US Is Now The Source For Carry Trade Wealth

November 26, 2007

Elaine Meinel Supkis

Time again to visit Japan and China and examine closely what is happening to both the carry trade and the future plans of both central banks. Also, we look at England's deteriorating debt condition and financial troubles as we see with the continuing mess of that offshore pirate operation, the sinking ship called Northern Rock. The US dollar has begun to replace the Japanese carry trade. This is an astonishing change in direction of money flows. The effects of this will now be felt far and wide. As I said last summer, the flow of money has changed and it is now flowing in a new channel. The Chinese are trying to figure out how to exploit this while the Japanese frantically work to dredge out the old channel and keep the previous flow going. This is destabilizing world currencies further.

Yen Declines Against High-Yielding Currencies on Carry Trades

The yen declined against all 16 of the world's most-active currencies as global stocks climbed, encouraging investors to increase holdings of higher-yielding assets bought with money borrowed in Japan.
*snip*
``The yen is weak following a rise in stock prices,'' said Tetsu Aikawa, deputy general manager of the capital markets division in Tokyo at Shinsei Bank Ltd., Japan's seventh-largest publicly traded lender by assets. ``The more stocks rise, the more risky positions investors can take.''

I love it when the Japanese lie about things. How did Tetsu keep a straight face while mouthing this total lie? Are the Japanese finally aware that some investors have figured out their stock/currency market duality? When the yen gets stronger, stocks fall. This is because a weak yen translates into huge trade advantages with the US and Europe. The export businesses such as Toyota depend on a weak yen. So if one wants to get rich, just play the Japanese markets with an eye on this business. One must be quick on the feet to do this because the effects are instantaneous. I am not the only person who is aware of this. All I do is analyze what other people are doing and then tie it to other, seemingly unrelated things.

The Japanese dislike this knowledge being out there so they have to occlude it and lying is the cheapest way to do this. Investors don't 'take more risks' when stocks rise due to the yen weakening. The risk here is 0%. The risk comes when one ignores the yen for five minutes, it rises a penny against the dollar and all hell instantly breaks lose in the Nikkei. I have patiently tracked this and detailed this in the past.

This article is also mentioning the Japanese 'carry trade' without naming it. Also, it mixes up cause and effect even in the headlines. The yen doesn't go up or down because of the carry trade. It CAUSES the carry trade to wax or wane! And the yen goes up or down depending on who holds yen in their FOREX reserves and who uses their leverage over these yen to force the yen upwards. I have proven my case that the Japanese government in the form of the LDP works with export companies and the Bank of Japan in a frontal assault on allies and close trade partners to shut down imports and boost exports using two tools: relative value of the yen, making it weak, and interest rates. The two together has been a very powerful force. One of declining value as more and more international traders and central bankers figure out this dirty little trick and either imitate it or work to wreck it.

In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two. The risk is currency fluctuations erase profits between the two rates. Japan's 0.5 percent benchmark borrowing cost is the lowest among major economies and compares with 6.75 percent in Australia, 4.5 percent in Canada and a record 8.25 percent in New Zealand.

``We still expect the yen to be a major carry trade currency into 2008,'' said Steve Rowles, a currency strategist at CFC Seymour Ltd., a Hong Kong-based securities firm. The currency will fall to 117 per dollar in a couple of months, he said.

HAHAHA. They all say this. Six months ago, they were all saying the yen would be 130 to the dollar by November. Instead, it strengthened. None of these forecasters dare mention past forecasts or people would lose faith in their seer abilities. Since I don't make money off of all this, I can cheerfully project forwards and see what reality looks like and not indulge in wishful thinking. There is NO WAY IN HELL the Chinese will allow the yen to drop that much against the dollar. Every time it approaches 100 yen to the dollar, the Japanese bestir themselves and use every tool they have including their massive FOREX reserves, the profits of the exporters and a host of Japanese traders to reverse this and drive down the yen. They shove it towards 120 yen to the dollar but the minute it crosses the 110 yard line, the Chinese bag them and shove it up in value again. This resembles a series of scrimmages near the goal posts in a close football game.

The reversals also depend on who has the 'ball'. That being, world trade profits and political power. The Japanese have had the ball for many years now. But they have fumbled it recently and European and a few Americans, very, very few, have begun to point out the noxious qualities of this Japanese carry trade/weak yen business and are beginning to join the Chinese in pushing up the yen.

A basket of currencies including the British pound, Brazilian real and Hungarian forint financed with dollars returned 17 percent this year, compared with 9 percent when funded in yen and 7 percent in Swiss francs, according to data compiled by Bloomberg. Falling U.S. interest rates and increasing volatility in the yen and franc are making the trade more appealing.

Volatility implied by dollar-yen currency options was 14.4 percent, up from 6.3 percent at the start of the year. Traders quote implied volatility, a measure of expected currency moves, as part of pricing options.

Instability is wealth. This is because the current currency system is based on constantly shifting sands of relative value based on government manipulations coupled with trade goals and clever diplomacy. The more things churn, the more money is made. This reminds me of yet another ancient Norse tale. The Norse believed that wealth was created by the daughters of the Frost Giants grinding gold from a magic mill they kept in a cave. Sounds familiar? Wealth is always located in a dark place that has death attached to it somehow.

These Frost Giant lasses were kidnapped by a hero who took them and their mill on a ship and as he sailed away from the Caves of Death, he said, 'Grind me some gold!' And the maidens complied. As his ship filled with gold, he said, 'Grind me more gold!' And the three maidens began to sing a song to their darker sisters, the Norns, the weavers of fate and death.

'Give me more gold!' cried the pirate. The grinding continued but the ice maidens began to change both their song and their state of being. They became Death Goddesses with all the snakes in the hair and necklaces of skulls we find in all Death Goddesses. And they sang of salt and tears and losses and the mill ground out salt which overflowed the ship and sank it and everyone drowned except for the Goddesses who went back to their cave.

To this day, the mill grinds salt deep in the vortex of the ocean's currents and this is why the sea is salty.

I like this story for it illustrates many vital magical parts of the mystery and riddle of wealth and wealth's limitations. The Japanese discovered a way to make a mill grind gold. Their gold was NOT in forex trading or playing currency games. It is exporting value-added goods. Period. But while they created this system that enables one-way trade without trade partners wising up and stopping this, they accidentally created a Gold Mill that creates constant chaos whereby traders of money can make endless money exploiting the Japanese need to keep the yen weak even as they are the world's #2 industrial power as well as #1 in trade profits and #2 in trade in general.

The US, without warning the US populace or outsiders who trade, has decided to imitate Japan in this fashion which is why Goldman Sachs is perfectly fine with a declining dollar. Unfortunately, unlike the yen, the dollar is the world's basis for judging all relative values of all other currencies so when the dollar nose dives imitating the kamikaze Japanese methods, the entire global financial system breaks apart and there is tremendous chaos as everyone tries frantically to realign their own currencies to the dollar. This means money traders have a wonderful time betting on the violent shifts taking place. No longer content to make money a fraction of a penny at a time, they are feasting on violent shifts like two weeks ago when the Canadian loonie shot up suddenly by 5¢ and then fell back down. This is an insane shift and a danger sign that the declining dollar is mega-trouble. For this is not enabling trade but wrecking world trade. As the Europeans are slowly wakening up to this danger, the days of 'hands off' monetary policies are ending and banks are now frantically trying to move things away from this instability.

Only they cannot unless the US stabilizes. And the plan is for a weak dollar no matter what. Which is why the Japanese are desperate to make the yen hyper-weak. Remember, they are not content to merely be weaker than the yuan and euro, they must be weak against the DOLLAR which is the market they make the greatest profits. This is in danger and thus, we have global currency instability as the world's #1 and #2 economies struggle to see who can be weaker, the faster.

This is why a possible depression is the greater danger than hyper-inflation.

Dollar Displaces Yen, Franc as Carry Trade Favorite

Using the dollar to pay for purchases of currencies with higher yields is proving to be the most profitable trade in the foreign-exchange market.
*snip*
``With the dollar giving the appearance of being in free fall, it increases the attractiveness of using the currency to fund investments,'' said Avinash Persaud, chairman of London- based Intelligence Capital Ltd., which advises hedge funds that manage more than $89 billion. ``That process will only add more fuel to the decline.''

The last time the U.S. currency was used for so-called carry trades was in 2004, when the Federal Reserve's target rate for overnight loans between banks was 1 percent, said Niels From, a strategist at Dresdner Kleinwort in Frankfurt. Since then, it has weakened 18 percent on a trade-weighted basis, according to a Fed index. The International Monetary Fund says the dollar made up 64.8 percent of central banks' currency reserves in the second quarter, down from 71 percent in 1999.

Investors are borrowing dollars and using the money to buy assets in countries with higher interest rates even though U.S. borrowing costs are 4 percentage points more than the Bank of Japan's and 1.75 percentage points above the Swiss National Bank benchmark. In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two.

The carry trade is a peculiar beast. Even though the spread between the dollar and yen is still pretty huge, the DYNAMICS of the dollar and its movement downwards vis a vis the yen fuels this new direction for the carry trade. Once upon a time, the IMF used to have a handle on interest rates and currency values but this has collapsed once both China and Japan built up gigantic forex reserves. This was a total revolution in the art of handling money that was first ignored then, belittled by both the IMF and the Federal Reserve. Now that time has passed, my evaluation that these giant forex holdings have altered the way all banking and national systems operate, is correct.

Time for a victory lap and a drink of hot chocolate. Hooray.

There are many scary stories running around the net about future financial collapse. We certainly can do this but we have to be alert to what is really going on so we can make a course correction and also so we can exploit all this chaos. Yes, there are readers here who are interested in exploiting all this and knowledge is power. So, time for me to make yet another prediction: the banking mess we are witnessing will be temporarily papered over by the G7 nations who are desperate to keep the present status quo. The oil pumping nations will exploit this desire to wring further concessions and cement their power over the inner workings of the G7 nations.

Asia's currency battle will quiet down once Japan and China finally decide to have a truce. This truce will involve the Bank of Japan quietly making a deal about holding yuan and the Chinese go back to building up their Asian alliance of currency values with the Japanese sort of sliding in through the side door. ASEAN meetings are important here. The Chinese and Japanese have no desire to see the present economic complex collapse so they will eventually come to terms with each other since the present competition is endangering the Golden Goose, aka, the USA. Both do NOT want to slay the goose.

The goose is going crazy and has to be placated. We shall see if this happens, It is all up to the Asians to decide how to do this delicate trick. Time to visit the Nikkei!

MISCALCULATION (1): Banks' Profits Suffer Heavily From U.S. Subprime Mess

TOKYO (Nikkei)--September midterm results announced by leading banks are showing profits substantially reduced with the impact of the subprime mortgage issue in the U.S., plus losses related to non-bank institutions. Their share prices have been hovering low and show no sign of recovery, with the midterm results only serving to lower investor confidence further.
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INSIDE VIEW: Bull Run In Commodities Markets Will Be Long-lived

TOKYO (Nikkei)--Commodities markets have been attracting a flow of steady capital from both domestic and overseas investors looking for high returns in the midst of financial market turmoil, and the bull run is expected to continue for quite some time.
**********************************************
China To Invest Forex Reserves In Japan Stocks

SHANGHAI (Nikkei)--A company set up by the Chinese government in late September to manage part of its roughly 1.4 trillion dollars in foreign exchange reserves is expected to invest some of its assets in Japanese stocks, company sources said.
**********************************************

I wanted a clue as to how this would work out and lo and behold, here it is, in the Japanese news stream! China is going to move into the Japanese markets in a big way. Now, Japan can have one of two reactions: take the Chinese money and accept Chinese influence or put up the legendary Japanese barriers to trade and drive out the Chinese. This battle has to be watched most closely. I am betting the Japanese secretly want to drive the Chinese out but are grinding their teeth and letting them in, temporarily. Or the yen will shoot up in value. So they have to rearrange things to neutralize the Chinese and you can bet, they are bending their minds to this riddle right now.

Also, the Japanese bankers who are life-long, astute liars, lied about their exposure to the dreaded CDO markets. I wrote some time ago, the Chinese had little exposure, the Japanese had a fair amount but the European and UK banks were gravely exposed. Also, the bull run in commodities: the Japanese expect the Chinese to continue buying raw materials. Period. Many online writers in the West are thinking this is the end of times. But Asia continues to believe they can move this mess forwards and since they are the wellspring and the agent of much of the world's dynamic industrialized action, they probably will keep it rolling some more. The US may wish to improve things by weakening the dollar but this dynamic is doomed as far as Asia is concerned.

The stresses of this collapse of the dollar which is quite deliberate [note how Paulson and Bernanke lie about this obvious policy of weakening the dollar] is causing chaos in all our other allies and trade partners in the West. But the effects in Asia are very muted. The effect of either the yuan or yen rising in value are very strong which is why both Japan and China wrestle with each other over this very issue. The compromise I expect both will end up with will involve both strengthening the dollar again like they did for 7 years previous to this year.

Average Briton is now £33,000 in debt

The average adult now owes £33,000 through mortgages, credit cards and personal loans compared with £17,000 in 2000, the international accountancy firm PricewaterhouseCoopers claims.
*snip*
Further pressure will be applied next year when more than a million people see their discounted fixed-rate mortgage deals end, the report predicts. They face an average rise of £140 on their monthly repayments.

The report delivers a bleak warning about the level of consumer borrowing in Britain, which now stands at more than £1.3 trillion.

This is the ultimate problem for Asian exporters: the West running out of any ability to pay for more goods. The transfer of wealth and power we are witnessing is based on us taking on ever-more debts. Our own banking systems ought to be set to accumulating savings, not increasing debts. In Asia, savings are being hammered by super-low interest rates which is forcing all of Asia to go into speculative ventures which benefits both exporters and traders there. The more the people are forced into this, the more power the Asian global traders have.

In the US, rates for banks are super-low too and savings have vanished. But the super-low interest rates has been turned into CONSUMER AND GOVERNMENT DEBTS. In other words, instead of INVESTING, we all went on a buying spree! And this is why we will be poorer and Asia richer in the future. The consumerist choices of the West are based on presumptions of empire. Europe and the US have been so accustomed to suck in world resources, we have forgotten that our imperial pretensions are causing imperial debts which always leads to trouble in the future. Fixing this is a mental process requiring lots of education and sensibility and a recognition that facing reality is far better than living in a fantasy.

Meanwhile, there are warnings that each British household could face paying £250 a year more in tax because of over borrowing by the Treasury, according to calculations by the accountancy firm Grant Thornton.

Roger Bootle, the managing director of Capital Economics and economic adviser to Deloitte, said: "The part of the economy on which so much else will turn is consumer spending. So far it has held up remarkably well but the omens are not encouraging. The pressure of debt on disposable incomes is intense and the savings ratio is very low. At the moment, real incomes are still rising and the labour market is strong but the position is precarious.

On top of being very deep in debt, the average Brit will now have to pay a huge overhead of interest on government loans. The US is in the same boat only we are not as badly swamped as our allies in the Isles. This last 7 years, we have seen a global deformation of borrowing and money creation. The West, the G7 alliance has grossly inflated its M3 funds while increasing debts to an astonishing degree. This was due to the West imagining they could undo a recession through an easy manipulation of interest rates below the rate of inflation. Voila, we are all rich! Only this merely increased debts. But NOT IN JAPAN.

We must always keep our eyes on that particular ball here. Britain went on a crazy binge for a dying world power that is seeing its industrial base, the biggest on earth 100 years ago, vanish. In a mere 7 years, they doubled their per capita debt load. Since a huge portion of the population is rather poor and has little debt capacity, I would suggest most of this debt is actually on less than 60% of the population. So the per capita is more like £48,000 in debt. The marriage rate in England is in decline, always a bad economic sign. In Japan, it is declining due to the enforcement of the present depression in the home markets. Housing has been in a tailspin for a while there. The difference in England is, the birth rate isn't being cut by 50% like in Japan [compared to Japan just 45 years ago, that is]. Single mothers are about to overtake married mothers in the statistics there. This isn't good news for England which is seeing a fall in education standards due to the lack of family stability.

In sum, the recent feeling of wealth due to rising home values has proven to be a Trojan horse and not beneficial.

HSBC Will Take on $45 Billion of Assets From Two SIVs

HSBC Holdings Plc, Europe's largest bank, will add $45 billion of assets to its balance sheet by consolidating two structured investment vehicles it manages.

Investors in the SIVs will be able to exchange their holdings for debt issued by a new company, backed by loans from HSBC, the London-based bank said in a statement. HSBC doesn't expect any ``material impact'' on its earnings or capital strength, according to the statement.

This is pure sleigh of hand. The magicians came up with an old trick to reinflate the value of tulip bulbs. They remake everything into a NEW paper value system. And dump all the old paper into it and say, 'Look, the Emperor has new NEW clothes! At discount!' Everyone hopes to save their skins this way but this will fail when someone notices that nothing has basically changed.

Northern Rock bill costing taxpayer 'twice national primary school budget'

The Northern Rock crisis is costing the taxpayer the equivalent of twice the country's primary school budget, it was claimed yesterday. Acting Liberal Democrat leader Vince Cable said the Government's initial £25billion bail-out was growing by £1billion a week.

He accused the Treasury of leaving itself open to "blackmail" by hedge fund shareholders who were threatening to block any sale of Northern Rock unless yet more public money was poured into it.

As the banking failures unravel the economic system in Britain, the fight over who pays for all this widens. The hedge funds that moved offshore are being bailed out by the onshore government which cannot collect taxes on these stupid funds. The British system has been based on exploiting their Queen's pirate coves and now that various pirate ships are sinking, they want the Royal Navy to come and polish their doorknobs [HMS Pinafore, that is]. Like all the systems in the West, the Brits pretend to be all about risk taking and paying the price but no one wants to pay anything, everyone has to take and take some more. The discipline of forcing investors to eat dirt is important to any system.

After all, the bankers themselves claim that if they don't punish people who fall even slightly behind on payments, everyone will stop paying on time. But when it comes to the banks and the big investors taking the pain so they learn to not stick their ass[et]s into the bonfires, suddenly they think that it is wiser to NOT punish anyone! This is why I hope these rescues are rescinded. Indeed, we often told Asians, if they protect banks who make reckless loans, why, the banking system will fail! Yet here we are, after telling this to the Japanese, but doing the exact opposite here.

Darling rocked again, as MPs attack PBR

The MPs said that the Treasury's optimism was "not adequately explained" and that they remained concerned that "the credit crunch will have a greater macroeconomic effect than expected".

The 'credit crunch' is actually 'too many debts.' Lowering interest rates will encourage more debts so this option ceases unless they do what Japan has done and simply not given consumers loans even as businesses and others get cheap credit whenever they want...so long as it is concentrated in export market areas of the economy.

French President Sarkozy kicks off China visit, stressing close ties

He said that he appreciated China's constructive role in international affairs, especially its positive contribution to the Korean Peninsula nuclear issue and the Darfur issue.

The 52-year-old Sarkozy encouraged more French companies to invest in China and explore win-win cooperation with their Chinese counterparts.

Back to world trade: note that Sarkozy has wasted little time and is running off to China to wheel and deal and the Chinese will encourage this. They don't give a damn who rules what country so long as they can get their claws on whoever it is. I will note here that China has heeded all the hot propaganda about Darfur and have happily sent over their MILITARY FORCES to fix things there! HAHAHA. Another big backfire on the part of the US and Europe. They wanted to rule Africa and exploit it but inviting the Chinese into there isn't exactly making this easier. Just like handing over the North Korean negotiations to the Dragon was utterly stupid. Our loss of status and face was tremendous. Since then, everyone turns to China for international solutions and have begun to discount US power politics.

The Chinese dragon has happily spread its feathers over this visit. Flattering them for their diplomacy pleases them greatly. In return, they decided to buy more Airbuses. So Sarkozy will return to France in triumph. And this was to be expected. The Chinese view plane purchases as pure diplomacy and gage these contracts on a very finely tuned scale of possible diplomatic advantages and strengths via such sales.

Chinese companies should encourage innovation, protect intellectual property, become more open and keep learning if they hope to become world-class companies, Chinese entrepreneurs said at a forum at the weekend.

"China is enjoying a buoyant growth, which provides an unprecedented platform for Chinese entrepreneurs to make their impact in the international market," said Jin Yanshi, chief economist with Xiangcai Securities Co.

"But we have to be aware of the potential risks in China's economy, including a bubble in the capital market, rising unemployment rate and less impetus for people to start new businesses, which do not make it easy for the growth to be sustainable."

On Nov. 5, shares of PetroChina Co, the nation's largest oil producer, almost tripled on its first day of trading in Shanghai, and it became the world's first company to be valued at 1 trillion U.S. dollars.

"Some people can't believe that a Chinese company can top the list as the world's most expensive enterprise. Some take it as a big joke," said Jin. "But it is true and this (achievement) propels us to think how to create really world-class Chinese companies, and not just merely big Chinese companies."

The Chinese are an ancient culture, a long-lived empire. They are intelligent and proud. There are many good things about China that we should respect. In the West, the media often picks up only the bad news or funny news or sad stuff. For example, the Chinese imitate us by building power-generating dams. Well, duh! But the news is all about the displaced populations. Well, guess what! We did this, too. Only we tend to forget this little fact. We just removed most of the population of the lowlands of New Orleans and simply tossed them aside. So we shouldn't point fingers.

As for pollution: our cleaner environment is due 100% to us exporting the dirtier industries to China. China is now moving to pass these elsewhere. They are very interested in cleaning up things just as we are today. The Chinese invented the concept of landscape painting in the first place. In other parts of the world, painters included backgrounds but the Chinese invented the idea of the landscape itself being of major interest with the humans as a tiny part, not dominating it. To this day, the scrolls by the great masters there still are amazing to see. The care of the finest details of trees and hills are lovingly examined. So I expect the Chinese to restore as much of their landscape as they can afford. After all, the environmental movement was started by landscape painters and photographers here in America!

Zhou Xiaochuan: Avoid Misreading History and Objectively Sum Up Lessons and Experiences

Zhou Xiaochuan stressed that reading the history of financial industry development correctly was not easy. There are two categories of history. The first one refers to history with continuous data. Tools such as econometrics and metrological techniques can be employed to test and find out if the analytical approach and conclusion is plausible. Another category is history of events, such as the 1929 depression, financial turbulence in Asia, and etc. Such events do not occur frequently. It might happen once in many years, or twice in several years but each with a unique circumstance. This category of events does not provide continuous data and usually have complex causality. When reading and analyzing such history, people might come up with drastically different interpretations. Thereupon, the issue of correctly understanding financial issue arises.

In regard to the background of the adoption of 1999 Banking Act in the U.S., Zhou Xiaochuan said that the 1999 Banking Act represented a negation of the 1934 Glass-Steagall as the latter was believed to be a "misreading of the lessons of the Great Depression". Milton Friedman, a Nobel Economics Prize laureate, discussed in A Monetary History of the United State,1867-1930 co-authored with Anna J. Schwartz, the background, causes and effect as well as the logics of the Great Depression, and came up with a clear message that Glass-Steagall Act was a misreading of the lessons of Great Depression, and a wrong description for a wrong ailment. Ben Bernanke, the current Chairman of the Federal Reserve, is a follower of this school of thinking.

This speech is quite astonishing. I plow through many US speeches about money and the economy. They all are launched from the exact same platform: our economy is great, it is strong and the guys guiding the Good Ship USS Even Keel are not tilted at a 45º angle and those penguins are not walking aboard from that iceberg we just hit. But the Chinese are openly cautious and clearly worried about the future which is why they are bringing up the matter of the Great Depression and even more interestingly, the Asian Currency Crisis. Like myself, they say know one knows all the causes of these great events. They, like myself, subscribe to the idea that the relative standing of Great Empires has a lot to do with these events. They and I both take professor Kennedy's book, 'The Rise AND Fall of the Great Powers' most seriously.

They also mention the Glass-Steagall Act. The Chinese head banker notes dryly that the last two bosses of the US Federal Reserve subscribe to the notion that Glass-Steagall was a mistake. He implies that this is a mistaken notion about this matter.

Through an analysis of evolution of Japanese industrial policy and causes of financial turmoil in Asia, Zhou Xiaochuan offered three suggestions on how to learn the lessons of historical events in a better way. First of all, there should be more intensive and in-depth academic discussions. Research should not be constrained by judgments and viewpoints of competent authorities; secondly, the theories of different schools should be thoroughly analyzed and pondered; third, an objective manner should be adopted to analyze questions; in this process, best efforts should be made to remove personal bias. With regard to the evolution of Chinese banking industry, Zhou Xiaochuan pointed out that lessons and experiences should be drawn in the review of the evolution of banking industry. In the past, other countries made mistakes in developing banking industry; it is very likely that the Chinese have made mistakes as well. Therefore, we should find out through analysis what problems have occurred and what are the causes. He believes that an objective sum-up of past experience will produce an even clearer approach and better methodology regarding the evolution and future development of Chinese banking industry.

The Contrary Investor has good charts, one of which I have heavily modified.

This chart is, I would guess, what the Chinese are worried about. Note how the banks in the US have resorted to derivative hedges and interest rate contracts in order to keep injecting funds into the system which is why our M3 funds are growing by over 10% a year even as our GNP grows at a far ower 2-4% a year, at best. The differential between the two sources of financing was only $2 billion in 1991 and both funds grew very slowly at first but like all graphs showing a climb to the clouds---ie.--bubble territory---it takes off after the Asian Currency Crisis. The growth of the differential is $23 billion! This is 12X greater over a 15 year period! And most of the growth increase has been concentrated in the last 7 fatal years. This is when the West decided to 'grow' its way out of trade difficulties by taking on the Japanese carry trade.

Overall reliance on this form of hedging and money making has shot up from under $10 billion to over $130 billion. This is 13X greater than in 1991. And it is obviously unsustainable.

I think this is a very important speech that made no news. But I have an idea of what is going on here. The Chinese first based their systems on the US/UK model due to both sending people here to learn our systems---I was part of this learning process---and also absorbing Hong Kong and picking up the financial habits there. But they discovered by 2000, the alternative system set up by the secretive Japanese. They have riddled out much of the secrets of this alternative banking system and are now struggling to discover its weaknesses and hazards. As I am doing here.

This astonishing paragraph signals a new dawn in Chinese banking: they are now bending their minds to devise a Third Way. I would suggest, knowing the Chinese, it will have strong elements of the concept of a Good Ship Even Keel. The desire for balance and harmony is very strong in China. The Japanese art likes a strong point of view with the figure of a plant, animal or human dominating the picture. The Chinese like a distant view of nature and humanity and a long scroll where the eye wanders far and wide, the close and the distant landscape all equally valuable and interesting.

Both systems have a downside. Will the Chinese meld the two? If they do, they will dominate the earth for the next 100 years. Time for us to be humble. Note, they admit to mistakes. If only our guys would do the same!

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Comments

[PFO]

Hello Elaine,

“The discipline of forcing investors to eat dirt is important to any system.”

Reminds me of Vladamir Putin's statement that he would make all the capitalists raping Russia 'run around in circles eating dust.'

In college days in the 70's my two favorite economics professors were:

Dr. Erwin Graue
Fr. Jerome Schwegmann SJ

Two of Dr. Graue's favorite phrases included:

"You are a 'Weisenheimer'."
"The great white fathers in Washington."

His favorite mantra was:

"Money easily acquired is more easily spent, until it has no value at all!"

Fr. Schwegmann regularly reminded us that 'inflation' was not rising prices, but too many dollars chasing too few goods.

Naturally, I agreed with both of these classical economists and have suffered the ridicule of my friends and family to this very day; for trying to warn them about the phony paper US money culture of death.

Now of course family and friends will not even acknowledge my references to your WEB site and others spreading the same warnings.

Guess I'll go back home and pick-up the pieces sometime next Spring.

Kindest regards,
PFO

[PFO]

Hello Elaine,

I think I found the 'Carry Trade Toilet' here in the USA you refer to in today's article:

http://online.barrons.com/article/SB119488478165290127.html?mod=barrons_most_viewed_day

http://www.fhlbanks.com/html/history.html

It seems that the Federal Home Loan Banks have been doing a lot of “banking” in the past few months! The Bears over at Ticker Forum have found it also, so you may consider reading some of their blog.

http://www.tickerforum.org/cgi-ticker/akcs-www?post=17088&page=1

http://www.tickerforum.org/cgi-ticker/akcs-www?singlepost=139727

Kindest regards,
PFO

[OC]

Hi Elaine,

Here is another interesting perspective from this article:

http://www.marketoracle.co.uk/Article2886.html

Hyper Inflation: Crude Oil and Gas The Next Fed Made Bubble To Come In 2008 ……by Eric_Chevrette

Folks are starting to wake up!!

[Elaine Supkis]

Already the price of anything that saves fuel has risen over 20% in the last year. So this means there is great buying desire which means people can charge more. Gas guzzlers, etc, are cheaper and cheaper, so it looks as if there is little inflation. But anyone trying to escape the energy trap is also trapped in an inflationary spiral when they buy things that are appropriate.

But retrofit, they must! Better doors, windows, insulation, heating sytems, gas miser cars, etc. All are selling rapidly and I know this from my own family and friends. I am retrofitting some doors as well as building more sun rooms on my kid's houses, for example.

[blues]

Thanks again Elaine!

Those Japanese I used to work for are something else. Secretive. Deceptive. Authoritarian. But all that is clearly the consequence of what could be called a "cultural accident." If I was raised in Japan, I would likely share those traits. It was irksome that my bosses would know I knew they told me lies, but forbade me to express even passive dissent. They are quite big on royalism. It's a power thing. It's almost fun to hear them pretend to lie! But many Japanese are great people!

You, Elaine, are an expert on "esoteric economics." And that's a crucial topic, for sure. I myself am more interested in "primitive economics" — energy sources, production systems, transportation, etc. I am convinced that that needs to be examined just as closely.

By the way, a huge (and masterfully written) story about esoteric economy has hit the front page over at the great blog My Left Wing:

Excerpt:

The Road Through Hell Leads to Redemption: Part One
by: gottlieb
Mon Nov 26, 2007

The United States has been on a slippery slope since shortly after its founding. What many of the founders warned against - foreign entanglements and banking interests' control of the money supply - came to pass in the 19th and early 20th Century. Private banking interests - the ability to create money (the super-commodity) out of nothing and then charge interest on its lending - own the government's (the people's) debt. The United States has entered into dark alliances all over the world (how many bases? 700+ in a hundred-plus 'sovereign' nations) - not in the name of life, liberty and happiness, not in the name of the people; the common wealth - but in the name of Capitalism. The rights of capital over human beings. The right of capital over labor. Property over people.

This is their big foray into economics. I did a post on that thread, with links back to here. And I also did a little side research. Here is an absolute gem!

Mike Whitney at CounterPunch has a fascinating article up. The article is called "Cheney's betting on bad news" and provides an account of where Cheney has socked away more than $25 million. While the figures may be estimates, the investments are not. According to Tom Blackburn of the Palm Beach Post, Cheney has invested heavily in "a fund that specializes in short-term municipal bonds, a tax-exempt money market fund and an inflation protected securities fund. The first two hold up if interest rates rise with inflation. The third is protected against inflation."

The Veep's Curious Investment Portfolio
Is Cheney Betting On Economic Collapse?
By MIKE WHITNEY
July 5, 2006

Cheney has dumped another (estimated) $10 to $25 million in a European bond fund which tells us that he is counting on a steadily weakening dollar. So, while working class Americans are loosing ground to inflation and rising energy costs, Darth Cheney will be enhancing his wealth in "Old Europe". As Blackburn sagely notes, "Not all bad news' is bad for everybody."

[Elaine Supkis]

Mike is a great writer. I love him a lot. I wish he were rewarded with a position at a top publication that pays for such research and work. This is the stupidest part of our present media system: great writers are read all over the earth but totally ignored by our entire media apparatus.

Mike Whitney is a stellar example of this discrimination against elegant, clear and fact-driven writing that is PUNISHED. I pray he sees better days and our media changes for the better.

I wish I had a million bucks so I could hire writers of his caliber.

[Teddy]

Gary Dorsch, who writes an economic newsletter that Elaine has mentioned, wrote a commentary a couple of months back about China's voracious appetite for stuff. Not only do they have great demand for oil, iron, copper, and other commodities, but they became a net importer of food in 2004. China's demand for milk has been increasing 25% per year and have doubled their demand for dairy products since 2000. They are consuming 30% of the world's milk production and represent 20% of world's population.

[Teddy]

China's inflation rate has gone up to 6.5% officially, the highest in 11 years, but some suspect that it is a lot higher. Meat prices are up 49% in the last year, egg prices 27%, chicken 20%, grains 6.4%, and there is a shortage of pork. China's demand for Brazilian soybeans has doubled since 2000. Their inflation in food prices this year averaged 18.2%. Even in India, where most are vegetarians, chicken consumption has doubled since 2000 according to Dorsch.

[Elaine Supkis]

Yes, they are eating. We are too but we never noticed our huge slice of the pie until now.

[Teddy]

Elaine, you have been complaining about rising food prices for the longest time. Ditto for oil and everything else. The money supply worldwide has been going up in double digits including that in China.

[Elaine Supkis]

Part of this is production costs are going up due to fuel hikes. I buy hay for Sparky, the last of my big mammals. I used to have an ox team who were on TV, for example. And I had a flock of sheep.

Now we have only the horse. And hay has gone from $1.25 a bale in 1992 to $3.50 a bale today. Grain for the animals has doubled, too. Everything goes up and up and up and I know when I do tractor work, I stopped doing hauling my tractor to work sites, this cost $50 in fuel these days, one trip of just 30 miles and then a day's work! People blanche when I tell them what it costs. So I stopped doing this.

[Teddy]

Elaine, so what's going to happen? Are the Chinese going to "industrialize" the other 1 billion of their people, India likewise, and sell the world their value added technology products and stress the planet even further by only buying the world's finite raw materials and food? 15 years ago, the US was suppose to lead the world with the technology revolution and its jobs, but Clinton, Bush, and the financiers changed all this. China (Airbus purchase?) and India better start buying our value added products and reverse the imbalances or World War III could happen. I can't believe that the financial industry sold out this country for a mere 300 million using their lobbyists and that's all it took for Congress and the politicians to go along with it. The factory workers in China are really not participating in their industrialization. Debt slaves are being created around the world which creates class warfare globally.

[Elaine Supkis]

HAHAHA. Our politicians are cheap, aren't they? The Japanese bought them long ago, the Chinese have followed suit. Everyone is buying them except for the American voters who are stuck with some pretty awful choices.

But this is our own fault. We want Santa Claus for President.