Wednesday, November 24, 2010

The Irish Whack the Euro, Tension on the Korean Peninsula

11/24/2010 Portland, Oregon – Pop in your mints…
We had hoped that the calm of yesterday would continue on through Thanksgiving.  We hoped that we would enjoy our favorite holiday at ease with the knowledge that the Plunge Protection Team would continue to save the world from the nasty side effects of Capitalism and the general upward progress that its operation brings to civilization.  Those nasty side effects, of course, entail the destruction of certain industries while new, more efficient industries take their place and the occasional destruction of overall capital in order to create new capital.
The Plunge Protection Team exists, for the most part, to ensure that on the surface the stock, bond, currency, and commodity markets as well as overall prices appear to remain the same or at least to move gently between one extreme and the other.  They strive to provide the false comfort that the status quo may be maintained or that any changes to it will occur in an orderly, predictable fashion.  In short, they try to create the illusion of stability.  Oddly enough, if the world simply adhered to the tenets of a stable currency structure and the institution of private property, meaning that each person would enjoy and/or freely exchange the fruits of their labor, the Plunge Protection Team would have no reason to exist.  It only came into begin during the Reagan years when the powers that be thought the world could no longer stomach capitalism running on a fiat currency.
Of course we know that a perfectly "stable" capitalistic world does not exist and that the Plunge Protection Team now finds itself attempting to preserve the calm in markets that as a rule operate in a constantly changing state of supposed chaos.
The chaos of the moment is taking two forms today.  First, the Irish.  We have  closely followed the woes that the Irish Government chose to take upon itself when it effectively nationalized its ailing banks.  The Irish Government jumped into the river to save its drowning banks and now finds itself being pushed under as the banks, whose size dwarfs that of the Irish Government, flail about desperately trying to survive.  Two days after accepting the EU's offer of a lifeline, the Irish Government itself appears to be disintegrating.  All of the sudden, no one wants to hold the Euro as there is speculation that the hypothesis of the Euro-zone's unique (and may we add, completely and totally insane) experiment of "One Monetary Policy, Multiple Fiscal Policies" appears to be once again in question.  What were they thinking when they signed up for the Euro?  In the rosy days of the late 1990's anything seemed like a good idea.
Meanwhile, Portugal and our beloved Spain, whether they like it or not, are again coming under the microscope in what we believe to be the first stages of the disintegration not of the Euro, but of the national governments within the Euro-zone.  We believe that this episode will end with more power being wielded by Brussels and the Euro experiment, unfortunately, intact.
The second form of chaos is the heightened prospect of military conflict on the Korean peninsula.  The North and South have exchanged fire with the most significant event being the shelling of a civilian inhabited area on an island claimed by the South.  The South is now promising "Enormous Retaliation" although according to the AP story, it appears that the South actually fired first.
Are the Events Occurring on the Korean Peninsula an Economic Key Indicator?
These skirmishes are troubling for a number of reasons but there is one that dwarfs them all, just as the Irish Banks dwarf their lifeguard Government.  North Korea is allied with China.  South Korea is allied with the United States, who maintains large military presence there.  The trade tensions between the US and China are well documented.  The US accuses China of keeping its currency artificially low and creating a large trade imbalance with China exporting and the US incurring large debts that are largely held by the Chinese.  The recent G20 meeting did little to calm either side that this imbalance would get better in the short to medium term.  Throw in Taiwan, accusations of human rights violations, and recent punitive tariffs and you have a relationship between the US and China that is on the rocks.
With the understanding that North Korea is a proxy for Chinese interests and South Korea a proxy for the United States interests, do we truly grasp the significance of what is currently happening in Korea?
We pray this Thanksgiving that the tensions on the Korean peninsula can be resolved peacefully and that China and the US can mutually agree to a sustainable balance of trade.  If this balance is not achieved, is conflict avoidable?
We give Thanks for you, faithful readers of The Mint, and wish you and your Family a peaceful and joyous holiday!
Stay Fresh!
P.S.  If you enjoy or at least tolerate The Mint please share it with your family, friends, and colleagues!
Key Indicators for Wednesday, November 24, 2010
 *See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.