Monday, March 17, 2008

A few notes after a silent week.

Some notes after a period of silence.

The American economic plunge has gained momentum. A major bank had to be rescued by its friends in government. The price of gasoline continues to rise. Ever expanding discussions continue on the withdrawal of troops from Iraq. No one quite knows where the bottom is - though hopes that there is a bottom run high. It is unlikely that public pressure over Iraq will deflate soon, however it is likely that public support for a presence in Afghanistan will remain even after a US withdrawl from Iraq. One also notes the curious effort at scaremongering in a closed session of the American parliament recently. One also sees lust in the eyes of those looking north towards Canada and Alaska.

In Pakistan a calm introspection over the prospects of facing the Islamists without the Army's support will dampen provocative gestures vis a vis Musharraf the Magnificient. The Pakistani public at large wants to see a demonstration of "accountability". Some demonstration will have to be arranged to appease the masses, but I doubt it makes sense to try this with someone called Pervez. At the end of the day - Pakistan's problems stem from its poorly developed industrial sector, and the Army with its allies in the Fauji, Shaheen, and Bahria foundations, represents the bulk of Pakistan's industry. The feudals cannot hope to create a stable feeding trough inside Pakistan without the Army's support. The Khilafa Coastal Refinery will ultimately "save" Pakistan - and the refinery will not be built without the Army's support to whoever is in power. The Feudals will have to content themselves with a game of musical chairs. The Pakistanis need to articulate the problems arising out of a collapse of their agriculture sector. It has been conveyed to them that India has a limited ability to resolve contentious water distribution issues *inside* Pakistan. The wheat crisis of today, is merely a preview of things to come unless Pakistan gets its act together on the water management issue.

In India we are only now gaining the first insights into how the crisis in the US will affect us. The dollar's problems directly impact the Indo-US nuclear deal in ways that go beyond KT's next paycheck. I have held my peace on this for long enough - with a recesssion looming in the US economy, I think the time has come for me to speak clearly. A collapsing dollar creates a climate that does not necessarily favour us. The US cannot expect us to purchase anything from them while simulataneously restricting our market access. Without a structure to offset losses due to the fall in the dollar - we cannot be expected to proceed towards anything on this deal. Setting all political considerations aside, one has to confront this issue.

Added later:

As predicted - the next wave of assaults (after the attacks on the SciCom) on Sri. Vajpayee have begun. An entirely circular logic is openly displayed - yet again - the results of the Shakti series are being questioned solely to justify the need for a gigaboom. No rationale is presented for a gigaboom - only drumbeating is indulged in. A time will soon be upon us when Sri. Vajpayee is blamed for not doing enough to make a gigaboom.

I now sadly await the public humiliation of Sri. Vajpayee at the hands of the very people he helped bring into the national mainstream. This will be a truly disgusting spectacle - watching a bunch of utter morons insult a man who is too weak to raise even an arm to defend himself. Tragically, as far as I can see, this is the only way in which these people will finally realise that without Sri. Vajpayee to do their thinking for them - they have no appeal to the rest of India. Only after humiliating Vajpayee and burning their bridges to the rest of India will these people realise their utter irrelevance in today's India.

As the US economy plunges, the US NRIs will become more vituperative and lacking the ability to project their angst in the US, they will turn on India. The angst of the NRI SuperHindus will feed the fight for succession in the BJP. This is one of those tragic cases of blowback - and I can do nothing about it.

Tis' a grisly affair we are about to witness, a very long night of very long knives.

On another note:

It appears Secy. Paulson has had no sleep recently - the word "depression" is making an appearance. The search for a "bottom" to this mess has begun.

So it is time for me to show *my* cards on this issue.

I *personally* think the following:

This is - at the end of the day - about manageability.

Human nature is troublesome at best - if everything seems fine - then no one will want to change. Even when everyone knows change is necessary - the bigger the change - the less is the incentive to actually do it. The more you shield people from the bad news, the less they feel the need to change.

On the other hand, if you make people feel like crap - albeit temporarily and when things are actually still really fine - you can induce them to change.

A sudden sharp shock following a period of brief semi-shielded exposure could achieve rapid swings of the desired variety. You will be able to reach ahead of the curve and drive the system at the desired rates.

That said.. it has to be done just right. It needs extreme attention to detail - I am not saying this is easy - it is easier than the alternative i.e. trying to fix everything at once.

And now I will go back to being silent on this issue.

15 Comments:

At 1:46 PM, Anonymous Sparsh said...

Maverick,

In your last post on Pakistan, you had mentioned how the elections were rigged to reduce the aura of political legitimacy that the political islamists enjoyed from their large presence in the national assembly.

I don't see how marginalizing the political islamists in this humiliating toilet paper like use-and-dispose manner will help either the Army or the Feudals. This will drive the political islamists closer to the jihadi islamists and further strengthen them.

Also, I disagree with you about the root of Pakistan's problems. It is far deeper that a mere lack of industrial capacity affording few employment opportunities to the populace. That is merely a symptom. All their problems stem from the founding mythos that they have created for their country and that piece of fantasy called the Nazaria-e-Pakistan.

P.S. - Do you still use your breakfast themed yahoo email account? I had a "a-ha" moment on the topic of pretenders to the throne.

 
At 8:05 AM, Blogger maverick said...

Hi Sparsh,

Yes I can be found at the usual place.

You are correct - the problems stemming from the founding myths of Pakistani society are impossible to fix. That narrative weds them to a perpetual assymetry of distribution of opportunity.

However a few economic stresses can be fixed require a growth of the industrial sector. The agriculture sector as you know has limited growth prospects given the population pressure on land and water resources.

I strongly suspect there is a desire to polarise the political spectrum and drive disaffected people into the Islamist ranks. This is in my opinion an extension of the strategy that was attempted in Lal Masjid.

It is unclear to me if anyone inside Pakistan has accepted the criticism of this strategy - that the extent of disaffection may be beyond the ability of the Islamists to control

Again as I said before bringing up this point either in DC or Delhi seems to provoke very stony silences.

And no I do not mean to criticise either city or its dwellers - as the great Nizami implies in his tale of the Seven Princesses, we all dwellers of the City of the Stupefied.

 
At 9:01 PM, Anonymous kg said...

Hi Maverick;

The situation in the US is a lot worse than that.

The credit trust chain is so badly broken that its almost inconceivable. Bear at $2 dollars a share?

Things are so bad that the hundreds of billions that the Feds handing out like confetti to the financial folks is *NOT* being used by the money people to repair the damage - instead they're squirreling it away to safe harbours, most of it out of the US.

I'm having difficulty grasping that one. US financial entities, the core of their global economic hegemony are given billions to fix their problems and this situation is so bad that they take the money and send it outside the US to be safe.

This is what happened to the Russians in the disastrous Yeltsin years. And Argentina.

Full scale *private* capital flight.

Currently, this private flight capital is all from the big boys "in the know". Once it flows lower down - well, I reckon the US will be in Iraq for a decade plus - because they won't have themoney to bring them home like the abandoned Soviet Armies in E. Europe during the 90's.

I wrote before that the US *is* getting money coming in - but here's the thing, it's almost entirely govt cash, i.e. Central bank support.

*Not* private capital. They're fleeing.

Central banks from around the world are desperately hurling gobs of cash to the US to fix their problem. The US is handing this cash to it's financial folks who . . . are promptly sending it outside for "safety".

That's the current situation at the moment. And that, I hear, was the issue with Bear Stearns.

Last week they were trading at $30 dollars and the Fed was supporting them. Then it all blew up.

Because apparently when the Fed found out that they were in capital flight mode, the killed them instantly.

That's how bad the situation is . . . the

Until this Bear/Stearn thing, I was certain the Fed would be able to contain this mess, and wrote about it here.

But if the situation has reached the stage where the Fed has to take core segments of their elite structures and shoot them in the back of the head, then . . .

The BS thing is the equivalent of Stalins
"anyone retreating gets shot" command.

No idea whether it will work. But I don't think things are going to improve so easily, not at the rate private funds are leaving the US.

Lets see where it goes.

kg.

 
At 9:47 AM, Anonymous Sparsh said...

KG,

I was wondering what had happened behind the scenes over the weekend that led the Fed and JP Morgan to gang up on a cornered Bear Stearns in the manner that they did. First they put on the pretense of extending a 28 day loan to Bear to overcome their liquidity crunch and then out of nowhere bam!

At that moment I had though that Bear was lying through its teeth about just how bad their situation was and not wanting a major investment bank to collapse if that true picture ever came out, the Fed forced JP Morgan to buy out Bear for mere peanuts.

Your post casts things in a far more sinister light. What I find most grotesquely funny about this is that all that noise about capitalism and fair play and rule of law is nowhere to be heard. Shareholders gaye bhaad mein! Even in the most benign version of events what happened was a plain old fashioned mugging.

I expect the details of this mess if they ever come out to be even more sordid than the Drexel Burnham affair.

 
At 6:13 PM, Anonymous kg said...

Hi Maverick:

I think for these folks, capitalism, fairplay and the rule of law are kinda like the phrase "good sportsmanship". It's only used for the losers.

The same jerks that used the IMF to break the back of third world countries so that they could get a bit of looting and pillaging done are now screaming like banshees for handouts - which they'll get in spades.

After all, letting a bunch of darkies starve to death is simply the natural order of things, but forcing the "right sort of people" to sell their yachts and holiday homes is beyond the pale, apparently.

LOL!

>> [i]mugging. . .Drexel Burnham[/i]

Yes, but there may be more. Sure, the public execution of Bear Stearns was used as a salutary lesson to others, but I'm wondering why BS took the hit.

As the fifth largest merchant bank and one of the long timers, they're sure weren't small nobodies or johnny come latelies like Milikin of the 80s/90s.

The only thing floating about is that it turns out that BS was the *only* Wall Street major that didn't play ball during the LMCT saga.

When the LMCT bailout was organised BS was, apparently, the only major that fatly refused to be in on the rescue.

That must have made some enemies but I can't see that as being the driver for such a savage response.

If JP Morgan gets a 10 billion boost on buying BS, it implies that BS had the assets to survive if the Feds let them. They didn't.

I wonder what exactly they were trying to play at with their capital flight scenario. It was clearly something that terrified the system.

That's something worth knowing - or trying to deduce, I'd say.

BTW: I think we're not going to be hit as badly as it appears at themoment. Not as badly as the Chinese anyway.

The capital flight to safety has set of a commodities boom (bubble? asset inflation?) that is showing all the signs of doing the same thing as the real estate bubble in the US did.

But that's an advantage for us. The Chinese have to absorb the price increases in inputs that a commodity bubble creates to maintain their market share.

They're going to take a beating here.

But for us, services are the major component of our economy. For that sector I can't see the commodity rise as raising input costs as much as it does for the Chinese manufacturing sector.

So we may be able to survive this a lot better.

And there's even better news in that our manufacturing is still in the "take off" phase. That means they can be more nimble and factor the commodity price rise than the Chinese who have massive fixed costs from existing production facilities to protect.

This whole crisis could be really advantageous to us.

The main weakness is the inflationary aspect of necessities. That is a real worry for us, I think. It places to much pressure on the janata.

GoI really needs to keep a sharp eye out for food inflation. If they can manage that, we'll come out of this smelling like roses.

In the mean time, there's all the fun and games of watching the US financial sector crumble apart like a stale biskooth.

kg.

 
At 6:15 PM, Anonymous kg. said...

oops, Sorry Sparsh. That post should have been addressed to you.

kg.

 
At 6:57 PM, Blogger maverick said...

Hi kg,

I feel at this point it may be most expedient to pull a bouncing maneuver. Deliberately drive it the other way.

The whole problem is that the US lifestyle is unsustainable in the light of the fact Asian economies are giving a far higher return on the same gallon of gas.

A cultural shift is necessary in the US and the Americans are not going to change unless some serious "incentive" is given. There is no better "incentive" than fears of a depression.

At the corporate top echelons, there is no interest in change. Any attempt to push change in a top down level is likely to generate proximate friction. By contrast a deliberately induced crisis situation will create a climate of fear that forces change per "market" principles.

Force GM/Chrysler/Ford to make hybrids using laws that demand higher efficiency? - no way - they will simply fuck your election prospects. Sure you can stand there and claim that you speak for Abbaji himself etc... but they will simply laugh at you and pay the media to make fun of you.

On the other hand, tell your friends in the oil companies to rape the customers, that way the customers run to buy toyotas and hondas. After that tell the banks to raise the interest rates, and watch as ford/GM/Chrysler buyers have trouble raising money to buy the cars. After that all you have to do is maintain a studied aura of complete incompetence - and then watch as Chrysler, GM and Ford run or more correctly sprint to make something that isn't a total piece of crap.

It can be suitably generalised to any industry of choice.

I think the same is true for the soldiers in Iraq. I mean seriously folks, did you really expect the government to bring them back and lose face? no.. they are only going to bring them back when "victory" is achieved. If there is no "victory" there is no coming back. They can either do what it to achieve "victory" or simply sit there forever.

We are looking at leaders of the superduper Corporate CEO variety -
To borrow the words of VP Cheney "So?".

Shooting BS in the back of the head is simply good for business.

A few more like that in the top echelon - especially when you make it look like ... you didn't do anything... all you did was hold the body when he fell... down the stairs - will really make it work.

I hate to say it like this - but the Boss knew exactly what he was doing when he ordered folks to be shot and it works.

 
At 8:04 PM, Anonymous alok_n said...

M,

you bring up an interesting set of points in a pot-pouri of posts ... however, I will pick on one that bugs me ...

Exhibit A: Bringing troops home requires a "Victory" -- Cool.

Exhibit B: The media is under the control of the Machine -- Cool.

Problem C: Why is the media not manufacturing Victory as opposed to whining about Loss?

Conjecture D: The Machine does NOT want to bring troops home. QED.

 
At 6:17 AM, Blogger maverick said...

Hi Alok,

It is always a brave attempt to summarise everything one says.

Here is my own attempt.

The "Machine" is a globalised economic elite. They have unimaginable amount of "money" and are seeking ways to preserve their position of dominance globally - because really speaking "money" is only what you can do with it.

The "Machine" wants to preserve monopolistic control over energy resources. This is key to preserving their future.

The "Machine" recognizes that lack of economic competitiveness and poor energy efficiency in the US economy is an obstacle to monopolistic control on a global scale.

Media and other psywar tools can be used to achieve cultural shifts in the US (and elsewhere) - however the exact strategy to achieve optimal utilisation of this resource is not immediately obvious.

Cultural shifts are extremely difficult to manage and well near impossible to achieve without participation from local expertise. Control over media and related psywar resources is easy - however leveraging this into a meaningful participation of the local political elite is more complicated.

Even if local expertise is secured, the most expedient way to achieve economic change is by inducing the desired level of strain and then nudging (via political and media based controls) the economy to where you want it to go.

What we are seeing in the US is a bunch of locals competing to be the "local experitise" component for the "Machine". Ofcourse the locals competing must demonstrate two things, the ability to operate the back office of the economy - something that Abbaji's men have all figured out and the ability to seduce people into accepting the necessity of change - something that is akin to winning a popularity contest in the media spotlight. This is something Abbu's apparatchiks don't do so well as - I mean no seriously they are picked on technical competence - not on theirlooks - and they live most of their lives in the shadows so there is no way they can be public stars. A Bill Clinton like figure is a rarity - and don't forget Abbu hand picked him!

From what I am seeing, Abbu's khaas aadmis seem to be leaning towards a bouncing maneouver. They will deliberately drive a depressive trend in the economy and then sit back and watch as people will make the necessary changes in their lifestyles to save themselves from dying.

My advice to the Americans buy a hybrid and try to come with ways to increase your productivity.

I have no sympathy for the BS types in the world - I can understand that they have compulsions and want to reassure their investors that their bank balances are safe - but man I don't know how to explain this to the waspy my-dadaji-was-a-founding-father-types. Their whole funda is "I want to secure my future even though a prostitute in Vegas earns more than me right now".

These guys have Ross Perot's so-what-main-bhi-oilman tendencies and often make the mistake of thinking that they are somehow on the same level as Abbu's khaas.

They don't understand that you *DO NOT* fuck with Abbu's men - because - they will kill you.

The Kshatriyas have similar "fancy-boy"-I-am-too-good-to-die-in-a-fight attitudes.

Abbu's men really couldn't give a crap and Cheney just openly told everyone that.

 
At 4:41 PM, Anonymous Sparsh said...

KG,

Re: Bear Stearns and the Wall Street types.

I think it is a mistake to attribute some sort of a latent racism to these people. I don't think they would have any more qualms about robbing the life savings of their own countrymen leaving them destitute and homeless than they would about starving some people in the so called third world. These modern day robber barons are rather colour-blind that way.

Even now after a period of time, I am at a loss about what panicked the Federal Reserve so much that they shot Bear Stearns in the back of the head. Of this I now have no doubt. The fact that JP Morgan's share price rose after taking over what should have been a millstone around their neck and that they later went on to raise their offer five fold shows that Bears Stearns was not in quite so precarious a situation as initially made out to be. As you put it, what panicked the Fed would be interesting to deduce.

I for one have no clue right now.


Re: The Chinese and us.

I think the Chinese are going to take a big hit, if not from the inflation in commodity prices then definitely from their sovereign wealth fund investments going sour as the credit crisis unfolds further in the US. I can not but help think that they have been made a royal fool of as far as their sovereign wealth fund goes. The buggers painstakingly build up a massive trade surplus over the years and a large chunk of that evaporates overnight. Somebody is privately giggling to whispers of "suckers!".

It is worrying to note that inflation has crossed the 5% target over the last couple of months. I hope we can adequately keep it under control.

There is one more thing we need to keep our eye on. Tibet. We all expected some agitation on that front as the Olympics drew near but the intensity has been somewhat more than what I expected, especially on the diplomatic level between us the and the Chinese. Something has definitely spooked them into behaving so undiplomatically. Though the worst is yet to come. I shudder to think what will happen when the restraining voice of the Dalai Lama is no longer there.

 
At 6:17 PM, Anonymous Sparsh said...

KG,

On a lighter note:

The blame for the current mess in the US financial system is one thing that you can not dump on the engineers.

I am going to claim with Musharaffian certainty that the theoretical physics types hired by Wall Street are to blame here. Only a theoretical physicist could come up with a scheme that rests on something that is unverifiable and for all practical purposes completely imaginary.

After all, these very same people conjure up completely imaginary fundamental particles, dimensions, interactions, symmetries etc. etc. out of their collective musharaffs on a routine basis. A completely imaginary asset valuation is small change in comparison.

:)

Waiting for you and Alok boss to hurl some outsized bricks at me ...

 
At 5:28 AM, Anonymous Anonymous said...

MAV, a very stupid question.Who is abbaji? Bush sr.? or some global financial cabal(who handpicked bill clinton as you say.)
Abhisheik

 
At 2:59 PM, Anonymous Anonymous said...

Friends I had said some time ago , we hve not seen nothing yet (on US eonomy)

Gradually the creepers re coming out of the rotten wood work. There was unmistaken collusion between the apprisers (of real estate assets, after all it was relative pricing method , three homes comparable in the same zip code, sub division, of same sq feet, there this home is worth....blah blah)), mortgage lenders, bankers..., the folks fell for sucker of double digit return on investment in 1.5 years.....
BS is just the begining, ther are more to follow suit, the real secret is now Insurance industry, the whole auditing systems (like KPMG etc ) are stinking with s_hit in the closet ...

The another secret that is still to be out is that banks margins were looking good as long as the mrgins (spread) were like 22% to 30% on credit cards, student loans which were federally backed.

Watch for more interesting times as the elections get closer....

 
At 12:37 PM, Blogger maverick said...

Hi,

Why just credit cards...a major weak point in my mind is the entire car loan economy.

Banks are handing out a vast majority of these loans to make people buy poorly efficiency American cars. This is part of a propping up maneuver to keep US car companies in business. The price of the car being inflated to make it look like the American car company is still making money - and the consumers are being given "low interest"/"no interest" loans to get them to buy these poor fuel efficiency cars.

If the petrol prices keep rising - there is no way that people will be able to use the cars they buy and if they can't use the cars, I do not see people being able to make their car payments. This is especially true if they are already courting bankruptcy with regards to home loans and utility bills.

In theory the car loans are "good" in that the car value is collateral but if suddenly thousands of cars have to repossessed on a single day - the value of the car will drop. Also in a more carbon conservative world, no one will want a car with poor fuel efficiency - so the depreciation rate for the car will be much higher if it is not a hybrid.

 
At 1:31 PM, Anonymous Anonymous said...

china's rise is a central issue may be. first came info on Ns proliferated around the world is all based on Almos designs. stolen by chinese. then chinese $ reserves of 1.2 trln giving it edge as a competitor to world markets US dominated. then chinas growth as manufacturing superpower. and then a lot of weight throwing by chinse around africa and mideast. after china shot down sats and blinded unkil's sats there has been a big shift may be in unkil's threat perception. first to protect oil for atleast 30 yrs or so. hence afg and iraq for good many years. then to bring chinse back to ground some real scare of worldwide recession coupled with $110 high oil. to devaluate chinse further bring down worth of 1.2 trln help by chinses make $ sink by whatever means. may be this will last for another 2 to 3 yrs.

 

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