Cui Bono ?

Due North: Canada’s Marvelous Mortgage and Banking System

What about the Canadian banking system allowed it to survive the recent worldwide slowdown without a single bank failure? What can the United States learn from Canada about sound banking?

By Mark J. Perry

There were some significant differences between Canada and the United States during the recent financial crisis. In general, Canada’s banking system proved more prudent, more resilient, and much less prone to excesses. Taking a closer look at these differences might tell us how the United States got into the mess it is in, and illuminate some ideas for future reforms.

Consider, for example, some of the following facts, illustrated with charts.

Canada didn’t have nearly the real estate bubble and subsequent corrective crash in home prices as the United States:

 

Canada has had nowhere near the problems with mortgage delinquencies and home foreclosures as the United States:

Yet Canadian banks remained profitable and reported positive return on equity even in the worst year of the meltdown, 2008, when U.S. banks (and banks in the United Kingdom and Europe) lost money and had negative returns on equity.

These were some of the more interesting banking statistics present recently at the American Enterprise Institute’s seminar, “Canadian versus U.S. Housing Finance: Comparison and Implications,” organized by AEI resident fellow Alex Pollock.

And this recent financial crisis isn’t the first time that Canada’s banking system showed greater signs of stability and less exposure to stress than U.S. banks. In the 1930s, when 9,000 U.S. banks failed during the Great Depression, not a single bank in Canada failed. When almost 3,000 American banks failed during the Savings and Loan (S&L) Crisis, only two small Canadian banks failed in 1985, and those were the first bank failures in Canada since 1923. And while almost 200 U.S. banks have failed since the start of the global recession in early 2008, Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure.

What about the Canadian banking system allowed it to survive the recent worldwide slowdown, and even the Great Depression, without a single bank failure, and what can the United States learn from Canada about sound banking? Below is a summary of some of the distinctly different features of Canada’s banks and mortgage markets discussed at the AEI seminar, which help explain the greater financial stress resiliency of Canadian banks compared to American banks.

1. Full Recourse Mortgages in Canada. Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

2. Shorter-Term Fixed Rates in Canada. Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. This practice allows banks to achieve a better maturity match between their assets (mortgages and loans) and interest income, and their liabilities (deposits) and interest expense, which protects them from the kind of maturity mismatch and interest rate risk that resulted in our S&L crisis and almost 3,000 bank failures in the 1980s and 1990s.

3. Mortgage Insurance Is More Common in Canada than in the United States. About half of Canadian mortgages carry mortgage insurance (compared to 30 percent in the U.S. currently and only 15 percent before the crisis), primarily for those mortgages financing the purchase of a home with less than a 20 percent down payment, and the borrower is required to pay the full mortgage insurance premium upfront. Another difference from the U.S. is that when private insurance companies in Canada insure mortgages, they have the authority to approve or reject the property appraisal, and they have strong financial incentives to only approve realistic property appraisals. Mortgage insurance in Canada covers the full loan amount for the full life of the mortgage, and cannot be eliminated like in the United States when the property value exceeds the mortgage balance. The traditionally much higher frequency of mortgage insurance in Canada compared to the United States helps to stabilize Canada’s mortgage and housing markets, and is one of the many features that contribute to its ranking as the safest banking system in the world.

4. No Tax Deductibility of Mortgage Interest in Canada. Home mortgage interest has never been tax-deductible in Canada, so there is no tax advantage to home ownership in Canada over renting. (Addendum: Except that any capital gains from the sale of a principal residence in Canada are not taxed). There is also no tax benefit to converting home equity into household debt in Canada, which has resulted in a much greater equity accumulation in Canada (70 percent of total real estate value) than in the United States (currently only about 45 percent). Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation than in the United States. Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the United States (67.2 percent).

5. Higher Prepayment Penalties in Canada. Prepaying mortgages in Canada is allowed, but there are much stiffer prepayment penalties (three months of mortgage interest) than in the United States, which discourages the kind of refinancing that frequently took place in the United States leading up to the housing meltdown, and often involved pulling home equity out in the refinancing process (encouraged by the tax deductibility of mortgage interest).

6. Public Policy Differences for Low-Income Housing. To promote affordable housing for low-income households, the Canadian government has not used public policies like the Community Reinvestment Act in the United States, which encouraged homeownership for lower-income and less creditworthy borrowers, financed frequently with subprime mortgages. Instead, the Canadian government provides public funding for low-income rental housing, rather than encouraging homeownership for low-income households, and Canada has thus avoided the American mistake of using misguided policies to turn good, low-income renters into bad homeowners.

7. Differences in Canada’s Bank Concentration and Greater Diversification. Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the United States) holding more than 80 percent of total bank assets. This concentration became an advantage during the recent financial crisis because it facilitated critical discussions among the five large banks and the single federal regulator (the Office of the Superintendent of Financial Institutions). Also, Canada has never had branching restrictions like the U.S. laws that prevented interstate banking up until 1994, and this has historically allowed Canadian banks to achieve geographical diversification for their deposits and loans portfolios. It was largely this difference in geographical diversification that help explains why the United States had 9,000 bank failures during the Great Depression (each operating within only one of the 48 states, due to the prohibition on interstate branching) and not a single Canadian bank (all with branches nationwide) failed in the 1930s.

8. A Few Other Differences that Contribute to Bank Safety in Canada. There is a much lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk. Finally, almost all mortgage payments in Canada are made electronically by an automatic payment arrangement, which minimizes late payments.

Bottom Line: Taken together, the features and regulations of banks in Canada outlined above create a healthy and sound “pro-lender” environment absent of political motivations for outcomes like greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with home ownership.

Canada’s banks are generally ranked as the safest and soundest in the world, and their non-politicized banking system could provide a model for banking reform in the United States. Moving towards the Canadian banking system could go a long way towards stabilizing our mortgage, credit, and housing markets and make us less vulnerable to financial shocks in the future.

A pebble in the river of U.S. history

Apocalypse postponed

By George Will

In 2011, for the first time in 62 years, America was a net exporter of petroleum products. For the indefinite future, a specter is haunting progressivism, the specter of abundance. Because progressivism exists to justify a few people bossing around most people and because progressives believe that only government’s energy should flow unimpeded, they crave energy scarcities as an excuse for rationing — by them — that produces ever-more-minute government supervision of Americans’ behavior.

Imagine what a horror 2011 was for progressives as Americans began to comprehend their stunning abundance of fossil fuels — beyond their two centuries’ supply of coal. Progressives responded with attempts to impede development of the vast, proven reserves of natural gas and oil here and in Canada. They bent the willowy Obama to delay approval of the Keystone XL pipeline to carry oil from Canadian tar sands; they raised environmental objections to new techniques for extracting gas and “tight” oil from shale formations.

An all-purpose rationale for rationing in its many permutations has been the progressives’ preferred apocalypse, the fear of climate change. But environmentalism as the thin end of an enormous wedge of regulation and redistribution is a spent force. How many Americans noticed that the latest United Nations climate change confabulation occurred in December in Durban, South Africa?

The futility of this nullity signaled the end — probably for decades, if not forever — of a trivial pursuit that began 14 years ago with the Kyoto Protocol, which the U.S. Senate would not even bring to a vote. The pursuit was for a 194-nation consensus obligating a few nations to transfer enormous wealth to many other nations’ governments, to be politically distributed by them, with the supposed effect of ending global warming, if such proves to be.

Meanwhile, back in the nation that probably would have ponied up the largest portion of this money, sales of the electric-powered Chevrolet Volt were falling short of General Motors’ goals even before reports about fire hazards in crash tests. And a Wall Street Journal headline proclaimed: “Americans Embrace SUVs Again.”

Because of the Energy Department’s myriad scandals and other misadventures as a venture capital firm (Solyndra,Beacon Power Corp., etc.), it is probable that 2011 will be remembered as the high-water mark of industrial policy. This is another way in which events are draining the Obama presidency of some of its power for mischief. If in November Republicans capture the Senate, which must confirm many senior officials of the executive branch and agencies, only weakness of Republican will can prevent, for example, the Environmental Protection Agency and the National Labor Relations Board from being unconstrained instruments of presidential decrees.

Political logic suggests that this year Obama will try to rekindle the love of young voters with some forgiveness of student debts. But one-third of students do not borrow to pay college tuition. The average debt for those who do borrow to attend a four-year public institution is $22,000, and the average difference between the per-year earnings of college graduates and those with only a high school diploma is . . . $22,000.

It will be interesting to see how such a bailout of young and privileged borrowers will appeal to voters, who will begin to be heard from in Iowa. Before this year is many months old, discerning conservatives may decide that Obama probably has been rescued by the Republican nominating electorate and hence it is time to begin focusing on two things other than the 2012 presidential election. One is capturing the Senate. The other is preparing the ground for a better presidential nomination competition in 2016.

In any case, nothing that happens this November will bring an apocalypse. America had 43 presidencies before the current one and will have many more than that after the end of this one in 2013 or 2017. Decades hence, it will look like most others, a pebble in the river of U.S. history

It is never enough

There’s No Such Thing as a Stable State

By Jeffrey Tucker       

Twenty years ago, and much to the shock of just about everyone, the mighty Soviet Union, the very embodiment of Hegel’s view of the state as the divine on Earth, dissolved and disappeared. The malicious foe of the U.S., the deadly grizzly that was said to wander the world seeking whom it would devour, just rolled over. .

What’s more, the satellite states became independent nations. The empire on its borders devolved into a series of secessions. The map looked totally different one day to the next.

The central power — said to be ruthless and all controlling — lacked the will to fight it out and just gave up, completely unable to control events. The pretense of communism in all these places was dropped, industry was privatized, the countries adopted their old names and their populations were rolled into the global division of labor after 50-plus years of being shut out.

The central plan stopped working, and not only in Moscow. The U.S.’ central plan also excluded the possibility that something this dramatic could happen. A decade of foreign and economic policy had been based on the Kirkpatrick Doctrine that totalitarian states were invulnerable and could only be contained or destroyed from the outside. It was on that basis that the U.S. chose its friends and enemies in the world.

Once the Iron Curtain was pulled back, we found societies ridiculously behind in the march toward material progress. The workers’ paradise had never materialized. And everyone wondered what we had really been afraid of all those years.

There’s no question that the Soviet state was an incredible threat to its own citizens — between 60-100 million deaths at government hands over 72 years — but was it really a threat to you and me? Far from being a superpower, it became clear that the Soviet Union had been decaying from within for a very long time.

I was raised at the tail end of the Cold War, but I find it nearly impossible to describe to younger people what it was like to be surrounded by the great Manichean conflict of those days. It consumed all political thinking from 1948-1991. Hundreds of thousands of experts devoted their lives to strategizing about it, writing about it and making a living off it in many different ways. It was the whole reason behind the gargantuan military empire that the U.S. put together over half a century. It was all done in the name of keeping us safe.

And then one day, it was gone.

Americans feared the communist menace for most of the 20th century. Russia was the embodiment of all evil but for those few years when, implausibly, Russia was oddly deemed an ally in World War II’s even mightier struggle against the horrors of Japan and Germany. Then in 1948, the status quo ante was restored again, and the Red Scare returned with a vengeance — from threat to ally to threat again in a matter of a few short years. It was a turnabout satirized in Orwell’s 1984 (flip the last two numbers and you see the point)…

The great debate of my early political experience concerned whether Russia should be treated as a unique evil in the world or just another country with whom the U.S. should have diplomatic relations. The thinker and intellectual who won the day was Jeane Kirkpatrick. Long before she became secretary of state, she wrote a famous essay, “Dictatorships and Double Standards.” This 1979 classic became a blueprint for the foreign policy of the next decade.

This powerful piece of writing excoriates the Carter administration for its alleged wimpiness on foreign policy, particularly with regard to its unwillingness to support authoritarian, noncommunist governments against the leftist rebels. The idea here is that we can live with authoritarian regimes and eventually democratize them, whereas once a state falls to communism, it is gone forever.

Therefore, the U.S. should back noncommunist thugs of any variety, whether in or out of power. That’s how the U.S. ended up supporting the Islamic fundamentalists in the mujahideen in Afghanistan, for example, that later became the Taliban and later the terror network that the U.S. now says is the mortal enemy.

Kirkpatrick couches in her claims in history, noting, “there is no instance of a revolutionary ‘socialist’ or communist society being democratized.” From there, the forecast is implied: It could never happen, ever. “There are no grounds,” she writes, “for expecting that radical totalitarian regimes will transform themselves.”

A little more than 10 years later, she was not only proven wrong, but history conspired to shred her entire analytical model to bits and toss it in the air like so much confetti. Not only has the Soviet Union vanished, but China is completely transformed. Cuba is privatizing. North Korea is probably the toughest nut to crack, but it too will relent in time.

Now, one might say that it was precisely the military buildup she inspired that brought about this result. The problem with that claim is that the military buildup was not designed to bring about that result, but rather to permanently “contain” the global Soviet reach and prevent it from spreading. In the mid-1980s, not a soul — and certainly not Kirkpatrick herself — anticipated that the next decade would open without the existence of the Soviet state at all.

What had been her mistake? She attempted to forge a law of politics based on recent history projected into the future. Her law blew up because there are no laws of politics of the sort she imagined. There are no permanent regimes. There is no impenetrable system of rules. States are created by elites and uncreated by everyone else. They are all more vulnerable than they appear, because they all consist of the few tricking the many into coughing up their property and giving up their lives on grounds that are ultimately revealed to be lies. When people catch on, the states get shaky and eventually crumble, sometimes when we least expect it.

This is a fact to celebrate, for if any state could create permanent rule, human freedom wouldn’t stand a chance. This is because every state is a conspiracy against liberty. No state is satisfied with just a bit of power and no more, just a bit of your money and no more. There is never enough. We must give and give until our freedom is completely suffocated. In the end, the people don’t like this and will not stand for it forever. This is true everywhere in all times.

Today, our own theorists say that the United States has figured out the key to permanent rule. Madeline Albright called the U.S. the one “indispensable nation.” Mitt Romney said that the U.S. is “the greatest nation in the history of the Earth.” Surely, the current configuration of the United States will last forever. Surely, it is destined to be the one stable and eternal global hegemon. It is the U.S. now that embodies Hegel’s divine will on Earth.

The lesson of the Soviet collapse is not just that socialism doesn’t work. It is that all-embracing statism cannot last, regardless of whether this comes about under one-party tyranny or the illusion of democracy. This experience of 20 years ago ought to instill some humility. In the same way that the Soviet experience was upended, the future history of the last superpower could change just as quickly.

Short-term pain but medium-term gain

On The German Triple-C Issue: Culture, Clausewitz And Clausius

by Brandywine Global Investment Management,

“It does seem to be true that the Germans, more readily than other peoples, can withdraw themselves from the exigencies and contingencies of life into a region of Innerlichkeit.” -John Dewey, Columbia University Professor of Philosophy

The issue of Germany and its approach to ameliorating the over leveraged balance sheets of its southern neighbors will dictate the direction of sovereign spreads in 2012. The direction of sovereign spreads will also determine the direction of risk premium spreads in the leveraged finance markets— both bonds and loans. Defaults in the leveraged finance market will and should be an after thought to the systemic risk factors inherent in sovereign and next-of-kin bank credit spreads. Therefore, forecasting default rates should take a back seat to a better understanding of German Kultur and thought that will shape the euro-zone sovereign finance structure in 2012 and beyond.

[ this is why we are so loathsome to take any notice of the rear-view mirror defaults as well as forecast default expectations as liquidity is much more critical than any macro or micro data]

John Dewey assessed German culture and thought in a 1915 book titled German Philosophy and Politics. His essential point was that “the chief mark of distinctively German culture is its self-conscious idealism with unsurpassed technical efficiency and organization.”

While these words were published nearly 100 years ago, they still ring true. In fact, they are very relevant to better understanding the German psyche and their approach to restructuring the debt of their most troubled southern neighbors, Greece and Portugal.

[short-term pain but medium-term gain on devaluations]

The most recent European Union summit highlighted that we are left with some of the same issues that confronted the great empires prior to World War I—the battle between “English liberalism with its emphasis on individual freedom and self-determination and Prussian socialism with its emphasis on order and authority.”

Events in 2012 will establish the path we will pursue. With this uncertain backdrop, investors should assess credit risk premiums with caution, but remain opportunistic to any changes in the macro background.

For the full article, go to:

Global High Yield Perspectives - 4Q 2011-1 

A fatal flaw

Why You Need to Get Your Head and Emails Out of the Cloud

By Kyle Gonzales

What would you say if I told you that someone in the U.S. Congress was trying to pass a law allowing authorities to access your e-mails or documents stored online for longer than 6 months WITHOUT A WARRANT?

Now what if I told you that you were too late, that it was already signed into law 25 years ago?

The year was 1986. The same year as the Iran-Contra scandal, the Space Shuttle Challenger disaster, and the Chernobyl meltdown. Little did anyone know that a privacy disaster was being signed into law by Ronald Reagan, ironically titled the Electronic Communications Privacy Act (ECPA).

The ECPA was created as an amendment to the Wiretap Statute written in 1968. The purpose was to extend the government's restrictions on wire taps of telephone calls to electronic data transmitted via computer. In many ways the law was very forward thinking and protected a medium of communication that was not yet widespread.

However, this law had a fatal flaw that has come back to haunt us. When the law was written, the Justice Department argued that e-mail residing on a server for long periods of time should be considered "abandoned" and no longer private. This assumption was made because in 1986 e-mail was not stored on the servers for long periods of time due to storage costs. Congress agreed, and set the limit for privacy protections in the ECPA to 180 days. E-mail stored on servers for longer than 180 days could be made available to the authorities with a subpoena issued without the approval of a judge.

Fast forward to 2011. People have GMail accounts with 5+ years of e-mail stored online with an ever-expanding availability to keep even more. The same is true with Hotmail, Yahoo Mail, and even Facebook. Many people do not even bother to download their e-mail at all, reading it via webmail interfaces.

Further, people have information stored online beyond just e-mail. Their calendars, contacts, business documents, personal diaries and more are all stored online. New services like Dropbox and Apple's iCloud encourage automated synchronization of the files on your computer with their servers online. Much of your data is stored in the cloud and therefore is open for the government to grab without a warrant once it has been online for more than 180 days.

At this point, you might feel powerless to escape the privacy hole created by this law, especially with so much of your data being pushed online and into "the cloud". Fortunately, however, there are proactive steps that you can take to get more privacy and protect your data.

Options to Protect Your Data

Now that you've been made aware of the problem, let's discuss some ways you can protect yourself from the provisions of this law:

1.   Get off the cloud: You can get all your data off "the cloud". Download 100% of your e-mail and never store anything online. Use POP (which downloads then deletes your e-mail from the server) instead of IMAP (which synchronizes your local e-mail store with that on the remote server). Stop using Facebook, Twitter, Picasa, Flickr, iCloud, Dropbox or any other online service. And certainly stop using Google for online searches. This is a plausible option for some, though potentially inconvenient and nearly impossible if you hope to use a mobile device with your data. Android phones, for example, require you to have a Google account and synchronize your data with Google cloud-based services by default.

2.   Get your data outside of the U.S.: For many of the same reasons that it is recommended to diversify your financial assets out of the U.S., we would advocate doing the same for your electronic assets, i.e. your data. There is no harm in keeping your Hotmail account to talk to Aunt Sue. But when communicating with a foreign lawyer or broker, or sharing information with a business partner outside of the US, using an e-mail account based outside the US makes a lot of sense. The case for e-mail diversification along with recommendations on how to find a good provider was made in my previous piece, "The Case for Email Diversification".

3.   Get political: You can donate money to and work with organizations like the Electronic Frontier Foundation or the Digital Due Process Coalition to get laws like the ECPA changed, and to prevent new laws like this from being passed. It is a good idea to get to know and support these organizations if you care about digital privacy in the United States. However, these options take time and will NOT protect your data today.

4.   Get a lawyer: The ECPA was recently used in a court case involving a fraudulent mail order company. The government used the Act to gain access to e-mail that resulted in a guilty judgment for the plaintiff. On appeal, the Sixth Circuit Court of Appeals ruled that the warrantless access to e-mail provided by the ECPA violated the Fourth Amendment protections against unreasonable search and seizure. This is great news... if you happen to live or own a business in Ohio, Kentucky, Michigan, or Tennessee. The Sixth Circuit's decisions are only valid in those states. If you live elsewhere in the US the full provisions of the ECPA still apply to you and your data.

The Next Steps

Take a look at the online services you use today. If you have services that are rarely used or perhaps abandoned, remove all of the data from that service, and cancel your account. For other online services, check the data held in the account and remove anything that you feel is sensitive or private. Finally, if you have a service that you use for sending and receiving important and/or private data, you may want to look at acquiring a new account in another jurisdiction where you will receive more privacy protection.

A Strategy Of Engineered Centralization

The EU Collapse

This has always been the plan for the EU.  Instead of pointing out the obvious disadvantages and frailties of an economic union between very different sovereign societies, the IMF and the ECB are now claiming that in order to solve the problems of globalism and centralization, Europe needs EVEN MORE centralization.  This sounds simply insane....unless you understand the ultimate goal.  The EU itself was always just a stepping stone to something far more insidious; a Union not just of economy, but of government, and society.  As streams of power are diverted to a core group, most likely the IMF with shades of other globalist institutions involved, sovereign finance, laws, and even human rights, will begin to disappear.  Make no mistake, just as in the U.S., the EU's troubles have only begun, but the end desired by the elitists behind the continuing fall is the same for both; total control...

Setting the stage for ww III

China, Japan to Back Direct Trade of Currencies

By Toru Fujioka

Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the Japanese and Chinese governments said.

China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.

“Given the huge size of the trade volume between Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations,” said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd.

Currency Swap

China also announced a 70 billion yuan ($11 billion) currency swap agreement with Thailand last week as part of a plan outlined in October to promote the use of the yuan in the Association of Southeast Asian Nations and establish free trade zones.

Central banks from Thailand to Nigeria plan to start buying yuan assets as slowing global growth has capped interest rates in the U.S. and Europe.

The move by China and Japan to strengthen market cooperation “benefits the ease of trade and investments between the two countries,” Chinese Foreign Ministry spokesman Hong Lei said today in Beijing. “It strengthens the region’s ability to protect against risks and deal with challenges.”

The yuan traded in Hong Kong’s offshore market gained 0.5 percent offshore last week and touched 6.3324 per dollar, the strongest level since trading started in July 2010. Its discount to the exchange rate in Shanghai narrowed to 0.1 percent, from a record 1.9 percent on Sept. 23.

Yuan Gains

The yuan gained 0.05 percent in Shanghai to 6.3330 per dollar today and was little changed at 6.3450 in Hong Kong. It strengthened 4.3 percent this year, the best-performing Asian currency excluding the yen. The currency is allowed to trade 0.5 percent on either side of that rate. The yuan is a denomination of the renminbi.

Japan exported 10.8 trillion yen to China in the year through November, and imported 12 trillion yen, according to Ministry of Finance data. The deficit with China widened to 1.2 trillion yen, from 418 billion yen in January-to-November 2010. About 60 percent of the trade transactions are settled in dollars, according to Japan’s Finance Ministry.

Finance Minister Jun Azumi said Dec. 20 buying of Chinese bonds would help reveal more information about financial markets in China. Noda said in September 2010, when he was finance minister, that Japan should be able to invest in China given that its neighbor buys Japanese debt. Japan holds $1.3 trillion of foreign-currency reserves, the world’s second largest after China’s $3.2 trillion.

Chinese Debt

Investing in Chinese debt has become easier for central banks as issuance of yuan-denominated bonds in Hong Kong more than tripled to 112 billion yuan ($18 billion) this year and institutions were granted quotas to invest onshore. Japan will start to buy “a small amount” of China’s bonds, a Japanese government official said on condition of anonymity because of the ministry’s policy, without elaborating.

China sold the second-biggest net amount of Japanese debt on record in October as the yen headed for a postwar high against the dollar and benchmark yields approached their lowest levels in a year. It cut Japanese debt by 853 billion yen, Japan’s Ministry of Finance said on Dec. 8.

Separately, the Japan Bank for International Cooperation, JGC Corp., Mizuho Corporate Bank Ltd., the Export-Import Bank of China and other Chinese companies will establish a $154 million fund to invest in environment-related businesses such as recycling and energy, the Japanese government said.

Another nail in the USD's coffin

The EUR Is Dead, Long Live Its Replacement - The Asian RMU

by Tyler Durden

In what could be the watershed news event of 2011, Dow Jones reports that Asean+3 governments (virtually every Asian country including China, Japan and South Korea), "have been concretely studying the idea of a common currency, though an internal paper shows anything like a euro for the region is still far off." In what appears to be Asia's attempt to recreate the Euro, "an Asian "regional monetary unit" could provide a helpful macroeconomic monitoring tool and its use could in time be expanded to include official and private transactions, according to a study by a high-level research group reporting to Asian officials." So for all those complaining that the Yuan would not be able to compete with the dollar as a reserve currency, how about a basket of currencies which includes the Yuan, the Yen, and virtually every other growth currency. It is only fitting that as a last ditch effort to save the current globalized system, as we see the last days of one failed "aggregator" currency, we get the inception of another.

More from DJ on this groundbreaking development:

The paper, part of documents prepared for a meeting of Asian deputy finance ministers in Hanoi, and seen by Dow Jones Newswires, was written by Japan's Institute for International Monetary Affairs, Singapore's Nanyang Technological University, and the University of Indonesia.Commissioned by Asean+3 finance ministers last May, the paper provides the first concrete evidence that Asian ministers are actively discussing the option of creating a quasi-currency, although any attempt to put such a system into practice would undoubtedly face huge challenges, such as the region's economic diversity

The creation of a common Asian currency is occasionally discussed at regional finance meetings but always in the context of a long-term aspiration rather than a realistic goal for even the next decade. Toyoo Gyohten, IIMA President and a proponent of the idea, has said a basket of Asian currencies could be a precursor to a common currency.

The Association of Southeast Asian Nations comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The Asean+3 grouping includes China, Japan and South Korea.

The study suggested that the RMU be used for surveillance by the Asean+3 Macroeconomic Research Office, or AMRO, which is expected to play a key role in deciding whether member nations facing financial difficulties can tap a regional fund. It said a survey had found that the high level of economic integration in the region meant having an RMU would be beneficial, because it could "accelerate the integration process." "As economic integration deepens further in East Asia, it would be more beneficial to East Asian countries to adopt an exchange rate regime that collectively floats against the U.S. dollar and the euro while maintaining a stable intra-regional exchange rate," it said.

And what appears to be a very diplomatic nail in the USD's coffin, at least from the perspective of Asia:

The use of a common monetary unit could also contribute to the development of financial and capital markets in the region, the report said, adding that its use for official and private transactions would likely become more feasible as economic and financial integration deepened.

The study noted that use of RMU for official purposes, such as payment among member governments or credit transactions among member authorities, could support private use of the common unit. It could also encourage individuals, businesses and financial institutions to consider using the RMU to diversify their foreign-exchange risks, it said.

"As short-term measures, RMU could be utilized for surveillance by announcing the RMU value on a daily basis and constant monitoring of RMU and RMU deviation," the study found. It added that political consensus would be needed for medium- and long-term measures, such as the currency unit's inclusion in the budget of AMRO or other Asean+3 activities.

Confirming that this project is far more than just a thought experiment at this point is the following:

The paper said several steps could be explored for using the RMU for private sector transactions: issuance of RMU-denominated bonds by government or multilateral institutions, preferential treatment for RMU-related operations in foreign exchange regulations, acknowledgement--de jure or de facto--of the RMU for private use as a foreign currency, accounting and tax treatment harmonization, and support for the establishment of an RMU fund settlement system.

While noted, the push for a RMU is not a new thing (previous paper on the topic here), the urgency to finally move from a theoretical to a practical monetary regime appears to finally be there. And should the DXY drop below 71, one can bet that Asia will launch this "thought experiment" within the year, ending the US hegemony, and setting of a chain of events that could well lead to the insolvency of the US.

The end of the dollar as we know it

New Asian Union Means The Fall Of The Dollar

by Brandon Smith

One of the most frustrating issues to haunt the halls of alternative economic analysis is the threat of misrepresentative terminology. For instance, when the U.S. government decided to back the private Federal Reserve in lowering the interest rates on lending windows to European banks last month, they did not call this a bailout, even though that’s exactly what it was. They did not call it quantitative easing, or fiat printing, or a hyperinflationary landmine; rarely does bureaucracy ever apply honest terminology to their subversive activities. False terminology is the bane of every honest analyst, because in order for them to educate and awaken those who are unaware of the truth, they must first battle through the daunting muck of the general public’s horrifically improper perceptions and vocabulary.

The chain of financial events taking place over the past decade in Asia have been correspondingly mislabeled and misunderstood. What some economists see as total collapse is actually a new and decidedly prophetic (or engineered) transition. What some naively see as the “natural” progression of globalism, is actually a distinctly deliberate program of centralization meant to further the goals of world economic and political totalitarianism. Asia, and most especially China, is a Petri dish for elitist psychopaths. What we see as suffocating collectivism in this region of the world today is the exact social schematic intended for the West tomorrow. Call it whatever you will, but on the other side of the Pacific, like the eerie smile of a sinister clown, sits fabricated fate.

The genius of globalization is not in how it “works”, but in how it DOESN’T work. Globalization chains mismatched cultures together through circumstance and throws us into the deep end of the pool. If one sinks, we all sink, enslaving us with interdependency. The question one must ask, then, is if all sovereign economies are currently tied together in the same way? The answer is no, not anymore. Certain countries have moved to insulate themselves from the domino effect of debt implosion, one of the primary examples being China.

Since at least 2005, China has been taking the exact steps required to counter the brunt of a global debt collapse; not enough to make it untouchable, but enough that its infrastructure will survive. One could even surmise that China’s actions indicate a foreknowledge of the events that would eventually escalate in 2008. How they knew is hard to say, but if the available evidence causes you to lean towards collapse as a Hegelian creation (and it should if you are paying any attention), then China’s activity begins to make perfect sense. If a globalist insider told you that in a few short years the two most powerful financial empires in the world were going to topple like bowling pins under the weight of their own liabilities, what would you do? Probably separate yourself as much as possible from the diseased dynamic and construct your own replacement system. This is what China has done…

China started with the circulation of Yuan denominated bonds, like T-Bonds, meant to securitize Chinese debt, creating an outlet for the currency to go global. China’s considerable forex and bond reserves make this move a rather suspicious one. With so much savings at their disposal, why bother to issue bonds at all? Why threaten the traditional export based economy and the uneven trade advantage that the country had been thriving on for decades? The success of Chinese bonds would mean the internationalization of the Yuan, a floating valuation of the currency, and the loss of the desirable trade deficit with the U.S. Back in 2005, this all would surely seem like a novelty that was going nowhere fast. Of course, today China’s actions suggest an unprecedented push to convert to a consumer hub at the center of a massive trading bloc. To put it simply; China knew ahead of schedule that the U.S. was no longer going to be a viable customer, and reliance on such a country would spell disaster. They have been preparing to break away from America’s consumer markets and the dollar for some time.

In 2008, after China announced the use of the Yuan in cross border trade on a limited basis, I began to write about the possibility that China was preparing to break from the Greenback. For the past few years my primary focus in terms of finance has been the East as a kind of warning bell for the state of the global economy. In 2009 and 2010, it became absolutely clear that China (with the help of global corporate entities) was developing the skeleton of a new system; a trade network that that had the capacity to supplant the U.S. and end the dollar’s world reserve status.

Since then, Yuan bonds have spread across the planet, China has dropped the dollar in bilateral trade with Russia, the ASEAN trading bloc has formed into a tight shell of export partners, and that is just the beginning. Two major announcements in 2011 have solidified my belief that a complete dump of the dollar by eastern interests is near…

First was the announcement that China was actively and openly pursuing the establishment of a central bank for the whole of ASEAN, with the Yuan utilized as the reserve currency instead of the dollar:

http://www.reuters.com/article/2011/10/27/us-china-asean-financial-idUST...

This news, of course, has barely been reported on in the mainstream. As I discussed at the beginning of this article, the terminology surrounding economic developments has been diluted and twisted. When China states that an ASEAN central bank is in the works, we need to point out what this really means; the ASEAN trading bloc is about to become the Asian Union. The only missing piece of the puzzle is something that I have been warning about for at least a couple years, ever since my days at Neithercorp (see “Migration Of The Black Swans” as a recent example). This key catalyst is the inclusion of Japan in ASEAN, something which many said would take five to ten years to unfold. News released this Christmas speaks otherwise:

http://www.bloomberg.com/news/2011-12-25/china-japan-to-promote-direct-trading-of-currencies-to-cut-company-costs.html

Japan has indeed entered into an agreement to drop the dollar in currency exchange with China and has expressed interest in melting into ASEAN. Japan has also struck somewhat similar though slightly more limited deals with India, South Korea, Indonesia, and the Philippines almost simultaneously:

http://www.bloomberg.com/news/2011-12-28/japan-india-seal-15-billion-currency-swap-arrangement-to-shore-up-rupee.html

This means that the two largest foreign holders of U.S. debt and Greenbacks will soon be in a position to tap into an export market far more profitable than that of America, and that all of this trade will be facilitated by currencies OTHER THAN THE DOLLAR. It means the end of the dollar as the world reserve and probably the end of the dollar as we know it.

Japan’s inclusion in this process was inevitable. With its economy already in steep deflationary decline, the Yen skyrocketing in value against the dollar making exports difficult, as well as the ongoing nuclear meltdown problem at Fukushima, the island nation has been on the edge of complete collapse. Its only option, therefore, is to sink into the chaotic sees, or float like a buoy tied to an Asian Union. There can be absolutely no doubt now that Japan will soon implement the latter solution.

The dilemma at this point becomes one of timing. Now that we are certain that two of the largest economies in the world are about to dump the Greenback, what signals can we watch when preparing for the event? My belief is that the trigger will come squarely from the U.S. and the Federal Reserve, either as legislation to heavily tax Asian imports, a renewed threat of further credit downgrades like that which S&P brought down in August, or the announcement of more open quantitative easing. Any and all of these issues could very well arise in the course of the next 6-12 months, QE3 being a basic no-brainer. ASEAN could, certainly, drop the dollar immediately after their central bank apparatus is put in place, resulting in a much more volatile trade war atmosphere (also useful for full global centralization later down the road). The point is, we are truly at a place in our economic life when ANYTHING is possible.

My hope is that as our predictions in the alternative economic community are proven correct with every passing quarter, more Americans will take note, and prepare. I can say quite confidently that we have entered the first stages of the catastrophic phase of the economic implosion. All the fantastic and terrible consequences many once considered theory or science fiction, are about to become reality. Practical solutions have been offered by myself and many others. The only thing left now is to take action, or ride the tidal wave of destruction like so much driftwood. We can help to determine the outcome, or we can be idle spectators.

In everything, there is a choice…