God’s New Address – The US treasury department!

If Shakespeare were alive and had recently met Henry Paulson, the question that he might have posed would have been – To $700 Billion or not to $ 700 Billion ?

On September 26th, 166 American economists including 3 Nobel Prize winners asked Bush not to go ahead with his “Golden Men” team’s brilliant $ 700 Billion package calling his plan a “subsidy” for business. Robert Lucas, a 1995 Nobel Prize winner and a University of Chicago economist says ``It doesn't seem to me that a lot decisions that we're going to have to live with for a long time have to be made by Friday.'' So is this $ 700 Billion something good?

Before pondering on this you must remember, its not only the 300 million US citizens only that will be impacted but rather the ripples will be felt by 6 Billion people across the globe not by this act but rather the outcomes from his actions

The US gave almost $ 150 billion of refunds to tax payers in February this year hoping to revive the economy and for all that what Bush Junior got were a couple of months where sales of Wal-Mart picked up. After that? You guessed it right! More freebies! The $ 200 Billion of Fannie and Freddie Mac guarantees, the $ 75 Billion AIG loan and still no change! The recent $280 Billion that was just given a few weeks back, where has that gone? The big banks have swallowed all of it in their coffers to prop up balance sheets but this has not reached the real economy, so why would $700 Billion dollars which is just the total of the all the above figures stand to be any different? You don’t give checks to people who are going to use this money to stock it up in their lockers to feel good about themselves and especially not to those who articulated the entire epic so far which is turning out to be more dramatic than even the Mahabharata!

Bankruptcies are something that we need to learn to live with. It isn’t like this hasn’t happened before. In 1907 US I banks went bankrupt, Wall Street was cleaned up and subsequently the US became the 20th Century King of the Jungle. In 1966 almost all the financial companies went bankrupt in Japan, the Japanese then cleaned up the system and Japan became the world’s best growth economy for the next 20 years! In 1990s the Japanese propped up banks and, they did not let their banks fail, this led to the creation of zombie banks and major problems for Japan which still haunts it. The same happened in the 1970’s in the US and this was a lost decade for the US with high inflation rates and troubles galore. Even, the dot com burst, all this happened but the world did not end! When capitalism goes awry you can’t bring in socialism all of a sudden, bankruptcies teach the capitalists to respect the markets and accept their failures with humility. So, this current performance is just desperation as the US doesn’t have any bullets left after shooting in the dark.

Till some time before the current banking fanfare Ben Bernake himself like Greenspan was a proponent of ‘the markets will set everything right themselves’ and that “interference is to be avoided”. But what can one say about their credibility after a U-Turn like this? If you or I had done that in a company after signing term sheets for investing Billions of dollars in a project, then making happy faces and drinking wine over it and tomorrow, you or I came and said hmm lets forget the Billions hmm lets look at this. Maybe even God would not have mercy on us then! But we are not Ben Bernake or Greenspan who can afford to sleep over and forget what they said because hey it’s your and my money that they are talking about, so a million a billion or something more what’s the difference?

These guys who are passing the resolution have got everything wrong! And we keep trusting them even more! The language in the proposed new law says that it would exempt the secretary’s decisions from review by any court or administrative agency, Blasphemy; finally we get God’s address – the US Treasury Department!

Yes, you may say and rightly argue what Keynes says here “When the facts change, I change my mind. What do you do, sir?" But the facts had changed ergo 2000 when money was being served as a 7 course buffet to people who didn’t even have jobs. Moreover, Greenspan didn’t prick the dot com bubble in the making even when he knew that there was something grossly incorrect in the US and famously talked about “irrational exuberance”. He plucked the interest rates when things got totally out of hand, while he could have raised interest rates or raised margin requirements to try to reduce the amount of stocks being bought on loan and allow the dot com to fizzle out slowly he did not. On a second thought, maybe the Fed did not interfere with the stock markets then because we all save the best for the last and that piece de resistance is now finally showing itself. A change when the exuberance was mounting might have saved the colossal damage but we honor these men by giving them Knight hoods. That’s how we work! When running for president in 1999, Senator John McCain said he would keep Greenspan at the Fed — no matter what: "If Mr. Greenspan should happen to die, God forbid, I would do like they did in the movie Weekend at Bernie's. I would prop him up and put a pair of dark glasses on him and keep him as long as we could." Would we think the same today? There is no taking away from the fact that he was darn intelligent but maybe we praise others at times because we know only so much as meets the eye.

The former Fed Governor is praised for reducing inflation. But hey! Inflation was not low because of great productivity gains or similar happy feeling matters, it was because China, India and other developing economies exported deflation to the developed economies keeping prices close to a MacDonald Chicken-Burger!

You have had the Fed saying time and again that they want a stronger dollar since over a year. Gibberish!! Yes they want it and what do they get by that? Yes it helps Americans to beautifully consume more oil but what about their production? If the dollar strengthens then God Bless America’s Production.

Washington Mutual is now under Chapter 11 bankruptcy with JP Morgan buying its assets. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were sub-prime mortgages. Washington Mutual, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest sub-prime lender in 2006, according to Inside Mortgage Finance. So the Bottom-line is, there are still 10 more!

Yes there might be hundreds of firms that would go bankrupt but isn’t this what capitalism is all about? People who have done the right things survive and the flamboyant losers eat humble pie. Even if you had invested in the financial stocks and their bonds you ought to have thought of the risks before investing. The current $ 700 Billion supposed to be bail-out is simply like putting band aid on a terminally ill patient.

While the dollar should have in all logic massively depreciated following what happened in the US (just think what would have happened if this had happened in India), it appreciated till about some time back. Strange? Well that’s the world we live in! despite all the technical charts and theories of Japanese Candlesticks and other exotic names, eventually it’s a human that trades world over and not machines

In most probability the $700 Billion band aid will get through, but who will finance it? The Sheikhs and men behind the opaque Chinese Walls, they have to, they don’t have any other option! Why? Read on...

Despite the brouhaha by the Arabs about debasing from the dollar to other currencies, the fact of the matter is even if they receive in Euros or in Gold or in Yuan(some day) they would still have to pay in dollars for what they purchase globally so like it or not as much as they move away the globally depreciating dollar, will only haunt them more in the future. Also moving away from the dollar to the Euro will depreciate the dollar more and make their imports even more expensive (we all know the 20% + inflation rates prevailing in the Gulf). So, the Arabs have will have to be party to the $ 700 Billion credit line to the US. Ditto for China. With the post Olympic slowdown effect being felt in the Chinese economy coupled with the fact that Chinese stocks have been the worst performers globally, imagine the effect on that economy which depends on US purchases from nuts and bolts all the way to complex gadgets and to being lenders of last resort for saving banks in the US. If the dollar was to depreciate and the Yuan appreciate then the Great Walls may not be all that strong after all. The Chinese are more interested in their economy growing at 9% plus rates and so have to keep the Yuan at a competitive level against the USD. But the big question is for how long will these two handhold the dollar?

So, in the short term I believe it is among a host of factors the above that have strongly contributed to the strengthening of the dollar, but long term the dollar would go down and more. Also, add the fact that you never know what the great US does, as it did in August 1971 when it abandoned the convertibility of the dollar. This unilateral action ended the exchange rates regime that had been negotiated by states at Bretton Woods and shocked the world from the equator to the poles and back! So, I suspect depreciation either willfully or due to market forces would be one of the solutions in the long run to help the 300 million self proclaimed ‘masters of the Universe’ get their house in Order.

I end by quoting what Marc Faber said in June 2008 and is now a big hit in the forwarding community ''The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on *********** and beer, since these are the only products still produced in US. I've been doing my part."

If you haven’t yet found out what the asterisks are google it! ;-)

My next write up would be where to invest in these turbulent markets…Keep watching this space! Do post your suggestions / comments on the write-ups!