Hayman manager says Ireland, Japan may default in coming years
By Alistair Barr, MarketWatch NEW YORK (MarketWatch) —
The world’s developed nations are entering the first stages of a currency war as they try to prop up their economies, Kyle Bass, head of $900 million hedge fund firm Hayman Advisors, said Wednesday.
Bass also warned that Ireland and Japan may default on their debts in coming years.
Unemployment in the U.S. has jumped in the wake of the 2008 financial crisis and Bass said a lot of the lost jobs are permanent. Figures out last week showed the U.S. economy lost 95,000 jobs in September. See story on September payrolls.
During a speech at the Value Investing Congress in New York, Bass said there a two main ways for the U.S. to become more competitive and generate new jobs. One is to devalue the U.S. dollar and the other is wage deflation, “which we can’t possibly have,” Bass explained.
A 50% devaluation of the U.S. dollar would make the U.S. a lot more competitive, but Japan is trying to devalue its currency to support its economy and Europe would love to have a weaker euro (U.S.:EURUSD) , Bass said.
“The whole developed world wants their currencies to devalue,” he added.
Earlier this month, finance leaders from the world’s largest economies discussed currencies at a meeting of the International Monetary Fund, but they made little progress on defusing tensions. See MarketWatch's full coverage of IMF meeting
“No one can agree on cross rates,” Bass said Wednesday. “You will see quiet protectionism through currency devaluations.”
Banking on defaults
Bass also warned about potential sovereign defaults, an investment theme he’s focused on intensely in the past year. Before the 2008 financial crisis, sovereign debt issuance averaged about $1.4 trillion a year. This year, to plug countries’ fiscal deficits, issuance has to reach $4.5 trillion, Bass estimated.
“Where does that money come from? Last year we printed it. What’s going to happen this year?” he added.
To gauge potential sovereign debt risk, Bass says Hayman analyzed the collapse of Iceland’s economy.
Iceland had sovereign debt of roughly 35% of its GDP. However, the country’s three largest banks amassed roughly $200 billion of assets — ten times the country’s GDP, Bass noted.
When the financial crisis hit and Iceland had to bail out its banks, the country’s sovereign debt ballooned.
Since Iceland’s demise, Hayman looked at other countries to see how big their banking systems are, compared to GDP. Iceland and Ireland are top of the list, Bass said.
Ireland’s on balance-sheet obligations are about 85% of GDP, but the country’s bank bailout program is another 50% of GDP, according to Bass. See Ireland topics page.
“I don’t think Ireland can be saved,” he said. “Policymakers weren’t paying attention to this a few years ago. No one knew the size of the world’s banking systems.”
Saturation
Bass also warned that Japan may default in coming years. From 1989 to 2009, government debt grew 137%, but interest rates have fallen a lot, so the cost of paying interest on the debt has declined, Bass explained.
But interest rates in Japan are close to zero now, he added. “You reached that point of mathematical saturation,” Bass said. “You can’t layer on more debt at near 0% without increasing your interest payments.”
Japan’s social security obligations and its interest payments on debt are about 44 trillion yen ($538 billion), while government revenue is about 41 trillion yen, according to Bass.
It will be increasingly difficult for the country to fund such deficits through more borrowing because the population is getting older and isn’t growing, Bass argued.
For most of the past 20 years, household and corporate savings in Japan have been higher than the country’s debt needs. But this reversed in 2008, Bass said.
That means the country may have to look overseas to borrow money, which could increase its borrowing costs, Bass added.
The country is currently paying about 9.5 trillion yen in interest. Every one percentage point increase in the interest rate increases Japan’s interest payments by 10.5 trillion yen, Bass estimated.
“I don’t see how they can fund themselves over the next two to three years,” Bass said. “If they look outside Japan their cost of financing will go up and they’re out of business.”
The world is dividing into two currency blocs. And over the last few months, China has gone to Turkey, Malaysia, Thailand, and said, "We want to avoid using the dollar altogether." They’re treating it like a pariah currency. They’re saying, "Well, let’s make a currency swap. We’ll give you our Chinese RMB, you give us your currency, the baht, and we’ll do our trade in our own currency. We are isolating the dollar, so that people are not going to use the dollar anymore." That’s why the dollar is plunging on world foreign exchange markets. The whole world that America created after World War II of open markets is now closing off. And it’s closing off, really, because the United States is trying to rescue the real estate market from all the junk mortgages, all the crooked loans, all of the financial fraud, instead of just letting the fraud go and throwing the guys in jail like other economists have suggested.
MICHAEL HUDSON: That was, I think, the best interview on your show that Professor Stiglitz has ever done. Last Saturday, I was in Germany at an economic meeting, and we were discussing this very interview there. And what they’re pointing out is that in Europe, in Germany and all of Europe, it’s illegal for the central bank to finance government debt. All of Europe is being subjected to austerity now because of the way in which their constitution is written. So they’re saying, "Wait a minute. When we run a deficit, we have to raise interest rates and impose austerity. And in the United States, they are doing just the opposite. They’re lowering interest rates to buy us out."
And the interview of Professor Stiglitz here was quite right. America is doing all of this. The Fed is doing this to cover up the huge fraud that he talks about. He’s right. These people should be in jail, and you shouldn’t bail them out. You’re keeping the debt that was run out by the junk mortgages and the fraudulent lending, you’re keeping that in place, pricing American labor out of the market, and making it impossible for America to earn its way out of debt. o, in Europe, they’re saying, "How can America ever repay these dollar debts that they’re running up?" They can’t repay, and that’s why the euro is going up against America. And that’s why they say, "We want to now talk to the BRIC countries, to China, to the third world, and move into a currency area with them and just isolate the dollar, so they can’t do the kind of financial warfare that they’ve been engaging in.
JUAN GONZALEZ: And what do you expect to happen at the G20 meeting that’s coming up now?
MICHAEL HUDSON: The same thing that happened two weeks ago: absolutely nothing. They will all agree that the soup was very good, that the food was nice, and that they will have further discussions. But America will not get any of what it’s asking for from them, because they’re going to say, "Look, we’re not going to let you create electronic keyboard credit and buy out our real estate and our industry and empty out our bank reserves like you did in the 1997 Asia crisis." That’s never going to happen again, and the world is going to begin splitting into two currency blocs: the BRIC bloc and the dollar bloc.
Michael Hudson, president of the Institute for the Study of Long-Term Economic Trends, distinguished research professor of economics at University of Missouri, Kansas City, author of Super Imperialism: The Economic Strategy of American Empire.
Quote:
AMY GOODMAN: Joe Stiglitz, we just have time for one question, last question, which is about China raising its interest rates for the first time in nearly three years, coming a day after the Treasury secretary vowed not to devalue the dollar to boost the economy. Explain the significance of this.
JOSEPH STIGLITZ: Well, the one source of strength in the global economy has been the emerging markets. And they’ve been doing very, very well. The problem is that the Federal Reserve has been letting forth a lot of liquidity in the hope that it would reignite the American economy. But the administration and Federal Reserve did not fix the banking system, did not deal with the mortgage problem, that we were talking about before. So the money isn’t going into the American economy. The lending is actually below what it was in 2007. In a globalized economy, the money is looking for the best place to go. And where is it finding it? In the emerging markets.
So, the irony is that money that was intended to rekindle the American economy is causing havoc all over the world. Those elsewhere in the world say, what the United States is trying to do is the twenty-first century version of "beggar thy neighbor" policies that were part of the Great Depression: you strengthen yourself by hurting the others. You can’t do protectionism in the old version of raising tariffs, but what you can do is lower your exchange rate, and that’s what low interest rates are trying to do, weaken the dollar. The flood of liquidity abroad is trying to push the exchange rates abroad. And they say—they’re saying, "We can’t allow that."
AMY GOODMAN: And thirty seconds. China, in particular?
JOSEPH STIGLITZ: Well, in the case of China, in particular, if it slows down significantly, it’s going to be bad for the US economy, not just directly, but China has been the support for Latin America, Africa. China has become the real engine of global economic growth. If it slows, Africa, Latin America slows, and that means American markets all over the world are going to have difficulties.
AMY GOODMAN: We’re going to leave it there. Joseph Stiglitz, winner of the Nobel Prize in Economics, his book Freefall is just out in paperback, America, Free Markets, and the Sinking of the World Economy.
Commentary: Fed move portends dangers for global economy
By Richard Duncan
BANGKOK (MarketWatch) — On Nov. 3, the Fed announced it will create 600 billion new dollars over the next eight months and use the money to buy U.S. government bonds. The media has dubbed this latest round of easing “Quantitative Easing 2,” but it is really the third such massive round of money creation, and this time, it may prove especially dangerous for the world economy.
In fact, the origin and evolution of the crisis in the global economy can best be understood by considering the purpose and consequences of each of the three rounds separately.
The first round was conducted not by the Fed, but by the Bank of Japan, the People’s Bank of China, the Central Bank of the Republic of China (Taiwan), the Bank of Korea and the central banks of numerous other countries with balance of payments surpluses.
Together, they created the equivalent of $5 trillion worth of their own currencies between 2000 and 2008, with the purpose being to support export-led economic development in those countries.
Their central banks printed their own currencies and used it to buy dollars, depressing those currencies’ values and perpetuating their trade advantages.
That policy was extraordinarily successful in raising growth rates for the countries involved, but the consequences extended far beyond their borders. These nations reinvested their dollars into Treasury bonds, Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC) debt, other corporate bonds and equities, pushing up asset prices, driving down interest rates and resulting in a shocking misallocation of capital throughout the U.S.
Fed Chairman Bernanke recognized the destabilizing impact of those capital flows and attributed them to a “global savings glut.” About this, however, he was badly mistaken. It was not foreign savings, but massive money creation by U.S. trading partners that was to blame for blowing the United States economy into a bubble.
Never before had so much money been created in such a short space of time. It was this round of money creation, QE 1, along with the U.S. trade deficit that caused the global economic bubble that imploded in 2008. The second and third rounds of money creation were made necessary by the crisis provoked by the first.
The second major round — the real QE 2 — began when the U.S. bubble popped and was carried out by the Fed, the European Central Bank, the Bank of England and the International Monetary Fund, creating the equivalent of trillions of dollars.
This time, the money was created to prevent the bankruptcy of the world’s largest banks and the collapse of the global financial system. The money created during QE 1, when lent to the U.S., U.K., Spain, Greece and other countries with trade deficits, inflated such large asset-price bubbles that the banking intermediaries were mortally threatened when they popped.
To prevent the destruction of the world’s savings, Western central banks fabricated money and acquired assets held by the banks. Had they not done so, the global economy would have collapsed. QE 2 was essentially completed by the end of 2009.
The purpose of the latest round of money creation is different from that of the first two: to push up stock prices in order to create wealth and consumption so that the U.S. economy will not fall back into severe recession.
By creating $600 billion and buying Treasury bonds over the next eight months, the Fed will finance the entire U.S. budget deficit over that period, massive though that deficit will be. By monetizing the government’s deficit in this way, the Fed will “crowd in” the private sector. The investors who would have bought $600 billion worth of Treasurys will now have to buy something else instead — something else like equities.
Higher stock prices will give Americans more money to spend. U.S. consumption will pull in imports from the rest of the world and thereby boost the global economy. Everyone will be happy for another year or so.
But this policy will do nothing to correct the real cause of this crisis, which is the utter lack of global competitiveness of the U.S. economy. Instead, as time goes by, what’s left of the U.S. manufacturing sector will be shipped abroad to countries where factory workers are glad to earn $5 per day. QE 3 will not cure, but rather prolong and exacerbate all the dangerous economic imbalances around the world.
Come mid-2011, when the Fed’s new money has all been spent, there will be no new driver of growth to replace it — only stock prices and levels of consumption that have been pushed to artificially and unsustainably high levels.
If the Fed then stops creating money and buying assets, the stock market will crash, consumption will contract, and the recession will resume with even greater intensity. So, the Fed won’t stop. It will have to create more money and repeat the process again and again, with the size of each round of QE larger than the one before.
There can be no doubt that the dollar will lose value every time the U.S. central bank creates money. However, the consequences will extend well beyond the worth of the dollar.
Consumer price inflation (excluding food and energy) will remain very low due to global excess industrial capacity and a limitless pool of $5-per-day labor. The price of stocks and bonds will be determined by both the supply (in terms of initial public offerings and debt issuance) and demand (which the Fed will orchestrate so that bond yields stay low and stock prices rise enough to provide at least some growth).
Commodity prices will also be determined by supply and demand. Accelerating money creation will generally put upward pressure on demand; but the extent to which supply can expand varies from commodity to commodity.
The price of oil, for instance, is managed by a cartel that strictly limits its supply. So oil prices will be determined by the success of that cartel in fixing prices. Gold, on the other hand, being both limited in supply and a store of wealth, seems certain to continue appreciating with each new round of money creation. As for land, there is no new supply. Its value will appreciate sharply.
As much more money is created, surging land prices could push the price of food to levels that become unaffordable for the two billion people on this planet who live on less than $2 a day. It will be ironic — and terribly tragic — if too much money causes starvation.
In the end, however, it may be starvation that provides the ultimate proof of the evil inherent in the creation of money by governments.
Richard Duncan is the author of “The Corruption of Capitalism: A Strategy to Rebalance the Global Economy and Restore Sustainable Growth”
Not sure I follow Do you mean a gold backed dollar? Well as it was in Nixon’s time so it is now If you do away with fiat currencies you can’t run up deficits at the drop of a hat anymore A gold back $ means a massive curbing in Imports No mo running wars on credit card, means calling the troops home It means reopening US factories to compete with the cheap Asian plantations The end of globalization Think China can afford to tell its burgeoning middle class they have to leave the factories and go back to planting soybeans?
Further the total yearly tonnage of gold produced worldwide is not enough to keep pace with the new age of how money flies around the world The Forex market turns over 2.5 - 3.0 trillion dollars Daily! The limited amount of gold being mined is just not enough The gold producing nations would sit pretty for a while but it would cramp/stifle every economy in the world to go back to the gold standard
The people in the mix that propose it as a solution are either delusional or just giving the media fodder for a day
The real deal though is the investors who are sitting on nearly a quadrillion of un-payable debt, some of it questionable, won’t bite the bullet and take a cut so somewhere down the line a new system
Europe sneezes, China wipes it's nose, new partners to back a small select basket of nations type world reserve currency?
November 1, 2010 Looking for Investments, China Turns to Europe
By LIZ ALDERMAN
PARIS — When Prime Minister Wen Jiabao of China visited Athens last month, he came bearing gifts: billions of dollars worth of business deals and a wave of favorable attention from a crucial foreign investor.
“The support of our Chinese friends is fortunate for us,” Greece’s minister of state, Haris Pamboukis, said by telephone.
But China had much greater ambitions. Greece is one foothold for China’s broad, strategic push into Europe. It is snapping up assets depressed by the global financial crisis and becoming a significant partner of other hard-hit European nations.
Ultimately, analysts say, Beijing hopes to achieve not just more business for its own companies, but also greater influence over the economic policies set in the power corridors of Brussels and Germany.
“They are indicating a willingness to stick their nose into Europe’s business,” said Carl B. Weinberg, chief economist of High Frequency Economics.
“It’s very clever and sends a clear message,” he added, “that China is a force to be contended with.”
That message will be reinforced by a visit this week by China’s president, Hu Jintao, who is scheduled to meet with top officials and business executives of Portugal and France.
Europe’s financial crisis this year has created buying opportunities for cash-rich investors, including secretive hedge funds and Qatar, the natural gas giant of the Persian Gulf that recently agreed to invest $5 billion in Greece. But China is leading the charge. It is singling out Greek, Spanish and other downgraded government debt, as well as ports, highways and industries in troubled countries on Europe’s eastern and southern edges.
Ireland and Hungary, among others, are also competing to lure Chinese investments, in the hopes that they will create thousands of new jobs.
“What is happening is that the Chinese are expanding in Europe as they did in Africa,” said François Godement, a senior policy fellow of the European Council on Foreign Relations. “But in Europe, they’re coming in through countries on the periphery, which is extraordinary.”
China is concentrating its efforts on ports in Greece and Italy and highways that link Eastern Europe to Germany and Turkey, and aims to secure larger infrastructure investments over time. It has provided billions of dollars in state financing for key public works projects that support Chinese state-owned companies and Chinese workers.
Such moves could give China a bigger presence in the European chain of distribution and production, while allowing it to build a track record of investments that it hopes will also encourage Europe to support its position on divisive currency issues and in trade disputes at the World Trade Organization.
During his recent European tour, Mr. Wen reminded politicians in Brussels that China had acted as “a friend” to Greece, Spain, Italy and other troubled European countries in their darkest hour by buying bonds as other investors fled. In return, he admonished regional leaders not to “pressure China on the yuan’s appreciation,” referring to the Chinese currency, formally called the renminbi.
In the past several months, China has pledged to buy Greek bonds when the government starts selling again, and purchased $625 million in Spanish debt. On his visit, Mr. Wen hailed scores of business deals in Italy and Greece, including one that allows a Chinese state firm to run Greece’s top shipping port — one of the largest European gateways for Chinese goods.
For China, plowing a small but growing share of its more than $2.3 trillion in foreign currency reserves into European investments instead of low-yielding United States Treasury bills helps diversify its portfolio. Beijing also hopes that this kind of push helps reduce the international political pressure to raise the value of its currency.
“It’s not a coincidence that China is doing this,” said Jens Bastian, an economist at the Hellenic Foundation for European and Foreign Policy. “They have huge currency reserves, and these countries where they are going right now have a dying need for foreign investment.”
While Chinese foreign direct investment in Europe is still small compared with its investments in other regions, it has grown quickly over the past two years. And this spring Europe overtook the United States as China’s largest trading partner.
Struggling Ireland is also looking for a piece of the action, and moves are afoot to create an “investment gateway to Europe” for China in the town of Athlone, which hopes for the creation of thousands of jobs. Prime Minister Brian Cowen of Ireland said in June that China had vowed to be “as helpful as they can to a friend like Ireland in the difficult times that we have.”
The investments also allow Beijing to advance the interests of Chinese companies as they go global. Mr. Wen last month talked up a $4.5 billion credit line that troubled Greek shipbuilders could tap — but almost exclusively to purchase Chinese-made ships. An additional $5 billion is flowing to Greek coffers from China’s state-run Cosco shipping company, which is leasing Piraeus, the port of Athens, to transform it from Europe’s largest passenger port to a much bigger hub for cargo, with aims to more than double traffic to 3.7 million containers in 2015.
In Italy, Cosco is expanding the port of Naples, while HNA, a logistics, transportation and tourism group based in Hainan Province, China, is in talks to build a giant air terminal north of Rome for cargo arriving from China. Mr. Wen pledged an additional $100 billion in trade with Italy through 2015 and heralded 10 business deals between Chinese and Italian businesses.
Some of China’s investments have already raised eyebrows. Last year, China outbid European companies to build a highway in Poland using a Chinese business and workers — with European subsidies — prompting Chancellor Angela Merkel of Germany to call for reciprocity.
In the coming decade, Europe will be considering numerous new projects, such as clearing the Danube River of wartime ordnance to use it as a transportation passageway; building railways between countries like Germany and Macedonia; and carving new highways from Germany to Turkey, Mr. Bastian said.
“What Europe lacks is a transportation infrastructure network where Western and Eastern Europe meet,” he said. “This is where China is trying to take advantage of their current buildup.”
Still, for all the fears of ulterior motives on China’s part, many Europeans welcome the investment with open arms. China is mainly interested in promoting trade and making money, said Mr. Pamboukis, the Greek minister of state.
China’s investment strategy in Europe is “discreet and well thought-out,” he said. “I don’t think China is coming in here as a Trojan Horse.”
This article has been revised to reflect the following correction:
Correction: November 5, 2010
An article on Tuesday about China’s new focus on investing in European countries hard hit by the financial crisis misstated the job title of Carl B. Weinberg, an analyst who commented on China’s interest in influencing European decision-making. He is the chief economist of High Frequency Economics there, not the chief United States economist. Because of an editing error, the article misstated the amount of Spanish debt that China purchased. It is $625 million, not billion. http://www.nytimes.com/2010/11/02/business/global/02euro.html
The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid program. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week.
While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.
“It seems to me that crying wolf is probably a good thing to do at this point,” said Felix Rohatyn, the financier who helped save New York City from bankruptcy in the 1970s.
Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.
Municipal bankruptcies or defaults have been extremely rare — no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so.
But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.
Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.
Mr. Rohatyn warned that while municipal bankruptcies were rare, they appeared increasingly possible. And the imbalances are so large in some places that the federal government will probably have to step in at some point, he said, even if that seems unlikely in the current political climate.
“I don’t like to play the scared rabbit, but I just don’t see where the end of this is,” he added.
Resorting to Fiscal Tricks
As the downturn has ground on, some of the worst-hit cities and states have resorted to fiscal sleight of hand to stay afloat, helping them close yawning budget gaps each year, but often at great future cost.
Few workers with neglected 401(k) retirement accounts would risk taking out second mortgages to invest in stocks, gambling that the investment gains would be enough to build bigger nest eggs and repay the loans.
But that is just what Illinois, which has been failing to make the required annual payments to its pension funds for years, is doing. It borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.
It is the long-term problems of a handful of states, including California, Illinois, New Jersey and New York, that financial analysts worry about most, fearing that their problems might precipitate a crisis that could hurt other states by driving up their borrowing costs.
But it is the short-term budget woes that nearly all states are facing that are preoccupying elected officials.
Illinois is not the only state behind on its bills. Many states, including New York, have delayed payments to vendors and local governments because they had too little cash on hand to make them. California paid vendors with i.o.u.’s last year. A handful of other states, worried about their cash flow, delayed paying tax refunds last spring.
Now, just as the downturn has driven up demand for state assistance, many states are cutting back.
The demand for food stamps has been rising significantly in Idaho, but tight budgets led the state to close nearly a third of the field offices of the state’s Department of Health and Welfare, which take applications for them. As states have cut aid to cities, many have resorted to previously unthinkable cuts, laying off police officers and closing firehouses.
Those cuts in aid to cities and counties, which are expected to continue, are one reason some analysts say cities are at greater risk of bankruptcy or are being placed under outside oversight.
Next year is unlikely to bring better news. States and cities typically face their biggest deficits after recessions officially end, as rainy-day funds are depleted and easy measures are exhausted.
This time is expected to be no different. The federal stimulus money increased the federal share of state budgets to over a third last year, from just over a quarter in 2008, according to a report issued last week by the National Governors Association and the National Association of State Budget Officers. That money is set to run out next summer. Tax collections, meanwhile, are not expected to return to their pre-recession levels for another year or two, given that the housing market and broader economy remain weak and that unemployment remains high.
Scott D. Pattison, the budget association’s director, said that for states, next year could be “the worst year of this four- or five-year downturn period.”
And few expect the federal government to offer more direct aid to states, at least in the short term. Many members of the new Republican majority in the House campaigned against the stimulus, and Washington is debating the recommendations of a debt-reduction commission.
So some states are essentially borrowing to pay their operating costs, adding new debts that are not always clearly disclosed.
Arizona, hobbled by the bursting housing bubble, turned to a real estate deal for relief, essentially selling off several state buildings — including the tower where the governor has her office — for a $735 million upfront payment. But leasing back the buildings over the next 20 years will ultimately cost taxpayers an extra $400 million in interest.
Many governments are delaying payments to their pension funds, which will eventually need to be made, along with the high interest — usually around 8 percent — that the funds are expected to earn each year.
New York balanced its budget this year by shortchanging its pension fund. And in New Jersey, Gov. Chris Christie deferred paying the $3.1 billion that was due to the pension funds this year.
It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books.
State and local pensions — another form of promised debt, guaranteed in some states by their constitutions — face hidden shortfalls of as much as $3.5 trillion by some calculations. And the health benefits that state and large local governments have promised their retirees going forward could cost more than $530 billion, according to the Government Accountability Office.
“Most financial crises happen in unpredictable ways, and they hit you when you’re not looking,” said Jerome H. Powell, a visiting scholar at the Bipartisan Policy Center who was an under secretary of the Treasury for finance during the bailout of the savings and loan industry in the early 1990s. “This one isn’t like that. You can see it coming. It would be sinful not to do something about this while there’s a chance.”
So far, investors have bought states’ bonds eagerly, on the widespread understanding that states and cities almost never default. But in recent weeks the demand has diminished sharply. Last month, mutual funds that invest in municipal bonds reported a big sell-off — a bigger one-week sell-off, in fact, than they had when the financial markets melted down in 2008. And hedge funds are already seeking out ways to place bets against the debts of some states, with the help of their investment banks.
Of course, not all states are in as dire straits as Illinois or California. And the credit-rating agencies say that the risk of default is small. States and cities typically make a priority of repaying their bond holders, even before paying for essential services. Standard & Poor’s issued a report this month saying that the crises that states and municipalities were facing were “more about tough decisions than potential defaults.”
Change in Ratings
The credit ratings of a number of local governments have improved this year, not because their finances have strengthened somewhat, but because the ratings agencies have changed the way they analyze governments.
The new higher ratings, which lower the cost of borrowing, emphasize the fact that municipal defaults have been much rarer than corporate defaults.
This October, Moody’s issued a report explaining why it now rates all 50 states, even Illinois, as better credit risks than a vast majority of American non-financial companies.
One reason: the belief that the federal government is more likely to bail out a teetering state than a bankrupt company.
“The federal government has broadly channeled cash to all state governments during recent recessions and provided support to individual states following natural disasters,” Moody’s explained, adding that there was no way of being sure how Washington would respond to a bond default by a state, since it had not happened since the 1930s.
But some analysts fear the ratings are too sanguine, recalling that the ratings agencies also dismissed the possibility that a subprime crisis was brewing. While most agree that defaults are unlikely, they fear that as states struggle with their growing debts, investors could decide not to buy the debt of the weakest state or local governments.
That would force a crisis, since states cannot operate if they cannot borrow. Such a crisis could then spread to healthier states, making it more expensive for them to borrow, if Europe is an example.
Meredith Whitney, a bank analyst who was among the first to warn of the impact the subprime mortgage meltdown would have on banks, is warning that she sees similar problems with state and local government finances.
“The state situation reminded me so much of the banks, pre-crisis,” she said this fall on CNBC.
There are eerie similarities between the subprime debt crisis and the looming municipal debt woes. Among them:
¶Just as housing was once considered a sure bet — prices would never fall all across the country at the same time, conventional wisdom suggested — municipal bonds have long been considered an investment safe enough for grandmothers, because states could always raise taxes to pay their bondholders. Now that proposition is being tested. Harrisburg, the capital of Pennsylvania, considered bankruptcy this year because it faced $68 million in debt payments related to a failed incinerator, which is more than the city’s entire annual budget. But officials there have resisted raising taxes.
¶Much of the debt of states and cities is hidden, since it is off the books, just as the amount of mortgage-related debt turned out to be underestimated. States and municipalities often understate their pension liabilities, in part by using accounting methods that would not be allowed in the private sector. Joshua D. Rauh, an associate professor of finance at Northwestern University, and Robert Novy-Marx, an assistant professor of finance at the University of Rochester, calculated that the true unfunded liability for state and local pension plans is roughly $3.5 trillion.
¶The states and many cities still carry good ratings, and those issuing warnings are dismissed as alarmists, reminding some analysts of the lead up to the subprime crisis.
Now states are bracing for more painful cuts, more layoffs, more tax increases, more battles with public employee unions, more requests to bail out cities. And in the long term, as cities and states try to keep up on their debts, the very nature of government could change as they have less money left over to pay for the services they have long provided.
Richard Ravitch, the lieutenant governor of New York, is among those warning that states are on an unsustainable path, and that their disclosures of pension and health care obligations are often misleading. And he worries how long it can last.
“They didn’t do it with bad motives,” he said. “Ninety-five percent of them didn’t understand what they were doing. They did it because it was easier than taxing people or cutting benefits. We’re getting closer and closer to the point where we can’t do that anymore. I don’t know where that is, but I know we’re close.” http://www.nytimes.com/2010/12/05/us/politics/05states.html?_r=1
MY main disappointment with the IMF projections is that there is no promise of a restructured economy once the programme is over. All it does is offer money to tide us over while the global economy recovers, and then we are back to the same old economic structure that caused us to be in the problem we were long before the global recession.
So the programme is counting on (i) improved tourism, remittances, and FDI inflows; and (ii) even more frighteningly that oil prices will be at US$83.40 per barrel in 2013/14. Yesterday oil traded at US$89.02 per barrel. The IMF projections are showing that oil imports will move from 14% to 14.5% of GDP. If one were to project today's prices to 2013/14, then oil imports would be 42.7% of projected imports in 2013/14 instead of the projected 40%. All projections are that oil prices should go beyond US$90 by the end of 2010, and surpass US$100 by summer 2011.
The other consideration, as it relates to any significant uplift from tourism, remittances, and FDI, is the current state of the US and global economy. If one looks at the market that supports our tourism and remittance inflows, it is not wealthy persons, but rather middle to lowermiddle income earners. I am not saying that these inflows won't improve, but certainly not enough to change our economic fortunes.
With respect to FDI, I am hard-pressed to see where they will achieve the levels we saw before the start of the recession, as global income and demand will remain subdued. Even with high levels of FDI, we have a problem with absorptive capacity, so that much of that investment will come in, spend a little time with us, and then go back out, unless we can change our social and economic relationships quickly.
Within the context of the global environment, I believe that commodity prices will cause inflationary pressures. This will be at a time when the US, egged on by the Republicans, is promising deep spending cuts come January 2011. In fact, a bill passed in the House last Wednesday has seen fiscal cuts, as the US faces a significant fiscal deficit and high debt levels. Remember that the only reason why the world did not sink into depression in 2008/2009 was because of the US stimulus. These spending cuts include a two-year year wage freeze for nonmilitary federal workers.
Add to this (i) the fiscal cutbacks in Europe and the looming threat to their monetary system, caused by the debt crisis of the PIGS; (ii) US unemployment rate increasing from 9.6% to 9.8%; (iii) Germany and Euro-zone economic indicators showing a slower than expected growth; and (iv) a very worrying increase in US consumer credit, when a reduction was expected. This shows that the recent improvements in the US economic spending may be because consumers are back to their old habits again.
So the consumers we are depending on for tourism and remittance inflows are faced with inflationary pressures, wage freezes, fiscal cutbacks, and are borrowing more again. What this says to me is that the risk of relying on these consumers is high, and could lead to vulnerabilities in our projection. And remember the job of managers is really all about managing and eliminating risk as much as possible, in order to achieve growth.
The implication of the above (oil price increases and the global economy) is that we must cause a change to the IMF projections, which includes an economic programme that includes much-needed stimulus funds, a focus on import substitution — in particular food imports through agroprocessing, and a focus on reducing fossil fuel consumption through renewable energy projects and an organised transportation system. The three critical ministries are Agriculture, Transport and Works, Energy and Mining, and National Security — or more specifically, the police.
Minister Tufton has been for a while promoting production in the agriculture industry, and the truth is that if it wasn't for this focus then Jamaica would have been looking at a much greater significant economic decline and aggravated social conditions. He must continue on his path, and I know he faces bureaucratic hurdles that are the bane of our economic development. I will say again that unless we address our bureaucracy, then we are going nowhere.
The next steps for Tufton must be to support the growth of the agro-processing industry, and I see he has been pushing for storage of excess production which is long overdue. I really don't understand why it has taken so long for us as a country to focus on this. Instead in the past all we have done is encourage farmers to start a new crop each year and what is excess belongs to the goats, cows, and pigs (not the European ones). Tufton must also push Minister Henry to provide adequate farm roads to ensure that the cost of transportation does not inhibit competition with the imported foods, and importantly get the Scientific Research Council to start making some significant contribution to the development of the industry.
Henry, I think, is one of the more organised and hardworking ministers, and I think he has been doing the best he can with the scarce resources and what we have as a road infrastructure. He must continue on this path but also must ensure that the JDIP road development is used to fix roads that add most to the value-added of economic growth. For example, we must be able to deal with a smooth flow of traffic in the corporate area, as the lack of this impedes productivity significantly. This, of course, includes a much more efficient public transportation system, where many challenges are faced and improvements have been made, but need to be done at a much quicker pace. For example, I would want to see the quick incorporation of the small operators into a highly organised transportation system. This would also serve the purposes of positively affecting productivity, significantly lowering the oil bill, and easing off inflationary pressures.
On the matter of energy, I think that much more (and at a faster pace) needs to be done with renewable energy. I wouldn't waste time arguing with the JPS, a monopoly that doesn't seem too concerned about the public interest, despite ads to the contrary. My focus would be first on breaking down the bureaucracy surrounding the solar energy loans through the NHT, and special loans to encourage businesses to move towards renewable energy sources. This combined with a more efficient and secure transport system will save the country hundreds of millions of US$ and, if implemented correctly, by 2013/14 alone will cause the elimination of the trade deficit, which the IMF is projecting will increase.
After my column last week, I don't think I need to say much about security and the need for the police to start influencing behaviour. We cannot grow an economy where indiscipline is rife, which as far as I am concerned doesn't take much to change. Just a little will. Look for example in Kingston — where there is a police station — at the blatant parking violations each night.
Space does not allow a detailed analysis, as done in my book, but these are just some of the more important focus areas needed to ensure that we get onto a new economic growth path.
The Fed fails to grasp that an interest rate is a price, the price of time. Attempting to manipulate that price is as destructive as any other government price control.
By RON PAUL
To know what is wrong with the Federal Reserve, one must first understand the nature of money. Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.
The Federal Reserve has caused every single boom and bust that has occurred in this country since the bank's creation in 1913. It pumps new money into the financial system to lower interest rates and spur the economy. Adding new money increases the supply of money, making the price of money over time—the interest rate—lower than the market would make it. These lower interest rates affect the allocation of resources, causing capital to be malinvested throughout the economy. So certain projects and ventures that appear profitable when funded at artificially low interest rates are not in fact the best use of those resources.
Eventually, the economic boom created by the Fed's actions is found to be unsustainable, and the bust ensues as this malinvested capital manifests itself in a surplus of capital goods, inventory overhangs, etc. Until these misdirected resources are put to a more productive use—the uses the free market actually desires—the economy stagnates.
The great contribution of the Austrian school of economics to economic theory was in its description of this business cycle: the process of booms and busts, and their origins in monetary intervention by the government in cooperation with the banking system. Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.
In many respects the governors of the Federal Reserve System and the members of the Federal Open Market Committee are like all other high-ranking powerful officials. Because they make decisions that profoundly affect the workings of the economy and because they have hundreds of bright economists working for them doing research and collecting data, they buy into the pretense of knowledge—the illusion that because they have all these resources at their fingertips they therefore have the ability to guide the economy as they see fit.
Nothing could be further from the truth. No attitude could be more destructive. What the Austrian economists Ludwig von Mises and Friedrich von Hayek victoriously asserted in the socialist calculation debate of the 1920s and 1930s—the notion that the marketplace, where people freely decide what they need and want to pay for, is the only effective way to allocate resources—may be obvious to many ordinary Americans. But it has not influenced government leaders today, who do not seem to see the importance of prices to the functioning of a market economy.
The manner of thinking of the Federal Reserve now is no different than that of the former Soviet Union, which employed hundreds of thousands of people to perform research and provide calculations in an attempt to mimic the price system of the West's (relatively) free markets. Despite the obvious lesson to be drawn from the Soviet collapse, the U.S. still has not fully absorbed it.
The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed's monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed's actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market's neck.
The Fed's quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so. But it will do something, we know, because the pressure to "just do something" often outweighs all other considerations.
What exactly the Fed will do is anyone's guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.
Registered: 02/13/04
Posts: 3695
Loc: Los Angeles, CA, USA
Offline
Originally Posted By: G.
Not sure I follow Do you mean a gold backed dollar? Well as it was in Nixon’s time so it is now If you do away with fiat currencies you can’t run up deficits at the drop of a hat anymore A gold back $ means a massive curbing in Imports No mo running wars on credit card, means calling the troops home It means reopening US factories to compete with the cheap Asian plantations The end of globalization Think China can afford to tell its burgeoning middle class they have to leave the factories and go back to planting soybeans?
Further the total yearly tonnage of gold produced worldwide is not enough to keep pace with the new age of how money flies around the world The Forex market turns over 2.5 - 3.0 trillion dollars Daily! The limited amount of gold being mined is just not enough The gold producing nations would sit pretty for a while but it would cramp/stifle every economy in the world to go back to the gold standard
The people in the mix that propose it as a solution are either delusional or just giving the media fodder for a day
The real deal though is the investors who are sitting on nearly a quadrillion of un-payable debt, some of it questionable, won’t bite the bullet and take a cut so somewhere down the line a new system
The real greenbacks were controlled by the government of the US (not backed by gold - first time legal tender came into being for the US) and not by a private owned central bank. Where does most of the US debt come from?
u mean to tell me with all the membership fee we pay roun here the mods cyant keep the threads clean hehheh
TD welcome back for the 1st anniversary hehheh
What is this Real Greenback u talking bout bigman? can u wait one day when u do not have to run down your bus or taxi and have some time to flesh out your POV caus it seems you are suggesting a fiat currency with or w/o a gang of central bank has more talk than dollars backed by gold or a goldlike standard not saying u r saying that mi seh it seems so
hold on u may have a point there comrade hmmmmm r u saying if we dump the central banksters and have no gold or goldlike standard and print Real Greenbacks controlled by some nice government people the price of gold would drop like a satellite from the skies?
do u wanna run that one by bernanke drowning man catches.....
hopefully u find some time between now and the 2nd anniversary to forward again
J'can banks no longer in the highest risk category — S&P Friday, November 11, 2011
RATINGS agency Standard & Poor's (S&P) moved Jamaica from the group of countries that have the highest banking industry risk to a grouping with the second highest risk, according to its Banking Industry Country Risk Assessment (BICRA) revision published on Wednesday.
"The BICRA groups summarise our view of the risks that a bank operating within a particular country and banking industry faces relative to those in other banking industries," said S&P. "(S&P) revised its BICRA on Jamaica to group '9' (the second highest risk) from group '10' (the highest risk).
Economic resilience and imbalances were considered to have extremely high risk in Jamaica due to banks facing the challenge of operating in cyclical industries such as tourism, bauxite mining, construction and manufacturing, which have been hurt by the economic slowdown, as well as the pressure the country's heavy debt burden places on economic prospects. The ratings agency also pointed to the rise in non-performing loans from building societies and banks, for which they expect asset quality to further deteriorate due to lengthy timeline involved in selling foreclosed properties.
The ratings agency viewed Jamaican's banking industry's credit risk and system-wide funding as very high due to declining debtors' payment capacity resulting from the weak economy and limited financial flexibility in accessing funding. "Banks have already begun to report the rise in past-due loans, and we believe that the trend will increase," said S&P. "Additionally, we believe Jamaican banks' exposure to cyclical industries and the importance of foreign currency loans (43 per cent) would further deteriorate the banking sector's asset quality. Standard & Poor's is concerned about the exposure of the banking system to its sovereign."
It went on to say that "despite the high dependence on deposits (consistently representing more than 100 per cent of total loans), the banking sector relies on external debt".
"In addition, Jamaica has a very limited access to external debt capital markets, and domestic debt markets are shallow," said S&P's BICRA report. "Also, we consider the government's capacity to provide support to systematically important banks to be limited and uncertain, given its limited financial flexibility. Foreign deposits represent 38 per cent of total deposits and we consider these funding sources to be more volatile than local funding sources."
S&P's "high risk" assessment of the institutional framework reflected it's view that Jamaica's regulatory and supervisory framework remains weak.
"We do not expect significant government support for the banking system amid the current economic weakness in Jamaica." Moreover, even though the Jamaican banking sector's profitability is above its peers in Venezuela, Paraguay, and other Caribbean countries, it is exposed to cyclical industries in an undiversified economy.
S&P's BICRAs on 16 systems in Latin America show a fairly wide dispersion among groups '3' to '10'. At the top end is Chile (group '3'), which benefits from a more stable and resilient economic environment, and Brazil and Mexico, which are in BICRA group '4'. Toward the lower end of the scale in group '9' are systems like Jamaica, Paraguay, and Venezuela, which S&P considers to have more vulnerable economies and relatively poor risk management.
For Trinidad and Tobago — the only other Caribbean country to be assessed in the 86 country examination — S&P revised its BICRA to group '5' (intermediate) from '6', citing the country's solid fiscal and external position, its good private-sector debt capacity and relatively low leverage and the moderate risk appetite of the banking industry there.
And while S&P has little expectation for significant government support for the banking system in Jamaica, the ratings agency believe that "the Trinidadian government has been supportive of the banking sector, and we expect the government to continue to provide support to the banking system in times of exceptional stress".
The situation could get even more interesting if the called for but not yet implemented public sector layoffs take place
Also I have long pointed out the short sightedness of relying too much on tourism all its does is dress up our Christmas tree when the G-7 countries citizens have some disposable income, and suck salt thru wooden spoon when they have to cut back But not to worry the new pharoah recently promised to bring on 15,825 new rooms in FOUR years and 21,646 jobs http://www.jamaicaobserver.com/news/Holness-brings-big-tourism-news-to-MoBay
It took Jamaica 30-40 years to reach the current room level of 30,000 I wonder if they misspoke and plan instead to put up 16,000 tents
16,000 rooms in 4 years will make holness King no mention is made on the expansion of the services and facilities to handle the increase or the impact on natural resources what else is new
Summary: 1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch) to the Bank of America, which is insured by the public 2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees) 3. Any marginally competent regulator would say “No, Hell NO!” 4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A 5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs)) 6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.
_________________________
When you have eliminated the impossible, whatever remains, however improbable, must be the truth
MFGlobal Reveals You Are A Bank Counter-Party By Barry Ritholtz - February 15th, 2012
The esteemed former Fed Chairman, Paul Volcker, introduced a very simple regulatory concept that bears his name: The Volcker Rule. It was part of the Dodd-Frank regulatory reforms passed after the financial crisis of 2008-09.
There has been enormous pushback against what should be a simple piece of prophylactic rules on proprietary trading by depository banks (see this Jamie Dimon commentary as an example). Why? The profits of speculation goes to banks, driving bonuses and compensation; but the ultimate risk of loss lay with the FDIC and taxpayer. If the banks blow up, someone else besides the banker pays.
Privatized gains, socialized losses.
I want to take a few moments to briefly explain why this rule is so important to taxpayers, especially following the collapse of MF Global and the loss of billions of client assets.
Recall the basic facts of MFG: Management engaged in leveraged speculations with monies — whether it was their own or clients became irrelevant as the losses were so great as to wipe out much more capital than the bank actually had. Billions in losses meant MFG was insolvent and was wound down. On the winning sides of those trades were folks like JPM and George Soros. It is neither their duty nor obligation to verify whose money is on the other side of the trade — the clearing firms make sure the trade settles.
Those trade settlements are the only possible outcome. Why? Imagine a burglar robs a house of cash, goes to a casino and loses the money playing Roulette. The Casino settles that bet, it clears — and the burgled homeowner can never recover the money. Exchanges work the same way. They simply cannot validate the capital sources of every transaction. In the case of MFG, he money wasn’t even burgled — it was simply entrusted to an entity that became so insolvent thru excess speculation that even money in “Segregated accounts” was highly compromised.
And therein lay the dirty little secret of modern banking: THERE IS NO SUCH THING AS A SEGREGATED ACCOUNT. It is simply a helpful way to think about money and banking; it does not exist in the real world.
Consider your basic bank account — checking, savings, passbook, etc. We go through massive contortions to create an illusion that your money is yours, that its safe and sound in a bank with your name on it, in your own virtual safe deposit box. But that is simply not the reality of modern banking. What you perceive as “your money” is little more than an electronic journal on the banks accounting ledgers.
Fractional reserve banking means that the $100 you deposit is lent out — only $10 of your $100 is kept in reserve. Under normal circumstances, with thousands of depositors and millions of dollars, the banks have no trouble giving customers who ask for their money back the full amount at anytime. But it is not as if your money is sitting in an account waiting for you — you merely have a claim on those monies, and that claim is insured by the FDIC, and backed by taxpayers (theoretically).
You are, in fact, a counter-party to your bank.
In the old days, banks were boring. 3-6-3 banking meant borrowing at 3%, lending at 6%, be on the links at 3pm. It was simple. Banks were a utility, making reliable steady money, so long as they didn’t do anything too stupid to screw it up. Glass Steagall, the depression era legislation, prevented them from engaging in the sort of risky Wall Street speculation that caused so much trouble over the years. Think MFGlobal to get a better understanding of what is involved.
Thanks to the sheer ideological idiocy of Phil Gramm, enabled by the corruption of former Treasury Secretary Robert Rubin and the hubris of former Treasury Secretary Larry Summers, Glass Steagall was repealed. Thus, banks could be as stupid as they want to be — and you get to foot the bill.
What does all this have to do with the Volcker rule and MF Global? It is quite simple: Today’s post Glass Steagall repeal Bankers engage in leveraged speculation that potentially could blow the bank up. They did it to themselves with sub-prime mortgages; have no doubt that someone is working on the next ‘financial innovation’ whose losses will be even bigger and better than RMBS and CDOs.
When the next bank blows up — note I said when and not if — their depositors will become counter-parties. Those depositors are you, just like MF Global’s. Only, you as counter-part are not first in line with a claim on the monies — the folks on the other side of the trade get first dibs.
So this bank blows up, the trades settle, the counter party banks/brokers get paid, and whatever is left (if anything) goes to depositors. The FDIC will make good up to $250,000. FDIC’s budgets comes from a small fee on banks. If the losses are great enough, it will exceed their budget and so the taxpayer than makes up the difference.
The risks and rewards are, to use a big word, “asymmetric.” Hit a home run as a trader or banker, collect a huge bonus. Lose it all and then some, and the taxpayer is on the hook. Anyone who fails to see the simple math of this either spends their days shilling for banks or are acting as CEO mouthpieces.
This is the global issue.Economies of all the counties are crisis from the last few years.GDP growth of all the top world econOmies is not so good.Third world countries are effected badly.There are at there threshold and fighting for there economical survival.
Can a bipolar nation outfox the IMF? Franklin JOHNSTON Friday, December 28, 2012
Jamaica is so exciting it could kill you. Sadly it breaks many hearts and does kill some. As we close 2012 we should do our balance sheet and our New Year's resolution for Jamaica. We are now negotiating the deal of a lifetime with our "last chance" bank, the IMF, who know our mettle for 40 years. We spent, used our credit, borrowed from our friends (Trinidad), cussed them and the last lot played fast-and-loose with our reputation. We are caught between agony and ecstasy, heavenly charity and brutal murder; manic depressive? We celebrate a lot. Few understand this frissom of intuitive talent and the diabolical-help the lady cross the street then pick her purse -good or evil? We keep the world guessing about us.
In August we were in heaven; took time out from the IMF to have a 50th Jubilee blast and celebrated Olympic gold. We partied like there was no tomorrow. By September we were in the rough; our oxygen was to be cut off; the IMF had our guts for garters; the flags were still up but their signal was grief and pain. We are an amazing people. As I end my first year back home a few things intrigue me.
FIRST, I use buses and public hospitals so I am shocked that so many leaders incurred near $2tn in debt yet none of our services work well. After 50 years of independence, 60 plus of self-government, almost 200 of freedom and 500 years of fame, nothing works. Jamaica has been a brand since Columbus took us to the Royal court of Spain and Portugal and tantalised the English. We made global news for centuries and as Port Royal attests, wickedness was never far off. Usain Bolt and Dudus are part of a Jamaican tradition of excellence in good and evil. So why do none of our systems work? We struggle to get food production off the ground for the "umpteenth" time; health care is shaky, light and power is vilified; housing is saved by its vice-ministry "Food for the Poor"; pick any service and as for education let the record show it has underperformed for decades and many kept silent; and facts as unearthed now match the sub-standard reality we have-someone blundered. A great injustice was done to poor people - the educated are not blameless. Transportation is feral and our poor are disrespected as leaders kowtow to powerful "eat a food" robots and minibuses. We demand no account, ignore betrayal and often "shoot the messenger" and do not heed the message. Which service can you tick off as "Job well done?" We do have a veneer of modernity and civility - little substance. The poor can take no more!
SECOND where we are going? We negotiate an IMF loan but even Greece and Zimbabwe move ahead of us. So it will stabilise us; what's next? Where is the growth? Whatever happens with the IMF we are royally screwed. You praised Mr Shaw last year for his loans and he took the accolades -half a trillion more debt - suck it up! We now fight to borrow more! What is Cabinet's game plan? Whither Jamaica?
THIRD what do leaders want us to do? Are we to gear-up? Will we continue "bobbin' and weavin'?" ODPEM prepares us for natural disasters, which agency preps us for man-made disasters? Why not mobilise the nation for survival, self-reliance and growth? A guy told me "Kick Stone, Walk Street and Company" is taking on people; this is not a good sign. Peter, what can we do to help? Say it loud!
FOURTH, what about energy? We rail against America and British Imperialism but our future rests on one man -Hugo Chavez. Petrocaribe (Venezuela) follows the San Jose Pact (Mexico and Venezuela); Manley's Socialism was in sync with Chavez's "the friend of my friend (Fidel) is my friend!" and it works. Before the 1973 Israeli war, oil was US$2.90 a barrel then rose to $12. By 1980 the Shah of Iran was ousted by the Ayatollah, we had the Iraq/Iran war and oil reached $35 plus. Mexico balked. Chavez did not and PJ Patterson brought the Petrocaribe deal to book. We do not have to know the real price of oil thanks to comrade Chavez who decided to "annul American hegemony" using democracy and his oil. The JLP bitched to the USA about Chavez's motives and pushed fire saying he gave the PNP millions but Golding came to office in 2007 and uttered not a word. He enjoyed the fruits of the Bolivarian Socialist fraternal.
Since Independence no other deal is as seminal to our survival and stability. Petrocaribe keeps us alive. The IMF is zilch compared to the "attaclaps" if Chavez dies. His opposition is not keen on it and his next in line is no fan either. Prayers ascend and "nuff candle a bun" for Hugo; "yuh tink seh tings hard? Hugo Chavez holds our future in his beneficient cancerous body! With shame I say, pray hard for Hugo!
We spent our "shirt" at the Olympics. Not one penny had to do with our athletes' success. We bitch but spend like crazy. Some want to change cars "before things get worse" What a contradiction? They "lash-out" for Christmas because it may be some time before they eat turkey and ham. Bipolar rot? The good news is we are no longer at the bottom in CARICOM. The bad news is we did not rise, others fell. Some members can't meet payroll, their NIR is gone and their creditors have them on a cash basis. One nation raided NIS funds to cover civil service salaries. We have never known life without the IMF. Even when it was not here we shadowed its targets. The road less travelled may be hard, lonely but better for us. The IMF is our bank and lifeline not a bogey man. We have work to do. Get this deal closed pronto!
The IMF is crucial but it's not all of our future. A loan will support our currency and the world lends us so we can pay them back. Our hope is self-reliance. As in Greece or Ireland they are not moved by our pain as we elected men who borrowed $1.7tn and we did not hold them to account. Time is not our friend. The longer the negotiations take the more our reserves, credit and options fade. In the words of Chicken Little "The sky is falling!" The next years will be worse than the last 40 because our friends are now in trouble. We were always in trouble - not new. It's time to look to our people and take charge of our lives.
What delays the IMF loan? We need the loan and need surplus to repay it; how do we do this? grow income and or cut costs! This is tricky. Why should the IMF believe us? We have always known what to do but never did it: will we do it now? We are not credible! They want to see us take action.
So when will the prosperity team get going? Vision 2030 is crucial but it is a plan like all the past glossy ones with pretty pictures and maps (the picture of the foreign suspension bridge in vision is risible but so us to use image for deed); Michael had one, Eddie too, they all failed. We need a PPP -a public, private oversight team, to cherry pick priority ministries for 2015, 2017 and 2020. More anon! My brain says "what man has done he may do; what man has never done he is unlikely to do ... ever!"
It is a principle in negotiation that parties lose flexibility over time. The longer this impasse the less likely we are to get our wishes. The IMF "Men in Black" have a track record to uphold and were stung once so they will not be made fools of again. They have mortgages, kids in posh schools in Washington and Boston. You don't keep this job by being outfoxed by smarmy, third world politicians. Stay conscious my friend!
Dr Franklin Johnston is a strategist, project manager and advises the minister of education. franklinjohnstontoo@gmail.com
----------------------
I too want to know why the govt spent a billion dollars in London on parties and booths. As to the millions spent on new cars for ministers, the people will just suck that up too, they always do
_________________________
When you have eliminated the impossible, whatever remains, however improbable, must be the truth
