morph366

The Great Shift: China Rising, U.S. Falling

User 353732 is right to stress that China may not be able to rival the US in terms of the "imagination of the world".
As the old saying goes, man does not live by bread alone and the need for "circuses" and powerful "memes" as well is very much a part of the overall mix that will continue to shape global commerce.
The contributions that Hollywood has made to "branding" the US dollar as a globally accepted instrument of value are a powerful counter-force to the ineptitude of its bankers

Political Will for Reform and the Concept of Corporate Communism

The experiments with sandpiles and to which John Mauldin refers (and were conducted by Per Bak and written about in a good book he wrote called "How Nature Works") actually show that the addition of the sand will create avalanches even when the point of contact of the new sand dropping on to the pile is not concentrated in just one spot.

The takeaway from Bak's experiments was that the sand piles are examples of self-organized criticality and highly unstable where there is no linear relationship between the cause (the addition of one tiny grain of sand) and the disproportionately large effects i.e. a massive avalanche or to apply the metaphor to the financial world - a potential systemic meltdown.

The only economist that I am aware of that has put this fundamental and inherent tendency towards financial instability at the heart of his economic analysis is Hyman Minsky.

Alas, I think that no matter how we try to re-structure the banking system and even if we should get a less corrupt political system, the nature of complex dynamical systems is such that frequent avalanches are something that have to be factored in, at ground level, in any strategy for risk management that goes beyond the ineffective techniques followed by advocates of Modern Portfolio Theory and Value At Risk.

Mish and Karl Fight Over Money

Derryl

Your contribution is wonderfully lucid and provocative.

Regarding the question you pose at the end - may I suggest the following difference between using the gold and using the bank loan to purchase my house - and it comes back to the reason why Nixon abandoned gold convertibility in 1971.

There is only a finite amount of gold in existence (and even still to be discovered) so there is an opportunity cost to consider in using it for any particular purpose rather than another.

Theoretically, if one takes a very relaxed view on capital adequacy, or if one provides a safety net in the case where the capital proves to be insufficient, there is virtually no limit to how much notional credit can be created.
In such a world (very much like the one we live in today) the opportunity cost issue does not arise.

This is a much easier system to live with for those who are reluctant to be disciplined by inter-generational accounting, and while this view prevails the illusory nature of wealth creation through credit expansion will continue.

Securitization: Have We Learned Our Lesson?

While your (and Mr. Krugman's) suggestion about a return to traditional banking may be eminently sensible Wall Street won't like it (and therefore nor will the Treasury) because there would be no more lavish fees for fancy financial engineering skills etc.

Don't Blame Trade Imbalances for the Financial Mess

As you suggest there's plenty of blame to go around.

One strand that I think is missed in your argument relates to the affordability issue and the diminishing incomes of US households as a result of competition from offshore labour.

You mention that "a bubble occurs when prices go up more than dictated by fundamentals like interest rates" - but perhaps more problematically real estate was rising faster than the average household's ability to afford the (non-subsidized) costs of owning their own homes. To make matters worse they used their home "equity" to continue to enjoy a lifestyle that they could no longer afford.
The reason they could no longer afford to consume the way they had for years was because those in the labour markets in the emerging markets, were not yet aware of the "lifestyle entitlement" mentality.
There may be more to the "imbalances" argument than your piece suggests.

The UK Moves First on Bank Reserves

John,

The FSA's proposal regarding the need for UK banks to hold much larger reserves of highly liquid government securities is partly inspired by a new fetish for capital adequacy but also (and perhaps largely) by the need to find buyers for the stunning amounts of gilts that will have to be sold in coming years.
At the moment the Bank of England is buying about one half of all new public debt issuance, and the FSA's motivation in calling for the commercial banks to recognize their civic duty and buy a lot more is to circumvent the nasty situation where, if the Bank stops buying, the UK government might have to finally do what it keeps claiming it will do - but not just yet - and take real steps to put the public finances in order.

Cutting Paulson Some Slack

Wall St Cheat Sheet has it exactly right.
Joe Public is lied to while those inside the magic circle are provided with the necessary and timely information to move ahead of the crowd.
Problem is that Joe Public increasingly doesn't have the wherewithal to be the sucker of last resort.l

Gold Hits Record High

In big picture terms, the suspicion is that players in gold and S&P futures are playing a high stakes poker game where the bluffing is becoming worthy of another sequel in the Ocean’s Eleven saga.

US Dollar: "I'm Not Dead Yet!"

The last sentence contains the clue as to what markets are groping towards already i.e. .... "the dollar ...will not likely lose its reserve status, unless a commodity standard currency comes into being."

The Chinese are increasingly putting their money where they believe it will best preserve its purchasing power - commodities. The world is awash with claims against paper assets and notional wealth, but has a finite and depleting supply of basic resources. These resources are being recognized as a more reliable store of value and according to the simple laws of supply and demand, this will ensure that their value will go up while the value of dollars (and all the other printed stuff) goes down.

U.S. Begins to Drain Liquidity

My suspicion is that the Fed will continue to err on the side of a too generous monetary policy and at the slightest sign of another pullback there will be fresh QE and other programs to "help" things along.

Krugman's Magnum Opus on Macroeconomics

What I found most intriguing about Krugman's piece was the fact that in connection with his exposition of the work of Keynes he used the term "casino" three times in the article ( I gather from John L's comment that it was 7000 words).

It is sad enough that the most apt description that the great macro-economists can arrive at for the financial economy is that it operates like a casino.
Even sadder when it is becoming increasingly apparent that all of the slot machines and roulette wheels are rigged.

The Good News About Bernanke

A vote for the status quo

Which Bernanke Are We Getting at the Fed?

"When the Big Crash comes, there’ll be another moment of decision: “Collapse or Rescue.”

Let's hope that there even is a choice for Bernanke to make at such a point!

Comparing Today's Bank Crisis to the Past

We have been and still are in unchartered territory....The ability of the U.S.and the world economy to withstand such a shock amazes me.

I agree and it suggests that larger the act of denial the more intransigent and hard to abandon it becomes

Did Lehman Save America from a Dollar Collapse?

As you say it is always difficult with counter-factuals so while it may be interesting to contemplate the idea that "Lehman saved America from a dollar collapse.", it is more likely that the massive unwinding of the carry trade and repatriation of dollars to shore up troubled US balance sheets was already in motion before Lehman collapsed and that plus the safe haven dynamics rescued the $

My own suspicion is that the events of last fall will lead to a continuing erosion of confidence in the dollar, but it will be a much more protracted event rather than a crash