Obama's Advice on Europe (No Joke), China Property Bubble Bursting, and My New Mises Piece

When you are getting financial advice from a community organizer, you know you are in trouble.  First it was George Soros, then Gordon Brown, and now President Barack Obama is weighing in on what steps to take to ensure that the Euro zone crisis doesn't spread to the U.S.  How ironic that the man leading us down the same pathway of Greece is now issuing warnings on fiscal calamities.  Does the President know no bounds? (Don't answer that).  Via, yet again, the Financial Times:

When leaders of the largest economies meet next week in France, our citizens will be watching for the same sense of common purpose that allowed us to rescue the global economy two years ago from a financial crisis that was sparked by years of irresponsibility.

Yes Mr. President, after George Bush ruined the world you presided over the bailing out your campaign donators.  We have overheard this narrative before, too bad it makes no sense.  The crisis occurred in late 2008, more than two years ago, and all you did during that period was win an election with empty phrases, a fossil fuel powered teleprompter, and a Hollywood smile.  Bernanke and the New York Fed did most of the leg work, of which certainly shouldn't be deemed as a "rescue."  Heroine junkies aren't cured with another fiat injection of dopamine.  Thank goodness another European vacation for world leaders funded by taxpayers is occurring.  Since all the world's problems seemingly melt away at G20 meetings, I expect it to rain gum drops and free puppies for everyone at the close of the latest charade.

Because of the co-ordinated action the Group of 20 took then, the global economy began to grow again. Emerging economies rebounded. In the US, we’ve had 19 straight months of private sector job growth and added more than 2.5m private sector jobs.

Correction: Because of massive government intervention in response to fiscal disasters caused by previous government intervention, the U.S. ONLY added 2.5 million private sector jobs.  Had there been no intervention and passage of such atrocities as Obamacare, private job growth would have been much more robust.

First, as the world’s largest economy, the US will continue to lead. The single most effective thing we can do to get the global economy growing faster is to get the US economy growing faster. That’s why my highest priority is putting Americans back to work. It’s why I’ve proposed the American Jobs Act, which independent economists have said would create nearly 2m jobs, boost demand and increase US economic growth.

What Obama is really saying is that in order for the U.S. economy to lead the world, he needs to be reelected.  The best way to do it is passage of a short sighted jobs plan that will slightly bring down the unemployment rate till after November 2012.   

At the same time, we’re building on the nearly $1,000bn in spending cuts agreed this summer. I’ve put forward a comprehensive and balanced plan to substantially reduce our deficit over the next few years in a way that does not hamper the current recovery and that lays the foundation for future growth.

If you believe for one second this will happen, put on the "dunce" hat and proceed to the nearest corner.

Second, the crisis in Europe must be resolved as quickly as possible. This week, our European allies made important progress on a strategy to restore confidence in European financial markets, laying a critical foundation on which to build.

Since European leaders put a gun to the head of Greece bondholders and forced a 50% haircut on payback and the European Financial Stability (bailout) Fund was increased to 1 trillion euros, world markets have calmed down for now.  The haircuts were hilariously labeled "voluntary" when nothing government does is ever voluntary.  Greece bond losses will end up being more than 50% and the doubling of the EFSF won't be enough to shore up a crisis with French banks, but the can has been kicked for the time being.  Time to celebrate.

Given the scope of the challenge and the threat to the global economy, it is important for all of us that this strategy be implemented successfully – including building a credible firewall that prevents the crisis from spreading, strengthening European banks, charting a sustainable path for Greece and tackling the structural issues at the heart of the current crisis.

If the crisis hits the U.S., which it inevitably will, banks may see significant losses.  This means less money for Obama's campaign and less government funding outside Federal Reserve monetization.  With his lackluster handling of the economy this far, all the President has left is buying votes.

Third, each nation must do its part to ensure that global growth is balanced and sustainable so we avoid slipping into old imbalances. For some countries, this means confronting their own fiscal challenges. For countries with large surpluses, it means taking additional steps to support growth. For export-oriented economies, it means working to boost domestic demand. A critical tool for accelerating that shift is greater flexibility in exchange rates, including exchange rates that are market-driven.

Obama is referring to China but not by name.  Since trade imbalances are the natural consequence of trading in general and the dollars lost find their way back to the U.S. in the form of other purchases, what the President is really trying to say is that China should drop its currency peg so Bernanke's printing press can work its magic.  China has had been leading the world's currency race to the bottom long enough, it's now time for the U.S. to have its turn at the front of the pack.  Little does the President realize however that China's enormous property bubble, fueled by its artificially low currency peg and cheap credit, is now in the midst of popping.

Finally, the G20 nations must deepen co-operation on the range of global challenges that affect our shared prosperity. We need to move ahead with our commitment to phase out subsidies for fossil fuels and transition to 21st-century clean-energy economies.

Yes, because crony capitalism for green energy always turns out well.  

When we met in London two years ago, we knew that putting the global economy on the path to recovery would be neither easy nor quick. But together, we forged a response that pulled the global economy back from the brink of catastrophe. That’s the leadership we’ve demonstrated before. That’s the leadership we need now – to sustain economic recovery and put people back to work, in our own countries and around the world. 

The world economy was "saved" by bailouts and liquidity injections from central banks around the world.  Structural problems weren't actually fixed but politicians need credit for performing miracles, hence the opinion article penned by the President but most likely written by a White House intern.  Expect more vague pronouncement of "coordinated action" and fantasy solutions from the next G20 meeting.  In other words, expect nothing.

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As linked to in the above rant, China's property bubble is indeed popping, via Wall Street Journal:

A weekend scuffle in Shanghai over a drop in apartment prices adds to increasing evidence that China’s efforts to tame a surging property market are having an impact – even as it offers a hint of what could happen if the measures go too far.
A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

This is it, the showdown of the century.  Will Bernanke's money printing offset China's slowdown? How will the downward pressure on commodities from China effect the money flowing into them from investments seeking returns to offset artificially suppressed interest rates?  Neal Soss, economist at Credit Suiss, is noting the upward trend in the U.S. economy, via Bloomberg:

“The American economy finally has accomplished the recovery and has now entered the expansion,” said Neal Soss, chief economist with Credit Suisse in New York, who was an aide to former Federal Reserve Chairman Paul Volcker. “But the growth is clearly too slow to solve the most significant problems the economy faces: jobs and getting the public budgets under control.”

This goes hand and hand with U.S. consumers reducing their rate of saving and increasing consumption in September, thus demonstrating their shifted time preference to not hold cash:

...in the last quarter...bringing their savings rate from a 2011 high 5.3% in June to 3.6% in September, after the BEA reported that while spending increase was in line with expectations at an unsustainable 0.6%, income was just barely above unchanged at 0.1% on expectations of 0.3% confirming that as far as the economy is concerned, the consumer is just getting worse and worse off. This is the lowest number since the depression started back in December 2007!

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The Personal Consumption Expenditure (PCE) price index rose 2.0 percent in September, following an upwardly revised 3.2 percent gain in August. Food prices continued to elevate, climbing 6.5 percent in September, and volatile energy prices rose 28.2 percent, contributing to the overall increase.

As I have said many times before, we are living in unprecedented monetary times.  While the Bernanke and Dudley have been printing like usual to offset a downturn (though at an erratic rate), China will play the wild card in how its deterioration puts a wrench in a fiat boom.

I had an article at the Mises Institute today entitled "In Defense of Flash Trading." An excerpt:

What this demonization of flash trading really comes down to is the inability of regulators to monitor and control such a phenomenon. What the state can't control, it exerts more power and authority to tame. Like a vampire to blood, the state never gets its fill of supremacy.

The justification for regulating flash trading comes down to a brief market crash back on May 6, 2010. In the course of just 16 minutes, the Dow Jones Industrial Average dropped 1,000 points, only to rebound to its original level. It was the largest intraday decline in the history of the Dow Jones. Despite the market's quick correction to the crash, a joint panel was created and headed by the chairmen of the Security and Exchange Commission and Commodity Futures Trading Commission to investigate the matter. Their report, which was released back in February, recommended that new rules and regulations be adopted to address flash trading. Considering how successful the SEC and CFTC were at recognizing the housing bubble, it's a wonder anyone still takes their recommendations seriously.

While flash trading can lead to sudden dips in the market, the market has proven to be quick in correcting itself. The rapid disbursement of information that encompasses the stock market becomes its own self-correcting mechanism.

As society and technology progress, the instantaneous sharing of knowledge and information is not something to fear but to celebrate. In a world where, to borrow a phrase from John Tamny, "capital moves at the speed of light," flash trading ensures that resources will continue to meet more deserving hands and be put to more efficient use.

Some of the commentors pointed out that high frequency trading was a result of government intervention.  I find this very hard to believe because I don't see hft not developing on a truly free market.  Any computer literate person could develop an algorithm in a super computer for a firm to use, how in the world is that government intervention?  I can see why some might think that the big banks have unfair access to such technology but that is an issue of fair/unfair ability to raise capital in regards to cozy government relations, not the technology in itself.  In the end, I am right and everyone else is wrong as always...