A Long, Steep Drop for Americans' Standard of Living

Think life is not as good as it used to be, at least in terms of your
wallet? You'd be right about that. The standard of living for
Americans has fallen longer and more steeply over the past three years
than at any time since the US government began recording it five
decades ago.

Bottom line: The average individual now has $1,315 less in disposable
income than he or she did three years ago at the onset of the Great
Recession – even though the recession ended, technically speaking, in
mid-2009. That means less money to spend at the spa or the movies,
less for vacations, new carpeting for the house, or dinner at a
restaurant.

In short, it means a less vibrant economy, with more Americans
spending primarily on necessities. The diminished standard of living,
moreover, is squeezing the middle class, whose restlessness and
discontent are evident in grass-roots movements such as the tea party
and "Occupy Wall Street" and who may take out their frustrations on
incumbent politicians in next year's election.

What has led to the most dramatic drop in the US standard of living
since at least 1960? One factor is stagnant incomes: Real median
income is down 9.8 percent since the start of the recession through
this June, according to Sentier Research in Annapolis, Md., citing
census bureau data. Another is falling net worth – think about the
value of your home and, if you have one, your retirement portfolio. A
third is rising consumer prices, with inflation eroding people's
buying power by 3.25 percent since mid-2008.

"In a dynamic economy, one would expect Americans' disposable income
to be growing, but it has flattened out at a low level," says
economist Bob Brusca of Fact & Opinion Economics in New York.

To be sure, the recession has hit unevenly, with lower-skilled and
less-educated Americans feeling the pinch the most, says Mark Zandi,
chief economist for Moody's Economy.com based in West Chester, Pa.
Many found their jobs gone for good as companies moved production
offshore or bought equipment that replaced manpower.

Think life is not as good as it used to be, at least in terms of your
wallet? You'd be right about that. The standard of living for
Americans has fallen longer and more steeply over the past three years
than at any time since the US government began recording it five
decades ago.

Bottom line: The average individual now has $1,315 less in disposable
income than he or she did three years ago at the onset of the Great
Recession – even though the recession ended, technically speaking, in
mid-2009. That means less money to spend at the spa or the movies,
less for vacations, new carpeting for the house, or dinner at a
restaurant.

In short, it means a less vibrant economy, with more Americans
spending primarily on necessities. The diminished standard of living,
moreover, is squeezing the middle class, whose restlessness and
discontent are evident in grass-roots movements such as the tea party
and "Occupy Wall Street" and who may take out their frustrations on
incumbent politicians in next year's election.

What has led to the most dramatic drop in the US standard of living
since at least 1960? One factor is stagnant incomes: Real median
income is down 9.8 percent since the start of the recession through
this June, according to Sentier Research in Annapolis, Md., citing
census bureau data. Another is falling net worth – think about the
value of your home and, if you have one, your retirement portfolio. A
third is rising consumer prices, with inflation eroding people's
buying power by 3.25 percent since mid-2008.

"In a dynamic economy, one would expect Americans' disposable income
to be growing, but it has flattened out at a low level," says
economist Bob Brusca of Fact & Opinion Economics in New York.

To be sure, the recession has hit unevenly, with lower-skilled and
less-educated Americans feeling the pinch the most, says Mark Zandi,
chief economist for Moody's Economy.com based in West Chester, Pa.
Many found their jobs gone for good as companies moved production
offshore or bought equipment that replaced manpower.

In Royal Oak, Mich., Adam Kowal knows exactly how the squeeze feels.
After losing a warehouse job in Lansing, he, his wife, and their two
children have had little recourse but to move in with his mother. Now
working at a school cafeteria, Mr. Kowal earns 28 percent less than at
his last job.

He and his wife now eat out once a month instead of once a week, do no
socializing, and eat less expensive foods, such as ground chuck
instead of ground sirloin. "My mom was hoping her kids would lead a
better life than her, but so far that has not happened," says Kowal.

With disposable incomes falling, perhaps it's not surprising that 64
percent of Americans worry that they won't be able to pay their
families' expenses at least some of the time, according to a survey
completed in mid-September by the Marist Institute for Public Opinion.
Among those, one-third say their financial problems are chronic.

"What we see is that very few are escaping the crunch," says Lee
Miringoff, director of the Marist Institute in Poughkeepsie, N.Y.

Income loss is hitting the middle class hard, especially in
communities where manufacturing facilities have closed. When those
jobs are gone, many workers have ended up in service-sector jobs that
pay less.

"Maybe it's the evolution of the economy, but it appears large
segments of the workforce have moved permanently into lower-paying
positions," says Joel Naroff of Naroff Economic Advisors in Holland,
Pa. "The economy can't grow at 4 percent per year when the middle
class becomes the lower middle class."

He would get no argument from Jeff Beatty of Richmond, Ky., who worked
in the IT and telecommunications businesses for most of his career –
until he hit a rough patch. He and his wife are living on his
unemployment insurance benefits (which will run out in months), his
early Social Security payments, and her disability payments from the
Social Security Administration. Their total income comes to $30,000 a
year.

"Our standard of living has probably declined threefold," he says.

Mr. Beatty, who used to make a comfortable income, now anticipates
applying for food stamps. He and his wife have sold much of their
furniture, which they no longer need because they have moved into a
one-bedroom apartment owned by his sister-in-law.

Even people with college degrees are feeling the squeeze. On a fall
day, Hunter College graduate and Brooklyn resident Paul Battis came to
lower Manhattan to check out the Occupy Wall Street protest. He tells
one of the protesters that America's problem is the various free-trade
pacts it has approved.

Mr. Battis's angst over trade is rooted in the fact that two years ago
he lost his data-entry job with a Wall Street firm that decided to
outsource such jobs to India.

When he had the job, he made a comfortable income. Now his income is
sporadic, from the occasional construction job he lands. He used to
buy clothing from Macy's or other department stores. Now he goes to
Goodwill or Salvation Army stores. He has even cut back on taking the
city subways, instead riding his bicycle. Separated from his wife and
his 15-year-old daughter, he says, "Try making child support payments
when you don't have a regular income. I'm constantly catching up."

Even recently some Americans could tap the equity in their homes or
their stock market accounts to make up for any shortfalls in income.
Not anymore. Since 2007, Americans' collective net worth has fallen
about $5.5 trillion, or more than 8.6 percent, according to the
Federal Reserve.

The bulk of that decline is in real estate, which has lost $4.7
trillion in value, or 22 percent, since 2007. In Arizona, for example,
more than half of homeowners live in houses that are worth less than
their purchase prices, according to some reports.

Stock investments aren't any better. Since 1999, the Standard & Poor's
index, on a price basis, is off 17 percent. It's up 3.2 percent when
dividends are included, but that's a small return for that length of
time.

"This is really a lost decade of affluence," says Sam Stovall, chief
investment strategist at Standard & Poor's in New York.

Among those who have watched their finances deteriorate are senior citizens.

"Given the stock market, they are very nervous," says Nancy LeaMond,
executive vice president at AARP, the seniors' lobbying group. "They
want to keep their savings."

But Ms. LeaMond also notes that about 2 in every 3 seniors are
dependent not on Wall Street but on Social Security. The average
annual income for those over 65 is $18,500 a year – almost all of it
from Social Security, she says. "This is not a part of America that is
rich," she says.

At the same time, seniors are getting pinched in their pocketbooks.

"Our members are watching all the things they have to buy, especially
health-care products, go up in price," says LeaMond.

In Pompano, Fla., some stretched seniors end up at the Blessings Food
Pantry, which is associated with Christ Church United Methodist.

"We have quite a few grandparents who are raising their grandchildren
on a fixed income, feeding them and buying clothes for them when they
can't afford to do [that for] themselves," says Yvonne Womack, the
team leader.

Others, she says, are forgoing food to pay for their medical
prescriptions. "And then there is your ordinary senior whose Social
Security [check] has not gone up in the last several years, but food
and gasoline [prices] have skyrocketed," she says. (However, Social
Security checks will go up 3.6 percent in January.) The Blessings, she
notes, is now feeding 42 percent more people than last year. "We also
provide food you can eat out of a can," she says. "We do have seniors
who are living on the streets."

The Housing Market in China is Crashing

Jim Chanos Was Right: The Housing Market in China is Crashing

Whatever goes up must come down."

That is the general law of gravity, but it is surprisingly true for
the real estate market too.

It happened in the United States, it happened in several European
countries, it happened in Dubai, and now it seems that the reality is
being witnessed in China. After going up steeply for the last few
years, now the housing prices in Beijing, Shanghai and in the other
cities have started to come crashing down. In March, the real estate
prices fell by a staggering 26.7% from February. But this is not just
a one-off month. The housing prices have actually come down by 50.9%
over the last 12 months.

Jim Chanos was one of the first to sound the alarm. At the time,
people thought he was a fear monger, and was dead wrong. The argument
went that China is different because down payments are so high, and
the economy is booming, etc. The "this time is different syndrome" was
rampant both in China and abroad. Now, almost everyone agrees that
things are getting out of control in China; the question is, "Will the
Government be able to stop it? And how bad will the crash be?" Let us
take a look at the housing market in China to get a clearer answer.

Housing is still scarce in many populated cities of China. In fact,
Shanghai, Beijing, Guangdong and most of the other major Eastern areas
are overpopulated, and they are bursting at the seams.

There are many reasons why the Chinese real estate market has been
booming for the last few years. First, the financial sector here is
quite limited — the investment options here are quite limited. Because
of this, many people believe in buying property to maintain the value
of money. Also, there are hardly any social security benefits and
state pensions in China too. So, investing in property in anticipation
of price rise is a way of saving for the future.

Interestingly, those with money in China believe in purchasing
multiple properties. Typically, a person would buy one in the city
center, and another one outside. And there are those who are always
open to upgrading by selling off an older property and purchasing a
new housing unit. So, a lot of apartment complexes and condos have
been coming up, and most of them were being sold off even before the
construction was complete.

The booming housing market has been driving China's economy too. In
fact, residential property investments accounted for 6.1% of the
country's GDP in 2010. Interestingly, housing accounted for a large
percentage of U.S. GDP in 2005 when the housing industry was booming
here, before it all started to crash down.

So, the warning bells have been ringing for some time now. Citigroup's
(C) research head in China, Shen Minggao, had warned investors that
the property market was about to enter the bubble stage, and that the
bubble was bound to burst. This level of growth was just
unsustainable, he said. Some people believe that based on things like
rent to income, and other statistics, the Chinese housing market is in
a worse position than America's was pre-bubble.

One reason for this is because of the fact that, unlike the U.S.
market, China's housing industry is not very regulated (although,
regulation in the United States was extremely lax during the boom in
the United States) and is quite inexperienced as well. According to
estimates, there are about 25,000 real estate broking companies that
employ more than 200,000 agents in China. There are also 20,000
property management businesses that employ about 2 million people.
Many of these companies do not have a license and the necessary
qualifications. In a recent survey, it was found that out of 4,000
real estate businesses in Beijing, just 700 had the license to carry
out business.

The global economy has definitely gained because of the growth in
China's housing market, but if the bubble bursts, which it now seems
might be happening already, then it could be bad news not just for the
country, but for the economies of other countries as well.

With clear signs that the bubble is already bursting, the authorities
in China have started to take steps.

As a law, state data cannot be released to the public if it is not
from the government. So when the data in March was published on the
Internet, that the real estate prices have fallen by 26.7%, it was
severely condemned by Shen Laiyun, who is the spokesman of the
National Bureau of Statistics in China. He warned of legal steps. He
mentioned that the official data will be published soon. But experts
say that this data of a 26.7% fall in March, and the 50.9% fall over
the last 12 months is indeed correct.

Honestly, the government has been taking note of the spiraling prices
and has been taking steps for some time now. In 2010, steps were taken
to halt the buying of second properties. The minimum down payment to
be made was increased. New taxes have also been imposed on buying
properties in Chongqing and Shanghai. Third mortgages have been
banned. Interest rates have been hiked two times in the last four
months alone. Local governments have been told to establish price
targets on new properties that are coming up. Some other restrictions
have also been imposed on bank loans.

So, the government is definitely sitting up and taking notice. But is
all this too little, too late? Only time can tell us. But one thing is
certain, and this is that the bubble in China's housing market has
definitely been getting bigger for some time now, and it has already
started to burst.

Nouriel Roubini

Nouriel Roubini is an American professor of economics at New York
University's Stern School of Business and chairman of Roubini Global
Economics, an economic consultancy firm.

Roubini may now be best known for his frequent commentary on global
markets, often with a pessimistic view point.

After receiving a BA in political economics at Bocconi University,
Milan, Italy and a doctorate in international economics at Harvard
University, Cambridge, Massachusetts, he began academic research and
policy making by teaching at Yale while also spending time at the
International Monetary Fund (IMF), the Federal Reserve, World Bank,
and Bank of Israel. Much of his early studies focused on emerging
markets. During the administration of President Bill Clinton, he was a
senior economist for the Council of Economic Advisers, later moving to
the United States Treasury Department as a senior adviser to Timothy
Geithner, who is now Treasury Secretary.

In 2008, Fortune magazine wrote, "In 2005 Roubini said home prices
were riding a speculative wave that would soon sink the economy. Back
then the professor was called a Cassandra. Now he's a sage". The New
York Times notes that he foresaw "homeowners defaulting on mortgages,
trillions of dollars of mortgage-backed securities unraveling
worldwide and the global financial system shuddering to a halt". In
September 2006, he warned a skeptical IMF that "the United States was
likely to face a once-in-a-lifetime housing bust, an oil shock,
sharply declining consumer confidence, and, ultimately, a deep
recession". Nobel laureate Paul Krugman adds that his once "seemingly
outlandish" predictions have been matched "or even exceeded by
reality."

As Roubini's descriptions of the current economic crisis have proven
to be accurate, he is today a major figure in the U.S. and
international debate about the economy, and spends much of his time
shuttling between meetings with central bank governors and finance
ministers in Europe and Asia. Although he is ranked only 512th in
terms of lifetime academic citations, he was #4 on Foreign Policy
magazine's list of the "top 100 global thinkers." He has appeared
before Congress, the Council on Foreign Relations, and the World
Economic Forum at Davos.

Early Life and Education

Nouriel Roubini was born in Istanbul, Turkey, to Iranian Jewish
parents. When he was age two, his family moved to Tehran, Iran, and
later he lived in Israel. From 1962 to 1983 he resided in Italy where
he attended Bocconi University in Milan, and then he moved to the
United States to pursue his business doctorate in international
economics at Harvard University. He is currently a U.S. citizen and
speaks English, Persian, Italian, and Hebrew. He lives in Manhattan,
has never married, and is "well-known on the New York club circuit".

Roubini spent one year at the Hebrew University of Jerusalem before
moving to Milan, Italy, where he received his B.A., summa cum laude,
in economics from the Bocconi University in 1982. He received his
Ph.D. in international economics from Harvard University in 1988.
According to his academic adviser, Jeffrey Sachs, he was unusual in
his talent with both mathematics and intuitive understanding of
economic institutions. In an interview in June 2009, when asked about
his best investment in life, he replied, "I think investing in a good
education has been key for me, although the investment was more in
time than money."

Career

For much of the 1990s, Roubini combined academic research and policy
making by teaching at Yale and then in New York, while also spending
time at the International Monetary Fund, the Federal Reserve, World
Bank and Bank of Israel. Currently, he is a professor at the Stern
School of Business at New York University. He spent much of his time
working on emerging market blowouts in Asia and Latin America which
helped him spot the looming disaster in the U.S. "I've been studying
emerging markets for 20 years, and saw the same signs in the U.S. that
I saw in them, which was that we were in a massive credit bubble," he
said.

By 1998, he joined the Clinton administration first as a senior
economist in the White House Council of Economic Advisers and then
moved to the Treasury department as a senior adviser to Timothy
Geithner, then the undersecretary for international affairs and now
Treasury secretary in the Obama administration.

Roubini returned to the IMF in 2001 as a visiting scholar while it
battled a financial meltdown in Argentina. He co-wrote a book on
saving bankrupt economies entitled Bailouts or Bail-ins? and opened
his own consulting firm.

Role Models

He credits a number of economists for his understanding of economics.
He said, "One person who has had a great impact on me intellectually
was my adviser at Harvard, Jeffrey Sachs. For me he's the model of a
great intellectual. He is both a rigorous academic and very human,
involved in big picture issues such as poverty, AIDS, and Africa. He's
someone with a great mind that is also very engaged with the world.
Another intellectual hero is Larry Summers, the former President of
Harvard, an amazing intellectual and academic, who is very deeply
involved with the policy world. I worked for him for many years in the
US Treasury during the Clinton Administration".

Global Nomad

He likes to refer to himself as a "global nomad", and says, "You can
be sitting still surfing the Internet, and experience other worlds,
ideas and societies. But I've found that there is nothing better than
visiting a different country, even if for three days. ... you can't
only be a virtual Global Nomad, with goggles on, in a virtual reality.
You have to be there. You have to see it, smell it and live it. You
have to see people, travel, and interact."

Partly to fulfill this need, he became chairman of RGE, an economic
consultancy for financial analysis. In describing the purpose of RGE
Monitor, he said, "the world is my home, so everything about society
and culture — no matter how miniscule — is worth knowing. I am an
information junkie and created RGE Monitor to collect information
about what's happening around the world."

Speaking of his early influences, Roubini said, "I was born into a
relatively orthodox Jewish family in Iran, lived in Israel and Turkey,
and then moved to Italy as a child. By the age of six, instead of
going to a yeshiva, I went to a secular Jewish school where I
interacted with kids from all sorts of different backgrounds. Had I
gone to an orthodox Jewish school, I would perhaps be orthodox now and
may have never become a Global Nomad."

Personal Investments

During an interview in June 2009, he was asked about his personal
lifestyle expenses and other investments. He said, "I regularly save
about 30% of my income. Apart from my mortgage, I don't have any other
debts. The credit crunch hasn't affected me much. . . . I've always
lived within my means and, luckily, have never been out of work. I
would say I'm a frugal person — I don't have very expensive tastes. .
. . You don't need to spend a lot to enjoy things."

Asked whether he invests in stocks, he replied, "Not as much these
days. I used to have a lot in equities — about 75% — but over the past
three years, I've had about 95% in cash and 5% in equities. You're not
getting much from savings these days but earning 0% is better than
losing 50%. . . . I don't believe in picking individual stocks or
assets. . . . Never invest your money as though you are gambling at
the casino. Buying and selling individual stocks is a waste of time."

Economic Forecast

U.S. Economy

In the 1990s, Roubini studied the collapse of emerging economies. He
used an intuitive, historical approach backed up by an understanding
of theoretical models to analyze these countries and came to the
conclusion that a common denominator was the large current account
deficits financed by loans from abroad. Roubini theorized that the
United States might be the next to suffer, and as early as 2004 began
writing about a possible future collapse. Business Week magazine
writer Michael Mandel, however, noted in 2006 that Roubini and other
economists often make general predictions which could happen over
multi-year periods.

In September 2006, he saw the end of the real estate bubble: "When
supply increases, prices fall: That's been the trend for 110 years,
since 1890. But since 1997, real home prices have increased by about
90 percent. There is no economic fundamental—real income, migration,
interest rates, demographics—that can explain this. It means there was
a speculative bubble. And now that bubble is bursting." In the Spring
2006 issue of International Finance, he wrote an article titled "Why
Central Banks Should Burst Bubbles" in which he argued that central
banks should take action against asset bubbles. When asked whether the
real estate ride was over, he said, "Not only is it over, it's going
to be a nasty fall."

By May 2009, he felt that analysts expecting the U.S. economy to
rebound in the third and fourth quarter were "too optimistic." He
stated, "Certainly the rate of economic contraction is slowing down
from the freefall of the last two quarters." He expects negative
growth to the end of 2009, and feels that during 2010 the recovery is
still going to be weak," with the full recession lasting 24 or 36
months, and a possibility of an "L-shaped" slow recovery that Japan
went through in The Lost Decade. But in fact, the US economy started
to grow in mid 2009 just like the optimistic analysts forecasted.

In his opinion, much of the current recession's cause is due to
"boom-and-bust cycles," and feels the U.S. economy needs to find a
different growth path in the future. "We've been growing through a
period of time of repeated big bubbles," he said. "We've had a model
of 'growth' based on overconsumption and lack of savings. And now that
model has broken down because we borrowed too much." He feels that too
much human capital went into financing the "most unproductive form of
capital, meaning housing" and would like to see America create a model
of growth in more-productive activities. He feels that "sustainable
growth may mean investing slowly in infrastructures for the future,
and rebuilding our human capital," by investing in renewable
resources. "We don't know what it's going to be," he says, "but it's
going to be a challenge to find a new growth model. It's not going to
be simple."

Recovery From Recession

In August 2009 Roubini predicted that the global economy will begin
recovering near the end of 2009, but the U.S. economy is likely to
grow only about 1 percent annually during the next two years, which is
less than the 3 percent normal "trend." He notes that the Fed is "now
embarked on a policy in which they are in effect directly monetizing
about half of the budget deficit," but that as of now "monetization is
not inflationary," as banks are holding much of the money themselves
and not relending it. At some point, however, probably by 2011, he
sees the recession ending, and "banks will want to lend the money;
people and businesses will want to borrow and spend it." Then it will
be time for an "exit strategy, of mopping up that liquidity" and
taking some of the money back out of circulation, "so it doesn't just
bid up house prices and stock values in a new bubble. And that will be
'very, very tricky indeed,'" he states. However this prediction proved
to be wrong when the US economy grew 2.2% in the third quarter of
2009, and contracted only 0.7% in the second quarter of 2009, showing
that the economy is recovering earlier and much more robustly than
Roubini expected.

Also, in late July he warned that if no clear exit strategy is
outlined and implemented, there was the potential of a perfect storm:
fiscal deficits, rising bond yields, higher oil prices, weak profits,
and a stagnant labor market, which combined could "blow the recovering
world economy back into a double-dip recession."

Global Economy

2009

As of January 2009, he remained pessimistic about the U.S. and global
economy. He said in September, 2008, "we have a subprime financial
system, not a subprime mortgage market". "As the U.S. economy shrinks,
the entire global economy will go into recession. In Europe, Canada,
Japan, and the other advanced economies, it will be severe. Nor will
emerging market economies—linked to the developed world by trade in
goods, finance, and currency—escape real pain." He was quoted in South
Africa's 2009 budget speech for his role in predicting the current
financial crisis in the developed markets.

Roubini notes that the subprime issues are a global, and not just a
U.S. problem. In an interview with author James Fallows in late spring
of 2009, he stated, "People talk about the American subprime problem,
but there were housing bubbles in the U.K., in Spain, in Ireland, in
Iceland, in a large part of emerging Europe, like the Baltics all the
way to Hungary and the Balkans. It was not just the U.S., and not just
'subprime.' It was excesses that led to the risk of a tipping point in
many different economies."

His pessimism is focused on the short-run rather than the medium or
long-run. In Foreign Policy (Jan/Feb 2009), he writes, "Last year's
worst-case scenarios came true. The global financial pandemic that I
and others had warned about is now upon us. But we are still only in
the early stages of this crisis. My predictions for the coming year,
unfortunately, are even more dire: The bubbles, and there were many,
have only begun to burst".

At a conference in Dubai in January, 2009, he said, the U.S. banking
system was "effectively insolvent." He added that the "systemic
banking crisis.... The problems of Citi, Bank of America and others
suggest the system is bankrupt. In Europe, it's the same thing." To
deal with this problem, he recommends that the U.S. government "do
triage between banks that are illiquid and undercapitalized but
solvent, and those that are insolvent. The insolvent ones you have to
shut down." He adds, "We're in a war economy. You need command-economy
allocation of credit to the real economy. Not enough is being done,"
he felt at the time.

2010

In 2010 he again warned that despite an improved economy with rising
stock markets, the crisis was not over and new bubbles were on the
horizon:

We are just at the next stage. This is where we move from a private to
a public debt problem . . . We socialised part of the private losses
by bailing out financial institutions and providing fiscal stimulus to
avoid the great recession from turning into a depression. But rising
public debt is never a free lunch, eventually you have to pay for it.

In late May 2010, markets around the world began dropping due partly
to problems in Greece and the Eurozone. "Roubini believes Greece will
prove to be just the first of a series of countries standing on the
brink," writes the Telegraph. Roubini explains the new issues
governments must deal with:

We have to start to worry about the solvency of governments. What is
happening today in Greece is the tip of the iceberg of rising
sovereign debt problems in the eurozone, in the UK, in Japan and in
the US. This... is going to be the next issue in the global financial
crisis.

China

Roubini met officials in China during spring 2009, and points out that
many Chinese commentators blame American "overborrowing and excess"
for dragging them into a recession. However, he states that "even they
realize that the very excess of American demand has created a market
for Chinese exports." He adds that although Chinese leaders "would
love to be less dependent on American customers and hate having so
many of their nation's foreign assets tied up in U.S. dollars,"
they're now "more worried about keeping Chinese exporters in business.
. . . I don't think even the Chinese authorities have fully
internalized the contradictions of their position."

Jim Chanos

James S. Chanos is an American hedge fund manager, and is president
and founder of Kynikos Associates, a New York City investment company
that is focused on short selling.

Chanos is famous for his short sale of Enron and more recently his
pessimistic view on China.

Born in 1958 in Milwaukee, of Greek origins, he was schooled at Wylie
E. Groves High School and Yale, where he graduated in 1980. In
business, he developed an investment strategy based on intensive
research into stocks searching for fundamental and large market
failures in valuation: typically under-estimated or previously
un-reported failings in the business or market of a stock. Followed by
committing to a (usually large) short-position which he is willing to
hold for long period of time - almost the mirror image of Warren
Buffett's reputed "fundamentals+long stay" investment strategy.
Because of this model, his investments function more like those of a
whistle-blower than most typical investments. Examples of this include
short-selling companies such as Baldwin-United, and more recently, the
notorious Enron Corporation.

He rose to fame in the 1980s as a short seller who had a knack of
spotting stocks that he thought to be overvalued. After working as an
analyst in several firms, he founded Kynikos (Greek for "cynic") in
1985 as a firm specializing in short selling. A critical position
taken at Kynikos was his shorting of Enron.

In October 2000, Chanos started research into the valuation of Enron
Corporation. He examined their use of mark to model (opposed to
mark-to-market) accounting, which, in Chanos' experience, results in
management overstating earnings, as well as what appeared to be a
worryingly low (6-7%) return on capital investment. Enron stock
declined from $90 in August 2000 to a low of $1 near the end of 2001.
Over this period, Chanos was a short seller of Enron during 2001,
increasing his short position as more information surfaced. Kynikos
profited greatly and Chanos himself became somewhat of a celebrity as
a consequence of his early awareness of Enron's problems.

More recently, James Chanos has warned that China's hyperstimulated
economy is headed for a crash, rather than the sustained boom that
some economists predict. He reiterated his concerns about the
stability of Chinese economy, stating that historically analogous
evidence points especially to a housing bubble, having mentioned
commercial real estate in particular.

Jim Rogers: The China Shorts Have Had It All Wrong

Jim Rogers: The China Shorts Have Had It All Wrong, But At Least Hugh
Hendry Admits It

The China shorts have got is all wrong thus far, and while the economy
will continue to experience problems, it will make it through, says
Jim Rogers in an interview with Index Universe.

Rogers says that while hedge funder Hugh Hendry has admitted his China
short is hurting him, Chanos has not thus far. He believes both, in
the long-run, will be proven wrong.

Jim Rogers, from Index Universe:

Well, I feel sorry for them. They've been dead wrong for two years.
Hugh Hendry has at least acknowledged that being short China is
hurting him. I don't know about Chanos—Jim said he was short, and if
so, he's hurting too. China has not gone down. It's been two years now
and, sure, there are going to be setbacks in China along the way, but
China has not collapsed. We, in the U.S., had many depressions—with a
"small d;" we had a horrible Civil War; we had very little rule of
law; we had periodic massacres in the streets; we had virtually no
human rights; you could buy and sell congressmen—well, you can still
buy and sell congressmen in America, but they were cheap in those
days. As recently as 1907, the whole system was broke in the U.S., and
yet we were on the verge of becoming the most successful country in
the 20thcentury.

Maybe real estate speculators in Shanghai will go bankrupt. I expect
that, I hope it happens; it would be good for China and it would be
good for the world. But in the meantime, these guys shorting China
have been dead wrong. But I want to repeat this: There will be massive
setbacks in China, along the way. It's the way the world works. If I
see serious problems in China, I'm not going to stop teaching my
children Mandarin.

CHANOS: China's Property Bubble Is Hitting The Wall Right Now

Fund manager Jim Chanos spoke to Bloomberg TV's Carol Massar about
China's economy, debt and real estate market.

Chanos said that growth in China may be zero and that China has
"European kind of numbers" when it comes to debt.

"I think that will be the surprise going into this year, and into 2012
- that it is not so strong. The property market is hitting the wall
right now and things are decelerating. The CEO of Komatsu said last
week that he is having trouble getting paid for his excavator sales in
China. Developers are being squeezed. They're turning to the black
market for lending, this shadow banking system that is growing by
leaps and bounds like everything in China.

"Regulators over there are really trying to get their hands around the
problem. In the meantime, local governments have every incentive to
just keep the game going. So they will continue with these projects,
continuing to borrow as the central government tries to rein it in."

Chanos on his long and short positions:

"We are short Chinese banks, the property developers, commodity
companies that sell into China, anything related to property there is
still a short."

"We are long the Macau casinos. It's our long corruption, short
property play. We feel that there's American management and American
accounting. They are growing at a faster rate even than the property
developers."

On the IMF lowering growth estimates for China:

"A lot of people are assuming that half of all new loans in China are
going to go bad. In fact, the Chinese government even said that last
year relating to the local governments. If we assume that China will
grow total credit this year between 30% to 40% of GDP, and half of
that debt will go bad, that is 15% to 20%. Say the recoveries on that
are 50%. That means that China, on an after write off basis, may not
be growing at all. It may be having to simply write off some of this
stuff in the future so its 9% growth may be zero."

Misleading Indicators

Please consider China Stocks Advance Most in Four Weeks as Leading
Indicator Shows Growth

China's stocks rose, sending the benchmark index to its biggest gain
in four weeks, after a gauge of economic indicators signaled growth is
withstanding Europe's debt crisis and faltering expansion in the U.S.

"Valuations have reached a bottom, leaving limited room for further
declines," said Mei Luwu, a fund manager at Lion Fund Management Co.,
which oversees more than $7.8 billion. "Volatility will rise in the
market as investors bet on the timing of a rebound."

The index "signals a continuation of economic expansion through the
end of this year," Jing Sima, the board's New York- based economist,
said in a statement. "The rate of economic growth will be slower in
2011 than last year."

The IMF estimates the Chinese economy will grow 9.5 percent this year,
down from a forecast of 9.6 percent in June, and 9 percent in 2012.
The fund lowered its estimate for world growth this year to 4 percent
from the previous 4.3 percent forecast.

Expect Huge China Slowdown

Developers not getting paid, coupled with excessive and unsustainable
credit growth, trumps alleged leading indicators.

For another view on the coming slowdown in China, please consider
Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12
Global Predictions.

Pettis, unlike Chanos does not foresee a China "crash" but at a
minimum, those expecting huge growth certainly will not get it.

Here are 12 predictions by Pettis (Please see article for detailed
explanations regarding China).

To summarize, my predictions are:

BRICs and other developing countries have not decoupled in any
meaningful sense, and once the current liquidity-driven investment
boom subsides the developing world will be hit hard by the global
crisis.
Over the next two years Chinese household consumption will
continue declining as a share of GDP.
Chinese debt levels will continue to rise quickly over the
rest of this year and next.
Chinese growth will begin to slow sharply by 2013-14 and will
hit an average of 3% well before the end of the decade.
Any decline in GDP growth will disproportionately affect
investment and so the demand for non-food commodities.
If the PBoC resists interest rate cuts as inflation declines,
China may even begin slowing in 2012.
Much slower growth in China will not lead to social unrest if
China meaningfully rebalances.
Within three years Beijing will be seriously examining
large-scale privatization as part of its adjustment policy.
European politics will continue to deteriorate rapidly and the
major political parties will either become increasingly radicalized or
marginalized.
Spain and several countries, perhaps even Italy (but probably
not France) will be forced to leave the euro and restructure their
debt with significant debt forgiveness.
Germany will stubbornly (and foolishly) refuse to bear its
share of the burden of the European adjustment, and the subsequent
retaliation by the deficit countries will cause German growth to drop
to zero or negative for many years.
Trade protection sentiment in the US will rise inexorably and
unemployment stays high for a few more years.

Valuations Not at Bottom

In the face of coming writedowns, alleged "cheap" valuations will
likely get much cheaper.

As Minyanville's Peter Atwater is fond of saying "At the top of every
credit cycle, the Income Statement is the Past, the Balance Sheet is
the Future"

Atwater's statement applied to "financial institutions", but Ponzi
financing is everywhere you look in China and the ripple effect will
hit every company just as happened in the US credit bust (soon to be
resumed).

Income only counts if you get it. Developers not getting paid is a
huge warning sign.

A Twisted QE3

The Federal Reserve announced last week that it will engage in a
policy called "the twist" - meaning it will sell some of the
short-term U.S. treasury holdings in exchange for long-term U.S.
treasuries. This is said to be neutral to the money supply and
therefore not inflationary, but let's take a closer look at the
consequences of this action.

Suppose the Fed did not announce this program and the treasuries held
by the Fed, with maturities ranging from a matter of months to three
years, stayed on its balance sheet. What would happen? Well, when they
matured and the U.S. Treasury had to come up with the cash to pay back
the principal, this would most likely just get refinanced at the
current rates. No new Federal Reserve notes are created in this
process. The date of repayment is simply pushed further into the
future and a new interest rate is imputed on the debt. The Fed
literally creates money and therefore can never experience a liquidity
crisis and so would never have any pressing need for cash.

Now let's look at what happens under the current scenario where the
short term debt is now being held by dozens or hundreds of private
investors. Many of the recipients of the short term treasuries are
going to be banks, which are facing a huge liquidity crisis. They need
cash and they need it now in order to remain solvent. So it's unlikely
that this debt is going to be refinanced. When these treasuries
mature, the principal is going to have to be repaid. But with a $1.6
trillion annual budget deficit, the government hasn't exactly planned
for the repayment of this money. They will have to find other lenders
and this will most likely come in the form of increased Treasury bond
purchases by the Fed, which is inflationary.

The Fed has also announced that it will start purchasing more
mortgage-backed securities at the expense of U.S. treasury purchases.
This can only be a symbolic gesture toward the failing housing market.
Interest rates are still at historic lows but no recovery is in sight.
Bernanke is firing every gun in his arsenal, in every direction, but
is still not hitting the target. It must be a tough time to be the
head of the world's most influential central bank. Day after day, the
god-like powers central bankers assumed they had are giving way to the
reality that they're just money-printers, completely impotent at
effecting any real improvement to economic conditions.

An article in the Wall Street Journal yesterday says it all:

"The Fed announced that through June 2012 it will buy $400 billion
in Treasury bonds at the long end of the market - with six- to 30-year
maturities - and sell an equal amount of securities of three years'
duration or less. The point, said the FOMC statement, is to put
further "downward pressure on longer-term interest rates and help make
broader financial conditions more accommodative."

It's hard to see how this will make much difference to economic
growth. Long rates are already at historic lows, and even a move of 10
or 20 basis points isn't likely to affect many investment decisions at
the margin. The Fed isn't acting in a vacuum, and any move in bond
prices could well be swamped by other economic news. Europe's woes are
accelerating, and every CEO in America these days is worried more
about what the National Labor Relations Board is doing to Boeing than
he is about the 30-year bond rate.

The Fed will also reinvest the principal payments it receives on
its asset holdings into mortgage-backed securities rather than in U.S.
Treasuries. The goal here is to further reduce mortgage costs and thus
help the housing market. But home borrowing costs are also at historic
lows, and the housing market suffers far more from the foreclosure
overhang and uncertainty encouraged by government policy than it does
from the price of money.

The Fed's announcement thus had the feel of an attempt to show it
is doing something to help the economy, even if it can't do much. The
current 10-member FOMC also reported three dissenting votes from
regional bank presidents, who also dissented from its August decision
to declare that short-term interest rates will stay near-zero through
mid-2013."

With the economy ailing, the Fed is trying everything it can to keep
the stock, housing and U.S. debt markets afloat. As the sovereign debt
crisis continues to spread throughout Europe it will reach epidemic
proportions. Already we're hearing demands for inflation in order to
make repayments easier. With these demands, the desperation of these
monetary and economic engineers is becoming more and more overt.
Resorting to inflation in order to repay huge debts has been the final
act of every empire, state and banana republic the world has ever
known. From Weimar to Zimbabwe, even "just a little inflation" has
turned in to a lot when the public realizes that the money system is
being gamed for the benefit of big government and big banks. Inflation
begets more inflation, as the price-level indexed government pension
and benefit liabilities grow with every successive injection of money.

Former Fed Chairman Paul Volker, who actually managed to avert an
inflationary catastrophe by doing the exact opposite of what Bernanke
is doing, couldn't have said it any better in a recent New York Times
article:

So now we are beginning to hear murmurings about the possible
invigorating effects of "just a little inflation." Perhaps 4% or 5% a
year would be just the thing to deal with the overhang of debt and
encourage the "animal spirits" of business, or so the argument goes.

It's not yet a full-throated chorus. But remarkably, at least one
member of the Fed's policy making committee recently departed from the
price-stability script.

The siren song is both alluring and predictable. Economic
circumstances and the limitations on orthodox policies are indeed
frustrating. After all, if 1% or 2% inflation is OK and has not raised
inflationary expectations - as the Fed and most central banks believe
- why not 3 or 4 or even more? Let's try to get business to jump the
gun and invest now in the expectation of higher prices later, and
raise housing prices (presumably commodities and gold, too) and maybe
wages will follow. If the dollar is weakened, that's a good thing; it
might even help close the trade deficit. And of course, as soon as the
economy expands sufficiently, we will promptly return to price
stability.

Well, good luck.

Good luck indeed, Mr. Bernanke. As for me, I'll be taking advantage of
the lower gold and silver prices to expand my position and profit from
the monetary lunacy that's crippling the global economy.