Rearranging the New World Order

The new Japan is China. It’s an export economy with too much capacity…like Japan in ’89.

The new Greece is Spain. It’s got mortgage debt up the kazoo…

The new Ireland is the old Ireland. Yes, Ireland is now exporting people again…at the fastest rate since the 19th century.

Our old friend Jim Davidson says the new America is Brazil. But what happened to the old America? It’s the new Argentina. Whoa! What a topsy-turvy world! The US is going broke…and going rogue. Just like Argentina in the ’80s…

First, here’s the story on China, from The New York Times:

HONG KONG — China announced Thursday that growth in imports had unexpectedly come to a screeching halt in April — rising just 0.3 percent from the same period a year earlier, compared with expectations for an 11 percent increase. Businesses across the country appeared to lose much of their appetite for products as varied as iron ore and computer chips.

China has been the largest single contributor to global economic growth in recent years, and a sustained slowdown in its economy could pose problems for many other countries. Particularly exposed are countries that export commodities like iron ore and oil and depend on demand from China’s voracious steel mills and ever-growing ranks of car owners.

Exports, a cornerstone of China’s torrid economic growth over the past three decades, grew only 4.9 percent last month — half as fast as economists had expected. And a slump in new orders over the past month at the Canton Fair, China’s main marketplace for exporters and foreign buyers, suggests that overseas shipments by the world’s second-biggest economy, after that of the United States, may not recover quickly.

Growth in other sectors appears to be slowing, too, particularly in real estate. Soufun Holdings, a Chinese real estate data provider, released figures Monday showing that residential land sales in the country’s 20 largest cities had fallen 92 percent last week from the week before, as declining prices for apartments have left developers short of cash and reluctant to start further projects.

There are early signs of a credit crunch, at least among private sector companies. Many seem to be asking their suppliers for more time to pay debts and complaining of cash flow problems. Zhang Jinmei, the sales manager at Qitele Group, a company that makes playground equipment in the coastal city of Wenzhou, said that local investment and lending pools there were starting to charge higher interest rates for loans, a sign of worries about creditworthiness.

“The business environment is getting tougher and tougher,” said Tom Zhang, the sales manager at Hebei Haihao High Pressure Flange and Pipe Fitting Group. “Competition is very intense to get more business — our domestic sales are down from last year, though our export sales are more or less stable.”

And here’s the lowdown on the pain in Spain from Bloomberg:

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt.

The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock.

Spain’s home-loan defaults were 2.7 percent in December, according to the Spanish mortgage association.

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

Spain… is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save.

In both countries, loans to real estate developers proved most toxic. Ireland funded a so-called bad bank to take much of that debt off lenders’ books, forcing writedowns of 58 percent. The government also required banks to raise capital to cover what was left behind, assuming expected losses of 7 percent for residential mortgages, 15 percent on the debt of small companies and 4 percent on that of larger corporations.

When an organization goes rogue it takes up a new mission, of its own choosing…often in cahoots with the enemy it was supposed to be fighting.

You can see this phenomenon in many different places in many different activities. Poor African nations were supposed to be fighting poverty and hunger. But leaders found that losing the battle was more rewarding than winning it. Famine brought aid. And top-end Mercedes sales went up in the capital cities shortly after new aid programs were announced.

Likewise, US cities such as Baltimore and Detroit largely destroyed their own middle class tax bases. So, they came to depend on federal aid programs with perverse incentives. The outside world saw city governments as corrupt and dysfunctional, but they were really responding, rationally, to the choices before them. The worse off you are the more money you get. They went rogue…because that’s where the money was.

The clearest example of this phenomenon is the War on Drugs. The anti-drug warriors went rogue many years ago. They found common cause with drug dealers, both of them now work against the public’s interest. The drug fighters gain power and money by putting resources to work against the drug dealers. The drug dealers gain power and money thanks to the drug fighters who, like regulators, create high barriers to entry, keep out competition, push up prices, and protect the dealers’ profit margins.

The drug dealers should thank the drug fighters. And here, one did:

“I couldn’t have gotten so stinking rich without George Bush, George Bush Jr., Ronald Reagan, even El Presidente Obama, none of them have the cojones to stand up to all the big money that wants to keep this stuff illegal. From the bottom of my heart, I want to say, Gracias amigos, I owe my whole empire to you.”

— Joaqin “El Chapo” Guzman, head of Mexico’s Sinaloa Cartel, as reported by a close confidant (via The Huffington Post)

Colleague Justice Litle explains:

The war on drugs — a war that America has lost — is an excellent example of why the world is so hard to change. Bad laws, bad ideas and bad arrangements persist by the will of stakeholders behind the scenes.

It’s a “tragedy of the commons:” Costs are shouldered by the oblivious many, while profit concentrates in the hands of the few.

There is no way the cartels could have prospered so mightily, for so long, without a symbiotic relationship between criminals, politicians, and the lobbying agents who love them both. If not for the long arm of the law — and the helping hand attached to it — El Chapo and his ilk would have been rubbed out by Fortune 500 corporations (via free competition in a regulated market) quite some time ago.

“Whoever came up with this whole War on Drugs,” one of El Chapo’s lieutenants reports he said, “I would like to kiss him on the lips and shake his hand and buy him dinner with caviar and champagne. The War on Drugs is the greatest thing that ever happened to me, and the day they decide to end that war, will be a sad one for me and all of my closest friends. And if you don’t believe me, ask those guys whose heads showed up in the ice chests.”

But the biggest rogue of all is the only one that still retains the faith and respect of the people — the US military. That alone is remarkable, considering that the Pentagon has a record of failure that stretches back over the last 60 years. In Korea, it accepted a draw. In Vietnam, it withdrew, shamefully. In Iraq, we replaced one corrupt government with another, probably just as corrupt and incompetent too. In Afghanistan, it is ready to get out…leaving the country in the hands of its enemies.

Still, instead of sending military personnel to the back of the bus, the airlines board them along with the first class passengers and even move them up to business class if there are seats available. Mother Teresa can stay in economy!

Additional “investments” in security have been arguably the least productive use of capital in American history. From an outsider’s perspective, it looks like the US military was suckered into spectacularly bad outlays in Iraq and Afghanistan. The New York Times reported as follows:

Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the US? In a survey of estimates by the New York Times, the answer [is] $3.3 trillion or about $7 million for every dollar Al Qaeda spent planning and executing the attacks.

The insiders knew better. The Pentagon has gone rogue. It no longer protects the US from war; it causes wars. It no longer seeks to win wars; it wants them to go on forever. It no longer avoids wasting US resources; it sucks up all it can get.

Like drug fighters and poverty fighters, the fighters in the military were happy to have an enemy…especially one that couldn’t do them any real harm.

Where does this lead? How does it progress? Stay tuned…

Regards,

Bill Bonner,
for The Daily Reckoning