China's Growing Pollution Problem and Social Mood

Mish has a great post up called China's Bill for Cleaning Air Pollution Mounts; State TV Promotes Benefits of Smog. My own take: the number of cars surged in recent years thanks to government subsidies. By some numbers the air is getting cleaner, but my view is that the air became much dirtier in 2013. Another issue is social mood: Chinese are in a negative mood and smog is increasingly a point of anger.

From one linked article in Mish's post

an expert from China’s Ministry of Environmental Protection just claimed that the smog is there to stay for ten to twenty years. Amid the gloomy outlook, however, there’s some silver-lining—CCTV, China’s national broadcaster, has identified five benefits of the smog: first, it has made people more united, because smog is a common enemy everywhere in China. Second, it has made people more equal, because both the rich and the poor have to inhale the same polluted air. Third, it has made the Chinese more clear-headed as to the price that the nation has to pay for becoming the “world’s factory.” Fourth, it has made the Chinese more humorous. Sarcasm abounds when it comes to the topic of smog, and “that sense of humor is the source of strength for defeating the smog.” Fifth, it has made the Chinese more knowledgeable, as people become educated on concepts like PM 2.5, important historical events like the London Great Smog of 1952, and even English words like “haze” and “smog.”

Of course this attempt at spin failed miserably as it only made the public even more unified in their anger.

Chinese reaction here: “5 Surprising Benefits of Smog” Jokes CCTV, Chinese Reactions

嘟嘟美女：

The smog has made historic contributions to realizing the revival of the Chinese nation and the Chinese Dream! lxhguzhang_org

Rookie智：

The smog has made this reporter brain damaged.

welonee：

Among the five major benefits, making Chinese people more equal is indeed true. No matter how much money you have, no matter how much power you have, no matter whether you live in a villa or in a basement, the smog is always there, where you can’t avoid breathing it!

布达拉蛋挞：

Being continuously poisoned/bewitched by CCTV is much more severe than smog.

火星柳叶刀：

That CCTV could think up these five points sure wasn’t easy.

一个晴空的云朵：

Can I say that I want health?

找个烂借口：

I totally don’t have this kind of feeling! Maintaining national unity should not rely on SARS, earthquakes, bird flu and smog. To realize real unity must rely on developing the economy and create a harmonious, open, pluralistic but cohesive concept of culture/civilization ~ angrya_organgrya_organgrya_org

Jenna蛋蛋：

I felt it was quite well said. See, the air quality is better today ~ Only by having hope will the nature treat you well. Only by having faith can we not be flustered. Of course, I also hope the government will introduce more environmentally friendly policies, and also hope that everyone can use a calm state of mind to fight for the opportunity of fresh air. This is the so-called “everything can be settled through discussion” ~ I also believe that the future will be better and better. hearta_org

nabo1982：

Except they did not think of what should be done for accountability and governance.

无-法：

Who will really do their part for [improving] air pollution? Such as quitting smoking and driving their private cars as little as possible? Ultimately, we still have to wait for the country to force losses linked to citizens’ self-interests can true it attract the true attention and concern of everyone.

YAS1993：

To have this kind of media (official media), I too felt an unexpected gain gain/benefit. crycry

子桐在德令哈:

Turns out Chongqing people being united, equal, humorous, and knowledgeable all the time was because they are in smog every winter.

A Vision of the Future: A World Filled With Robots and Religious Fundamentalists?

Mish has a post up: Dark Vision for Jobs: Jobless Future? Is It Different This Time?, in which he discusses automation. Some analysts are starting to predict major job losses due to automation hitting all levels of jobs, from complex to the simple.

The most likely future path I see unfolding, if there really is no future innovation that requires large numbers of workers, is one where people are plugged into immersive games and entertainment. In a world of automation, what will be the cost of providing the average citizen with a basic existence? Think about how many people are going on disability, how many are already happy on food stamps and welfare. Now consider that the trend is for young people to drive less and to entertain themselves digitally. Entertainment costs could plunge and people will be plugged in all day. Imagine how many people would accept a life of no work and no responsibility.

Many Westerners already choose a hedonistic lifestyle and do not have children. If there was an even easier path to this lifestyle, one could imagine a highly automated world functioning with a very low birthrate. Charles Murray has proposed the minimum income to replace all welfare, and Switzerland may vote it in. Under the Murray proposal, if people have children they will receive no cost of living increase. Therefore, there will be a great incentive for people not to have children, because having children will mean the need to work (at all, let alone harder). And while it is tossed around as a joke, there really may be some issue once the sex industry develops authentic sex bots. At that point, the fertility rate may plunge for real because in the automated society, where's the incentive for government to reverse a decline in fertility? The Catholic Church and other traditional religions will oppose it, but their sphere of influence will be reduced to a small number of reactionaries who refuse the easy life. They will be people who still choose to do manual labor even for no pay (like Benedictine monks) and have multiple (or any) children.

Over enough generations, everyone who doesn't want to work will have voluntarily remove themselves from the gene pool. This could lead to a future with a large population of religious people (though a population far below today's world population) who maintain the automated systems and do the jobs, with an elite creative/entrepreneurial class who eventually reach stable fertility.

That's not really a prediction, but I think it's most plausible than some of the dystopian visions of over population. From a Christian perspective, this future world would be a dystopia (or at least the path arriving at it), but many people might willingly choose this lifestyle if it were offered. Instead of a government imposed Brave New World of genetic engineering, it would be a voluntarily chosen Brave New World. The wide gate will be offered, and many will willingly pass through it.

In fact, I expect people will find jobs. It may require a lot of people to keep the machines running and if automation really takes off, total production could soar. Freed up labor will be redeployed. With higher profits, businesses that find ways to do more with cheaper labor will out-compete their rivals. In the short-run, energy bottlenecks will slow automation. In the intermediate term, new jobs will be created. In the very long-run though, when science fiction starts becoming a reality, then we might see some type of future where machines can outperform the majority of humans at most tasks—but that day is still quite a ways off.

Excellent post by Mish puts the kibosh on yuan as new reserve currency

There has been a flurry of yuan talk of late, about a new yuan-bloc of nations that are using the renminbi more than the U.S. dollar. While the renminbi continues to grow in importance and currency reforms continue to expand the use of the yuan, the facts on the ground differ from the hype. China doesn't want the yuan to be the reserve currency.

Furthermore, although Mish doesn't get into this, China's currency reform is creating structural weakness, not strength, in the short-term. Over the next few years, the risk of a currency crisis in China will rise because pent up demand for foreign assets on the part of Chinese individuals and companies will drain the central banks reserves. Any policy missteps could lead to a rush for the exits, rather than a slow and steady rebalancing of the economy.

I see yuan hype as mostly coming from U.S. dollar bearishness. People are trying to figure out what will replace the U.S. dollar. Looking at "recent" history, the two reserve currencies were the British pound and then the U.S. dollar—two major superpowers with large numbers of colonies/allied/client states around the globe. Looking ahead, odds favor a multipolar solution, which argues for gold or some type of global fiat currency as the new reserve currency.

Anyway, on to Mish:

Is the Yuan About to Replace the Dollar as the World's Reserve Currency?

Three Essential Facts

1. China's bond markets are not big enough or deep enough for the Yuan to displace the US dollar.
2. Contrary to what most think, having the reserve currency is a a curse more than a blessing.
3. Neither China nor the US wants to be the global reserve currency.

The first point alone seals the fate in my opinion but let's take a closer look at the "curse of the reserve currency".

Mish talks sense on hyperinflation

Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?
Mish correctly describes hyperinflation as the loss of faith in the currency. He goes on to say that:

It's important to note that hyperinflation is not really a monetary event in the first place. Rather, hyperinflation is a political event caused by governments.

I once pissed off a University of Chicago economics grad by making a similar statement, although I describe it as a cultural event.

Mish lists a chart of many hyperinflations:

I would take Mish's argument one step further. In the worst hyperinflations, such as Wiemar, post-WWII Hungary and Zimbabwe, the entire cultural fell apart. In Wiemar, there were nationalists and communists engaged in civil warfare, executing political leaders, while parts of Germany were occupied by foreign powers. In Hungary, after being destroyed in WWII, saw the coming of the Red Army. In Zimbabwe, a policy of white genocide against farmers systematically destroyed the country's economy. If someone predicts this level of hyperinflation, they are predicting civil war or foreign invasion.

Moving up a bit on the list are cases such as Chile. Allende was feared to be installing a Marxist dictatorship and was subsequently overthrown by the military, led by General Pinochet. Others are post-Soviet collapse or during war.

Simply put, there's not going to be hyperinflation in the absence of a war, and that war must be one in which the United States is feared to lose, and not Vietnam lose, but more like Russian invading and taking Alaska or the entire Navy sunk and the U.S. forced to give Hawaii to China.

In reality, when you look back at what has taken place over the past 30 years, the inflation is in the past. It would take an extraordinary political act to spark inflation, let alone hyperinflation.

Earlier this week in How much money does the Federal Reserve need to print in order to end the the threat of deflation?, I used one method (the chart below) to estimate the Fed needs to monetize $8 trillion in order to stop the deflation. That's one estimate, using one simple method, but based on the debt problem facing the United States, it's in the ballpark.

Sarkozy finished?

Taiwan stayed with current leadership in their election, but it appears France may go with new leadership as Nikolas Sarkozy only has a 2% lead on the anti-euro Marine Le Pen.
He currently has a 2% lead on Le Pen, but is behind the Socialist Party candidate. France has two rounds of elections: a first and then a second run-off if no candidate has more than 50%. In 2002, Jean-Marie Le Pen led the National Front to a first round victory over the the left-wing candidate, but in the run-off French voters came out overwhelmingly in support of Jacques Chirac. This time around, things are going to be more interesting. If Marine Le Pen knocks out Sarkozy, she will likely pull some right-wing support her way. However, since the socialists are also against the current euro bailout deals, she may not be able to turn her anti-euro stance into the presidency.

The CAC 40 is trading above 2009 lows, but not much. It is only higher than about 1 month of trading, when the indexes plunged to panic lows.
H/T to Mish. "Let the Euro Die" Candidate Trails Sarkozy by Slight 2 Percentage Points; Will Sarkozy Survive the First Round Vote? Eurozone About to Become Unglued

Mish, ZeroHedge take on Roubini on gold

Dear Nouriel Roubini: The Fundamental Case for Gold Has Not Changed; To Understand, All Roubini Need Do is Look in a Mirror
ZeroHedge: Roubini Asks of ‘Goldbugs’ on Twitter “Where is 2,000?”
Coming from the perspective of deflation, gold is overpriced. However, all assets except the U.S. dollar are overpriced and since a major deflationary wave may include more MF Global scenarios where money market and other "cash" accounts are wiped out to zero or some reduced percentage (I saw one story saying MF Global customers may get two-thirds of their cash back, or "only" lose 33% of their cash), then physical gold in your possession is relatively attractive. It also offers wildcard protection should a major central bank surprise everyone with a massive printing scheme, and by massive I mean multiple trillions of dollars. The other factor I see is that gold bulls have correctly noted Chinese demand, but Chinese demand is conditioned on a strong economy. Should the economy slow down markedly in 2012 (and I anticipate it will), demand for gold will slow as well. Here, the wildcard is a collapse in the yuan and exchange rate driven hyperinflation in China, which could send Chinese investors into gold or U.S. dollars.
FWIW, I am allowing cash to accumulate and plan on purchasing gold at significantly lower prices from today's $1600 level. I expect the $1000 level will not be breached, but a decline of several hundred dollars from here would no surprise me, if only because there's too many people who believe in inflation. While I will calmly watch a decline, those betting on inflation may dump their positions in the face of terrible declines.

More deflation mechanics

Mish Shedlock has a post about deficiency judgements. Go there to read it all, I just want to pick out a snip from an article on the post. House is Gone but Debt Lives On; Expect Huge Surge in Deficiency Lawsuits

Silverleaf says its collection efforts are limited. "We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.

Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.

Debt haunts the economy. If people borrow money, it might be to pay off their debt...

Interactive Map of Banks in Trouble

Mish has an interactive map of banks with solvency issues. I haven't had time to check it out much, but there's a lot to see. A cursory glance shows the Southeast is vulnerable.
Interactive Map of Worst Banks in the U.S. by Texas Ratio, Non-Performing Assets, and Total Capital

Deflation, Chinese yuan, gold and other connections

I've been busy lately and haven't had as much time to post, but the financial markets continue to behave in a manner that has me planning rather than acting.

If you read nothing else, check out Hugh Hendry's latest letter to investors. He's still in the deflation camp and he raises some interesting points, such as the under-ownership of U.S. Treasuries by Americans, financial institutions and individuals. He compares it to Japan, which saw government debt ownership increase following the 1989 asset bubble peak.

Also see this from ZeroHedge, whither depegging. It's a good summation of the Chinese point of view on yuan revaluation and why one shouldn't expect it any time soon. And on that score, the China Banking Regulatory Commission (CBRC) Chairman Liu criticized U.S. government policy for creating new asset bubbles and following in the steps of Japan.

The yuan could be the critical currnecy. As the "whither depegging" article discusses, if the yuan started appreciating now it could cause an acceleration away from the U.S. dollar. That would cause gold and other commodities to gain and give the Federal Reserve a huge headache. Perhaps a terminal aneurysm.

Also see Mish Shedlock on unemployment "Unemployment Projections Through 2020 - It Looks Grim" and an FHA bailout.

Mish Makes the Case for Deflation

and refutes an argument for inflation. Check out "The Big Inflationist Scare"

However, Gary's hypothesis "the Federal Reserve can re-ignite monetary inflation at any time by charging banks a fee to keep excess reserves with the FED", is just that, a hypothesis, and I believe a very poor one at that.

Bernanke's idea to pay interest on reserves will slowly recapitalize banks over time. This is why he desperately wanted to do so. To suggest he is about to charge interest on deposits is silly.

The key fact now is there are not enough credit worthy customers for banks to want to lend, or for that matter willing borrowers looking to expand debt. Thus, if banks had to pay interest on reserves, rather than causing mass inflation, the Fed would cause mass panic.

Indeed, the likely result would be banks scrambling for dollars to repay the Fed as opposed to a mad dash to lend dollars.

Clearly the Fed understands this. Thus, it's not the Fed who is screaming about the banks' unwillingness to lend; it's Congress. Moreover, banks won't lend because most of them know the score as well, regardless of what lies they tell the public about being well capitalized. This is why "reserves" are accumulating in the first place.

Of course those "excess reserves" are a mirage; they don't really exist. Banks need those reserves because of the massive wave of credit card defaults and foreclosures yet to hit the books. Every uptick in unemployment exacerbates credit card losses, foreclosures, losses on home equity loans, etc, something that Gary North ignores.

So charging interest on reserves would not bring about inflation, it would cause a systemic deflationary crash if Bernanke was foolish enough to attempt it.

Read the whole thing. I agree with Mish on every point, especially the facts: rising savings rates, tighter regulation, and more credit losses.

One point I made recently is that if the Fed wanted to inflate, it first needs deflation anyway. I do not believe it is possible to inflate when everyone is watching. Who will be the sucker to lend money at 4% when "everyone" knows the Fed will create 6 or 7% inflation? You have to have everyone looking for deflation or complacent with low inflation. When everyone is looking for inflation, you get bond vigilantes and people piling into oil futures. When commodity prices soar and interest rates head higher, Fed printing will cause rates and commodities to skyrocket in pure bubble fashion. On the other hand, if the Fed does nothing, it acts as a deflationary force on the economy. Zero Hedge excerpted a David Rosenberg report on June 9, to wit:

U.S. retail gasoline prices are now up a full buck from the lows, to $2.62 a gallon (up 41 days in a row) — the equivalent of a $130 billion drag on discretionary spending at an annual rate. Tack on the 60bps bounce in mortgage rates too, which has triggered a near-60% collapse in mortgage refinancings. Then tack onto that the 0.2% decline in average weekly earnings in May — down now in two of the last three months — and a consumer relapse could well be in the offing and end up snuffing out this ballyhooed inventory-led recovery that has underpinned equities and undermined Treasuries over the last 3-4 months.

Higher oil prices and higher energy prices, the supposed signs of hyperinflation, threaten to derail the recovery. Ben Bernanke probably thinks he lives in bizarro world. He's fretting about deflation, but won't publicly say anything lest he frighten the public. On the other hand, he's painted as helicopter Ben. Millions of people are making his job much harder by threatening high inflation at the drop of a hat and their actions will exacerbate any deflationary flare up. The actions of the inflationists themselves indicate deflation!

The Federal Reserve is clueless

Really, the Federal Reserve doesn't understand what is happening in the government debt markets. I hope Reuters analyst Alister Bull has made an error and the Federal Reserve does not actually believe the second paragraph below:

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

Quantitative easing is the reason people are worried about a U.S. dollar collapse. Stepping up quantitative easing will not solve the problem, it will exacerbate it. All QE can achieve is the lowering of interest rates. On the issue of central banks such as China reducing long-term bond purchases, in my post Crowding Out has arrived, I linked to the Brad Sester post that shows this is exactly the case.

Read the whole article. The Federal Reserve has no idea what it going on, yet they are pursuing the most interventionist policy in their history. Does that inspire confidence? I've mentioned TBT and PST before, two ETFs that deliver the double inverse of the daily change in Treasuries. The above is why the trade carries risk above and beyond their leveraged nature.

Unfortunately, it doesn't appear the Reuters story was wrong on the facts, Bloomberg has a similar story out today:Treasuries, Dollar ‘Only Game in Town’ as China Buys.

Fed officials see several possible explanations for the rise in yields. One is the outlook for the economy is improving and investors are selling government debt used as a hedge against mortgage securities.

Another is the supply of Treasuries for sale exceeds the Fed’s so-called quantitative easing program. After cutting its target interest rate for overnight loans between banks to almost zero, the central bank pledged to buy as much as $300 billion of Treasuries and $1.25 trillion of bonds backed by mortgages to cap borrowing costs.

That confirms what Reuters reported about the Fed believing their asset purchases may not be sufficient. The article also goes on to mention central bank purchases, mentioning China specifically:

China increased its holdings by 3.2 percent, the most since November, buying Treasuries with its reserves to control the level of the yuan. The currency, which was pegged at about 8 to the dollar until July 2005, has traded between 6.8 and 6.9 since last June. It closed May 29 at 6.8291 to the dollar.

“To some extent they have to buy Treasuries because they want to support their currency peg,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC. The firm is also a primary dealer.

China can cease purchasing Treasuries as soon as they decide to allow the yuan to appreciate. The article goes on to discuss "bond vigilantes", sovereign credit ratings, and Fed policy, and then this:

Indirect bidders, a group that includes foreign central banks, purchased 54.4 percent of the $40 billion in two-year notes sold May 26, the biggest percentage since November 2006, according to the Treasury. They bought 44.2 percent of the $35 billion five-year notes auctioned May 27, compared with an average of 32.4 percent at the previous 10 sales. The scooped up 33 percent of the $26 billion of seven-year notes offered on May 28, matching the average of the other three sales this year.

“The idea that we have lost sponsorship at the auctions seems farfetched,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut at RBS Securities Inc., another primary dealer.

Central banks purchased a larger percentage of bonds on the day rates tumbled. The simplest explanation is that outside of central banks, there isn't much private demand for government paper, the old argument for crowding out, considering the action in mortgage markets. Please see Mish Shedlock's post,"Mortgage Market Locks Up". Mish also covered the Federal Reserve's failure on Wednesday in a post titled: Treasuries Massacred; Yield Curve Steepest On Record
Check out his post, which includes the following quote from Fil Zucchi, "As I publicly asked before, if Mr. Fed can't rig the price of an asset by buying it with printed money, why should anyone else buy it?" The chart above indicates few have found an answer to that question.