The Dollar

I guess this means that everything will be just fine, for whatever that is work these days.  China to Stick With US Bonds.

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday.

Mr Luo [director-general at the China Banking Regulatory Commission], whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Bailouts

Clusterstock this morning has a great summary of a Minneapolis Fed paper, The Current Financial Crisis: What Should We Learn From the Great Depressions of the Twentieth Century.  Clusterstock simply titles their post, How To Cause Great Depressions.  The two salient points:

1. Seizing and breaking up insolvent banks while reprivatizing strong ones is expensive, but it works.  See Chile and Finland.
2. Nursing insolvent banks and unproductive firms along leads to a Great Depression.  See Mexico and Japan.

New York City

This really isn’t a New York City specific post, but I am not really sure where else this happens.  In many older, multi-family building, the costs for electricity are included with the monthly rent.  Some of these buildings are now being retrofitted to submeter the electric usage by the tenants so that, in turn, each tenant can be charged for their own usage.  Many times there are financial reasons for building owners to do this, but submeters also purported to save energy.  From the New York Times,

The concept, called submetering, is a pocketbook approach to energy conservation. Instead of being allowed to use heaters, lights and appliances without worrying about the cost, tenants will have to pay for the power they use, which proponents say provides an economic incentive to reduce energy consumption.

In a recent example of this occuring in the Roosevelt Island section of NYC, there were some rather interesting results.

Last week, managers at Roosevelt Landings, the home of many low-income and working-class families, handed out sample electricity bills. The bills, for a 33-day period from November to December, were based on the readings of submeters installed in individual apartments.

Vera Velloso, 40, who lives in a three-bedroom unit with her husband and three children, received a bill for $1,050.43, which was about half of what she pays in rent.

The first item that caught my attention in the article was electric heat in NYC?(!)  What were they thinking?  More to the point, however, hopefully this sort of thing gets more consumers and potential buyers of real estate more focused on energy usage and costs where they live.  Imagine if potential buyers asked for six months of utility bills as part of due diligence.   Some of those energy retrofits might start to look more appealing.

Friday Quote

A bonus Friday Quote.  U.S. Rep. David Obey (D-WI), the chairman of the House Appropriations Committee, speaking about earmarks in the stimulus bill.

“So what?”

Friday Quote

And I’m goin’ with some hesitation, you know that I can surely see, that I don’t want to get caught up in any of that funky shit goin’ down in the city.

-Steve Miller Band

The Dollar.

This is where the rubber really starts to hit the road, so to speak, US Treasury in Plans for Record Debt Sale.

“The Fed has to be troubled by the fact that mortgage rates have been rising and the buying of Treasuries by the Fed may come sooner than the market expects,” said William O’Donnell, UBS strategist.

At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month.

The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.

The rise in Treasury yields has been pushing mortgage rates higher, complicating efforts to revive the economy. The US Federal Reserve said last week it was “prepared to” buy Treasuries if that would be a “particularly effective” way of reducing private borrowing costs.

The one question about this that I have been pondering was articulated by James West in Dollars, Gold, and Soon – Intelligent Life.

So let me see if I have this straight. The Fed prints money based on the sales of United States Treasury bills, which the U.S. Treasury sells to investors so it can write checks to the Fed so the Fed can print money. If the Fed is the buyer of T-bills, then isn’t that like kiting a check to yourself from your own account at a different bank? Is this how the debt/money supply thingy works?

If I did that, at some point I would get a visit from a gentleman wearing a uniform who would be determined to stop such behavior by depriving me of my liberty. I think it’s called “fraud”. The trigger for that would be when the bank cashing the check realized that the signature on the back of the check was the same as the one on the front.

The Dollar.

The “Best Quotes of January 2009” from DollarCollapse.com.  (The fact that there is now a website with the address probably says something as well).  There are plenty there, but I’ll excerpt one quote here.

The grim reality is that when the real estate bubble burst the Government was able to “bail-out” private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option.

Bailouts.

The current administration is set to announce today limits on executive pay at firms taking money from the next round of TARP funding.

Can anyone envision a scenario where the executives of Wall Street firms simply become front men/women for the “real executives” running the operation from behind the scenes.  Basically, a few people, who probably would not be able to make it into executive positions on their own merits, are pushed into the top positions at these investment banks, take the limited $500,000 a year salary, while the people actually running the show are quietly behind the scenes, making their normal pay.

I am thinking of the situation of Phillip Green running the Tangiers Casino for Sam Rothstein in the movie Casino, presumably because Rothstein does not want to undergo the scrutiny required to obtain a gaming license.  Or Wendell “Orlando” Blocker running Orlando’s strip club as a front for the kingpin of the drug dealing operation, Avon Barksdale, in series The Wire. In both these cases, the front man provided cover for the nefarious backgrounds of those actually running the operations.

Somewhat similarly, would it be possible for a Wall Street firm to push someone into the executive position to take the $500,000 and provide cover for those running the show behind the scenes, who are presumably taking a much larger salary?

UPDATE: Unrelated, since it comes from the first TARP distribution, but interesting.  Goldman Sachs Would Like to Pay Back TARP Money, Viniar Says

The Dollar

From Niall Ferguson’s discussion of the Great Depression in The Ascent of Money,

A second lesson of history would therefore seem to be that the benefits of a stable exchange rate are not so great as to exceed the costs of domestic deflation.  Anyone who doubts that there are lessons to be learned from history need do no more than compare the academic writings and the recent actions of the current chairman of the Federal Reserve System. (p 164)

I tend to agree with this, but during the time of the Great Depression, the US was a creditor nation.  Currently, the US is, in a big way, a debtor nation.  Losing control of the exchange rate can portend losing control of borrowing ability.  Somewhere in all of this there would seem to be a tipping point.

The Dollar

Paco Ahlgren has a four point plan on why the dollar is going to fall, The End of the U.S. As We Know It: Tracking the Dollar Downward.  His conclusion,

The demise of the dollar is imminent, and there aren’t a whole lot of different scenarios that could play out. I’ve established that the amount of currency in the system — especially once multiplied — is going to result in rising prices and rates. Likewise, the massive amount of existing and future debt is going to demand higher and higher yields. So which one is going to to lead the downward charge? My guess is the Treasury bubble will continue to unwind and this will damage the dollar’s integrity — after which the imminent rise in prices and rates caused by inflationary printing will only be exacerbated. Of course the dollar could start to weaken in anticipation of these rising prices and rates, pushing Treasuries lower.