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What We Read Today 13 July 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

Contrary to what naive economists believe, existing systems are NOT collections of fully independent, calculating agents. Rather, each is an incomprehensibly tuned syncytium, with incredibly densely engineered and deeply tuned, seemingly endless lists of interdependencies. Everything depends upon everything else.
  • Former CEO of CalPERS pleads guilty to fraud, corruption charge (Marc Lifshher, Los Angeles Times) Hat tip to Russell Huntley. Federico R. Buenrostro Jr. pleaded guilty Friday to one federal charge of conspiracy to commit corruption and fraud in funneling deals through his friend, Alfred J.R. Villalobos, for outside firms to manage funds for the California Public Employees' Retirement System. He was charged with and admitted to accepting more than $200,000 in cash plus other valuable gifts. Villalobos, facing charges in a separate trial (he has pled not guilty) is alleged to have received at least $48 million in fees as a middleman for placement of Calpers investments with Wall Street firms between 2005 and 2009. In comparison, executives at Calpers are modestly compensated: In 2011 CEO Anne Stausboll, who succeeded Buenrostro, was paid a total of $380,138 ($283,500 salary and $96,638 bonus). While it may be tempting to think that Buenrostro's judgement was clouded because of his "poor" compensation, excessive compensation has produced many ethical issues as well. See the next article and the writing of William K. Black on "accounting control fraud" at GEI Analysis (here and here) and GEI Opinion.

There are 10 articles discussed today 'behind the wall'.

The final five articles discuss the future of the dollar as the global reserve currency and the possible ascendency of the yuan (Chinese renminbi).

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  • The Failure of Macroeconomics (John H. Cochrane, The Wall Street Journal) Prof. Cochrane bemoans the effects of attempted demand creation on the blowing of additional asset bubbles instead of the desired creation of "demand". He further attributes Justice Department activities as a cause of the slow recovery:
Where, instead, are the problems? John Taylor, Stanford's Nick Bloom and Chicago Booth's Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault. Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work? Ed Prescott emphasizes large distorting taxes and intrusive regulations.
  • John Cochrane’s Witch Hunt for Witch Hunters (William K. Black, New Economic Perspectives) William K. Black contributes to GEI. This and the preceding article could be part of a featured The Great Debate© about the difference between free competitive markets and the control of markets by fraudulent oligarchs. Here is Prof. Black's reaction to John Cochrane:
Because Cochrane does not read the criminological research or the multi-disciplinary research on finance and criminology it is clear that he did not research corporate fraud or the supposed "witch hunt" against business. He simply launched a real witch hunt in his imagination and declared the Department of Justice (DOJ) was engaged in a (mythical) witch hunt against corporations - and claimed that this explained the positive, but far from stellar growth of the U.S. economy.
  • The diminishing returns of fuel efficiency (Walter Kurtz, Sober Look) Once you get to 30 mpg how much more would you spend to get a car with 40 mpg. Using the Kurtz cost parameters ($3.50 per gallon and 12k miles per year) the savings for making that change is about $300 per year. Would you pay $3,000 more for that car if you planned to keep it for five years. If you did you would be $1,500 out of pocket (assuming equivalent trade-in value). But what if the experience of the 1970s was repeated and gasoline increased 3x or 4x during those five years? The $3,000 extra cost would be returned with probably some to spare. And certainly the trade-in value of the 40 mpg vehicle would be much more improved over the lower gas price scenario.



China's Yuan usage in global trade and finance has more than doubled this year. While still notably below USD usage in international payments it remains firmly in second place for trade finance and according to a recent survey by HSBC, the number of US companies planning to use Yuan has almost tripled this year (from 8% to 22%).
  • Fears of tough action by Beijing following allegation BOC launders money (Daniel Ren, South China Morning Post) This report says that the Bank of China (one of China's "big four" state owned commercial banks) has a program that enables China's wealthy to transfer unlimited amounts overseas, circumventing the official limit of $50,000 per year. China's wealthiest are not sold on the future of the Middle Kingdom - nearly 2/3 want to leave:
Rich mainlanders have increasingly been seeking to migrate, baulking at the deteriorating business climate and worsening pollution problem at home. According to the Hurun Report's survey of China's richest people, the percentage of super-rich individuals wanting to emigrate, or who had already done so, hit 64 per cent this year, up from 60 per cent last year.

What do the wealthy in China know about currency and economic risks that is being missed by others?

  • France hits out at dollar dominance in international transactions (Michael Slothard, Financial Times) This is a repeat from the beginning of last week (WWRT public section). French government officials and industry leaders are calling for a "rebalancing" of the international payments system away from use of the dollar. This is in response to the nearly $9 billion penalty levied by the U.S. against BNP Paribus for money laundering to circumvent international sanctions. The protests center on the fact that BNP Paribus broke no European laws. See next article.

Moreover, the sanctions were not capricious, not publicized or imposed after the fact. ; The sanctions against Sudan, which is where BNP's violations were concentrated, have been in place since 1997 and; were tightened in 2006.; Press reports suggest that internal BNP documents showed that senior bank officials were well aware of the atrocities that led to the sanctions.;

Banks were also warned. In 2006, the Bush Administration warned foreign banks doing business in the US that they would be prosecuted if they helped sanctioned countries.; According to the Wall Street Journal, BNP told employees in 2007 that it would cease sanction-busting actions.; Instead, it appears they developed an elaborate payment structure, routing transactions through satellite banks, which would strip crucial information off wire transfers as they passed through the US system and banks.

Even though many senior BNP officials appeared to have known about the deceit, the CEO indicated that breaking the sanctions was "something that goes against the grain of the bank." It has taken steps to strengthen internal controls and going forward, all dollar transactions will be properly routed through NY.; Reports suggest that other European banks are tightening their internal controls to ensure compliance with US rules.

Econintersect comment: What most discussions fail to include is the vast unused productive capacity of the U.S. (the output gap). If the dollar depreciates because of increased use of the Chinese currency for international transactions, the production of China becomes overpriced and results in production shifting to the U.S. with reduced imports from China. This creates some self-limiting interactions as China experiences a lower trade surplus and the U.S. will see a reduced trade deficit. This is the way exchange rate determined currency valuations are supposed to work in theory. It this situation theory may be related to actuality. But the entire outlook creates much confusion. See the following article and video for an example.

  • Dollar Collapse Starts in Late 2014-Charles Nenner (Greg Hunter, Watchdog USA) Greg Hunter has contributed to GEI. In an interview Chuck Nenner tells Greg Hunter he is still "holding on to the deflation scenario". Then he says "inflation will start in 2014" and "the dollar is going to collapse by the end of 2014". Eventually he expects high inflation because sovereign debts need them or "deficits are going to be huge". This is a rather mixed position scenario. See if it makes sense to you:

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