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Generational Dynamics Web Log for 9-Sep-2010
9-Sep-10 News -- Fed reports 'widespread signs of deceleration' in economy

Web Log - September, 2010

9-Sep-10 News -- Fed reports 'widespread signs of deceleration' in economy

China threatens 'further actions' after Japan arrests a Chinese fisherman

Fed reports 'widespread signs of deceleration' in economy

In its regular "Beige Book" report, released on Wednesday, the Federal Reserve reported "widespread signs of deceleration" in the economy. This is a change in assessment that's occurred just over a few weeks, according to Bloomberg.

In a speech last month, Fed chairman Ben Bernanke said "the preconditions for a pickup in growth in 2011 appear to remain in place," but the current report undermines that appraisal, without predicting a new recession.

This report is consistent with the numerous articles that I've been posting since June, starting with "7-Jun-10 News -- Globally, May was a month of ominous events."

Since that time, trends in numerous areas, including jobs, retail, manufacturing, housing, and GDP have all shown declines or slowing growth.

The report says that the economy particularly lost strength in late summer, according to the Associated Press.

There are twelve regions tracked by the Fed, and the reasons for slow economic growth differ by region. Thus, Philadelphia had a mixed picture, reporting slower manufacturing and real estate activity, but retailing revenue.

In New York, on the other hand, retail sales dropped, factory production slowed, and both residential and commercial real estate turned even softer.

Still, I hear nutjobs, liars and crooks on CNBC and Bloomberg TV, all of whom stand to make money from commissions and fees (including advertising fees) from a rising stock market, claiming that this new report is just a temporary blip, and prosperity is just around the corner. this is actually both sickening and fascinating to watch, because it's exactly the kind of thing that happened in the 1930s, and it's what's happening today.

Ireland and Greece raise new concerns about Europe's financial problems

Bond spreads -- interest rates for debt issued by Ireland, Greece and Spain, measured by the amount it exceeds interest rates for Germany's debt <font size=-2>(Source: Financial Times)</font>

Bond spreads -- interest rates for debt issued by Ireland, Greece and Spain, measured by the amount it exceeds interest rates for Germany's debt (Source: Financial Times)

After a summer where everyone forgot about Europe's financial problems, people seem to be paying attention again, especially to the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain).

Greece is being accused of continuing to hide the details of secret financial transactions that it used to conceal debt, according to Bloomberg. Although several countries besides Greece, including Germany, Italy, Poland and Belgium, used synthetic securities in the past to hide debt levels from the EU, Greece is the only country that continued to lie about them after 2008, and is the only country that is still concealing the details of those transactions.

The European Union’s statistics agency Eurostat is heading to Greece later this month to audit the debt hidden by these opaque contracts. The audit is expected to be tough.

Another PIIGS country, Ireland, is also receiving new scrunity.

As we reported several months ago (see "2-Apr-10 News - Ireland's banks in crisis,"), an Ireland agency has found 80 billion euros of "toxic assets" in Ireland's banks, about half the size of the economy.

Ireland has nationalized the banks, and those toxic assets are now on Ireland's books, adding to Ireland's debt, which Ireland cannot repay in any reasonable time frame.

The result is that Ireland's bond yields have been increasing, like those of Greece. Rising bond yields mean that the country has to pay much more interest payments when borrowing money, which creates a vicious cycle, since the higher interest payments make it even more likely that the country will default.

On Wednesday, Ireland announced that it will split its most troubled financial institution, the Anglo Irish Bank, into two banks, a "good bank" and a "bad bank," according to Associated Press. All of the toxic assets will be transferred to the "bad bank," leaving the "good bank" with good assets.

The concept, as I understand it, is that the government will slowly sell off the debts incurred by the bad bank, and in the meantime, the good bank can borrow money at lower interest rates. However, what doesn't make sense to me -- or apparently to investors as well -- is that if Ireland can't pay its debts when there's one bank, how can they pay their debts just because they've split up one bank into two?

Europe's bank stress tests were all but fraudulent

On Tuesday, the Wall Street Journal (Access) published the result of an analysis that shows that European banks essentially lied last spring, when they reported the results of mandated "stress tests."

Before going further, let me say that lying is the norm today. I just explained how Greece is continuing to lie. For years, I've repeatedly claimed that so-called experts on CNBC and Bloomberg TV constantly lie about price/earnings ratios. (See, for example, "24-Aug-10 News -- Ariel's Bobrinskoy gives price/earnings fantasy.") So when these European banks lied, I guess they aren't really lying, because they're just doing what everyone else does.

The stress tests were mandated for 91 European banks. The purpose of the stress tests was to regain investor confidence by revealing how exposed these banks were to "toxic assets" in the form of debt owed by other countries, especially the PIIGS countries. It was thought that once the exact size of the problem was known, then investors would feel confident enough to start growing the stock market and credit bubbles again.

According to the WSJ analysis, many banks simply cheated, by using various subterfuges to high toxic assets.

For example, using data from the Bank of International Settlements, WSJ determined that French banks were holding about €20 billion of Greek sovereign debt and €35 billion of Spanish sovereign debt. In the stress tests, four French banks, which represent nearly 80% of the assets in France's banking system, reported holding a total of €11.6 billion of Greek government debt and €6.6 billion of Spanish debt.

As I look back over the Europe stories that I've written today in the last few paragraphs, I'm struck by something: Ireland is the only country of the bunch that appears not to be committing fraud at the moment. Of course, Ireland is screwed as far as its debt is concerned, but that's because they lied massively in the past. Still, it's nice to know that there might be some people who may be telling the truth, in a world where lying and fraud continue to be the norm.

China threatens 'further actions,' after Japan arrests a Chinese fisherman

Simmering tensions over islands in the East China Sea claimed by both China and Japan boiled over on Wednesday, after Japan arrested the captain of a fishing trawler that was fishing in the disputed waters, and pledged to bring criminal charages against him.

For centuries Japan and China have disputed the ownership of the small island chain, called the Senkaku Islands by the Japanese and the Diaoyu Islands by the Chinese. The islands are little more than rocks in the middle of the sea, but they are valuable because of a potential oil field there.

In 2005, the dispute became so bitter that military action was being threatened on both sides. (See "China and Japan head for military confrontation over disputed islands.")

In the latest incident, Japan's coast guard said that the Chinese boat twice struck Japanese patrol vessels after ignoring instructions to cease fishing in the disputed waters, according to the Telegraph. No one was injured.

The 2005 dispute led to violent riots in Beijing targeting the Japanese embassy.

On Wednesday, more than 30 people, holding up banners and Chinese flags, demonstrated in front of the same embassy, according to the Chinese government publication Global Times. One protestor is quoted as saying, "Japan, get out of the Diaoyu Islands. Get out." Another protestor said, "Japan's arrest of the Chinese captain is a form of illegal kidnapping."

So far, everything is pretty calm. But if Japan implements its threat to bring criminal charges against the captain, and sentence him to jail, then the dispute could become more violent.

Additional links

June 2005: Jean-Claude Juncker, Tony Blair, Jacques Chirac

June 2005: Jean-Claude Juncker, Tony Blair, Jacques Chirac

In 2005, there was a bitter budget dispute between Britain and France because of rules on rebates and agricultural subsidies dating back to the 1980s. The dispute became so visceral that it threatened the entire European Union, and it was settled only when Britain caved in to France's demands. (See "Press reports say that Tony Blair caving on EU budget.") Now five years have passed, and there's a new budget cycle, and the same dispute is starting up again. EU Observer

Participation of Saudi women in violent al-Qaeda activities is growing. This creates a problem because Saudi Arabia's male security forces are not permitted to question and keep track of women. Furthermore, women terrorists can disguise themselves by wearing face veils, and thereby gain access to areas where a man cannot. The result is that Saudi women are being recruited to participate in anti-terrorist programs. Global Post

As relations between India and China continue to deteriorate, and China and Pakistan develop closer relations, India is developing closer relations with Japan and South Korea. This is consistent with the expectation that Japan, South Korea, India and Russia will be allied with the West against China and Pakistan in the Clash of Civilizations world war. South Asia Analysis Group

Two new books on the Caucasus region -- including Georgia, Armenia, Azerbaijan and parts of Turkey and Russia -- describe a region without meaningful borders with unique social mores and a long history of violence. EurasiaNet

Secretary of State Hillary Clinton signaled a major shift in U.S. policy towards Mexico, by saying that the Mexico drug wars are starting to look like a leftist insurgency. From the point of view of Generational Dynamics, Mexico is headed for a re-fighting of the 1910s Mexican Revolution, pitting descendants of Europeans against indigenous people (Aztecs and Mayans). LA Times

The BBC completely fails to understand the Tea Party movement. Telegraph

Tylenol-loaded mice dropped from air to control snakes. CNN

(Comments: For reader comments, questions and discussion, see the 9-Sep-10 News -- Fed reports 'widespread signs of deceleration' in economy thread of the Generational Dynamics forum. Comments may be posted anonymously.) (9-Sep-2010) Permanent Link
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