on the Congress railing against Bernanke and the Fed (WSJ article)

In the article, "Lawmakers Chide Fed in Bernanke Hearing" in the WSJ you get to hear Congress (who was complicit in allowing the great recession to happen by passing certain policies & regulations) yell at one man (Bernanke) for the "Fed's failure".

"You are the definition of a moral hazard," said Sen. Jim Bunning (R, Ky.), a long-time Fed critic. "I will do everything I can to stop your nomination and drag out this process as long as I can."


I fear rule by the majority and congress represents the interests of the majority & industries while the white house & the Fed (Geithner/Bernanke) seem to be looking out for national interests. I could be wrong and of course not all of congress /senate is intentionally against national interests but their motivations are more diverse.

thoughts on NYT article: Oil Companies Look to the Future in Iraq

Is it any surprise why Iraq was/is so important now? I was stunned when I researched Iraq's oil reserves last year. It turns out they have the least developed/tapped and  one of the largest oil reserves on the planet. The price of a barrel of oil from such a source is/was/historically 10-15x cheaper at the onset (as the well dries the cost of retrieving barrels increases to the market price, however). Now the exxon/royal dutch/big oil is coming in and about to develop the most lucrative areas:


http://www.nytimes.com/2009/12/01/world/middleeast/01iraqoil.html


“The attraction of these fields to oil companies is not the per-barrel profit, which is very low, but their value as an entrance ticket to the oil sector of southern Iraq,” said Reidar Visser, a research fellow at theNorwegian Institute of International Affairs who operates an Iraq Web site, Historiae. “In terms of size and potential, the Basra region remains one of the most attractive areas of future growth for the international oil industry.

Iraq has the third largest proven reserves of oil in the world, with about 115 billion barrels, but it does not rank in the top 10 producers. If and when its oil production rises toward seven million barrels a day or more, Iraq might find itself in conflict with OPEC, which maintains production quotas for its members. Iraq has been exempt from the quotas since sanctions were imposed in 1990, Iraqi officials said.
Iraqi officials say there is no justification for imposing a quota on their production, saying they have been underproducing for years, allowing others to enjoy higher quotas.
“The production from these three fields will surely threaten other oil-producing countries and will show the world that Iraq can match Saudi Arabia’s production,” said Mr. Hassani. “Our share has been taken by other countries, and we will gain our share again from the countries that took it.”

Brunnermeier & Sannikov's new macro model (Bernanke you have some reading to do this morning...)

Capitalism evolves before our very eyes:
http://www.princeton.edu/~markus/research/papers/macro_finance.pdf

"In contrast, our model predicts an equilibrium in which the volatility becomes very
large once the system shifts far enough below the steady state. Moreover, higher borrowing
costs, reduced positions, and precautionary motives lead to deleveraging, bound the
experts’ profits and lower the growth rate of expert capital/the rate of reversion towards
the steady state. As a result, this dynamical system involves episodes in which the value
of η becomes very low and the price distribution exhibits fat tails. We conclude that the
financial system is prone to crises, and that predictions of steady-state analyses may be
misleading."

In English, this means that during a crisis volatility increases as investors run to cash or treasuries etc. & furthermore the length of time it takes for asset prices to mean revert takes longer (whereas in a steady state the mean reversion of growth rate of expert capital is quicker).

china real estate bubble?

Housing models at the Shanghai Real Estate Exhibition and Trade FairIn Shanghai, which is China's New York, locals and expats are doing their best to foist American-style consumerism onto China's rising masses—with mixed results. Starbucks has opened several hundred stores, even though China has no coffee-drinking culture to speak of. As it spreads into China, Toys "R" Us is trying to convince higher-income Chinese parents that toys are a part of a childhood, not a distraction from preparation for the all-important national college entrance exams. Dickie Yip, executive vice president at Bank of Communications, lamented that 80 percent of the 11 million Chinese people who have opened up credit card accounts with the bank pay off their accounts in full every month. "We're encouraging our best customers not to repay," he said.

But there's one distinctly American habit the Shanghaiese seem to have picked up easily: talking about money, profits, and real estate prices without self-consciousness. I'm traveling in China this week and next with a group of American journalists. And we were instantly schooled by our interlocutors on the divide between the political capital (Beijing) and the financial capital (Shanghai). Beijing is all about politics, analysis, debate. In Shanghai, it's all pragmatism, getting things done, and making money. "To get rich is glorious," as Deng Xiaoping famously said.


From wiki about America in 1840s:
This rapidly democratizing society, as Tocqueville understood it, had a population devoted to "middling" values which wanted to amass, through hard work, vast fortunes. In Tocqueville's mind, this explained why America was so different from Europe. In Europe, he claimed, nobody cared about making money. The lower classes had no hope of gaining more than minimal wealth, while the upper classes found it crass, vulgar, and unbecoming of their sort to care about something as unseemly as money; many were virtually guaranteed wealth and took it for granted. At the same time in America workers would see people fashioned in exquisite attire and merely proclaim that through hard work they too would soon possess the fortune necessary to enjoy such luxuries.
*


Furthermore, from the same wiki: Tocqueville tried to understand why America was so different from Europe in the last throes of aristocracy. America, in contrast to the aristocratic ethic, was a society where hard work and money-making was the dominant ethic, where the common man enjoyed a level of dignity which was unprecedented, where commoners never deferred to elites, and where what he described as crass individualism and market capitalism had taken root to an extraordinary degree.


Sounds like China today doesn't it...

higher interest rates? 1.6T due within a year (or months)...

Two things are interesting here. One is the amount of debt coming due within a year. This is always a potential opportunity for the rates required on treasuries to go up. The second thing is the creditors section. Note China only makes up 7% of the foreign debt owned..other+japan+private=56%, which means I (and the media) should be focusing much more on what the other 56% is doing. Another takeaway is the social security, medicare, healthcare issues that will have to be tackled at some point. There's so many issues that politicians don't seem to want to tackle or work together on (and risk their political careers in the process).

great post on china on michael pettis' site on china's financial markets

Reading this entry by pettis helps me see my suspicions about China are probably spot on.

http://mpettis.com/2009/11/lecturing-each-other-on-trade/

1) gov't policies have encouraged investment over consumption
2) the gov't has excess revenue or savings which they use to invest in productive capacity (ie. factories etc...) & to continue weakening its currency (mercantilist stance) e.g. see  wiki on mercantilism:

Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade^{[citation needed]}. As bullion flowed into one country, the supply would increase and the value of bullion in that state would steadily decline relative to other goods. Conversely, in the state exporting bullion, its value would slowly rise. Eventually it would no longer be cost-effective to export goods from the high-price country to the low-price country, and the balance of trade would reverse itself. Mercantilists fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that everyone gets richer.^[22]

The importance placed on bullion was also a central target, even if many mercantilists had themselves begun to de-emphasize the importance of gold and silver. Adam Smith noted at the core of the mercantile system was the "popular folly of confusing wealth with money," bullion was just the same as any other commodity, and there was no reason to give it special treatment.^[23] More recently, scholars have discounted the accuracy of this critique. 

Wiki doesn't specify what the critique is (unfortunately), but some of this makes sense and the reason there's no correction is because of the neo-mercantilist strategy of using the bullion/fx reserves to weaken the yuan in this case (thereby delaying the necessary correction). Also in Pettis' post he mentions research about an NBER (Moritz Schularick and Alan M. Taylor have a new NBER Working Paper, “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008.”) working paper that discusses bubbles they studied were equally likely to happen from excess credit or excess investment.

What I haven't found an answer to is why the Chinese gov't pursues these policies? At first I thought it was to keep the laborers poor and help the Communist party continue to amass wealth (in the form of commodities, fx reserves, and productive capacity) with the idea that this was the best path to preserve the current political power structure. Now I think they Chinese gov't is pursuing these policies to keep employing more and more people because employment, in a non-farming setting, maybe more important than an increase in the standard of living.

The US could, in effect, spend the excess savings in China through deficit spending/printing money but the Chinese say they don't want this. I see three ways this could play out:

1) China expects the US to come out of this recession and through new industries re-employ it's people and for the positive surplus mercantilist machine to continue in China. Unlikely

2) China allows its currency to appreciate slowly, it's people begin to buy more products from the US/world, China realizes comparative advantage works and they can focus on certain industries, the US currency weakens in a controlled fashion, jobs return to the US/the rest of the world in sectors where the US has an advantage. Rosy scenario. The risks to this is what will happen to Communist power as this progresses?

3) Scary scenario: The US puts up tariffs, demand falls precipitously in China and retaliates by selling US treasuries en masse, US interest rates sky rocket, the dollar crashes, hyper inflation settles into the US and an unheard of growth in employment and rebuilding of productive capacity in the US, US domestic demand sky rockets, and imports implode. China not only loses its investment in US treasuries/dollars/commodities, it also loses on its investments as all of its factories become useless and workers unemployed.

projecting the digital world onto the real world--you have to watch this to understand what this even means:)