Monday, December 29, 2008

Making Sense of Circular Logic

I trust all the readers had a great holiday. Things were pretty hectic around here, but at least the weather was reasonable. Had a big Christmas Dinner here at the house and my pug dog made out the best. Now my dog is not very bright, in fact he is pretty stupid. Problem solving has never been his strength. I have to tell you that he underwent an evolution! It seems that a plate of crackers and cheese was on a table (too high for him to get near) but he could smell the goods. The dog figured out that he could jump up onto a nearby couch and stretch his way over to the table and have full access to the food! I mean he had a revelation! It was like in the film 2001: A Space Odyssey when the monkeys figure out how to use bones as weapons. Soon after I caught him trying the same thing using chairs, short tables, anything he could climb to try and get to food. I so much prefer cats.

The COMEX Bust That Wasn't
I spent a bit of time discussing the possibility that the Gold COMEX market could get busted this month. Things appear to be just fine with only 2 days to go. While I never really believed that the COMEX would fail, I did hope! So much for that idea. Gold and silver still seem to be holding up well, with gold even seeing some strength. With the long term picture of dollar printing and reflation attempts galore I expect that will continue.
Full Disclosure: I own positions in gold miners GG and KGC.

Making Sense of Circular Logic
When I came across this Bloomberg story I must have spent over an hour just rereading it and trying to figure out just what the heck this Japanese credit ratings agency guy was trying to say. I am still confused. Full story here, it is a must read.
Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says
By Stanley White and Shigeki Nozawa
Dec. 24 (Bloomberg) -- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.
The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”

Mr. Mikuni correctly observes that the US may have an issue borrowing it's way out of this mess. His proposal is to simply cancel debt that Japan holds to help. What a guy. So if the US cannot borrow out of trouble, what can the US do? Back to the piece:
Marshall Plan
Japan should also invest in U.S. roads and bridges to support personal spending and secure demand for its goods as a global recession crimps trade, Mikuni said.
Japan’s exports fell 26.7 percent in November from a year earlier, the Finance Ministry said on Dec. 22. That was the biggest decline on record as shipments of cars and electronics collapsed.
Combining debt waivers with infrastructure spending would be similar to the Marshall Plan that helped Europe rebuild after the destruction of World War II, Mikuni said.
“U.S. households simply won’t have the same access to credit that they’ve enjoyed in the past,” he said. “Their demand for all products, including imports, will suffer unless something is done.”

Japan is going to buy the US new roads and bridges? At least they would build them right. I wonder how great a thing it is that foreign countries like Japan think the US needs a "Marshall Plan" to get out of a recession.

The main thing I take away from this article is the crazy circular logic that it uses. The US is in debt that it cannot pay back. A country like Japan could forgive a load of that debt and offer money to build infrastructure to maintain employment. This would allow debt strapped US consumers to, you guessed it, buy more crap from Japan with the very money they get from the Japanese cash infusions! Amazing and simple, why didn't anyone think of this before?

In my last post "US Consumption Worth More Than All the Gold in the World" I opined that the need of export nations for US consumption was worth more than gold to this country. It seems I was thinking along the right lines. Here we have Akio Mikuni, president of credit ratings agency Mikuni & Co., basically saying that Japan should just give money to the US so the US can import more stuff from Japan with money they just gave us. It doesn't get any better. Maybe we can get China and Taiwan into the game. Just think of it, they are going to give us money to buy their stuff so their economy grows!

I think you can see why I am a little confused. It is this kind of mental monetary gymnastics that has allowed things to get as bad as they are. This article is a great highlight of current fiscal insanity. Discuss this one in the comments section, I would be interested in your opinions.

Mish on Fire as of Late
I have to say that Mish has been on fire lately. Professor Shedlock has hit the nail directly on the head so many times over the past 2 weeks I cannot recount all the great insight in one paragraph. Take a read over the past 2 weeks worth of posts and you will see what I mean.

Tonight is another great one, full article here.
Goodbye Yellow Brick Road
The "Yellow Brick Road" theory of the global economy was based on three foolish ideas.
1. The US consumer could consume beyond his means for perpetuity.
2. China could decouple from the global economy and grow its GDP forever at an 11% clip by taking workers from the farms and moving them to cities.
3. It is possible for a county to spend its way to prosperity.
The Yellow Brick Road Theory is rapidly flying apart. US consumers aren't consuming, protectionist tensions are rising, and Chinese workers are leaving the cities, headed back to the plough. Yet in spite of massive logic and evidence to the contrary, Keynesians are still sticking with the belief it's possible to spend one's way to prosperity.

Again, the theme of borrowing and spending more money to fix a problem brought about by that very activity will be a major plot line for the drama that will be the year 2009.

Have a good night.

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