Good series over at Financialsense.com

[kalian]

Part 1
http://www.financialsense.com/fsu/editorials/willie/2004/0112.html

Part 2
http://www.financialsense.com/fsu/editorials/willie/2004/0120.html

Part 3
http://www.financialsense.com/fsu/editorials/willie/2004/0130.html

Some excerpts...
One could accurately conclude that accommodative Federal Reserve monetary policy, in conjunction with loose fiscal actions, is building the next Asian powerhouse, namely China. This is far more than leakage of jobs. Complementing capital bloodletting in the financial market is the pure rupture taking place in the labor market. The mfg capacity utilization rate, stubbornly stuck at 75% for many quarters across US plants, confirms the misdirected reflation benefits and the ongoing labor rupture. The nourishment and erection of China is the great unintended consequence of our nation’s response to the great stock bust in 2000 and the recession in 2001. While building new much more magnificent unstable bubble structures, the Fed has exposed our financial and economic system’s vulnerability not only to job leakage, but to debt suffocation, to capital hemorrhage, and worse. Only Asia has benefited. Before long, however, China will be coerced into either slowing their credit and mfg capacity growth, or diverting capital export for domestic usage by their expanding middle class. I regard that to be the tipping point, certain to challenge our weak and highly fractured economic recovery in the current year. The next battle will be waged in the US Treasury Bond market.

...

In contrast to the spinning credit gears, where modest economic output comes from more voluminous credit extension, the mental side is vapid and equally lacking. Beliefs and expectations abound, based upon faulty economic thought process coalesced over the past decades. Economic policy is now based on assumptions and beliefs having little basis in historical fact, and every basis in accommodation to credit largesse. Little thought is given to the maintained engines of artificial wealth, which displaces real wealth. Many signals have been carefully re-engineered toward deception. The current conditions are being badly misread. Motives can be offered up for the perpetuation of debt. In my opinion, a strong case can be made that we are attempting to deceive both our creditors (who supply it), businesses (who must float it), and spenders (who depend on it). Our entire system is held hostage to debt in order to remain financially alive. Our newest speculative game (real estate) is now regarded as a real wealth generator by no less than our bank system spokesman, Dept of Inflation Secy Greenspasm. The situation seems without question unfixable.

Leaders and citizen voters alike continue to believe that consumption must continue uninterrupted. They believe that the economy actually can revive if only we step up consumer spending. How shallow. We tend to purchase things we do not need, built by people who do not live on American soil, with money we do not have, extended on credit by nations whose workers make the products we buy. This is insane. We believe that capital investment will follow and arrive if only consumer and business demand would increase. Again, no historical precedent. Investment tends to occur when conditions ripen for potential economic expansion. Right now, that expansion for labor and manufacturing resides in Asia, as our nation’s business executives know all too well. They are outsourcing and investing heavily in China and the rest of Asia.

To the last press pundit, to the last analyst wag, to the last unschooled taxpayer, a belief stands unshakable that foreigners will always be there to provide the US Economy its much needed capital. By and large, the foreign source is Asia, which recycles their vast trade surplus to our markets, finding little alternative of sufficient size and magnificent proportion. Where else can they sock away almost $20 billion per month? They have come to the table with fists full of our own printed phony cash so often, that we have come to take its arrival for granted.

Our federal govt depends on Asians for 45% of new debt issuance. Our mortgage agencies Fanny Mae and Freddy Mac heavily depend on Asians to soak up regular debt issuance. Estimates on the opaque mortgage balance sheet and hedge fund books offer that Asians purchase up to 30-35% of GSE debt issuance. With the refinance movement stalled, dependence on external sources has become more magnified. Turnover once supplied some mortgage funding, but not so true any longer with the stalled REFI movement. Our alpha dog leaders have recently bitten the Asian trade partner hands that feed our credit markets, during trans-Pacific bickering over trade protection and job losses. In December we actually risked jet plane orders while holding up shipments of bras and bathrobes !!! Any firm confidence in uninterrupted credit supply from Asia seems badly misplaced at best, and horribly naïve at worst.

...

It is my view that the change in FOMC the January 28th statement of words issued might have been the result of bickering, rhetoric, and outright conflict between the Federal Reserve and the European Central Bank. Greenspasm has given every indication that the Fed will blink first. He has served warning to bond speculators who have enjoyed a downhill ride, a free lunch, in their highly prosperous yield carry trade. It is amazing to watch the effect of the Fed Open Mouth Committee changes, where mere words roil the financial markets. While US rates have not moved, futures contracts in distant months certainly have. The Fed will raise interest rates eventually, when their patience runs out, or when the USDollar Decline becomes disorderly. Disorder is a major concern in Europe. Traders must now find a way to unwind their staggeringly large positions without inflicting damage to themselves or the bond market, let alone the economy. Financial leverage contraptions have a way of removing the limbs of their users when they go into reverse. We are witnessing the end game to the Greenspasm Gambit. Given the debt levels and imbalances, a positive outcome comes with heavy odds against.

...more...

Let's just say that if this doesn't give people nightmares...I don't
know what will.
Everything that this guy writes about should be used by the dems
to pound away at the repukes. We need to bring a MASSIVE change to
this country if we want to survive as a first world nation.
Unfortunately, and IMHO, this required change will NOT occur...and
it won't matter whether its a dem or a repuke in the WH...

[papau]

1. A Good series - but while we are screwed by Bush - the 04 election

can stop this crap.

[kalian]

2. I don't think change just because of an election....

sorry, it doesn't work that way.
The structural damages to the economy has been done and unless
the sheeple are willing to live through extreme austere economic
measures...NOTHING is going to change.
What's more, the whole thing will unravel during the next dem's
watch (if a dem is allowed to win...) and guess what: the repukes will
be pointing fingers again....

[papau]

3. 10 yr or more debt is < 20% of National Debt - any fix will be painful but

we must start.

The debt rollover the above causes means interest rate increases - and budget deficit increases, causing further interest rate increases, are in the future unless the tax cuts are reversed.

There will be no money to do anything "good" if Bush is elected in 04 - but then that was/is the GOP plan, since Reagan.

[54anickel]

4. Thanks for posting Kalian. A good read, and reiterates much of

what gets discussed in the Daily Stock Market Watch thread, along with many other threads. Nicely packaged into a cohert 3 part series of articles. The author articulates many of the concerns and confusion expressed here at DU.
It certainly has helped me to gather and arrange many of my thoughts.

Thank you again for posting.