Sorry for the light posting, I'll try to make up for some of it next year.

I am not optimistic about 2009. Only then will the economic downturn really unfold. The worldwide social-political consequences of the crisis will be huge and in some cases violent. It will take more time and social unrest for the people in charge to
understand what this is about. Only after that happens the system will
start to change.

But that is the sad big picture world. The small picture can be much prettier. My little niece laughing and giggling is giving me a lot of fun and hope for the future. I plan to plant lots of flowers in 2009 and give them away for smiles.

To all of you I simply wish the very best: peace and love.

Lebanon 2006, Gaza 2008 – the same Israeli rational, the same outcome.

Will they ever learn?

Hey, if everyone here puts in a buck, we can buy a MoA house in Detroit.

Thinking of Detroit. GMAC, General Motors Financing Arm, was supposed to become a bank and eligible for TARP money if it was able to restructure debt it has into equity. But some GMAC bondholders did not want to convert the GMAC bonds they own into stocks of lesser value and boycotted that solution. PIMCO being the biggest one of them.

On one side it risked that GMAC would go bankrupt and default on the bonds PIMCO owns. On the other side was the chance that the Treasury would break its own rules and bail out GMAC no matter what and the bonds would be paid for in full.

PIMCO won. The Treasury caved in:

Someone should please explain the next grafs to me.

The deal is lopsided — such investments are generally proportional to existing ownership stakes — and it could have the effect of restoring GM to majority ownership of GMAC.

The distinction would be short-lived, however, because the Federal Reserve has required both companies to divest most of their ownership stakes as a condition of allowing GMAC to become a bank holding company.

GM is, by demand from the Fed, supposed to lower its stake in GMAC as a condition for GMAC to become a bank. Now the Treasury lends a billion to GM to buy more of GMAC so GMAC has the equity to become a bank. Something does not compute here.

But this deal might reignite the great credit machinery:

GMAC, the automobile financing company, said Tuesday morning that it would immediately resume financing to a wider range of car buyers, a day after the Treasury Department injected billions of dollars into the lender.
…
And General Motors said Tuesday that it would begin to offer zero-percent financing on some models as it tries to jump-start sales.
…
“This is exactly what some of the government money was intended to do — stimulate credit, stimulate business,” Mr. LaNeve said.

That is healing the consequences of the last binge with more hard drinks. That may work as long as the consumer's liver is able to cope with it. I doubt that's still the case.

The Defense Security Cooperation Agency notified Congress of a possible Foreign Military Sale to Israel of GBU-39 Small Diameter Bombs as well as associated equipment and services. The total value, if all options are exercised, could be as high as $77 million.
…
Israel will have no difficulty absorbing these additional bombs into its armed forces. The proposed sale will not affect the basic military balance in the region.

Defense Security Cooperation Agency – Israel – GBU-39 Small Diameter Bombs, Sept. 9, 2008

The bombs now get "absorbed" by people in Gaza.

The Israel Air Force used a new bunker-buster missile that it received recently from the United States in strikes against Hamas targets in the Gaza Strip on Saturday, The Jerusalem Post learned on Sunday.

The missile, called GBU-39, was developed in recent years by the US as a small-diameter bomb for low-cost, high-precision and low collateral damage strikes.

Israel received approval from Congress to purchase 1,000 units in September and defense officials said on Sunday that the first shipment had arrived earlier this month …
IAF uses new US-supplied smart bomb, Dec. 29, 2008

Notice the fast, just in time, delivery …

Just back from visiting my brother. He owns and runs the family wholesale business in the fifth generation. For a
long time that business also dealt in tobacco products.

While there I came across this artifact.

bigger

The thing above is ceramic and about 4 inch long and 1 1/2 inch high. It contains thin pieces of wood.

Cont. reading: A Story On Free Trade And “Trustfrei” Marketing

For month Israel blocked the Gaza Strip from nearly any supply. No paper for schoolbooks, too little fuel, only little medical stuff. On November 5 it broke the truce [corrected] Hamas had held for nearly five month.

That truce officially ended a few days ago and Hamas as well as other groups started to again to launch ineffective homemade rockets onto Israeli ground.

Yesterday Israel let some 80 trucks with supplies into Gaza. That was not to get relief to 1.5 million prisoners there, but to prepare for the onslaught that started today. Too little supplies in Gaza would let too many people call for a 'premature' stop of the ongoing war against the Palestinian people there.

The first day of a brutal bombing campaign killed at least 195 people, all of them 'militants' and Hamas 'extremists' we are told.

The killing will go on for at least a week and more likely up to February 10 when Israel holds elections. Every politician in Israel seems to run a 'I will hit 'em harder' campaign. This is totally useless violence for the most cynic reason I can think of – to boast the personal egos of Livni, Barak and Netanjahu.

As the U.S. dollar is likely to sink further relative to other currencies, its status as the main monetary exchange medium in world trade will be looked on unfavorably by a lot of trading partners.

The euro has its own trouble and will not take the dollars role either.

I expect a trade weighted bundle of three currencies to be the future monetary exchange medium. For a start one third dollar, one third euro and one third renminbi/yuan with periodical modifications if trade balances deviate between these anchors.

This was futuristic as China until now used the dollar as exchange medium in external trade and tightly coupled the yuan to the dollar. But now the first steps are taken to use the yuan in foreign trade:

BEIJING,
Dec. 25 — The yuan will be used in transactions with neighboring trade partners as part of a pilot project – in what could be the first step on the road to making it an international currency.
…
The Guangxi Zhuang autonomous region and Yunnan province will be allowed to use the yuan to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.
…
The mainland's trade with Hong Kong, Macao and ASEAN nations has been rising rapidly over the past years to reach $402.7 billion last year, or 20 percent of the mainland's total trade volume.

It is a big move and one of the long term adjustments that will follow from the current crisis.

“We are actually looking at a never-ending range of reflections. But sometimes a writer has to smash the mirror – for it is on the other side of that mirror that the truth stares at us.” – HP

BBC obit

Noble Lecture 2005: Art, Truth & Politics

I wish you all some contemplative, hope- and peaceful holidays.

May all walls come down.

Picture courtesy of the Bethlehem Association

Let me be clear: no one wants war.
…
If the international community once again shows a lack of resolve, there is no chance that Saddam Hussein will disarm voluntarily or flee – and thus little chance of a peaceful outcome.
…
17 times the UN has drawn a line in the sand – and 17 times Saddam Hussein has crossed that line. As last week's statement by the eight European leaders so eloquently put it: "If [those resolutions] are not complied with, the Security Council will lose its credibility and world peace will suffer as a result."
Donald Rumsfeld, The Global Fight against Terrorism: Status and Perspectives, Munich, Feb. 8, 2003

"The issue is not war. Nobody wants war," Dr Singh told media persons outside Parliament when asked to comment on the present stand-off with Pakistan over the Mumbai terror attacks.

He said India wanted Pakistan to make 'objective efforts to dismantle terror machine' and added that Islamabad 'knows what it implies'.

'Talk of war, surgical strikes is ill-advised'

Referring to 'many' UN resolutions prohibiting member countries from allowing terrorism to emanate from their territories, Dr Singh said Pakistan should "comply with those resolutions".

At the same time, he said: "The international community should use its power to persuade Pakistan (to end terrorism)."
Nobody wants war with Pakistan: Dr Singh, New Delhi, Dec. 23, 2008

I am traveling and will likely post little over the next few days.

Open thread …

While the terror assault in Mumbai was still ongoing, I developed a conspiracy theory speculating that it was a diversion to kill anti-terrorism officers that were investigating right-wing terror against Muslims by Hindutva with ties to the opposition BJP party :

This coordinated attack brought out all anti-terror units in Mumbai. That, I think, might have well been the intended aim. The attacks seem to have been designed to do and to create direct battle situations with the anti-terror forces.
…
The attack, designed to created fight-outs with police, killed the man who was the biggest danger for the BJP as he was revealing Hindu terrorism and made the BJP campaign against Muslim terrorism seem bigot.

Did the Indian minister Antulay read my piece?

Union Minority Affairs Minister A R Antulay today kicked up a political storm when he raised doubts over the circumstances around the killing of Maharashtra Anti-Terrorism Squad chief Hemant Karkare and suggested a link with the Malegaon blasts that the officer and his team were investigating.

Calling for a CBI probe into his death, Antulay said “there is more than what meets the eye” as Karkare was investigating cases in which “there are non-Muslims also” and “somebody wanted Karkare killed”. That “somebody”, Antulay claimed, sent the officer to the place where he was killed.

The ministers remark led to a storm in the Indian parliament, accusations of treason and unpatriotic behavior are raised and he will probably get pushed out of his job.

Meanwhile India and Pakistan prepare to go to war. 120 Indian ambassadors met in New Dehli and were briefed by the foreign affairs minister:

Cont. reading: India – Pakistan Prepare For War

For about a year now, the Fed is pushing more and more money towards banks, but even a trillion and some dollars later, nothing seem to have helped. Sure interbank landing rates came back a bit from the record values we saw before, but they are still much higher than they should be. More important lending to even good real economy companies has slowed to a crawl.

One reason is the counter intuitive Fed policy. To somewhat sterilize the expansion of its balance sheet the Fed is now paying interest on the reserves banks keep with it. The result:

Last week, banks were sitting on about $800 billion in excess reserves with the Fed, doing absolutely nothing with them.

But the real issue is trust. Some banks are insolvent, but we do not know which one is or which one is not. The Fed and the Treasury repeat the mistakes made in the 'lost years' in Japan where insolvent banks were kept alive until, six years into the crisis, then economics minister Heizo Takenaka got one thing right and finally forced them to come clean and write off their bad assets. Sweden did the equivalent when it nationalized the banking system, eliminated the shareholders and forced the banks to write down bad debt and to restructure before returning them to normal business.

As I wrote before when I demanded Declare All Credit Default Swaps Null And Void trust is the important issue and there is only one way to get it back.

As Ilargi says:

Cont. reading: Bad Assets – No Trust

The shiny city upon a hill meme is bread and butter of U.S. politics since the first Puritan colonists arrived and it is asserted by about every modern politician since JFK. Anna missed digs into its variants (1, 2, 3, 4, 5, 6) much deeper than I can. It is an entitlement the U.S. claims to have.

Here is another example, not mentioned in the media, where the U.S. stands out from the world. Where it is truly exceptional:

By a vote of 180 in favour to 1 against (United States) and no abstentions, the Committee also approved a resolution on the right to food,
by which the [UN General] Assembly would “consider it intolerable” that more than 6
million children still died every year from hunger-related illness
before their fifth birthday, and that the number of undernourished
people had grown to about 923 million worldwide, at the same time that
the planet could produce enough food to feed 12 billion people, or
twice the world’s present population. (See Annex III.)
…

Cont. reading: Truly Exceptional

Chairman of the Joint Chiefs of Staff Admiral Mullen wants to increase U.S. forces in Afghanistan by 30,000 next summer. One wonders where these troops are supposed to come from given that Mullen and other generals are trying to sabotage Obama's plan of retreat there. As the British leave, some troops will now also be needed to cover Basra.

Following their masters, the Brits also plan a troop increase in Afghanistan. This time by 3,000. They may be able to so because the Iraqi parliament just denied them a stay in Iraq beyond January 1.

Not everyone seems to be on board though:

U.S. military officers, speaking privately, concede that the bleak
outlook in Afghanistan will probably prompt a scaling back of US goals
for the country. There is widespread belief in national security
circles that the Bush Administration’s goals for Afghanistan were too
ambitious. Whether new boots on the ground will bring anything other
than short term tactical gains is the big question to which few in
Washington have an answer.

But when in Afghanistan, how will those troops get supplies?

The road war in Pakistan continues. Another convoy of NATO/U.S. supplies was attacked yesterday and three drivers were killed. Additionally:

On Thursday, more than 10,000 protesters in Peshawar demanded Pakistan prevent Western use of the supply route to Afghanistan, saying the equipment transported was being used for attacks on Pakistani soil.

The U.S. will increase the bribe/protection money it is paying the Pakistani military:

The United States will provide more than $300 million a year in military aid to Pakistan over the next five years, diplomatic sources told Dawn.
…
[Pentagon Press Secretary Geoff Morrell]said the proposal for new assistance for to Pakistan has come from
the Central Command and is at early stages. The proposed funding is in
addition to existing programmes, including the coalition support fund
and foreign military financing.

This may induce the Pakistani military to do more for convoy protection near the Khyber pass. But that would only move the problem down south to the port of Karachi where the convoys start and where a sizable Pashtun refugee population lives.

NATO is negotiating with Russia over opening a new supply route through Russia, Kazakhstan and Uzbekistan. The U.S. plans a different route through Georgia, Azerbaijan, Turkmenistan and Uzbekistan. There might well be additional ideas behind this plan:

Another dramatic fallout is that the proposed land route covering Georgia, Azerbaijan, Kazakhstan and Turkmenistan can also be easily converted into an energy corridor and become a Caspian oil and gas corridor bypassing Russia. Such a corridor has been a long-cherished dream for Washington. Furthermore, European countries will feel the imperative to agree to the US demand that the transit countries for the energy corridor are granted NATO protection in one form or the other. That, in turn, leads to NATO's expansion into the Caucasus and Central Asia.

I doubt that the effort will succeed. Russia will have a say in this no matter how much bribes the U.S. is willing to pay the dictators of those countries.

A short NYT portrait of Avraham Burg, an Israeli politician who became a gerechter (chassidey, righteous).

[F]our years ago Mr. Burg not only walked away from politics, but also basically walked away from Zionism. In a book that came out last year and has just been translated and released in the United States, he said that Israel should not be a Jewish state, that its law of return granting citizenship to any Jew should be radically altered, that Israeli Arabs were like German Jews during the Second Reich and that the entire society felt eerily like Germany just before the rise of Hitler.

…
MR. BURG has shifted the title of his book over the years. When he was writing it, he called it “Hitler Won.” When he published it in Hebrew he called it “Defeating Hitler.”

Partly, he said in the interview, his thinking is evolving, and partly his American editors made some smart cuts and suggestions. But it also seems clear that he has modified and adjusted his arguments, especially for a foreign audience. The English version does not have some of his more alarming assertions in the Hebrew one — for example, that the Israeli government would probably soon pass the equivalent of the Nuremberg laws, with provisions like a prohibition on marriage between Jews and Arabs.

So the editors thought that was too much for the foreign audience to take?

Aside from such: Let me recommend last years discussion/interview about the book between Burg and Ari Shavit in Haaretz (part 1 and 2):

The end may be optimistic, but throughout its entire course the book repeatedly equates Israel with Germany. Is that really justified? Is there sufficient basis for the Israel-Germany analogy?

"It is not an exact science, but I will describe to you some of the elements that go into the stew: a great sense of national insult; a feeling that the world has rejected us; unexplained losses in wars. And, as a result, the centrality of militarism in our identity. The place of reserve officers in society. The number of armed Israelis in the streets. Where is this swarm of armed people going? The expressions hurled publicly: 'Arabs out.'"
…
Are you concerned about a fascist debacle in Israel?

"I think it is already here."

While the capturing of the "Faina", a Ukranian ship loaded with tanks and other military stuff, by the Somali coast guard/pirates was noticed around the world, little has been reported in English about another ship that delivered a load of weapons late last year.

The earlier ship was the German fund owned heavy lift ship "Beluga Endurance", IMO 9312169. There were reports on this in Der Spiegel, Nord-West-Radio and the Hamburger Abendblatt, all in German.

The ship is on long term charter with Beluga Group, a heavy lift shipping company. In November/December 2007 the ship was on secondary charter with ACE Shipping, a company on the British Isle of Man which shortly before was sold to some Ukrainian interest.

Cont. reading: More Weapons To South Sudan

November 12: Will Paulson Spend The Full $700 billion TARP?

As the first tranche of the $700 billion is nearly gone, the Treasury will tell Congress that help to Detroit through the TARP program can only be given if Congress immediately and unconditionally hands over the full second tranche.

Today:

The conditionality of an auto bailout on releasing the second half of TARP is not made explicit, but that they are announced together is very suspicious:

Citing danger to the national economy, the Bush administration approved an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans in exchange for deep concessions from the desperately troubled carmakers and their workers.

…

At the same time, Treasury Secretary Henry Paulson said Congress should release the second $350 billion from the financial rescue fund that it approved in October to bail out huge financial institutions.

Only yesterday the White House said it was considering bankruptcy for the automakers. That was certain to build pressure. Only three days ago Paulson said he will not ask for the second TARP tranche at all. Now he does. Now he knows he will get away with it.

I believe there is a deal behind this. Bush pressed Reid and Pelosi to not block TARP part II as a condition for a TARP loan to the automakers.

To formally get the second half of TARP Paulson needs to send a plan to Congress on how he wants to spend it. Congress then has 15 days to block the money. Bush could veto that block. Congress could override that veto.

But what if  Reid and Pelosi do not call Congress back to Washington between Christmas and new years eve to stage a difficult fight to block the second $350 billion?

The second TARP tranche will sail through quietly. Congress will aprove it by not convening. And the automakers are safe for now.

In 1976 Emmanuel Todd predicted the down fall of the Soviet Union. In After The Empire, first published in French in 2001, he predicted the (relative) decline of the United States. From a 2003 review:

Todd makes the following key points:
…
3.  The United States economy is headed for a crash and is only buoyed up by foreign investments. The United States trade deficit is a disaster that is fed by US firms which push their factory jobs overseas and gut the nation’s industrial base. Some 10% of American industrial consumption depends on foreign goods for which there is no corresponding balance in national exports. America no longer has the economic and financial resources to back up its foreign policy objectives. The United States is becoming a nondemocratic, arch-conservative society split between the very rich and the service sector;
…
5. The United States is economically dependent on those countries which hold its bonds and debt–China, Japan and Europe. The US needs a certain amount of global disorder to offset this dependence in order to maintain the US political-military presence in the Old World; and,

Seems like he got some things right.

Now Todd published a new book, this time on Europe. I have not yet read it, but this from a Financial Times review sound interesting:

Ordinary
workers blame cheap-wage China for killing jobs and compressing wages.
Instead, France’s leaders scapegoat Muslim immigrants and target
militant Islam, justifying an unpopular intervention in Afghanistan.
Employees want Europe to protect their jobs but, in spite of his
increasingly protectionist rhetoric, Mr Sarkozy – and the opposition
Socialist party – still adhere to the free-trade dictates of the EU and
the World Trade Organisation.

In Mr Todd’s reductionist view,
globalisation is simply the exploitation of cheap workers in China and
India by US, European and Japanese companies. He is therefore an
unabashed champion of European protectionism. Erecting trade barriers
would increase European wages which, in turn, would increase demand and
boost trade, he argues. The “social asphyxia” that is sucking the
breath out of democracy would disappear.

The British, whose very
identity is wrapped up in free trade, will never buy protectionism, Mr
Todd suggests, but Germany and the rest of the EU could be persuaded.

Hmm … Possible? Likely? What do you think?

The world economy is facing two distinct crises, one in the financial sphere and one in the productive sphere. While interlinked in their creation, they demand different remedies.

The creation of these crises originated in the financial part of the economy:

Over the last 15 years, increased competition (within the industry and increasingly from non-banking institutions) and the reduction of earning from the commoditisation of products forced banks to rely on “voodoo banking” – performance enhancement to boost returns.

Voodoo banking created money out of nothing, pushed it down the throats of gullible consumers and sold the such created debt assets to gullible investors.

The regulators stood by or were even complicit in the gigantomaniac Ponzi scheme. The fictitious financial industry grew ten times bigger than the real one it was betting on.

Driven by brutal marketing the consumers indebted themselves more and more. They used the money to buy more and more stuff. Houses, cars or whatever China could produce for them. This artificial demand created production capacity that under more benign circumstance would never have been created. World wide car building capacity now by far exceeds plausible demand.

But finally the consumer was exhausted. Even at 0% interest and no income questions asked there was no one left to take on another loan to buy another house at astronomic prices. The bubble burst.

The financial pyramid came down first. Investors found out they had been lied to. Banks found they held the toxic stuff they had created in their own portfolios. Lehman crashed and took everyone with it.

The feds and governments of this world  try to pump money into the financial industry black hole to reanimate the bubble economics. This will inevitably fail. The financial industry is mostly insolvent. No one will lend to another financial entity unless it knows it will get its money back.

As everyone by now recognizes, no one can trust the statement of a bank CEO, balance sheet numbers, the rating agencies ratings, the regulators neutrality, finance media talking heads or politicians.

No one lends in such an environment no matter how much money is thrown into the game. Bernake's quantitative easing will fail.

In the end all financial business is based on trust. Trust in the system and in counter-parties is gone.

The only way to revive some kind of financial system is to sort out the bad apples, to open the books, to re-regulate to very clear and simple standards. And yes, throw some folks into jail. Unless that gets done, trust will not come back.

The real world has a different problem. The artificial demand created by debt peddled to the consumer has evaporated. The production capacities that were created to satisfy that demand are now standing still. Unless debt gets forgiven the consumers will, for many years to come, not be able to go on another buying binge.

Lots of people will now become unemployed. The production capacity will rot away one way or another just like many of those cheaply build overpriced houses.

There is no way to avoid this now. The government can create some demand and put some people to work with infrastructure investment. But it can not replace all the artificial consumer demand that has withered away. If it tries by pumping up money supply it might well create an immense inflation in the mid of a depression.

My grandfather left me some Reichsmark notes. One has 100 million printed on it. But before it was issued the 100 million got overprinted in red with 1 billion. It may have bought a loaf of bread at that time.

The fixing of the financial realm will come when authorities get real with re-regulation and shutting down zombie institutions.

A fixing of the real economy is not possible. Production capacity has to shrink back to a more realistic demand level. Public programs can help to soften the slump. What can and should be done is to help those who lose their jobs, be that by public works or some payed retraining. To let wages fall, as soon some will argue for, will only decrease demand further.

Such crashes as the current one happen every century or so. Usually after the generation that lived through the last crash is gone. Then people forget and redo the errors their ancestors committed.

Unfortunately the politicians that have the task to find ways out of the crisis also redo the errors their ancestors committed.

Instead of cleaning up the Augean stable that the financial industry is, they feed the animals to produce more dung. Instead of letting over-production capacity decay, they will try to keep it going through subsidies and tariff barriers. It will take years until some sanity will get into their action.

Stable societies can survive such storms. Unstable societies may see large revolts and wars. Some  stable societies may join in on those wars as domestic Keynesian programs. To created demand at home, to put unemployed into uniforms and in hope to capture this or that natural resource.

Let's hope that will not happen.

But I am not optimistic anymore. This is not just another recession. This is a depression and a global one. Not a great one, but greater.