Structural Defects Deepened after the 1997 Financial Crisis

Korea underwent a major financial crisis in 1997, which shook up its entire economy.

On the surface, Korea seems to have recovered since then. And yet, beneath the surface structural defects have got deepened.

Some of them are:

-Innovation engine has not been upgraded.

-Manufacturing jobs have disappeared.

-The middle class base has waned

-Disparity between big business and small business has widened.

-Resources have been mismanaged.

-Monetary bubbles has formed due to increased capital inflows and easy monetary policy

-The levels of debt both at government and household have increased.

Some of these defects are rooted in its economic model which has made Korea rapidly grow its economy. Some are caused by its policy choice and misallocation of resources. Of course, external factors such as a worldwide economic slowdown and capacity overhang have affected them.

Korea has a heap of increasing problems looming.

Samsung Launches Venture To Make Biologic Drugs

Samsung has prepared for this for some time.

As I have pointed out on more than a few occasions, I have my criticism on Chaebols. And yet, at times like these, we welcome Samsung’s move to create jobs in Korea. Biomedical and energy harnessing technologies will probably continue to advance regardless of global downturns.

From Bloomberg:

Samsung Group, the South Korean company whose businesses range from electronics to ship-building, will partner with Quintiles Transnational Corp. to make biologic drugs as it seeks new businesses to drive growth.

The venture, with 300 billion won ($266 million) in capital, will begin building a plant in the Songdo district of Incheon, near Seoul, in the first half of the year, Samsung Group said today. It will contract-make medicines made from living cells, and Samsung Group plans to expand into producing copies of biologics including Rituxan, the leukemia and lymphoma treatment sold by Roche Holding AG and Biogen Idec Inc.

The investment will help Samsung Group, South Korea’s largest industrial group, tap a market that boasts 5 of the world’s 10 bestselling medicines. The Seoul-based group may exceed its target to generate 1.8 trillion won a year by 2020 from biopharmaceuticals because of the demand for those medicines, Executive Vice President Kim Tae Han said.

http://www.bloomberg.com/news/2011-02-25/samsung-electronics-group-to-form-266-million-biopharmaceuticals-venture.html

“The Lord is my strength and my shield; My heart trusts in him, and he helps me. My heart leaps for joy, and with my song I praise him.”
Psalm 28

How Polarized the U.S. Has Become: Winners Take It All

From Zero Hedge:

While many watch the revolutions starting virtually on a daily basis in the "developing world", few are concerned that these have any chance of occurring in the United States: "our society is far more cohesive and far less stratified" the rebuttal logic goes. Is it? Over the past two years, the one social class that has received the most voluminous amount of opprobrium is the ubiquitously derogatory "bankster" which represents far more a wealth and income qualification, that a job description. Americans it appears are becoming increasingly sensitive to the stratification within our own society, even if on a subliminal level. And while we have repeatedly shown before in visual terms just how polarized US society is, it worth reminding every few months or so, that the US is rapidly becoming a banana republic not only in its approach to legislative and judicial matters (not to mention regulatory), but toward the distribution of income and wealth.

http://www.zerohedge.com/article/visual-reminder-us-social-stratification?page=2

More Bank Run in Korea

From Joongang Daily:

Domin Bank, a savings bank with a capital adequacy ratio below 5 percent, voluntarily decided yesterday to suspend its operations temporarily because of massive withdrawals, becoming the country’s eighth savings bank to close.

The decision took both depositors and financial regulators by surprise since it was the first time that a local bank shut its doors on its own.

Domin Bank, which has six branches in Gangwon, was placed on a watch list last week by the Financial Services Commission. The move triggered a bank run on Domin Bank.

According to Domin Bank, deposits amounting 31.8 billion won ($28.2 million) were withdrawn since last Thursday, including 18.8 billion won on Monday.

The news of Domin Bank’s temporary closure came as FSC Chairman Kim Seok-dong was visiting Mokpo, South Jeolla, where recently suspended Bohae Savings Bank is located.

Kim criticized Domin Bank’s decision.

“This savings bank was supposed to submit a management improvement plan to the FSC by Feb. 24,” said Kim. “We will now have to review whether [the closure] is even legally O.K.”

Bae Joon-soo, senior FSC deputy director, said, “I think it is legally and morally wrong for a financial firm to do such a thing.”

http://joongangdaily.joins.com/article/view.asp?aid=2932614

“For we wrestle not against flesh and blood, but against principalities and powers, the rulers of the darkness in this world, and spiritual wickedness in high places. Therefore, take on the whole armour of God, that you may be able to withstand these days of evil and, all things having been done, to remain standing… and pray that freedom of utterance remains, that we may proclaim the good news. Pray that we may declare it without shame and with courageous love, as we ought to do.”
Ephesians 6:11-20

Bank Run in Korea

From Zero Hedge:

When one thinks of South Korea one tends to think of stable government and an even more stable financial system. That may change very soon. According to JoongAng Daily, "more than a thousand customers lined up in front of the Busan II Savings Bank located in Busan yesterday as soon as the nation’s financial regulator announced a six-month business suspension of Busan Savings Bank and its affiliate Daejeon Mutual Savings Bank." And not helping the mood was a bank employee who told the crowd that "You won’t be allowed to withdraw your money if you are just standing there without a queue ticket number." Needless to say, most promptly got a number. Those that didn't tried to get their cash at an ATM. Unsuccessfully: "Those without a ticket then headed to the automated teller machines to withdraw their money, but the machines quickly ran out of cash." And while the bank run at Busan was driven by capital inadequacy (shockingly Korea still hasn't figure out that the best way to mask liabilities surpassing assets is through pervasive fraud and suspension of all common sense accounting rules: they should promptly consult with Tim Geithner and Sheila Bair on the issue), it may promptly spread to the entire banking system. "Analysts expressed concerns that public panic about savings banks could spread. “The fears of depositors are mounting, which could lead to bank runs at a number of savings banks, and it could eventually spread to the entire savings bank industry,” said Jung Sung-tae, a researcher at LG Economic Institute." But fear not, for the Korean government is one step ahead: "A way to secure capital [for savings banks] is to establish a joint account holding fund amounting to 10 trillion won,” explained Kim Seok-dong, FSC chairman. “This problem will be closely discussed with the National Assembly.” Any day now Korea will end up with its own version of a taxpayer funded capital block hole, a/k/a in the US as the FDIC, and all problems will be promptly brushed under the rug. We can't wait until this brilliant idea comes to China (advised by Goldman Sachs no doubt). We just wonder if it will be before or after the Chinese bank run hits...

From JoongAng:

“I’ve saved 40 million won ($35,810) over my whole life. That money was going to be used for my grandson’s marriage but I cannot trust these people [bank employees] saying that I am guaranteed to get my money back,” said Cho So-young, 79.

Although operations of three of Busan Savings Bank’s four affiliates were not suspended, there are fears that they could be hit by a bank run on their deposits.

In the case of Busan II Savings Bank, its capital adequacy ratio stood at 6.0 percent as of the end of 2010, but its liabilities exceeded assets by 12.5 billion won.

Two other affiliates, Jungang Busan Savings Bank and Jeonju Savings Bank, have capital adequacy ratios of 3.6 percent and 5.6 percent, respectively. But they are unlikely to avoid a suspension of business if a bank run occurs.

The state-run Korea Finance Corporation and four commercial banks - Woori, Kookmin, Shinhan and Hana - have decided to inject 2 trillion won of emergency liquidity into the savings bank sector.

In addition, the government has decided to extend the amount of loans that can be borrowed by the Korea Federation of Savings Banks to support savings banks from the current 600 billion won to 3 trillion won.

Financial authorities are currently working to establish a joint deposit insurance account as a safety net for other financial sectors to curb the spread of possible financial risks from the savings banks. Funds for a joint deposit insurance account would be collected by financial institutions.

It is refreshing to see that both US banking insolvency, and its means of dealing with problems (insert head firmly and deeply in sand) are spreading across the world. And with that in mind, and a drink in hand, we now await for the daily trickle of press releases from the FDIC describing today's roster of Failure Friday banks, which have really failed in not realizing that the only way to avoid bankruptcy is to merge with everyone else who is just as insolvent and become a systemic risk.

http://www.zerohedge.com/article/bank-run-korea

Update:

From Reuters:

South Korean financial regulators on Saturday imposed a six-month suspension of operations on four small-sized savings banks after the recent halt to businesses at two rivals sparked bank runs.

http://business.asiaone.com/Business/News/Story/A1Story20110219-264348.html

Matt Taibbi: Financial Crooks Brought Down the World’s Economy, Yet Why Aren’t They in Jail?

From Rolling Stone:

The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=1

Charles Hugh Smith: A 5-Year Scenario: 2011-2016

Although we may not necessarily agree with his contention, we know that his projection has some valid points given the state of the world economy.

From Of Two Minds:

In this scenario, the wheels fall off the debt-fueled global "recovery" and assets bottom in 2014.

Here is one possible scenario for the next five years. Why do I consider this somewhat more likely than other possible scenarios? Here some undercurrents which may be generally under-appreciated:

1. There is a difference between speculative and organic demand. The two are of course related, as industrial consumers of resources must hedge against rising prices using the same instruments as speculators--futures contracts, etc.

2. Follow the credit, not just the money. It's not just the U.S. economy which is dependent on cheap, abundant credit--the same can be said of China and the European Union to some degree.

Just because Chinese buyers put 50% down on their fourth flat doesn't mean they don't need credit for the other 50%. Chinese developers are heavily dependent on credit issued or backed by the Central Governments banks and proxies.

Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.

This is why some claim that hyperinflation has never occurred in a credit-based system; it can only arise in a monetary system in which cash itself is printed (i.e. Zimbabwe et al.)

I am not making any such broad claim, but to identify the two as identical seems to me to be a profound confusion.

This distinction plays out in a number of ways. If the Fed had actually printed $1 trillion in cash and dropped it from helicopters, then those collecting the cash on the ground might have spent it, creating more organic demand for goods and services.

If the Fed creates credit and loans it to banks at zero-interest rate, the credit only flows into the real economy if somebody borrows it.

Without borrowers, the "money" just sits in reserves, where it does not spark inflationary organic demand for resources, goods or services.

If someone borrows the "money" to refinance existing debt, the only money that flows into the real economy is the difference between their original debt servicing costs and their new debt servicing costs, presuming the new costs are lower than the original. (Not always the case if said borrower had an interest-only "teaser rate" mortgage that he/she is now rolling into a mortgage with principal payments and a market rate interest payment.)

Or a large speculator (trading desk, hedge fund, etc.) could borrow the credit-money to speculate in commodities, driving prices up on the widespread expectation of higher costs in the future. In this case, the credit-money does influence the real world economy by driving commodity prices above levels set by organic demand.

But speculative "hot money" is not organic demand; it flees or is lost if trends suddenly reverse.

Since commodities such as oil are priced on the margins, this matters. A sudden decline in oil from $86/barrel to $76/barrel would trigger an exodus from speculative long positions, reinforcing that decline in a positive feedback loop.

3. Hoarding is a special flavor of organic demand. Like speculative demand, it vanishes once the fear of ever-higher prices evaporates.

4. The global GDP is around $60 trillion; the Federal Reserve has "printed" $2 trillion in the past three years. Placed in the proper context, the Fed's printing and asset purchases are large enough to influence the U.S. stock and bond markets, but they simply aren't significant enough or focused enough to enslave the entire global markets in stocks, bonds, precious metals and commodities.

Other players are busy printing and issuing zero-interest credit, too, of course, but we should be wary of sweeping generalizations about the deterministic nature of these central bank campaigns.

As further context, consider that the Fed's vast interventions have distributed some $2 trillion into the financial sector; meanwhile, U.S. homeowners saw their net equity decline by some $6 trillion.

OK, on to the scenario which will get me in all sorts of trouble:

Here is the sequence of events I consider rather likely:

Q3/Q4 2011-2012: extend and pretend fails. The wheels fall off the global "recovery," the emerging market equity bubbles, oil, China's equities and its property bubble, and most if not all commodities. Gold and silver swoon as per late 2008 as raising cash become paramount. Oil retraces to the $40/barrel level, and then drops further as exporters ramp up their exports to generate desperately needed cash.

Interest rates rise sharply, risk assets tank, borrowing dries up, housing prices "slip" to new lows (the stick-slip phenomenon), and the hated/loathed U.S. dollar confounds almost everyone by breaking out of technical resistance levels.

Civil disorder spreads along with recession and lower energy prices, which devastate oil exporters' primary source of government revenues.

With better grain harvests stemming from improved weather, declining meat consumption in 2012 due to recession and the implosion of the market for corn ethanol, grain prices plummet, wiping out all the speculators who reckoned 2010 had set the trend for the decade.

All of this starts slowly in Q3 2011 but gathers momentum in 2012.

Unfortunately for central banks, all their printing and credit creation is analogous to insulin resistance: without borrowers and solvent banks and consumers, their frantic efforts to "stimulate" their economies with additional liquidity come to naught.

The Central State's other gambit, monumental fiscal "stimulus," runs into the brick wall of rapidly rising interest payments and a political revulsion triggered by the realization that only the financial and political Elites actually benefitted from the trillions squandered in the 2008-2011 orgy of Central State "stimulus" and backstops.

With asset prices collapsing in a phase shift, the equity needed to float new loans vanishes; with risks rising, the market for junk bonds and other risk-laden debt also disappears.

All those who clung on through the "recovery," hoping to made whole, are wiped out. Their bankruptcies trigger a new wave of selling and writedowns.

2013-2014: Re-set and reckoning. Widespread political and financial turmoil leads to a few central choices:

1. Repudiation of the Neoliberal Central State/Financial Oligarchy strategy of 2008-2011 which focused on preserving the insolvent (but politically dominant) banking and Wall Street financial sectors and transferring their private losses to public entities/taxpayers.

2. Replacement of incompetent, venal, exploitative dictatorships with some new flavor or autocracy, oligarchy, theocracy or dictatorship, most of which will prove to be equally incompetent, venal and exploitative--but shorter-lived.

3. Experimentation with new models of governance, "growth" and credit/debt. Some modest recognition of the profound failures in the "extend and pretend" status quo generates a sense that these catastrophically destructive policies have been recognized as such and corrected.

These years will see the near-term bottom in housing, equities, and other assets. Those few who preserved cash during the meltdown are in a position to snap up assets on the cheap. Those who depended on credit/debit find borrowing is now difficult and dear. Those who "bottom-fished" real estate in 2011 are wiped out, along with those who bet that commodities were heading straight to the moon.

2015-2016: false dawn. Things get better; prices stabilize, assets and commodities start rising in price and a sense of hope replaces widespread gloom and distemper.

The real crisis has been pushed forward to 2020-2022. Nonetheless, 2015-2016 will offer those with cash tremendous profit opportunities.

http://www.oftwominds.com/blogfeb11/2011-2016-2-11.html

“Then you will call out, and the Lord will answer, ‘here I am.’ If you stop using cruel words and attacking others, if you feed those who are hungry and care for the afflicted, then your light will shine in the darkness. The Lord will guide and care for you. You will be like a garden. A spring that never runs dry. Your people will rebuild the cities that are falling into ruin. You will be known for repairing the broken and for rebuilding the roads and houses.”
Isaiah 58: 9-12

China’s Ambitious Drive for Indigenous Innovation

I have repeatedly pointed out how fast China is catching up in terms of technological innovation.

I have also emphasized that innovation endeavors each country pursues are intertwined with its political economy, along with global forces including multinational high-tech companies.

Of course, the issue of technonationalism should be understood in this context.

From the WSJ:

A titanic battle is under way between U.S. business and China, a battle reflected in President Barack Obama's State of the Union address last week and destined to dominate relations between the two countries for years.

China's bureaucrats have been rolling out an array of interlocking regulations and state spending aimed at making their country a global technology powerhouse by 2020.

The new initiatives—shaped by rising nationalism and a belief that foreign companies unfairly dominate key technologies—range from big investments in national industries to patent laws that favor Chinese companies and mandates that essentially require foreign companies to transfer technology to China if they hope to sell in that market.

To hear U.S. business executives describe it, Beijing's mammoth new industrial policy is like the Borg in "Star Trek"—an enormous organic machine assimilating everything in its path, in this case the inventions of other nations. Notably, China's road map, which is enshrined in the "National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020)," talks in those terms. China will build its dominance by "enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies."

"It's a huge, long-term strategic issue," says a top executive at a U.S. technology firm operating in China. "It isn't just the crisis of the day for U.S. business. It's the crisis."

http://online.wsj.com/article/SB10001424052748703439504576116152871912040.html

“Before the mountains were brought forth, or even before the earth and the sky had been formed, from age to everlasting age, God is.” Psalm 90:2

Chris Martenson: How Long Can the Party in Stocks Last?

From Zero Hedge:

How long the stock market rally will last is therefore unknowable, but stocks and bonds and commodities will remain elevated in price for as long as the Fed continues to dump hundreds of billions of thin-air money into the markets. The only problem is that there's no clear exit strategy for the Fed.

Further, when the Fed goes to get its money back from the marketplace, that action will drain liquidity, creating ripples throughout all sorts of markets, especially and including knocking the stock market down. Very few people complain about adding thin-air money; a crowd roars its disapproval for the reverse.

The bottom line is that by the time the Fed becomes institutionally aware that inflation is raging across the globe - and I often wonder when they'll finally awake to the threat - it will be too late. Inflation will have the momentum, and it will take a vast overreaction on the part of the Fed to restrain it. They'll have to drain enormous amounts of liquidity and tolerate vastly higher interest rates to be able to do that, and I doubt they have the courage for such bold action. I think they will hesitate, equivocate, and ultimately be late.

History suggests that inflation is best tamed early, but the Fed is already late and demonstrating a remarkable callousness by doing the exact opposite of fighting inflation. While we cannot know what it is that the Fed sees, or which demons it is fighting that provide the internal rationalization for risking a hyperinflationary outcome, we can only conclude that these threats are more spectacular than the alternatives.

Events of the past few weeks - unrest in Tunisa/Egypt/Jordan, skyrocketing food prices, Dow cracking a 2-year high, dropping dollar with rising bond yields - make me even more confident in the conclusions of my recent report on How This Will All End (published January 12) in which I derive a calculated estimate of when a final fiscal deterioration will overwhelm even the best of intentions. While the money-printing-induced high we're currently on may feel fun today, the unavoidable inflationary smackdown we'll experience tomorrow most certainly will not.

http://www.zerohedge.com/article/chris-martenson-answers-how-long-party-stocks-can-last