oppressed cultures around the world, a world even more divided by skin color than the United States.

But, political popularity can turn quickly. It was stunning to watch Schwarzenegger's endorsed ballet propositions go down to defeat, two years after his successful recall of Grey Davis. And George W. Bush had a 75 + % approval rating for what seemed like a year, only to see it fall to the lowest rating, upon leaving office, of any U.S. president.

Leaving the pageantry of the next few weeks aside, it is interesting to think about what Obama's policies in the White House will be, as he works with the Democratic Congress.

Though as a politician he is brilliant, in terms of policy, Obama is a fairly mainstream centrist-liberal Democrat. Chicago is the source of his political upbringing, and a such, he has a different power base than recent presidents. Chicago is a union town, and the Upper Midwest in general is built around domestic manufacturing and agriculture. Unions and domestic manufacturing are pushing for protectionism against China, and I expect Obama will move in that direction in his first year.

"I don't think just jawboning will be the approach of this administration," Rep. Sander Levin, a Michigan Democrat who chairs a key trade subcommittee in the House of Representatives, told reporters.

"I think it will look at all options, including a (WTO case), including working through the IMF, including looking at present legislation," Levin said.

Protectionism will fit the mood of the U.S. by the time late 2009 rolls around, and Obama will be hard for foreign leaders to demagogue. But it does bring the risk of an international backlash, as the global economy contracts, and countries feel their backs against the wall.
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On the issue of Afghanistan, Obama has talked himself into a corner:

Despite plans to send up to 30,000 additional U.S. troops to reinforce the 32,000 already in Afghanistan, of whom about half serve in the 50,000-strong NATO-led International Security Assistance Force, the prospect of routing the Taliban is remote.

Afghanistan is landlocked and more isolated than Iraq, has a longer history of successful rebellion, and very little recent history as a functioning state. Obama has positioned it as the real fight in the so-called war on terror, but he risks sinking his presidency on what could be an interminable stalemate.

Space Race , Part II

NASA has been officially independent of the U.S. military since its founding, with a mission of science and space exploration. There has always been spillover and sharing between the two organizations, given the similarities in technology and personnel, but I think the original distinction is important. However, Obama might be merging many aspects of the two, in the name of cost control, and possibly to increase the military's influence. His probable selection of a retired Air Force general to lead NASA also signals this merger. The militarization of space has always seemed to me both like a bad idea, and inevitable. There also is a long-term trajectory of increasing tensions between China and the United States which is worrisome.

Debt

The economy is going to be moribund, at best, for a good long time. The U.S. consumer is tapped out, 'busted', and deep in debt. The total amount of debt can be debated, but in my opinion, a good amount of the world's economic growth since 2001 emanates from the burgeoning debt load of the United States.

Looking at world trade figures for 2008, the U.S. current account deficit was around $ 700 billion dollars. In second place was Spain, at about $ 166 billion. The top three surplus countries of China (378), Germany (266) and Japan (176) just overtop the U.S.'s deficit. More than the numbers, this fits with the facts on the ground.

It doesn't take unique insight to see that these three export dependent countries, and their smaller satellites, will face a dramatic unwinding as the U.S. consumer goes into deep freeze. It also belies claims that the middle-class in the BRIC countries, Japan, or the E.U., was or is capable of soaking up the extra demand needed for world economic growth. This is because of the dollar's reserve status, and government policies in surplus countries that have been entrenched a very long time.

South Korean Blogger Arrested

I don't think this has gotten enough 'play', so to speak. Governments do this sort of thing as a warning to dissidents, especially in times of economic vulnerability.

"A South Korean blogger pleaded not guilty Saturday to charges that he spread false economic information on the Internet, a news report said, in a case that drew heated debate over freedom of speech. The blogger, identified only by his surname Park, gained prominence among South Koreans because some of his dire predictions about the global economy, including the collapse of Lehman Brothers, later proved to be correct."

I also find it interesting that he was largely self-taught. One can learn a lot with leisure time, a library, the internet, and interest in a subject.

"Park described himself in Web entries as a former securities firm employee with a master's degree earned in the United States and experience in the field of corporate acquisitions and takeovers, according to local media. His deeply analytical style and sometimes prescient forecasts made Park a star on the Web, earning him the nickname 'economic president on the Internet'. But prosecutors said Park was an unemployed resident of Seoul who studied economics on his own after graduating from a vocational high school and a junior college with a major in information and communication."

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Update: It looks like this guy was acquitted, which is great news.

Rowing Across the Pacific

Saw this last month, and it caught my eye.

An Italian adventurer who spent 10 months rowing more than 9,500 nautical miles across the Pacific has been rescued a mere 65 nautical miles short of his goal — Australia — after rough weather sapped him of his final shreds of energy. Alex Bellini, who began his voyage off Peru in February, contacted his wife Friday to say he was too exhausted to row his 25-foot boat any further, despite being nearly in sight of the eastern Australian town of Laurieton.

It reminds me tangentially of the Polynesian mariners, who were some of the greatest explorers in recent human history. They settled the vast Pacific Ocean, including the most remote islands in the world, Hawai'i and Easter Island, in long dugout canoes. This was done without modern technology, but rather, accumulated knowledge passed through the generations. A complex knowledge of the stars, ocean currents, animal migrations and weather patterns. Based on this, it's not a huge leap to guess that small groups of Polynesians landed in the Americas, and indeed it's a hypothesis :

From a single chicken bone recovered from the archaeological site of El Arenal-1, on the Arauco Peninsula, Chile, recent research of a radiocarbon date and an ancient DNA sequence indicates that Polynesian navigators may have reached the Americas at least 100 years before Europeans (who arrived after 1500 AD), introducing chickens to South America.

The need to explore, invent, and be creative, is a fundamental element of human culture, and has been going on a long time.

The Bestest and the Brightest

Princeton making budget cuts. Harvard's endowment down at least 22 %.

"None of the schools gave data on performance to date of their holdings of more exotic and illiquid investments, such as real estate, commodities and private equities. The expected losses in those categories have led to the bigger, full-year loss estimates"

Like the banks, they are probably hiding loses far beyond what is reported.

Which brings me to an interesting article , by Chris Hedges, called "The Best and the Brightest Led America off a Cliff". I post excerpts below, with comments.

"Harvard, Yale, Princeton and Stanford, along with most other elite schools, do a poor job educating students to think. They focus instead, through the filter of standardized tests, enrichment activities, advanced placement classes, high-priced tutors, swanky private schools and blind deference to all authority"

I've long thought that the low status of arts in our schools stems from an authoritarian distrust of people in that milieu. People in the arts are generally perceived as being free-thinking and suspicious of authority figures.

"The established corporate hierarchies these institutions service—economic, political and social—come with clear parameters, such as the primacy of an unfettered free market, and with a highly specialized vocabulary. This vocabulary, a sign of the “specialist” and of course the elitist, thwarts universal understanding. It keeps the uninitiated from asking unpleasant questions."

If someone can't explain an idea simply, then there's a good chance they don't fully understand it.

"The elite schools, which trumpet their diversity, base this diversity on race and ethnicity, rarely on class."

Our current conception of diversity seems limiting. Diversity does not mean equality, and a different skin color does not represent a diversity of class. Silicon Valley is one of the most diverse places in the United States, and one of most unequal places as well. Its tech workers are made up of a recruited elite, from around the world, and the service sector is largely made up of the poor from rural Mexico.

"The tutor told him things like “stop thinking about whether the passage is true. You are wasting test time thinking about the ideas. Just spit back what they tell you.” His reading score went up 130 points."

Teaching to the test. Any teacher whose job depends on it, will encourage it. Parents usually place an inordinate value on high test scores, as well.

"These elites, and the corporate system they serve, have ruined the country. These elite cannot solve our problems. They have been trained to find “solutions,” such as the trillion-dollar bailout of banks and financial firms, that sustain the system. They will feed the beast until it dies."

It takes a massive crisis before long-standing institutions of authority crumble. It took the 'Black Death' to ravage Europe, with a mortality rate of 30%, before the institution of the Church was weakened. Our current crisis , while not comparable (of course), will shake the institutions and conventions of thought in the United States.

Thoroughly Ridiculous NYT Headline

According to the Paper of Record: "Oakland Turns Violent Over Shooting".

The violence started when a cop killed an unarmed man who was lying face down. It didn't start when some windows got smashed.

And, at the end of the article:

"Federal law enforcement were also reported to be looking into whether Mr. Grant’s civil rights were violated in his killing".

Seems like an oddly detached way to phrase it.

I used to live in this area, from the Fruitvale district to downtown. It's really diverse culturally, with an interesting working-class Oakland vibe that underlays everything.

Overheard at the Dinner Party

"We don't need all the stuff we buy" (Heads Nodding)

Thrift will become the new cool in America over the next few years, mixed with the environmentally friendly notion of 'reducing and reusing'.

Doesn't sound like good news for export dependent countries.

And 2009 Begins

Back to posting ...

Talking to my fellow musicians, this was the worst December they could remember in terms of free-lance gigs. Similar to retailers, the holidays are usually a busy season for us.

It's going to be a rough year for the U.S. and global economy.