Economic Doom on Ice
Baltimore, Maryland - Melbourne, Australia
Monday, 17th February, 2014
By Nick Hubble

• Snowden to get Russian visa for life after this?
• Debt doesn't matter
• Plus, the end of American exceptionalism...

--The financial world is plodding along like a drunken sailor avoiding debt collectors by keeping no cash in his wallet. It's not the kind of calm that's going to last or end well. But the storm will have to wait until after the Olympics.

--What a game! We've never watched ice hockey closely before. But watching Russia and the US play a contact sport is bound to be fun.

--Just before the end of the third period, the Russian team scored to take the lead 3-2. But the goal was disallowed because the pin holding the goal had stretched, leaving the net imperfectly square. It had no impact on the quality of the shot, but the refs didn't seem to care.

--The game went to penalty shootout. The Americans scored the first shot, but missed the next two. The Russians missed their first two and then scored the third.

--So it went to sudden death penalties. (By this point we were late for an appointment, but couldn't leave the clueless British commentator to it.) A Mr Oshie from St Louis was designated to take all the Americans' sudden death penalties.

-- About ten minutes later, Oshie and the crème of the Russian team were still matching each other shot by shot. Each time the Russian scored, Oshie scored. Each time the Russian missed, Oshie missed. And so it went on for about eight penalties.

--Eventually Oshie got one up and the game was over.

--The crowd didn't like it. Russian President Vladimir Putin didn't look happy. The referee who disallowed the Russian's goal is unlikely to make it out of Russia alive.

--The good news is that NSA leaker Edward Snowden received an extension to his Russian visa. At least we suspect he will shortly.

--Snowden's files continue to bring up embarrassing surprises. The German media is reporting that their intelligence community, banks and government were all subject to a digital attack out of China. That's just the kind of trouble our upcoming conference, World War D, is about. But what is China doing attacking the Germans? And isn't it odd that we find out about it from leaked US intelligence files?

--Of course, economic attacks are an age old strategy. But the digital age makes things far more interesting. According to one keynote speaker set to star at our conference, the Americans managed to get Iranian nuclear equipment to go haywire using a computer virus. That's much cooler than the medieval technique of lobbing a dead cow over the city walls to try and get disease to spread and the city to surrender.

--We think all this digital warfare is overhyped. Globalisation has the upper hand. And in the end a serious digital attack is an act of war. The Cold War stayed cold for a reason.

--Not that this means we're off the hook. Governments are much better at screwing up their own economies than other countries'. The American virus which messed with Iran's nuclear production also ended up infecting the networks of western oil producing companies.

--But these aren't the kind of shenanigans that will cause serious global problems. The next big crisis is going to be far more original.

--In keeping with the upcoming World War D conference theme, Societe Generale staged an economic wargame which modeled an economic slowdown in China. The conclusion was that the US dollar would rise, world economic growth would stumble and commodity producing nations would be hit hard.

--Strangely enough, SocGen isn't worried about the Chinese banking system and its systemic risk. Foreigners only have a small exposure to China. Just as the subprime housing crisis in the US was just a small problem.

--Sound Money. Sound Investments. editor Greg Canavan is worried about the Chinese banking system in particular. It's out of control and fraying at the edges. The shadow banks are defaulting and struggling already.

--But why does debt play such an important role in economic crises? The answer is that it's the government's number one economic tool. They see debt as a way of managing economic growth. By fiddling with the price of debt - interest rates - economists can manipulate GDP.

--And apparently they can do it without fear or consequence. Over at the IMF, researchers have come up with an absolutely priceless piece of research proving it. We have to quote the abstract because it's so beautifully ignorant of any sense of reality.

'Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised. Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt. Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility.'

--In other words, debt doesn't matter. Borrow and binge away. Nothing will go wrong.

--So back to the Olympics...for now.

Regards,

Nick Hubble
for The Daily Reckoning

The Problem with World Improvers...
By Bill Bonner

Yesterday, we sat in front of the fire. Electricity was out in the hotel. All we could do was to keep the fire going and stay close to it. Alas, the firewood was a little green. It absorbed most of the heat rather than projecting it into the room.

In the hotel, we got to know the other refugees. It turned out that many were from Baltimore...and some were friends of our friends. So, the atmosphere was convivial, if not actually warm.

This morning, the power is still off. It's hard to write because our hands are so cold!

But we continue to report on the markets...however briefly!

What is amazing about the world improvers is that they never bother to figure out how the world works. It is as though they weren't interested. Instead, they just want to control it...to force it in one direction or another...and to mold it, as if it were wet mud.

Take David Brooks in the New York Times. He reckons the US isn't the country it used to be:

'[A]mericans have become steadily less mobile. In 1950, 20% of Americans moved in a given year. Now, it's around 12%. In the 1950s and 1960s, people lived in the same house for an average of five years; now people live in the same house for an average of 8.6 years. When it comes to geographic mobility, we are now at historic lows, no more mobile than people in Denmark or Finland.'

Is that a bad thing? Is stability something that needs to be corrected? Brooks thinks so.

'[T]oday's young people are much less mobile than young people from earlier generations. Between the 1980s and the 2000s alone, mobility among young adults dropped by 41%.

'[A] big factor here is a loss in self-confidence. It takes faith to move. You are putting yourself through temporary expense and hardship because you have faith that over the long run you will slingshot forward. Many highly educated people, who are still moving in high numbers, have that long-term faith. Less-educated people often do not.

'This loss of faith is evident in other areas of life. Fertility rates, a good marker of confidence, are down. Even accounting for cyclical changes, people are less likely to voluntarily vacate a job in search of a better one. Only 46% of white Americans believe they have a good chance of improving their standard of living, the lowest levels in the history of the General Social Survey.

'Peter Beinart wrote a fascinating piece for National Journal, arguing that Americans used to have much more faith in capitalism, a classless society, America's role in the world and organized religion than people from Europe. But now American attitudes resemble European attitudes, and when you just look at young people, American exceptionalism is basically gone.'

Now, fewer young Americans believe in capitalism than young Europeans.

Who would have thought?

What is really going on? Are mobility and appreciation for free enterprise parts of the same thing? Or are they different things? Is the loss of mobility really a bad thing?

Brooks doesn't even ask. Instead, he just comes up with a crackpot solution: Give people vouchers to help them move!

We won't grace that suggestion with a discussion. It is self-evidently absurd and ridiculous.

Regards,

Bill Bonner