Business – Economics – News

The Huffington Post reported on five House Democrats that are backing in opposition to the Obama Administration the bringing back the Depression era Glass-Steagall Act.  If you are unfamiliar with this act here is a basic explanation.  After the Great Depression, as part of the banking reforms put in place, we made it so our banks would have to chose between being a commercial deposit taking institution or a investment bank that underwrote securities and did trading on its own books and with its own capital.

I have heard countless experts and official explain how this is not possible or feasible as a plan.  I wonder how we got along for 59 years with this in place?  The reason it was such an important piece of legislation is because it made the core of our banking system (commercial banks with deposits) the most risk adverse form of financial company so that even if our investment banks got in over their head and a few failed, it would not directly affect the commercial banks so that was to contain the need for people to feel their bank was insolvent and then that would create a panic or “run on the bank“.

On the other hand, our investment banks were encouraged to take as much risk as they wanted to make profits with the understanding that they were on their own as far as the government as concerned so they would have to rely on the markets for their support and along with that we allow them to be unregulated so they had as much financial freedom as we could give them to innovate.

This was a very fair trade in my opinion.  One thing to remember is that both forms of banking are very profitable in there own manner.  What I hear now is because these mega-banks are so ‘used” to these enormous profits because they can operate in both areas, that somehow would make them uncompetitive compared to their peers.   I disagree, first off, the U.S. is still the number one financial center of the world hands down and is a favorite place for capital to enter so that is can be deployed.  Second, if we do nothing then we are just setting ourselves up for another situation where these major banks get into trouble and then we will have another supposed “too big to fail” situation that the only answer is “bailout” because it seems to be politically unfeasible for us to let the markets do their jobs and let the bad players fail.

Five House Democrats will call this week for a return to a Depression-era law that separated Wall Street investment banking from Main Street commercial banking.

If adopted, the measure would give banks one year to choose between being commercial banks or investment banks. The nation’s biggest — those now commonly referred to as “too big to fail” — would be broken up. The Obama administration opposes the measure.

The amendment’s five co-sponsors — Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts – want to restore the Glass-Steagall Act of 1933, which prohibited commercial banks from underwriting stocks and bonds. The act was repealed in 1999 at the urging of, among others, Larry Summers, now President Barack Obama’s chief economic adviser.

The five congressman all voted against the repeal then — and now they want it back.

Analysis: I fully support this move and hope it gains more support.  We really need to structurally shore up our banking system and get rid of this “too big to fail” doctrine and this is a step in the right direction.  Please sound off with your comments

This has been a rumor going around for awhile now.  It is logical to think that with the U.S. dollar in such precipitous decline that large Treasury holders like Japan and China would want to diversify out of this large positions.  The problem is of course that if anyone figures out this is your move then everyone heads to the door and that would create a panic and that would speed up the decline and reduce the value of their holders which is not in their national interest.

Recently, in the last couple days, we have seen the dollar strengthen quite a bit on some comments from the Federal Reserve Chairman about “strong headwinds” ahead of us and the threat of deflation is not behind us.  This is correct because we still have a massive amount of debt in the system that needs to be either serviced or defaulted and many institutions have this one their balance-sheets or off-balance-sheet and that makes these companies vulnerable.

Speculation that the Japanese government plans to sell $100 billion of U.S. Treasury debt to pay for domestic spending may impede the Obama administration’s borrowing plans.

Japan has been this year’s biggest buyer of Treasuries, which means it has done more to help finance the widening U.S. budget deficit than any other country. Its holdings have risen by $125.5 billion, according to data compiled by the Treasury. The comparable figure for China, which surpassed Japan last year as the largest international investor in the securities, is $71.5 billion — 43 percent lower.

Japan will inform the U.S. about the possible $100 billion sale, according to a Market News International report yesterday that cited “rumors” from unnamed sources.

“There’s absolutely no such proposal right now,” Chief Cabinet Secretary Hirofumi Hirano told reporters today in Tokyo. “That kind of talk often surfaces at this season.”

Analysis: 2010 will be a very tell-tale year for the U.S. and Global economy.  The risk of another recession is still a major threat and unless we get unemployment down by having private businesses to start hiring so we can get real income produced in the economy.

North Korea sure knows how to punish savers.  North Korea revalued the Won by a factor of 100 making it a scenario where if you have 1,000 Won of the old notes, now you would have only 10 Won.  Here is the kicker, the North Korean government put a limit to how much currency you can exchange in which is 150,000 Won which is about $60 in a country ravaged by inflation.  Reports have come in that protests have broken out and commercial activity has basically halted during this process.

Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country’s currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won — much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.

The sudden currency move appeared to be part of a continuing effort by the government to crack down on private markets, which have become an essential part of the food-supply system in chronically hungry North Korea.

In recent years, some market traders have stashed away substantial amounts of cash, while establishing themselves in profitable businesses that the government struggles to control.

Analysis: Could this be a preview on what could happen in other countries if inflation becomes a much larger threat?

The gold market exploded even higher today on the news that Reserve Bank of India (RBI) is in talks with the International Monetary Fund to purchase the rest of the 400 tons that were made available for purchase of this latest round of gold bullion sales.

At the time of this writing, the price of gold is at $1,191.00 per ounce.  At the same time, the U.S. Dollar weaken by 1.05% bring it to 74.249 on a currency weighted basis.  Today is a short trading week and light session so it is too soon to know if they is a real move.

India is open to buying more gold from the International Monetary Fund(IMF). It bought 200 tonnes for $6.7 billion on November 3. The Reserve Bank of India (RBI) may well buy IMF’s remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation.

A government official said that the additional purchase would depend on the “successful pitching by RBI”. “RBI is an independent body, and the government does not interfere in its affairs. It will get the gold if its bid is successful and at the price it has offered,” said the official.

Analysis: Too soon to tell but it looks like gold is being “remonetized” as a international money and asset class.  If that is so then it does not bode well for the U.S. dollar as the “sole” reserve currency and if that is to be prevented then a major reform of the currency is needed.

Now we are dealing with a mathematical function called “compound interest“.  The U.S. dollar is a un-backed fiat currency that used to be a contract for 1/20th an ounce of gold but that is no more.  So when we have treasuries that come due at maturity, we issue/print dollars to make good on the principal and interest or we issue more treasuries that will come due in the future again.  Over time this creates more money that is not keeping up with the amount of taxes we produce as a society or the exports we send abroad to settle with our trade partners.  Not to mention is creates price inflation because we are bringing in dollars faster that the economy can grow the put those extra dollars to work.

What is happening is we are slowing creating a situation where will not be able to “ever” pay back the debt unless we raise taxes through the roof and if we actually let the debt increase to $27 trillion dollars, that would actually eat up the entire U.S. GDP ($14 trillion).  CNN did a nice piece and if you look at the chart the produce that projects the increase in interest cost from now until 2019, it is a steady increasing line that looking just like a compounding rate of interest, which is actually happens to be and reinforces what I said above.

Here’s a new way to think about the U.S. government’s epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.

More than half. In fact, $4.8 trillion.  If that’s hard to grasp, here’s another way to look at why that’s a problem.

In 2015 alone, the estimated interest due – $533 billion – is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.

On the bright side – such as it is – the record levels of debt issued lately have paid for stimulus and other rescue programs that prevented the economy from falling off a cliff. And the money was borrowed at very low rates.

But accumulating any more interest on what the United States owes at this point is like extreme sport: dangerous.

Analysis: We are  coming to point where we are going to have a serious currency crisis and our current leaders seem to not being doing anything to prevent is and actually we are doing things that are making it worse.  Dollars savers are being punished so right now you are forced to speculate on other and more risky assets.

This is really coming from the same White House Administration that is predicting multi-trillion dollar federal deficits for the next decade.  President Obama giving lip service to this fact and actually doing something about it are two separate issues that only one is being address and it is not the “doing” part.  Why do I feel like we are being treated like a kid with an attention deficit disorder so that they think even if we hear both statements we can’t put two and two together.  It is the same as the supposed “strong dollar policy” that is nothing more that lip service because we don’t hear about major spending cuts or large tax cuts that would support an actual strong dollar policy.

President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

“It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.

Analysis: Too much debt is going to cause a double-dip and we are doing nothing to prevent it and we are actually making another recession and possible almost a certainty.