Mish's Global Economic Trend Analysis

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• PBoC Researcher says China Should "Set Red Line for Yuan Appreciation at 3%"; IMF Participants Pledge to "Create Reports"
• Cost of War Since 2001; Federal outlays and revenues, 1940-2015
• Sunday Funnies 2010-10-10 Sacrifices Must Be Made
• FDIC Authorizes $1 Billion Lawsuits Against Failed-Bank Executives; Token Search for Low-Profile Scapegoats

PBoC Researcher says China Should "Set Red Line for Yuan Appreciation at 3%"; IMF Participants Pledge to "Create Reports" Posted: 10 Oct 2010 09:48 PM PDT In spite of ongoing currency wars, there are no surprises to report from G-20 participants at the IMF's annual meeting. Indeed, I cannot recall ever being surprised by major agreements at any IMF or G-Whatever meeting. Year in and year out the achievement is the same, a pledge to cooperate more. This year we see a slight twist: the G-20 agrees to have the IMF to create reports on the U.S., China, the U.K. and the Eurozone. Translation: The talks failed. Bloomberg reports Finance Chiefs Fail to Resolve Currency Spat as G-20 Splits Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism. Exchange rates dominated the IMF's annual meeting in Washington on concern that officials are relying on cheaper currencies to aid growth, risking retaliatory devaluations and trade barriers. China was accused of undervaluing the yuan, while low interest rates in the U.S. and other rich nations were blamed for flooding emerging markets with capital. Finance ministers and central bankers pledged to improve cooperation, yet did little to show how they would alter their ways beyond agreeing to let the IMF to study the matter. Days after Brazilian Finance Minister Guido Mantega set the tone for the gathering by declaring a "currency war" was underway, officials held their traditional battle lines. U.S. Treasury Secretary Timothy F. Geithner and European Central Bank President Jean-Claude Trichet were among those to signal irritation that China is restraining the yuan to aid exports even as its economy outpaces those of other G-20 members. "Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery," Geithner said. "Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand- led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation." Some forms of protectionism may already be on the rise. Ukraine's Deputy Premier Serhiy Tigipko said in an interview in Washington that his country may follow South Korea, Poland, Brazil and other emerging markets in introducing capital controls to prevent short-term investments from fueling currency volatility. India may also intervene to "prevent the disruption of the macroeconomic situation," Reserve Bank of India Governor Duvvuri Subbarao told reporters. Unable to find common ground themselves, governments agreed the IMF should serve as currency cop by preparing reports which show how the policies of one economy affect others. The studies will focus on the U.S., China, the U.K. and the euro area. "The need to have this kind of spillover report has been discussed for months and now it's part of our toolbox," IMF Managing Director Dominique Strauss-Kahn said. Preparing Reports Useless Brazil set the tone for the meeting with complaints about currency wars, but Brazil can scream its wants but no one can force China (or any other country), to do anything. Since the IMF cannot set or enforce policy decisions, it was known in advance the whole conference was a waste of time and money. The main "achievement" is the G-20 countries all agreed to have the IMF prepare reports. Sheesh. What a waste of money. What good is yapping and preparing reports when no one will act on those reports? Capital Controls, Constant Bickering are Signs of Increasing Stress The fact that Ukraine will follow South Korea, Poland, and Brazil in setting capital controls (with Japan, the US, Europe, and China all at each other's throats) is a clear indication of global currency stress. Something is sure to blow sky high, but what and when is still not clear. China to Cap the Yuan's Rise at 3 Percent All the pressure being applied to China is likely to be futile given that a Chinese Central bank researcher says China must cap yuan rise this year China need not worry about whether U.S. lawmakers label the country as a currency manipulator and should instead halt the yuan's rise at an appropriate time, said Wang Yong, a professor at the central bank's training school in Zhengzhou, Henan province, according to the Securities Times. "This is the red line for yuan appreciation," he said, referring to a 3 percent rise. "Once the line is crossed, it means the yuan's exchange rate will be derailed from the normal track and the government should intervene in the market in a timely manner," Wang added. Adding Fat to the Fire The yuan has risen 2.3% this year, certainly not the 20-40% that Congress and Geithner wants. Thus, limits of 3% are likely to infuriate Congress. Bear in mind that announcements of a possible 3% cap could be China's way of setting expectations deliberately low, with a planned reversal coming at an opportune time later. However, moves of 20% or even 8% are highly unlikely to be in the cards. For more on economic tensions and currency wars please see Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs? Global Competitive Debasement; Currency Wars Begin; Message of Gold Trichet's Exit Strategy Trapped by PIIGS; Currency Tensions Continue to Build; China Tells EU to Stuff It It will be interesting to see how Congress responds to news of a possible 3% cap on Yuan appreciation. With an election coming up, followed by a lame-duck session, China may have correctly calculated Congress will not do anything, at least for at least 3-4 months. Regardless, tensions beneath the surface continue to mount. All it may take to see some very unwise legislation is a few more bad job reports and unemployment rising. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Cost of War Since 2001; Federal outlays and revenues, 1940-2015 Posted: 10 Oct 2010 10:46 AM PDT The National Priorities Project has some interesting charts and graphics on the US budget. Federal outlays and revenues, 1940-2015 The following chart shows federal outlays and revenues from 1940 to the proposed levels in 2015. The difference between the two equals the federal deficit or surplus. Aside from specific policy initiatives, spending grows over time in order to accomodate a larger economy and population. Though many federal programs were cut during the 1990s, the outlays continued to increase as more people retired and Social Security payments grew. Recent growth in spending is due in large part due to increases in military spending. Federal outlays and revenues, 1930-2015 as a percentage of the GDP The following chart shows federal outlays and revenues from 1930 to the proposed levels in 2015 as a percentage of gross domestic product (GDP). Viewing federal spending and revenues as a percentage of GDP indicates how large or small government is in relation to the economy. Bring the Troops Home Now! Those costs do not include the future medical costs of injured soldiers, the countless wrecked lives of US soldiers and the lives of millions of innocent civilians killed in the needless war in Iraq. Bear in mind, I do not support the social agenda of the National Priorities Project. However, I would rather see any spending in the US than the needless destruction of lives and property around the globe. The US cannot afford to be the world's policemen, and even if we could, I still would not support such needless destruction. It's time to declare the war won and bring back all the troops. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Sunday Funnies 2010-10-10 Sacrifices Must Be Made Posted: 10 Oct 2010 10:41 AM PDT Government Workers Prepare To Make Much Needed Sacrifices. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

FDIC Authorizes $1 Billion Lawsuits Against Failed-Bank Executives; Token Search for Low-Profile Scapegoats Posted: 10 Oct 2010 07:53 AM PDT The FDIC has only brought one case to date against executives of failed banks. Supposedly more charges are coming. Bloomberg reports FDIC May Seek $1 Billion From Failed-Bank Executives The Federal Deposit Insurance Corp. has authorized lawsuits against more than 50 officers and directors of failed banks as the agency aims to recoup more than $1 billion in losses stemming from the credit crisis. The lawsuits were authorized during closed sessions of the FDIC board and haven't been made public. The agency, which has shuttered 294 lenders since the start of 2008, has held off court action while conducting settlement talks with executives whose actions may have led to bank collapses, Richard Osterman, the FDIC's acting general counsel, said in an interview. "We're ready to go," Osterman said. "We could walk into court tomorrow and file the lawsuits." The FDIC, which reviews losses for every bank failure, has brought only one case against officers or directors tied to recent collapses -- a suit filed in July seeking $300 million in damages from four executives of IndyMac Bancorp Inc. The FDIC "brings suits only where they are believed to be sound on the merits and likely to be cost-effective," according to an agency policy statement that dates from the savings-and- loan crisis of the 1980s. That requires considerations of whether an individual, if sued, has the means to pay or an insurance policy to cover all or part of the claim. "It doesn't make sense to file a lawsuit if at the end of the day you have a low chance of recovery," Osterman said. "It's in both our interest and theirs to try and settle this matter before it gets into the court and we get into expensive litigation," he said. Political Stunt to Placate the Public I see this as little more than a political stunt to placate the public. These cases are unlikely to go to trial, on purpose, and not for the reason the FDIC says. The FDIC does not want to rattle the banking system, so they won't. Instead they will settle most if not all of these cases for peanuts. To make it look legit, the FDIC might pursue a couple of scapegoat cases, IndyMac being one of them, but don't expect anything more. Criminal Fraud "In the IndyMac case, executives are accused of granting loans that were unlikely to be repaid while seeking to benefit from the bank's compensation structure." Excuse me but why isn't this criminal fraud? Why isn't the SEC involved? I believe all the executives from Dick Fuld on down are guilty of fraud. Indeed, there is a huge list of those who should be prosecuted for fraud. Running List of Needed Criminal Investigations It's time to update my rolling list of who should be criminally indicted and why. April 29, 2010: Barofsky Threatens Criminal Charges in AIG Coverup, Goldman Sachs Abacus Deal, TARP Insider Trading; New York Fed Implicated April 16, 2010: Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed March 2, 2010: Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says "Don't Trust Your Government" January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels January 26, 2010: Questions Geithner Cannot Escape January 07, 2010: Time To Indict Geithner For Securities Fraud October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation July 17, 2009: Paulson Admits Coercion; Where are the Indictments? June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl" April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis We can safely add IndyMac and countless other bank executives to the list. Token Search for Low-Profile Scapegoats Continues To date, in spite of the myriad of possible targets, and even some threats from Barofsky and others, we have seen no real action. So why should we expect this to be any different? At best, all we are likely to see is a token search for a couple of relatively low-profile scapegoats, and those will be settled out of court for peanuts, with bank executives laughing all the way. Addendum: In response to the post, Janet Tavakoli pinged me with a one line comment: "Angelo, Angelo, Angelo...Lloyd, Lloyd, Lloyd....Jamie, Jamie, Jamie" Without a Doubt In case you do not recognize the above by first name, here they are... Angelo Mozilo - Former CEO Countrywide Financial Lloyd Blankfein - CEO of Goldman Sachs Jamie Dimon - CEO of JPMorgan Chase Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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