Category: Current Events

Wisconsin Evokes Democrats’ Dilemma

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Douglas Belkin & Neil King, Jr.

Last week’s election rout did more than put Republicans in charge of the U.S. House of Representatives. It upended the electoral map that propelled President Barack Obama to the White House.
Mr. Obama bagged traditionally liberal Wisconsin and its ten electoral votes two years ago, part of a sweep that also included states that hadn’t tilted Democratic for decades. That went into reverse Tuesday. The party suffered heavy losses in Ohio and Pennsylvania, two big states that had backed Mr. Obama in 2008, as independent voters swung to the right. Other presidential territory–Virginia, Indiana and North Carolina–swung back to the GOP.
The depth of the party’s losses outside Washington, in state-level-contests, can be seen in this working-class city. The president won handily here in 2008 along with surrounding Brown County. Last week, Republicans carried all 18 races on the county’s ballots, right down to the clerk of the court. The GOP took control of the governor’s office, the state assembly and the state senate–the first time the state has reverted so abruptly to one side since 1938.

Brazil ready to retaliate for US move in ‘currency war’

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John Paul Rathbone & Jonathan Wheatley

Brazil, the country that fired the gun on the so-called “currency wars”, is girding itself for further battle.
Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.
“It’s no use throwing dollars out of a helicopter,” Guido Mantega, the finance minister, said on Thursday. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.”
At a joint press conference with president-elect Dilma Rousseff, outgoing president Luiz Inácio Lula da Silva said on Wednesday he would travel to the G20 summit in Seoul with Ms Rousseff, ready to take “all the necessary measures to not allow our currency to become overvalued” and to “fight for Brazil’s interests”. “They’ll have to face two of us this time!” he said.

The Subprime Debacle: Act 2, Part 2

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John Mauldin

At the end of last week’s letter on the whole mortgage foreclosure mess, I wrote:


“All those subprime and Alt-A mortgages written in the middle of the last decade? They were packaged and sold in securities. They have had huge losses. But those securities had representations and warranties about what was in them. And guess what, the investment banks may have stretched credibility about those warranties. There is the real probability that the investment banks that sold them are going to have to buy them back. We are talking the potential for multiple hundreds of billions of dollars in losses that will have to be eaten by the large investment banks. We will get into details, but it could create the potential for some banks to have real problems.”



Real problems indeed. Seems the Fed, PIMCO, and others are suing Countrywide over this very topic. We will go into detail later in this week’s letter, covering the massive fraud involved in the sale of mortgage-backed securities. Frankly, this is scandalous. It is almost too much to contemplate, but I will make an effort.

On China’s Renminbi

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Michael Pettis

As my reference to the Japanese yen might suggest, I am pretty skeptical about the likelihood of this happening, at least with some of the more excited predictions. So, by the way, is the ADB, whose recent report (“The Future Global Reserve System — An Asian Perspective”), suggests that by 2035, the RMB may comprise about 3 to 12 per cent of international reserves. This is a pretty reasonable prediction, in my opinion, and far from the more feverish claims we see reported almost daily.



If the renminbi ever becomes a major trading or reserve currency, it is going to take a long time for this to happen and will require a radical transformation of the Chinese economy and the role of the government. This may seem like a surprising statement. After all nearly every week we see reports about a new breakthrough for the renminbi, and almost every day someone important somewhere speculates publicly about what the world will be like when (never if) the renminbi displaces the dollar.



But away from all “qualitative” arguments about why this is unlikely, and there are many, I think there is a problem with the arithmetic of reserve currency accumulation. If the rest of the world is going to use the renminbi as a reserve or trading currency, clearly it needs a mechanism by which to accumulate renminbi. This is something on which a surprisingly large share of people who talk about the future of reserve currencies don’t seem to focus.

Why America is going to win the global currency battle

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Martin Wolf:

The US is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange controls (such as China), able to manage the adjustment better.



It would be far better for everybody to seek a co-operative outcome. Maybe the leaders of the group of 20 will even be able to use their “mutual assessment process” to achieve just that. Their November summit in Seoul is the opportunity. Of the need there can be no doubt. Of the will, the doubts are many. In the worst of the crisis, leaders hung together. Now, the Fed is about to hang them all separately.

Moahmed El-Erian has more.

Currency Wars

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Alan Beattie:

If the world is on the brink of an out-and-out currency war, a variety of battalions has been out on manoeuvres in the past few weeks. The Bank of Japan, after six years off the battlefield, has launched a fusillade of intervention to hold down the yen in foreign exchange markets. Brazil used the guerrilla tactic of doubling taxes on capital inflows to stop the real surging. India and Thailand warned that they too might bring heavy ordnance into play.



The main combatants, the US and China, continued to exchange rhetorical salvos. Washington (and Brussels) identified undervalued currencies such as the renminbi as a prime cause of global macroeconomic imbalances. Beijing retorted that such aggression risked bringing mutual destruction upon the great economic powers.



On Monday Dominique Strauss-Kahn, managing director of the International Monetary Fund, voiced his concern. “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” he said. “Translated into action, such an idea would represent a very serious risk to the global recovery.”

Condoleezza Rice on German Reunification

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In a SPIEGEL interview, former United States Secretary of State Condoleezza Rice discusses America’s fight for German reunification, Soviet leader Mikhail Gorbachev’s woes at the time, Chancellor Helmut Kohl’s merits and the later mistakes of his successor, Gerhard Schröder.


SPIEGEL: Madame Secretary, when the Berlin Wall fell in 1989, European nations like Great Britain and France were very worried about the prospect of German unification. America was the only country that didn’t appear to be concerned. Why not?



Condoleezza Rice: The United States — and President George H.W. Bush — recognized that Germany had gone through a long democratic transition. It had been a good friend, it was a member of NATO. Any issues that had existed in 1945, it seemed perfectly reasonable to lay them to rest. For us, the question wasn’t should Germany unify? It was how and under what circumstances? We had no concern about a resurgent Germany, unlike the British or French.



SPIEGEL: Because a unified German was in America’s strategic interest?


Rice: If you were going to have a Europe that was whole and free, you couldn’t have a Germany that was divided. So, with the possibility that Soviet power was going to be receding from Europe, it made perfectly good sense to try to achieve reunification on terms that nobody would have thought thinkable, even four or five years before.