Promoting Goldman On Gov't Tab

December 13, 2006

US Treasury Secy Hank Paulson and USFed Chairman have embarked upon yet another trip to China, joined even by Commerce Secy Gutierrez. This Strategic Economic Dialog between the Untied States and China deserves comment. The official reasons stated are to discuss economic and banking reforms, more like a begging session for China not to torpedo the USEconomy. In my opinion, that is in part a cover smokescreen. Paulson publicly cites the need for China to make quick progress on economic changes toward an open market society, like with greater permitted foreign competition, greater market efficiency practices, more improved collection of intellectual property royalty to Westerners, and more development of internal domestic demand. He also cites the need for China to make quick progress on banking changes toward a more open system, like with freer foreign participation in bank partnership and lending permitted by law, and a more liberally exchanged convertible yuan currency with less rigid control. These are the stated reasons. They are realistic, but only half the story.

The US leaders, called the "dream team" by our press, will urgently plead in Beijing for the Chinese bankers not to abandon their vast horde of US$-based bonds. China holds over a $1 trillion account in foreign FOREX reserves, with perhaps 40% tied to US$-based bonds like US Treasurys, US Corporates, and US Agencys (mortgages). We deliver an empty threat to impose a trade tariff, a stick swung which will not go away, but which is truly hollow. The US is desperate, let's say it again. The foreign central bank revolt is entering full swing across Asia, joined by the Persian Gulf nations in the Middle East. Dollar risk is cited by Qatar and other emirates, not just defiant practices with euro-based petro sales out of Iran. The bloat of USDollars and US$-based bonds has overflowed and grown absurdly dangerous.

Paulson can cite strength of the USEconomy all he wishes. His tone rings empty given both the trade gap and sector slowdown within the economy. Bernanke can cite stability of the same USEconomy all he wishes. His words echo a blindness to housing. Gutierrez is more like a glorified mail room clerk, whose is doubling as a shepherd. He leads a group of US corporate CEO executives interested in expanded business. Our new credit masters are three: China, Persian Gulf nations, and Japan. An old but reliable book claims that the debtor becomes the slave to the credit master, and this arrangement is no different. Sovereignty of the United States is in deep jeopardy. The Asians are increasingly jockeying into a position of control. China wants a seat at the G8 Finance Minister table, not a Waiting Room invitation. China has ambitions for a blue water navy. China wants to share the mantle of Asian regional leadership with Japan. They choose to attain the role without the traditional heavy hand of control seen with Tokyo leaders, whom many regard as operating off puppet strings.

WALL STREET INVESTMENT BANKERS
Step back and consider the last trip by Paulson to China this autumn. At a time near the beginning of November, he traveled to Beijing for the officially expressed purpose to urge their leaders to permit an upward adjustment in the Chinese yuan currency. The outsized US trade deficit has been pushing the $60 billion monthly figure for several months. China alone accounts bilaterally for one third of the total US trade gap, with three consecutive months over $20 billion and no respite in sight. Don't jump to any conclusion from the chart below that the monthly bilateral trade gap has doubled in a year. It has not. The October 2005 gap was at $20.5 billion, which exposes some seasonality to the series. At the time of the last China mission by Paulson, the US Senate was threatening to pass the Schumer-Graham bill to impose a 27.5% trade tariff on Chinese goods entering the country. Well, what a coincidence that two weeks later, the giant ICBC bank initial public offering was completed, which netted Goldman Sachs a hefty profit of $3.9 billion, detailed in the November Hat Trick Letter issue. Paulson must have had a high priority not to screw up the largest IPO in history, with ICBC selling $21.9 billion in stock. Citigroup led the brokerage underwriting, but GoldSax benefited on its planted stake. Was a deal struck, to back off the tariff imposition, to let the bilateral trade deficit fester as huge and gaping, so that Citi and Goldman would profit? My impression is certainly yes. The oligarchs triumphed.

THE REAL PURPOSES
So now why are Paulson and Bernanke visiting Beijing this time? We hear the official reasons. What events or statements have been made in recent weeks? To be sure, a few important public statements have been made to change the landscape and tense relationship. The Peoples Bank of China deputy governor Wu Xiaoling stated in late November: "Firstly, long-term interest rates are falling, reducing returns on bond investments. Secondly, the exchange rate of the dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for East Asian reserve assets." In addition, an anonymous source was quoted: "These low rates can easily lead to an asset price bubble, and this is what we are paying attention to." The details are that since summertime, the yuan exchange rate has fallen from 8.0 to 7.82 for over a 2% decline. Also, the paid yield on long-term USTBonds to them has fallen from 5.0% months ago to 4.5% now, which is 10% less income. On this trip, Bernanke joins the team. We are not told of who or how many Wall Street investment bankers are included in the entourage. My opinion, pure conjecture, is that the current trip has two purposes.

First, the Chinese have threatened to withdraw from USTreasury Bond purchases, and possibly to sell some of their vast $1000 billion horde. The "diversification" word sends shock waves in the currency world. Their leaders harp and threaten on a regular basis about diversification, a dreaded word in the FOREX trader pits. Bernanke is there most likely to convince the Chinese not to diversify, since doing so would harm the USEconomy. Their export business would suffer, while their foreign reserves (national savings account) would decline in value. Important jobs within China would be lost, putting their leadership at risk. The dynamic duo have made the journey for the purpose of urging China not to diversify, at least not until after several more lucrative deals are brokered. Independent control of our nation is slowly eroding, not just with energy security but with industrial security. Precious few seem to notice, until perhaps now.

Secondly, Paulson will act once more as the Wall Street investment banker ambassador, to strike secret deals on stock issuance and public offerings. The pressure to open up their financial sector comes with unspoken mega-million$ in fees for the Manhattan insiders, who will surely not share their booty with small fry Wall Street firms, not with Paulson at guard. Paulson repeatedly has referred to the path of reforms, which is the euphemism for opening up their banks to US partnerships and competition. It is more than banks though. Numerous other US corporations across numerous industries, from construction firms to car makers to telecommunications, they wish to enter China, which has concrete roadblocks in place to obstruct. They must remember all too well the days of colonialism early in the 20th century. Chairman Mao fought the foreign devils, and the memory lingers.

Wall Street lusts and drools over the prospect of investment banker fees. This is the immediate opportunity, with many zeros on pay checks and coveted bonuses. In addition, major Manhattan firms are putting their initial positions in place BEFORE the initial public offerings to sell the stock. The deals will profit not only US princes of government service, but Chinese communist captains. Chinese leaders, like their US counterparts, have vested interests for personal gain in the sale or capitalization of some trophy corporations (mostly big banks) with enormous future prospects as the Middle Kingdom continues to emerge as a world leader. The losers are the US workers and investors. Systemically, global village forces continue to exert pressures, both to level the wage playing field and to provide exploitation opportunities for those in power. The trend of outsourcing jobs to Asia has both assisted US businesses and wrecked US worker lives.

GROWING VULNERABILITY, DESPERATION
The degree of US vulnerability is difficult to quantify, off the scale of available adjectives. China could shut down the entire USEconomy if a concerted program were embarked upon to dump USTBonds. They could permit US shopping retail centers to perform a vanishing act where the majority of electronics, clothing, housewares, and furniture would be halted in supply.

Few Americans fully appreciate and consider the vast problems facing China. They have several demographic classes which migrate step by step from rural to urban centers. Large tracts of farm lands are being taken for industrial purposes, offering a higher wage in factory jobs. People are demonstrating openly against displacement, pollution, and forced compensation. The number of violent events from such demonstrations is on an alarming rise. Beijing leaders are highly suspicious of Western business. So far they have managed the Westerners brilliantly, by permitting technology and fixed investment to enter, and finished products to leave. But they have blocked competition directly from outsiders in key industries. Where they have opened a segment to competition, Chinese firms have fared poorly. Now Beijing leaders are slow to permit foreign competition and partnerships. They want the next piece, more total control of the technology, greater independence to expand beyond original partnerships. The US firms are reluctant, and for good reason.

Hard data is difficult to come by, but the domestic Chinese economy is growing in its own consumption patterns. In fact, the growth rate in internal consumption is growing 40% to 50% faster than their export growth. Government actions have raised their minimum wage and welfare grants, which have helped to prompt households to spend more. Incredibly, the nation saves 50% of its entire GDP. Contrast that with a US population which saves virtually nothing. The dirty little secret inside China is that a tremendous amount of wealth is concentrated within the Communist Party leadership. They own a big proportion of the banks and other companies offered in IPO stock launches.

FOREX reserve diversification can be delivered in a slow drip, called Chinese Water Torture. The Thanksgiving holiday USDollar selloff sounded the global currency alarm. An uncomfortable alliance between the US and China has always been uneasy, despite extremely large business investment. Beijing leaders are uncomfortable with their $1 trillion of FOREX reserves, 40% of which are estimated to be in US bonds of some kind. They wish to continue the vast technology transfer from US and other Western corporations. They have many other priorities, demands, and ongoing practices which are important. Huge concern persists that the Chinese firms up for stock issuance have distorted, questionable, and corrupted balance sheets. If multi-million$ are up for Wall Street fees, then our titans will likely participate and then begin a long slow distribution process of that stock to the US public. It happened with the US public owned pension accounts, and will again. In my view, the second hidden motive is one of our envoys traveling in desperate measures. These currency impact and other Chinese motives are discussed in the December Hat Trick Letter to appear in mid-month.

MUSSOLINI BUSINESS MODEL
Such collusive practices between government and private industry are precisely where the Mussolini Fascist Business Model profits for the connected insiders, apart from any public participation. Expect more compromises which sell out the USEconomy, the US workers, and future financial health of our nation, so that Wall Street can continue to earn billion$ which ordinary people cannot earn. And Paulson is revered as a genius. He is one bright successful man, whose 2005 income at Goldman Sachs was a hefty $38.8 million. See last month's report for the tax incentive used by the USGovt to attract top titans as they advance the Mussolini Model. Paulson leads the pack in top income for 2005. The current CEO Lloyd Blankfein ranked #4 in the wage & bonus earnings parade at $30.8 million. The bank royalty has profited well during the rampant inflationary period, when the USEconomy has faltered, when the trade gap has magnified, when US workers have lost jobs in droves, when US companies have been squeeze to the point of establishing operations in China & India. Merrill Lynch earned $5 billion in 2005 profit. In all, 50 GoldSax executives earned $25 million yearend bonuses, while 12 Morgan Stanley executives did, and 12 Merrill Lynch executives did. It was a good year for Wall Street, and a miserable year for Main Street. Personally, no objections to success for individuals, but here one can find much to object to on the methods and cut deals. A cool $4.1 trillion has found its way in capital inflows to the US financial markets since March 2003. Wall Street firms has been first in line grab their fair share, and most of your share.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him atJimWillieCB@aol.com

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

For personal questions about subscriptions, contact Jim Willie at JimWillieCB@aol.com

 

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