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Stimulus spending is a net negative to the US economy. But in China…?

"The WORLD’S LARGEST shopping mall is almost entirely empty," says a headline now making its way around the internet, notes Bill Bonner in his Daily Reckoning.

The mall is not one of America’s consumer emporia. It is not even in the UK. Instead, it is in the Middle Kingdom…and twice as large as the "Mall of the Americas"…sitting in Guangzhou, China.

The world did not end in 2009. Two things are widely reported to have saved it – stimulus in the West and China in the East.

Harvard economist Robert Barro, writing in the Wall Street Journal, considered the effect of stimulus spending on the US economy. The US government’s 2009 program was originally expected to cost $787 billion. Now it is estimated to come in with a final price tag of $862 billion. What do you get for that kind of money, he wondered?

The initial spending appears to work, since the government is spending money without raising taxes to pay for it. But the money has to come from somewhere. Tax receipts inevitably have to go up. Both spending and taxing are subject to "multipliers," says Barro. He calculates that each Dollar of public stimulus spending has a net cost of $1.50 in foregone private spending. A "bad deal…there’s no such thing as a free lunch," even in fiscal stimulus, he concludes.

Stimulus spending is a net negative in the US; what about in China? The China story is largely a stimulus story too. China’s stimulus, compared to GDP, is the world’s largest ever – four times the size of America’s stimulus program.

When bank loan volume is determined by central planners you are asking for trouble. But last year, faced with a downturn in demand from their main customer, the Chinese authorities put out the word to banks – increase loans. Loan volume approximately doubled…up to $1.4 trillion…for the greatest increase, in GDP terms, ever…and equal to a quarter of the entire national output.

Investment spending has long been an oversize part of the Chinese economy. As Americans spent too much, the Chinese invested too much in factories in order to make them things they could buy – just as the Japanese had done before them. Investment spending in China increased 200% since 2001, making it the world’s biggest buyer of raw materials – by a huge margin. Chinese output is less than 10% of the world’s total but China consumes 30% of the world’s aluminum, 40% of its copper and 47% of its steel.

Where does all this stuff go? Thanks to China’s visionary central planners, it goes just where it is not needed most – into more infrastructure and output capacity. Last year, 90% of China’s growth came from this fixed investment spending.

There are about five times as many rivers in the US and five times as many cars…but China now has nearly as many bridges…three quarters as much road surface. But with easy credit, the connivance of local officials, and the blessing of the central government, it builds more.

Last year, approximately one out of every four square feet of commercial office space in Beijing were empty – about 100 million square feet of zombie space. All over town are dark buildings…the Minsheng Financial Center…concrete and glass towers on Financial Street…the China Life Plaza…the Bank of Communications.

This year, the vacancy rate will go up to 30%…possibly 50%, depending on whose estimates you believe. In Eastern Beijing, officials are doubling the size of the Central Business District, even though the vacancy rate there is above 35% already. Overall, the city will add another 13 million square feet of commercial space.

Outside Beijing, the zombies are multiplying too. Whole cities are empty. And in the suburbs of Huairou, a mock alpine village…with a 200ft clock tower…rises improbably in the industrial suburbs. Called the "Spring Legend", its publicists must be the same people who write fortune cookie forecasts.

"The air is so fresh it penetrates your heart," says the sales pitch. You would normally dismiss such descriptions as puffery. But in China’s industrial suburbs the air is often so acidic that it might penetrate the skull too.

National politicians determine the availability of capital. Local ones have a hand in ‘investing’ it. Typically, development projects involve bankers, developers, and local politicians – much like Japan’s huge public works’ projects of the past 20 years. Local governments are deep in debt – with total local government debt equal to about a third of GDP. But they keep spending. In Huaxi, for example, they’re still planning to build the world’s second tallest building, a few feet shorter than Dubai’s pyrrhic monument. Huaxi is also the home of the New Sky Village…another project that is lost in the toxic clouds.

Property prices are still spiking up. People are still speculating. Ships with dirt and rocks still head for Chinese ports. The capital spending boom goes on.

It looks like growth. But it is zombie growth. People build bridges to nowhere rather than working for profit-making enterprises. Concrete is used to put up cities where no one lives. Savings that might have been used to start a new bank is instead used to prop up an old one.

Japan has been doing it for years. Encouraged by government miscues in the ’80s, private industry created Japan’s zombies. Then, after the bubble burst, the government kept them alive. They’ve been sucking blood from the living ever since.

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Source:Zombieland

What if the 25-year bull market in US stocks was an aberration…?

TWELVE MONTHS AGO I was getting calls from old friends saying that they were scared to be in stocks any longer, writes Chris Weber in Daily Wealth.

These were people who just had bought and held for decades. In fact, a year ago was the right time to start buying stocks, not selling them.

Nowadays, I see the opposite comments. People are proud to own stocks. Of course they are…since they’ve risen 60% in the past year.

As one reader put it in a Feb. 24th review of my Weber Opportunities Report:

"I am a traditional market investor, dividing my investments primarily between stocks and mutual funds."

Now, I’m no Sherlock Holmes, but a sentence like this tells me that this reader is middle-aged at the youngest. And it all makes perfect sense, really.

Take a person who started investing in 1982. From then until 2007, he’d had a full quarter-century of gains. If the market fell, as it did in 1987 and again from 2000-2002, it always snapped back.

The fact that a 25-year bull market for stocks had never happened before in history that probably means little to him. After all, it happened to him. It was the experience of his entire life.

But what if a 25-year bull market was an anomaly…a once in a lifetime event?

For someone who, say, turned 30 around 1982 and is now nearly 60, this is a hard thing to contemplate. All your life things have been a certain way. You’ve come to accept them as normal. Any change is thus temporary. That is, until it isn’t, and you are left holding on to past dreams.

I’ve seen this happen several times over my life. As a kid in the late 1960s, I listened to investors who had ridden the great stock bull market from 1949 to 1966. The Dow soared from about 150 to 1000 points during those 17 years, a great rise of over 550%. They thought it would last forever, and when the Dow briefly touched new highs of over 1000 in early 1973, they all thought they were back to the races.

In fact, they were in for hard times. By mid-1982, the Dow was well below where it had been in 1966.

Then came the people who had gotten rich in the precious metals markets during the 1970s. Silver soared from $1.29 to nearly $50 an ounce…a rise of over 6000%. Gold rose by 2300% from 1971 to 1980. And for many people, all through the 1980s, they waited for what they thought was a temporary correction to turn into a 20-year bear market. Many held all during this period with only hopes and memories to sustain them.

I believe we are seeing the same thing now with those who hold stock-market shares as a huge portion of their total investments. Getting back to the reader quoted above, his use of the term "mutual funds" already dates him from the time when these were every investor’s dream. Younger investors well understand that with mutual funds, you are paying managers a fee that is too high for what they give back. Exchange traded funds, or ETFs, accomplish the same thing at a much lower cost.

And to say that you are diversified between stocks and mutual funds is to say that you are not truly diversified at all. A recent letter to me from another reader shows he understands this. A new reader, he comes on with 2% in cash and 98% in stocks, and he knows he has too much in stocks.

In my way of thinking, the stock market has given a rare reprieve to those who hold most of their money in it. This is a time to be moving out. You don’t even have to abandon the stock market entirely (though I myself very nearly have). You can just lower the percent you hold in stocks to 33% or so.

Cash and physical metals such as Gold Bullion and silver could make up the other two-thirds. You can have some precious metals miner stocks, but try to arrange things so that you own them with as little risk as possible, and have patience. A new leg down in the general market could take down all stocks, even the Gold Mining stocks.

I know it can be hard for people to visualize what they grew up with completely being turned on its head. But investment history teaches us that this is exactly what happens, time and time again.

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Source:Once in a Lifetime

What first ailed the Dollar has now sent the Gold Price in Euros soaring…

THE PIECE we wrote on gold de-coupling from the Euro/Dollar exchange rate proved correct, notes Julian Phillips at the Gold Forecaster.

The action of the last week has shown that as gold rose strongly in the Euro in the Pound and is moving up in the Dollar alongside most currencies.

More than that, market commentators are now mentioning this too. But this action involves far more than these two main currencies.

To make the point, we ask you, "Which is better, a glass cracked in the higher part of the glass or cracked in the lower part of the glass.

Now replace the glasses with the Dollar and the Euro. Both are now under question.

Above is a picture of a $50 Bill as you see it today. Below is a picture of a $50 bill from yesteryear then called a "Gold Certificate".

It was exchangeable for $50 worth of Gold Bullion when gold was fixed at $20 an ounce. Note the same President’s picture there.

What would he think…?

The modern note is not exchangeable for any gold let alone 2.5 ounces. And therein lies the problem of valuing any Dollar bill. Its backing is your confidence in the government and the monetary authorities issuing it, as a reliable measure of value.

The United States is not alone, of course. The Euro is now going through a similar loss of confidence. But put in your mind’s eye a situation where the currency has the backing of gold and the government overseeing the currency. The dual support gives it far more value. Whereas today, you have a currency without the backing of gold and with the backing of a government trying to control the state of the economy by printing vast quantities of money in the belief that when the time is right they will withdraw it and re-establish monetary stability.

History alone gives us due cause to be prudent, doesn’t it…?

On my recent trip to London I was given a $100 trillion bill from Zimbabwe. It will not even buy one sheet of toilet paper. The currency is no more. And if currencies are to retain more than a captive set of users, they have to retain the inherent disciplines that gold brings. History has shown that both politicians and bankers cannot resist the power that comes with money, and they eventually distort it. The distance between currency management that reinforces the value of that money (not just stable prices) no matter what pain is involved and profligacy is a long one. Once travelled it is extremely difficult to go back as confidence has gone.

Take a look at both the Euro and the Dollar over the last few months and you can see how far along that road we have travelled. Greece is threatening to go to the IMF and Germany still has not announced it is willing to bail out the country. Now look from Greece westward through Italy and Spain and those countries that rely on tourist spending on second homes and holidays. They’re all in the same boat. Once Greece is helped, others will come too. It’s more than just Greece for sure. If the IMF bails them out the Euro will weaken.

The real issue is of course the Dollar and the Pound Sterling. As we say in our global currency slot below, we are waiting for the morning to arrive when we wake up and find one Pound for commercial transactions and one Pound for capital transactions (last time called the Dollar Premium; I started my stock exchange career as a dealer in the capital currency in 1971). As for the US Dollar, keep your eyes on those 10-year Treasury bonds to see how the Dollar is faring internationally.

If China has stopped buying T-bonds and is selling, then the yield will rise and the Dollar will fall. Or did the People’s Bank merely threaten to do so?

Sadly, Gold Prices are now a thermometer to the state of global currencies and the decay of confidence. As the Dollar weakens we are seeing gold rise. As the Euro weakens the Gold Price rises and when the Pound falls gold rises. The price of gold in local currencies is being more widely quoted now, not just a US Dollar price.

The problem is systemic. All currencies operate the same way and their health springs from the US Dollar and the Euro. Only resource producing or China oriented currencies look healthy at the moment. But even there we have to realize that national power lies with people irrevocably committed to putting their national interests ahead of global interests. A global reformation is called for!

But in this scene, global national authorities, without the dominance of one single nation, have neither the will nor the competence to rectify problems.

Extrapolate this situation and you see an increase in the level of currency crises in both severity and consequence. Suddenly the musings of the IMF head, M. Strauss Kahn on a completely new global currency becomes pertinent. Unless this road is followed and quickly, the situation will darken considerably.

This is why the Gold Price is moving now. As politics will have it, unless push comes to shove and the situation becomes dire, little will be done. Smart money, institutional money is quietly moving a portion into gold as a measure of prudence.

How far will the Gold Price run in the next move up? This section is for subscribers only…

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Source:Why is the Gold Price Rising?

Stocks and bonds are high, not low, and big government is deemed a solution, not the problem…

SO THERE’S good news…and bad news…and a lot of news in between, writes Bill Bonner in his Daily Reckoning.

Consumers spent a little more than was expected of them, new figures say. And manufacturing did a little better than expected too.

On the other hand, the federal government’s tax receipts plunged in the month of February…and bank lending is still contracting. Last week it shrank $33 billion – the 7th week in a row it has contracted.

How does an economy expand when the banks are lending less money? Beats us.

We believe the "expansion" reported in the latest GDP figures is mostly counterfeit. It’s government spending and hot money filtering into the economy. Still, it’s amazing that the GDP figures are positive.

The Dow was flat yesterday. The Euro rose a little – on expectations of a settlement of the Greek affair. Greece only had a month to sort out its problems. That was two weeks ago. The "clock is ticking," say news reports. Most likely, the Hellenes can’t really sort their problems out on their own. Greece will need some sort of bailout – even if it is limited and tentative – from Germany. Stay tuned.

It will be interesting to see what happens when Britain runs into trouble financing its deficits. It won’t have the Germans to help. Britain never took up the Euro. It will be on its own.

But the big news from yesterday is that gold hung onto Tuesday’s $19 boost per ounce. Why did gold suddenly shoot up? We don’t know. But our guess is that gold will suddenly shoot up a lot more. We’re in a deflationary period. That means everything is going down in price. But against what? Well, against money. Against real money that is – meaning Gold Bullion.

Gold should continue to go up until this deflationary period is over. That doesn’t mean there won’t be more hiccups and reverses in the gold bull market. But one of the surest trends of our time is the crack-up of the paper money system. And that is bound be good for Gold Prices.

Chris Wood of CSLA says he gives the Dollar Standard five more years. Maybe it will be a bit more…maybe a bit less. But one thing is sure. Governments cannot continue to run such huge deficits forever. There will come a day of reckoning.

The feds are hoping it comes at a time and place of their own choosing. They all want to ease their way out of their troubles…with the help of consumer price inflation. You heard central bankers talking last week about increasing the inflation target from 2% to 4%. If they can actually control inflation so precisely, it will be a miracle. But that is what they hope to do.

A few years of 4% inflation would do wonders. In ten years, they would have cut a third of the national debt – in real terms, of course (supposing that they don’t add to it even faster). Not only that, the debts of the private sector would be eased too. At 6%…debts would be cut in half in a decade. With half the debt burden – the private sector might be ready to begin a new period of growth. That is the feds’ real strategy…to de-leverage the private sector enough that it can grow…and increase tax receipts.

By the way, that was what happened in the Reagan administration. The inflation of the ’70s forced up interest rates and caused the worst recession since the Great Depression. But it also lightened debt loads – so much that the economy was ready for another big growth spurt.

This growth really paid off in the ’90s…and the very early years of the Bush junior administration. Thanks to growing tax revenues, both Clinton and Bush were able to pay down the huge debts of the Reagan years…and still increase spending. The economy was able to "grow its way" out of debt.

Then, with the war on terror and the micro-recession of 2001, the budget magic of the ’90s was lost. Bush apparently never met a spending bill that he didn’t like. Spending exploded…especially time bomb spending for health care, which increases automatically year after year.

Then came the depression…known popularly as the Great Recession of 2007-2009. Tax revenues fell. Spending increased even more. And now the deficits come hard and fast. And there seems to be no way to "grow our way out" of them.

All of the conditions that made for a boom in the early ’80s are making for a bust in the early 2010s. Interest rates are at record lows, not record highs. Stocks are high, not low. Bonds are high, not low. The government is the solution, not the problem.

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Source:Just Like 1980 Wasn't

Comparing SDRs with the Dollar in gold, you can see what peeves the Chinese…

LAST WEEK, the head of the International Monetary Fund, Dominique Strauss-Kahn, suggested the global lending organization might be called upon to offer its 186-nation members an alternative to the US Dollar as a reserve currency, writes Brad Zigler at Hard Assets Investor.

In response to calls by China and Russia to supplant the greenback with special drawing rights – the IMF’s internal accounting unit – Strauss-Kahn said:

"That day has not yet come. But I think it is intellectually healthy to explore these kinds of ideas now."

Special drawing rights were devised by the IMF in 1969 to replace Gold Bullion in large international transactions and to serve as a supplement to central bank reserve positions.

Though freely convertible in IMF transactions, SDRs aren’t a currency. Instead, they’re credits that a nation with a trade deficit can use to settle balance-of-payment debts. Since SDRs are ledger entries, their use eliminates the logistics of shipping Gold Bullion back and forth to settle national accounts.

By value, SDRs represent a trade- and reserve-weighted basket of currencies, including the US Dollar, the Euro, the Japanese Yen and the Pound Sterling. The SDR basket’s makeup is determined every five years by the IMF executive board and is due for its next revamp later this year. Currently, the SDR basket is weighted as:

• US Dollar: 41.1%
• Euro: 36.1%
• Japanese Yen: 13.5%
• British Pound: 8.9%

The IMF recently increased the SDR float to 204.1 billion, now worth about $313.2 billion.

This year’s reset of SDRs is bound to reflect ongoing shifts in central bank reserves positions. In particular, the IMF executive board will consider rejiggering the SDR to reflect a diminution in the Dollar’s heft.

The US Dollar is the world’s most widely held reserve currency, making up just under two-thirds (10-year weighted average: 65.2%) of central bank holdings worldwide. The currency’s ubiquity, however, has been chipped away with increasing velocity over the past decade. As central banks have sought to diversify their reserve positions, Dollar concentrations have declined at an average annual rate of 92 basis points (0.92%) since 1999.

The primary beneficiary of world currency realignment has been the Euro, which now comprises a quarter (a weighted average of 25.3%) of global reserve allocations. Since the Euro’s introduction in 1999, allocations have grown at a 99 basis point compound annual rate.

At a distant third is the British Pound Sterling (weighted average: 3.8% of allocated reserves), once the world’s most heavily banked currency. Sterling allocations, though relatively small, have been growing along with the diversification trend. Central banks’ holdings of British currency have grown an average 14 basis points a year.

Commitments to the Japanese yen, however, have taken a downward trajectory. With allocations averaging 3.7%, the Yen’s reserve position has been falling at a 32 basis point annual rate.

One of the "intellectually healthy" notions for diversifying away from the greenback was floated last year by the governor of the People’s Bank of China, who argued for enlarging the SDR basket to include more currencies and establishing a settlement system that would make SDRs tradable outside of the IMF’s books.

Indeed, the trend among central banks is to hold increasingly large positions in currencies that the IMF currently buckets as "other". To be sure, some central bank holdings (weighted average: 18 basis points) are still maintained in Swiss Francs, but that position is shrinking by a basis point a year. Yet the "other" category is growing at virtually the same pace as the British Pound allocation, and now represents nearly 3% of global reserve commitments.

It’s easy to see why the Chinese have an axe to grind. The People’s Republic holds more than $2 trillion in Dollar assets accrued through years of Treasury purchases and exporting. The greenback’s hegemony as a reserve currency makes it easier for the US to run high trade deficits, a consequence of debt-financed consumerism and a low savings rate. American budget deficits put Chinese Dollar-based investments at risk.

But using the current iteration of SDRs as a substitute for Dollars really wouldn’t offer much risk reduction. Why? Reduce the SDR and the Dollar to Gold Bullion terms, and you’ll see they’re highly correlated with each other

For most of the five years since the last SDR reset, in fact, the IMF accounting unit was a virtual clone of the Dollar. Their rolling 30-day correlation (when priced in Gold Bullion) has averaged 98.6% since February 2005…as near to perfect as could possibly matter.

Clearly, a revision of the SDR basket is needed, but doing so raises new questions.

First of all, the Euro’s correlation to SDRs, though lower than the Dollar’s, isn’t small. The currency’s 30-day correlation to the IMF unit has averaged 93.4% over the past five years. Thus, pushing the Euro into a dominant position in the basket would run the risk of replacing one problem for another of virtually equal proportions.

One also has to consider the strains on the Euro as weaknesses in Irish and Greek economies threaten to scuttle the currency. So what about adding additional "other" currencies to the basket?

The truly representative choices are slim. The Chinese Yuan can’t be used until it becomes freely convertible on the world’s currency markets. And the Chinese currency’s value is only gradually – very gradually – being unwound from the Dollar. Full convertibility isn’t likely until trade barriers are lowered and access to Chinese markets is enhanced. That requires political change in Beijing, something not easily wrought.

Even if an optimal mix of other currencies could be found, attempting to float the SDR as a currency would introduce another set of risks and challenges. There’s no banking infrastructure in place for trading SDRs. Getting SDRs into worldwide circulation among private parties and businesses would be a headache exponentially more painful than the launch of the Euro.

More important, the use of SDRs would require management by a "super" central bank, a potential insult to national sovereignty. The Euro failed to establish hegemony in Great Britain over this very issue a decade ago. The hue and cry in the United States over "giving away" reserves to the IMF or another entity would likely be even louder.

While the IMF might find it intellectually stimulating to consider a top-down approach to finding an alternative to the Dollar as a reserve currency, changes are much more likely to come incrementally and be market driven.

That is, unless we convene another meeting at Bretton Woods to decide a new global currency order.

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Source:Gold & the World's No.1 Currency