Mish's Global Economic Trend Analysis

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• Sunday Funnies 2010-11-21 Dual Mandate
• San Diego Mayor Proposes Eliminating City Pensions; Public Union Concessions a New Trend
• China Renews Attack on Bernanke for Asset Bubbles, Imported Inflation, Excessive Printing; US$ About to Lose Reserve Currency Status?

Sunday Funnies 2010-11-21 Dual Mandate Posted: 20 Nov 2010 10:23 PM PST Honey about your dual mandate ... The above is in response to the dual mandate of the Fed to produce price stability and maximum employment. The Fed has failed at both. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

San Diego Mayor Proposes Eliminating City Pensions; Public Union Concessions a New Trend Posted: 20 Nov 2010 03:03 PM PST After citizens of San Diego voted overwhelmingly against raising taxes to cover deficits, the Voice of San Diego reports Mayor Proposes Eliminating City Pensions As time runs down in San Diego Mayor Jerry Sanders' tenure, his proposals to solve the city's financial crisis are becoming more drastic. This summer, he embraced a tax hike. Friday, he proposed 401(k)-style retirement accounts for most new city employees, and in turn, eliminating their pensions. Staring him and everyone else in the face is a $70 million-plus ongoing deficit, one that neither a tax increase or a pension elimination will fix. The tax hike won't work because voters said no. The pension elimination, which also needs voter approval, won't save any money for years and wouldn't go on a ballot until next year at the earliest. Sanders has two more years to solve the financial problem he was elected to fix. Friday, he recommitted to the task. "I won't pass the structural deficit on to the next mayor," Sanders said. Details of how the new 401(k) plan would work are sparse. Sanders said it would exempt police officers and firefighters. He didn't say how much it would save, just millions. While I wholeheartedly endorse the idea of eliminating defined benefit pension plans for public employees, the mayor simply refuses to admit the truth. You cannot balance the budget responsibly unless and until police and fire unions aid in the effort. Politicians Padding Their Own Pensions Please consider Reform to Politicians' Pensions Could Go Further The U-T ran the numbers last week. To fund council members' pensions, $29,700 must be paid into the retirement fund annually. Now, they contribute $2,400 toward that amount and taxpayers pay the rest. With the Prop. D reform, the amount would increase to $6,800. If the cap is eliminated, which the council can do, the council members would be paying nearly $15,000 each year. Politicians own pension contributions rarely reached the radar until Prop. D came along over the summer. Since then, it's become an example of the effectiveness of Councilman Carl DeMaio, the most outspoken Prop. D opponent, in hammering on an issue. He has been discussing the politician pension cap for months, and it has gained traction. No One Speaks for the Taxpayer The biggest problems with public pensions is no one speaks for the taxpayer. The sad state of affairs is that mayors buy votes of the teachers, police, and fire unions to get reelected. Then they create outlandish pension plans for themselves, funded by taxpayers. Voters in San Diego finally had enough. Citizens Rejected Proposition D by a margin of 63-37. San Diego voters gave a stiff rebuke to city leaders Tuesday by roundly rejecting a proposed sales tax increase, setting up a difficult choice for Mayor Jerry Sanders on whether to follow through on his threat of devastating cuts to public safety if Proposition D failed. The ballot measure would have increased the city's sales tax by a half-cent on the dollar for the next five years, but it fell well short of topping the 50 percent threshold for passage. The measure was receiving 37 percent support with nearly two-thirds of the returns in at 12:30 a.m. Amid sweeping anti-tax sentiment that propelled Republicans into office across the nation, local voters also rejected a property tax for San Diego city schools, a utility tax in Chula Vista and a fee for state parks. Public Union Concessions a New Trend Meanwhile please note the start of a trend. City after city is starting to address these issues. They have to. The economy finally forced it. Expect to see major concessions by public unions in big and small cities alike as taxpayers and voters everywhere have had enough. Voters are fed up with a national unemployment rate close to 10%, with 14 million unemployed, with seeing their property taxes go up, even as the value of their homes collapse, topped by public union pension guarantees the average person can only begin to dream about. It is high time mayors of cities big and small stand up for taxpayers and not for unions who contribute to their election campaigns. The inequities must stop, and they will. Mayors who do not understand the economics and the anger of voters will soon be out of office. Although I applaud the mayor's move in the right direction (finally), there is much more to this story that shows how disingenuous mayor Jerry Sanders is. I will do a followup post shortly that will prove it. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

China Renews Attack on Bernanke for Asset Bubbles, Imported Inflation, Excessive Printing; US$ About to Lose Reserve Currency Status? Posted: 20 Nov 2010 09:38 AM PST G-20 is over but the acrimony is not. Bloomberg reports China Assails Monetary Easing, Citing Inflation, Bubble Risks China renewed an attack on quantitative easing, citing the risk of increased prices in emerging economies, a day after the Group of 20 nations said the markets can adopt regulatory steps to cope. China "doesn't support" the monetary easing that causes "imported" inflation in developing countries, Commerce Minister Chen Deming told a forum today in Macau, a Chinese special autonomous region. The capital inflows increase the risk of "asset bubbles," Jin Zhongxia, deputy director general of the international department at the People's Bank of China, said at the same forum. "Major reserve-currency issuing countries excessively print money to get out of their own economic difficulties, posing a policy dilemma for emerging economies," Jin said in Macau today, without naming any countries. "That will impose greater pressure on capital inflows, bigger bubbles in asset markets and inflationary pressure." Capital flows into emerging markets are running at $575 billion a year, 20 percent higher than before the world financial crisis, Goldman Sachs Group Inc. said in September. The U.S. dollar has weakened over the past three months against all 16 major market currencies tracked by Bloomberg. Steps to impose restrictions on capital have increased as emerging-market currencies strengthened, with Brazil's real climbing 21 percent against the dollar in the past 18 months, Chile's peso up 18 percent, Thailand's baht rising 16 percent and South Korea's won appreciating 10 percent. China plans to boost cross-border yuan-denominated trade with other countries 10-fold to 20 percent of total trade, or more than 2.5 trillion yuan, to reduce reliance on a few reserve currencies, Jin said, without specifying a target date. More Regional Yuan Trading Proposed Echoing the sentiment of Jin Zhongxia, Thailand calls on Asia to use yuan in trade. Prime Minister Abhisit Vejjajiva, fearful of the effects of the soaring baht due to massive capital inflows, has proposed the use of the Chinese yuan as a major regional trading currency. "The G20 did not make any progress on the matter and it is difficult to get the United States and China to express their clear stances on the issue. But what we can do is try to cooperate in the region and reduce the impact from currency volatility," Mr Abhisit said before leaving for the Asian Games in China and an Asia-Pacific Economic Cooperation (Apec) leaders' meeting in Yokohama, Japan, this weekend. Only vague "indicative guidelines" were set for measuring imbalances between their multi-speed economies. Leaders called a timeout to let tempers cool and left details to be discussed in the first half of next year. Mr Abhisit echoed a call made by the Asian Development Bank (ADB) to use China's yuan as a major trading currency in the region to reduce the impact of currency volatility, especially linked to the weakening of the US dollar. He said he was the one who proposed the idea to the ADB. Donald Tsang, chief executive of the Hong Kong Special Administrative Region, said the regional private sector should brace for high volatility in the currency and securities markets as economies were increasingly linked. The most pronounced problem to result from capital inflows, stemming from US funds seeking returns in Asia, would be an unsustainable rise in asset prices, Mr Tsang said. "The imbalance is unique. I have never seen it in my working life," he said. An Attack on US$ Hegemony? Is this the start of a the Yuan as a reserve currency? China may want that, but it hard to take China serious unless and until it is willing to float the Yuan. The irony in the proposal by Jin and Abhisit is they are proposing a reserve currency that is still tied to the dollar. Moreover, there are other several constraints, but first consider this UN proposal. UN Proposes to Scrap Dollar as Sole Reserve Currency A UN Report says Scrap dollar as sole reserve currency. A new United Nations report released on Tuesday calls for abandoning the U.S. dollar as the main global reserve currency, saying it has been unable to safeguard value. But several European officials attending a high-level meeting of the U.N. Economic and Social Council countered by saying that the market, not politicians, would determine what currencies countries would keep on hand for reserves. "The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," the U.N. World Economic and Social Survey 2010 said. The report says that developing countries have been hit by the U.S. dollar's loss of value in recent years. "Motivated in part by needs for self-insurance against volatility in commodity markets and capital flows, many developing countries accumulated vast amounts of such (U.S. dollar) reserves during the 2000s," it said. The report supports replacing the dollar with the International Monetary Fund's special drawing rights (SDRs), an international reserve asset that is used as a unit of payment on IMF loans and is made up of a basket of currencies. "A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency," the U.N. report said. Russia and China have also supported the idea. But Paavo Vayrynen, Finland's Foreign Trade and Development Minister, told reporters that he doubted it was possible "to make any political or administrative decisions how to formulate the currency system in the world." The Market Dictates Reserve Currencies Short of reestablishing gold as a mechanism for forcing trade balances to be kept in sync, the whole idea of establishing new reserve currencies by decree or agreement is potty. How can you dictate what currencies a country should hold, or if they hold any at all? Does one size fit all? Look at the acrimony out of G-20. Think there is going to be an agreement on using SDRs? Reserve currencies cannot be set by decree or even by agreement. There are market constraints and mathematical constraints. Function of Math Some maintain that commodities are priced in dollars so dollars must be held. Nonsense. To the extent that countries trade with each other and not the US, there is no need to hold dollars at all. The Yen is freely convertible to dollars so is the Euro. One does not need dollars to buy oil or copper. Currencies are fungible. With a couple mathematical caveats, any country is free to hold whatever it wants. One mathematical constraint is there are not enough New Zealand dollars (or Australian dollars or Canadian dollars, etc) to go around for everyone to expect to buy oil in any of those currencies. However, there are enough New Zealand dollars to go around to support all existing trade with New Zealand. Why Are Countries Piling Up US$? The second mathematical constraint relates to trade imbalances. The US runs a trade deficit as well as a budget deficit partially financed by foreigners. Our dollars go overseas, month after month, year after year. The reserves pile up over time as a function of basic math. To the extent Asian countries trade with China, then sure, a buildup of Yuan reserves is possible. However, given the US trade deficit dwarfs the trade deficit of every other country, it will be tough mathematically to make a dent in the buildup of US dollar reserves relative to other reserves. Sure there will be periods of fluctuations in reserves are there are now, but the trend towards higher reserve levels is essentially mathematically forced by trade imbalances. In addition to trade imbalances, one must also factor in hot money inflows of US$ into China, Brazil, and other places. Those countries hold reserves to accommodate an eventual exodus of hot dollar inflows. That is the third constraint. Note that Bernanke's QE has had such an impact that countries are resorting to capital constraints to stop the inflight of dollars. Mathematically, whoever has the biggest trade deficit and hot money outflows on a sustained basis will see the biggest amount of reserves pile up elsewhere. It's as simple as that. Thus, all this talk about SDRs and using the Yuan or the Yen as major reserve currencies is complete silliness. As it stands now, any reserve currency changes will be dictated by math, not decree. Want to cure global trade imbalances? It's quite easy. Go back to the gold standard and have the political will to balance the budget. Nothing else will work. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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