Government Action on Both Sides of the Pacific

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Japanese are at it again. The Bank of Japan is now instituting yet another program to buy shares of bank stocks. The history of their interference in the Japanese stock market goes way back and has proven to be a failed approach over and over again. Apparently just because something doesn't work is not a good enough reason for the Japanese (or almost any other government for that matter) to abandon it. While the U.S. is close to emulating Japan's disastrous market interference policies, there is a common-sense bill in Congress that would limit Credit Default Swaps. These instruments are more responsible for the financial market collapse worldwide than anything else. The discredited U.S. financial industry of course opposes the bill. Just because it is obvious they have no idea what they are doing, doesn't mean the U.S. government won't follow their suggestions.

When the Japanese government decided it was better than the Free Market in determining stock prices is not clear. It is known that during the 1987 crash, which was less serious in Japan than in other countries, that the Ministry of Finance called all the major brokerage houses to a meeting and told them to buy stocks (with at least a tacit agreement that the government would make good on the losses). After the Nikkei started tanking from its high of 40,000 set the first day of 1990, various schemes were used by the government to funnel money into stock purchases. While these moved the market up for awhile, each one eventually failed, but the market looked like it might have finally hit bottom after a 13 year sell off in spring of 2003 (the Nikkei was in the low 7000s). But this was not the case.

As per usual the Japanese government helped establish the 2003 stock market low by buying banking stocks. This last stock purchase program took place between November 2002 and September 2004. The Bank of Japan began disposing of these holdings in October 2007 (when international stock markets were at their peak). They had to suspend their selling by September 2008 when they still had 1.3 trillion Yen of stock on the books (at least that's the 'official' number). The Nikkei then hit a new 18 year low after that. The Bank of Japan's just released scheme is to buy one trillion Yen of bank shares, but there a plan in the works to add a 20 trillion Yen to that amount. Unfortunately, at some point these Bank of Japan purchased shares will have to be sold, otherwise the Japanese government would eventually wind up owning most, if not all, of the shares of their major banks. It is quite possible any new selling will cause a new market low to be established. If the Japanese government's real objective is to create the longest stock market sell off in history, they might be successful. If it is to fix their financial system, they should realize that they don't know more than the Free Market.

As for the proposed ban on Credit Default Swaps (CDS) in the U.S. This bill would limit the purchase of CDSs to parties that have an underlying economic interest and reduce the size of the market (and associated risk in it) substantially. CDSs, because they allowed huge leverage in the financial system were key components of the implosion that we are currently witnessing. One industry witness testified that this bill could 'collapse' the $31 trillion CDS market. I seem to remember the less than a year ago the CDS market was $62 trillion is size. Looks to me like the CDS market already collapsed by itself.

NEXT: New York Investing Meetup Versus the SEC

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Britain Points the Way to U.S. Economic Future

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

As of today, Great Britain is officially in recession, joining the U.S., Japan and Germany. Britain's GDP shrank 1.5% in Q4 2008, after shrinking 0.6% in Q3 2008. Those are at least the official figures, it is quite probable that the actual ones are even worse. Notable declines took place in the banking, retail, and manufacturing sectors (just like in the U.S.). The FTSE fell below 4000 and the pound dropped to 1.35 per U.S. dollar, a 23 year low, on the news.

Great Britain was once the premier economy in the world. The British pound was once the world's reserve currency. A rigid class system which guaranteed entitlement to those on top - similar to contemporary Wall Street in the United States - followed by socialist practices that offered entitlement to those on the bottom have over time eroded the country's economic dynamism. Early in the 20th century the capitalist free for all and innovation friendly U.S. began to assume economic preeminence after World War I. U.S. currency dominance was made official at Breton Woods in 1944 toward the end of World War II.

One of the most shocking stories in the history of technology illustrates quite clearly how Britain and U.S. attitudes differed in mid-century and why the U.S. became the post World War II economic powerhouse that it did. Both Britain and the U.S. developed early electronic computers for war time use. At the end of the war, the British government destroyed even the plans for the computers fearing they would fall into the hands of the Russians. The U.S. made the plans publicly available by publishing them, engendering one of the biggest growth industries of all time. The lesson of openness and transparency is currently being lost in the U.S. however with the Federal Reserve and Treasury engaging in significant and frequently secret manipulation of the financial system. In the long term this is only going to prove to be disastrous - although the short term results have been horrendous enough as is.

The response of the British prime minister, Gordon Brown, to the current British recession is that it is a result of global events. In case anyone has forgotten, Gordon Brown was the Chancellor of the Exchequer (equivalent to U.S. Treasury Secretary), who took the decision to sell half of British gold reserves in 1999 , when gold was around $260 an ounce, to buy among other things, U.S. dollars. Brown also has presided over a subprime crisis, 125% housing loans to people who could never pay them back were common, that is much worse than in the U.S. Unfortunately, while Gordon Brown is one of the most economically incompetent officials ever to run a major economy, he has plenty of company on the world stage these days. George Bush is certainly in the running for a close second. Many Japanese leaders in the last 25 years would be up there as well. Because economic idiocracies are common place in the world today, drastic action will be required to fix things. If the U.S. doesn't take appropriate action soon, it will be following Britain down the path of long term economic and currency decline.

NEXT: Unemployment Everywhere

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.