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How to Save the U.S. Economy

I read a lot of blogs, news, policy papers, etc. I also have thoughts as to what is broken with the US economy, and what needs to happen for the world to recover. The underlying issue - US consumers consumed...and consumed...and then borrowed a lot more and consumed that. China built its whole manufacturing capacity around this phenomena. China runs narrow trade deficits/surpluses w/ most nations, but a HUGE trade surplus w/ the US. All to feed US consumer demand. This is broken, and now the US is faced with persistent >15% unemployment, and China owns $2trn in US IOUs. Further, the US is facing a liability shortfall that amounts to US$53trn in current dollars. The majority of this >80% is entitlements - healthcare and Social Security. So what to do? The obvious answer is to roll up our shirt sleeves, and work. But how should the playing field be altered... Continue reading
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"I remember when Countries and Banks were AAA....."

I am putting an age on myself. I remember when JPM was AAA. I remember when UBS was AAA. When 2 Dutch banks (ING and Rabo) were AAA. Those were the days. What were those days though? And can we return, and do we want to? Capital was husbanded in these institutions against all manner of financial catastrophes, none of which ever occured. Now this might be the tail wagging the dog - they were so well capitalized that their counterparties knew they would lose in any bet against them. So even if the bank might have been technically insolvent for a weekend, nobody dared risking a bet that would suggest they would not be trading by Monday. The securitisation market changed all of this. The erstwhile monopoly that banks enjoyed - providers of credit and so the sole conduit by which money supply increased - was eroded as more and... Continue reading
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What Now?

Markets are pricing in a big recovery. They are neither cheap nor expensive (depending on your outlook for earnings) But there are many cracks in the foundation, none of which are going to improve anytime soon: 1. Consumer spending - its not there. Anywhere. It is not snapping back to old levels anywhere in the world. I do not believe the numbers coming from China. 2. Consumer Credit - its declining. People are afraid, and reducing debt. The rate of mortgage defaults is terrifying people. They do not want to lose the equity in their homes, so they will (sometimes irrationally) pay down their mortgage as quickly as possible, sometimes to zero. 3. Total Manufacturing Capacity Utilization - 68% in the US. No figures from China, but the last I heard, there were signs in Dongguan saying, "Will manufacture for food". 4. Structural Unemployment >8% is here to stay - With... Continue reading
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The Burgeoning American Underclass

Job growth in the US over the past 10 years has been almost exclusively to the public sector. Job losses in the private sector have been equaled by a comparable number of jobs created in the public and quasi-public arena (i.e. healthcare). Now that another 6mm US citizens have been tossed out of work, where they had received health insurance and something remotely resembling a pension, they are in need, and looking to the largest creator of employment in recent memory - the US Federal Government. The real-dollar benefits of a Federal job are now considerable - full healthcare for your entire family, access to a credit union, and a pension system. All of these benefits were considered par for the course until 20-30 years ago. Then when the most recent flames of entreprenurialism took hold of peoples' imaginations, they pursued brighter horizons in technology, law, consulting, and of course, finance.... Continue reading
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Sweden's Riksbanken Cuts Overnight Rate to -0.25% and Nobody Notices

10 days ago the Swedish Central Bank cut its overnight deposit rate to -0.25%. Negative return, guaranteed. Depoist 100 krona, and in 1 year we'll return 99.75. The implications of this are staggering, and yet most have been silent. Sweden had a major bank meltdown in the early '90s, nationalizing all 5 major banks, and then reselling them to the public at a marginal profit. Mission accomplished, and a few extra krona in your pocket to pay for the party after it was all over. I would say this experience means that Sweden, more than any other regulatory regime in the world, has the institutional memory and wariness of banking collapse to make the difficult choices. So they cut rates to less than zero. I had read everywhere that this was impossible. But they have done it. Why? 1. Exposure to Eastern European Lending - Eastern Europe's housing boom was built... Continue reading
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