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View Full Version : USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen



EJ
06-05-09, 11:59 AM
http://www.itulip.com/images/2ndmeeting300.jpgUSA Fire Sale, 2nd Meeting, June 2009: Political capital call

The following fictional conversation never occurred in June 2009 between Treasury Secretary Tim Geithner and a Chinese negotiator named Cheng for the sale of U.S. assets, at least not that we know of.

The first fictional meeting July 3, 2007 (http://www.itulip.com/forums/showthread.php?p=11927#post11927) between Cheng and America’s representative broke off without a deal. Maybe Geithner did better on his latest trip to China.

Cheng: You’re back.

Geithner: I’m here to represent the government of the people of the United States of America...

Cheng: Of course you are.

Geithner: ...and I’d like to begin by saying that I cannot speak to commitments made by the previous administration by my predecessor...

Cheng: This is the difficulty with your “multi-party” system. Leadership change there between your two political parties controverts the principle of accountability that is supposedly the chief benefit of your so-called “democratic” system. The system is supposed to replace ineffective leadership with more effective leadership. Represent the will of the people? In truth both political parties in the United States are captive of influence from your finance, insurance, real estate, weapons manufacturing, and pharmaceutical industries that finance elections there. The leaders they choose constantly rotate in and out of power, avoiding blame for the problems they leave behind. Voters chase one meaningless promise for “change” after another. The latest administration is not held responsible for the previous administration’s mistakes. There is no continuity or sustained effort toward a goal for the nation and its people. Errors accumulate.

Geithner: I do not hope to get into a political argument...

Cheng: I'm getting to my point. The greatest accumulated error of all? Foreign government debt.

Geithner: If we can get back to...

Cheng: Your so-called economy, and those of your western allies who have followed you on your misguided path to finance-based wealth, have become a burden to the savers of the world. How do you feel to come here once again, hat in hand, to us, a nation that the west only recently granted admission to the WTO but still holds out of the OECD and other international governing bodies? We read in your press that China is a third world country. Why then is the United States, the leader of western democracies, borrowing from us, and under ever more desperate circumstances?

Geithner: I’d like to get back to the matter at hand...

Cheng: Please be patient. I not you will frame this discussion, thank you.

We are tired of the accusations of your Congress that we manipulate our currency. Tired of your western paid so-called “economists” criticizing our use of our “excess” savings, as you call them, as we see fit. Tired of so-called human rights organizations, financed by your British allies, accusing us of human rights abuses because we will not abide dangerous cults inside our own borders. Tired of your “Pentagon” accusing us of increasing our military capabilities to threaten the United States, even though our spending is a fraction of your own. There is not a single Chinese military base outside Chinese territory yet America has 747 bases around the world, including many near to China. Everyone can see that your weapons industry has ties to your government. It creates this excuse of a military threat from China to justify appropriations of public funds from your legislature. And who do you ask to cover the gap in funding for these programs when you can’t raise the funds through taxes or from domestic or foreign borrowing? Us! Your “enemy.” It’s outrageous. Ridiculous.

Geithner: To keep this conversation constructive...

Cheng: These are the matters that we will discuss today.

Geithner: I’m am not sure how in the context of these negotiations I can address your...

Cheng: I will help you. All in good time. When we met in July 2007 we held $480 billion in U.S. Treasury bonds. Now we hold $768 billion, an increase in nearly 40% in less than two years. Obviously, our foreign exchange needs did not grow by 40% in two years. We want to exchange a portion of these securities for assets of value to us. What have you come to offer?

Geithner: I have come prepared with a few ideas, but before I get to those there is a matter of concern to us. Officials of the Chinese government have over the past months made a number of public statements questioning U.S. sovereign debt quality, particularly since we began to execute emergency government investment programs to support our economy similar to the Chinese government spending programs. Your central bank representative Yu Yongding repeated these points to me yesterday, and the matter also came up at a speech I gave at Peking University. U.S. government bonds represent the gold standard of sovereign debt in the world...

Cheng: Yes, we read the reports in your press.
Geithner tells China its dollar assets are safe (http://www.reuters.com/article/companyNewsAndPR/idUSPEK14475620090601?sp=true)
June 1, 2009 (Reuters)

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.
But again, the purpose of this meeting, nor the last one, is not about future purchases. We own a great deal of U.S. debt. We do not need to be “sold” on U.S. debt. The question is, what do we do with the U.S. government securities we already hold? This question has been a matter of intense internal debate here, and—quite frankly—deep and growing concern. We used to argue within the government about the urgency of it, about the soundness of the policy of buying U.S. debt with savings of our people, but there is no disagreement anymore. The actions of your department, and your central bank, and your legislature over the past year have decided the argument. Something must be done. Something has to change.

Geithner: Are you referring to our fiscal stimulus programs? These amount to 5.5% of 2009 GDP. These are reasonable compared to China’s outlays of 6.8% of GDP...

Cheng: Your projections assume that your GDP will not shrink. That is unrealistic. Our stimulus programs are not, as you claim, like those pursued by your government. They are not even remotely similar. When your legislature approved spending in February this year no national improvement plan existed to build on. The as yet unelected Obama administration hastily threw together a plan that focused on infrastructure and alternative energy, near as we can tell based on articles published in magazines. But here in China we accelerated a well-defined and efficient plan for investment. Our spending will result in an even more competitive economy, yours in even more public debt and little improvement in infrastructure to help make your economy more productive. And if not in rising productivity, then in what are we investing by buying your bonds?

No, we are certain that we will not make additional purchases of US treasury bonds, or at least no significant new purchases, and only in short term instruments. Further purchases shall be modest and sufficient to avoid a dollar crash.

Geithner: The US dollar is not in danger of crashing.

Cheng: You have us "over a barrel," right? If we do not buy a certain quantity of US debt, and Japan does not, and the UK does not, and other nations do not—and who but China is in a position to buy now?—that U.S. interest rates will rise, by our estimates 100 basis points per year. Such a rise in interest rates in the U.S., caused simply by your creditors collectively “doing nothing” will halt and reverse your economy’s weak recovery. Your already falling housing market will crash from rising mortgage rates. If the U.S. economy shrinks more than others’ then the dollar falls against the others, and the value of our U.S. debt holdings with it. Then your interest rates rise more. And so on. We want to use these holdings to finance purchases of assets abroad. We want to avoid that cycle. We have an interest in seeing the purchasing power of these remain high, but do not take that for a perpetual commitment to buying US debt. We shall purchase U.S. debt only at levels necessary to avoid such an outcome if we can, but no more.

Geithner: I appreciate that, your position. As you know, our central bank has taken steps to mitigate the problem of rising interest rates caused by reductions in foreign purchases of U.S. debt, to support the U.S. housing market, by making purchases of treasury and agency debt directly.

Cheng: I hope you are not suggesting that your central banks’ monetization of expenditures appropriated by your legislature for the benefit of politically important industries was done for the benefit of your foreign creditors? Quite obviously these are desperate measures, covering for the damage done by your corrupt financial industry. If continued these spending policies lead to certain calamity for your currency no matter what we want, unless your economy recovers within, say, six months and tax receipts with it.

We see your state media selling the idea of recovery hard, for the benefit of the currency and bond markets. Consumers are asked to go spend money. Your stock markets are inflated to increase consumer confidence. The hope is that recovery of the American Economy can be willed into being. But if economic growth were so easy to accomplish why can’t the Mexican economy become as strong as Canada’s by the act of convincing the Mexican people to spend more? The idea is absurd.

Look at the data. Your people don’t have money to spend. They have debts. They have no savings. Their incomes are falling. Tax receipts are off by more than 30%.

Closing a multi-trillion dollar gap in tax receipts and foreign borrowing by monetizing debt is a dangerous game. Your government is playing with the reserve status of the currency. Every other nation that has tried this has failed. The dollar has saved you so far, but the reprieve is temporary. That gives this meeting urgency.

Geithner: The reserve currency status of the dollar is not in question.

Cheng: Your creditors will be the judge of that.

Geithner: China purchased U.S. assets for the risk-adjusted returns and let us not forget that China pursues a policy foreign bond purchases, especially U.S. debt, in order to effectively make the yuan more competitive, to improve China’s trade position.

Cheng: We are tired of this claim. If we do not purchase sufficient dollar denominated financial assets to offset foreign exchange, the yuan will appreciate against the U.S. dollar.

The euro as a viable alternative to the dollar, and we are increasing our euro position.

But getting back to the purpose of this meeting, as I told your predecessor two years ago, we value assets such as raw materials that allow us build our economy. We want to buy resources companies in the US as we do in Australia, but we understand the political difficulties. We have rules on foreign ownership here, as well. But there are philosophical differences that we can work on. Your government’s decision to acquire a 70% stake in your nation’s largest automobile manufacturer is a step in the right direction. Here 32 of our largest 33 companies are majority owned by government. Over time, we see America becoming more like China and welcome this development. When more US companies are majority government owned, our governments can arrange for transfers without the current difficulties. Our concern is that the dollar does not sustain value through that process.

Geithner: The dollar...

Cheng: We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products. For example, telecommunications. As you know it is not toys and clothes sold at Walmart that make up the bulk of China’s exports to the U.S. but industrial goods, by dollar volume.

I’ve brought charts to show you to make my points.

http://www.itulip.com/images/topUSimporetsfromChina.gif





We learn from Americans, Germans, Japanese, Taiwanese and others how to make these high value goods. Over time we become more independent and able to compete in the global market for high value goods and labor. This is a well-worn path to development that other nations have taken, such as Japan. But in the case of China your dysfunctional political bubble economy has sped up the transfer process. Your bubble economy booms and busts have been a boon to us.

I will provide you an example. After your reckless early 2000s technology market bubble, U.S. companies such as Cisco Systems cast off their U.S. based technology manufacturing to improve profits and today China manufactures and exports far more telecomms equipment than the U.S.

http://www.itulip.com/images/chinatelcoexports.gif





After the U.S. crash, many of your major manufacturing companies, particularly in computer hardware technology, outsourced production to China. Many, such as Dell and Cisco, are now R&D and marketing companies. We manufacture high tech products for export but we make our own high tech equipment for domestic use. We use different standards and protocols, as Japan did, for networking and wireless, so our market is not “interesting” to your technology equipment companies. Remember 3Com?

Geithner: I’m sorry, you’ve lost me.

Cheng: Well, your latest difficulties with your political bubble economy present a new opportunity for us. We’d like to import the most important of all U.S. assets: human capital. After 2001, America trained our engineers in the U.S.—at MIT and Stanford—then sent them home to us for “security” reasons! Today, with U.S. economy in shambles but China still growing robustly, they no longer wait to be shipped off by your immigration services. They come here for better job opportunities and a high standard of living. They earn less than in America but live like kings by American standards.

We like to say that America does not have the most engineers but has the best. Ten years after this latest blow up of your economy, China will have both the most and the best human capital.

Geithner: I’d like to get back to...

Cheng: What does this have to do with our discussion today, of America’s debt to China? I’m getting to that. You see, as long as the Chinese economy performs better than the U.S. economy, without the baggage of empire it is a matter of time before China acquires most of the advantages that the U.S. has enjoyed for over a century. We do not have an overextended military with hundreds of bases and millions of troops stationed around the world. We do not labor under the political liabilities of special interests as you have in your finance, insurance, real estate, weapons, tobacco, agriculture, oil, and pharmaceuticals industries. Our social programs are modest. And not only do we have no foreign debt, we are creditors to so-called “rich” western states.

Geithner: I’d like to assure you that the U.S. government has no intention of allowing the U.S. to lose its sterling credit rating...

Cheng: A curious choice of words, considering that the pound sterling was once a reserve currency, before the United Kingdom committed itself to projects that it could not afford, much as the United States has. Perhaps if I recount recent history I may orient you to our perspective.

You will recall that your nation’s stock market bubble popped in 2000 and deflated well into 2003. A recession in 2001 hit incomes hard. Corporate and individual tax receipts declined with incomes and profits. Taxes on capital gains fell with stock prices. Private foreign investors in U.S. agency and Treasury debt exited the market as they have during each recession since the early 1980s, but this time the United States government could not take the loss. Your government was in need, both money to fill the tax gap to fund government operations and also money to finance economic stimulus programs—focused on housing—to restart growth. Central banks stepped in to fill the gap left open by private investors.

http://www.itulip.com/forums/../images/foreignholdingstreas1952-2008.gif

Private investors nearly stopped buying US treasury debt in 2003



http://www.itulip.com/images/foreignholdingsagency1987-2008.gif
Private investors stopped buying US Agency debt in 2006





America’s political and economic ally Japan took the lead role in the bailout of the United States economy and government that time. By the end of 2006, Japan held $650 billion of a total of $2.2 trillion in U.S. treasury debt held outside the U.S. while China held $320 billion, half as much as Japan.

http://www.itulip.com/images/foreignholdingsTreas2005-2006.gif





We made most of our purchases of U.S. debt after 2006. As I mentioned before, between October 2007 and October 2008 we increased our holdings from $450 billion to $650 billion.

http://www.itulip.com/images/ForeignUSdebt%29ct2007-Oct2008.gif





China took decades to purchase $320 billion. We doubled our holdings in only two years! We had our reasons for buying so many bonds at that time. We were more dependent on the U.S. for export income. In 2006, we earned 31% of our export income from the U.S. and Canada.

http://www.itulip.com/images/chinatrade.gif





Today our dependence is less than 20%. If U.S. demand for our exports falls by 50% our exports will fall by 10%, a tolerable loss.

Then in 2008 the U.S. suffered an even greater financial and economic crisis than in 2001 as your country’s financial system collapsed, then your economy, then much of the global economy, but not all of it.

At the end of 2008 only China stood by the United States as a significant net buyer of U.S. Treasury bonds. Other U.S. allies made token contributions to the effort.

http://www.itulip.com/images/foreigntreasholdersOct2008-Jan2009.gif





Curiously, the largest net sellers were America’s former traditional tax havens, Caribbean banking centers and Luxemburg. Cracking down on savers with more stringent tax laws did not quite have the net benefit expected, did it? The United Kingdom from which, it is widely known, Middle East Oil money flows also reduced holdings.




But I digress.

China is now far and away the largest holder of U.S. Treasury debt, with more than twice the holdings of Japan, and one third of the total.

http://www.itulip.com/images/foreignUStreasurydebt2007-2009.gif





The chart shows only Treasury debt. We as well hold a considerable amount of agency debt, the bonds that back your housing market that is collapsing despite your government’s best efforts to support it through your nationalized government sponsored enterprises Fannie Mae and Freddie Mac. We agree with those who predict that the price of the collateral on those mortgage loans—housing—will continue to decline for more than a decade as occurred in Japan after a similar property bubble collapsed in 1992, where prices fell for 18 years. We are more optimistic about the U.S., however, and agree with forecasts that prices will not bottom until 2015 or so.

http://www.itulip.com/images/ituliphomepriceprojection.gif





No, no. We are certainly not interested in buying more agency bonds.

Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit. We will use our long duration US securities holdings as collateral to buy assets such as oil and metals in Latin America, Africa, Australia, and Canada that we need here in China, to improve the living standards of our people. These are, after all, their savings. In return, the United States will reduce its foreign lending requirements by cutting wasteful spending, starting with your bloated military. The U.S. will cease to meddle in our internal affairs. Your Congress will stop berating us for "manipulating" our currency. We will diversify into other currencies and implement foreign exchange programs with our trade partners, providing convertibility of the yuan directly into currencies other than the dollar. The U.S. dollar will over time cease to be the major global reserve currency but will become equal to the euro, yen, and yuan.

That is, as you say in your country, “how we roll.”

Thank you for coming.

http://www.itulip.com/images/CCP-USA50.gifPart II: Economic M.A.D. Revisited: Turning point ($ubscription) (http://www.itulip.com/forums/showthread.php?p=102423#post102423)

The global economic crisis has given China even more leverage over the US, but the question remains, if the US does not give China what China wants, what can China do about it?
“China and the US are running inter-dependent bubble economies, relying on the economic equivalent of Mutually Assured Destruction (M.A.D.) to keep one from blowing up the other’s economy. Whether by intent or accident, sooner or later market forces will assert themselves and both economies will go through tough transitions. How will the world look after that?”

- “Economic Mutually Assured Destruction” Janszen, iTulip.com, April 19, 2006 (http://www.itulip.com/forums/../economicMAD.htm)
James Fallows authored the December 2008 Atlantic Monthly cover article, Be Nice to the Countries That Lend You Money (http://www.theatlantic.com/doc/200812/fallows-chinese-banker), an interview with Gao Xiqing, the president of resident of the China Investment Corporation, a sovereign wealth fund that oversees $200 billion of China’s $2 trillion in dollar holdings. Gao Xiqing makes a number of assertions that will not challenge established iTulip views:


The dollar will weaken
The overall financial situation in the US will change fundamentally
Americans can’t live on other people’s savings forever
US households will have less access to credit in the future
Financial wizards were paid too much and will be paid less from now on
There will be more “real” economy in the US and less finance-based economic growth
The world needs a new global monetary system
There are hard line factions within the Chinese Communist party that want to see less Chinese support for the US
The US remains a safe haven for capital because it is still the most politically predictable

Hard to argue with that assessment. more... ($ubscription) (http://www.itulip.com/forums/showthread.php?p=102423#post102423)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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Roughneck
06-05-09, 01:11 PM
The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.

metalman
06-05-09, 03:19 PM
The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.

when it comes to executing on 20 year plans it helps to not have elections.

on the other hand...

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farmers riot

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tibet riot

audrey_girl
06-05-09, 04:01 PM
after reading this USA Fire Sale, 2nd Meeting....

hmm

guess Peter Schiff was really right after all

Mn_Mark
06-05-09, 04:27 PM
We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

metalman
06-05-09, 05:07 PM
We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

worse than that! they come here. we make them into the best engineers in the world. they fall in love with the usa... their college town, whatever... and want to stay, to start the next great high tech company. do we let them? no! we make them go home.

nuts!!!

metalman
06-05-09, 05:10 PM
after reading this USA Fire Sale, 2nd Meeting....

hmm

guess Peter Schiff was really right after all

you think she's writing about peter?


Investment Funds: Should You Hear Alarm Bells? by Janet Tavakoli (http://www.wowowow.com/print/198672)

Editor’s Note: Janet Tavakoli is the president of Chicago-based Tavakoli Structured Finance (http://www.tavakolistructuredfinance.com/) and the author of Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street. (http://www.amazon.com/gp/product/047040678X?ie=UTF8&tag=wowowow-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=047040678X)

Even Warren Buffett will try to buy an investment fund when the price is right, but it rarely is.

Buffett tried to buy Long Term Capital Management (LTCM), a hedge fund that famously blew up in the late 1990s, but the Federal Reserve Bank, the U.S. central bank, organized a bailout instead. LTCM’s management was honest but unlucky. Lately, we’ve heard a lot about hedge funds and other types of investment funds that have been both unlucky and dishonest.

The overwhelming majority of these managers are men, because the world of finance is dominated by men. A woman can feel at a disadvantage, but when dealing with the wrong crowd, even savvy, male money managers sometimes feel at a disadvantage. How can you tell if you should be worried?

These nine warning signs alarm the savviest money managers in the world:


A cult figure. If the manager is a cult figure and has no independent third party that verifies his returns, you are probably already in trouble. Do-it-yourself reporting doesn’t cut it when it comes to your money.
The fund can hang onto your money. This is known as a “gate.” If the fund manager can prevent you from withdrawing your money, or if the fund manager can change the rules later to prevent you from withdrawing your money, you need a very good explanation why this is necessary. (Sometimes there is a legitimate reason for this, such as in a real-estate partnership, but it is rare.) If you invested in the stock market, you can get your money anytime you want, even if you have lost money — it is your decision. Yet, money managers with poor performance will tell you that you cannot have your money back and it is for your own good: The fund’s value has taken a beating; if you sell now you will get a lousy price; hang on and things will get better. This may be true, but it is also possible value has been permanently destroyed due to an investment mistake, or worse, the money is missing. In any case, it is your money, and you should decide when you get it back and how much of a loss you are willing to take. Do you want to trust the judgment of someone who has just proven he has misjudged the market?
No-name banks and accountants. It is bad practice if a manager does not separate the investment funds from his other accounts in a custodial account with a well-known bank. He should also have a credible auditor from a large, well-known accounting firm.



Poor transparency. It is so hard to tell what you are invested in that your money manager might as well be wearing a flannel nightgown.
No visible risk controls. If you ask how your manager is controlling the risk and you don’t get an answer you can understand with some proof to go along with it, then your manager probably isn’t managing anything; he’s probably manipulating you.



Lots of borrowing. In the business this is known as “leverage” or “gearing.” This is just a fancy way of saying I put down only a fraction of the purchase price. If you bought an uninsured car and put 20% down, you don’t want to take it for a spin on New Year’s Eve unless it is armor-plated. Most financial assets in this crazy financial environment don’t have that kind of protection, and when you invest in a fund, you don’t have any insurance. In fact you are the insurance. If you have the equivalent of 20% down (5 times leverage), if your car takes more than 20% damage, you are wiped out. Your money disappears faster than a car in "Gone in 60 Seconds."
A single strategy. If your fund’s performance is dominated by one strategy, you should worry. One type of investment strategy does not fit all markets. If you know you are making a bet on, say, buying stocks paying high dividends — some of which will have a high chance of being wiped out — go ahead. But don’t pretend it is a long-term investment, when it is actually a bet.
Unlimited expenses. Most funds have a cap on expenses, plus management performance fees. Ask your manager where you can find this information in your documents. Do not take his word for it.
Won’t answer questions. When you are about to give (or if you have given) your money to someone else to manage, any question is a reasonable question. If your manager seems too cocky, patronizes you or answers your questions with jargon, you are being mistreated. If your manager responds with irritation, anger or condescension when you ask for clarification, it is a red flag. That said, the most dangerous cat you will ever meet in life is the false leveler, the charming manager who seems to answer your questions, but in reality he is softening you up. He may be charming his way to get into your pockets (instead of your pants). Don’t fall for it.

flintlock
06-05-09, 05:45 PM
you think she's writing about peter?

Ok mister Red Herring, that doesn't address whether Schiff was right or not. :D

ax
06-05-09, 05:52 PM
I like and respect most of what Janet has to say, but this sentence is crazy.

"LTCM’s management was honest but unlucky."

No, they were greedy and over-leveraged. and for all of their mathematical skill they couldn't grasp that being half-way down meant all the way down.

flintlock
06-05-09, 05:56 PM
We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

Thats the whole catch with "Globalism". Without going into the pros and cons of Globalism, its obvious that there is a natural leveling of the playing field. The strongest will, relatively speaking, lose ground to weaker nations. The weaker nations have the most to gain. The Strongest, most to lose.

What we had is a system where taxpayers fund research and knowledge, and then private individuals take that knowledge and make money off it . Often to the benefit of many in that country. But now we have the benefits being sent overseas, with only perhaps a few living in the country that develped the knowledge actually benefiting.

Bottom line, workers in more developed countries are going to continue to become more irrelevant. Its just the natural progression.

metalman
06-05-09, 06:01 PM
Ok mister Red Herring, that doesn't address whether Schiff was right or not. :D

right about what? the dollar crashing last year? no.

about it crashing in the future? i doubt it.

this makes more sense to me... they support the dollar as needed with short term debt while diversifying out of dollars... use long term debt as collateral... set up currency swaps... etc...

what's the motto here... 'a process not an event'.

chart from part ii...

http://www.itulip.com/images/dollartrend1970-Jun2009.gif

the dollar's been 'crashing' since 1971.

the pound sterling didn't 'crash' and lose reserve status overnight, either. process took decades, too...

http://www.nowandfutures.com/download/BritishPound1791-2004.png

Chris Coles
06-05-09, 06:23 PM
These nine warning signs alarm the savviest money managers in the world:

And that leaves the last but most important, the one no one talks about nowadays...... actually investing in the productive nation rather than keeping the money constantly flowing between their "friends" in all the other financial institutions.

Too much to think some of the savings should be actually invested in the citizens....... my oh my, whatever next?

*T*
06-05-09, 08:01 PM
We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

Without foreign students bringing funding, top universities would not be viable financially.

You get what you pay for.

seanm123
06-05-09, 10:36 PM
EJ wonderful post you never cease to deliver especially for neophytes like me who have stumbled here and on your insight have saved some coin.

My question for you, what is your take on the rest of the "bag holders"?

For example, Japan and the oil exporters have massive US T-Bill leverage combined bigger than China.

http://www.treas.gov/tic/mfh.txt

Cheers,


Sean

ASH
06-06-09, 12:38 AM
I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past.

...

But allow them to study at MIT? For God's sake, why?


Without foreign students bringing funding, top universities would not be viable financially.

You get what you pay for.

I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:


POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.

For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

Sapiens
06-06-09, 05:26 AM
We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

People tend to forget why they do things, the U.S. used to allow the best and brightest into their schools to gain "brains" as those students tended to stay put in the U.S., that is no longer true.

From time to time I like to recall the little story at the beginning of this sermon when I see someone doing something that does not make sense:

http://www.crossties.org/sermons/indiv/sermon19.pdf

touchring
06-06-09, 06:07 AM
The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.


The Chinese society from the time of antiquity was based on capitalism and commerce. With capitalism there will be inventions. Stuff like matches, steel, drilling for natural gas, gunpowder, rockets, paper, countless others were Chinese inventions.

In fact, the bank note is a Chinese invention around 600AD, 1000 years before the bank of Sweden issued Europe's first bank notes in 1660.

http://en.wikipedia.org/wiki/Banknote

Along with bank notes, the Chinese invented modern banking. Everything we know of today, loans, issuing of paper money, money exchange, long-distance remittance, the Chinese were doing it in 1000 years ago, without computers.

http://en.wikipedia.org/wiki/History_of_banking_in_China

As for communism, it's a European invention, China had never been a socialist society before communism 60 years ago.

*T*
06-06-09, 08:27 AM
I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:


POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.

For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

I think it's both. In the UK at least, research council grad student funding is usually restricted to home (EU) students. Foreign students often have to bring their own funding via a bursary from industry or their govt.

Further, I would add that security clearance is a problem. In my field, I have a colleague (a professor at a top US university) who is applying for US citizenship because "it's hard to get funding otherwise" since in the US the funding in Eng is often defence related.

The UK produces lots of good engineering graduates, so it's not about talent or interest (at least here). However they are not able to find engineering jobs so they go (went) into finance, accounting, management consultancy etc -- where the pay and the prestige is. Despite many of them wanting to be engineers as kids. I could name a dozen of them right now.

jiimbergin
06-06-09, 08:47 AM
People tend to forget why they do things, the U.S. used to allow the best and brightest into their schools to gain "brains" as those students tended to stay put in the U.S., that is no longer true.

From time to time I like to recall the little story at the beginning of this sermon when I see someone doing something that does not make sense:

http://www.crossties.org/sermons/indiv/sermon19.pdf

Thanks for the link. I enjoyed the sermon. It certainly shows both the positives and negatives of traditionalism.

jim

goadam1
06-06-09, 09:12 AM
The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.

They are sneaky but make good food (but what animal is it?).

Saying they "lack" creativity is different than saying the Chinese system discourages individual creativity.

goadam1
06-06-09, 09:17 AM
worse than that! they come here. we make them into the best engineers in the world. they fall in love with the usa... their college town, whatever... and want to stay, to start the next great high tech company. do we let them? no! we make them go home.

nuts!!!

If you want to fix nearly every economic ail America is in right now, allow a proper wave of immigration. Hell, give incentive to allow the best and the brightest to come. It would be better than the FIRE economy policy of looking the other way on illegal (cheap) labor.

goadam1
06-06-09, 09:22 AM
right about what? the dollar crashing last year? no.

about it crashing in the future? i doubt it.

this makes more sense to me... they support the dollar as needed with short term debt while diversifying out of dollars... use long term debt as collateral... set up currency swaps... etc...

what's the motto here... 'a process not an event'.

chart from part ii...

http://www.itulip.com/images/dollartrend1970-Jun2009.gif

the dollar's been 'crashing' since 1971.

the pound sterling didn't 'crash' and lose reserve status overnight, either. process took decades, too...

http://www.nowandfutures.com/download/BritishPound1791-2004.png

The question is, should a British citizen with some savings, diversified out of holding denominated in pounds or would it not have mattered that much?

WildspitzE
06-06-09, 09:48 AM
I’ve brought charts to show you to make my points.

http://www.itulip.com/images/topUSimporetsfromChina.gif


Interesting graph. I own part of a company that has invented and is producing a disruptive technology that will revolutionize electrical transformers. Guess where it's going? The highest bid, and fairest strategic partnership offering came from?


Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit. We will use our long duration US securities holdings as collateral to buy assets such as oil and metals in Latin America, Africa, Australia, and Canada that we need here in China, to improve the living standards of our people.

One of my other projects validates this initiative (it does not validate the source of the USD, but that isn't the hard part IMO). I cannot say much as it's in very early implementation phase, but it bypasses the US and bridges Latam energy with China's (among other investors) LT view.

goadam1
06-06-09, 10:00 AM
It seems to me that in the last dozen years, it doesn't matter if you invest in a productive economy. The nature of inflation is all the money chases returns. A productive economy is just as likely, if not more, to suffer from a market distortion as extra good returns create a positive feedback loop of smart investors. And then pop!

metalman
06-06-09, 10:01 AM
The question is, should a British citizen with some savings, diversified out of holding denominated in pounds or would it not have mattered that much?

$5 1941 to $2.50 in 1971... 50% in 30 yrs = dollar 110 in 2001 to 55 in 2031. itulip sees 79 to 60 in 5yrs.

my take... either way, slow or fast depreciation... you do not want a big exposure to a currency of a country that has another country trapped in that currency.

another the 'poom' scenario...

China’s Syndrome: The “dollar trap” in historical perspective (http://www.voxeu.org/index.php?q=node/3490)

<table class="layouttable" border="0" cellpadding="1" cellspacing="1" width="100%"> <tbody><tr> <td align="left" valign="top" width="*">Olivier Accominotti
23 April 2009
</td> <td align="right" valign="top" width="25%">
</td></tr></tbody></table> China’s “dollar trap” has many analysts worried about its future resolution. This column discusses a similar situation in the 1920s when France held more than half the world’s foreign reserves. France’s “sterling trap” ended disastrously. Sterling suffered a major currency crisis, French authorities lost a lot of money, and subsequent policy reactions deepened the Great Depression.

China’s huge volume of dollar reserves is now at the centre of serious concerns about the future of the US currency. The origin of this situation dates back to the early 2000s, after the East Asian and Russian crises. At that time, accumulating foreign reserves was considered benign policy. Developing and emerging countries were encouraged in this way in order to insure against sudden reversals of capital inflows. China was pegging its currency against the dollar and, due to the US trade deficits, started acquiring US assets.

Ten years on, the People’s Bank of China (PBOC) has an extraordinary stock of dollars, and one pressing question: “What to do out of them?” Increasing political tensions have given rise to fears that it might get rid of this huge bulk of securities and precipitate a dollar crash. In August 2007, a Chinese official indeed reminded that Beijing was in a position to provoke a “mass depreciation” of the dollar if it decided to do so. Recent suggestion by Zhou Xiaochuan that China’s central bank might shift from the dollar has put the issue on newspapers’ headlines once again.

But bold statements are one thing, and actual policy another. Up to now, China’s authorities have shown few signs of attempting to weaken the dollar. The reason for this seems straightforward. After all, China is the world’s largest dollar investor, and no one else would have less interest in seeing the value of the US currency plummet. The PBOC might be the promptest to support the dollar, not least because it would suffer a huge capital loss in the event of a dollar depreciation. In a recent New York Times column, Paul Krugman argues that China has “driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.”

This situation might appear unprecedented. But in truth, all this is not brand-new.

French foreign reserves policy during the Great Depression

Economic history offers one striking example of a country being trapped by the huge volume of its foreign reserves. This country was France, the period was the early 1930s, and the currency at stake the pound sterling. The episode ended up dramatically. Sterling suffered a major currency crisis, French authorities lost a lot of money, and their subsequent policy largely contributed to the Great Depression.

The origin of the problem lay in the government’s decision of 1926 to peg the franc to the sterling and dollar, two years before re-establishing the gold standard. Since the trade balance was in surplus and capital was flowing into the country, this goal was achieved through public purchases of foreign exchange. The Bank of France therefore accumulated a bulging portfolio of foreign holdings. At the end of the 1920s, the country held more than half of the world’s volume of foreign reserves.

French policy over subsequent years has been heavily criticized for being destabilizing. British contemporaries, like Paul Einzig, accused France of using its reserves in order to weaken the pound before the sterling crisis of September 1931. Others have noted that French conversions of foreign assets into gold after 1931, by imposing constraints on their money supplies, put intense deflationary pressures on other countries on the gold standard.

France’s Sterling Trap in 1931

Why did France engage in a policy that had such dramatic consequences? In a recent work, I explore the motivations behind the French reserves policy of this period. Spending time in the archives, I was able first to reconstitute the evolution of the reserves currency composition, and second, to identify the reasons invoked for the allocation decisions. Last, I have combined this information with market indicators of the perceived risk of reserves currencies.

France’s problems were similar to those of China today. The Bank of France was a private institution and its primary objective was to avoid capital losses. Its reserves were allocated between sterling and dollar. From 1929 to 1931, there were fears that the pound might be devalued and the Bank started shifting to the dollar (figures 1 and 2).

Figure 1. Bank of France’s Sterling Reserve (in millions of pounds sterling), 1928-1936
http://www.voxeu.org/files/image/accominotti%20fig%201.JPG

Figure 2. Bank of France’s Dollar Reserve (in millions of US dollars), 1928-1936
http://www.voxeu.org/files/image/accominotti%20fig%202.JPG
Source: Bank of France’s archives.

However, in implementing this policy, the Bank was also constrained by its position as a large player on the exchange market. So, as sterling’s weakness worsened at the end of 1930, the Bank was in a trap: it could not continue selling pounds without precipitating a sterling collapse and a huge exchange loss for itself. The only workable option left was to support the pound. French policy therefore suddenly turned cooperative. The Bank halted the sterling liquidations, and even intervened on the market in order to support the British currency.

When the pound eventually collapsed, the Bank of France was put into a state of technical bankruptcy. It was only able to survive thanks to a state’s rescue, obtained under tough conditions. Moreover, there were now rising fears over the dollar. The will to avoid further losses therefore led authorities to convert all their dollar assets into gold (figure 2), a policy that heavily contributed to the global monetary contraction of the 1930s.

Lessons for today?

What are the lessons for today? China’s objective function today certainly differs from those of France in the interwar years. But French experiences in the early 1930s are a reminder that when there is growing risk on reserves currencies, foreign reserves can be both a source of instability for the international monetary system, and a burden for large holders.

References

Accominotti, O., 2008, “The Sterling Trap: Foreign Reserves Management at the Bank of France, 1928-1936 (http://sites.google.com/site/sterlingtrap19281936/Home/SterlingTrap.pdf?attredirects=0)”, forthcoming European Review of Economic History.
Einzig, P., 1932, Behind the scenes of international finance, London: Macmillan.
Krugman, P., “China’s Dollar Trap (http://www.nytimes.com/2009/04/03/opinion/03krugman.html?_r=2)”, New York Times, 2 April 2009
“China threatens nuclear option-of-dollar-sales (http://www.telegraph.co.uk/finance/markets/2813630/China-threatens-nuclear-option-of-dollar-sales.html)”, Daily Telegraph, 10 August 2007

This article may be reproduced with appropriate attribution. See Copyright (below).

metalman
06-06-09, 10:10 AM
Interesting graph. I own part of a company that has invented and is producing a disruptive technology that will revolutionize electrical transformers. Guess where it's going? The highest bid, and fairest strategic partnership offering came from?

i count $90B in equipment and steel imports, $55B in toys and crap for walmart, yet american's think 'china' they think 'toys and crap'. when i was a kid in the usa in the 1970s we made the same mistake re japan... 'japan' = cheap plastic toys... never saw the auto competition coming. back then we had an excuse... no internet, no data. here's the data from wto in black and white. what's the explanation for the misunderstanding today?


One of my other projects validates this initiative (it does not validate the source of the USD, but that isn't the hard part IMO). I cannot say much as it's in very early implementation phase, but it bypasses the US and bridges Latam energy with China's (among other investors) LT view.

they'll cut the dollar out one trade partner at a time... drip... drip... drip. some day we'll wake up and china dominates in medical equipment, telecoms, computers, you name it, and the dollar is #4 world currency.

WildspitzE
06-06-09, 10:29 AM
i count $90B in equipment and steel imports, $55B in toys and crap for walmart, yet american's think 'china' they think 'toys and crap'. when i was a kid in the usa in the 1970s we made the same mistake re japan... 'japan' = cheap plastic toys... never saw the auto competition coming. back then we had an excuse... no internet, no data. here's the data from wto in black and white. what's the explanation for the misunderstanding today?

Hubris, a country full of people reading their own press-releases.

Forgot to mention, the human capital transfer that EJ talks about, is the motivation for the strategic partnerships.


they'll cut the dollar out one trade partner at a time... drip... drip... drip. some day we'll wake up and china dominates in medical equipment, telecoms, computers, you name it, and the dollar is #4 world currency.

This is the first one in my pipeline, and it's relatively significant in it's goals, but it's only the beginning IMO.

metalman
06-06-09, 01:09 PM
Hubris, a country full of people reading their own press-releases.

Forgot to mention, the human capital transfer that EJ talks about, is the motivation for the strategic partnerships.



This is the first one in my pipeline, and it's relatively significant in it's goals, but it's only the beginning IMO.

dollar dies with a whimper not a bang.

Munger
06-06-09, 01:37 PM
I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:
POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

Professor Katz is more than half crazy, but also completely brilliant. He had this to say on the topic:



Don't Become a Scientist!


Are you thinking of becoming a scientist? Do you want to uncover the mysteries of nature, perform experiments or carry out calculations to learn how the world works? Forget it!

Science is fun and exciting. The thrill of discovery is unique. If you are smart, ambitious and hard working you should major in science as an undergraduate. But that is as far as you should take it. After graduation, you will have to deal with the real world. That means that you should not even consider going to graduate school in science. Do something else instead: medical school, law school, computers or engineering, or something else which appeals to you.

Why am I (a tenured professor of physics) trying to discourage you from following a career path which was successful for me? Because times have changed (I received my Ph.D. in 1973, and tenure in 1976). American science no longer offers a reasonable career path. If you go to graduate school in science it is in the expectation of spending your working life doing scientific research, using your ingenuity and curiosity to solve important and interesting problems. You will almost certainly be disappointed, probably when it is too late to choose another career.

American universities train roughly twice as many Ph.D.s as there are jobs for them. When something, or someone, is a glut on the market, the price drops. In the case of Ph.D. scientists, the reduction in price takes the form of many years spent in ``holding pattern'' postdoctoral jobs. Permanent jobs don't pay much less than they used to, but instead of obtaining a real job two years after the Ph.D. (as was typical 25 years ago) most young scientists spend five, ten, or more years as postdocs. They have no prospect of permanent employment and often must obtain a new postdoctoral position and move every two years. For many more details consult the Young Scientists' Network (http://garp.univ-bpclermont.fr/guilde/emploi/ysn.html) or read the account in the May, 2001 issue of the Washington Monthly. (http://www.washingtonmonthly.com/)

As examples, consider two of the leading candidates for a recent Assistant Professorship in my department. One was 37, ten years out of graduate school (he didn't get the job). The leading candidate, whom everyone thinks is brilliant, was 35, seven years out of graduate school. Only then was he offered his first permanent job (that's not tenure, just the possibility of it six years later, and a step off the treadmill of looking for a new job every two years). The latest example is a 39 year old candidate for another Assistant Professorship; he has published 35 papers. In contrast, a doctor typically enters private practice at 29, a lawyer at 25 and makes partner at 31, and a computer scientist with a Ph.D. has a very good job at 27 (computer science and engineering are the few fields in which industrial demand makes it sensible to get a Ph.D.). Anyone with the intelligence, ambition and willingness to work hard to succeed in science can also succeed in any of these other professions.

Typical postdoctoral salaries begin at $27,000 annually in the biological sciences and about $35,000 in the physical sciences (graduate student stipends are less than half these figures). Can you support a family on that income? It suffices for a young couple in a small apartment, though I know of one physicist whose wife left him because she was tired of repeatedly moving with little prospect of settling down. When you are in your thirties you will need more: a house in a good school district and all the other necessities of ordinary middle class life. Science is a profession, not a religious vocation, and does not justify an oath of poverty or celibacy.

Of course, you don't go into science to get rich. So you choose not to go to medical or law school, even though a doctor or lawyer typically earns two to three times as much as a scientist (one lucky enough to have a good senior-level job). I made that choice too. I became a scientist in order to have the freedom to work on problems which interest me. But you probably won't get that freedom. As a postdoc you will work on someone else's ideas, and may be treated as a technician rather than as an independent collaborator. Eventually, you will probably be squeezed out of science entirely. You can get a fine job as a computer programmer, but why not do this at 22, rather than putting up with a decade of misery in the scientific job market first? The longer you spend in science the harder you will find it to leave, and the less attractive you will be to prospective employers in other fields.

Perhaps you are so talented that you can beat the postdoc trap; some university (there are hardly any industrial jobs in the physical sciences) will be so impressed with you that you will be hired into a tenure track position two years out of graduate school. Maybe. But the general cheapening of scientific labor means that even the most talented stay on the postdoctoral treadmill for a very long time; consider the job candidates described above. And many who appear to be very talented, with grades and recommendations to match, later find that the competition of research is more difficult, or at least different, and that they must struggle with the rest.

Suppose you do eventually obtain a permanent job, perhaps a tenured professorship. The struggle for a job is now replaced by a struggle for grant support, and again there is a glut of scientists. Now you spend your time writing proposals rather than doing research. Worse, because your proposals are judged by your competitors you cannot follow your curiosity, but must spend your effort and talents on anticipating and deflecting criticism rather than on solving the important scientific problems. They're not the same thing: you cannot put your past successes in a proposal, because they are finished work, and your new ideas, however original and clever, are still unproven. It is proverbial that original ideas are the kiss of death for a proposal; because they have not yet been proved to work (after all, that is what you are proposing to do) they can be, and will be, rated poorly. Having achieved the promised land, you find that it is not what you wanted after all.

What can be done? The first thing for any young person (which means anyone who does not have a permanent job in science) to do is to pursue another career. This will spare you the misery of disappointed expectations. Young Americans have generally woken up to the bad prospects and absence of a reasonable middle class career path in science and are deserting it. If you haven't yet, then join them. Leave graduate school to people from India and China, for whom the prospects at home are even worse. I have known more people whose lives have been ruined by getting a Ph.D. in physics than by drugs.

If you are in a position of leadership in science then you should try to persuade the funding agencies to train fewer Ph.D.s. The glut of scientists is entirely the consequence of funding policies (almost all graduate education is paid for by federal grants). The funding agencies are bemoaning the scarcity of young people interested in science when they themselves caused this scarcity by destroying science as a career. They could reverse this situation by matching the number trained to the demand, but they refuse to do so, or even to discuss the problem seriously (for many years the NSF propagated a dishonest prediction of a coming shortage of scientists, and most funding agencies still act as if this were true). The result is that the best young people, who should go into science, sensibly refuse to do so, and the graduate schools are filled with weak American students and with foreigners lured by the American student visa.



Sad but true.
http://wuphys.wustl.edu/~katz/scientist.html (http://wuphys.wustl.edu/%7Ekatz/scientist.html)

jk
06-06-09, 04:01 PM
Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit.
i don't think the chinese will continue to have this option for very long. as chinese exports to the u.s. are constrained by the u.s. recession, and as the u.s. need to borrow grows for the same reason, the chinese flow of new dollar income will become simply inadequate to the task.

dummass
06-06-09, 05:19 PM
If you want to fix nearly every economic ail America is in right now, allow a proper wave of immigration. Hell, give incentive to allow the best and the brightest to come. It would be better than the FIRE economy policy of looking the other way on illegal (cheap) labor.

How about this program: Serve in the US military for three years and become naturalized. Assuming you make it back from ... :(

http://www.hooyou.com/naturalization/class.html

goadam1
06-06-09, 06:34 PM
Service Guarantees Citzenship!

http://www.youtube.com/watch?v=SMTz9nIUkGc

goadam1
06-06-09, 06:39 PM
Again I ask: Do I teach my kids Mandarin or how to grow there own food? Wait, didn't I hear this stuff before about the Soviets or Japan?

dummass
06-06-09, 06:58 PM
If you see it on TV, it must be real. Another reinforced conditioned response.

http://allpsych.com/psychology101/conditioning.html

ggirod
06-06-09, 07:09 PM
From goadam1

Again I ask: Do I teach my kids Mandarin or how to grow there own food? Wait, didn't I hear this stuff before about the Soviets or Japan?The answer is pretty obvious. If you manage to site your family with inherited land in an area not prone to drought given global warming, which means probably east of the Mississippi and as far north as possible, then growing their own food is a real possibility. I suspect that China will neither crave nor desire the pathetic products produced by our post-FIRE economy. Also, I suspect that they will have no shortage of capable people and facility in Mandarin will probably not take an American far.

In the beginning, exploiting rich resources of North America was the basis for amazing growth. This time, the remainder may suffice for survival as the next generation tries to pick up the pieces that the ruins the FIRE economy left them. If they are as abysmally stupid as their parents then they will squander the remainder of their resources and die out. Maybe instead, they will be challenged by the problems and overcome to rise again. Or, maybe they will be content to have full tummies, a nice place to live, and a lifestyle of simple pleasures and relatively pure food and water.

ThePythonicCow
06-06-09, 08:29 PM
China’s Syndrome: The “dollar trap” in historical perspective (http://www.voxeu.org/index.php?q=node/3490)

<table class="layouttable" width="100%" border="0" cellpadding="1" cellspacing="1"> <tbody><tr> <td valign="top" width="*" align="left">Olivier Accominotti
23 April 2009
</td> <td valign="top" width="25%" align="right">
</td></tr></tbody></table> China’s “dollar trap” has many analysts worried about its future resolution. This column discusses a similar situation in the 1920s when France held more than half the world’s foreign reserves. France’s “sterling trap” ended disastrously. Sterling suffered a major currency crisis, French authorities lost a lot of money, and subsequent policy reactions deepened the Great Depression.
A 32 page PDF document <cite></cite>The Sterling Trap Foreign reserves management at the Bank of France, 1928 – 1936 (http://www.sciences-po.fr/recherche/fr/pdf/Sterling%20Trap.pdf), by Olivier Accominotti (November 2008), provides what seems to be more details in an earlier version of this study.

*T*
06-07-09, 04:12 AM
Professor Katz is more than half crazy, but also completely brilliant. He had this to say on the topic:

...

Sad but true.
http://wuphys.wustl.edu/~katz/scientist.html (http://wuphys.wustl.edu/%7Ekatz/scientist.html)

Very, very familiar. Unfortunately true in the UK too.

Science for me is a compulsion, not a career

touchring
06-07-09, 05:45 AM
When the pound eventually collapsed, the Bank of France was put into a state of technical bankruptcy. It was only able to survive thanks to a state’s rescue, obtained under tough conditions. Moreover, there were now rising fears over the dollar. The will to avoid further losses therefore led authorities to convert all their dollar assets into gold (figure 2), a policy that heavily contributed to the global monetary contraction of the 1930s.



Why would converting dollar to gold cause monetary contraction?

goadam1
06-07-09, 09:19 AM
From goadam1
The answer is pretty obvious. If you manage to site your family with inherited land in an area not prone to drought given global warming, which means probably east of the Mississippi and as far north as possible, then growing their own food is a real possibility. I suspect that China will neither crave nor desire the pathetic products produced by our post-FIRE economy. Also, I suspect that they will have no shortage of capable people and facility in Mandarin will probably not take an American far.

In the beginning, exploiting rich resources of North America was the basis for amazing growth. This time, the remainder may suffice for survival as the next generation tries to pick up the pieces that the ruins the FIRE economy left them. If they are as abysmally stupid as their parents then they will squander the remainder of their resources and die out. Maybe instead, they will be challenged by the problems and overcome to rise again. Or, maybe they will be content to have full tummies, a nice place to live, and a lifestyle of simple pleasures and relatively pure food and water.
lol. come on we won't wind up worse than Portugal. My favorite part of this is we were on a course for dollar collapse and detoured. Those detours included black swan events like winning the cold war, gulf war 1 and it's effect on oil prices and the internet. Just saying.

Charles Mackay
06-07-09, 09:26 AM
China’s Syndrome: The “dollar trap” in historical perspective (http://www.voxeu.org/index.php?q=node/3490)

<table class="layouttable" border="0" cellpadding="1" cellspacing="1" width="100%"> <tbody><tr> <td align="left" valign="top" width="*">Olivier Accominotti
23 April 2009
</td> <td align="right" valign="top" width="25%">
</td></tr></tbody></table> China’s “dollar trap” has many analysts worried about its future resolution. This column discusses a similar situation in the 1920s when France held more than half the world’s foreign reserves. France’s “sterling trap” ended disastrously.

Great article... thanks for posting it.. I wonder if France converted to gold before FDR's 69% devaluation? With China's latest 400 ton accumulation they maybe on this same path already.

jk
06-07-09, 11:18 AM
Great article... thanks for posting it.. I wonder if France converted to gold before FDR's 69% devaluation? With China's latest 400 ton accumulation they maybe on this same path already.
my understanding is that china accumulated this position from their own domestic production. what will be interesting is if the imf decides to sell its gold.

c1ue
06-07-09, 11:47 AM
I've seen this paper before - Yves on NakedCapitalism posted a link to it some time ago (1 month?).

The question I have is that this example may not apply due to a special circumstance. That circumstance is the French undervaluation of their currency just prior to a currency agreement - this is what led to their surplus to begin with.

Thus France did not have an ongong cost*productivity based advantage but rather a legal/political one.

The reason this might matter is that in a cost*producivity based advantage, past accumulations are added to by ongoing operations. In the legal/political one, what you've got is all you're going to get.

In more prosaic terms: fixed income vs. working income. In an inflationary period, those on fixed incomes can only try to exchange their capital (if possible) into some other form less affected by inflation whereas working incomes can be negotiated for higher pay increases as offsets.

Munger
06-07-09, 06:13 PM
Why would converting dollar to gold cause monetary contraction?

Because the dollar was tied to gold. Governments on the gold standard would convert their currency to gold at a fixed rate.

France was presumably getting its gold from other governments. The other government would give France some gold in exchange for its currency, which would take that currency out of circulation (unless it could find more gold on the market to buy and thus put the currency back into circulation).

LargoWinch
06-09-09, 10:44 AM
Top Chinese Official: I think you and the IMF should issue bonds in yuan.

Geithner: Lets go back to the safest currency, shall we?

Top Chinese Official: That is what I meant.



Sun Jun 7, 2009 4:06pm EDT
NEW YORK (Reuters) - A top Chinese banker on Sunday called on the U.S. government and the World Bank to sell yuan-denominated bonds in Hong Kong and Shanghai to encourage the development of debt markets in those centers and to promote the yuan as a major international currency.
...

Reuters Article here. (http://www.reuters.com/article/newsOne/idUSTRE5561QK20090607)

and another article here too. (http://http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5473491/Top-Chinese-banker-Guo-Shuqing-calls-for-wider-use-of-yuan.html)

ocelotl
06-13-09, 03:12 AM
worse than that! they come here. we make them into the best engineers in the world. they fall in love with the usa... their college town, whatever... and want to stay, to start the next great high tech company. do we let them? no! we make them go home.

nuts!!!

Worse. Many are invited via head hunter based scholarships to outstanding foreign students. I know, I rejected two invitations offered in my last university year.

metalman
06-15-09, 11:30 AM
'... we'll only buy short term debt... and only enough to prevent a dollar crash... that's how we roll... (http://finance.yahoo.com/news/Foreign-demand-for-US-apf-15524501.html?sec=topStories&pos=2&asset=&ccode=)'

Foreign demand for US financial assets falls

Foreign demand for long-term US financial assets falls in April; China, Japan cut holdings

WASHINGTON (AP) -- Foreign demand for long-term U.S. financial assets fell in April as both China and Japan trimmed their holdings of Treasury securities.

Slimprofits
08-27-09, 09:11 AM
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aR242y98WzNY


“The People’s Bank of China should try to reduce intervention on the exchange rate as much as possible,” Yu, a member of the central bank’s monetary policy committee from 2004 to 2006, said in an interview. “Eventually, the yuan should be demanded as a reserve currency, and we are far away from this stage.”

The government needs to encourage more overseas investment, reduce exports and promote sales of yuan-denominated debt by foreign companies as part of a transition from managing the currency and piling up U.S. dollar assets, Yu said. China’s foreign reserves rose 9.1 percent in the second quarter, climbing a record $178 billion, and totaled $2.13 trillion on June 30, according to central bank data.

China, America’s largest creditor, has been buying more Treasuries and increasing sales of yuan to keep its value near 6.83 per dollar since July 2008, a policy that helps exporters by making their products cheaper overseas while exposing China to losses if the dollar falls. The central bank reiterated its goal on Aug. 5 of keeping the yuan stable at a “reasonable and balanced” level. Policy makers intervene in currency markets by arranging purchases or sales of foreign exchange.

Twelve-month non-deliverable yuan forwards gained 0.2 percent to 6.7935 per dollar. Forwards are agreements to buy and sell assets at current prices for delivery at a specified date. Non-deliverable contracts are settled in dollars. The dollar fell 0.4 percent to $1.43 per euro.

Not ‘Easy’

“Yu is pointing the right direction for China’s policy,” said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. “The government should continue the reform to make the yuan rate more flexible and adjust the economy’s structure once growth stabilizes.”

Solving China’s dilemma “won’t be easy,” Yu, 60, said in the Aug. 6 interview, citing a Chinese saying. “We never give up trying to cure a dying horse,” he said. “At this moment, we have to think carefully about all possible alternatives.”

China’s $776.4 billion in Treasuries, up 45 percent in the past year, “are not safe, and we should be worried about that,” Yu said. The current strength of Treasuries, which returned 16 percent in two years according to a Merrill Lynch & Co. index, is “a temporary phenomenon, because I think the U.S. economy is not healthy” and there are no alternative investment havens, he said.

Dollar Trap

“Why should we continue to pile up those reserves?” Yu said. Once the U.S. recovers from the deepest global recession since World War II, the dollar will weaken and Treasury prices will fall, he said. The 10-year yield of about 3.39 percent is below its five-year average of about 4.20 percent, according to data compiled by Bloomberg.

China’s reserves are so large that it is hard to sell the greenback without triggering a drop in its value, a dilemma Yu dubbed the “dollar trap” in April.

“Mr. Yu can combine theory with good understanding of China’s reality,” said Pan Xiangdong, the chief economist at Everbright Securities Co. in Beijing. “His views and comments had impact on government policies as well as investors’ choices, and his influence has never weakened.”

Grilling Geithner

Yu’s views have received official backing before. In February, he called for China to seek guarantees that its investments in Treasuries won’t be eroded by “reckless policies.” A month later, Premier Wen Jiabao did just that during an annual session of parliament. Yu was picked by the China Daily to grill U.S. Treasury Secretary Timothy Geithner in Beijing in June about risks that the record U.S. fiscal deficit would undermine the value of its debt.

“I worry about details,” Yu told Geithner. “We will be watching you very carefully.” Geithner said in the June 2 interview with the newspaper that Chinese officials had expressed “justifiable confidence in the strength and resilience and dynamism of the American economy.”

In 2005, Yu’s January call for a revaluation of the currency presaged an end to the yuan’s dollar peg that July. That October, he urged China not to “be afraid” of yuan gains, and the currency’s appreciation accelerated over the following months. In an interview last August, he urged policy makers to avoid “backtracking” on allowing the yuan to strengthen.

[..]

Change in the U.S.-China political and economic relationship is inevitable, Henry Kissinger, the former secretary of state who helped re-establish ties between the two countries under President Richard Nixon, said in an interview yesterday with Bloomberg Television.

Kissinger’s Outlook

“I think the center of gravity of the economic world is beginning to shift towards Asia,” he said.

Chinese economists and leaders are beginning to feel “that the global financial system should not be determined primarily by one country,” and that “a new alternative or companion currency to the dollar would be created, built around the Chinese currency,” Kissinger said. That change won’t happen for several years because the yuan isn’t yet convertible, he said.

Premier Wen said on July 20 more of the nation’s reserves should be used to help companies invest abroad. China Development Bank Corp., the state-run bank for public works projects, agreed in May to lend $10 billion to Brazil’s state- controlled oil company in return for guarantees of fuel, helped finance a fund in Africa and extended loans in June to Russia’s development bank.

“If China can translate its trade surplus into outbound investment, then there won’t be so much pressure on the yuan to appreciate, even if the central bank stops intervening in the foreign-exchange market,” Yu said.

A People’s Bank spokesman said the central bank never comments on economists’ viewpoints.

[..]

The current account gap may decline to $400 billion this year as overseas sales slow, said Stephen Green, the head of China research in Shanghai at Standard Chartered Plc.

“Yu doesn’t speak for the government and I am sure the Ministry of Commerce will have a different view about reducing exports,” Green said. Even so, “policy makers are on board with the broader goal of rebalancing the current account,” he said.

Yu said he expects it will take more than five years for the yuan to become “very internationalized” and used widely for trade settlements and ultimately as a reserve currency.

“Internationalization is a process, piece by piece,” he said. “This will take a long time. But, step by step, we have to try our best.”