DB Briefs: Danger of a deteriorating social mood / China’s shifting economic sands / Is bank recapitalization the answer?
from The Daily Bell
Posted August 30, 2011
Deteriorating social mood is like a very slow-building, very slow-moving hurricane: The longer it goes on, the stronger it gets. And while some policymakers may be praying like St. Augustine for chastity, and others for a book of dry matches, I’d be moving to higher ground to stand on. The path I am most worried about is not the long-term sustainable inflationary economic one, but the much nearer-term deflationary storm path that comes with deteriorating social mood. For the northeast, Irene may have now passed. But for all of America, there is another, much bigger storm that bears watching closely. – Minyanville.com
Dominant Social Theme: Everything is OK and don’t you worry. The elites know how to handle the economy, and you will retire rich, even if you don’t think so now.
Free-Market Analysis: The writer of this article, Peter Atwater, has hit upon a kind of anti-meme. He believes that “Everything we [in the West] need to do for long-term economic, if not societal, success and stability comes with very severe short-term consequences.” And thus it has not been done. Fed Chairman Ben Bernanke‘s monetary stimuli are not the answer, he argues. More radical solutions are required. What is necessary is a severe reinforcement of economic “chastity.” Banks must be strengthened; nations must cease to spend; citizens must accept austerity.
Of course, this is a power elite theme of itself: that the larger world (and Western) economy is an irresponsible one and that the West’s leadership has proven inadequate to the task. Here at the DB, we disagree. The issue is not austerity or cost-cutting. Responsible leadership in our view is that which demands an end to the elite’s ruinous central banking economy and a return to some sort of competitive money, which would inevitably feature silver and gold.
Somehow, despite Atwater’s concerned gloom, we don’t sense he’s ready for the really radical reconfigurations necessary to build healthy economies. He apparently feels that reshuffling the proverbial deck chairs is a revolutionary act.
China’s shifting economic sands
Is China’s economic miracle built on sand or cement? It won’t exactly make world headlines, but in the Chinese port city of Dalian there was another accident today in the city’s sprawling petrochemicals development zone. This time a fuel tank caught fire in an oil refinery belonging to state major PetroChina. This is the same city, you’ll remember, that was hit by serious protests a fortnight back after a paraxylene chemical plant was nearly breached by a storm surge caused by a passing typhoon. In that case, the local government caved in and agreed to shut down the plant. What’s amazing – and disconcerting for many living in Dalian – is that this is the FOURTH major safety alert in the petrochemicals complex in the last 12 months or so. – UK Telegraph
Dominant Social Theme: Don’t worry about China. This is one powerful and far-sighted country.
Free-Market Analysis: This article in the Telegraph about China is an interesting one because unlike many mainstream articles it dares to ask the question whether the “Chinese Miracle” is nothing but hype and the proverbial madness of crowds.
Every night when he goes home to his Beijing apartment, the author writes, he catalogues the way that the apartment is “quietly crumbling.” Look carefully, he writes, “and you’ll see the flagstones in the public areas are subsiding drunkenly, the access road to the rear is shot to pieces, the bathroom fittings are corroding and the façades are starting to peel. With an apartment that hardly matters, but when it comes to railways, bridges, petrochemical complexes, 40,000 dams (as my colleague Malcolm Moore reported this week) and even nuclear power stations, we’ll have to pray higher standards have been enforced.”
Actually, the article’s feedback comments are even more alarming, speculating that the same sort of sloppy construction may doom modern Chinese dams to catastrophic failure within the next ten years. As for domestic harmony, we find the article has generated the following feedback from Scott Jensen: “In 2005, China stopped publicly reporting how many riots occur each year in its country because the rate of increase was rapidly increasing year after year. Some now speculate there are at least 120,000 riots in China a year. That’s over 10,000 a month.”
We’ve been writing about the demise of the Chinese Miracle for several years now. And articles like this one only reinforce our conclusions. China’s old communist leaders simply don’t know what to do. They’ve thrust China into the modern era, but in a manipulative and controlled way (see Sino-Forest Corp.) that is merely storing up problems for the future. Eventually, the dam is likely going to break – metaphorically and in reality. The catastrophic results may shake the world.
Is bank recapitalization the answer?
European banks set cash test by IMF chief … European banks face ordeal by fire this week after the International Monetary Fund called for “urgent” action to shore up their defences, if necessary with state money and under legal compulsion. Recovery is in danger if we don’t shore up defences, says Christine Lagarde – UK Telegraph
Dominant Social Theme: Strengthen the banks to strengthen the EU.
Free-Market Analysis: One of the problems with gaining Christine Lagarde as the IMF’s new chief, is that she seems to believe it is incumbent on her to be vocal about the Western economic system. Thus, she set off what the Telegraph calls “tremors” at a recent financial conference by warning that the global economic system was on “thin ice.”
“We are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed, so we must act now,” she said. “Banks need urgent recapitalisation. If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalisation,” she said.
Lagarde is a lawyer by training, so perhaps we should give her the benefit of the doubt. But such warnings are merely part and parcel of a larger elite charade in our view (and Lagarde now works directly for the elite). The “reserves” a bank holds in the modern era are nothing but paper certificates. It is difficult to see how holding more or fewer of them contributes to a bank’s solvency.
If she were to demand that banks hold gold or silver reserves, we would be more impressed. But that would be too sensible. Instead, she will no doubt continue to offer this sort of nonsensical rhetoric. In the age of central banking, a bank’s solvency is far more dependent on the largesse of central banks.
If Lagarde were truly sincere about bank recapitalization, she would examine the linkages between central bankers and their commercial banking brethren. Those with the strongest relationships would been seen as having the healthiest banking prospects. No doubt, this is an overly cynical recipe. But it is a realistic one.