Baseball91's Weblog

February 1, 2009

The View from Abroad


“Any system produces winners and losers. If the gap between them gets too great, the losers will organize themselves politically and seek to recast the existing system — within nations and between them.” — Henry Kissinger, in The Economist   


Davos.  The spin from Davos this week was that the current system of capitalism was an American system.  Wen Jiabao lashed out at the ‘blind pursuit of profit’ in some countries in what he called the ‘American financial crisis.’   Stocks and bonds.  Wall Street.  The view from China was that stocks and bonds were an American system.  When it collapsed, it was the fault of one nation.  ‘There was no effective management of the astronomical salaries of those greedy senior executives.”  Wen Jiabao said that the quality of financial assets must be assured.  One of the most profound lessons to be learnt from the ‘American financial crisis’ was the relaxation of the supervision or ‘even no management at all’ of the financial industry.”   


If this all collapsed, Americans were apt to be viewed as scapegoats by Russians and the Chinese.  Putin also lashed out at American capitalism.  These were words that could lead to enmity in matters of defense one day. 


From Paul Farrell (MarketWatch) – “Yes, there’s a test. We call it the “Black Swan Test.” It can predict your chances of making money on the next big meltdown, which will be far more damaging than the combined impact of the 2000 dot-com crash and the current subprime/banking meltdown that so far has cost American investors over $10 trillion. 


 “The Black Swan Test will help you predict your chances of making money in what many are now reluctantly saying may turn into the Great Depression 2. Nassim Taleb, an options trader, mathematics professor and author of Fooled by Randomness and The Black Swan,”says “Black Swans” are rare events with three defining characteristics:  The event is highly improbable and unpredictable.  It will have “massive consequences,” and  afterwards, experts invent reasons why it was predictable, not random.   Taleb also implies a fourth characteristic. There are “two kinds of these rare events: the narrated Black Swans that are present in current discourse and you are likely to hear about on television, and those that nobody talks about … that you feel ashamed discussing in public because they do not seem plausible.”  


Yulia Latynina wrote a piece spotlighting the political consequences of the finanacial meltdown.  “Prime Minister Vladimir Putin made it clear that he would never forgive Ukrainian President Viktor Yushchenko for his role in sending arms to Tbilisi to help Georgian President Mikheil Saakashvili fight in the August war — although the conflict between the two goes back much further, to 2004, when Yushchenko beat out Moscow’s preferred candidate in the presidential election. After this, many wondered if Russia would really start a war against Ukraine.” 


FROM THE MOSCOW TIMES, dateline KIEV — RosUkrEnergo, the intermediary company that has supplied Russian gas to Ukraine, is still owed about $650 million by Ukraine’s state energy company, its chairman said in comments published Tuesday.  Dmytro Firtash also told the Kommersant Ukraina daily that RosUkrEnergo was unconcerned about the provisions of a Russia-Ukraine gas deal eliminating the need for intermediaries in the gas trade.  “RosUkrEnergo is quite a large company, and for us Ukrainian business was never profitable. Therefore, if we no longer have the obligation to supply Ukraine, and this will only make me happy.”  Firtash said his company, half-owned by Gazprom, held options to buy part of Ukraine’s gas distribution companies.


FROM THE MOSCOW TIMES:  Oleksandr Shlapak, first deputy chief of staff at Ukraine’s presidential office, said Tuesday that the government’s gas agreement with Russia would be more damaging than a deal proposed by exporter Gazprom at the end of last year.  The agreed base price of $450 per 1,000 cubic meters of gas is “absolutely wrong,” Shlapak said. That compares with a Gazprom offer of $250 at the end of 2008. Naftogaz Ukrainy is now forced to hold talks with the government on doubling gas rates for consumers, he said. 


FROM THE MOSCOW TIMES, Concerning the ongoing devaluation policy in Russia, the new government forecast implies that the ruble should average 41.4 to the basket, made of 0.55 dollars and 0.45 Euros. That is based on the average price of oil at $41 per barrel.  That is assuming more devaluation seen by some analysts as harmful for the economy.” 


From John Mauldin:  Concerning the ongoing indication of deflation causing a massive destruction of wealth, thereby curtailing jobs, income and spending, Irving Fisher, the most brilliant of all U.S. economists  according to Milton Friedman, has noted that when the economy enters a period of “debt and price disturbances”, those forces will eventually engulf the economy.  The theory of excessive debt and its pernicious and unrelenting deflationary impulse to the economy has been best chronicled by notable economists such as Joseph A. Schumpeter (1883-1950), Hyman Minsky (1919-1996), and Charles P. Kindleberger (author of Manias, Panics, and Crashes). 


MARKETWATCH by Deborah Levine (January 15, 2009)  “While much of December consumer price drop can be chalked up to plunging energy prices at year-end, deflation may not end there. The $530 billion market for Treasury Inflation Protected Securities shows prices are expected to continue dropping for several years as a shrinking economy curtails demand.


“The market is forecasting a deflation scenario for years,” said Tim Wilhide, co-manager of the $831-million Hartford Inflation Plus Fund. “Nothing on the horizon says right now that the economy is turning around.”   


From John MauldinHoisington Investment Management Company has reported, “Monetary policy works by creating the environment for a renewed borrowing and lending cycle. This cycle would require that the debt to GDP ratio, which is already at a record level, grow even higher. Would such an outcome really be that desirable when the controlling problem of the U.S. economy is too much improperly financed debt? If the Fed were able to engender an increase in the debt to GDP ratio, this might merely serve to postpone the reckoning of the current debt levels while laying the foundation for an even more vicious unwinding down the road.” 


Hoisington Investment Management Company:  “Milton Friedman, noted in his 1963 book, Monetary History of the United States (coauthored with Anna Swartz), that the money stock decreased by a massive 31% in the Great Depression. The turnover of that money, called velocity, fell 21%. Nominal GDP equals money multiplied by velocity. Consequently, from 1929 to 1933 the breakdown of both measures resulted in a contraction in nominal GDP of approximately 50%. However, Friedman postulated that if the Fed had not let money shrink, velocity would have been steady and the Great Depression would have been averted, i.e., nominal GDP would not have collapsed. Our current Fed Chairman, Ben Bernanke, is an expert on the Great Depression, and he has, in fact, adopted Friedman’s strategy to greatly expand the money supply.” 


From Paul Farrell (MarketWatch) “Either way, whether we talk too much about a Black Swan coming or not at all, the evidence indicates that the vast majority of investors end up doing nothing in advance to protect themselves against the “massive consequences” when a Black Swan finally triggers a meltdown. And that includes ‘investors’ like our Treasury secretary and Fed chairman, who failed the test. “


“Don’t do what so many of us do, which is hold our breath and hope [the problem] goes away.”                             –Gary Neuman  


In an economy with a gross national product of $14 trillion a year, the loss of $10 trillion is beyond comprehension.  And the aftershocks can be felt in nations and between them.


“We give you a Republic.  Now see if you can keep it.”   – Ben Franklin      



  1. Comment by baseball91 — March 6, 2012 @ 11:16 PM | Reply

  2. Comment by baseball91 — February 6, 2018 @ 12:59 PM | Reply

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