Korean Scare

A small piece from today that not many people noticed, but that may be important down the road:

Korea's Central Bank May Sell its US Treasury Bonds

To be fair, the Koreans are now denying this, but the rumor riled the bond markets today. For those of you who are not interested in currencies and bond yields, let me try to explain why this is interesting.

The US and Asia have an important but unwritten agreement that the US consumer buys a lot of stuff from Asia, and Asian central banks buy US bonds to finance it. It allows US consumers to buy more than they produce, and it allows Asian manufacturers to have customers to sell all the stuff they make in the best factories in the world.

The problem is that the US dollar should fall to compensate for the trade imbalance, which makes all the money/assets and BONDS that are denominated in dollars worth a lot less. The Asian central banks know that they have to buy US dollars (mostly in the form of Treasuries) to support the value of the dollar or else the value of the dollar falls and Americans would buy less of their goods. So Asia buys bonds to support the Dollar, as long as they keep buying, everything works out for Asia and for the US, but if they stop, or even worse, if they sell the bonds they already have, then the dollar falls quickly.

The imbalances are pretty bad, and over the long term the value of the dollar is going to fall. So if you know the value of an asset will fall what would you do, you would sell it. But if you are China or Japan, you have billions of Dollars of US Bonds and if people saw you selling some of them, the value of all of them would fall very quickly. So we have what could be called a prisoner's dilemma. As long as they all keep buying it will be okay, if anyone stops they all lose, so if you thought someone else was going to sell, you would want to beat them to the punch.

That has got to be going through the mind of every central banker in the world, as well as a few Presidents, and even a few investors. That is why Korea selling some bonds could be a very big deal.

Timothy Burger

Dennis Moore and Social Security

Today our friends at Fire Dennis Moore are beginning a series focusing on Dennis Moore's record on Social Security.

An even more important point voters need to hear about was the last time Social Security benefits really were cut dramatically, and what party did the cutting.

Early in the Clinton Administration, when the Dems. still controlled the House, the budget needed to be balanced. Clinton came up with a plan: tax more of the Social Security benefits of the "rich."

The way the plan played out the rich were defined as any couple on Social Security making more than $44,000. For those people 85% of their Social Security benefits became taxable, up from 50%. If you do the math you will realize that if you tax an extra 35% of benefits at the tax rates those people would have paid, the government is basically taking 9-10% of their benefit, the same as a 10% benefit cut. While Social Security payments stayed the same, in reality recipients lost almost 10% of their benefits, not surprisingly the budget deficit declined.

The point is that the Dems got away with a huge SS cut for the middle class and then turn around and claim the Republicans want to throw old people out on the street. It was a clever way to implement the cut, mail out the check, and then take it back in taxes. I would argue that it would be more difficult to play these types of games if people had personal accounts.

Dennis Moore knows this, he also know that people who get checks from the government feel a kind of loyalty to the government that people who get checks from their own accounts never will. Right now Social Security runs a surplus that is spent on a variety of wasteful programs that don't have any connection to providing income to seniors, Moore knows this and he wants it to continue.

As FDM's post today highlights, Moore's record is basically a record of misleading the public and demagoguery. Moore has never hesitated to scare seniors, promoting the idea that Republicans want to take away Social Security, the fear that any kind of personal account would lead to everyone being forced to invest in "risky" stocks, which would all instantly go to zero, throwing seniors out on the street. It is a disgraceful legacy that voters need to hear about.


Timothy Burger

JP Morgan

I just finished a research report on JP Morgan for my Investments class, I thought I would post it in case anyone has an interest in a critique.

COO Jamie Dimon has the company moving in the right direction, but the stock is overvalued relative to other large-cap banks, let me know what you think.

Burger's analysis of JP Morgan

Timothy Burger