http://www.foreignpolicy.com/articles/2010/08/19/china_s_japanese_future?page=full

Parasite economies are facing the sad fact that their hosts are dying or worse playing the same game that they are!  When you can’t devalue and export your way to a growth target and you can’t subsidize investment with lower rates, then what do you do? 

Consume? Yes, but how?

“The model itself prohibits high consumption: growth is high because consumption is low. China cannot enjoy the double-digit GDP growth generated by low wages, cheap capital, and an undervalued currency and stillhave strong domestic consumer demand.”

So how do you boost income? Increasing household wealth can happen in two ways: (1) Privatize! - but who’s going to bet that the PRC is going to go Reagan!? (2) Reverse subsidies.  That means detach your parasitic sucker cups from the developed world and allow your currency to appreciate and interest rates to rise.  This will increase wages and domestic household net worth relative to the rest of the world.  But if this happens too suddenly - recall the Plaza accords and the revaluing of the Yen - then China will wipe out all of its exporters and will be staring a Lost Decade straight in the face. 

http://ftalphaville.ft.com/blog/2011/04/15/547596/the-other-missing-side-of-risk-retention

“The emphasis on risk retention overlooks the fact that investors in structured finance were primarily sophisticated financial institutions who understood the asset classes. The LTV’s on home loans, the use of non-traditional mortgage structures, oversupply in the housing market and the progressively higher price points being paid for homes were also ell known… Originate to distribute was born out of the demand by sophisticated investors and, aside from some incidences that are minor when framed against the entirely of the market, all parties understood the products that failed and those that succeeded.”

What a silly point.  This implies that buyers of any product always understand all the risks of owning that product.  If that were true then markets would always be in equilibrium and would be perfectly discounting things like a housing bust and massive principal losses.  Not only did that not happen - that’s pretty much impossible!  To say that AAA investors of non-agency MBS or that a repo counterparty accepting similar collateral knew that these bonds were actually defunct is waffling psycho-babble.  To argue otherwise would have to explain how these products suffered MASSIVE re-valuations overnight.  Why did the repo financing for ‘AAA’ mbs just disappear? I guess the author would say that the counterparty accepting these products at a 5% haircut knew that the titanic was sinking but thought he could squeeze in one more game of poker.  Investing 101!

Everyone’s favorite mortgage REIT speaks - “A breakout in inflation while wage growth is so low would be a truly unique event in our short economic history.”  That’s right folks, if Uncle Milton is right that “The cure for inflation is to reduce the rate at which total spending is growing” then it follows that inflation won’t become unanchored without an increase in the rate of spending or transitively, income growth (income = spending).

And their take on QRM - “As it is currently written, only about 20% of the Fannie Mae and Freddie Mac pool of borrowers were underwritten to QRM guidelines (see graph nearby). The rule will likely not be finalized until this summer at the earliest.” Love the sarcasm Mr Farrell! Nothing liking constricting a private label RMBS market that basically doesn’t exist! 

Pettis on point as always - Washington should be exploiting the dollar’s status as the global reserve currency.  Asian growth ain’t doing us any favors anyways (thanks for the loan though Chiner, but we want our jobs back).  Force the readjustment now - export only growth strategies have EM balance sheets accumulating both dollars and unsustainable shares of global GDP (rewind to 1980s Japan).  But sacrificing the dollar’s hegemony isn’t exactly a politically favorable move.  For all intents and purposes, we stand as the only country running a significant trade deficit )(thx Europe!) and the only country capable of being a capital exporter.  Name another sovereign who is ready to handle and carry the trade parasites?