BERLIN, Jul 20, 2010 (IPS) - More than three years after the start of the financial crisis that brought the world economy to the brink of collapse, the governments of industrialised countries are still struggling to reach a consensus on the minimum regulation required for the operations of international banks and hedge funds.

This was confirmed just ahead of the meeting of the Group of Twenty (G-20) in Toronto last month, a summit of the world's largest economies, including several developing countries, like India, Brazil and Indonesia, and the European Union (EU).

Even though the EU agreed to propose at the summit the introduction of a tax on international financial transactions, also called Tobin tax, this scheme was not approved at the meeting. Canadian minister of finance Jim Flaherty told the press ahead of the meeting: "I can assure you that the majority of the G- 20 is opposed to this tax."

The German finance minister, Wolfgang Schaeuble, also excluded the possibility of Germany alone raising the tax. At a press conference in Berlin late last month, he contended that the EU collectively must raise the tax.

The German government is the main supporter of the Tobin tax in Europe. Most European countries except Britain support a tax on financial transactions. Britain opposes it vehemently, arguing that the tax would raise costs of financial operations, compelling operators to operators to move their base of operation elsewhere.

WASHINGTON -- U.S. President Barack Obama signed into law the most sweeping financial regulatory overhaul since the Great Depression Wednesday, saying that the new laws will foster innovation, not hamper it.

Speaking at the Ronald Reagan Building in Washington, D.C., Wednesday morning, Obama noted that over the past two years the nation has faced the worst recession since the Great Depression, with millions of Americans losing their jobs and watching the value of their retirement savings decline.

Loss-making coal mines across the EU will have to close over the next four years, the European Commission says.

State subsidies for such mines will only be allowed if a closure plan is in place. Production subsidies are to be replaced by social and environmental aid for affected areas.

Baidu Inc., operator of China's most popular online search engine, reported second-quarter profit that beat analysts' estimates as a censorship dispute with Chinese regulators hampered main rival Google Inc.

Net income for the three months ended June more than doubled to 837.4 million yuan ($123.6 million), or 2.40 yuan per American depositary receipt, Baidu said today in a statement. That exceeded the 710.4 million yuan average of 14 analysts' estimates compiled by Bloomberg. In the year-earlier period, Baidu's profit was 383.3 million yuan, or 1.10 yuan per ADR.

Baidu gained advertisers from Google after the U.S. company shut its China-based search site in March and redirected local users offshore to avoid censorship rules in the world's biggest online market. The Beijing-based company's stock has climbed 78 percent in U.S. trading this year, making it the best performer in the Morgan Stanley Internet Index.

"We believe the market-share gain for Baidu versus the market-share loss for Google is likely related to Google China's partial exit [!]," Citigroup Inc. analyst Alicia Yap wrote in a July 19 report. The changes in Google's China site "caused increasingly bad user experiences," according to Yap.

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Even as Bernanke is receiving his last minute briefing on what to say (everything, EVERYTHING, is good) and what to play dumb on (explaining the price of gold for example), a new report by the Center for Economic and Policy Research concludes that digging ourselves out of the current unemployment hole, which is 7.5 million less people having jobs than did in December 2007, will take at least 4 years, and not occur prior to March 2014. However, this assumes a flat working-age population, something the Fed would love to be the case. Alas, the country is growing: and if one incorporates the effects of labor force growth into the above analysis, as the CEPR authors have done using CBO projections, then we may have a much larger problem on our hands: the study concludes that taking into account the approximately 14 million new job seekers in the future, then the December 2007 unemployment rate will not be met until April 2021! Welcome to the new normal. Of course, both of these analyses assume that the economy will immediately commence growing and generating jobs at the recovery rate seen in the 2000s, when about 166,000 jobs per month were being added. With every month that this does not happen the 2021 date will continue being pushed out further into the future. Perhaps one of the Senators today can ask a question of Bernanke just how he plans on reconciling this glaringly simple explanation for why the US economy will be underwater for a period of over a decade.

However, it would not be inconceivable for birth rates to go down and infant deaths to increase over this period. That would warm the hearts of Malthusians.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

The common thought amongst even reasonably educated and economically literate Americans is that China is 'stuck with US Treasuries' and has no choice, so it must perform within the status quo and do as the US wishes, or face a ruinous decline in their reserve holdings of US Treasuries.

And with real short term US Treasury interest rates decidedly negative, meaning that it is costing you money to hold dollars, there is a case to be made that there are a lot of 'price takers' out there in this world. Wow, they are just that good, aren't they. Having their heyday in a genuine deflation. A subtle tax levied on all holders of US dollars, probably more significant because of the official understantement of inflation. Yo, come git some.

I think China is already diversifying their reserve portfolio, and more stealthily and effectively than one would imagine. Further, I suspect that through the use of hedging short positions and derivatives such as Credit Default Swaps, China would be able to cover a greater portion of its reserves than the common mind might allow. And if this is in reality one theater in a global struggle for power, sacrificing a pawn or two, and even a bishop, would be a small price to pay to bring down the world's remaining superpower, as indirectly and gracefully as is possible. War is never cheaply waged.

It would most certainly be a nuclear option to outright dump Treasuries outright, and would raise the ire of what is still a formidable military power. But it is the Western mind that is so incapable of seeing the many shades of gray in every situation, the subtle gradations in a range of choices that I believe China not only sees but is already actively pursuing.

Exhibit A from Jesse's post:

China rating agency condemns rivals  Financial Times

The head of China's largest credit rating agency has slammed his western counterparts for causing the global financial crisis and said that as the world's largest creditor nation China should have a bigger say in how governments and their debt are rated.

"The western rating agencies are politicised and highly ideological and they do not adhere to objective standards," Guan Jianzhong, chairman of Dagong Global Credit Rating, told the Financial Times in an interview. "China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged."

....

"The financial crisis was caused because rating agencies didn't properly disclose risk and this brought the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests," Mr Guan said.

....

"The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings ," Mr Guan said. "Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable."

Jesse's conclusion:

China is not the only country that resents the devastating frauds that the US has perpetrated on not only its own people but the rest of the world through its Wall Street banks and ratings agencies.

Most Americans overlook this developing estrangement that is beginning to isolate the US and UK from even their traditional allies in Europe and South America and Asia. This is a serious error, but so typical of the short term mentality dominated by greed, dishonesty, and self-delusion that captured the American psyche in the latter part of The New American Century. But what choice does Europe have except to take what the Anglo-Americans serve them. Take it or leave it. And ain't currency war hell?

It never pays to have a 'checkerboard mentality' when your opponent is playing Go."

If you enjoyed how well the Dynamic Stochastic General Equilibrium Model employed by US mainstream economists guided us through the ongoing Great Clusterfuck you will really enjoy how it plays when our greatest creditor China employs its own "rational expectations". Who knows. They might even hire Goldman to advise them.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

"We three were each asked to sign the letter organized by Sir Harold Evans and now co-signed by many of our friends, including Joseph Stiglitz, Robert Reich, Laura Tyson, Derek Shearer, Alan Blinder and Richard Parker. We support the central objective of the letter -- a full employment policy now, based on sharply expanded public effort. Yet we each, separately, declined to sign it.

Our reservations centered on one sentence, namely, "We recognize the necessity of a program to cut the mid-and long-term federal deficit..." Since we do not agree with this statement, we could not sign the letter.

Why do we disagree with this statement? The answer is that apart from the effects of unemployment itself the United States does not in fact face a serious deficit problem over the next generation, and for this reason there is no "necessity [for] a program to cut the mid-and long-term deficit."

On the contrary: If unemployment can be cured, the deficits we presently face will necessarily shrink. This is the universal experience of rapid economic growth: tax revenues rise, public welfare spending falls, and the budget moves toward balance. There is indeed no other experience in modern peacetime American history, most recently in the late 1990s when the budget went into surplus as full employment was reached.

We agree that health care costs are an important issue. But health care is a burden faced by both the public and private sectors, and cost control is a job for health policy, not budget policy. Cutting the public element in health care - Medicare, especially - in response to the health care cost problem is just a way of invidiously targeting the elderly who are covered by that program. We oppose this.

Yes, shale gas is there, but it is expensive to produce, and there is much, much less of it available at today's low prices than policy people, investors, and energy consumers are counting on. It is not a cheap and simple way to replace coal (in America), or Russian gas supplies (in Europe). I am, however, humbled in the presence of the marketing genius of the promoters who have convinced so many people to buy the story.

European regulators plan to detail three scenarios when they publish the results of their stress tests on the region's banks this week, according to a document by the Committee of European Banking Supervisors.

Banks will publish their estimated Tier 1 capital ratios under a benchmark for 2011, an adverse scenario and a third test that includes "sovereign shock," according to a template prepared by CEBS for the banks and obtained by Bloomberg News.

In the last scenario, banks will publish their estimated losses on sovereign debt held in their trading book as well as "additional impairment losses on the banking book" that they may suffer after a sovereign debt crisis, according to the document dated July 15.

First it was Indonesia, then South Korea. Inspired by the strength of an Asian recovery that has left the western developed world standing, regional central bankers are challenging old Western orthodoxies, and are embracing once dreaded capital controls.
...
It is no surprise this newest trend is gaining force in Asia, as global liquidity from developed countries sloshes into the region and central bankers, increasingly concerned about controlling rising inflation and looming asset bubbles, look for a policy toolkit to control these inflows. Thailand's central bank governor is just the latest to publicly challenge the status quo.

It makes little sense arguing about the BDI without taking into account the blizzard of dire data from the US over recent weeks, and the turn in the OECD leading indicators for China, India, Brazil, France, Italy, the UK, and Canada - ie, the world economy minus Germany (which is a special case with a rigged currency).

China's campaign of lending curbs to cool the property sector are starting to bite... There was sharp slowdown in Chinese industrial output in tail-end of Q2. Baoshan Iron and Steel has cut steel prices for the last two months, and China Steel Corp (in Taiwan) followed this week. Lloyd's List has reported warnings that some Chinese steel makers may default on contracts with shippers.

When the US Federal Reserve reveals suddenly that it may abandon its exit strategy and resort instead to another blitz of stimulus - ie, QE2 - it is surely worth asking why. Leaving aside the collapse in the ECRI leading indicator last week to -9.8 (a level that has always preceded recession in the post-war era, but may of course be wrong this time because we are in a zero-rate, mega-stimulus, fin de regime, total upheaval that makes any comparison with past cycles meaningless), there are some hard facts.