Articles
Greek Debt Restructuring Off the Table: EU Official
By Reuters
Saturday, June 18, 2011
A restructuring of Greece's 340 billion euro ($481.5 billion) debt is not on the agenda and would damage the country's credibility on bond markets, the European Union's internal markets commissioner said on Saturday.
Forcing Greece's private creditors to take part in an upcoming aid package would count as a restructuring and is not being considered either, Michel Barnier told Europe 1 radio.
"This question of a restructuring ... is not on the table," he said. "It would only postpone the problem and in the wake of a restructuring Greece would face exactly the same difficulties and would no longer have any credibility to borrow."
Greece's embattled prime minister on Friday sacrificed his finance minister to force through an unpopular austerity plan and avert bankruptcy, while EU powers Germany and France promised to go on funding Athens.
Citing German and French backing for a plan to involve private bondholders such as banks on a purely voluntary basis, Barnier said: "To impose an effort would be to acknowledge a restructuring and that is not on the agenda."
Describing Greece as a country that had been badly run and had lived above its means, Barnier said the solution was a "collective" effort to successfully thrash out the details of a new rescue plan in the coming weeks.
"We don't have the right to draw blank cheques on the back of future generations," he said. "The work is to continue over the coming weeks."
Bond markets remain spooked by fears of a Greek default and most economists are overwhelmingly sceptical that Greece can ever repay its debts in full.
IMF cuts U.S. growth forecast, warns of crisis
By Luciana Lopez
June 17, 2011
Original Article on FINANCIAL POST
SAO PAULO – The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are “playing with fire” unless they take immediate steps to reduce their budget deficits.
The IMF, in its regular assessment of global economic prospects, said bigger threats to growth had emerged since its previous report in April, citing the eurozone debt crisis and signs of overheating in emerging market economies.
The Washington-based global lender forecast that U.S. gross domestic product would grow a tepid 2.5% this year and 2.7% in 2012. In its forecast just two months ago, it had expected 2.8% and 2.9% growth, respectively.
Overall, the IMF slightly lowered its 2011 global growth forecast to 4.3%, down from 4.4% in April. Its forecast for 2012 growth remained unchanged at 4.5%.
The IMF said it was slightly more optimistic about the euro area’s growth prospects this year, but a lack of political leadership in dealing with Europe’s debt crisis and the wrangling over budget in the United States could create major financial volatility in coming months.
“You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire,” said Jose Vinals, director of the IMF’s monetary and capital markets department.
“We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis,” he said in an interview in Sao Paulo, where the updates to the IMF’s World Economic Outlook and Global Financial Stability Report were published.
In the United States, the political problems include a fight over raising the legal ceiling on the nation’s debt. A first-ever U.S. default would roil markets and Fitch Ratings said even a “technical” default would jeopardize the country’s AAA rating.
Olivier Blanchard, the fund’s chief economist, told reporters that while the risk of a double-dip recession in the United States is small, growth is unlikely to be fast enough to quickly bring down the 9.1% U.S. unemployment rate.
The IMF said the outlook for the U.S. budget deficit this year has improved somewhat due to higher-than-expected revenues. In a separate report, it forecast a deficit of 9.9% of GDP — still high, but better than the deficit of 10.8% of GDP it foresaw in April.
MARKETS INCREASINGLY ON EDGE
Despite the relative improvement, Mr. Blanchard said financial markets were becoming increasingly worried by the lack of a “convincing” plan in the United States and other countries to reduce their budget deficits.
“If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States,” Mr. Vinals said.
Greece has edged closer to default as euro zone officials disagree on a planned second aid package for the indebted country. With strikes and protests around the country, political turmoil has added to uncertainty, stoking fears that the government will not be able to tighten its belt enough to reduce crippling deficits.
Fears of contagion in the euro zone have driven global stock markets lower in recent sessions.
The IMF raised its growth view for the euro area in 2011 to 2.0% from 1.6%. For 2012, the IMF saw growth at 1.7%, nearly stable from its previous 1.8%.
It raised its forecast for Germany, the powerhouse of the eurozone, to 3.2% from 2.5%, with growth moderating to 2% in 2012.
Forecasts for large emerging markets remained stable or slipped. While China’s GDP view stayed at 9.6% this year, the IMF lowered its forecast for Brazil to 4.1% from 4.5% in April.
Those countries, along with Russia, India and South Africa, make up the fast-growing BRICS, a group of emerging economies whose brisk expansion has outstripped that of developed markets recently.
Robust economic growth and rising inflation has caused emerging economies to tighten monetary policy with higher interest rates and reserve requirements, even as many developed nations keep policy ultra-loose to try to boost anemic growth.
The IMF warned that many emerging markets still need more tightening. In China, for example, the high inflation rate means negative real interest rates.
Some emerging markets have been reluctant to tighten too far, fearful of derailing growth or attracting speculative flows that could pressure currencies ever higher.
IRS bearing down on Americans in Canada
June 13, 2011
Original Article on THE GLOBE AND MAIL
Janet Selby never imagined she was anything other than a Canadian.
After all, she has lived in Canada for all of her 47 years. She went to school here, voted in elections, travelled on a Canadian passport and built a successful career as an accountant and corporate recruiter.
But a recent call from her online broker forced her to confront a long-forgotten past. Ms. Selby spent the first four days of her life in the United States, born in 1963 to two Canadians pursuing graduate work at the University of Illinois in Champaign, Ill.
That makes Ms. Selby an accidental American – a reality that comes with sweeping tax and reporting obligations that could now cost her thousands of dollars and a monster headache.
“It’s frustrating,” Ms. Selby said from Toronto, where she has lived most of her life. “I’m a responsible citizen. I’ve paid my taxes dutifully since I’ve been earning money. It makes me feel like it’s an overreaching tax grab by the Americans.”
Ms. Selby is not alone. Hundreds of thousands of Americans living in Canada may soon run into the increasingly long and muscular arm of the U.S. Internal Revenue Service. Many aren’t aware of what is about to hit them as Canadian financial institutions comply with a new law that requires them to identify their U.S. customers to the IRS, tax experts warn. Banks and customers who fail to provide the information would be hit with steep penalties on all their U.S. income.
Unlike almost every country in the world, the United States taxes its citizens based on worldwide income, regardless of where they live.
And now an aggressive campaign to root out tax cheats and tax havens is reaching deep into Canada and other countries. Starting in 2013, the IRS will require foreign financial institutions – banks, brokers, insurers and the like – to disclose all accounts held by U.S. citizens and green-card holders.
But that’s not the end of it. Those caught up by the sweep of the U.S. Foreign Account Tax Compliance Act, or FATCA, will likely have to file U.S. tax returns and detailed annual foreign account disclosure statements, going back years. Getting rid of a U.S. citizenship – accidental or not – doesn’t eliminate past tax obligations to the IRS.
“There are a lot of people who don’t even know they have an issue,” warned Beth Webel, a tax partner at PwC Canada in Hamilton, Ont., one of the accounting firm’s experts on the new U.S. rules.
“There are people who didn’t know, or just didn’t file. Those are tough conversations to have with people. There’s no easy way to deal with it.”
Relatively few of these Americans and dual citizens are the kinds of tax cheats the IRS insists it’s hunting for. They’re ordinary people who’ve been paying taxes that are typically higher than in the United States.
They are also children and spouses of Canadians who spent significant chunks of their lives working in the United States as permanent residents, who may not even know they have a lifelong obligation to Uncle Sam by virtue of their family’s U.S. ties.
The experience of Anthony Smith of Kelowna, B.C., highlights another group of Canadians at risk: long-term green-card holders. Mr. Smith spent 11 years working as a network designer for Nortel Networks in Dallas. Ending his obligations to the IRS after he surrendered his green card and returned to Canada in 2004 took years and cost him thousands of dollars.
“There’s a triangle of security, immigration and accounting, and in there you can get totally lost,” Mr. Smith said.
The new U.S. law will ultimately force vast numbers of Canadians to start filing with the IRS, Ms. Webel said. “They’re going to be on the radar screen,” she said.
It may be driving others further underground. Dave McKay, head of Canadian banking at Royal Bank of Canada, said it’s noticed an increase in the number of customers who abandon the online account-opening process when they get to the long list of questions about U.S. citizenship and taxation.
“It’s a huge barrier [to new accounts], because of the amount of information the customer has to provide and their willingness to provide it, and not understanding why they need to do this,” Mr. McKay said. “It shuts the whole process down.”
In the end, many of those affected may not owe any U.S. taxes because they’ll get credit for any taxes they’ve already paid to Canadian authorities under a Canada-U.S. tax treaty.
But they’ll still have to file with the IRS.
Under an amnesty program that expires at the end of August, they’ll still have to pay a blanket tax of up to 25 per cent on the value of all their foreign accounts, including bank accounts, mutual funds and RRSPs.
Once the amnesty period ends, they could also face fines for the years they haven’t filed with the IRS.
As Ms. Shelby found out, Canadian financial institutions are already ramping up for 2013, by identifying customers now who may have ties to the United States. Many institutions have already signed so-called Qualifying Intermediary Agreements with the IRS, a first step toward giving U.S. tax authorities access to client information, including U.S. social security numbers or tax ID numbers.
However, Canadian law doesn’t require account holders to report their citizenship. In the case of bank accounts, for example, customers need only show a driver’s licence and one other piece of identification, verifying residency, but not necessarily citizenship or immigration status.
Canadian and other foreign financial institutions are lobbying furiously for changes and exemptions that would soften the impact on both themselves and their customers. The banks have complained to Finance Minister Jim Flaherty that the law is an end-run around Canadian tax authorities and an administrative nightmare.
Meanwhile, Ms. Shelby is scrambling to find a tax expert before the August deadline to help her sort out what she needs to do and how much she might owe. Even the best-case scenario will leave her poorer.
“If I can get by without a penalty, I’ll be happy,” she said. “But no matter what, I’m going to have a financial hit here. To hire an adviser to do this for me is going to cost money.”
It may be driving others further underground. Dave McKay, head of Canadian banking at Royal Bank of Canada, said it’s noticed an increase in the number of customers who abandon the online account-opening process when they get to the long list of questions about U.S. citizenship and taxation.
“It’s a huge barrier [to new accounts], because of the amount of information the customer has to provide and their willingness to provide it, and not understanding why they need to do this,” Mr. McKay said. “It shuts the whole process down.”
In the end, many of those affected may not owe any U.S. taxes because they’ll get credit for any taxes they’ve already paid to Canadian authorities under a Canada-U.S. tax treaty.
But they’ll still have to file with the IRS.
Under an amnesty program that expires at the end of August, they’ll still have to pay a blanket tax of up to 25 per cent on the value of all their foreign accounts, including bank accounts, mutual funds and RRSPs.
Once the amnesty period ends, they could also face fines for the years they haven’t filed with the IRS.
As Ms. Shelby found out, Canadian financial institutions are already ramping up for 2013, by identifying customers now who may have ties to the United States. Many institutions have already signed so-called Qualifying Intermediary Agreements with the IRS, a first step toward giving U.S. tax authorities access to client information, including U.S. social security numbers or tax ID numbers.
However, Canadian law doesn’t require account holders to report their citizenship. In the case of bank accounts, for example, customers need only show a driver’s licence and one other piece of identification, verifying residency, but not necessarily citizenship or immigration status.
Canadian and other foreign financial institutions are lobbying furiously for changes and exemptions that would soften the impact on both themselves and their customers. The banks have complained to Finance Minister Jim Flaherty that the law is an end-run around Canadian tax authorities and an administrative nightmare.
Meanwhile, Ms. Shelby is scrambling to find a tax expert before the August deadline to help her sort out what she needs to do and how much she might owe. Even the best-case scenario will leave her poorer.
“If I can get by without a penalty, I’ll be happy,” she said. “But no matter what, I’m going to have a financial hit here. To hire an adviser to do this for me is going to cost money.”
China Raises Reserve Ratio After Industrial Production Outpaces Estimates
By Bloomberg News - Jun 14, 2011
China ordered lenders to set aside more cash as reserves after inflation accelerated to the fastest pace in almost three years in May and industrial production rose more than estimates.
A half percentage point increase announced by the central bank today and effective June 20 will take the ratio to a record 21.5 percent for the biggest lenders. The move was hours after data showing the inflation rate climbed to 5.5 percent.
Signs the world’s second-biggest economy is maintaining momentum after increases in borrowing costs and curbs on real estate may have encouraged policy makers to add to tightening measures. At the same time, weakness in the global economy and data yesterday showing slower bank lending and money-supply growth may make a decision on further raising interest rates a tougher call.
“Growth is moderating in response to recent policy measures, but at a very gradual pace, with little to suggest that Beijing needs to worry about a hard landing in coming months,” said Brian Jackson, an emerging-market strategist at Royal Bank of Canada. “Headline measures of inflation are above Beijing’s comfort level, with risks skewed to the upside.”
Jackson sees the key one-year lending rate rising by a quarter percentage point by the end of this month, with another move in the third quarter.
Swaps, Bonds
China’s interest-rate swaps surged and bonds slumped after the central bank announcement.
The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, jumped 0.08 percentage point to 3.58 percent as of 4:15 p.m. in Shanghai, the biggest increase since March 21.
The yield on the 3.94 percent government bond due January 2021 climbed five basis points to 3.93 percent, the largest rise since April 26. The benchmark Shanghai Composite Index earlier closed 1.1 percent higher.
Today’s reserve-ratio increase “was quite a surprise but the central bank may be concerned about rising inflation expectations,” said Lu Ting, a Hong Kong-based economist with Bank of America Merrill Lynch. “It may also indicate that there have been inflows of foreign exchange especially from the trade surplus which was above $10 billion in April and May.”
Government Target
Lu estimates today’s move will drain about 370 billion yuan ($57 billion) from the banking system.
China has raised interest rates four times since September and allowed the yuan to gain about 1.6 percent against the dollar this year. Inflation has exceeded the government’s 4 percent target each month this year as companies including McDonald’s Corp. boost prices.
Still, the pace of inflation remains the slowest of the so-called BRIC nations, with the latest data showing annual rates of 6.6 percent for Brazil, 9.6 percent for Russia and 9.1 percent for India. China’s peak this year may be “slightly above” 6 percent in June, Bank of America said.
Food prices in China rose 11.7 percent in May from a year earlier as pork costs surged and vegetable prices rebounded late in the month, the statistics bureau said today. Low-income nations from India to Algeria are struggling with food prices that climbed to a record in February according to a United Nations gauge. The Food and Agricultural Organization index was up 37 percent in May from a year earlier.
Inflation Expectations
“Inflation pressure is still large,” Li Daokui, an academic adviser to the People’s Bank of China, said on his microblog today. “My personal view is that the policy focus should be on considering raising the deposit rate to adjust inflation expectations.”
China’s producer prices rose a more-than-estimated 6.8 percent in May and non-food inflation accelerated to 2.9 percent, the fastest pace in at least six years, today’s data showed.
Industrial output gained 13.3 percent last month from a year earlier compared with April’s 13.4 percent expansion. Retail sales, which are boosted by inflation, rose 16.9 percent after a 17.1 percent gain in April.
Fixed-asset investment excluding rural households expanded 25.8 percent in the first five months of the year, up from 25.4 percent in January-through-April.
The government is weighing the threat to growth from tightening measures against the danger that rising food and housing costs may fuel social instability. In March, Premier Wen Jiabao said a combination of inflation, corruption, and the gap between rich and poor could “even affect the government’s hold on power.”
Signs of unrest include clashes involving migrant street vendors in Zengcheng, Guangdong, this month and riots last month in Inner Mongolia. The government has detained activists this year after calls for so-called “jasmine” rallies, inspired by revolts in the Middle East and North Africa.
America at tipping point, Shiller warns
Reuters, June 9, 2011
Original Article on Financial Post
NEW YORK — Recent housing and employment data suggests the U.S. economy is at a tipping point where a double-dip recession is possible and home prices could have much further to fall, a veteran economist said Thursday.
Robert Shiller said the recent uptick in unemployment is not yet enough of a sign as to which way the recovery is heading. But if unemployment continues to rise in the coming months, it could suggest another recession.
“Whether we call it a double-dip or not, I think there is a risk,” Shiller told Reuters Insider in an interview.
Likewise, data showing U.S. home prices fell into a double dip in March could prove to be either a seasonal effect over the winter months or part of a downward trend.
“My gut feeling is we might see a continuation of the decline” in home prices, Shiller said earlier Thursday at a Standard & Poor’s housing summit.
He added that a 10% to 25% slump in real home prices “wouldn’t surprise me at all,” though he cautioned that was not a forecast.
Shiller pointed to the glut of unsold homes on the market and the large amount of homeowners under water on their mortgages as pressuring prices.
As for when home prices might bottom, Shiller told Insider that was unclear and it was possible prices could slide for 20 years.
“We’ve seen five years of decline already since the peak in 2006 and I don’t see evidence that we’re coming out of it,” he said.
Shiller, known for warning about bubbles in the stock market and housing market, is also the co-founder of the S&P/Case-Shiller home price index. Last week the index showed single-family home prices in March slumped to lows not seen since March 2003, falling below the previous crisis-era bottom set in April 2009.
That report, along with other data, including grim jobs figures and a slowdown in manufacturing, suggested that the economic soft patch seen in the first quarter of the year could be more protracted.
Home prices had been supported last spring by a tax credit, but the housing market has struggled since the credit expired.
Sources told Reuters earlier this week that the Obama administration has grown increasingly frustrated with the country’s struggling housing sector and is exploring ways to keep it from weakening further.
US Is Nearing Even Worse Financial Crisis: Jim Rogers
By: Margo D. Beller
Wednesday, June 8, 2011
The U.S. is approaching a financial crisis worse than 2008, Jim Rogers, chief executive, Rogers Holdings, warned CNBC Wednesday.
"The debts that are in this country are skyrocketing," he said. "In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.
"When the problems arise next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around."
The well-known investor believes the government won't shut down in August if agreement isn't reached on raising the debt ceiling, but he did say "draconian cuts" are needed in taxes and spending, especially military spending.
"We’ve got troops in 150 countries around the world. They’re not doing us any good, they’re making enemies. They’re costing us a fortune," he said.
Rogers said he is "not long anything in the U.S." and short on American tech stocks. He owns Chinese stocks as well as commodities and would love the world price of silver and gold to come down so he could "pick up the phone and buy more."
He said he owns Chinese stocks, currencies and commodities, adding the Chinese yuan will be a safer currency than the dollar.
"The U.S. is the largest debtor nation in the history of the world," he said. "The debts are going through the roof. Would you keep lending money to somebody who's spending money and not doing anything about it? No you wouldn't."
The pound sterling lost 90% of its value when it was no longer the world's reserve currency, he said, and the dollar will, too. In keeping with his philosophy he said he owns the U.S. dollar and is waiting for a rally. "If it doesn't happen I'll have to sell and take my losses."
He called Federal Reserve Chairman Ben Bernanke a "disaster" who has "never been right about anything" since he's been in Washington. "I hope he doesn't come back with QE3 but that's all he knows. The only thing he knows is to print money."
He predicted that after the Fed ends its quantitative easing program, known as QE2, this month, it may come back under another name.
"They're gonna bring it back because [Bernanke will] be terrified and Washington will be terrified," he said. "There's an election coming in November 2012. Washington's gonna print more money."
U.S. funding for future promises lags by trillions
By Dennis Cauchon
The federal government's financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit, a USA TODAY analysis shows.
The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.
This gap between spending commitments and revenue last year equals more than one-third of the nation's gross domestic product.
Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit prompting heated debate between Congress and the White House over lifting the debt ceiling.
STORY: Government's mountain of debt
Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs added more to the financial hole, too.
Corporations would be required to count these new liabilities when they are taken on — and report a big loss to shareholders. Unlike businesses, however, Congress postpones recording spending commitments until it writes a check.
The $61.6 trillion in unfunded obligations amounts to $528,000 per household. That's more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt. It reflects the challenge as the number of retirees soars over the next 20 years and seniors try to collect on those spending promises.
"The (federal) debt only tells us what the government owes to the public. It doesn't take into account what's owed to seniors, veterans and retired employees," says accountant Sheila Weinberg, founder of the Institute for Truth in Accounting, a Chicago-based group that advocates better financial reporting. "Without accurate accounting, we can't make good decisions."
Michael Lind, policy director at the liberal New America Foundation's economic growth program, says there is no near-term crisis for federal retirement programs and that economic growth will make these programs more affordable.
"The false claim that Social Security and Medicare are about to bankrupt the United States has been repeated for decades by conservatives and libertarians who pretend that their ideological opposition to these successful and cost-effective programs is based on worries about the deficit," he says.
USA TODAY has calculated federal finances based on standard accounting rules since 2004 using data from the Medicare and Social Security annual reports and the little-known audited financial report of the federal government.
The government has promised pension and health benefits worth more than $700,000 per retired civil servant. The pension fund's key asset: federal IOUs.
Fed made $9 trillion in emergency overnight loans
By Chris Isidore, senior writerDecember 1, 2010
NEW YORK (CNNMoney.com) -- The Federal Reserve made $9 trillion in overnight loans to major banks and Wall Street firms during the financial crisis, according to newly revealed data released Wednesday.
The loans were made through a special loan program set up by the Fed in the wake of the Bear Stearns collapse in March 2008 to keep the nation's bond markets trading normally.
The amount of cash being pumped out to the financial giants was not previously disclosed. All the loans were backed by collateral and all were paid back with a very low interest rate to the Fed -- an annual rate of between 0.5% to 3.5%.
Still, the total amount was a surprise, even to some who had followed the Fed's rescue efforts closely.
"That's a real number, even for the Fed," said FusionIQ's Barry Ritholtz, author of the book "Bailout Nation." While the fact that the markets were in trouble was already well known, he said the amount of help they needed is still surprising.
"It makes it very clear this was a very serious, very unusual situation," he said.
Sen. Bernie Sanders, the Vermont independent who had authored the provision of the financial reform law that required Wednesday's disclosure, called the data that was released incredible and jaw-dropping.
"The $700 billion Wall Street bailout turned out to be pocket change compared to trillions and trillions of dollars in near zero interest loans and other financial arrangements that the Federal Reserve doled out to every major financial institution," Sanders said.
He said that even if the Fed was right to make the loans to keep the economy from toppling into a depression, it should have made stronger demands that the banks help American consumers and small businesses.
"They may have repaid their loans, but that's not good enough," he said. "It's clear the demands the Fed made were not enough."
The Wall Street firm that received the most assistance was Merrill Lynch, which received $2.1 trillion, spread across 226 loans. The firm did not survive the crisis as an independent company, and was purchased by Bank of America (BAC, Fortune 500) just as Lehman Brothers was failing.
Citigroup (C, Fortune 500), which ended up with a majority of its shares owned by the Treasury Department due to a separate federal bailout, was No. 2 on the list with 279 loans totaling $2 trillion. Morgan Stanley (MS, Fortune 500) was third with $1.9 trillion coming from 212 loans.
"As we have previously disclosed, Morgan Stanley utilized some of the Federal Reserve's emergency lending facilities during a time of immense financial turmoil throughout the banking sector and the broader market," Morgan Stanley said in a statement Wednesday. "The Fed's actions were timely and critical, and we commend them for providing liquidity and stabilizing the financial system during that period.''
The largest single loan was by Barclays Capital, which borrowed $47.9 billion on Sept. 18, 2008, in the days after the Lehman bankruptcy. The loan financed Barclays' purchase of Lehman's remaining assets.
Some Wall Street firms disputed the way the Fed reported the numbers. An executive from one of the firms said that many of the overnight loans were rolled over for days at a time, and that each day it was counted as a new loan. "It's being double, triple, quadruple counted in some cases," said the executive.
Can our opinion of banks get any worse?
Not all the major banks needed much help from the Fed. JPMorgan Chase (JPM, Fortune 500) received only three loans from this program for a total of $3 billion.
The last loan was made under the program in May 2009, and the program, known as the primary dealer credit facility, was officially discontinued in February of this year.
The Federal Reserve revealed details of that program as part of a large scale release of data on all the steps it took to stabilize the nation's financial sector during the markets crisis of the last few years.
The central bank posted details of more than 21,000 transactions with major banks and Wall Street firms between December of 2007 and July of 2010.
In addition to the loan program for bond dealers, the data covered the Fed's purchases of more $1 trillion in mortgages, and spending to back consumer and small business loans, as well as commercial paper used to keep large corporations running.
The rescues of the investment bank Bear Stearns in March of 2008, and insurance behemoth AIG in September of that year, were also revealed in far greater detail, as were programs to make dollars available to foreign central banks in return for their currency, in order to keep international trade flowing.
The Fed's full data
Most of the special programs set up by the Fed in response to the crisis of 2008 have since expired, although it still holds close to $2 trillion in assets it purchased during that time.
The Fed said it did not lose money on any of the transactions that have been closed, and that it does not expect to lose money on the assets it still holds.
The details of which banks participated in the Fed's emergency programs, and how the banks benefited from the transactions, had never before been revealed.
The Fed argued that revealing the information could cause a run on the banks that needed to draw cash at the discount window. But under the financial regulatory reform act that was passed in July, the Fed will reveal future discount window transactions following a two-year lag.
UN sees risk of crisis of confidence in U.S. dollar
By Patrick Worsnip
May 25, 2011
Original Article on FINANCIAL POST
UNITED NATIONS – The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.
In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.
The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.
This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners.
“As a result, further (expected) losses of the book value of the vast foreign reserve holdings could trigger a crisis of confidence in the reserve currency, which would put the entire global financial system at risk,” it said.
The 17-page report referred at another point to the “still looming risk of a collapse of the United States dollar.”
Rob Vos, a senior UN economist involved with the report, said if emerging markets “massively start selling off dollars, then you can have this risk of a slide in the dollar.
“We’re not saying the collapse is imminent, but the factors are further building up that we could quickly come to that stage if other things are not improving quickly on other fronts — like the risk of the U.S. not being able to service its obligations,” he told Reuters.
UN economists have for some time queried whether the dollar should continue to be the world’s sole reserve currency. Others have also expressed concerns about U.S. finances.
Standard & Poor’s threatened on April 18 to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress found a way to slash the yawning federal budget deficit within two years.
A downgrade would erode the status of the United States as the world’s most powerful economy and the dollar’s role as the dominant global currency.
Treasury Secretary Timothy Geithner said on Wednesday the U.S. government would “never default on its obligations.”
ASSET BUBBLES
Assessing the broader global economy, the UN report said recovery from the 2008 financial crisis continued to be led by China, India and Brazil, but that their growth outlook was moderating due to fears of inflation and domestic asset price bubbles.
It took a slightly more optimistic view of world growth prospects than it did six months ago, forecasting 3.3% expansion this year and 3.6% in 2012, compared with 3.1% and 3.5% respectively.
The United Nations uses a different exchange rate calculation than the International Monetary Fund and the Organization for Economic Cooperation and Development, making its global growth figures slightly lower.
It boosted its forecast for U.S. gross domestic product growth this year from 2.2% to 2.6% but kept next year’s estimate steady at 2.8%.
The report cut Japan’s growth outlook this year by more than a third to 0.7% following March’s catastrophic earthquake, tsunami and nuclear plant crisis. It put damage to buildings and infrastructure at about 25 trillion yen (US$305-billion) or 5% of GDP.
Despite a recent surge in oil prices, it predicted that barring major disruptions from political unrest in the Middle East, they would level off at an average $99 a barrel this year — close to the price of U.S. crude on Wednesday — and fall to an average of US$90 next year.
“Supply and demand conditions do not warrant a continued upward trend,” it said.
Food prices have also been soaring but the report said better harvests were expected to moderate them in the second half of this year.
CAN THE U.S. RETURN TO A GOLD STANDARD?
By Alan Greenspan
Original Article on GOLD EAGLE
The growing disillusionment with politically controlled monetary policies has produced an increasing number of advocates for a return to the GOLD STANDARD - including at times president Reagan.
In years past a desire to return to a monetary system based on gold was perceived as nostalgia for an era when times were simpler, problems less complex and the world not threatened with nuclear annihilation. But after a decade of destabilizing inflation and economic stagnation, the restoration of a GOLD STANDARD has become an issue that is clearly rising on the economic policy agenda. A commission to study the issue, with strong support from President Reagan, is in place.
The increasingly numerous proponents of a GOLD STANDARD persuasively argue that budget deficits and large federal borrowings would be difficult to finance under such a standard. Heavy claims against paper dollars cause few technical problems, for the Treasury can legally borrow as many dollars as Congress authorizes.
But with unlimited dollar conversion into gold, the ability to issue dollar claims would be severely limited. Obviously if you cannot finance federal deficits, you cannot create them. Either taxes would then have to be raised and expenditures lowered. The restrictions of gold convertibility would therefore profoundly alter the politics of fiscal policy that have prevailed for half a century.
Disturbed by Alternatives
Even some of those who conclude a return to gold is infeasible remain deeply disturbed by the current alternatives. For example, William Fellner of the American Enterprise Institute in a forthcoming publication remarks "...I find it difficult not to be greatly impressed by the very large damage done to the economies of the industrialized world... by the monetary management that has followed the era of (gold) convertibility... It has placed the Western economies in acute danger."
Yet even those of us who are attracted to the prospect of gold convertibility are confronted with a seemingly impossible obstacle: the latest claims to gold represented by the huge world overhang of fiat currency, many dollars.
The immediate problem of restoring a GOLD STANDARD is fixing a gold price that is consistent with market forces. Obviously if the offering price by the Treasury is too low, or subsequently proves to be too low, heavy demand at the offering price could quickly deplete the total U.S. government stock of gold, as well as any gold borrowed to thwart the assault. At that point, with no additional gold available, the U.S. would be off the GOLD STANDARD and likely to remain off for decades.
Alternatively, if the gold price is initially set too high, or subsequently becomes too high, the Treasury would be inundated with gold offerings. The payments the gold drawn on the Treasury's account at the Federal Reserve would add substantially to commercial bank reserves and probably act, at least temporarily, to expand the money supply with all the inflationary implications thereof.
Monetary offsets to neutralize or "earmark" gold are, of course, possible in the short run. But as the West Germany authorities soon learned from their past endeavors to support the dollar, there are limits to monetary countermeasures.
The only seeming solution is for the U.S. to create a fiscal and monetary environment which in effect makes the dollar as good as gold, i.e., stabilizes the general price level and by inference the dollar price of gold bullion itself. Then a modest reserve of bullion could reduce the narrow gold price fluctuations effectively to zero, allowing any changes in gold supply and demand to be absorbed in fluctuations in the Treasury's inventory.
What the above suggests is that a necessary condition of returning to a GOLD STANDARD is the financial environment which the GOLD STANDARD itself is presumed to create. But, if we restored financial stability, what purpose is then served by return to a GOLD STANDARD?
Certainly a gold-based monetary system will necessarily prevent fiscal imprudence, as 20th Century history clearly demonstrates. Nonetheless, once achieved, the discipline of the GOLD STANDARD would surely reinforce anti-inflation policies, and make it far more difficult to resume financial profligacy. The redemption of dollars for gold in response to excess federal government-induced credit creation would be a strong political signal. Even after inflation is brought under control the extraordinary political sensitivity to inflation will remain.
Concrete actions to install a GOLD STANDARD are premature. Nonetheless, there are certain preparatory policy actions that could test the eventual feasibility of returning to a GOLD STANDARD, that would have positive short-term anti-inflation benefits and little cost if they fail.
The major roadblock to restoring the GOLD STANDARD is the problem of re-entry. With the vast quantity of dollars worldwide laying claims to the U.S. Treasury's 264 million ounces of gold, an overnight transition to gold convertibility would create a major discontinuity for the U.S. financial system. But there is no need for the whole block of current dollar obligations to become an immediate claim.
Convertibility can be instituted gradually by, in effect, creating a dual currency with a limited issue of dollars convertible into gold. Initially they could be deferred claims to gold, for example, five-year Treasury Notes with interest and principal payable in grams or ounces of gold.
With the passage of time and several issues of these notes we would have a series of "new monies" in terms of gold and eventually, demand claims on gold. The degree of success of restoring long-term fiscal confidence will show up clearly in the yield spreads between gold and fiat dollar obligations of the same maturities. Full convertibility would require that the yield spread for all maturities virtually disappear. If they do not, convertibility will be very difficult, probably impossible, to implement.
A second advantage of gold notes is that they are likely to reduce current budget deficits. Treasury gold notes in today's markets could be sold at interest rates at approximately 2% or less. In fact from today's markets one can construct the equivalent of a 22-month gold note yielding 1%, by arbitraging regular Treasury note yields for June 1983 maturities (17%) and the forward delivery premiums of gold (16% annual rate) inferred from June 1983 futures contracts. Presumably five-year note issues would reflect a similar relationship.
A Risk of Exchange Loss
The exchange risk of the Treasury gold notes, of course, is the same as that associated with our foreign currency Treasury note series. The U.S. Treasury has, over the years, sold significant quantities of both German mark - and Swiss franc denominated issues, and both made and lost money in terms of dollars as exchange rates have fluctuated. And indeed there is a risk of exchange rate loss with gold notes.
However, unless the price of gold doubles over a five-year period (16% compounded annually), interest payments on the gold notes in terms of dollars will be less than conventional financing requires. The run-up to $875 per ounce in early 1980 was surely an aberration, reflecting certain circumstances in the Middle East which are unlikely to be repeated in the near future. Hence, anything close to doubling of gold prices in the next five years appears improbable. On the other hand, if gold prices remain stable or rise moderately, the savings could be large: Each $10 billion in equivalent gold notes outstanding would, under stable gold prices, save $1.5 billion per year in interest outlays.
A possible further side benefit of the existence of gold notes is that they could set a standard in terms of prices and interest rates that could put additional political pressure on the administration and Congress to move expeditiously toward non-inflationary policies. Gold notes could be a case of reversing Gresham's Law. Good money would drive out bad.
Those who advocate a return to a GOLD STANDARD should be aware that returning our monetary system to gold convertibility is no mere technical, financial restructuring. It is a basic change in our economic processes. However, considering where the policies of the last 50 years have eventually led us, perhaps there are lessons to be learned from our more distant GOLD STANDARD past.
Federal Retreat on Bigger Loans Rattles Housing
BY David Streitfeld
Wednesday, May 11, 2011
By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government. In this seaside community of pricey homes, the dread of yet another housing shock is already spreading.
“We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”
For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.
But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.
Michael S. Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities. “There’s always going to be a line, and for the person just over it it’s always going to be an arbitrary line,” said Mr. Barr, who teaches at the University of Michigan Law School. “But there is no entitlement to living in a home that costs $750,000.”
As the housing market braces for more trouble, homeowners everywhere have been reduced to hoping things will someday stop getting worse. In some areas, foreclosures are the only thing selling. New home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the last year.
The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.
Buyers might face less competition in the fall but are likely to see more demands from lenders, including higher credit scores and larger down payments. Steve McNally, a hotel manager from Vancouver, said he had only about 20 percent to put down on a new home in Monterey County.
If a bigger deposit were required, Mr. McNally said, “I’d wait and rent.”
Forbes Predicts U.S. Gold Standard Within 5 Years
by Paul Dykewicz
05/11/2011
Original Article on HUMAN EVENTS
A return to the gold standard by the United States within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills, Steve Forbes predicted during an exclusive interview this week with HUMAN EVENTS.
“What seems astonishing today could become conventional wisdom in a short period of time,” Forbes said.
Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending, the media mogul and former presidential candidate said. The United States used gold as the basis for valuing the U.S. dollar successfully for roughly 180 years before President Richard Nixon embarked upon an experiment to end the practice in the 1970s that has contributed to a number of woes that the country is suffering from now, Forbes added.
If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed, Forbes told HUMAN EVENTS. The constantly changing value of the U.S. dollar leads to marketplace uncertainty and consequently spurs speculation in commodity investing as a hedge against inflation.
The only probable 2012 U.S. presidential candidate who has championed a return to the gold standard so far is Rep. Ron Paul (R.-Tex.). But the idea “makes too much sense” not to gain popularity as the U.S. economy struggles to create jobs, recover from a housing bubble induced by the Federal Reserve’s easy-money policies, stop rising gasoline prices, and restore fiscal responsibility to U.S. government’s budget, Forbes insisted.
With a stable currency, it is “much harder” for governments to borrow excessively, Forbes said. Without lax Federal Reserve System monetary policies that led to the printing of too much money, the housing bubble would not have been nearly as severe, he added.
“When it comes to exchange rates and monetary policy, people often don’t grasp” what is at stake for the economy, Forbes said. By restoring the gold standard, the United States would shift away from “less responsible policies” and toward a stronger dollar and a stronger America, he said. “If the dollar was as good as gold, other countries would want to buy it.”
An encouraging sign for Forbes is that key lawmakers besides Rep. Paul are recognizing that the Fed is straying well beyond its intended role of promoting stable prices and full employment with its monetary policies.
Forbes cited Rep. Paul Ryan (R.-Wis.), who, he believes, understands monetary policy better than most lawmakers and has shown a willingness to ask tough but necessary questions. For example, when Federal Reserve Chairman Ben Bernanke appeared before the House Budget Committee in February, Ryan, who chairs the panel, asked Bernanke bluntly how many jobs the Fed’s quantitative-easing program had helped to create.
Politicians need to “get over” the notion that the Fed can guide the economy with monetary policy. The Fed is like a “bull in a China shop," Forbes said. “It can’t help but knock things down.”
“People know that something is wrong with the dollar," Forbes concluded. "You cannot trash your money without repercussions.”
Jobs Report Has More Bad News Than Good News
By Jeff Cox
Friday, May 6, 2011
There was more bad news than met the eye to Friday’s jobs report, even beyond the bump up in the unemployment rate.
While the top-line number of 244,000 jobs created sounded great when it came off the tape, the internals were somewhat weaker. In particular, the household survey, which is an actual head count, suggested that the job creation barely kept up with the expansion of the labor force.
Under some circumstances, the rise in the jobless rate might have suggested good news—namely that many of the millions of discouraged workers were coming off the sidelines and looking for jobs, thus being added to the count according to the Labor Department’s byzantine method of composing the labor picture.
But nothing in the data suggests that.
The labor participation rate for April, in fact, stood unchanged at 64.2 percent.
Ditto for the actual amount of people out of work, which also was unchanged at 13.7 million.
Another measure of unemployment rose as well: the so-called “real” unemployment rate, which rose to 15.9 percent, up two-tenths from the prior month. The government calls the rate the U-6, and it measures not just those looking for work and unable to find jobs but also those “marginally” attached to the labor force and those who are working part-time but who want full-time work.
There were 8.6 million of those involuntary part-time workers, a number also unchanged from the previous month.
So what did change?
McDonald’s [MCD 81.14 0.44 (+0.55%) ] said it would hire 50,000 workers, but that was outside the April reporting period, so it didn't help these numbers.
Retail created another 57,000, including 27,000 in general merchandise stores.
Leisure and hospitality continued its torrid pace of job creation, adding 46,000 to bring its three-month addition to the burgeoning job market to 46,000.Manufacturing? There continued to be a slow rise, with 29,000 news jobs recorded, while mining added a net 11,000, most in support positions.
Professional and business services had a sold month, adding 51,000 positions.
But the average workweek, considered a key barometer of economic activity, also did not move, staying stagnant at 34.3 hours. At the same time, wages actually edged higher, up three cents, or 0.1 percent, to $22.95.
Wages, which are looked at as important for inflation expectations, have gained 1.7 percent over the past year.
The upshot, then, is that there is reason to cheer, but also some things to fear.
“In stark contrast to the payrolls figures, the household survey measure suggests that employment fell by 191,000 last month, with the labor force expanding by 235,000,” Paul Ashworth, chief US economist at Capital Economics in Toronto, wrote in a note to clients. “Overall, very encouraging, although the rebound in the unemployment rate underlines how far we still have to go.”
America’s Middle Class Crisis: The Sobering Facts
By Peter Gorenstein | Daily Ticker – Wed, May 4, 2011
Original Article on YAHOO! FINANCE
Two recessions, a couple of market crashes, and stubbornly high unemployment are all wreaking havoc on America's middle class.
In the accompanying interview, The Daily Ticker's Aaron Task discusses the state of the middle class with Sherle Schwenninger, director of economic growth and American strategy programs at the New America Foundation. Schwenninger's recent report "The American Middle Class Under Stress" has some stunning facts that highlight the struggles the average American is having getting a decent-paying job and keeping up with rising cost of living.
Here are just some of the sobering facts:
-- There are 8.5 million people receiving unemployment insurance and over 40 million receiving food stamps.
-- At the current pace of job creation, the economy won't return to full employment until 2018.
-- Middle-income jobs are disappearing from the economy. The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010.
-- Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.
-- 17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor's degree.
-- Over the past year, nominal wages grew only 1.7% while all consumer prices, including food and energy, increased by 2.7%.
-- Wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010. Government transfers have risen from 11.7% of personal income in 1980 to 18.4% in 2010, a post-war high.
The bottom line is simple says Schwenninger: The middle class is shrinking, which threatens the social composition and stability of the world's biggest economy. "I worry that we're becoming a barbell society - a lot of money wealth and power at the top, increasing hollowness at the center, which I think provides the stability and the heart and soul of the society... and then too many people in fear of falling down."
US Debt Rating Should Be 'C': Independent Agency
Tuesday, 3 May 2011
There have been increasing concerns about the fate of United States' prized triple-A sovereign debt rating. While Standard and Poor's recently downgraded its U.S. debt outlook to negative from stable, implying that a ratings cut could happen in two years, one independent ratings agency has given the U.S. sovereign rating a "C".
"A 'C' is equivalent to approximately a triple-B on the S&P, Moody's and Fitch scales. It's two notches above junk and one notch above the equivalent of a single A," Martin Weiss, President of Weiss Ratings, told CNBC Tuesday.
Weiss was quick to add that while the rating seems weak, the debt situation is not in a danger zone that would trigger panic, noting that there was still broad market acceptance for Treasurys.
The grade reflects the U.S. massive debt burden, low international reserves and the volatility in the American economy, he said.
The U.S. government debt is fast approaching the $14.3 trillion ceiling, with the debt-to-GDP ratio close to 100 percent. And a downgrade of U.S. Treasurys - one of the most widely held assets - could theoretically raise borrowing costs and in a worst case scenario, trigger a default on the government's debt obligations.
America's rating was ranked 33rd out of 47 nations, according to Weiss, which began tracking sovereign debt last year. France and Japan also got a "C" rating, while Only China and Thailand received an "A" rating.
Weiss Ratings based its score purely on statistics, and does not take into account qualitative factors such as political stability.
It's Getting Harder to Bring Home the Bacon
By MARY KISSEL
April 30, 2011
The Original Article on THE WALL STREET JOURNAL
Bobbie Jean Pope, the 81-year-old mother of C. Larry Pope of Newport News, Va., can't afford her bacon.
"I said, 'Mom, I'll get you some bacon.' And she goes, 'I can't afford y'all's meat anymore! Why is y'all's meat so expensive?' And I said, 'Mom, you ought to understand why it's expensive—it's 'cause our costs are so expensive.'"
Mr. Pope is the chief executive officer of Smithfield Foods Inc., the world's largest pork processor and hog producer by volume. He doesn't mince words when it comes to rapidly rising food prices. The 56-year-old accountant by training has been in the business for more than three decades, and he warns that the higher costs may be here to stay.
Courtesy of? "I'm not going to say, 'a political policy,'" he tells me. (His senior vice president, a lawyer by training, sits close by, ready to "kick his leg" if his garrulous boss speaks too plainly.) But politics indeed plays a large role, as Congress subsidizes favorite industries and the Federal Reserve pursues an expansive monetary policy.
Ours is a timely chat, given the burst of food inflation the world is living through. Mr. Pope is running a multibillion-dollar business in the midst of economic turmoil, and he has strong views about why prices are rising and what can be done about it.
The Southerner is an old hand when it comes to food. He graduated from William and Mary in 1975, spent a few years at an accountancy, then joined Smithfield and worked his way up the ranks. He's something of an evangelist about his trade: He boasts that Smithfield employs some 50,000 people, many of whom are high-school graduates and immigrants others would consider "hard to hire." It's a "good business" that "gives people a good start."
It's also a business under enormous strain. Some "60 to 70% of the cost of raising a hog is tied up in the grains," Mr. Pope explains. "The major ingredient is corn, and the secondary ingredient is soybean meal." Over the last several years, "the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago." Which means every product that uses corn has risen, too—including everything from "cereal to soft drinks" and more.
What triggered the upswing? In part: ethanol. President George W. Bush "came forward with—what do you call?—the edict that we were going to mandate 36 billion gallons of alternative fuels" by 2022, of which corn-based ethanol is "a substantial part." Companies that blend ethanol into fuel get a $5 billion annual tax credit, and there's a tariff to keep foreign producers out of the U.S. market. Now 40% of the corn crop is "directed to ethanol, which equals the amount that's going into livestock food," Mr. Pope calculates.
The rapidly depreciating dollar is also sparking inflation, although Mr. Pope says that's a "hard" topic for him to discuss, trying to be diplomatic. But he doesn't deny that money is cheap. Investment bankers are throwing cash at the firm—a turnaround from 2008, when money was scarce—even though Mr. Pope doesn't need it right now.
Rising prices are already squeezing food producers' "two to three percent" earnings margins. "Many of us had our costs hedged in the commodity markets and we all took on strident measures to control our cost structures," Mr. Pope says. "In the case of Smithfield, we closed six processing plants and one slaughter plant. We also closed 15% of all our live production business." But "once those measures are done, we have no choice but to pass those prices down" to consumers.
Now food price inflation is popping up across the country. A pound of sliced bacon costs $4.54 today versus $3.59 two years ago and $3.16 a decade ago, according to the Bureau of Labor Statistics. Ground beef is $2.72, up from $2.27 in 2009 and $1.74 in 2001. And it's not just Smithfield's products: "You eat eggs, you drink milk, you get a loaf of bread, and you get a pound of meat," he drawls. "Those are the four staples of what Americans eat in their diet. All of those are based on grains."
"Maybe to someone in the upper incomes it doesn't matter what the price of a pound of bacon is, or what the price of a ham, or the price of a pound of pork chops is," he says. "But for many of the customers we sell to, it really does matter." Workers can share cars when the price of oil rises, he quips, but "you can't share your food."
Mr. Pope also worries about the impact on farmers, who are leveraging up operations to afford the ever-rising price of land and fertilizer that has resulted from the increased corn demand. "There are record prices for livestock but farmers are exiting the business!" he exclaims. "Why? Farmers know they won't make money."
Weather is a factor, too. "We've had the luxury for the last three years of extremely good corn crops, with high yields and good growing conditions. We are just one bad weather event away from potentially $10 corn, which once again is another 50% increase in the input cost to our live production."
Mr. Pope says companies are coping by increasing prices "substantially" or shrinking "what's in the package." "That's the alternative way of passing on price increases . . . 'cause we're all trying to reach price points with our customers in terms of what we can sell somethan' for." "You're ultimately going to buy less bacon. . . . We're going to sell pizzas with less pepperoni on 'em." (Mr. Pope's team also laments the effect on beer prices.)
Not all companies will survive this economic whirlwind. Mr. Pope recalls what happened the last time there was a surge in corn prices, in 2008: "The largest chicken processor in the United States, Pilgrim's Pride, filed for bankruptcy." They "couldn't raise prices, so their cost of production went up dramatically." Could it happen again? "It darn well could!" Mr. Pope exclaims.
Food price inflation isn't a problem confined to America's shores. "This ethanol policy has impacted the world price of corn," Mr. Pope says. The Mexican, Canadian and European industries have "shrunk dramatically. . . . We have an unsustainable meat protein production industry," he says. "We're built on a platform of costs, on a policy that doesn't make any sense!"
Nor does the science. The ethanol industry would supply only 4% of the nation's annual energy needs even if it used 100% of the corn crop. The Environmental Protection Agency has found ethanol production has a neutral to negative impact on the environment. "The subsidy has been out there since the 1970s," Mr. Pope says. "If they can't make themselves into a viable economic model in 40 years, haven't we demonstrated that this is an industry that shouldn't exist?"
So what's the solution? First, Mr. Pope says, get rid of the ethanol subsidies and the tariff. "I am in competition with the government and the oil industry," he says. "It's not fair." Smithfield's economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn't subsidized. "Even the announcement that it is going away would see the price of corn go down, which would translate very quickly into reduced meat prices in the meat case," he says. Imagine what would happen if the mandate and tariff were eliminated, too.
He also advocates lifting regulatory and tax burdens on business. "I fundamentally don't understand the logic of corporate income taxes," he tells me. "If I have a 35% tax, all I do is take that 35% tax and I transfer it into the price of bacon and the price of pork chops."
Then there's the challenge of opening up export markets, which Mr. Pope sees as a long-term opportunity for U.S. agriculture. "This is a land-rich country, with rich soils, with the right kind of temperatures and the right kind of cultivation practices," he says. "We can raise livestock and compete with anybody in the world. That's how we can help the balance of payments." (Smithfield has European operations but has had a hard time cracking Asia, and especially China. "It's easy to invest," Mr. Pope says, but "it's hard to make money" there thanks to rampant intellectual-property rights violations and other hazards.)
While Mr. Pope waits to see how the politics of ethanol and trade play out, he's not standing still. He's assigned one of his senior executives the task of figuring out what else Smithfield could possibly feed hogs, other than corn. Could Mr. Pope have envisioned setting up such an enterprise a few years ago? "Absolutely not" he says. "It's me trying to change our business model to adapt to the realities that I have to live in."
Mr. Pope says the "losers" here "are the consumer, who's going to have to pay more for the product, and the livestock farmer who's going to have to buy high-priced grain that he can't afford because he's stretching his own lines of credit. The hog farmer . . . is in jeopardy of simply going out of business 'cause he doesn't have the cash liquidity to even pay for the corn to pay for the input to raise the hog. It's a dynamic that we can't sustain."
Russia Unexpectedly Raises Benchmark Interest Rate Quarter Point to 8.25%
By Scott Rose - Apr 29, 2011
Russia’s central bank unexpectedly increased its benchmark rate for the second time this year to quell inflation.
Bank Rossii raised the refinancing rate to 8.25 percent from 8 percent, it said on its website today. Fifteen of 20 economists in a Bloomberg survey expected no change. Policy makers in Moscow also increased the deposit rate a quarter point to 3.25 percent and the overnight auction-based repurchase rate by the same amount to 5.5 percent. The change is effective May 3.
The inflation rate has been above the central bank’s target of between 6 percent and 7 percent for this year since October, driven by rising food and fuel prices. The European Central Bank lifted interest rates this month for the first time in almost three years, while regulators in Brazil, India and China raised borrowing costs at least four times in the past year.
"The decision was made due to continued high inflation expectations, exceeding inflation guidelines for the year, and also noting the mixed effect on the Russian economy of the trends on global financial and commodities markets," the bank said in its statement.
The ruble was 0.8 percent higher against the dollar at 27.3000 and 0.4 percent stronger at 40.5875 per euro at 12:57 p.m. in Moscow.
‘Doesn’t Begin’
The Russian central bank had relied on currency gains and higher reserve requirements for lenders to quell inflation, seeking to avoid choking economic growth. Modernizing the economy, a priority for President Dmitry Medvedev, "practically doesn’t begin" with inflation above 7 percent, Finance Minister Alexei Kudrin said April 21.
"The central bank wouldn’t like to hurt the recovery in credit and investment by hiking its benchmark rate, not until inflation threat becomes real," Vladimir Tikhomirov, chief economist at Moscow-based Otkritie Financial Corp., said by e- mail before the release. "They’d like to narrow the gap between various rates, so they can make another move in deposit/repo rates."
The economy grew 4 percent last year after a 7.8 percent contraction in 2009. The Economy Ministry expects gross domestic product to expand 4.2 percent this year before slowing to 3.5 percent in 2012. Medvedev said in February that Russia should seek growth of as much as 10 percent a year within five years to keep up with the pace of rival so-called BRIC developing economies.
February Increase
Russia raised all of its main policy rates in February, adding to a quarter percentage point increase to the deposit rate in December. The central bank also raised reserve requirements for banks at its first three policy meetings this year.
Consumer prices will probably rise 0.4 percent in April from the previous month, slower than a monthly increase of 0.6 percent in March, Sergei Voloboev, a London-based emerging- markets economist at Credit Suiss Group AG, said in an e-mail yesterday.
The inflation rate fell from a 15-month high of 9.6 percent in January to 9.5 percent in February and March as the ruble rose about 11 percent against the dollar this year.
Emerging-Market Equity Funds Post Fifth Week of Inflows, Citigroup Says
By Shiyin Chen and Belinda Cao - Apr 29, 2011
Emerging-market equity funds attracted capital for a fifth straight week, the longest streak since December, according to EPFR Global.
The funds lured $1.83 billion in the week ended April 27, EPFR said in a statement today. Flows into Asia stock funds excluding Japan climbed to almost $3 billion in April, supported by “renewed faith in the resilience of the region’s economic growth,” the researcher said. Latin America posted inflows for the first time in 14 weeks, with commodity exporters benefiting from Asia’s growth, and funds invested in Europe, the Middle East and Africa took in money for the sixth week in a row.
The MSCI Emerging Markets Index is up 2.9 percent this month, adding to March’s 5.7 percent climb, on speculation economic growth will sustain earnings. China’s economy grew a faster-than-estimated 9.7 percent in the first quarter. India is aiming for expansion of 9 percent to 9.5 percent in the five years to March 2017, Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission, said on April 21.
“Asia and emerging markets are going to be a better play in the second half of the year,” Komal Sri-Kumar, the chief global strategist at TCW Group Inc., said in an interview with Bloomberg Television from Los Angeles today. “Both China and India are going to stabilize. At some point, by the middle of this year, we’ll see the end of monetary tightening by Asian central banks. That will be very positive.”
Bull Market
China has raised interest rates four times since October and India eight times since early 2010 to curb inflation. The Reserve Bank of India’s policy announcement is due on May 3.
MSCI’s emerging-markets index climbed 0.3 percent to 1,204.59 as of 1:34 p.m. New York time. The MSCI World Index of developed nations also rose 0.3 percent.
Emerging funds have attracted $13.8 billion in the past five weeks, regaining about 50 percent of outflows in the previous nine weeks, according to a report yesterday by analysts at Citigroup Inc., citing EPFR data. Inflation in Asia will peak in the middle of this year, Citigroup’s Kelly Kwok said in a phone interview from Hong Kong today.
The best places to capitalize on a global bull market are Brazil, Russia, India and China, while “there are lots of opportunities,” in so-called frontier markets such as Vietnam, Bangladesh and Pakistan, Templeton Asset Management’s Mark Mobius said on April 27. Investors diversifying away from U.S. Treasuries have helped emerging markets, he said.
Ben S. Bernanke, chairman of the U.S. Federal Reserve, signaled on April 27 the central bank will maintain its record monetary stimulus following its decision to leave its benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008.
“Dovish comments from Bernanke suggest that there will be some time for rate hikes,” Citigroup’s Kwok said. “That will give some support to risk assets such as the emerging markets.”
IMF bombshell: Age of America nears end
BY Brett Arends
April 25, 2011
Original Article on MARKET WATCH
For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China.
And it’s a lot closer than you may think.
According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.
Put that in your calendar.
It provides a painful context for the budget wrangling taking place in Washington right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.
More China news: U.S., China to hold economic talks in early May, Shanghai hit by tightening, China 2011 trade surplus may shrink to 2% of GDP
According to the IMF forecast, which was quietly posted on the Fund’s website just two weeks ago, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.
Most people aren’t prepared for this. They aren’t even aware it’s that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.
But they’re miscounting. They’re only comparing the gross domestic products of the two countries using current exchange rates.
That’s a largely meaningless comparison in real terms. Exchange rates change quickly. And China’s exchange rates are phony. China artificially undervalues its currency, the renminbi, through massive intervention in the markets.
The comparison that really matters
In addition to comparing the two countries based on exchange rates, the IMF analysis also looked to the true, real-terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies.
Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.
Just 10 years ago, the U.S. economy was three times the size of China’s.
Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.
This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”
We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.
And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.
Victor Cha, senior adviser on Asian affairs at Washington’s Center for Strategic and International Studies, told me China’s neighbors in Asia are already waking up to the dangers. “The region is overwhelmingly looking to the U.S. in a way that it hasn’t done in the past,” he said. “They see the U.S. as a counterweight to China. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don’t see it as a benign hegemony.”
The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.
This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.
“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”
The next chapter of the story is just beginning.
U.S. spending spree won’t work
What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. See: Pentagon spending is budget blind spot .
It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t.
Equally to the point, here is what this means economically, and for investors.
Some years ago I was having lunch with the smartest investor I know, London-based hedge-fund manager Crispin Odey. He made the argument that markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, “paradigm” shifts — whether a rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.
The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the “risk-free rate” on money. And so it has been for more than a century. But that’s all based on the Age of America.
No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old deutschemark. If it’s just the Greek drachma in drag ... not so much.
The last time the world’s dominant hegemon lost its ability to run things singlehandedly was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.
Updated with IMF reaction
The International Monetary Fund has responded to my article.
In a statement sent to MarketWatch, the IMF confirmed the report, but challenged my interpretation of the data. Comparing the U.S. and Chinese economies using “purchase-power-parity,” it argued, “is not the most appropriate measure… because PPP price levels are influenced by nontraded services, which are more relevant domestically than globally.”
The IMF added that it prefers to compare economies using market exchange rates, and that under this comparison the U.S. “is currently 130% bigger than China, and will still be 70% larger by 2016.”
My take?
The IMF is entitled to make its case. But its argument raises more questions than it answers.
First, no one measure is perfect. Everybody knows that.
But that’s also true of the GDP figures themselves. Hurricane Katrina, for example, added to the U.S. GDP, because it stimulated a lot of economic activity — like providing emergency relief, and rebuilding homes. Is there anyone who seriously thinks Katrina was a net positive for the United States? All statistics need caveats.
Second, comparing economies using simple exchange rates, as the IMF suggests, raises huge problems.
Currency markets fluctuate. They represent international money flows, not real output.
The U.S. dollar has fallen nearly 10% against the euro so far this year. Does anyone suggest that the real size of the U.S. economy has shrunk by 10% in comparison with Europe over that period? The idea is absurd.
China actively suppresses the renminbi on the currency markets through massive dollar purchases. As a result the renminbi is deeply undervalued on the foreign-exchange markets. Just comparing the economies on their exchange rates misses that altogether.
Purchasing power parity is not a perfect measure. None exists. But it measures the output of economies in terms of real goods and services, not just paper money. That’s why it’s widely used to compare economies. The IMF publishes PPP data. So does the OECD. Many economists rely on them.
Fleeing the Dollar Flood
April 21, 2011
Original Article on THE WALL STREET JOURNAL
Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That's a dangerous game, given the need for investment to drive economic development. But it's also increasingly typical of the world's reaction to America's mismanagement of the dollar and its eroding financial leadership.
The dollar is the world's reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.
The Fed's relentlessly easy monetary policy combined with Congress's reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on.
This incoming wall of money puts the central bankers in these countries in a bind. If they do nothing, the result can be asset bubbles and inflation. Brazil (6.3%) and China (5.4% officially but no doubt higher in fact) are both enduring bursts of inflation, as are many other countries. These nations can raise interest rates or let their own currencies appreciate, at the risk of slower economic growth. Rather than endure that adjustment, many countries are resorting to capital controls and other administrative measures to try to stop the inflow.
Over the past year, Brazil has introduced taxes on stock and bond investment and raised bank reserve requirements; Indonesia has introduced holding periods for government bonds; South Korea has limited banks' ability to engage in foreign-currency financing, among other things; Peru and Turkey have taken action, too. Yet their currencies have in many cases continued to rise and the money keeps coming in.
So it was little surprise earlier this month when IMF chief Dominique Strauss-Kahn joined the parade and endorsed capital controls as a necessary "tool" to be used on a "temporary basis," ending the fund's long-time commitment to free flows of capital. The last time the fund did this was amid the Mexico monetary crisis of the mid-1990s.
The IMF wanted its members last weekend to endorse guidelines on when they would use such measures. Brazil's finance minister spoke for many when he refused, calling capital controls necessary "self defense" measures against "spillover effects" from other countries' policies. He meant the U.S.
As if to underscore the point, U.S. Treasury Secretary Timothy Geithner responded by pointing the finger right back at developing countries, essentially updating Treasury Secretary John Connally's famous line to a delegation of Europeans in the 1970s that the dollar is "our currency but your problem."
The larger story is that the world is starting to protect, and perhaps ultimately free, itself from America's weak dollar standard. The European Central Bank recently raised interest rates and may do so again to prevent an inflation breakout. China is allowing more trade to be conducted in yuan, a first step toward making it a global currency. At a meeting of developing countries—the so-called BRICs—in China recently, leaders called for "a broad-based international reserve currency system providing stability and certainty." They weren't referring to the dollar.
Even in the U.S., Americans are buying commodities (oil per barrel: $111) and gold ($1,500 an ounce) as a dollar hedge, and the state of Utah recently took steps to make it easier for citizens to buy and sell gold as a de facto alternative currency. Whether or not these prove to be wise investments, they are certainly signals of mistrust in Washington's economic stewardship.
At an economic town hall this week, President Obama blamed "speculators" for rising oil prices. He should have mentioned the Fed and his own Treasury, which have encouraged the world to invest in hedges against the falling dollar. Chairman Ben Bernanke and Mr. Geithner have deliberately pursued a policy of unprecedented monetary and spending stimulus to reflate the economy and boost asset prices. The bill is coming due in a weak dollar, food and energy inflation, and the decline of U.S. economic credibility.
In Financial Crisis, No Prosecutions of Top Figures
By Gretchen Morgenson and Louise Story
April 14, 2011
Original Article on YAHOO! FINAN CE
It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?
Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.
At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.
Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.
Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.
His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.
Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”
Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.
But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.
Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.
As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.
Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.
A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.
“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”
Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.
To be sure, Wall Street’s role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly.
But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could.
Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.
Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems.
Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known.
Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.
But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company’s collapse. Mr. Cassano’s lawyers said that documents they had given to prosecutors refuted accusations that he had misled investors or the company’s board. Mr. Mozilo’s lawyers have said he denies any wrongdoing.
Among the few exceptions so far in civil action against senior bankers is a lawsuit filed last month against top executives of Washington Mutual, the failed bank now owned by JPMorgan Chase. The Federal Deposit Insurance Corporation sued Kerry K. Killinger, the company’s former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. The S.E.C. also extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built, though the S.E.C. did not name executives in that case.
Representatives at the Justice Department and the S.E.C. say they are still pursuing financial crisis cases, but legal experts warn that they become more difficult as time passes.
“If you look at the last couple of years and say, ‘This is the big-ticket prosecution that came out of the crisis,’ you realize we haven’t gotten very much,” said David A. Skeel, a law professor at the University of Pennsylvania. “It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not.”
The Countrywide Puzzle
As nonprosecutions go, perhaps none is more puzzling to legal experts than the case of Countrywide, the nation’s largest mortgage lender. Last month, the office of the United States attorney for Los Angeles dropped its investigation of Mr. Mozilo after the S.E.C. extracted a settlement from him in a civil fraud case. Mr. Mozilo paid $22.5 million in penalties, without admitting or denying the accusations.
White-collar crime lawyers contend that Countrywide exemplifies the difficulties of mounting a criminal case without assistance and documentation from regulators — the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Fed, in Countrywide’s case.
“When regulators don’t believe in regulation and don’t get what is going on at the companies they oversee, there can be no major white-collar crime prosecutions,” said Henry N. Pontell, professor of criminology, law and society in the School of Social Ecology at the University of California, Irvine. “If they don’t understand what we call collective embezzlement, where people are literally looting their own firms, then it’s impossible to bring cases.”
Financial crisis cases can be brought by many parties. Since the big banks’ mortgage machinery involved loans on properties across the country, attorneys general in most states have broad criminal authority over most of these institutions. The Justice Department can bring civil or criminal cases, while the S.E.C. can file only civil lawsuits.
All of these enforcement agencies traditionally depend heavily on referrals from bank regulators, who are more savvy on complex financial matters.
But data supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially fewer cases to criminal investigators than previously.
The university’s Transactional Records Access Clearinghouse indicates that in 1995, bank regulators referred 1,837 cases to the Justice Department. In 2006, that number had fallen to 75. In the four subsequent years, a period encompassing the worst of the crisis, an average of only 72 a year have been referred for criminal prosecution.
Law enforcement officials say financial case referrals began declining under President Clinton as his administration shifted its focus to health care fraud. The trend continued in the Bush administration, except for a spike in prosecutions for Enron, WorldCom, Tyco and others for accounting fraud.
The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions. From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed.
The thrift supervisor, however, has not referred a single case to the Justice Department since 2000, the Syracuse data show. The Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade.
The comptroller’s office declined to comment on its referrals. But a spokesman, Kevin Mukri, noted that bank regulators can and do bring their own civil enforcement actions. But most are against small banks and do not involve the stiff penalties that accompany criminal charges.
Historically, Countrywide’s bank subsidiary was overseen by the comptroller, while the Federal Reserve supervised its home loans unit. But in March 2007, Countrywide switched oversight of both units to the thrift supervisor. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush.
Robert Gnaizda, former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Mr. Reich about Countrywide’s reckless lending.
“We saw that people were getting bad loans,” Mr. Gnaizda recalled. “We focused on Countrywide because they were the largest originator in California and they were the ones with the most exotic mortgages.”
Mr. Gnaizda suggested many times that the thrift supervisor tighten its oversight of the company, he said. He said he advised Mr. Reich to set up a hot line for whistle-blowers inside Countrywide to communicate with regulators.
“I told John, ‘This is what any police chief does if he wants to solve a crime,’ ” Mr. Gnaizda said in an interview. “John was uninterested. He told me he was a good friend of Mozilo’s.”
In an e-mail message, Mr. Reich said he did not recall the conversation with Mr. Gnaizda, and his relationships with the chief executives of banks overseen by his agency were strictly professional. “I met with Mr. Mozilo only a few times, always in a business environment, and any insinuation of a personal friendship is simply false,” he wrote.
After the crisis had subsided, another opportunity to investigate Countrywide and its executives yielded little. The Financial Crisis Inquiry Commission, created by Congress to investigate the origins of the disaster, decided not to make an in-depth examination of the company — though some staff members felt strongly that it should.
In a January 2010 memo, Brad Bondi and Martin Biegelman, two assistant directors of the commission, outlined their recommendations for investigative targets and hearings, according to Tom Krebs, another assistant director of the commission. Countrywide and Mr. Mozilo were specifically named; the memo noted that subprime mortgage executives like Mr. Mozilo received hundreds of millions of dollars in compensation even though their companies collapsed.
However, the two soon received a startling message: Countrywide was off limits. In a staff meeting, deputies to Phil Angelides, the commission’s chairman, said he had told them Countrywide should not be a target or featured at any hearing, said Mr. Krebs, who said he was briefed on that meeting by Mr. Bondi and Mr. Biegelman shortly after it occurred. His account has been confirmed by two other people with direct knowledge of the situation.
Mr. Angelides denied that he had said Countrywide or Mr. Mozilo were off limits. Chris Seefer, the F.C.I.C. official responsible for the Countrywide investigation, also said Countrywide had not been given a pass. Mr. Angelides said a full investigation was done on the company, including 40 interviews, and that a hearing was planned for the fall of 2010 to feature Mr. Mozilo. It was canceled because Republican members of the commission did not want any more hearings, he said.
“It got as full a scrub as A.I.G., Citi, anyone,” Mr. Angelides said of Countrywide. “If you look at the report, it’s extraordinarily condemnatory.”
An F.B.I. Investigation Fizzles
The Justice Department in Washington was abuzz in the spring of 2008. Bear Stearns had collapsed, and some law enforcement insiders were suggesting an in-depth search for fraud throughout the mortgage pipeline.
The F.B.I. had expressed concerns about mortgage improprieties as early as 2004. But it was not until four years later that its officials recommended closing several investigative programs to free agents for financial fraud cases, according to two people briefed on a study by the bureau.
The study identified about two dozen regions where mortgage fraud was believed rampant, and the bureau’s criminal division created a plan to investigate major banks and lenders. Robert S. Mueller III, the director of the F.B.I., approved the plan, which was described in a memo sent in spring 2008 to the bureau’s field offices.
“We were focused on the whole gamut: the individuals, the mortgage brokers and the top of the industry,” said Kenneth W. Kaiser, the former assistant director of the criminal investigations unit. “We were looking at the corporate level.”
Days after the memo was sent, however, prosecutors at some Justice Department offices began to complain that shifting agents to mortgage cases would hurt other investigations, he recalled. “We got told by the D.O.J. not to shift those resources,” he said. About a week later, he said, he was told to send another memo undoing many of the changes. Some of the extra agents were not deployed.
A spokesman for the F.B.I., Michael Kortan, said that a second memo was sent out that allowed field offices to try to opt out of some of the changes in the first memo. Mr. Kaiser’s account of pushback from the Justice Department was confirmed by two other people who were at the F.B.I. in 2008.
Around the same time, the Justice Department also considered setting up a financial fraud task force specifically to scrutinize the mortgage industry. Such task forces had been crucial to winning cases against Enron executives and those who looted savings and loans in the early 1990s.
Michael B. Mukasey, a former federal judge in New York who had been the head of the Justice Department less than a year when Bear Stearns fell, discussed the matter with deputies, three people briefed on the talks said. He decided against a task force and announced his decision in June 2008.
Last year, officials of the Financial Crisis Inquiry Commission interviewed Mr. Mukasey. Asked if he was aware of requests for more resources to be dedicated to mortgage fraud, Mr. Mukasey said he did not recall internal requests.
A spokesman for Mr. Mukasey, who is now at the law firm Debevoise & Plimpton in New York, said he would not comment beyond his F.C.I.C. testimony. He had no knowledge of the F.B.I. memo, his spokesman added.
A year later — with precious time lost — several lawmakers decided that the government needed more people tracking financial crimes. Congress passed a bill, providing a $165 million budget increase to the F.B.I. and Justice Department for investigations in this area. But when lawmakers got around to allocating the budget, only about $30 million in new money was provided.
Subsequently, in late 2009, the Justice Department announced a task force to focus broadly on financial crimes. But it received no additional resources.
A Break for 8 Banks
In July 2008, the staff of the S.E.C. received a phone call from Scott G. Alvarez, general counsel at the Federal Reserve in Washington.
The purpose: to discuss an S.E.C. investigation into improprieties by several of the nation’s largest brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities.
These investments carry interest rates that reset regularly, usually weekly, in auctions overseen by the brokerage firms that sell them. They were popular among investors because the interest rates they received were slightly higher than what they could earn elsewhere.
For years, companies like UBS and Goldman Sachs operated auctions of these securities, promoting them as highly liquid investments. But by mid-February 2008, as the subprime mortgage crisis began to spread, investors holding hundreds of billions of dollars of these securities could no longer cash them in.
As the S.E.C. investigated these events, several of its officials argued that the banks should make all investors whole on the securities, according to three people with knowledge of the negotiations but who were not authorized to speak publicly, because banks had marketed them as safe investments.
But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their “best efforts.”
This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Mr. Alvarez declined to comment, through a spokeswoman.
An S.E.C. spokesman said: “The primary consideration was remedying the alleged wrongdoing and in fashioning that remedy, the emphasis was placed on retail investors because they were suffering the greatest hardship and had the fewest avenues for redress.”
A similar caution emerged in other civil cases after the bank bailouts in the autumn of 2008. The S.E.C.’s investigations of financial institutions began to be questioned by its staff and the agency’s commissioners, who worried that the settlements might be paid using federal bailout money.
Four people briefed on the discussions, who spoke anonymously because they were not authorized to speak publicly, said that in early 2009, the S.E.C. created a broad policy involving settlements with companies that had received taxpayer assistance. In discussions with the Treasury Department, the agency’s division of enforcement devised a guideline stating that the financial health of those banks should be taken into account when the agency negotiated settlements with them.
“This wasn’t a political thing so much as, ‘We don’t know if it makes sense to bring a big penalty against a bank that just got a check from the government,’ ” said one of the people briefed on the discussions.
The people briefed on the S.E.C.’s settlement policy said that, while it did not directly affect many settlements, it slowed down the investigative work on other cases. A spokesman for the S.E.C. declined to comment.
Attorney General Moves On
The final chapter still hasn’t been written about the financial crisis and its aftermath. One thing has been especially challenging for regulators and law enforcement officials: balancing concerns for the state of the financial system even as they pursued immensely complicated cases.
The conundrum was especially clear back in the fall of 2008 when Mr. Geithner visited Mr. Cuomo and discussed A.I.G. Asked for details about the meeting, a spokesman for Mr. Geithner said: “As A.I.G.’s largest creditor, the New York Federal Reserve installed new management at A.I.G. in the fall of 2008 and directed the new C.E.O. to take steps to end wasteful spending by the company in order to protect taxpayers.”
Mr. Cuomo’s office said, “The attorney general went on to lead the most aggressive investigation of A.I.G. and other financial institutions in the nation.” After that meeting, and until he left to become governor, Mr. Cuomo focused on the financial crisis, with mixed success. In late 2010, Mr. Cuomo sued the accounting firm Ernst & Young, accusing it of helping its client Lehman Brothers “engage in massive accounting fraud.”
To date, however, no arm of government has sued Lehman or any of its executives on the same accounting tactic.
Other targets have also avoided legal action. Mr. Cuomo investigated the 2008 bonuses that were paid out by giant banks just after the bailout, and he considered bringing a case to try to claw back some of that money, two people familiar with the matter said. But ultimately he chose to publicly shame the companies by releasing their bonus figures.
Mr. Cuomo took a tough stance on Bank of America. While the S.E.C. settled its case with Bank of America without charging any executives with wrongdoing, Mr. Cuomo filed a civil fraud lawsuit against Kenneth D. Lewis, the former chief executive, and the bank’s former chief financial officer. The suit accuses them of understating the losses of Merrill Lynch to shareholders before the deal was approved; the case is still pending.
Last spring, Mr. Cuomo issued new mortgage-related subpoenas to eight large banks. He was interested in whether the banks had misled the ratings agencies about the quality of the loans they were bundling and asked how many workers they had hired from the ratings agencies. But Mr. Cuomo did not bring a case on this matter before leaving office.
Investors Bound for Shock If Rising Rates Sink Bonds, Cohen Says
By Christopher Palmeri
April 20, 2011
Investors who poured more than half a trillion dollars into bond mutual funds since 2007 will experience a market crash when interest rates rise, according to Marilyn Cohen, a Los Angeles money manager.
Cohen lays out a grim scenario in “Surviving the Bond Bear Market” (John Wiley & Sons Inc.), co-written with husband Chris Malburg. Rates will surge if the global economy strengthens or because investors lose faith in governments with growing deficits, said Cohen, whose book came out this month. Standard & Poor’s this week put a “negative” outlook on U.S. credit, citing the risk that leaders will fail to curb debt.
“The baby boomers, who really have been all-in to all kinds of bonds and bond funds since the end of the credit crisis, they’ve never lived through a bear market with skin in the game,” Cohen said in a telephone interview. “It’ll freak people out.”
Fixed-income mutual funds took in net deposits of $645 billion from 2008 through 2010, according to the Washington- based Investment Company Institute. Cohen, who oversees $325 million as chief executive officer of Envision Capital Management Inc., said falling bond prices will lead to a wave of sales, much as the 2008 financial crisis triggered a 46 percent drop in the Standard & Poor’s 500 Index before the U.S. stock- market benchmark bottomed out in March 2009.
Cohen, 61, worked as an equity analyst at William O’Neil & Co. and as a bond broker at Cantor Fitzgerald & Co. before founding her firm, which manages fixed-income portfolios for individuals, 16 years ago. She writes a Forbes Magazine column and a newsletter on bond investing. This is her third book.
‘Bad to Terminal’
Cohen warned in November against California’s general obligation bonds because of the state’s deficits, saying, “The news headlines are going to continue to go from bad to terminal.” Since then, yields have risen to 4.44 percent from 4.09 percent.
Investors can guard against the steepest losses by switching to shorter-term funds, or profit through bearish Treasury bets, Cohen said. A 2 percentage point climb in interest rates over the next 12 months, which she said is possible, could spur price declines of 14 percent in 10-year U.S. Treasuries, according to data compiled by Bloomberg.
“Investors should keep a substantial amount of cash on hand during the nuclear winter to take advantage of the opportunities that inevitably occur,” said Cohen, whose book features a mushroom cloud on its cover.
Not everyone agrees with her thesis.
“Fear sells,” said Chris Ryon, who co-manages $6.5 billion in municipal bonds at Thornburg Investment Management in Santa Fe, New Mexico.
Muni Market Risk
The risk of municipal bankruptcies is overblown, he said. The average default rate for investment-grade municipal debt in the 10 years after issuance from 1970 through 2009 was 0.06 percent, according to Moody’s Investors Service.
Investors are better off diversifying their holdings among funds with short, intermediate and long-term maturities than putting assets in cash at money-market yields close to zero, Ryon said.
Short-term interest rates might rise more than long-term rates, said Ryon, whose Thornburg Limited Term Municipal Fund averaged 4.1 percent gains in the five years through April 19, beating 89 percent of peers, according to Bloomberg data.
“The steepness of the yield curve makes the cost of insuring against rising rates very expensive,” Ryon said in a phone interview.
The 10-year U.S. Treasury note yielded 3.41 percent yesterday, up from the recent low of 2.38 percent on Oct. 7. Economists predict a rate of 3.91 percent in the fourth quarter, the average of 73 estimates compiled by Bloomberg.
Economic Indicators
Improvements in indicators such as employment, consumer confidence and housing starts could signal an economic upswing and interest-rate increases, Cohen wrote.
U.S. unemployment declined to 8.8 percent in March from a cyclical peak of 10.1 percent in October 2009. The Consumer Confidence Index decreased to 63.4 in March from 72 in February, the Conference Board said last month.
Federal Reserve Chairman Ben S. Bernanke said earlier this month he expects an increase in commodity prices to create a “transitory” boost in U.S. inflation, and that the central bank would act if he’s proven incorrect.
Interest rates will be driven higher if investors demand better returns from the U.S. government, which owes $14 trillion and faces a deficit estimated at more than $1.6 trillion this year.
China, the largest foreign owner of U.S. Treasury securities, cut its holdings to $1.15 trillion in February from $1.17 trillion in October, according to the Treasury Department.
‘Big Rumblings’
At worst, China “will stop buying U.S. Treasuries,” Cohen wrote. “At best they will drastically reduce their purchases. Either way, the consequences will be the largest interest-rate hikes in history.”
The Fed, which is purchasing an additional $600 billion in government bonds under a strategy dubbed QE2, may cause “big rumblings” when that program winds down at midyear, Cohen said.
Interest rates could also jump if a state such as Illinois or a city such as Los Angeles defaults on its debt, she said. Los Angeles, she wrote, has a fiscal 2012 deficit equal to about 10 percent of its general-fund expenditures.
“We’ve never been in a sea of red ink like we are in now,” Cohen said. “If things get really worse, we will have some cities and some counties, and certainly in all types of little projects, we’ll see more defaults. Historic numbers have absolutely no relevance.”
Muni-Fund Withdrawals
Meredith Whitney, the analyst who predicted Citigroup Inc.’s dividend cut, sparked a sell-off in municipal bonds when she told CBS Corp.’s “60 Minutes” in December the market could see at least “50 to 100 sizable defaults.”
Shareholders withdrew a net $43.1 billion from U.S. muni- bond funds from mid-November through April 13, according to the investment institute. Redemptions can force managers to sell securities to raise cash, speeding price declines.
Unlike previous bond bear markets, baby boomers are more invested in fixed-income securities, Cohen said. Of the $4.69 trillion in mutual funds held in retirement accounts as of Dec. 31, one-third was in bond funds or hybrid funds that own stocks and fixed income, according to the institute.
The Barclays Capital U.S. Aggregate Bond Index averaged 6 percent annual returns in the five years through March 31, versus 2.6 percent for the S&P 500.
ETF Strategies
Investors can benefit from the coming slide by purchasing exchange-traded funds, such as the ProShares UltraShort 20+ Year or iPath U.S. Treasury 10-year Bear ETN, whose prices move inversely to U.S. Treasury bonds, Cohen wrote.
They can buy floating-rate funds such as the Fidelity Floating Rate High Income Fund (FFRHX) or the Oppenheimer Senior Floating Rate Fund that purchase bank loans or corporate bonds whose yields rise along with interest rates, she said.
Another option is short-term ETFs whose holdings expire on a specific date, such as the iShares 2013 S&P AMT-Free Municipal Series or Guggenheim BulletShares 2012 Corporate Bond ETF. (BSCC) Funds with shorter maturities will maintain more value than longer- dated ones if rates climb, she wrote.
Municipal-bond investors should stick to prefunded securities whose principal and interest payments have been set aside by the issuer, minimizing credit risk, she said. She also suggested bonds backed by projects that provide essential services such as sewer and water facilities.
Cohen recommended putting as much as 25 percent of a portfolio in money-market funds, which invest in short-term Treasury bills and commercial paper. Their yields rise along with interest rates.
Higher Yields
Instead of buying low-yielding money funds, investors would do better to spread their cash between municipal-bond funds that hold short-term bonds and longer-term ones so they can capture higher yields and lose less principal if interest rates rise steeply, said Thornburg’s Ryon.
Large, well-run bond funds such as Bill Gross’s Pimco Total Return Fund (PTTRX) may be relatively unscathed, Cohen said. The fund had a minus 3 percent of its $236 billion in assets in U.S. government debt and 31 percent in cash last month. It can have a negative position by using derivatives to short, or wager against, the market.
“That’s the smartest guy in the room,” Cohen said. “He’s already in the bomb shelter.”
Brazil Raises Interest Rate to 12% to Lower Inflation from Two-Year High
By Andre Soliani and MatthewBristow
April 20, 2011
Brazil’s central bank slowed the pace of rate increases on a less-than-unanimous vote, saying they need to implement policy adjustments “for a sufficiently long period” to bring inflation to target next year.
Policy makers, led by central bank President Alexandre Tombini, voted 5-2 to raise the Selic rate by a quarter point to 12 percent from 11.75 percent, as expected by 15 of 58 analysts surveyed by Bloomberg. Forty-one analysts forecast a half-point increase and two predicted a pause. The bank said that two board members voted for a half-point increase.
The rate rise was smaller than the 0.5 percentage-point increases the bank implemented at its January and March meetings. Policy makers are betting that a combination of higher borrowing costs, curbs on consumer lending and government spending cuts will be enough to bring inflation back to its target in 2012, according to the central bank’s quarterly inflation report, published March 30.
Because of the “balance of inflation risks” and “uncertain moderation of domestic activity,” policy makers said in their statement that they see “the implementation of adjustment in monetary conditions for a sufficiently long period is the most adequate strategy to guarantee the convergence of inflation to the target in 2012,” according to their statement that accompanied their decision.
Currency Appreciation
The 6.4 percent appreciation of Brazil’s currency against the dollar in the past month may have been decisive in persuading policy makers to increase borrowing costs by 25 basis points rather than 50, said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York.
“The central bank has a better outlook for inflation than the market does,” Rangel said, speaking by telephone before the rate decision. “It’s clear to everyone that foreign exchange is a big thing here. That clearly adds to that more benign assessment of inflation.”
Consumer prices rose 6.44 percent in the year through mid- April, close to the upper limit of the central bank’s target range of 4.5 percent, plus or minus 2 percentage points.
Economists surveyed by the central bank expect consumer prices to rise 6.29 percent this year, and 5 percent in 2012, according to an April 15 survey. The central bank itself expects consumer prices to rise 5.6 percent this year, and 4.6 percent in 2012, according to its so-called reference scenario, which assumes an interest rate of 11.75 percent.
Commodity Prices
The central bank is betting that much of the quickening of inflation this year will fade as a supply shock caused by higher commodities prices recedes, said Pedro Tuesta, an economist for Latin America at 4Cast Inc.
“They feel that they don’t need to rush to bring inflation down, they can wait until 2012,” Tuesta said, speaking by telephone from Washington before the rate decision was announced. “They feel the macro-prudential measures will do the job. They feel they don’t need to hike that much.”
Food and beverage prices rose 2.15 percent in the first three months of 2011, after increasing 10.4 percent in 2010, according to data collected by the central bank.
Tuesta forecasts inflation of 6.3 percent this year, and 5.2 percent in 2012.
Not Tolerant
Finance Minister Guido Mantega said April 18 that Brazil is neither “patient” with nor “tolerant” of faster inflation, and that the measures already taken will be effective after a lag.
President Dilma Rousseff’s government cut 50.7 billion reais ($32.4 billion) from its 2011 budget, to help curb inflationary pressure. In December, the central bank raised banks’ reserve requirements to slow credit growth, and this month the Finance Ministry doubled to 3 percent the so-called IOF tax on consumer credit.
Total outstanding credit in Brazil’s economy rose 21 percent from a year earlier in February, to 1.74 trillion reais. Tombini told lawmakers March 22 that growth in consumer credit of more than 15 percent needs to be monitored “very carefully” to avoid “excessive risks.”
The central bank forecasts credit growth of 13 percent in 2011, Tulio Maciel, acting head of the bank’s economic research department, said March 29.
Retail Sales
Retail sales unexpectedly fell 0.4 percent in February, down from a revised 1.1 percent increase in January. Tombini said March 22 that the retail sector is “perhaps the best expression of the current state of the economy.”
The yield on interest rate futures maturing in May 2011 rose five basis points to 11.92 percent. The real gained 0.6 percent to 1.5662 per dollar, its strongest close since Aug. 4, 2008. The real’s gain in the last month is the third best among the 16-most traded currencies tracked by Bloomberg after the New Zealand and Australian dollars.
Chile’s central bank raised its benchmark interest rate for the 10th time in 11 months at its April 12 policy meeting. Peru’s central bank raised borrowing costs a quarter point to 4 percent in April, its ninth increase in 12 meetings. Colombia raised its benchmark interest rate by 0.25-point for a second straight month in March to 3.5 percent.
Inflation Actually Near 10% Using Older Measure
By John Melloy
April 12, 2011
After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.
Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.
Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, Shadowstats.com.
“Near-term circumstances generally have continued to deteriorate,” said John Williams, creator of the site, in a new note out Tuesday. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”
The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze “flaws in current U.S. government economic data and reporting…net of financial-market and political hype.”
Investors are anxiously awaiting the release of March’s CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.
“Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation,” said Williams, citing a 10 percent jump in gasoline prices in March, in the note.
“While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams’ statistics.
Newman uses recent comments from Walmart CEO Bill Simon that inflation is going to be “serious” to back up the much higher CPI figures from him and Williams.
“Given Walmart’s [WMT 53.31 -0.27 (-0.5%) ] sales of $422 billion, we think Mr. Simon has a good idea of what’s in the pipeline,” said Newman.
To be sure, the BLS argues that the changes it has made over the last three decades more accurately reflect a true change in the cost of living. For example, in response to its hedonic adjustments, the BLS web site states, “to measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change.
Still, going by recent strong comments from Federal Reserve officials, even members of the central bank must believe inflation is being underreported. Dallas Federal Reserve President Richard Fisher said in a speech last week that the central bank was reaching a “tipping point” as far as changing its policy so it can react to inflation. Maybe Fisher stumbled across Shadowstats.com. The voting member did, after all, mention Volcker in the same speech.
“The need to break the back of that (budgetary debt) spiral is as dire now as was the need for Paul Volcker to break the back of inflation in the 1980s,” said Fisher on April 8th. “As a result of his steadfast determination to press on with exorcising inflation, Mr. Volcker is today among the most respected living Americans and widely considered an exemplar for public servants worldwide.”
Government shutdown isn't our biggest worry. It's the coming fiscal train wreck
By Peter Morici
April 5, 2011
Original Article on YAHOO! NEWS
College Park, Md. – The economic consequences of a government shutdown can’t be calibrated on a spreadsheet with an economic model. It all depends on who wins public opinion – congressional Republicans or the president and Democrats.
Federal spending is out of control. From 2007, the last full year before the financial crisis, to 2011, the second full year of economic recovery, spending has jumped $1.1 trillion – 40 percent, when only a $200 billion increase would have kept pace with inflation.
For any other country, a deficit exceeding 10 percent of GDP would force austerity by sending interest rates on government bonds through the roof. Alas, the United States prints the world’s currency – the dollar – so it can inflate its way to solvency, and the bond market is starting to take that bet.
Enter the tea party – that troublesome bunch of youngsters pushing elder Republicans to stand up for fiscal solvency, end the madness, or halt funding for the government. 


Closing federal offices for a few days will have not a great, lasting impact. On reopening, the checks will go out. What counts, though, is whether the newly elected conservative majority in the House of Representatives keeps its mandate as measured by the polls.
Republicans don't have all the answersThrough 2022, the projected cumulative deficit is $11 trillion, and House Republicans have just released a plan to cut that figure by roughly $6 trillion over the next decade.
But the means for getting there are hardly attractive – vouchers for poor folks to purchase health care and block grants to the states to replace and reduce much of federal Medicare spending. That would morph President Obama’s vision of universal coverage into a victimization plan for the poor and even bigger budget crises for the states.
Americans pay too much for health care, spending 18 percent of GDP for less effective service than the Germans and Dutch receive spending only about 12 percent of GDP. Instead of taking on higher US drug prices, bloated health insurance and hospital administrative costs, and malpractice abuse, Republicans will tell the poor and the states to bargain with the big guys directly. Good luck with those ideas.
As for Social Security – hush, Republicans have a secret plan! The GOP will save money but so far has not revealed how. Private investment accounts, the favorite among free marketeers, would leave brokers smiling but the old poorer, judging by how most IRAs have faired since 2000.
Of course, if the president comes out of the government shutdown politically stronger, then its business as usual. But can it be?
Can't go back to business as usualThanks to huge deficits, inflation expectations are rising, and bond investors are becoming wary that the secular trend on 20- and 30-year US Treasury rates is up and up. That’s not just a cyclical adjustment this summer, as unemployment falls and the Federal Reserve ends quantitative easing. Rather, the upward trend is happening in large part because federal deficits in coming years are expected to be much larger than what President Obama's budgets project. He assumes too much cost savings and additional revenue from health-care reforms, and a 4 percent growth rate for the next four years, which few economists would endorse.
As the long rate on Treasuries rises, interest payments will absorb more and more federal revenue, and austerity will be foisted on the US government in the manner of Greece or Portugal. At that point, slashing as opposed to reason will prevail. Thoughtful reforms in health care and for Social Security become even more difficult.
It’s tough to forecast the consequences of a fiscal train wreck; but if the Democrats win the day in a government shutdown, it only postpones the inevitable day of reckoning.
The choices are clear. Congress must make responsible reforms to health care that harness drug, administrative, and tort costs now, and ensure solvency for Social Security by raising the retirement age to 70, or the bond vigilantes will ultimately end the party. Then more draconian changes will be forced on the American people who simply refuse to live within their means.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the US International Trade Commission.
Chinese firms face U.S. M&A hurdles
By Paritosh Bansal
April 4, 2011
(Reuters) - Chinese firms face a series of regulatory, political and procedural challenges in buying U.S. companies, which is driving them to other countries that are seen as friendlier, senior dealmakers said on Monday.
Chinese companies see the U.S. market as heavily regulated and intensely competitive, and they are looking elsewhere for buying opportunities when they can, bankers and lawyers said at the Reuters Global M&A Summit in New York.
"When you step away from technology and when you step away from natural resources, I am not sure that the U.S. is remotely high on the list of where Chinese corporates or entrepreneurs would like to acquire," said Cary Kochman, joint global head of M&A at UBS. (UBSN.VX)
"Unless there is this strategic compulsion in these particular areas I think it is unlikely we are going to see a widespread outbreak of M&A among the other sectors," Kochman said. "There is no question that Canada presents an easier environment for Chinese companies to acquire in."
Last year, Chinese companies spent $13.2 billion on deals in Brazil and $6.8 billion in Canada, compared with just $3 billion in the United States, Thomson Reuters data shows.
Such a low level of M&A between the world's two largest economies is likely a symptom of broader bilateral relations between the two countries and could have consequences on that relationship as well.
High-profile rejections of Chinese deals in the United States amid political opposition and national security concerns, as well as rejection of bids by U.S. companies in China, have made things worse in recent years.
Even when a Chinese company gets past all these hurdles, they have to overcome several procedural issues, ranging from the speed with which they could move to the certainty of closing when a deal is announced.
"It can range from simple blocking and tackling, such as how do you get two management teams together here in the U.S. quickly when visa issues may cause a six-week delay, to real issues and considerations," said Patrick Ramsey, head of Americas M&A at Bank of America Merrill Lynch. (BAC.N)
Howard Ellin, co-head of Skadden Arps' corporate transactions and M&A practices, added, "The regulatory path to approval or political path to approval in state-owned enterprises is complicated and not transparent in the way we are used to in our deals."
These hurdles mean that when Chinese buyers do participate in an auction they may need to pay a higher price to succeed, said Jeffrey Buckalew, Greenhill & Co's (GHL.N) head of North American corporate advisory.
"For them to be successful, because of the risks involved in dealing with them as a buyer, the price has to be higher," Buckalew said.
"Where it does affect deals that you don't see because it never gets announced that way is when you have a Chinese buyer -- which happened to us recently in a sale process -- and you choose to go with somebody else because you don't even want to deal with it," Buckalew said.
Still, in certain sectors the Chinese may be the obvious bidders and bankers said they then design the auction to make sure they can accommodate them.
"We have certainly included them in processes where they were an obvious potential buyer," Buckalew said.
These dealmakers also emphasized that deals with China are getting done despite these problems, such as CNOOC Ltd's (0883.HK) recent shale deals with Chesapeake Energy Corp. (CHK.N)
"We are all getting smarter as to how to get a deal done that makes sense with a Chinese entity, whether we are representing the Chinese entity or we are on the other side of it," Bank of America's Ramsey said.
Get used to triple-digit oil prices
By Shaun Polczer
April 6, 2011
Original Article on FINANCIAL POST
CALGARY — Oil is poised to average US$100 a barrel in 2011 for the first time, according to the latest round of quarterly commodity price forecasts.
Local experts are raising their 2011 oil price forecasts on the assumption that global unrest and a strengthening economic recovery will continue to provide support for crude prices over the balance of the year.
Benchmark U.S. crude came off 30-month highs on Tuesday, losing 13 cents US in New York to close at US$108.34. But despite the drop, oil prices have gained about 25% since the start of the year, and Ralph Glass, AJM Petroleum Consultants’ vice-president of operations, doesn’t expect them to come down soon.
“I always anticipated oil coming back to the $100 mark,” he said.
“Because of world events and even the disaster in Japan, the need for oil is just going to keep up there. I see far too many things to keep it up than throw it down.”
Oil companies use the forecasts, which are typically updated quarterly, to determine the value of their reserves and project future cash flows.
If it bears out, it would mark the highest average oil price on record.
Although oil prices previously spiked to $147 US in the summer of 2008, the average price that year came in around $99 US.
AJM originally predicted oil would return to the $100 US mark in 2016, but now expects it to stay in the triple digits past 2017.
FirstEnergy commodities analyst Martin King said his own $100 US forecast takes into account tighter supply and demand balances combined with a recognition that disruptions in places like Libya will take longer to sort out.
Reuters reported that Libyan rebels are prepared to sell oil cargoes, which would mark some of the first exports from the OPEC member since an uprising took hold last month.
“The fundamental stuff looks tighter, we’ve factored in a higher risk premium,” King said. “When all this unrest will settle down is anybody’s guess.”
Likewise Moody’s Investor’s Service increased its 2011 price assumptions by $10 US a barrel, but at $90 US it retains one of the most conservative outlooks.
“These figures represent baseline approximations —not forecasts —that help us evaluate risk when we analyze credit conditions for E&P (exploration and production) issuers,” said Terry Marshall, Moody’s senior vice-president.
In releasing the updated numbers, Moody’s increased its ranking for the entire integrated oil and gas sector to “positive” from “stable,” saying it expects improvements in financial performance, underpinned by higher oil prices and a gradual improvement in operating conditions, which will benefit downstream activities such as refining.
Although there is a broad agreement for bullish oil prices, there is no consensus for gas. Moody’s lowered its assumption to $4 US per million British thermal units while FirstEnergy increased its previous estimate by 10 cents to $4 US.
King said the cold winter means storage levels won’t be filled to the max by the end of the summer, which resulted in September price crashes in each of the past two years. He maintained that two extra weeks of cold weather this year could have whittled down reserves enough to put gas producers back on a positive footing.
AJM has maintained its intra-Alberta AECO gas price at $4.10 Cdn per gigajoule for 2011, but increased its long-term forecast to $6.50 Cdn by 2016, which Glass said also reflects the current increase in crude oil prices.
He agreed U.S. rig counts have to come down and storage levels have to fall further.
“It’s more longer-term,” he said, of the bullish outlook. “A lot of things have to happen first.”
Could 2011 Be Worse Than 2008? Don't Rule It Out
By Patrick Allen
April 6, 2011
2011 is beginning to look very like 2008 before the collapse of Lehman Brothers—except the numbers involved are much bigger this time around, according to Simon Derrick, the chief currency strategist at Bank of New York Mellon.
“The front-month Nymex crude future is [CLCV1 111.98 -0.31 (-0.28%)], for example, trading at almost exactly the same level that it was in early April 2008, FX reserves are growing at a similar pace globally and the euro is in demand as talk focuses on what the ECB will do next,” said Derrick in a research note.
Even dollar/yen [JPY=X 81.91 0.10 (+0.12%) ] is providing an eerie echo of the price action before Bear Stearns went under, according to Derrick.
The one major difference between early 2008 and early 2011 is that this time, the numbers are bigger.
"This time around, the battle is being staged in the euro zone and is taking place at both an institutional and sovereign level," he said.
“If the loans extended to Northern Rock and Bear Stearns collectively amounted to somewhere in the region of 72.5 billion euros, then how does this compare to the bailouts of Greece and Ireland?”
At 195 billion euros for Greece and Ireland alone the current bailout numbers are 2.7 times larger than the help given those two banks.
“It is apparent from the recent price action in the sovereign debt markets that Ireland and Greece still do not command the confidence of investors,” said Derrick.
“With the yields on Portuguese debt rapidly approaching the same levels being paid by Ireland, it seems reasonable to say that the collapse of confidence in peripheral euro zone states is gaining momentum rather than stabilising.”
The question for the wider market is whether the collapse of confidence in sovereign nations is more important than the loss of confidence in two second-tier banks.
China economist blasts dollar dominance on eve of G20
By Simon Rabinovitch
Original Article on YAHOO! FINANCE
BEIJING (Reuters) - Dollar dominance is sowing the seeds of financial turmoil, and the solution is to promote new reserve currencies, a Chinese government economist said in a paper published on the eve of a G20 meeting about how to reform the global monetary system.
Although not an official policy statement, the paper by Xu Hongcai, a department deputy director at the China Center for International Economic Exchanges, offered a window onto the domestic pressures bearing on Beijing to move away from a dollar-centric global economy.
The China Center, a top government think tank, has represented the Chinese government in organizing a forum on Thursday in Nanjing that will bring together finance ministers, central bankers and academics from the Group of 20 wealthy and developing economies.
Xu's paper, "Reform of the international monetary system under the G20 framework," was published in Chinese on the center's website this week (www.cciee.org.cn).
"Nations around the world have no way of restricting dollar issuance by the Federal Reserve. The current international monetary system lacks both stability and fairness," Xu wrote.
He said the global monetary system had fallen into a "dollar trap." While it would be sensible to reduce dollar holdings in official currency reserves, nations cannot easily cut back, because doing so would only lead the dollar to weaken and so hit the value of their assets, he said.
CHINA'S DILEMMA
China's dollar dilemma is particularly acute, though Xu did not say as much. China had $2.85 trillion in foreign exchange reserves at the end of last year, more than any other country. About two-thirds are estimated to be invested in dollars.
Beijing has repeatedly warned that loose U.S. monetary policy threatens the dollar, but it has continued to accumulate dollar assets at the same time, adding about $260 billion of Treasury securities last year, according to U.S. data.
With the Chinese government determined to limit yuan appreciation, it must buy a large amount of the dollars streaming into the country from its trade surplus and recycle those into U.S. investments.
Xu was not shy about proposing ways to remake the global monetary system.
For a start, he said diversification was needed, with several reserve currencies. Other countries could reinforce these currencies' status by buying or selling them to keep their exchange rates stable, Xu said.
He said the International Monetary Fund should also play a policing role.
"If any international reserve currency depreciates, the IMF would be responsible for issuing a timely alert, increasing international pressure to force the country in question to take measures to stabilize its currency," he said.
LITTLE SUPPORT
Xu's call for regular intervention to keep key currencies steady is unlikely to find much support among developed economies, which have come to view a system of floating, largely market-determined exchange rates as the most stable underpinning of the global economy.
When the G7 rich countries banded together to weaken the yen earlier this month, it was their first joint intervention since 2000 and came against the extraordinary background of speculator-driven yen appreciation after Japan's devastating earthquake, tsunami and nuclear crisis.
Xu also suggested that the Special Drawing Right, the IMF's unit of account, should gradually be built into a global reserve currency, although he noted this would still be a long time off.
Chinese central bank governor Zhou Xiaochuan said two years ago that the SDR would be better than the dollar as a supra-national reserve currency, disconnected from the interests of any single country.
With France at the helm of the G20 this year, French President Nicolas Sarkozy has seized on the SDR idea, promoting it as a possible alternative to the dollar-led global monetary order. But China itself appears to have cooled on the SDR, instead describing it as a largely symbolic issue.
For all the defects in the global monetary system identified by Xu, foreign officials, especially from the United States, have said that China has a much easier solution within its grasp.
By allowing the yuan to float freely, the Chinese central bank would no longer need to buy dollars flowing into the country and so could drastically slow its accumulation of foreign exchange reserves.
Pimco’s Gross Eliminates Government Debt From Total Return Fund
By Sosanne Walker
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.
Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the Newport Beach, California-based company’s website. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.
Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Federal Reserve approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.
Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, he wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.
Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old- fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.
Emerging-Market Debt
Gross last month increased holdings of emerging-market debt to 10 percent, the highest since October, from 9 percent in January. He cut holdings of mortgage securities to 34 percent from 42 percent in January.
The Zero Hedge website first reported the change in assets today. Pimco doesn’t comment on changes in holdings.
Treasuries returned 5.9 percent in 2010, according to Bank of America Merrill Lynch Indexes. The securities lost 0.6 percent so far this year.
Ten-year Treasury yields have risen for each of the past six months, according to data compiled by Bloomberg, the longest run since June 2006, as the economy showed signs of improvement and prices of commodities climbed. The 10-year yield fell six basis points to 3.48 percent today.
Gross kept the holdings of non-U.S. developed debt at 5 percent in February.
Inflation Outlook
Gross’ fund has returned 7.23 percent in the past year, beating 85 percent of its peers, according to data compiled by Bloomberg. It gained 1.39 percent over the past month.
As the Fed maintains its target rate at a record low range of zero to 0.25 percent and has made an increase in inflation a cornerstone of its monetary policy, Gross noted that inflation may be a bigger factor than many suggest.
Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.
“Bernanke tends to think this doesn’t matter -- at least in terms of headline versus the core -- we do,” Gross said.
Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the company’s website. The fund can have a so-called negative position by using derivatives, futures or by shorting.
Derivatives are financial obligations whose value is derived from an underlying asset. Futures are agreements to buy or sell assets at a later specific price and date. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.24 trillion of assets as of December.
Trade Deficit in U.S. Widened More Than Forecast in January
By Shobhana Chandra
The U.S. trade deficit widened more than forecast in January to the highest level in seven months as a surge in imports led by costlier crude oil overshadowed record exports.
The gap in goods and services increased 15 percent to $46.3 billion, from $40.3 billion in December, Commerce Department figures showed today in Washington. Imports jumped 5.2 percent, the most since March 1993, while exports grew 2.7 percent. The deficit was wider than the most pessimistic forecast in a Bloomberg News survey.
Imports were the highest since August 2008, reflecting a jump in oil prices and purchases of business equipment and consumer goods that may be sustained as the world’s largest economy expands. Exports of American-made goods are getting a boost from the weaker dollar and growth in Asia and Latin America, benefiting companies like Deere & Co. (DE)
“There’s no doubt the trade deficit will continue to widen through the quarter,” said Chris Low, chief economist at FTN Financial in New York. “The big increase in oil prices could cause some temporary pain. Companies are betting that demand will continue to be strong this year,” which will fuel gains in non- oil imports, he said.
The median estimate in a Bloomberg News survey was for a January deficit of $41.5 billion. Estimates of 74 economists ranged from $39 billion to $46 billion after a previously reported December shortfall of $40.6 billion.
Jobless Claims Rise
First-time claims for jobless benefits rose more than forecast last week from an almost three-year low, highlighting the uneven nature of the improvement in the labor market.
Applications for unemployment benefits increased by 26,000 to 397,000 in the week ended March 5, the Labor Department said today. Economists forecast claims would climb to 376,000, according to the median estimate in a Bloomberg survey.
Stock-index futures extended losses after the claims figures, with the March contract on the Standard & Poor’s 500 Index dropping 0.6 percent to 1,307.5 at 8:56 a.m. in New York. Treasuries rose, pushing down the yield on the benchmark 10-year note to 3.45 percent from 3.47 percent late yesterday.
Exports increased to $167.7 billion, boosted by record shipments of industrial supplies and more deliveries of motor vehicles and food.
Imports climbed to $214.1 billion from $203.6 billion in the prior month. Purchases of capital goods rose to a record $41.7 billion in January, while auto imports were the highest since February 2008.
Effect on Growth
Faster import growth explains why the trade balance may keep widening. Net exports helped to reduce the gap in the fourth quarter, adding 3.4 percentage points to economic growth, the most since 1980, Commerce Department figures showed last month. The U.S. grew at a 2.8 percent annual rate in the period.
The January trade figures showed the U.S. imported 290.7 million barrels of crude oil, the most since August. The value of oil imports increased to $24.5 billion from $22.5 billion. The average price per barrel of imported crude reached $84.34, the highest since October 2008.
Even after eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit widened to $49.5 billion from $46 billion.
The trade gap with China grew to $23.3 billion from $20.7 billion as imports rose and U.S. exports declined.
The U.S. shortfall with OPEC nations widened to $9.9 billion as imports increased to the highest level since October 2008.
Higher Oil
Crude oil prices are climbing as escalating violence in Libya raises concern that supply disruptions may spread through the region. Crude oil for April delivery was $104.37 a barrel yesterday at the close of floor trading on the New York Mercantile Exchange. The contract touched $106.95 on March 7, the highest intraday price since Sept. 26, 2008.
The trade gap with the European Union and Japan narrowed in January, today’s report showed. The trade deficit with Canada shrank, while the gap with Mexico widened.
Since reaching a one-year high on June 7, the dollar has fallen 9 percent against a trade-weighted basket of currencies. The drop makes American goods cheaper to buyers abroad and may keep spurring manufacturing, which expanded in February at the fastest pace since May 2004, according to the Institute for Supply Management’s factory index.
Among firms expanding overseas operations is Deere, the world’s largest maker of agriculture equipment. The Moline, Illinois-based company last month announced plans to almost double sales to $50 billion by 2018 by expanding outside the U.S.
Emerging Markets
“Where our efforts are going to be focused is in places like Asia, South America, and in addition to continuing to extend our position in North America,” Chief Financial Officer James M. Field said in a March 8 presentation. Deere got 35 percent of sales from outside the U.S. and Canada in the fiscal year ended Oct. 31.
Overseas demand is being complemented by a pickup in consumer spending, the biggest part of the U.S. economy, which is prompting companies to replenish inventories.
President Barack Obama, who has set a goal of doubling American exports in five years, yesterday said he will nominate Commerce Secretary Gary Locke to be the next U.S. ambassador to China, putting him at the forefront of managing one of the nation’s “most critical” relationships.
China’s trade surplus with the U.S. remains a thorny subject. China’s economy passed Japan’s to become the world’s second-largest last year, and the Asian nation is the second- biggest U.S. trading partner after Canada.
CNBC EXCERPTS: DR. ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN, ON CNBC'S "SQUAWK BOX" TODAY
By Jennifer Dauble
Following are excerpts from the unofficial transcript of a CNBC interview with Former Federal Reserve Chairman Dr. Alan Greenspan today on CNBC's "Squawk Box." All references must be sourced to CNBC.
GREENSPAN ON OIL:
"One thing that economists have been bedeviled by over the years is that the correlation between oil prices on a global basis, and global economic activity is far more precise than any evidence we have that it should be, in short, as a leading indicator, global oil prices are a very useful statistic, the only problem is we don't know fully where all the channels are."
GREENSPAN ON MOMENTUM:
"My view is that when oil prices get up to this area and start to move up even higher, you do have to start to worry, but there is no question at this stage that the momentum of this economy, leaving out the oil price issue, leaving out the Euro problems that have emerged, and very specifically leaving out the budget problems, this economy is really beginning to pick up momentum."
GREENSPAN ON MOMENTUM:
"There is no question at this stage that the momentum of this economy, leaving out the oil price issue, leaving out the Euro problems that have emerged, and very specifically leaving out the budget problems, this economy is really beginning to pick up momentum."
GREENSPAN ON FORECAST:
"The fascinating issue for forecasters is how do you factor in all of the negatives because there are not sort of modest rises here, modest costs here, these are big stuff on both the debit and the credit side, and how its going to work is not all together clear-- but for the moment this economy is moving."
GREENSPAN ON CURRENCY:
"When you have two faulty currencies, and the euro and dollar are both faulty, but probably almost equally faulty, so that the exchange rate between the dollar and Euro is not really moving all that much."
GREENSPAN ON GOLD:
"What the price of gold is saying, is that there elements within the marketplace that feel very uncomfortable with respect to what is going on generally, and its not an accident that you're finding that central banks are going in to buy gold and one of the reasons is gold is historically one of the rare media of exchange that doesn't require any collateral or backing, counter signatures, gold is universally acceptable as a means of payment."
GREENSPAN ON THE GOLD STANDARD:
"I'm not saying we can or should go back on the gold standard, that would be extremely difficult, and it would require such cast changes that this society has made no indication that it wants to do that, but I do think to get a sense of the stability of the system, watching the price of gold is not too bad."
GREENSPAN ON OIL PRICE:
"When we talk about the price that will hit us, keep an eye on brent and not on WTI, that has got technical problems."
GREENSPAN ON FORECLOSURES:
"I am assuming, and this is an assumption, that the foreclosures will begin to slow down, they are beginning to slow down, but the problem that we've had is such a large proportion of sales are distressed sales, and clearly if you have a significant proportion in that category, the overall price level is going down."
GREENSPAN ON HOME PRICES:
"Ultimately what is the determinate, as far as I'm concerned, is basically whether or not the price, excluding distressed sales, is falling, because the other is a statistical problem, I'm not saying its not real, it is real, but it gives you a false signal, so I'm watching the less distressed sales, now I must admit those prices have edged down recently somewhat to my surprise. But not enough to create where I think the problem is."
GREENSPAN ON MORTGAGES:
"When subprime went underwater, they were very rapidly going into foreclosure because they couldn't basically live with it, but the vast majority of conventional conforming mortgages, even those which were underwater, are none the less capable of being financed by the people who live in the homes the proportion of conventional conforming homes that will be defaulted, is really very small."
GREENSPAN ON THE FED:
"At this point the Fed is in the position where it can contract its balance sheet very significantly and the issue is will they be able to do it in proper timing? They think they can."
GREENSPAN ON BERNANKE:
"These are judgments that you have to make, I know Bernanke very well, we worked together, Ben and I went over a number of crisises together, I know how he functions, I have considerable trust in his judgment."
GREENSPAN ON THE FUTURE:
"You're dealing with very difficult problems. The one thing we all pretend we can do but we can't, is forecast, the future out there isn't very bright."
GREENSPAN ON DODD/FRANK:
"I look at whole series of mandates in Dodd/Frank and I think some of them are internally contradictory, and we're going to find out if that is indeed the case when the regulators start to implement."
GREENSPAN ON CONSEQUENCES:
"What we're going to find is that the unexpected consequences of much of the new regulation that's going to come as a result of Dodd/Frank is going to have to reversed, and that's going to create very high degrees of uncertainty."
GREENSPAN ON TOO BIG TO FAIL:
"The purpose of a financial system is to move the scarce savings of a society into physically productive assets, we in the United States have been very affective in doing that, poor savings but very high rates of return. You start moving some of that scarce savings to propping up companies, it does not go into effective uses, and the result is output per hour slows down and standards of living slow down. So too big to fail is critically an issue with respect to standards of living, you have to have failures, JOE (HAVE WE SOLVED IT?) no we have not."
GREENSPAN ON SAUDI OIL:
"Saudi Arabia is, look- its got three and a half million barrels of standby crude capacity, nobody else has standby capacity, so Saudi is a whole game."
After historic gains, are stocks nearing a bubble?
By Matthew Craft and David K. Randall
Original Article on YAHOO! FINANCE
Federal Reserve Chairman Ben Bernanke fielded the usual questions about inflation, tax cuts and government debt during a trip to Congress last week. Then a new question popped up: Is the Fed creating another bubble in stock prices?
Bernanke told the Senate Banking Committee he saw "little evidence" that was happening. But he cautioned: "Of course, nobody can know for sure."
That's the problem with bubbles. You only know you're in one when it pops.
This week is the second anniversary of the bull market that followed the financial meltdown. The Standard & Poor's 500-stock index is in its fastest climb since 1955, doubling since the market bottomed on March 9, 2009. In January and February alone, it's up 5.5 percent, the best start to a year since 1998.
Stock bubbles are famously hard to define. In 1999, for instance, investors thought it was perfectly rational to pay 62 times a company's earnings per share for a technology stock because it seemed dot-com companies couldn't lose. They only realized their error when many of those companies turned out to be nothing more than slick marketing ploys.
After two bubbles in the past 10 years -- tech stocks and real estate -- investors are suspicious of consistent gains that seem too good to be true. Some worry that the Fed's dramatic measures to pump up the economy mean the market's gains are an illusion. But a range of measurements suggest the market isn't in the midst of a bubble now. Instead, the stock market may simply be back to normal.
"The last two years were the great giveaway," says Stephen Lieber, the chief investment officer responsible for $6 billion in assets at Alpine Mutual Funds. Stocks had fallen so low during the panic that anyone who bought stocks on March 9, 2009, received a once-in-a-lifetime deal, he says. Caterpillar Inc., for instance, closed below $24 that day. It's now above $100.
While stock prices are much higher than they were two years ago, Bob Doll, market strategist for asset-management giant BlackRock, says investors aren't irrationally optimistic.
"Bubbles occur when there are high valuations, evidence of lots of borrowing to lever up to buy something," he says. "When I look around the landscape I have a hard time finding anything that looks like that."
One sign of a bubble would be if stocks rose far beyond what's normal by historical standards, says Bill Stone, chief investment strategist at PNC Asset Management Group. By that measure, it's not happening yet. According to Stone's research, since 1928, the average bull market runs almost five years and gains 164 percent. By comparison, this bull market has barely hit middle age.
The fundamentals of the stock market don't suggest a bubble, either. The S&P 500 index now trades at 17.4 times the earnings of its stocks over the past year. In March 1999, during the tech bubble, the multiple was 30.6.
Corporations are expected to make record profits this year and have enough cash -- $2 trillion -- to pay bigger dividends and start buying back shares of stock, both of which make stocks more valuable.
"Corporate balance sheets haven't been in better shape over the last 200 years, period," says Joe Davis, the chief economist at fund giant Vanguard.
And there's no ignoring the economic recovery. The economy was shrinking at almost a 5 percent annual rate when stocks bottomed in 2009. Now it's growing at almost a 3 percent pace. Businesses added 222,000 jobs in February, the most since April 2010, and unemployment has fallen almost a full percentage point in three months.
"The economy is absolutely justifying what is happening in the stock market," says Liz Ann Sonders, an investment strategist at Charles Schwab.
Some investors say there isn't a bubble yet but worry that the market is in the first stages of inflating one. Rob Arnott, the founder of investment firm Research Affliates, thinks the stock market is "dangerously" overpriced. He points to Apple, which has a $321 billion market value, making it the second-largest company in the world behind Exxon Mobil. By revenue, profits or payouts to investors, however, Apple fails to crack the top 20, Arnott says.
"They have wonderful products and a finger on the pulse of the consumer like nobody else," Arnott says. "But the second-largest on the planet must mean Apple is the second-largest source of profits. Boy, that's a stretch."
Judged by other measures of value, the companies that make up the S&P 500 look rich. Investors are paying 24 times inflation-adjusted earnings over the last decade. The historical average is 16. That ratio could climb if people push stock prices higher because they expect earnings to catch up. But Arnott believes people are already underestimating larger problems ahead. The U.S. government's $14 trillion in debt and a greater share of the work force hitting retirement are both bound to drag down economic growth. "That's quite a hurricane," he says.
Legendary investor Jeremy Grantham, chief investment strategist of GMO, has a knack for timing. In a letter to investors released in early March 2009, Grantham argued it was impossible to declare a bottom in the stock market but said its steep drop was reason enough to jump back in. He predicted that the combined efforts of the Fed and government spending would spur a stock rally "far in excess of anything justified by either long-term or short-term fundamentals."
Grantham remains a critic of the Fed's stimulus program but isn't willing to say stocks have reached bubble territory. At least not yet. If the S&P 500, at 1,321 on Friday, climbs to 1,500 by October, then watch out. At that point, he says, "it will be a market looking for an excuse to go. On the first piece of really bad news, it will make a determined effort to tank."
U.S. Cotton Is `Sold Out,' Boosting Australian Sales, Shippers Group Says
By Wendy Pugh
Cotton buyers have purchased more than 80 percent of the coming harvest from Australia, the fourth-largest shipper, stepping up the pace of advance sales as a shortage pushes prices to a record, an industry executive said.
The amount of so-called forward sales compared with usual levels of 50 percent to 60 percent at this time, Phill Ryan, a director of the Australian Cotton Shippers Association, said in an interview. “The U.S. is the biggest exporter in the world and they are sold out,” Ryan said yesterday in Canberra.
Cotton traded near a record today on signs global supplies will remain limited amid increased demand from China, helping to drive a surge in farm-commodity prices that’s also included rallies in wheat, corn and soybeans. The most-active May- delivery cotton contract ended yesterday at a 56 percent premium to the December price, indicating a near-term supply squeeze.
“The market is demanding cotton, which is why you have this massive invert,” said Ryan, who’s trading and export manager at Olam International Ltd. (OLAM)’s Queensland Cotton unit. Australia will next month begin shipping the harvest, which will be about a record 4 million bales, he said. Each bale weighs 227 kilograms, or 500 pounds.
The May contract jumped by the daily limit for a fifth day today, rising by as much as 7 cents to $2.076 per pound on ICE Futures U.S. and nearing Feb. 18’s all-time high of $2.0893. The contract for delivery in December, when the next U.S. harvest will be available, traded at $1.2580 at 3:29 p.m. in Singapore.
“Consumers around the world have clearly taken the view that they need to lock in supplies before the market potentially moves higher,” Luke Mathews, commodity strategist at Commonwealth Bank of Australia, said from Sydney today.
Supply Void
There’s a supply void in the market after Australian and South American crops are harvested and before an expected jump in Northern Hemisphere output later this year, Mathews said.
Cotton is the best performer over the past year on the UBS Bloomberg CMCI Index and prices have more than doubled. Sid Love, president of Joe Kropf & Sid Love Consulting Services LLC, said last month that cotton “bulls have gone berserk.”
China purchased more than 40 percent of Australia’s cotton shipments in 2009-2010, while Indonesia and Thailand were the next largest buyers, according to government data. Cotton output in China fell 6.3 percent to 5.97 million metric tons last year, the National Bureau of Statistics said on Feb. 28.
Cotton exports are also in short supply from central Asia and west Africa, and India may not be able to ship more than a flagged 5.5 million bale quantity, Ryan said.
Boost Output
Global production will rise 11 percent to a record 27.6 million tons in the year from Aug. 1 as higher prices prompt farmers to boost output, the International Cotton Advisory Committee said on March 1.
U.S. production may reach 4.24 million tons, the advisory committee said. The U.S. is forecast to be the largest exporter in 2010-2011 followed by India, Uzbekistan, Australia and Brazil, according to the U.S. Department of Agriculture.
Australian production may surge to a record 1.106 million tons for the next crop, which will be planted later this year and harvested in 2012, the Australian Bureau of Agricultural & Resource Economics & Sciences forecast March 1. That’s up from 839,000 tons from this season’s harvest, which was smaller than initially expected after floods in Queensland. The forecast for next year would equate to 4.9 million bales.
Australian production in 2012 would likely gain after rainfall raised the water level in reservoirs, Ryan said, without giving a forecast. The demand to ship cotton out quickly this year would stretch ginning capacity and that could be more of a problem next year, depending on prices, he said.
China's U.S. Treasuries holdings revised to $1.16 trillion
By David Lawder
February 28, 2011
(Reuters) - The U.S. government owes nearly a third more money to China than previously thought, the Treasury Department said on Monday as it revised Beijing's December holdings of U.S. Treasury debt sharply higher to $1.160 trillion.
The $268.4 billion increase over figures reported on February 15 was contained in a survey of foreign portfolio holdings of U.S. securities that provided fresh evidence that China has been buying Treasuries through broker-dealers in Britain.
The report's benchmark revisions attributed Treasuries holdings to China that were previously counted in other countries where the transactions were made, cementing Beijing's status as the largest U.S. creditor.
The Treasury report showed that UK December Treasuries holdings were revised downward to $272.1 billion from a previously reported $541.3 billion -- a nearly corresponding drop of $269.2 billion.
"This provides the most substantive evidence to what has been previously suspected -- that China has been increasingly transacting through the U.K.," said Alan Ruskin, global had of G10 foreign exchange strategy at Deutsche Bank in New York.
"It does suggest that there's more commitment on the part of China to finance the U.S. current account deficit. On the downside is the perception that the United States is more beholden to the Chinese," he added.
However, it also means that China has an even bigger stake in Washington's ability to bring its deficits under control and avoid a major market decline in its debt prices.
Analysts and officials across the Group of 20 major economies say that China has had to purchase vast amounts of U.S. assets in to keep its currency from rising against the dollar.
While Beijing has allowed the yuan to rise about 3.8 percent since last June, the currency is widely viewed as undervalued, giving China an export advantage. U.S. Treasury officials say they believe China will allow the yuan to appreciate more quickly to control growing inflationary pressures.
The preliminary report on foreign portfolio holdings showed that China's total holdings of U.S. securities as of June 30, 2010, including Treasuries, stocks, asset backed securities and other long-term and short-term debt rose to $1.61 trillion from $1.46 trillion a year earlier.
Total U.S. securities held by all foreign countries on June 30, 2010 rose 11 percent to $10.701 trillion from $9.641 trillion a year earlier. At that time, Europe was still in the throes of a sovereign debt crisis that had prompted many foreign investors to seek the safety of U.S. assets.
The Treasury used the survey data through June 30, 2010, to identify the ultimate holders of its debt and make the benchmark revisions to its latest Treasury International Capital data.
Other major foreign holders of Treasuries showed much smaller revisions. December holdings by Japan, the second-largest U.S. creditor, declined just $1.3 billion to 882.3 billion. Holdings of oil-exporting countries, the number three group, fell $6.1 billion to $211.9 billion.
But December Treasuries holdings in Russia were revised sharply upward to $151 billion from $106.2 billion, putting it in eighth place behind Taiwan, which saw its holdings revised $23.2 billion higher, suggesting that both countries had made offshore purchases.
Canada, meanwhile, saw its December Treasuries holdings revised sharply lower to $76.8 billion from a previously reported $134.6 billion, suggesting that its banks also may be purchasing on behalf of buyers elsewhere.
US Will Be the World's Third Largest Economy: Citi
By: Patrick Allen
February 25, 2011
The world is going to become richer and richer as developing economies play catch up over the coming years, according to Willem Buiter, chief economist at Citigroup.
"We expect strong growth in the world economy until 2050, with average real GDP growth rates of 4.6 percent per annum until 2030 and 3.8 percent per annum between 2030 and 2050," Buiter wrote in a market research.
"As a result, world GDP should rise in real PPP-adjusted terms from $72 trillion in 2010 to $380 trillion dollars in 2050," he wrote.
As the world watches oil prices rise sharply amid unrest in the Middle East, Buiter's analysis of the world's long-term prospects offer some hope that better times are ahead but if he is right power will shift from the West to the East very quickly.
"China should overtake the US to become the largest economy in the world by 2020, then be overtaken by India by 2050," he predicted.
One Way Bet on Emerging Markets?
Growth will not be smooth, according to Buiter. "Expect booms and busts. Occasionally, there will be growth disasters, driven by poor policy, conflicts, or natural disasters. When it comes to that, don't believe that 'this time it's different'."
The Most Extreme Cases of Hyperinflation, Ever
However, there are some easy wins for poor countries with big, young populations, he said.
"Developing Asia and Africa will be the fastest growing regions, in our view, driven by population and income per capita growth, followed in terms of growth by the Middle East, Latin America, Central and Eastern Europe, the CIS, and finally the advanced nations of today," he wrote.
"For poor countries with large young populations, growing fast should be easy: open up, create some form of market economy, invest in human and physical capital, don't be unlucky and don't blow it. Catch-up and convergence should do the rest," Buiter added.
Buiter has constructed a "3G index" to measure economic progress; 3G stands for "Global Growth Generators" and is a weighted average of six growth drivers that the Citigroup economists consider important:
A measure of domestic saving/ investment
A measure of demographic prospects
A measure of health
A measure of education
A measure of the quality of institutions and policies
A measure of trade openness
Using that index the nations to watch over the coming years are Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, the Philippines, Sri Lanka and Vietnam.
China Flexes Muscles With US As Biggest Creditor: WikiLeaks
By: Reuters
February 17, 2011
Confidential diplomatic cables from the U.S. embassies in Beijing and Hong Kong lay bare China's growing influence as America's largest creditor.
As the U.S. Federal Reserve grappled with the aftershocks of financial crisis, the Chinese, like many others, suffered huge losses from their investments in American financial firms — from Lehman Brothers to the Primary Reserve Fund, the money market fund that broke the buck.
The cables, obtained by WikiLeaks, show that escalating Chinese pressure prompted a procession of soothing visits from the U.S. Treasury Department.
In one striking instance, a top Chinese money manager directly asked U.S. Treasury Secretary Timothy Geithner for a favor.
In June, 2009, the head of China's powerful sovereign wealth fund met with Geithner and requested that he lean on regulators at the U.S. Federal Reserve to speed up the approval of its $1.2 billion investment in Morgan Stanley [MS 28.97 0.15 (+0.52%) ], according to the cables, which were provided to Reuters by a third party.
Although the cables do not mention if Geithner took any action, China's deal to buy Morgan Stanley shares was announced the very next day.
The two Treasury officials to whom the cables were addressed, Deputy Assistant Secretary for Asia Robert Dohner and Deputy Assistant Secretary for International Monetary and Financial Policy Mark Sobel, declined through a spokesperson to comment for this story.
The State Department also declined to comment.
China is America's biggest foreign lender, playing a crucial role in the U.S. Treasury auctions that allow Washington to borrow what it needs to keep its government running. At the same time, the United States is China's top export destination: America's trade deficit with the nation reached a record $273.1 billion in 2010.
Most economists describe the two economies as co-dependent.
The concern in certain influential Washington and Wall Street circles is that Beijing would leverage its position as the main enabler of U.S. overspending. And the cables provide a glimpse into how much politics inform relations between the world's two largest economies.
One cable cites Chinese money managers expressing concern that U.S. arms sales to Taiwan — a major, longstanding irritant in the relationship — could sour the Chinese public on Treasury purchases.
The subject of Taiwan came up during an Oct. 9, 2008 meeting the U.S. financial attache's office had with Liu Jiahua, Deputy Director General of China's foreign currency reserve manager, the secretive behemoth known as the State Administration for Foreign Exchange, or SAFE.
"Liu observed that the recent U.S. announcement of another arms sale to Taiwan made it more difficult for the Chinese government to explain its policies supportive of the U.S. to the Chinese public," reads an account of his comments in one of the cables.
The cables also indicate a high level of confidence among the Americans that China can't entirely stop buying U.S. debt, a sentiment shared by most economists who describe the dynamic as a form of mutually assured financial destruction. But the cables do show that China can and will pull back, with financial repercussions.
In the spring of 2009, with U.S.-China financial tensions running especially high, China's Treasury holdings fell to around $764 billion, down from nearly $900 billion. In July, after tensions between the two nations mostly subsided, its holdings rose to a record $940 billion.
During the financial turmoil, the cables show that Beijing also shifted its portfolio away from longer-term Treasury notes, which helped drive up America's long-term borrowing costs.
The collapse of Lehman had a swift and powerful impact on SAFE.
"Several interlocutors have told us that Lehman was a counterparty to SAFE in financial transactions and as a result SAFE suffered large losses when Lehman collapsed," Deputy Chief of Mission at the U.S. Embassy in Beijing Dan Piccuta wrote in a cable to Washington on March 20, 2009.
The hit to its balance sheet is likely what prompted a Chinese official to tell a U.S. diplomat months earlier that SAFE was afraid to re-enter the U.S. repo market — that is, it was reluctant to resume lending its short-term Treasuries to counterparties wanting to use them as collateral in cash loans.
On Oct. 9, 2008, officials from the U.S. embassy's office of the financial attache in Beijing met with SAFE Deputy Director General Liu Jiahua.
"SAFE is very concerned over the danger involved in lending U.S. Treasuries to U.S. financial institutions in the repurchase agreement market," Liu said.
Liu said SAFE's confidence in U.S. banks had been shaken.
SAFE had exited the repo market, which is a way for corporations and financial institutions to borrow overnight.
The cable continues, "Liu remained noncommittal on the possible resumption of lending, but agreed that SAFE had sufficient confidence in those institutions and would consider a system whereby the Federal Reserve or other U.S. government agency would act as a guarantor." Public opinion clearly rattled China's financial leaders.
One cable shows Liu citing an internet discussion forum, saying "the Chinese leadership must pay close attention to public opinion in forming policies." The U.S. government does not appear to have offered the Chinese a special setup guaranteeing U.S. banks.
Instead, the cables show, American diplomats reassured the Chinese by pointing out that Washington had infused banks' balance sheets with $700 billion in fresh capital, effectively propping up the banking system.
China holds hundreds of billions of dollars in debt issued by Fannie Mae and Freddie Mac, the housing agencies known as Government Sponsored Entities, or GSEs.
Like many other investors, it purchased agency debt before the crisis with the expectation that Fannie and Freddie were implicitly backed by the U.S. government.
In Sept. 2008, when the Treasury Department took control of the two GSEs, SAFE officials grew alarmed, the cables show.
Suggestions that senior GSE debt holders would have to take a haircut sparked a public outcry in China. The media warned that the government's currency manager faced monstrous losses similar to those suffered earlier by the nation's sovereign wealth fund, China Investment, after its investments in U.S. financial institutions blew up.
Media outlets had already heavily criticized the government for CIC's losses — a Financial Times story circulated by outlets such as China Daily speculated that CIC had lost $80 billion of the government's foreign reserves. In late 2008 Chinese newspapers routinely ran headlines with the words "Fannie Mae" and "Freddie Mac" spelled out in English.
To defuse the situation, the Treasury Department sent Undersecretary for International Affairs David McCormick to Beijing for two days in October 2008. The gesture went over well.
"All of Undersecretary McCormick's counterparts appeared to appreciate his willingness to come to Beijing in the midst of a financial crisis," Piccuta wrote in a cable dated Oct. 29, 2008. "Interlocutors stressed that unless leaders' concerns about the viability of banks and U.S. government-sponsored enterprises (GSEs) are assuaged, lower-level officials will be constrained from taking on greater counter-party risks."
The cables show McCormick trying to reassure the Chinese.
"In each meeting, Undersecretary McCormick emphasized that even though the U.S. government did not explicitly guarantee GSE debt, it effectively did so by committing to inject up to $100 billion of equity in each institution to avoid insolvency and that this contractual commitment would remain for the life of these institutions," Piccuta wrote.
Pacific Rift
The U.S. Federal Reserve announced a program to buy agency mortgage-backed securities and Treasuries in early 2009 to help flood the financial system with liquidity and stop Treasury yields from rising. But at first the purchases had very little impact on yields, which climbed steadily while the Treasury Department's auctions of new debt wobbled.
In China, top officials began publicly criticizing the inflationary side-effects of the Fed's program. They said the expansion of the Fed's balance sheet would devalue their Treasury holdings — and indeed, the Chinese public watched as Treasury yields rose and the older debt the Chinese had sank in value.
On March 13, 2009, Chinese Premier Wen Jiabao said at a press conference he was "concerned" about the security of China's investments in U.S. Treasuries. The March 20 cable, titled "Premier Wen's comments on U.S. Treasuries: Protect China's investments," documents a score of Chinese officials discussing their worries about U.S. Treasuries and the potential consequences of their uncertainty.
One economist at Caijing Magazine, which diplomats described as a "respected" Chinese outlet, told U.S. officials in late February "there has been a 'huge debate' within the government about China's holdings of U.S. Treasuries."
According to the cable, the Chinese economist told U.S. embassy officials that "SAFE has been shifting its portfolio toward shorter-term assets to reduce the risk of capital losses from higher inflation."
That information dovetailed with data, released many months later, showing the Chinese had indeed sold longer-dated Treasuries and bought more T-bills, which surged to $210 billion by May 2009. The move likely contributed to the rise in long-term yields.
Geithner in Beijing
Tensions remained high during Geithner's visit to China — his first as Treasury Secretary — on June 1 and 2, 2009.
Geithner, who has lived in China and other parts of Asia and holds a master's in East Asian studies, met with top Chinese officials, including the head of CIC, China's $200 billion sovereign wealth fund, and the ministers of finance and commerce.
The trip had been scheduled for months with a predictable agenda, but the meetings were full of spontaneous discussion and frank complaints from the Chinese, the cables reveal.
Xie Xuren, China's minister of finance, met with Geithner on June 1 and "expressed concern about the potential for inflation and the long-term sustainability of U.S. budget deficits," according to a cable detailing Geithner's visit, dated June 17, 2009.
The next day, June 2, CIC Chairman Lou Jiwei confided in Geithner that his fund had halted all new investments in 2008 after the financial crisis broke out, but had since scoped out a new stake in Morgan Stanley, the U.S. investment bank.
At the time of Geithner's visit, Morgan Stanley was planning a new share issue to raise funds to repay the government for the money it received during the financial crisis.
"Lou asked if it would be possible for the Fed to expedite approval of CIC's request that this investment be exempted from restrictions on investment by bank holding companies, as the customary two-week process for considering such exemption requests is too long to allow CIC to take advantage of this opportunity," according to the cable.
There's no record in the cable of how Geithner responded, but it was only a day later, on June 3, that CIC announced plans to purchase $1.2 billion in Morgan Stanley shares.
A spokesperson for the Fed said in the instance of the June 3 CIC investment, no application for an exemption was made to the Federal Reserve Board.
Home prices fall 4.1%, near 2009 lows
By: Les Christie
February 22, 2011
Original Article at YAHOO! FINANCE
Home prices took a big hit at the end of 2010, even as the rest of the economy gained steam.
National home prices fell 4.1% during the last three months of 2010, compared with 12 months earlier, according to the latest report from the S&P/Case-Shiller home price index, a closely watched indicator of market trends. They were down 1.9% compared with three months earlier.
"Despite improvements in the overall economy, housing continues to drift lower and weaker," said David Blitzer, spokesman for S&P.
And things may get a lot worse, said Robert Shiller, a Yale economist and half of the Case-Shiller team, in a web conference after the report's release.
"There's a substantial risk of home prices falling another 15%, 20% or 25% more," he said.
Shiller cited a few reasons for his bearish stance. The government is expected to reduce the presence of Fannie Mae and Freddie Mac in the housing market. These agencies currently provide loan guarantees for about two-thirds of mortgages. If they fade away, private mortgage money will have to fill the gap and the cost of mortgage borrowing will surely rise. That will hurt home prices.
There's also talk of possibly ending the mortgage interest tax deduction for many homeowners. Meanwhile, the weak economic recovery may be threatened by higher oil prices as a result of turmoil in the Mideast.
At the web conference, Shiller's index partner Karl Case wasn't much more optimistic.
"I see [the market] bouncing along the bottom with a slight negative trend," said Case, an economics professor emeritus at Wellesley College.
A widespread drop
On a seasonally adjusted basis, the national index surpassed the low it hit in the first quarter of 2009.
The decline was widespread, with 18 of the 20 large cities covered by a separate S&P/Case-Shiller index recording losses for the year. The only gains were posted by Washington, which was up 4.1%, and San Diego, which saw prices climb 1.7%.
The biggest loser for the year was Detroit, where prices dropped 9.1%.
"We're really close to being at the bottom again," said S&P's Maureen Maitland. "Last year's gains came courtesy of the tax incentives and the market is not holding up on its own."
The impact of homebuyer tax credits ended back last spring, and the two quarters of data since then reflect that. Prices fell steeply during the third quarter, down 3.3%. When the credit was in effect, prices rose consistently, up four out of five quarters starting in the second quarter of 2009.
S&P reported that both the company's 10- and 20-city indexes also fell month over month. In three cities, Detroit, Cleveland and Las Vegas, home prices have dropped below their January 2000 levels -- yes, you'd have to go back to the past millennium to find lower prices there.
Eleven markets, including New York and Chicago, have reached their lowest levels since home prices peaked in 2006 and 2007.
The losses were not unexpected, according to Brad Hunter, chief economist for Metrostudy, a housing market research firm.
"It's clear now that, going back to last fall, the apparent strength was a false strength," he said. "Now that the tax credits are gone, we're back to where the training wheels are off, to normal consumer demand."
He expects home prices to decline gradually throughout 2011, with markets picking up only when hiring increases substantially.
Is the Fed Building Sandcastles?
By Mario Rizzo
February 23, 2011
Original Article at THE CHRISTIAN SCIENCE MONITOR
Chairman Ben Bernanke says don’t blame the Fed for rapidly increasing commodity prices and probable bubbles forming in many investment markets throughout the world. I am just doing what is necessary for a recovery in the US and that is in the interests of the world. (See “Bernanke Defends US Policies” Wall Street Journal, February 19-20).
The reality is different. From a short-run point of view there is no reason for Bernanke to care what is going on in other nations. He will be judged “by history” by what happens here in the US. Therefore, he cannot be trusted to take the costs of policy – elsewhere in the world – fully into account. However, since bursting bubbles will affect asset markets here, he may begin to worry later.
And yet our fellow is boxed in. As he creates more money, and keeps interest rates low, in an effort to spur spending, much of the money will chase higher, riskier yields in foreign markets. From a US perspective, damage to foreign markets may just be the price we – oops they – have to pay.
But is the US successfully shifting the costs of its monetary policy to foreign countries? The prevailing view at the Fed and elsewhere seems to be as long as “inflation” is under control then the appropriate policy is further stimulus through quantitative easing. But wait a minute. The last two recessions – including the so-called Great Recession – were not preceded by bouts of inflation. Obviously, then, bad things can happen without general inflation.
Bernanke realizes that overall measured inflation is not increasing (as much as he thinks bad, that is) because (1) the prices of services are relatively stable and (2) food and other commodity-dependent prices are excluded, by definition, from core inflation.
On the first point, I should think that service prices – closer in general to the consumer stage – would not be as affected by low interest rates as those sectors farther from consumption. Certainly, at the early stages of massive credit expansion with low interest rates this is the case. On the second point, there is a sensible case to be made for excluding food and fuel if they are simply being “normally” volatile – that is, experiencing ups and downs due to weather or other temporary factors. (Let us put aside for the moment commodity price appreciation due to political unrest in the Middle East. The rise in commodity prices predates this.)
But we have other plausible explanations. Commodity prices are a frequent indicator of inflationary fears. They are also, because of their volatility, a good vehicle for speculative demands – money in search of higher returns. Furthermore, to the extent that other economies are over-heating, in part due to US policy, their demands for commodities of all kinds will increase. These demands are not sustainable – which is the point.
Closer to home, the stock market (S&P) has now experienced the fastest rise ever in the past two years, just about doubling. Is that because the Fed has made everything all better now and we are almost back we started from? Or are we witnessing the curious combination of firms being cautious about real investment and financial investors seeking yield? Money created out of thin air needs to find a home.
(Of course, the averages are helped a lot by bank stocks doing well as a result of the infusion of TARP money. But that has covered up the real negative value of the banking sector and built expectations of further rescues when behavior is not sustainable.)
A non-sustainable stock market rise based on expectations of bailouts if bubbles burst is a fine recipe for future difficulties.
I do not pretend to have definitive answers but there is certain complacency emanating from Bernanke that is not warranted either by his personal record at the Fed or by the facts. I know people will say that he must project self-confidence for the sake of the markets. I am not of big fan of purely atmospheric confidence, that is, of thinly-based confidence.
I fear we are living in a precarious world with the Fed building sand castles. But at least Bernanke has his self-confidence.
Obama budget plan shows interest owed on national debt quadrupling in next decade
By Steven Mufson
February 17, 2011
Original Article at THE WASHINGTON POST
Interest payments on the national debt will quadruple in the next decade and every man, woman and child in the United States will be paying more than $2,500 a year to cover for the nation's past profligacy, according to figures in President Obama's new budget plan.
Starting in 2014, net interest payments will surpass the amount spent on education, transportation, energy and all other discretionary programs outside defense. In 2018, they will outstrip Medicare spending. Only the amounts spent on defense and Social Security would remain bigger under the president's plan.
The soaring bill for interest payments is one of the biggest obstacles to balancing the federal budget, pushing the White House and Congress to come up with cuts deeper than previously imagined. Unlike with discretionary spending or even entitlement programs, the line item for interest payments cannot be altered except through other budget cuts.
The phenomenon is a bit like running up the down escalator. Without interest payments, the president's plan would balance the budget by 2017. But net interest payments that year are expected to reach $627 billion, up from $207 billion in the current fiscal year.
"This goes to the heart of why we have to address our fiscal problems," said Mark Zandi, co-founder and chief economist at Moody's Economy.com. "If we don't, we're going to get swamped by our interest payments."
Benjamin Friedman, a Harvard economic professor and author of "Day of Reckoning," about U.S. economic policy, said, "I think it's a reminder that we have a very serious problem and that the budget that's on the table does not address that problem."
Even with the cuts in Obama's budget, relief would not come until 2021, when the deficit as a percentage of gross domestic product would stop rising and plateau at 3.4 percent.
The explosion of interest payments comes from a double whammy of economic factors. First, the nation's debt is growing faster than the economy. Second, interest rates are rising. Over the next decade, net interest payments will amount to nearly 80 percent of the debt added, an indication of how past borrowing is forcing the country deeper into debt.
"We're running a gigantic deficit, and we're not growing very fast," said Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund. "We're on a dramatically unsustainable path."
The Obama administration's latest forecasts starkly illustrate the phenomenon of generation shifting, moving today's costs to future taxpayers. The borrowing the United States did over the past decade - to pay for the 2001 tax cut, the wars in Iraq and Afghanistan, and propping up the economy during the steep 2009 downturn - is coming due this decade.
As bad as the outlook is in the Obama budget proposal for fiscal year 2012, it could get worse. So far, interest payments have been relatively low because of the willingness of global investors to lend the U.S. government money at abnormally low interest rates. But that could change.
"The scary scenario - which I am not predicting but is a real possibility - is an incident of capital flight, where investors lose confidence in the U.S., causing interest rates to rise precipitously and pushing the budget deficit even further into the red," said N. Gregory Mankiw, a Harvard economics professor and former chairman of President George W. Bush's Council of Economic Advisers.
The Obama budget's assumptions include a substantial increase in rates. It predicts that the interest rate on 10-year Treasury notes will climb from 3 percent this year to 3.6 percent next year. It forecasts rates of 5 percent by 2015 and 5.3 percent at the end of the decade.
Short-term rates will rise even more sharply, from nearly zero now to 4 percent by 2015 in the Office of Management and Budget assumptions.
Rogoff calls the administration's forecast "reasonable," but he warns that the actual number is hard to know with any certainty.
"The basic issue is that when you hold a lot of debt you're vulnerable to shifts in sentiment and sharp rises in the interest rates," Rogoff said.
He said that combined federal, state and municipal debt in the United States is at a record high, beyond the famous post-World War II levels. Unlike interest payments made then, however, a huge portion of interest payments are flowing to investors in other countries, draining funds out of the U.S. economy. (There are other interest payments made to the Social Security fund, but because they shift money from one pocket of the government to another, they are not counted in the net interest numbers.)
Some positive developments could ease the interest payment crisis, including faster-than-expected economic recovery, higher-than-expected tax receipts and lower-than-expected government borrowing rates.
Ultimately, Rogoff said, the federal government should aim to reduce the amount of debt as a percentage of GDP. But for now, the U.S. government is still borrowing just to meet the interest payments on earlier borrowing.
"We are in a self-reinforcing, vicious cycle," Zandi said.
He compared the United States to European nations such as Greece or Portugal, or developing nations that in the past have received bailouts from the European Central Bank or the IMF.
"But there's no one we can get help from," Zandi said, noting that no economy is bigger than the U.S. economy. "There's no sugar daddy out there for us."
Global food prices rise to new highs, not expected to fall in coming months – UN
February 3, 2011
Original Article on UN NEWS CENTRE
Food prices around the world surged to a new historic peak in January, for the seventh consecutive month, the United Nations Food and Agriculture Organization (FAO) reported today, adding that the prices are not likely to decline in the months ahead.
According to the FAO, its latest Food Price Index, a commodity basket that tracks monthly changes in global food prices, averaged 231 points in January and was up 3.4 per cent from December last year – the highest level since the agency started measuring food prices in 1990. It added that prices of all monitored commodity groups surged in January, except the cost of meat, which remained unchanged.
“The new figures clearly show that the upward pressure on world food prices is not abating. These high prices are likely to persist in the months to come,” said Abdolreza Abbassian, an FAO economist and grains expert. “High food prices are of major concern especially for low-income food deficit countries that may face problems in financing food imports and for poor households which spend a large share of their income on food.”
Mr. Abbasian added that the “only encouraging factor so far” stems from a number of countries where good harvests helped domestic prices of some of the food staples remain low compared to world prices.
Late last year, the FAO warned that international food import bills could pass the one trillion dollar mark in 2010 with prices for most commodities up sharply from 2009. It also warned the international community to prepare for harder times ahead unless production of major food crops increases significantly in 2011.
In relation to its Food Price Index, FAO said the index has been revised, largely reflecting adjustments to its meat price index. The revision, which is retroactive, has produced new figures for all the indices, but the overall trends measured since 1990 remain unchanged.
The FAO Cereal Price Index averaged 245 points in January, up three per cent from December and the highest since July 2008, but still 11 percent below its peak in April 2008. The agency said the increase in January mostly reflected continuing increases in international prices of wheat and maize, amid declining supplies, while rice prices fell slightly, as the timing coincides with the harvesting of main crops in major exporting countries.
The Oils/Fats Price Index rose by 5.6 per cent to 278 points, nearing the June 2008 record level, a reflection of an increasingly tight supply and demand balance across the different oilseeds; while the Dairy Price Index averaged 221 points in January, up 6.2 per cent from December, but still 17 per cent below its peak in November 2007. FAO noted that a firm global demand for dairy products, against the backdrop of a normal seasonal decline of production in the southern hemisphere, continued to underpin dairy prices.
The Sugar Price Index averaged 420 points in January, up 5.4 per cent from December, as international sugar prices remain high, driven by tight global supplies. FAO said that its Meat Price Index, by contrast, was steady at around 166 points, as declining meat prices in Europe – the result of a fall in consumer confidence following a feed contamination scandal – was compensated for by a slight increase in export prices from Brazil and the United States.
Bond Market Flashes Inflation Warning
By: Mark Gongloff
Original Article on THE WALL STREET JOURNAL
The U.S. bond market has begun sending a message that inflation risks are rising and the Federal Reserve may be too slow to act, potentially marking a significant turning point in the economic recovery.
In the past week, Treasury-bond yields have jumped to their highest levels since last spring. Yields on 10-year Treasurys surpassed 3.5% and 30-year yields broke through 4.7%, which makes some worry could mean rates will march even higher.
Long-term rates have been gradually moving higher in response to an improving economy and rising commodity prices. But in recent days the increases in yields accelerated, a move many say is due to the worry that the Federal Reserve may be underestimating inflationary pressures in the economy, and may act too slowly to tame them. Inflation is bad for bondholders, eroding the value of their fixed returns and sending the prices of their bonds lower.
While raising alarm bells about inflation, the bond market is also indicating it sees no signs that the Fed will intervene. Short-term rates, which are most sensitive to Fed moves, have held relatively steady, causing the difference between two-year and 10-year notes to reach its steepest level since February 2010.
Such a steep "yield curve" is typically a bullish sign for the economy and the stock market. It could also, however, suggest that investors see a risk of overheating.
Even if they don't consider themselves bond-market "vigilantes"—the term for investors who try to change government policies by driving interest rates higher—the effect of their actions may still be the same.
Though most market watchers express faith that the Fed can still get ahead of the inflation pressures, the doubters are exacerbating a bond-market selloff.
"It seems to a lot of people that the Fed will be behind the curve and won't be ahead of inflation," said Ira Jersey, an interest-rate strategist at Credit Suisse. "We don't buy that, but future economic reality doesn't always have a significant impact on what happens in the market."
The yield on the 10-year Treasury note closed Friday at 3.647%, the highest since May 3.
That means the effects of last year's turmoil, which sent investors running to bonds and drove yields lower, have been erased. Bond yields and prices move inversely.
The yield on the 30-year Treasury bond ended Friday at 4.732%, its highest since last April. Adding to the almost-panicky feel in the bond market on Friday, traders circulated a chart of 30-year-bond yields showing that the yields had broken out of a 30-year trendline—a sign that the decades-long bull market in Treasurys may be drawing to a close.
Most in the market have suspected that the long bull market was likely over. Friday's move seemed to help confirm these suspicions.
The recent moves in many ways look like an echo of last spring, when yields rose as the economy started picking up steam, only to come sharply down amid the "flash crash" and European debt crisis. But there as some significant differences that indicate to some that this rise in yields may be the beginning of a longer trend.
The Fed isn't even halfway through the second round of its quantitative-easing program to buy $600 billion of bonds, commodity prices are much higher, and the economic recovery has been in progress for a year.
Rates are also rising because of gnawing concerns about government finances. That will be in fresh relief this week, with the Treasury planning to sell $72 billion of new notes and bonds.
"The more bonds they issue and the more they raise capital, the less favorable it is to the bond market," said Todd Colvin, vice president of interest-rate products at MF Global.
Medium-term Treasury notes, which have been the main focus of "QE2," have suffered the most in the recent selloff, in a sign that investors are giving up any lingering hopes that the Fed will embark on a third round of bond buying when this round ends in June.
Barclays Capital strategists on Friday raised their forecast for interest rates in 2011, due in part to the market's increasing focus on soaring prices for oil, food and other commodities.
In measuring inflation, the Fed prefers to strip out such costs, which they view as transitory. Fed policy makers prefer to focus on "core" inflation measures, which are still extraordinarily low.
Some in the market think that is a mistake.
"They perceive the Fed as getting behind the curve despite core inflation remaining well below the Fed's target," Barclays rates strategist Ajay Rajadhyaksha wrote. "This perception is unlikely to reverse quickly."
Angst about Fed policy hasn't been the only factor driving rates higher. For one thing, recent economic data have been surprisingly positive.
A stronger economy, which the Fed likely is welcoming, typically argues for higher interest rates.Though the labor market has been a stubborn laggard, investors appeared to take January's head-scratching drop in unemployment to 9% at face value.
Many in the bond market also focused on a 0.4% increase in average hourly earnings in January, the biggest since 2008. Rising wages can help inflation take root.
Still, many in the bond market feel the punishment for bonds may have run its course, at least for the time being. Disappointing economic data, another flare-up of European sovereign-debt worries, or any number of issues could push investors back into bonds.
"It does feel like a repeat of last spring," said George Goncalves, Nomura Securities International's head of rates strategy for the Americas. "There are still a lot of risks out there that are unresolved."
Policymakers see dollar losing reserve currency allure
By: Paul Carrel
Jan 28 (Reuters) - The U.S. dollar's role as a reserve currency will diminish in the coming years as Asian economies like China grow and countries seek to diversify their monetary holdings, policymakers said on Friday.
The U.S. Federal Reserve's policy of quantitative easing -- essentially printing money -- and a call by France to look at ways to wean the world off the dollar as the sole reserve money have put the U.S. currency in the spotlight.
"I'm more optimistic about the euro gaining strength as a potential reserve currency," Bank of Israel Governor Stanley Fischer said during a panel discussion at the annual World Economic Forum in Davos, Switzerland.
"We ourselves are diversifying into currencies which we would never have put in the reserves before, including the Australian dollar and so forth," he added. "I think people will diversify their reserves."
French President Nicolas Sarkozy is trying to rally the Group of 20 powers to the idea of a more varied monetary system after decades of the dollar being the world's reserve currency and a major unit of international trade settlement.
The dollar debate comes at a time when many countries are tempted to let their currency drop to promote exports and growth after the worst downturn since World War Two, even if that can be at each others' expense.
Bank of Canada Governor Mark Carney and Fischer anticipated that, in the long run, Asian monies would have a greater role as reserve currencies.
"I agree with Stan (Fischer) that over time there will be more of a multi-polar system. Other currencies will play a central role in reserves," he said. "The (Chinese) renminbi, over time, should have a role as a reserve currency."
Turkish Finance Minister Mehmet Simsek saw the United States' quantitative easing policy leading to a diversification of reserve holdings.
"If the U.S. continues the way it is ... certainly countries will look for alternatives because you can't print so much money and expect no consequences," he said.
"Ultimately the center of gravity is shifting toward the East," Simsek added. "Certainly, 10 years from now there could be a very different landscape."
Why You Can't Trust the Inflation Numbers
Original Article on THE WALL STREET JOURNAL
A surprising number of people on Wall Street will tell you not to worry too much about inflation.
After all, they'll say, just look at the numbers. The inflation picture is incredibly benign. In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low rate. And when you strip out volatile food and energy costs, they'll say, it's even lower—a meager 0.8%.
It doesn't stop there. Many economists will point out that wages are also rising by less than 2% a year. With so many people still out of work, goes the line, labor costs are going to stay low for a long time too. So what's the worry?
Clearly, a lot of investors agree. Inflation-protected government bonds, which people would buy to protect themselves if they were worried, have fallen in price in the past couple of months. Gold, another inflation hedge, is down. Ten-year Treasury bonds yield less—3.3%—than they did when President Eisenhower left office.
It's crazy. There is plenty to worry about. As you battle to manage your family's finances, be aware that there are three reasons why inflation needs to be on your radar screen.
• First, the official inflation numbers should be taken with a fistful of salt.
Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It's taken place under presidents of both parties. Each change in methodology has come with plausible-sounding justifications. But, as if by magic, each change has had the effect of flattering the numbers. Funny, that.
According to one rogue economist, John Williams at Shadow Government Statistics, if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%.
Mr. Williams is just one voice. But it makes sense to treat the government numbers with skepticism.
Under the official calculations, if steak prices boom, the government just assumes you buy cheaper hamburger instead. Presto—no inflation!
Or consider the case of Apple computers. We all know Macs are expensive. And we know Apple doesn't discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?
Ha. Not according Uncle Sam. Using a piece of chicanery called "hedonics," Uncle Sam calls this a price cut. His reasoning? You're getting more for the money. Today's $999 Mac is lighter, fancier and faster than last year's $999 Mac. So the government calculates that the "real" price has actually fallen.
How's that work in the real world? Try it. Go into your local Apple store and ask for 50% off thanks to hedonics. (If you do, please, please video the exchange and put in YouTube. We could all use a good laugh.)
Instead, the government is worrying about deflation, partly because of all the "cheap" MacBooks out there.
• The second reason to treat the official inflation figures with some mistrust is that they look backward. They register what just happened, not what's about to happen next.
OK, so the prices of many things haven't risen. Yet. But if the laws of economics mean anything, they will have to. Why? Because costs are rising.
Economists need to stop focusing just on labor costs. The world has plenty of surplus labor. But look at raw materials. Around the world prices are skyrocketing, from copper to cocoa. The United Nations Food Price Index has just hit a new record high. Oil's back near $90 a barrel. Wheat prices have nearly doubled since last summer.
Soaring food prices helped spark the revolution in Tunisia. According to Alex Bos, commodities analyst at Macquarie Securities in London, other governments—especially in North Africa—have responded with panic buying of foodstuffs.
Algeria alone, he says, has bought about 1.5 million tons of wheat this month—maybe triple its usual amount. Saudi Arabia is rushing to build up grain supplies. Corn supplies are as tight as they were back in the inflationary 1970s.
Sooner or later this is going to show up in your supermarket, or at the mall, in higher prices.
Just ask McDonald's. Or paints and plastics giant DuPont. Or Kleenex and Huggies maker Kimberly-Clark. Or 3M. Or Coach. These companies, and many others, have warned in recent days that they're getting squeezed by rising costs. They'll either eat the costs, which will hit the stock, or pass them on. How is this not inflation?
• The third reason to be mistrustful of the inflation picture? Simple. Economics.
We are flooding the world with extra dollars. The Fed simply invents as many as it likes. In the past couple of years, to try to keep the economy out of a tailspin, it has more than doubled the size of the so-called monetary base.
A dollar bill has no intrinsic value. Dollars are only "worth" something because you can exchange them for a haircut, or a pair of shoes, or a book from Amazon.com. So if you drastically increase the number of dollars without a commensurate increase in the number of goods and services, each dollar must, by definition, be worth less. That's another way of describing inflation.
So far, this inflation seems to have shown up in the unlikeliest of places. It's like Whac-A-Mole. The price of vintage wines has skyrocketed 57% in the past year, according to the Liv-ex Fine Wine 50 Index. Real estate prices across China are in a bubble. So long as the Chinese tie themselves to the U.S. dollar, they are importing our inflation. But, once again, one wonders how this can be called benign.
Is inflation certain? I'm wary of any predictions. Casey Stengel once said, "Never make predictions, especially about the future." Mr. Stengel would have lasted three days as a Wall Street analyst. But he won five World Series in a row, and he knew a thing or two.
Maybe inflation really will stay tame. But I'm not counting on it. I'm not buying the conventional wisdom, and neither should you.
Cutting Billions From Defense Won’t Save Medicare: David Pauly
By David Pauly
Original Article on BLOOMBERG BUSINESSWEEK
Jan. 28 (Bloomberg) -- U.S. citizens about 45 to 50 years old and contemplating retirement should know this: In 2029 primary Medicare benefits will be 15 percent less than what they might expect.
Eighteen years from now, the fund that pays for hospitalization expenses -- Part A benefits, if you’re up on the jargon -- will be exhausted, according to estimates in the 2010 report from Medicare’s trustees.
To keep paying benefits, Medicare would then have to depend entirely on revenue from payroll taxes and income taxes, which the trustees estimate will cover 85 percent of estimated outlays in 2029. By 2050, those revenue sources might cover only 77 percent of benefits.
Imagine the uproar today if President Barack Obama or any of the 435 members of Congress would say aloud that Medicare benefits for current workers might be 23 percent less than what senior citizens now get -- and which today’s workers help pay for.
This is why the talk among Democrats and Republicans about cutting costs never focuses on the plight of Medicare and or the equally worrisome future of Social Security.
All calls for reduced spending are welcome. The U.S. faces a fiscal 2011 budget deficit of $1.48 trillion, up from 2010’s $1.29 trillion, the Congressional Budget Office estimated this week.
Belt-Tightening
Obama wants to slash defense spending by $78 billion over five years and other discretionary spending by $400 billion over 10 years. Republicans demand $100 billion in immediate cuts.
These reductions may seem immaterial to a 40-year-old worker who wants to retire in about 2037 and collect a Social Security check. Yet that’s when the fund that pays for these benefits will be depleted, according to the Social Security trustees.
By that time, retirement checks would have to be slashed by about 25 percent, since the trustees estimate the taxes collected then would cover only about 75 percent of benefits.
Social Security’s separate fund for disabled workers is in worse shape: It runs out of money in 2018. Trustees say there would be enough in the main retirement fund to keep paying these benefits, though a change in the law would be required to do so.
In theory, Medicare Part B insurance, which covers doctor bills, and Part D, for drug coverage, are on solid ground indefinitely -- because premiums can be raised annually. But how large a cost will the beneficiaries bear?
Wrong Target
Estimates stretching out over periods longer than next week are suspect. The actuarial guessing by government trustees can vary widely from year to year. This uncertainty and the notion that 2029 and 2037 seem a long way off encourage politicians to blather about earmarks, which are insignificant in the large picture, rather than entitlements.
There’s no arguing, however, with statistics showing that the retirement of all those babies born after the end of World War II will overwhelm the ability of future workers to finance their benefits.
You’d never know it from the cowardice among politicians, but fixing Social Security is rather easy. It would have been even easier if begun earlier.
Possible changes include raising the retirement age to 72 from the current 67 (for people born after 1959), extending payroll taxes beyond the current limit of $106,800 on salaries and eliminating or reducing annual cost-of-living increases for beneficiaries.
Medicare is tougher because you can’t predict the costs of health care. Still, you can delay benefits until age 68 rather than beginning at 65. We can make sure that the provisions for cutting Medicare payments in the new health-care law are upheld.
None of this is new. Social Security and Medicare trustees lay out the grim financial future every year. What’s really sad is that the solutions do no real harm to anyone -- especially against the cost of doing nothing. Won’t someone please stand up?
GE CEO: China to Replace US as Top Economic Power
By: Chriystia Freeland
Original Article on FINANCIAL POST
NEW YORK — For Jeff Immelt, the CEO of General Electric, the 130 year-old American industrial behemoth, the financial crisis marked the end of the age of America’s economic dominance.
“I came to GE in 1982,” Mr. Immelt told me this week in Washington. “For the first 25 years, until the bubble crashed in 2007, the American consumer was the definitive driver of the global economy.”
But Mr. Immelt said the future will be different. For the next 25 years, he said, the American consumer “is not going to be the engine of global growth. It is going to be the billion people joining the middle class in Asia, it is going to be what the resource-rich countries do with their newfound wealth of high oil prices. That’s the game.”
A lot of that game will be played in China. At a moment when it is compulsory on the American right to pay homage to the exceptionalism of the United States, Mr. Immelt, a lifelong Republican, is matter-of-fact about China’s inevitable rise.
Indeed, reflecting this pragmatism, GE is this week signing a joint venture agreement in commercial aviation with a state-owned Chinese company that — despite any risk of handing over advanced technology — will mean sharing some of the most sophisticated airplane electronics.
“It is going to be the biggest economy in the world,” Mr. Immelt said of China. “The only question is when.”
Underlining this new reality, Mr. Immelt spoke after attending a White House summit of U.S. and Chinese CEOs, and before a state dinner for Chinese President Hu Jintao in Washington.
In the American public discourse, the big strain in the American-Chinese economic relationship is the renminbi, and what many Americans view as the government-manipulated undervaluation of the Chinese currency.
Some U.S. businessmen — who share Mr. Immelt’s enthusiasm for the Chinese market — are so keen to court Sino-investors that they are reluctant publicly to criticise China’s exchange rate policy.
Mr. Immelt is bolder. He supports the open complaints from Mr. Obama and his administration about the exchange rate — but not why you might think. For the GE chief, the renminbi is a valid focus of U.S. economic policy not because of its impact on his company’s bottom line, but because of its impact on American public opinion.
At a time of much worry that the American public debate is dumbed-down and parochial, the fact that currency exchange rates have become a populist issue says a lot about Americans, and their awareness of the impact of globalisation.
Here’s how Mr. Immelt explained GE’s perspective: “Is it the one, two, three, four or five issue for GE? It isn’t, because we make and sell things in so many different countries around the world.” Yet Mr. Obama was right to complain, Mr. Immelt added, because ”it’s important for the President to do the right things inside our country so that people feel like China can be a partner, and if it means sometimes you have to talk tough then I want the President to do that.”
But the GE chief had a warning for those Americans tempted to attribute China’s rise, and possibly their own country’s economic malaise, to the Chinese exchange rate.
“If the American people sit back in the comfort of their home, whether it is in Ohio or New York state, and think that the only reason the Chinese succeed is because of the cheap currency, they’re missing the point. And I think that’s dangerous.”
The China challenge, in Mr. Immelt’s view, is about much more than a manipulated exchange rate and “cheap labor.” “It is the adaptability, it is the speed with which they move, it is the unanimity of purpose, it is the productivity of thought,” he said, adding that when he visits his interlocutors at the Ministry of Railways in Beijing, the mandarins are at work on Sunday.
Nor does Mr. Immelt flinch when, in conversation, it is suggested that this “business model that works for them” is Communist authoritarianism. “That has been very effective,” he said. “They’re in their 12th five-year plan and they’ve done quite well.”
If you stop to recall that just 20 years ago America was the proud victor of the Cold War, confident it could export democracy and free-market capitalism to the rest of the world, that is quite a concession, particularly coming as it does from a conservative, millionaire, college-football playing, Cincinnati-raised businessman.
But it speaks to Mr. Immelt’s belief — shared by other global-minded American businesspeople — that the defining challenge for America in the 21st century is understanding that ”there are certain things that are taking place that you have to treat as real and important, and the emergence of the developing world is one of those.”
And Mr. Immelt thinks he knows what America needs to do to thrive in this changed world. “If you want to be a great country, which the U.S. has every right to want to be, you have got to be thinking about being a better exporter,” he said. ”Our only destiny can be as a high-tech exporter, that creates jobs, high-paying jobs ... Export-led growth is the key to national success.”
Happily for Mr. Immelt, that national destiny would be very good indeed for high-tech manufacturers, like — to take one not very random example — GE.
Both the approach, and the man who advocates it, are finding favor in a White House keenly aware that Mr. Obama must be seen as trying to reduce stubbornly high unemployment.
Expect to hear more on Friday, when Mr. Obama and Mr. Immelt, who is a member of the President’s Economic Recovery Advisory Board, are scheduled to visit GE’s birthplace in Schenectady, New York, and talk about ... how to create American jobs in the competitive global economy.
A Path Is Sought for States to Escape Their Debt Burdens
By: Mary Williams Walsh
Original Article on THE NEW YORK TIMES
Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.
For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.
House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.
Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.
Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.
“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”
Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.
“States have adequate tools and means to meet their obligations,” the report stated.
No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.
Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.
Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed. That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.
But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.
“The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.
Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.
He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.
“Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”
Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.
“We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.
A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard. It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.
“I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.
Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.
Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.
The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.
Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.
“I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”
NY State May Lay Off 15,000 Workers
By: Reuters
New York state may lay off 15,000 workers to help close next year's deficit of at least $9 billion, The New York Times reported on Thursday.
Governor Andrew Cuomo has about 132,000 workers under his control; tens of thousands of other workers at independent public authorities likely would not be affected.
The New York Times said it was not known if attrition or early retirement incentives would also be used to trim the workforce.
A spokesman for Cuomo said "any speculation was premature" until the governor finalizes the budget for the next fiscal year; it is due by about Feb. 1.
"Unfortunately, as the governor has said, given that the state is going through its worst fiscal crisis since the 1970's, large cuts and shared sacrificed will be required in order to close the $10 billion budget gap," Josh Vlasto, the Cuomo spokesman said by email.
New York also faces around a $1 billion deficit in the current budget, which ends on March 31, and Cuomo already has called for freezing wages for one year.
Oil up to near $92 on dollar slip, demand rise
Original Article on YAHOO! FINANCE
Oil prices rose to near $92 a barrel Wednesday, underpinned by a weaker dollar and increases to demand forecasts for this year.
By early afternoon in Europe, benchmark crude for February delivery was up 56 cents at $91.94 a barrel in electronic trading on the New York Mercantile Exchange. The contract, which expires this week, fell 16 cents to settle at $91.38 on Tuesday.
The euro and yen gained against the dollar, making crude less expensive for buyers holding those currencies.
The previous day the dollar fell to a one-month low against the euro as investors believe European officials will soon bolster the region's plans for countering its debt crisis.
Also supporting oil were higher demand forecasts released over the past two days from the Organization of Petroleum Exporting Countries and the International Energy Agency.
The Paris-based IEA predicts oil demand this year will rise to 89.1 million barrels a day, up from 87.7 million barrels a day in 2010. Last month the IEA forecast 2011 oil demand would hit 88.8 million barrels a day.
Markets were also awaiting the release of data on U.S. oil inventories, coming a day later than usual because of Monday's Martin Luther King Jr. holiday.
The American Petroleum Institute will release its report on oil stocks later Wednesday, while the report from the Energy Department's Energy Information Administration -- the market benchmark -- will be out on Thursday.
Data for the week ending Jan. 14 is expected to show draws of 2.2 million barrels in crude oil stocks and a rise of 2.8 million barrels in gasoline stocks, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.
In other Nymex trading in February contracts, heating oil rose 2.09 cents to $2.6668 a gallon and gasoline was up 1.75 cents at $2.4967 a gallon. Natural gas added 3.7 cents to $4.462 per 1,000 cubic feet.
In London, Brent crude was up 56 cents at $98.36 a barrel on the ICE Futures exchange.
Brent's movements near $100 "might attract some momentum traders that want to print the magic number, but we still do not see how the European crude oil market will be able to sustain the current premium to other regions," said a report from Commerzbank in Frankfurt.
US, Europe Better Bets as Inflation Hits: Marc Faber
Original Article on YAHOO! FINANCE
Rising inflation pressures in emerging market nations will make Europe and the US better investment opportunities in 2011, according to "Dr. Doom" Marc Faber.
Escalating food and energy prices will take a greater toll in poorer countries such as China and India, the author of the "Gloom, Boom and Doom" report said in a CNBC interview.
"We have money printing around the world and particularly in the US and that has led to very high food inflation and inflation in energy prices," Faber said. "In low-income countries like China, India, Vietnam and so forth, energy and food account for a much larger portion of personal disposable income than in the United States."
"So these countries are suffering from basic high inflation, and that reduces the purchasing power of people. So I think the monetary authorities in emerging countries are going to have to tighten or let inflation accelerate, both of which are not particularly good for equities," he said.
Investors looking to brace themselves against the coming inflation pressures should buy oil, which Faber said will rise regardless of what happens in the global economy.
Oil (BIS: US@CL.1) prices have risen sharply over the past two months, up 14 percent since their most recent low on Nov. 23. Other commodities, particularly grains and other food-related items, also have shown big gains.
If the economy recovers, then oil demand will rise, and if high inflation leads to global conflict then that will disrupt supplies and also lead to higher prices, he said.
"Either you're very bullish or very bearish," he said. "You should own some oil and energy equities."
Geithner warns of future intervention
By Alistair Barr
Original Article on MARKET WATCH
SAN FRANCISCO (MarketWatch) — Treasury Secretary Timothy Geithner warned that the U.S. government may have to take control of major financial institutions again if there’s a crisis as big as the last one, according to a report released Thursday by a group overseeing the Troubled Asset Relief Program.
“We may have to do exceptional things again if we face a shock that large,” Geithner told the Office of the Special Inspector General for TARP in December.
SIGTARP, as the oversight group is known, spoke with Geithner during its investigation of the government bailout of Citigroup Inc. (C 5.13, 0.00, 0.00%) . The group’s findings were released Thursday.
SIGTARP commended Geithner for his candor, but the group also said the Treasury secretary’s comments highlight that TARP has left a legacy of “moral hazard associated with the continued existence of institutions that. remain ‘too big to fail.’”
“It also serves as a reminder that the ultimate cost of bailing out Citigroup and the other ‘too big to fail’ institutions will remain unknown until the next financial crisis occurs,” SIGTARP added in its report.
Orderly wind down
When Geithner said “exceptional things” he wasn’t referring to old-school bailouts like the ones that saved American International Group Inc. (AIG 54.00, 0.00, 0.00%) or Citigroup, according to Treasury officials.
Instead, Geithner was referring to the possible orderly wind down of a failing institution under new powers given to regulators by last year’s Dodd-Frank bill.
The legislation allows a Financial Stability Oversight Council to set general criteria to identify firms that should be exposed to heightened prudential standards from the Federal Reserve. This may include higher capital or liquidity requirements.
If an institution still looks like it might fail, the legislation gives the Federal Deposit Corp. the tools to wind down the firm in a way that regulators hope will avoid the broader impact of an unruly collapse.
‘Gratitude’
Citigroup said in a statement Thursday that when the financial crisis hit in the fall of 2008, it was “well-capitalized and liquid,” but faced uncertainty resulting from “dysfunctional markets and a declining stock price.”
“The government’s investment removed that uncertainty,” the banking giant said.
“As Citi CEO Vikram Pandit has said, we owe a debt of gratitude to the U.S. Government and the American taxpayer for providing Citi with TARP funds,” the bank said. “This program restored confidence in the financial system and built a bridge to sound footing for many institutions.”
Citigroup shares slipped 3 cents to $5.05 in afternoon trading on Thursday. The stock is down 90% in the past five years.
‘Citi Weekend’
Citigroup almost failed in November 2008, even after getting $25 billion from TARP’s Capital Purchase Plan just weeks earlier, SIGTARP said in its report Thursday.
During a late-November weekend, officials including Geithner, then-Treasury Secretary Henry Paulson and FDIC Chairwoman Sheila Bair crafted a rescue for Citigroup that included asset guarantees and a $20 billion capital infusion in exchange for preferred stock in the company.
Participants called it “Citi Weekend,” according to SIGTARP.
Citigroup initially proposed that the U.S. government guarantee 100% of $306 billion in troubled assets in return for $20 billion of preferred stock. But officials rejected this and made a “take-it-or-leave-it” offer that required the bank to absorb the first $37 billion of losses in the asset pool, plus 10% of any losses beyond that, in return for $7 billion in preferred stock, SIGTARP’s report said.
Citi executives were concerned that the government’s terms were too expensive and some bank insiders recommended against accepting the bailout, SIGTARP said, without identifying these people.
$12 billion profit
In the end, Citi accepted the deal. It’s stock price stabilized, access to credit improved and the cost of insuring the company’s debt dropped, SIGTARP reported.
Just over a year later, Citi terminated the guarantee program and repaid the $20 billion it got from the government, the oversight group said. Citi also ended up absorbing all losses on assets that were guaranteed by the government. That totaled $10.2 billion by the time the guarantee ended, SIGTARP said.
The U.S. government ended up making more than $12 billion from its rescue of Citi, the group noted.
“The Government constructed a plan that not only achieved the primary goal of restoring market confidence in Citigroup, but also carefully controlled the risk of Government loss on the asset guarantee,” SIGTARP said.
‘Ad hoc’
Still, SIGTARP said that the criteria used by government officials to decide whether to save Citi were “strikingly ad hoc.”
The FDIC’s Bair told SIGTARP that the New York Fed warned told her that “problems would occur in global markets” if Citi failed.
“We didn’t have our own information to verify this statement, so I didn’t want to dispute that with them,” Bair added, according to SIGTARP.
Pandit told SIGTARP that no one knew what the systemic effect of a Citi failure would be, and that no one wanted to find out.
John Reich, then-director of the Office of Thrift Supervision, said during a Nov. 23 FDIC board meeting that “selective creativity” was used to decide which financial institutions were systemic and which weren’t.
There “has been a high degree of pressure exerted in certain situations, and not in others, and I’m concerned about parity,” Reich added, according to SIGTARP.
Migrate and respond
SIGTARP said this ad hoc approach to massive government bailouts can be avoided if regulators develop objective criteria and a “detailed roadmap” showing how these rules should be applied during future crises.
However, Geithner told SIGTARP that it’s impossible to develop such criteria because no one knows yet what the nature of another economic shock might be. Financial institutions and markets would just “migrate around” such rules, he added.
SIGTARP countered that regulators must not simply accept that Wall Street with work around regulation. Instead, they must “maintain the flexibility to respond in kind.”
2010 Had Record 2.9 Million Foreclosures
By Susanna Kim
Original Article on ABC NEWS MONEY
In 2010, 2.9 million properties received foreclosure filings -- an increase of 2 percent from 2009 and 23 percent from 2008, according to data from the website RealtryTrac.
The figures would have been worse, if not for a surprising decrease in foreclosures toward the end of 2010. December saw a 30-month low of foreclosures, with filings on 257,747 properties, a drop of 26 percent from the previous year. That was the biggest annual drop in foreclosure activity since RealtyTrac first published foreclosure data in January 2005.
"Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity," said James J. Saccacio, chief executive officer of RealtyTrac, in a statement. Some economists point to the year's high unemployment levels as a contributing factor to foreclosures.
Saccacio said the decrease in foreclosures in the fourth quarter was in part due to the controversy that started in the fall over foreclosure procedures. He said many major lenders temporarily halted some foreclosures.
Earlier this month, the highest court in Massachusetts ruled against U.S. Bancorp and Wells Fargo, invalidating two mortgage foreclosure sales because the banks did not prove they owned the mortgages at the time of foreclosure.
Rick Sharga, senior vice president of RealtyTrac, said it is possible that foreclosure figures could be even higher. RealtyTrac collected its data from over 2,200 counties, accounting for about 92 percent of the nation's population. The figures incorporate the most recent filing from all three phases of foreclosure: default, auction, and real estate owned properties that have been foreclosed on and repurchased by a bank.
"I think we're in for a rough year in 2011 in terms of the housing market," said Sharga. "It's likely that we're going to see a peak here in turns of foreclosure activity and bank repossessions. We think there will be about five percent price deprecation before the market bottoms out. And demand candidly will be a little weak this year."
Five states -- California, Florida, Arizona, Illinois and Michigan -- accounted for more than half of the 2.9 million total filings last year.
California had the most foreclosure filings: 546,669, or 4.08 percent of its total housing units.
The state of Nevada had the highest state foreclosure rate for the fourth year in a row with its 106,160 filings. One in 11 housing units in Nevada, or 9 percent, received a foreclosure filing last year.
Nevada's foreclosure activity increased in December by 18 percent from the previous month, and 14 percent from last year, despite efforts by legislators. Nevada's foreclosure mediation program, which started in 2009, requires lenders to meet in good faith with state authorities to make foreclosure decisions.
Arizona had the second highest foreclosure rate for the second year in a row with one in 17 housing units, or 5.73 percent, receiving at least one foreclosure filing. The state had a total of 155,878 foreclosures, a decrease of 4 percent from 2009.
Florida had the third highest foreclosure rate with one in 18 housing units, or 5.51 percent, receiving at least one foreclosure filing last year. Florida had 485,286 foreclosed properties in 2010, the second largest total after California.
The seven other states included in the country's 10 highest foreclosure rates by state were California (4.08 percent), Utah (3.44 percent), Georgia (3.25 percent) Michigan (3 percent), Idaho (2.98 percent), Illinois, (2.97 percent) and Colorado (2.51 percent).
Housing industry readies mortgage tax break fight
By Steve Kerch
Original Article on THE WALL STREET JOURNAL
ORLANDO, Fla. (MarketWatch) — The housing industry is girding for a fight in Congress to protect the mortgage interest deduction, along with a number of other housing-related tax breaks.
The National Association of Home Builders is putting a high priority on lobbying in favor of the mortgage-interest deduction, along with breaks such as the capital-gains exclusion on home sales, and has already created a website, Savemymortgageinterestdeduction.com., to begin rallying public support behind its position.
“This is a huge benefit for 35 million taxpayers a year. And the biggest beneficiaries are middle-class families and younger home buyers,” said Robert Dietz, who oversees tax policy and issues for the NAHB.
The mortgage-interest deduction has come under scrutiny before, but housing groups have always beaten back any attempts to do away with it. The National Association of Realtors and the Mortgage Bankers Association are two other powerful lobbies that have opposed those efforts in the past.
“There are a couple of sacred cows in the tax code and the mortgage-interest deduction is one of those. Politicians take it on at their own risk,” said J.P. Delmore, the senior federal legislative director for the home builders.
The builders were worried enough about the tax situation that they excluded the press from their sessions on tax policy here this week at the International Builders Show in order to formulate strategy.
In a press conference, Dietz and Delmore touched on at least some of what that strategy will entail.
“Without question we will be very aggressive in the media and we are prepared to do that,” Delmore said.
Another key point housing groups will focus on is the still shaky state of the housing market. Although estimates vary widely on what elimination of the mortgage-interest deduction could mean to home sales, Dietz said at least one analysis shows home prices falling 15% in that event.
But Delmore believes some sort of tax legislation is likely to advance in Congress either this year or next as lawmakers contend with mounting deficits, a presidential commission’s recommendations for reform and the 2012 expiration of tax breaks that Congress merely extended late last year.
One idea being floated is to replace the interest deduction with a 12% tax credit, but Delmore pointed out that for many middle-class taxpayers in the 25% tax bracket that would amount to a 50% cut.
And any elimination of the capital-gains exclusion could harm older American homeowners, many of whom bank on the equity in their home to bolster retirement savings and need to sell to cash out, Dietz said.
“Any changes will have a huge impact on current and future homeowners,” Delmore said. “Any tax reform would have to be pushed like the health-care reform was pushed or it will fizzle out.”
Delmore said that President Obama’s upcoming State of the Union address could provide clues as to how much impetus tax reform will get this year. The speech is set for Jan. 25.
Public strongly opposes debt ceiling increase: Reuters/Ipsos
By Andy Sullivan
(Reuters) - The U.S. public overwhelmingly opposes raising the country's debt limit even though failure to do so could hurt America's international standing and push up borrowing costs, according to a Reuters/Ipsos poll released on Wednesday.
Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending. Only 18 percent support an increase
The poll underscores the tough task ahead for U.S. lawmakers as the debt nears its current ceiling of $14.3 trillion. Treasury Secretary Timothy Geithner last week warned that a failure to raise the borrowing limit in the coming months could lead to "catastrophic economic consequences".
Republicans, who won control of the House of Representatives in November on a promise to scale back government, hope to pair any debt-ceiling hike with a commitment from President Barack Obama to reduce long-term spending.
Republicans have vowed to slash $60 billion from the budget as soon as March, but many of those cuts are not likely to be popular with the public.
WHAT TO CUT?
Only 24 percent say the country can afford to cut back on education spending, a likely Republican target, and 21 percent support cuts to law enforcement.
With the Pentagon fighting wars in Afghanistan and Iraq, 51 percent supported cutbacks to military spending.
Less than half, 45 percent, support an expected Republican effort to pare environmental enforcement.
Some 53 percent support cutting the budgets of financial regulators like the Securities and Exchange Commission, in spite of the widespread consensus that a lax regulatory atmosphere contributed to the devastating financial crisis of 2007-2009.
And 47 percent support cutbacks to national parks, which were shuttered for several weeks during the budget battles of 1995 and 1996.
Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program.
Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection.
The poll of 1,021 U.S. adults was conducted between Friday and Monday. It has a margin of error of plus or minus 3.1 percent.
At Least One Euro-Zone Country Could Go Bankrupt
Survey of German Bankers
At Least One Euro-Zone Country Could Go Bankrupt
Original Article on SPIEGEL ONLINE
Billions in loans have succeeded in pulling Greece and Ireland back from the brink of bankruptcy. But many bankers are still expecting the worst. A new Ernst & Young survey reports that almost half of German banking executives think at least one euro-zone country will go belly up.
Where will the euro crisis lead us next? Will Portugal really be the next euro-zone country to ask for help from the European Union's rescue fund? It would appear that the majority of investors are expecting it to. What's more, German banking executives even go one step farther: According to a recent survey of executives at 120 banks in Germany conducted by the management consulting firm Ernst & Young, almost half of them predict that at least one euro-zone country will go bust. Indeed, when asked whether they currently expected to see a sovereign debtor in Europe default, 47 percent of those questioned answered "yes."
Still, only a quarter of them said that they expected possible defaults to negatively affect their companies. Claus-Peter Wagner, the head of the financial services division of Ernst & Young's branch in Germany, said that: "The vast majority of surveyed institutions hold either no or very few bonds of the shaky countries and, consequently, do not have to fear any direct losses." Wagner also added that measures recently taken by the European Central Bank (ECB) to stabilize the bonds of weak euro-zone countries had been successful.
Nevertheless, Wagner did warn that there would be catastrophic consequences if one of these countries actually did become insolvent. "If some of the major banking houses are forced to make massive write-offs," Wagner said, "it would lead to renewed turbulence in the entire global securities market."
The ECB has recently being stabilizing the market by buying up the sovereign bonds of dangerously over-indebted euro-zone countries. Until the end of last week, the ECB had done this to the tune of roughly €74 billion ($96 billion). Dispute within Portugal's Central Bank
According to information obtained by SPIEGEL, Germany and France want to push Portugal to seek a bailout from the EU's rescue fund as soon as possible because they don't think the financially troubled country will be able to borrow funds on capital markets for much longer. Officials in Berlin and Paris deny exerting any pressure to make such a move. And Portuguese Prime Minister Jose Socrates insists that his country will be able to stick to its 2010 budgetary targets and does not need any assistance.
German Chancellor Angela Merkel has been cautioning against making any overly hasty judgments regarding the situation in Portugal. She intends to initially take a wait-and-see stance toward Portugal's reform efforts aimed at increasing stability. "From our point of view," Merkel told reporters Tuesday, "Portugal has undertaken what are obviously very significant and far-reaching measures."
The debate over whether Portugal will eventually be forced to ask for help has sparked controversy within the country's central bank. Teodora Cardoso, a member of the bank's six-member board of directors, has publicly entertained the idea of accepting EU funds -- and thereby pitted herself against her boss, Carlos Costa, the board's governor.
Last week saw an additional rise in the risk premiums for the sovereign bonds of weak euro-zone countries. Greece and Ireland have already accepted help from their fellow euro-zone member states and the IMF that came with stiff conditions. However, Tuesday's markets did bring some good news for Greece: At an auction of six-month T-bills, the Greek government was able to raise €1.95 billion instead of an expected €1.5 billion. According to the Finance Ministry in Athens, the interest rate on the papers was 4.9 percent.
According to the Ernst & Young survey, executives are predicting that 2011 will be a good year for their banks. For the next six months, 81 percent of the executives expect to see positive trends in their business operations, and 12 percent even expect them to be very positive. This last figure reveals a marked improvement in bank expectations from last June, when only seven percent of respondents were confident enough to predict very positive results.
China's Currency Reserves Rise to Record, Domestic Lending Exceeds Target
By Bloomberg News
China’s foreign-exchange reserves climbed by a record last quarter and lending exceeded the government’s annual target, increasing pressure on the central bank to tighten policies to rein in liquidity and inflation.
The currency holdings, reported by the central bank on its website today, rose by $199 billion to $2.85 trillion, the biggest quarterly gain since Bloomberg data began in 1996. Full- year yuan-denominated lending of 7.95 trillion yuan ($1.2 trillion) compared with a target of 7.5 trillion yuan.
The central bank may need to raise benchmark interest rates, boost reserve requirements for lenders and allow faster yuan appreciation, economists from Standard Chartered Plc and Credit Agricole CIB said. Policy makers may also experiment with more ways of encouraging outflows of capital, after expanding a program for exporters to park revenue overseas and letting some citizens invest directly abroad.
“All eyes are going to be on what new policies the central bank can bring to the table,” said Jinny Yan, a Shanghai-based economist at Standard Chartered. “But there’s still going to be a lot of excess liquidity in the market in the first half of the year.”
Yan forecasts three interest-rate increases this year with the first this quarter. Citigroup Inc. said today that the central bank may announce rate and reserve-requirement increases before or during a Lunar New Year holiday starting Feb. 2, to take effect afterwards.
Yuan Strengthens
The level of China’s currency holdings is a world record.
The Shanghai Composite Index closed 0.4 percent higher, paring a decline in the past year of about 13 percent. The yuan strengthened amid speculation that the central bank will allow gains ahead of President Hu Jintao’s visit to the U.S. next week. The currency climbed 0.3 percent to 6.6204 per dollar, the biggest jump since Dec. 30, as of 3:40 p.m. in Shanghai.
Gains in China’s currency holdings underscore global economic imbalances and claims that the yuan is undervalued, topics President Barack Obama has put on the agenda for his Jan. 19 meeting with counterpart Hu in Washington. The yuan has climbed about 3 percent against the dollar since officials scrapped in June last year a peg which had been in place since the global financial crisis.
China will increase the currency’s flexibility this year to cut the trade surplus and reduce inflationary pressure, central bank Deputy Governor Yi Gang said in China Forex magazine.
Hot Money
Today’s data may indicate a “huge surge” in inflows of hot money, or speculative capital, according to Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole. He estimated the current-account surplus contributed about 40 percent of last quarter’s increase. China yesterday reported a $13.1 billion trade surplus for December, the smallest in eight months, according to customs data.
Economists’ median estimate was for a $112 billion gain in the reserves after a $194 billion increase between July and September. China’s holdings may reach $3 trillion by June 30, UBS AG estimates.
The currency regulator is seeking to curb inflows of cash from investors attracted by China’s growth and the prospects for higher rates and a stronger currency. Officials are also testing measures to encourage Chinese businesses and investors to have more money offshore.
Investment Channels
A program to allow exporters to park revenue in overseas accounts was expanded nationwide from Jan. 1. The government has also allowed citizens in the eastern city of Wenzhou to make direct investments overseas, according to a Jan. 7 local government statement.
M2, the broadest measure of money supply, rose 19.7 percent in December from a year earlier, the central bank said today, the fastest pace since May. Economists’ median estimate was for a 19 percent increase. New local-currency lending was a higher- than-estimated 480.7 billion yuan in December.
“Liquidity in the banking system will be more than abundant and the central bank needs to tighten more aggressively,” said Kowalczyk. He estimates reserve requirements will climb 150 basis points, with benchmark interest rates jumping 50 basis points, by the end of June.
For the biggest banks, ratios stand at 18.5 percent, excluding any temporary increases not publicly announced. The key one-year lending rate is 5.81 percent.
Bank Lending
Officials will use differentiated reserve ratios to improve liquidity management, Governor Zhou Xiaochuan said in an interview published by the central bank’s China Finance magazine on Jan. 4. The system involves setting separate requirements for lenders according to their balance sheets.
The amount of cash in the economy could surge this quarter because of maturing central bank bills and the tendency for bank lending to be highest in the early months.
The People’s Bank of China will have 1.2 trillion yuan of bills issued through open-market operations falling due in the first quarter and 869 billion yuan in the second quarter, Kowalczyk estimated. Standard Chartered’s Yan forecast new lending in January could amount to 1 trillion yuan while Goldman Sachs Group Inc. says the figure could be higher.
“This is going to be a challenge for the PBOC to keep control over lending,” said Helen Qiao, a Beijing-based economist with Goldman Sachs. “But the so-called dynamic differential reserve requirement will act as a threat to any bank that extends too much lending that they will be punished.”
China’s four biggest banks may need to limit the growth in overall yuan lending to about 14 percent this year to avoid being punished under this new system, three people with knowledge of the matter said today. Outstanding local-currency credit rose 19.9 percent last year.
Zhou raised banks’ reserve ratios six times last year and boosted interest rates twice in the fourth quarter. The government also cracked down on property speculation after record lending helped the economy recover from the global financial crisis.
--Zheng Lifei and Li Yanping. With assistance from Jay Wang, Sonja Cheung, Sophie Leung and Luo Jun. Editors: Nerys Avery, Paul Panckhurst
Beatles `Revolution' Returns Four Decades Later: Matthew Lynn
By Matthew Lynn
“You say you want a revolution,” the Beatles sang in a song that was released in the year that students across Europe famously took to the streets to protest against the established order.
It may not quite be 1968 all over again. Even so, there is a whiff of youthful rebellion in the air. Young people across the region have been staging angry demonstrations in the last few months as government austerity measures take effect.
The kids have a better case than their parents did. Even if they are doing so incoherently, the protesters are making a valid point: Europe’s young are being offered a rotten deal.
What we are witnessing may well be the first shots in a long generational war. Whereas the last century was dominated by a battle between classes over how to divide up the economic pie, this one may be over how you divide it up between generations.
The protests have been hard to ignore. Greek students took to the streets in October over harsh budget cuts.
In the U.K., plans to triple university fees provoked riots. Demonstrators attempted to smash their way into the Treasury and attacked a car carrying Prince Charles and his wife, Camilla, through central London.
In Rome last month, students hurled bottles, threw smoke bombs and dumped manure in the street before charging the barricades to protest against cuts to education spending. The police responded with tear gas.
In France, students joined worker protests in October last year against government plans to raise the minimum retirement age to 62 from 60.
Tough Times
It would be simple to dismiss it all as insignificant. Maybe all those students should accept that we live in tough times. They should just get back to the library to study for what will be a tight labor market when they graduate.
Then again, perhaps they are justified. At the root of this, many young people sense they are getting a raw deal. This generation will graduate burdened by big debts. If they want to buy a house, it will be cripplingly expensive, and there may not even be any mortgage loans available. Jobs are scarce, and often not very well paid, certainly when the cost of the education required just to get your foot in the door is taken into account.
Governments across Europe are running up vast debts, money that will have to be paid back in higher taxes by today’s 20- somethings. Retirement ages are being raised all the time. This generation may end up working into their 80s. They can forget about spending a few decades cruising around the Mediterranean and touring the Spanish golf courses like their parents.
No Jobs
In the euro area, the costs of austerity packages required to salvage the single currency are being paid by the young rather than the middle-aged or the old. Why? Because as demand collapses, rigid labor markets make it virtually impossible to fire older workers in many countries. So instead, employers just stop hiring -- and that means young people don’t get jobs.
According to Eurostat, the statistical agency of the European Union, the unemployment rate for the under-25s averaged almost 20 percent across the euro area in August 2010. In Spain, it was more than 40 percent. It will soon be normal for Spanish people in their early 20s to be out of work.
People are starting to notice that the dice are increasingly stacked against the under-30s.
“As home ownership becomes less accessible to the young, the ending of the retirement age poses challenges for youth employment, and the costs of higher education become punitive, it remains quite plausible that the fault lines of age could become increasingly well defined,” a report for the U.K.’s National Centre for Social Research concluded last year.
Elderly Rule
And yet, it isn’t inevitable that such burdens should be placed on young shoulders. In reality, governments are deliberately loading more and more costs on the young. Static or declining populations, and rising life expectancy, mean the number of older people is rising. The old also vote more: In the British election of 2005, only 48 percent of those in the 25-34 age group voted, compared with 75 percent of the over-65s.
There are more of them, and they vote more, so the incentive for politicians is to constantly favor the old over the young. In practice, that means health spending gets protected, but education spending is cut. Employment rights are protected at the expense of new jobs. Interest rates are held down to support house prices -- good if you already own one, but tough if you don’t.
The net effect is that the system is increasingly unfair to the young. It’s time to find a fairer balance. Maybe retirement ages shouldn’t be raised unless there are enough jobs to absorb young workers. Perhaps education cuts should be matched by reductions in health-care spending.
Otherwise, the middle-aged and the elderly will have only themselves to blame if they see a lot more smashed windows and cars in the next few years. And the generational war will be a long one.
(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own.)
Japan Will Buy Euro-Region Bonds, Joining China in Assisting Irish Bailout
By Toru Fujioka and Aki Ito
Japan plans to buy bonds issued by Europe’s financial-aid funds, its finance minister said, joining China in assisting the region as it battles against a debt crisis that prompted bailouts of Ireland and Greece.
“There is a plan for the euro zone to jointly issue a large amount of bonds late this month to raise funds to assist Ireland,” Finance Minister Yoshihiko Noda said at a news conference in Tokyo today. “It’s appropriate for Japan to make a contribution as a leading nation to increase trust in the deal. We want to buy more than 20 percent.”
The euro gained against the yen as the statements of support showed that the country with the world’s second-largest foreign-exchange reserves, after China, may help stem the risk of the crisis spreading. Portugal’s borrowing costs jumped last week as concern deepened that that nation may be unable to avoid tapping the European Union’s rescue fund.
“This signals that the world is coming together” to save Europe, said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “But it’s unlikely the euro will maintain its current strength. It’s unclear whether the market will be able absorb all the bonds being issued by the problematic euro-zone nations.”
China has also voiced support for Europe, with Vice Premier Li Keqiang last week expressing confidence in Spain’s financial markets and pledging more purchases of that country’s debt.
Irish Bailout
The euro was trading at 107.58 yen as of 2:15 p.m. in London, compared with 107.12 yen in New York yesterday, when it touched 106.83 yen, the lowest level since Sept. 14. The single currency traded at $1.2959 from $1.2951.
Japan will use existing euro assets in its foreign-exchange reserves to buy more than a fifth of bonds to be issued later in January by the European Financial Stability Facility, Noda said. Japan’s reserves total $1.096 trillion, the government said today. That compared with China’s $2.85 trillion last quarter, according to figures reported by country’s central bank today.
Japan’s plan “confirms the strong interest of investors globally in buying EFSF bonds,” Christof Roche, a spokesman for the Luxembourg-based facility, said by telephone. In mid- November, two weeks before the Irish rescue, EFSF Chief Executive Officer Klaus Regling said Asian investors were “particularly” interested in purchasing any debt issued by the facility.
Shifting Reserves
The EFSF, overseen by euro-area governments, plans to raise up to 16.5 billion euros ($21.4 billion) this year and 10 billion euros in 2012 to help finance the Irish bailout, the European Commission said in December. The facility plans to issue between 3 billion euros and 5 billion euros of the AAA- rated bonds later this month, meaning Japan may spend more than 1 billion euros.
“I think we cannot rule out the possibility that the Japanese government” may need to shift part of its reserves to euros from U.S. dollars to buy the bonds, Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase & Co. in Tokyo, said in a note to clients today.
The commission, the EU’s executive arm, said last month that Europe’s financial-aid funds for distressed governments will sell bonds to raise as much as 34.1 billion euros for Ireland in 2011 and 14.9 billion euros in 2012.
The two funds -- the European Financial Stabilization Mechanism and the EFSF -- will sell a total of seven to eight benchmark bonds, each worth 3 billion euros to 5 billion euros in 2011, the commission said in a statement in Brussels. The commission manages the EFSM.
Stabilizing the System
Investors in Asia were allocated almost a quarter of the 5 billion euros in bonds sold last week by the EU when it began raising funds for the aid package for Ireland.
Asian buyers accounted for 21.5 percent of the five-year securities sold on Jan. 5 by the EFSM, the commission said. That compares with Asia’s 4 percent average for EU bond sales since December 2008, the commission said on Jan. 6.
“Japan’s finally contributing to the stabilization of the global financial system,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo. “This is good news for the euro and it’s good news for the global financial system. Since Japan has a current-account surplus, in some ways it has a responsibility to help those with a capital shortage.”
The nation’s current-account surplus, which tracks the flow of goods, services and investment income between Japan and its trading partners, came to 1.436 trillion yen in October.
Portugal’s six-month borrowing cost jumped to 3.686 percent at a bill sale last week, up from 2.045 percent in September. The country plans to borrow as much as 1.25 billion euros tomorrow by issuing debt repayable in October 2014 and June 2020, the nation’s debt agency said on Jan. 6.
Noda didn’t mention Portugal at today’s news conference.
Sarkozy Brings Message on Dollar to U.S.
By BRIAN KNOWLTON
Original Article on THE NEW YORK TIMES
WASHINGTON — President Nicolas Sarkozy on Monday brought his campaign to lessen the dollar’s central role to the White House, where such talk has never found a warm hearing.
President Barack Obama said little about the details of the economic message Mr. Sarkozy was thought to be carrying, but he did offer unusually warm words of support for his ally on other issues.
“We don’t have a stronger friend and a stronger ally than Nicolas Sarkozy and the French people,” he said as the French leader, listening to a translator through headphones, solemnly nodded his agreement. “I’ve always found Nicolas to be an outstanding partner and an outstanding friend to the American people.”
The White House visit marked a crucial step in Mr. Sarkozy’s efforts to use the French position in 2011 as leader of the Group of 8 and the Group of 20 to press for an international monetary order that gives greater weight to emerging-nation currencies like China’s.
The French president also wants to see the G-20, which includes rich and developing countries, take a larger role in global economic coordination, lessening the part played by the G-8, which represents only rich nations.
Mr. Sarkozy has argued that the dollar’s role as the single global reserve currency does not reflect an increasingly multipolar world. Rising economies like China, India, Brazil and Russia are wielding increasing weight and, in China’s case, explicitly calling for a shift away from the dollar’s privileged status.
Mr. Obama did offer general words of support for Mr. Sarkozy’s efforts. “With France in the lead both at the G-8 and the G-20 this year” the two sides could “coordinate our agendas” in pursuing changes, he said.
It has been unclear exactly what alternative approach Mr. Sarkozy might be proposing, or how the United States, where the centrality of the dollar has long gone unquestioned, might be persuaded to support it.
The Chilean finance minister, Felipe Larraín, according to Bloomberg News, said recently in Paris: “In the absence of a new crisis, there is no incentive for the U.S. to move away from a U.S. dollar-centric system. We are in a state of flux in the international monetary system. The problem is that we don’t really have a perfect substitute.”
Mr. Sarkozy and Mr. Obama were also expected to discuss the volatility of commodity prices, a possible tax to help finance development and a strengthening of the International Monetary Fund.
A French official, discussing Mr. Sarkozy’s visit ahead of time, suggested that France was still refining specific ideas designed to buffer national economies against major shocks caused by currency fluctuations and the big influxes and outflows of investment.
“Can we consider a kind of insurance or facility against these shocks,” something like the European Union did to save Greece from default? asked the official, who spoke on the condition of anonymity under traditional diplomatic practice.
He said the I.M.F. could play a part, perhaps by expanding the role of special drawing rights, its accounting unit, which is based on a basket of currencies. And to make such a shift less of a confrontation between China and the United States, he added, the United Nations might be given a role as well.
Aides had said the two presidents would also touch on Afghanistan, Pakistan, Iran, Middle East peace efforts, the independence referendum in Sudan and the troubles in Ivory Coast.
In May, Mr. Sarkozy will be host to a G-8 summit meeting in the Normandy resort town of Deauville, where the agenda is expected to include African development. The next G-20 summit meeting will be in Cannes in November.
The two men appeared serious but comfortable in their first face-to-face meeting since WikiLeaks released confidential U.S. diplomatic cables that described Mr. Sarkozy in mixed terms. On the one hand, he was said to be “viscerally pro-American” and a “force multiplier” for American foreign policy interests.
The U.S. relationship with France was called “one of the best.” But descriptions of his personal leadership style were less flattering. He was called an “impulsive” man who worked in “a zone of monarchlike impunity.” Mr. Sarkozy, said one cable, had a “thin-skinned, authoritarian” streak; another said he had amassed an “unprecedented” concentration of power over foreign affairs.
Brown to unveil tight spending plan, reorder govt
By JULIET WILLIAMS Associated Press
Original Article on MERCURYNEWS.COM
SACRAMENTO, Calif.—California's newly sworn-in governor, Jerry Brown, has been cagey about his spending plans for the state of California, offering few specifics about how he will tackle the state's massive budget shortfall and chronic spending imbalance.
One thing he has made clear: Nearly everyone in California will feel the pain.
Brown has warned interest groups, lawmakers, schools and citizens to brace themselves, as deep, across-the-board spending cuts will be needed to close the state's $28 billion shortfall through June 2012.
The state has already seen massive cuts to address a succession of multibillion-dollar budget gaps in the last few years, but they were laden with gimmicks and money shifts, many of which offered only short-term relief to the state's ongoing fiscal crisis.
"The budget I present next week will be painful but it will be an honest budget," Brown promised last week in his inauguration speech, saying that any spending will be matched with available revenue. "It's a tough budget for tough times."
Brown has already begun to lay out a vision in which he will seek to fundamentally restructure state government, shifting a host of responsibilities from the state level to counties and cities, possibly giving them more authority to raise local taxes to pay for them.
He also has signaled that he wants to severely flatten state government by cutting bureaucracy and merging departments and programs. On Friday he announced he is eliminating the Secretary of Education position, many of whose responsibilities were duplicative, and closing several of the governor's field offices.
Voters also could be asked to weigh in on the changes the state faces.
The Los Angeles Times and The Sacramento Bee, citing unnamed sources, have also reported that Brown will propose extending a variety of temporary tax hikes that are set to expire by July, a politically risky move just a year after voters rejected another measure to extend the taxes.
The Bee also reported that Brown will propose cutting an additional $10 billion from state government in exchange for the extensions.
California had temporarily raised the state income tax rate by 0.25 percent, increased the fee for licensing vehicles from 0.65 percent to 1.15 percent and hiked the sales tax by 1 percent as part of a February 2009 budget deal.
The new governor could also ask voters to approve moving funds appropriated for special education and mental health care to pay for other programs—another idea voters rejected in the May 2009 special election.
Last November, voters also rejected an $18-a-year increase in the vehicle license fee to fund state parks, even though passage would have allowed free park admission for all vehicles with a state license plate.
Jean Ross, executive director of the California Budget Project, a Sacramento-based nonprofit that advocates for lower- and middle-income families, said the May 2009 measures voters rejected were too convoluted and required too many tradeoffs.
"Over and over again, (in polls) voters express fairly strong willingness to pay more for quality services," Ross said. "Voters say that they're willing to spend more to avoid cuts to health, avoid cuts to education."
Placing a tax measure on a special election ballot in 2011 will require a two-thirds vote of the Legislature and thus will need some support from Republicans who have vowed to oppose any tax increases and are already being pressured by national anti-tax groups not to cooperate.
Brown refused to discuss whether he'll propose a tax extension last week, saying Californians will have to wait until Monday for all the budget details, but some of the state's top Democrats are already signaling what to expect.
Senate President Pro Tem Darrel Steinberg, D-Sacramento, said now that the temporary fixes are gone, the Democratic lawmakers who control the state Legislature are more likely to give a fair hearing to deep cuts, even those previously floated by Gov. Arnold Scwharzenegger and rejected.
"This governor will not just propose cuts. He's going to propose ... a complete plan to put the fiscal crisis behind us. He's going to propose raising revenue, but it's going to be revenue coupled with restructuring," Steinberg said.
Steinberg said the measure needs to be on the ballot this spring "to put the fiscal crisis behind us before the start of the next fiscal year. I think that makes a lot of sense."
The state's unemployment rate has been stuck at 12 percent or higher since August 2009. The recession has led to a steep drop in tax revenue, with general fund spending in this year's fiscal spending plan about $16 billion less than it was just three years ago.
Brown is hoping to reach consensus with lawmakers in quick order: 60 days, a short window for modern budgetmaking in California.
Several political changes make this year's dynamic less certain.
Budget passage was theoretically made easier last November when voters approved a ballot initiative lowering the threshold to pass a budget from a two-thirds vote to simple majority, but a two-thirds vote is still required to raise taxes and fees, potentially negating that advantage.
Voters also approved Proposition 22, which restricts the state's ability to borrow money from local governments, and legislators have their eye on a redistricting commission that could redraw many of their seats, putting them in jeopardy.
Volcker Sidelined as Obama Reshapes Advisory Panel
By Yalman Onaran and Hans Nichols
Paul Volcker is leaving as chairman of a presidential advisory board that’s being reshaped to have more of a business-outreach mission.
Volcker, 83, was kept out of discussions on how the President’s Economic Recovery Advisory Board, which brought together business executives to come up with solutions to the economic crisis, might function next or who its new members might be, according to a person with knowledge of his views.
President Barack Obama is planning to reconstitute the board when its term expires next month and Volcker, a former Federal Reserve Board chairman, leaves, according to another person familiar with administration deliberations.
The president wants the board to put a greater focus on U.S. economic competitiveness now that the recovery is on firmer footing, said the person, speaking on condition of anonymity because the decisions haven’t been made final.
Volcker, known for taming inflation in the 1980s, was disappointed with the way his advisory group became a public relations tool for the White House as its meetings with the president were televised live, making honest discussion difficult to conduct, the person familiar with his views said.
The group moved most of its work to subcommittees to get around that, presenting Obama with advisory reports on matters from financial reform to economic revival, and cut its full group meetings to about every six months.
The Outsider
“Volcker was always sort of on the outside anyway,” said Joseph Engelhard, a former U.S. Treasury deputy assistant secretary who is now a senior vice president at Capital Alpha Partners in Washington. “They pretty much used him to look tough on regulation, and now they’re done with him, they’re saying goodbye.”
Volcker has been chairman of the advisory board since it was established by executive order two years ago. That charter expires Feb. 6, and the president plans to renew it.
Volcker agreed to serve for two years and plans to remain available to advise the administration, according to another person familiar with the matter. On the panel, Volcker provided advice on economic issues as well as the rewriting of regulations for financial institutions.
The law enacting those regulations included the so-called Volcker rule, which banned proprietary trading at banks and restricted their investments in private-equity and hedge funds.
Volcker had rocky relations with Obama’s top economic staff from the start. Although the former Fed chief was in Obama’s circle of advisers early in the 2008 election campaign, he lost much of his influence when the newly elected president chose Lawrence Summers to head his National Economic Council.
Clash With Summers
Summers was instrumental in pushing deregulatory measures through Congress as Treasury secretary in President Bill Clinton’s administration. Summers also has left, with the White House expected to name Gene Sperling, an adviser to Treasury Secretary Timothy Geithner, as chairman of the NEC tomorrow.
Volcker complained when the startup of the advisory board was delayed. He slowly got his voice heard and achieved one of his biggest goals when Obama in January 2010 backed the main tenet of Volcker’s financial reform ideas, preventing banks from using their own money to take risky trading positions or invest in hedge funds.
That breakthrough was due to the election of Republican Scott Brown that month to fill the late Edward Kennedy’s Senate seat representing Massachusetts, following defeats in gubernatorial races in November, according to Engelhard.
Disappointment
“The best thing that happened to Volcker was a Republican’s election in Massachusetts,” Engelhard said. “Otherwise he wouldn’t even get the Volcker rule out of the administration.”
Volcker was disappointed with the final version of the rule that bears his name as it was watered down with lobbying by banks and members of Congress sympathetic to Wall Street’s views, as well as some administration members in the banks’ defense, people with knowledge of the talks said at the time.
In the final version, U.S. banks, including Goldman Sachs Group Inc. and Citigroup Inc., have as long as a dozen years to reduce stakes in hedge funds and private-equity units.
JPMorgan Chase & Co., the second-largest U.S. bank by assets, operates the world’s biggest hedge fund, according to the 2009 rankings of AR magazine, an industry trade publication. The New York-based firm’s hedge funds had $50 billion of assets under management as of Jan. 1, the magazine reported in March. Goldman Sachs’s hedge funds, which ranked ninth on the list, had $21 billion.
Levin in Line
Yale University President Richard Levin is a leading candidate to be chairman of the reconfigured board that Volcker chairs, according to one of the people familiar with the matter.
Levin was also interviewed by Obama to replace Summers, who returned to Harvard University at the end of the year, according to an administration official. Sperling served as NEC chairman during Clinton’s administration.
The 17-member advisory board known as PERAB was created to provide an outside perspective on the administration’s plans to revive the economy and draft recommendations.
Members of the panel include General Electric Co. Chairman and Chief Executive Officer Jeffrey Immelt; former Securities and Exchange Commission Chairman William Donaldson; former Fed Vice Chairman Roger Ferguson; UBS Americas Chairman and CEO Robert Wolf, and Service Employees International Union Secretary-Treasurer Anna Burger.
G-7 Will Be Overtaken by Emerging Economies in 2032, PriceWaterhouse Says
By Scott Hamilton
The Group of Seven economies will be surpassed in size by the largest emerging markets in just over two decades as the financial crisis accelerates the shift of power in the global economy, PricewaterhouseCoopers LLP said.
The combined gross domestic product of the seven biggest developing economies will exceed that of the G-7, the world’s largest industrialized markets, in 2032 using projected market exchange rates, the company said in a report released in London today. China will overtake the U.S. as the world’s largest economy also in that year, it said.
Emerging markets have been leading the world out of the recession triggered by the banking crisis in developed nations, with China replacing Japan as the world’s second-largest economy last year. The report adds to forecasts saying that developing nations will propel the world economy in coming decades, driven by growth in China and India.
“This renewed dominance of China and India, with their much larger populations, is a return to the historical norm prior to the Industrial Revolution of the late 18th and 19th Centuries,” economists John Hawksworth and Anmol Tiwari said in the report. “That caused a shift in global economic power to Western Europe and the U.S. -- this temporary shift in power is now going into reverse.”
Gap Narrows
In 2009, the combined GDP what PricewaterhouseCoopers calls the Emerging Seven of China, India, Brazil, Russia, Indonesia, Mexico, and Turkey was the equivalent of 35 percent of the G-7. By 2020, E-7 GDP will increase to about 70 percent of the G-7’s, and by 2050 it will be 64 percent larger, according to the report.
Also in 2032, Brazil’s economy will overtake Germany’s in size, while India will eclipse Japan in 2028, the accountancy firm said.
“Rapid growth in consumer markets in the major emerging economies associated with a fast-growing middle class will provide great new opportunities for Western companies,” Hawksworth and Tiwari said. “Without it, Western companies will increasingly be playing in the slow lane of history if they continue to focus on markets in North America and Western Europe.”
In a report last year, PricewaterhouseCoopers said the G-7 would be eclipsed in size by the “Emerging Seven” by 2020 using purchasing-power-parity-adjusted exchange rates, which take into account price differences of the same goods between countries. Today’s 2032 estimate uses projected market exchange rates, which does not correct for price differences.
China Should Consider Increasing Gold Reserves, Central Bank Adviser Says
By Bloomberg News
China should consider adding to its gold reserves as a long-term strategy to pave the way for the yuan’s internationalization, central bank adviser Xia Bin wrote in the China Business News today.
The country must revise its foreign-reserves management principle, Xia wrote. China is the world’s largest producer and second-biggest user of gold and has a world-record $2.65 trillion in foreign-exchange reserves.
Gold is set for a 10th annual increase, the longest winning streak since at least 1920, spurring central banks globally to add the metal to reserves. China is allowing greater use of its currency for cross-border transactions to reduce reliance on the dollar, after Premier Wen Jiabao said in March he is “worried” about holdings of assets denominated in the greenback.
“If China increases gold buying significantly to diversify their foreign exchange reserves, that could affect the market,” said Park Jong Beom, a trader at Tong Yang Futures Trading Co. in Seoul.
Gold for immediate delivery increased 0.4 percent to $1,390.32 an ounce at 12:49 p.m. in Shanghai, boosting this week’s gain to 2 percent, as China’s imports increased and a fall in the dollar boosted the appeal of the precious metal as an alternative asset.
Imports of gold by China jumped almost fivefold in the first 10 months from the entire amount shipped in last year, the Shanghai Gold Exchange said yesterday. Shipments were 209 metric tons compared with 45 tons for all of 2009, said exchange Chairman Shen Xiangrong.
State Buying
“In the mid and longer term, of course, I think China is the biggest bullish factor for gold prices,” Yuichi Ikemizu, head of commodity trading at Standard Bank Plc in Tokyo, said, referring to the gold imports by China. Still, “the advisors are not the guys to decide policies of the central bank. They can advise whatever they want and the percentage of gold in foreign reserves is really small.”
The country increased gold reserves by 454 tons to 1,054 tons since 2003, the State Administration of Foreign Exchange said last April. The metal only accounts for 1.6 percent of the nation’s reserves held by the People’s Bank of China, according to the World Gold Council. China doesn’t regularly publish gold- trade figures and rarely comments on its reserves.
Bangladesh bought 10 metric tons of bullion from the International Monetary Fund for about $403 million in September. That followed a 200-ton purchase by India last year, as well as reserve increases by other Asian nations including Sri Lanka.
Solvency
Building gold as the basis of solvency has been used through history, PBOC adviser Xia wrote. Having a corresponding amount of solvency is a necessary precondition and indispensible safeguard in the long-term strategy for the internationalization of the yuan, Xia wrote.
China also needs to set up a commission soon under the State Council to make plans for investing its foreign reserves overseas, Xia wrote. The investments should include oil, resources, equipment and technology, Xia said.
The non-convertibility of the yuan is a major hurdle in China’s efforts to become a “real financial power,” Bank of China Ltd. Chairman Xiao Gang wrote in a commentary published in today’s China Daily.
The Chinese currency will only become an international monetary unit like the Euro or the dollar once it can be freely converted into foreign currencies, Xiao wrote.
Yuan Transactions
Trade transactions settled in the yuan may rise to $3 trillion a year by 2015 as China pushes for the wider use of its currency as an alternative to the dollar in business and finance, China Construction Bank Corp. said Nov. 23.
China Construction Bank, which helped organize the biggest number of bond sales in China this year, forecasts an increase from the current $19 billion a year of yuan-denominated trade transactions, or commercial deals primarily paid for and financed using the yuan that don’t involve the dollar.
China should raise its gold holdings and the 1,054 tons of reserves are inadequate compared with the 8,133 tons held by the U.S. and 3,408 tons by Germany, Meng Qingfa, a researcher at the China Chamber of International Commerce said on Oct. 27.
“China does not hold much gold in its reserves for now so I cannot immediately see what impact it will have on gold prices,” Tong Yang Futures’ Park said.
South Korea Defends U.S. Trade Pact
By EVAN RAMSTAD
Original Article on THE WALL STREET JOURNAL
SEOUL—The U.S. and South Korea,in finalizing a sweeping free-trade agreement that had been stuck in legislative limbo since 2007, made compromises that drew some political criticism here over fairness—but likely not enough to prevent ratification.
Trade Minister Kim Jong-hoon, in a nationally televised news conference that lasted more than an hour, on Sunday rejected critics who, before hearing details, were accusing his negotiating team of caving in to U.S. pressure in the revising of the agreement.
He also denied acting too swiftly to make a deal in the aftermath of a North Korean attack on South Korea, an event that prompted Seoul to look to Washington for reassurance of their decadeslong defense alliance.
"I only negotiated this on the basis of economic principles," Mr. Kim said.
The pact, which requires legislative approval in both countries, is the largest by value of trade volume anywhere in the world since the North American Free Trade Agreement took effect in 1994 involving the U.S., Canada and Mexico.
U.S. President Barack Obama said it would support at least 70,000 American jobs, an important selling point as he pushes for ratification in the U.S. Congress.
The floor speaker of South Korea's opposition party derided the revised agreement as an "economic attack" and a "humiliation." But leaders of the ruling party, which controls 171 of the 299 seats in parliament, endorsed the changes and said ratification is likely.
The U.S.-South Korea deal doesn't open every economic segment in either country. But it is expected to boost two-way trade, which amounted to $69 billion last year, by $10 billion or more, and slightly narrow South Korea's surplus with the U.S.
To clinch the deal, South Korea agreed to new steps to open its auto market to U.S. producers. Chief among those steps was that it will allow U.S. makers to sell as many as 25,000 vehicles a year using U.S. safety standards rather than Korean ones.
South Korea's auto rules are a mix of domestic, U.S. and European standards that have stymied foreign manufacturers because they require modifications to a small volume of production. As a result, foreign brands account for only about 6% of overall vehicle sales in South Korea, making it one of the most closed auto markets in the world. The top-selling U.S. brand in South Korea, Ford Motor Co., sold 3,100 units from January through October, about 0.2% of the overall market volume of approximately 1.2 million vehicles.
Mr. Obama had hoped to secure a revised agreement during his trip to Asia last month for the Group of 20 summit hosted by South Korea. The talks foundered, in part because South Korean officials had told the Korean public for weeks they would make no compromises.
Mr. Obama left Seoul empty-handed, but the appearance that the U.S. was willing to walk away from the entire deal alarmed South Koreans, Seoul officials said.
The pact gives a lift to Mr. Obama's efforts to double U.S. exports by 2015.
"Essential to that is opening new markets around the world to products that are made in America," Mr. Obama said in Washington on Saturday. "We don't simply want to be an economy that consumes other countries' goods."
The focus of the South Korean public has been less on the economic impact of the FTA than on perceptions of whether its trade negotiators were winning or losing. That score-keeping became an extra challenge for Seoul's negotiators since the country's tariffs were much higher to start with than those in the U.S.
Since the start of the U.S. talks in 2006, the focus of the South Korean public has been less on the economic outcome than on perceptions of whether their trade negotiators were winning or losing. The intense score-keeping became an extra challenge for Seoul's negotiators because their country's tariffs were much higher to start with than those in the U.S.
Adding to the sporting-event environment of the process, South Korean TV stations built anchor booths in the parking lots of hotels where negotiators met, and the leaders of the two negotiating teams were trailed by cameras and reporters.
"It's over. It's over," Mr. Kim, who was the lead negotiator in the U.S. talks before becoming trade minister, said in English as he walked out of his news conference.
The U.S. Chamber of Commerce, which has frequently feuded with the White House, put its muscle behind the modified agreement. "The administration has done its part. Now it's time for the new Congress to make passage of [the pact] a top priority in January. We will do everything in our power to round up the votes," said Thomas Donohue, president of the U.S. Chamber of Commerce.
The agreement changed little, however, on the issue of U.S. beef exports. South Korea banned U.S. beef after a case of mad-cow disease was found in Washington state in 2003. When South Korea agreed to restart imports in 2008, the decision sparked riots that were driven by a sense among South Koreans that Washington had bested Seoul, rather than by health concerns.
South Korea limited its purchases of U.S. beef to cuts from cattle younger than 30 months, which are perceived to be at less risk of mad-cow disease. U.S. beef sales in South Korea are now nearly as high as they were before the initial ban in 2003, but some American lawmakers and industry officials object to any limits.
Debt plan draws bipartisan support
By Jeanne Sahadi
NEW YORK (CNNMoney.com) -- Defying expectations, more than 60% of President Obama's debt commission voted Friday in favor of the group's final recommendations for reducing the country's long-term debt.
In a strong bipartisan showing, 11 of 18 members voted yes. Five Democrats, five Republicans and one independent voted in favor of the panel's debt-reduction plan. Those who voted against it included four Democrats and three Republicans.
But the result still fell short of the 14 votes needed in order for the commission to present its recommendations to Congress for a legislative vote.
No matter, said Dave Kendall, senior fellow for health and fiscal policy at Third Way, a moderate progressive think tank. " A majority ... that's huge. The president can say to Congress, 'We got 11 votes. We know we can do this on a bipartisan basis.' "
Indeed, said Sen. Kent Conrad, one of the Democrats who voted for the plan, "this book is going to be read again."
A Democrat who voted against the plan -- former union leader Andy Stern -- nevertheless said because more than 60% of the commission voted in favor, "this plan deserves a vote [in Congress]."
Think you're smart about deficits? Take the quiz
At the very least, the commission's final report will provide lawmakers a comprehensive framework for how to tackle the problem of reining in debt, and some of their ideas may find their way into future budgets.
It's certainly likely some of them will make their way into the president's 2012 budget proposal, which is due out in February.
"If we want an America that can compete for the jobs of tomorrow, we simply cannot allow our nation to be dragged down by our debt," Obama said in a statement.
See what's in the debt commission's plan
He promised that he and his economic team "will study closely [the specific recommendations in the commission's report] in the coming weeks as we develop our budget and our priorities for the coming year."
Just which proposals show up in his budget are the question.
The group's final report -- called "The Moment of Truth" -- includes a wide range of suggested spending cuts and tax changes that would slash $4 trillion from projected deficits between now and 2020. The panel's co-chairmen, Erskine Bowles and Alan Simpson, said all along they would not let any part of the federal budget be treated as a sacred cow
Their recommendations include a radical overhaul of the tax code, changes to Social Security and substantial cuts in defense and discretionary spending
Overall the panel's plan would reduce the country's accumulated debt to 40% of the overall economy by 2035, down from the 185% currently projected.
November jobs report: Unemployment rate up
By Annalyn Censky
NEW YORK (CNNMoney.com) -- The government's monthly labor report threw a curve ball Friday morning as November's job growth came in far lower than expected and the unemployment rate rose to 9.8%.
U.S. employers added 39,000 jobs to their payrolls in November, the Labor Department reported. That marks a major slowdown from October, when the economy added an upwardly revised 172,000 jobs.
November's numbers also fell short of the 150,000 gain that economists surveyed by CNNMoney.com were expecting.
"The overall pace of job growth is disappointing," said Wells Fargo Chief Economist John Silvia, who had forecast a gain of 130,000 jobs in the month.
While private businesses continued to hire for the eleventh month in a row, they also missed expectations. Companies added just 50,000 jobs to their payrolls in October, falling short of the 175,000 jobs economists had predicted for the sector.
Meanwhile, the government shed 11,000 jobs during the month.
The job market is still reeling from the longest recession since the Great Depression, with 15.1 million Americans still unemployed.
On the upside, revisions for September and October showed there were 38,000 additional job gains in those months than previously reported.
Holding pattern
Overall, employers are still reluctant to commit to full-time hires as they remain uncertain about tax increases, health care costs and new regulations, Silvia said.
While gains were primarily in the services industry, huge losses in retail came as the biggest surprise, Silvia said. The sector lost 28,000 jobs in November -- a figure that could partially be attributed to seasonal adjustments, he said.
Manufacturing also brought disappointing news. Despite other indicators that show the manufacturing sector is recovering, factories cut 13,000 jobs last month.
The construction sector, which some economists had thought already bottomed out with its job cuts, also shed another 5,000 positions.
But employers are at least getting their feet wet with temporary hires. The economy added 40,000 temporary jobs in November, and overall, temp jobs have been increasing since September of last year.
Temporary jobs are often considered a precursor to permanent job growth, although many experts say they should have translated into full-time positions months ago.
Hours worked and wages were essentially flat in November, boding poorly for Americans heading into the holidays, said Diane Swonk, chief economist from Mesirow Financial.
Deep Black Friday and Cyber Monday discounts recently kicked off the holiday shopping season and gave a strong boost to retailers in November.
"[This] makes one wonder how much consumers were dipping into their savings to take advantage of all the holiday promotions that we saw during the month," Swonk said in a research note.
Jobless recovery?
The unemployment rate, which is calculated in a separate survey, unexpectedly ticked up to 9.8% after holding at 9.6% for the prior three months, the government said.
While many economists had predicted the rate would stay the same, an uptick isn't completely surprising either, said Sal Guatieri, senior economist with BMO Capital Markets.
See full survey results
That's because the unemployment rate only includes people who are actively looking for jobs, and in this downturn, many Americans just give up.
When the job market started looking up in October, many of those so-called discouraged workers may have started looking again, and that makes the unemployment rate float higher, Guatieri said.
"Some discouraged job seekers were encouraged to come back into the labor search," he said. "In the end, they were greatly disappointed when they could not find work."
The number of discouraged workers rose to 1.3 million in November, up 63,000 from the previous month.
The jobless rate has remained above 9% for 19 straight months, the longest stretch on record since the Labor Department started tracking unemployment in 1949. That record "hammers home" the fact that Americans are stuck in a jobless recovery, Guatieri said.
"The economy is not growing fast enough to satisfy all the new job seekers," he said. "We're not even keeping up with population growth in generating jobs, let alone putting a dent in the sky-high unemployment rate."
Economists often say the labor market needs about 150,000 additional jobs per month just to keep pace with population growth, and at least 300,000 to make a difference in the unemployment rate.
Lawmakers point fingers
The jobs report barely moved stock markets Friday, but lawmakers were quick to jump up on their soap boxes to point fingers across the aisle. Both sides accuse each other of holding up the job recovery.
"My Republican colleagues have offered few ideas on how to create jobs, but have been vocal and steadfast in their opposition to unemployment benefits for those without jobs," said Rep. Carolyn Maloney, a Democrat from New York and chairwoman of the Joint Economic Committee.
Democrats say the disappointing jobs number supports their push for extending federal unemployment benefits. On Tuesday, the Senate failed to advance a Democrat-sponsored bill to extend federal unemployment benefits.
Meanwhile, Republicans say the jobs report supports their call to extend the Bush tax cuts which -- they argue -- stimulate the economy.
"All the while, [Democrats] have left a massive job-killing tax increase hanging over the heads of every single American family and small business, prolonging the existing economic uncertainty that has kept employers from hiring," Republican National Committee chairman Michael Steele said in prepared remarks.
Fed to Name Recipients of $3.3 Trillion in Aid During Crisis
By Scott Lanman and Craig Torres
The Federal Reserve, under orders from Congress, plans today to identify recipients of $3.3 trillion in emergency aid the central bank provided as it fought the worst financial crisis since the Great Depression.
The Fed intends to post the data on its website at midday in Washington to comply with a provision in July’s Dodd-Frank law overhauling financial regulation. The information spans six loan programs as well as currency swaps with other central banks, purchases of mortgage-backed securities and the rescues of Bear Stearns Cos. and American International Group Inc.
The disclosures may heighten political scrutiny of the central bank already at its most intense in three decades. The Fed’s Nov. 3 decision to add $600 billion of monetary stimulus has met with backlash from top Republicans in Congress, who said in a Nov. 17 letter to Chairman Ben S. Bernanke that the action risks inflation and asset-price bubbles.
“It is quite conceivable it is going to stir up the political pot,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. “But political criticism isn’t going to prevent them from doing what they need to do. An important part of being a Fed official is to understand whatever you do is going to come under scrutiny.”
The data will probably show the magnitude of central bank support to companies including Bank of America Corp. and General Electric Co. after the collapse of Lehman Brothers Holdings Inc. spurred a surge in private borrowing costs. Lawmakers demanded disclosure after the Fed approved aid dwarfing the federal government’s $700 billion Troubled Asset Relief Program.
Discount Window
Congress excluded one Fed program from disclosure, the discount window, which is the subject of a 2008 lawsuit filed by Bloomberg LP, parent of Bloomberg News, against the central bank. A group of banks is appealing to the Supreme Court over lower-court decisions ordering the Fed to identify loan recipients. The program peaked at $110.7 billion in October 2008.
“We see this not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government,” Senator Bernard Sanders, the Vermont Independent who wrote the provision on Fed disclosure, said to reporters Nov. 17.
U.S. central bankers stepped outside of their traditional role as a lender of last resort to banks as credit markets nearly ground to a halt in the wake of Lehman’s bankruptcy on Sept. 15, 2008. Bernanke pushed the boundaries of the Fed’s powers, using section 13(3) of the Federal Reserve Act, which allowed the central bank to aid non-banks under “unusual and exigent circumstances.”
Commercial Paper
Over time, the Fed would provide financing for such diverse borrowers as U.S. corporations who needed to sell commercial paper and to money managers who wanted to invest in consumer auto loans.
Today’s information relates to aid from Dec. 1, 2007, through July 21, 2010, when President Barack Obama signed Dodd- Frank into law. The act requires the Fed, after a two-year delay, to identify firms that, following the law’s passage, borrow through its discount window and participate in its purchases or sales of assets such as mortgage-backed securities and Treasuries.
The Dodd-Frank legislation has also limited the Fed’s emergency lending powers from now on to programs with broad- based eligibility, curtailing bailouts of individual institutions.
Europe's Crisis Widens
By MARCUS WALKER And BRIAN BLACKSTONE
Original Article on THE WALL STREET JOURNAL
Investors dismissed European leaders' latest attempt to restore market calm, raising doubts about whether governments can rebuild confidence in the region's common currency amid signs that the debt crisis is creeping deeper into the Continent.
The euro fell to a 10-week low, and was below $1.30 in late New York trading. Bond markets across Europe's vulnerable fringe sank, as the "risk premium" investors demand for lending to Spain and Italy hit record highs. Standard & Poor's said after European markets closed it is considering a downgrade on Portugal's credit rating, citing economic pressures and increased risks to the government's creditworthiness.
The bond selloff extended Monday's declines, suggesting that Sunday's agreement by European governments to bail out Ireland and set up a permanent rescue fund has left investors cold.
Germany and other European governments hoped the twin announcement would end the near-panic that has gripped debt markets in recent weeks. Instead, a crisis of confidence that began last year in Greece has continued to spread.
Particularly worrying to Europe's leaders are early signs the market turmoil is spilling into countries thought to be less at risk: Italy and Belgium. "Tension is very high, in part because the market has already raided three countries," said Luca Cazzulani, deputy head of fixed-income strategy at Italy's Unicredit bank.
Economists generally agree Europe's current bailout fund is sufficient to rescue Spain, should that be necessary. But if Italy, Europe's third-largest economy, teetered, a rescue would test both Europe's economic resources and the will of healthier countries such as Germany to shoulder the costs.
Italy is faring better economically than some neighbors and its budget deficit is among the lowest in the euro zone. But Italy also has the region's second-largest debt burden, and half of it is financed abroad.
In addition to the huge government debt of some countries, especially on Europe's periphery, investors worry banks could face big losses. If problems among banks are greater than disclosed, that would have effects on these countries' budgets—and the size of any bailout they might need.
That concern is driven partly by a lack of trust in the integrity of "stress tests" of euro-zone banks earlier this year. Ireland's passed, yet it was the weakness of those same banks that forced Ireland to seek a bailout.
Now European officials are planning a new round of stress tests next year. While some leaders are pushing for these to be broader and more transparent, the agency that will oversee them says it might opt not to publicly disclose the results.
Germany stands accused by critics, ranging from financial markets to European capitals, of fueling the current anxiety by insisting Europe's future bailout fund include rules that could see bondholders take a hit in government rescues.
Chancellor Angela Merkel pushed hard for that principle, saying it is unacceptable that investors make profits from lending to governments while taxpayers cover all of the losses. Even some economists who believe she is right in principle say the timing was terrible, because it undermined fragile confidence in European debt markets.
German officials maintain the rules would affect only future bonds, not existing euro-zone debt, which would be repaid in full. But merely talking about the issue of lenders taking a so-called haircut has shattered the assumption that Western European governments never default. By raising the cost of borrowing for Portugal and Spain, this has made it more likely they may need a bailout, economists say.
"By their actions, the Germans have unsettled the markets and brought about what they're hoping to prevent," said Simon Tilford, chief economist at the Center for European Reform, a London think tank.
One reason the prospect of bailouts of weaker governments is no longer enough to win back investor confidence, economists say, is that they don't solve the underlying problem: Several countries have more debt than their economies can cope with.
Their rising cost of borrowing bodes ill for their plans to issue hundreds of billions in new bonds in the coming years. Ireland, Portugal, Spain and Italy need to issue close to €900 billion of government bonds over the next three years—about €500 billion in Italy alone—according to Citigroup estimates.
Some observers say the euro zone will eventually have to choose between unraveling or creating a deeper union that includes financial transfers from strong countries to weaker ones. But creating the central budget authority that the euro-zone now lacks would be a hard sell in countries such as Germany that would have to foot the bill.
On the other hand, giving up on the euro would undermine 60 years of political efforts to build a united Europe, and could cause unpredictable economic and financial disruption in a region whose trade and banking systems have become deeply intertwined since the euro was created in 1999.
A paradox of the debt crisis is that the 16-nation euro zone, as a whole, has a budget deficit of around 6% of its gross domestic product and total public debts of around 84% of GDP. While not exactly low—6% is twice what's supposed to be the maximum in euro-zone countries—that is healthier than in the U.S., which is running a budget deficit of over 11% and has total debts of around 92% of GDP.
Germany is forcing Ireland and Southern European countries to pursue painful fiscal austerity policies, in the hope that slashing deficits will win back investors' trust. But many in financial markets doubt the strategy will work, saying that without better economic growth, the euro zone's weaker members will struggle to pay down their debts even with fiscal austerity. That makes many analysts believe the ultimate resolution will involve either a restructuring of debts in some countries or a financial transfer, such as by forgiving rescue loans.
Such transfers wouldn't solve a growing problem that threatens the cohesion of the currency area—economic divergence.
The gaps among countries are widening, suggesting that robust recoveries in northern European nations such as Germany aren't spreading south or to Ireland. Jobless rates are relatively low in Germany, at 6.7%, and below 5% in the Netherlands. But Spain's is over 20%, according to the EU. Others in Europe's periphery have double-digit rates, making deficit reduction hard to do without triggering a backlash.
In a currency union with a single monetary policy and 16 different fiscal policies—and, critically, 16 distinct sovereign bond markets—such gaps matter a lot, economists say.
"These divergences give the markets something to sink their teeth into by attacking individual countries and their bond markets," says Jonathan Loynes, an economist at the consultancy Capital Economics. The divergences mean tiny countries like Ireland and Greece, which combined account for just 4% of the region's output, "are almost becoming pivotal to the financial stability of the region as a whole," he adds.
Portugal banks face 'intolerable' risk unless austerity measures are implemented
By: Emma Rowley
Original Article on THE TELEGRAPH
Failure to consolidate the public finances will put the country's banks in danger, the Bank of Portugal said in a report, which followed Prime Minister Jose Socrates last week pushing through an austerity budget.
The Portuguese government says no bail-out is needed, but markets are already pointing the finger at the country as the next to follow Greece and Ireland in requesting a rescue package.
"The risk will become intolerable if we do not see the implementation of measures that consolidate public finances in a credible and sustainable way," the central bank said.
Ratings agencies have downgraded Portugal's sovereign debt, leaving its banks shut out from market funding and reliant on the European Central Bank (ECB) for their borrowing needs.
The banks must address this dependency, the central bank said, as "large-scale and permanent use of financing from the Eurosystem is unsustainable".
Meanwhile, Spanish lenders are now paying the biggest premium ever on their debt compared with other banks in Europe - a record 166 basis points more than the average for other euro lenders, according to Bank of America.
The warnings came as the euro dropped below the $1.30 mark for the first time since the middle of September, while fears over the eurozone's debt crisis pushed bond yields - the rewards investors demand to take on the debt - to new highs. The spreads between Spanish and Italian 10-year bond yields over the German benchmarks widened to the biggest levels since the euro was launched in 1999 - around 3 and 2.1 percentage points respectively.
ECB President Jean-Claude Trichet said investors are underestimating policy-makers' determination to shore up the eurozone: "I don't believe that financial stability in the eurozone could really be called into question."
However, leaders have not been able to allay concerns over nations' liquidity and solvency, which have been exacerbated in recent weeks by fears bondholders will have to share the costs of future bail-outs.
Sunday's agreement of a €85bn (£71bn) emergency aid package for Ireland, felled by the costs of bailing out its banks, has failed to calm markets.
One worry is that Spain's economy is twice as big as that of Greece, Ireland and Portugal combined, prompting fears the euro region's €750bn safety net may not be big enough if the country requires aid.
Similarly, although most analysts view Italy as at less risk, the country is now being referred to as "too big to fail" and "too big to bail".
The pound climbed past 83.5p against the euro, its strongest level since mid-September, while appetite for UK government debt likewise strengthened as investors looked for a relative safe haven.
A poll by Reuters of 11 British fund managers found they reduced their exposure to European debt during November. They also upped the average allocation to UK debt in their global bond portfolios to 20.7 pc from 17.9 pc a month earlier.
"The European banking system still has major issues," said Jeremy Beckwith, chief investment officer at wealth manager Kleinwort Benson, predicting "more nasty surprises".
Allied Irish Banks on Tuesday said it will need to raise €5.3bn of additional capital by the end of February to reach a target set by Ireland's central bank.
Home prices falling faster in most metro areas
NEW YORK (AP) — Home prices are falling faster in the nation's largest cities, and a record number of foreclosures are expected to push prices down further through next year.
The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday fell 0.7 percent in September from August. Eighteen of the cities recorded monthly price declines.
Analysts say high unemployment, tight lending standards and millions of foreclosures will weigh on home prices.
"Unemployment is still high, people are afraid of losing their homes and credit is hard to get," said Maureen Maitland, vice president of S&P indices.
Still, Americans are gaining more confidence in the broader economy, a new report Tuesday showed. The Conference Board, a private research group based in New York, said consumer confidence rose to a five-month high in November.
Yet the housing market remains depressed.
Among the cities in the Case-Shiller index, Cleveland recorded the largest decline. Prices there dropped 3 percent from a month earlier. Prices in San Francisco, Los Angeles and San Diego, which had been showing strength this year, also dropped in September from August.
Washington and Las Vegas were the only metro areas to post gains in monthly prices.
The 20-city index has risen 5.9 percent from their April 2009 bottom. But it remains nearly 28.6 percent below its July 2006 peak.
And home prices have fallen in 15 of the 20 cities in the past year.
Prices in Tampa, Fla., fell to their lowest point since the index was created in 2000. Portland, Ore., Charlotte, N.C., Miami are also near their low points since the U.S. housing market collapsed in 2006.
Prices were on the upswing in many cities from April through July, mostly boosted by government tax credits which have since expired. Job worries and record high foreclosures are dampening buyer demand and weighing on prices.
The national quarterly index, which measures home prices in the nine U.S. census regions, dropped 2 percent in the third quarter from the previous quarter.
Thousands protest against Irish bailout
Henry McDonald
More than 100,000 Irish citizens took to the streets of Dublin today to protest against the international bailout and four years of austerity.
Despite overnight snow storms and freezing temperatures, huge crowds have gathered in O'Connell Street to demonstrate against the cuts aimed at driving down Ireland's colossal national debt.
So far the march has passed off peacefully although there is a huge Garda presence with up to 700 officers on duty working alongside 250 security guards for the Irish Congress of Trade Unions.
Among the marchers there is deep anger that most of the more than €80bn (£67bn) from the EU and the International Monetary Fund will be given to shore up Ireland's ailing banks.
Marching in the rally was Irish builder Mick Wallace who has had to lay off 100 workers due to the crash in the construction industry. Wallace said it was time the Irish became more militant.
"We should be more like the French and get onto the streets more often. Because our politicians go over to Europe and tell the EU that our people do not demonstrate, they don't take to the streets. It's time we changed that and openly opposed what is going on," he said.
Placards carried by the marchers reflect the mood of anger and humiliation at having to be bailed out by the EU and IMF. One was designed to look like an estate agent's billboard and read: "3,599 square miles For Sale. Full Planning Permission Granted".
The protest has not halted at the GPO in Dublin, the scene of the 1916 rising where trade unionists and workers are denouncing the government's cost cutting programme which will take €15bn out of the Irish economy over the next four years.
China, Russia quit dollar
By Su Qiang and Li Xiaokun (China Daily)
St. Petersburg, Russia - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.
Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.
"About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg.
The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.
The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.
"That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries," he said.
Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.
The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communiqu. Details of the documents have yet to be released.
Putin said one of the pacts between the two countries is about the purchase of two nuclear reactors from Russia by China's Tianwan nuclear power plant, the most advanced nuclear power complex in China.
Putin has called for boosting sales of natural resources - Russia's main export - to China, but price has proven to be a sticking point.
Russian Deputy Prime Minister Igor Sechin, who holds sway over Russia's energy sector, said following a meeting with Chinese representatives that Moscow and Beijing are unlikely to agree on the price of Russian gas supplies to China before the middle of next year.
Russia is looking for China to pay prices similar to those Russian gas giant Gazprom charges its European customers, but Beijing wants a discount. The two sides were about $100 per 1,000 cubic meters apart, according to Chinese officials last week.
Wen's trip follows Russian President Dmitry Medvedev's three-day visit to China in September, during which he and President Hu Jintao launched a cross-border pipeline linking the world's biggest energy producer with the largest energy consumer.
Wen said at the press conference that the partnership between Beijing and Moscow has "reached an unprecedented level" and pledged the two countries will "never become each other's enemy".
Over the past year, "our strategic cooperative partnership endured strenuous tests and reached an unprecedented level," Wen said, adding the two nations are now more confident and determined to defend their mutual interests.
"China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power," he said.
"The modernization of China will not affect other countries' interests, while a solid and strong Sino-Russian relationship is in line with the fundamental interests of both countries."
Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a "fair and reasonable new order" in international politics and the economy.
Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.
Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.
Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.
He left St. Petersburg for Moscow late on Tuesday and is set to meet with Russian President Dmitry Medvedev on Wednesday.
UPDATE 1-Euro zone recovery accelerates, still two-speed -PMI
By Jonathan Cable
LONDON, Nov 23 (Reuters) - Economic recovery in a divergent euro zone accelerated this month as a strong resurgence in private sector growth in Germany and France offset persistent stagnation in periphery members, surveys showed on Tuesday.
Markit's Eurozone Flash Services Purchasing Managers' Index, made up of surveys of around 2,000 businesses ranging from banks to hotels, bounced to 55.2 in November from a final reading of 53.3 in October.
The index comfortably exceeded consensus expectations in a Reuters poll, which were for it to fall to 53.1. The services PMI has now been above the 50.0 mark that divides growth from contraction since August 2009.
"They surprised to the upside largely due to the strength of the core of the euro area, in particular Germany," said Ken Wattret at BNP Paribas.
"Although we inevitably focus on the euro zone as a whole, I think we are seeing a persistent divergence between the core countries and those on the periphery, and that is here to stay."
The European Union and International Monetary Fund agreed on Sunday to help bail out Ireland with loans to tackle its banking and budget crisis in a bid to protect Europe's financial stability. [ID:nLDE6AL00M]
It will be the second euro zone bailout in six months, after Greece accepted help in May and there are concerns that this may not be the last rescue package in the region.
Peak Oil: Why the Pentagon is Pessimistic [EXCLUSIVE]
“Twilight in the desert” is a book summing up the arguments of a Texan oil banker who suggests that Saudi Arabia is overestimating its future oil production capacity. I’ve learned through the American Department of Defense that this book is the source of two recent Pentagon reports envisaging a severe lack of oil starting in 2012 and continuing until 2015 at least.
[Matthew Simmons, who wrote “Twilight in the desert, published in 2005, died in august at the age of 67. His analysis remain a major piece of the peak oil debate.]
According to the thesis developed in “Twilight in the Desert”, the official numbers published by Saudi Aramco, the national Saudi oil company, highly overestimate the true level of reserves that the largest world oil power is capable of extracting from its soil. As a consequence, according to Matthew Simmons, the Saudi oil production will no longer increase, and could even be on the point of a drastic reduction.
The advisory staff of the American armed services seems to consider the fears of Mr. Simmons as well-founded and credible, and based on this, the staff has produced a prognosis of a “severe energy crisis” that is potentially inevitable.
Two biannual reports, having appeared in 2008 and in 2010, describe the “environment” of the American Joint Chiefs of Staff [translator: “inter-armed service forces” in the original] (the JOE reports stand for Joint Operating Environment). They occupy an important place, in this reporter’s opinion, among the recent analyses recognizing the eventuality (or stating the threat) of a fall in the world oil production between now and the middle of this decade.
[The simple fact that the reports JOE2008 and JOE2010 come from the US Army makes them important. The U.S. armed forces have always overseen (very) closely the provisioning of this great power of the “free world” with Saudi black gold : since 1944 and the past alliance between President Roosevelt and King Ibn Saoud several days after Yalta, continuing to 1973 and the Yom Kippur war, when the U.S. Navy developed attack plans to get a hold of the Ghawar mega-field the no less vital terminal of Ras Tanura, and when at the same time Saudi Arabia agreed to secretly break its own oil embargo in order to provision the American sixth fleet, which was threatened with its gasoline tank going dry, and… continuing on to today.]
The 2008 and 2010 JOE reports describe in identical terms a diagnosis that figures to this day to be among the most pessimistic on the question of an eventual structural oil shock between now and 2015.
In the Joint Operating Environment 2008 report [p. 17 ] and JOE2010 [pp. 28, 29 ], one can read:
“By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.”
10 million barrels per day is approximately the equivalent daily production of Saudi Arabia.
If in 2015, in satisfying the world’s energy demand, there was really a gap equivalent to the Saudi production, the years to come would promise to be extremely delicate with effects spread throughout the world, affecting the economy, politics, and, therefore, the military forces.
The 2010 Joint Operating Environment report warns:
“A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India.
At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest.“
The JOE2010 authors, published in March, emphasize that this year, due to the financial crisis, “investment in oil production is just beginning to start up again, with the result that production could reach a prolonged plateau.”
Such a “prolonged plateau” for world production of oil and other liquid fuels would devalue the assets that were dealt to the economies of this planet. Because the future global oil demand doesn’t seem ready for stagnation. The International Energy Agency foresees that this demand would increase by 18% between now and 2035, according to the annual report published by this institution based in Paris, and charged with advising the rich OECD countries.
The JOE2008 and JOE2010 reports don’t indicate the sources that enabled them to put out this warning (they don’t even mention the names of their authors). Their main author, Joe Purser, Joint Futures Group director at the US Joint Forces Command, did not wish to reply to my questions.
Nevertheless, Kathleen Jabs, head of the press office of the Joint Forces Command, indicates by e-mail that Mr. Purser says “that he had access to a presentation of “Twilight in the Desert” that Matt Simmons gave to Pentagon personnel in February, 2008.”.
Kathleen Jabs states that the two other sources of the JOE2008 and JOE2010 reports are from data furnished by the International Energy Agency, and from an analysis group in the American Department of Energy, the Energy Information Administration (EIA).
A document of the EIA, described on this blog, envisages a possible gap of 10 million barrels per day between oil supply and demand, between now and 2015. A gap identical to the one that appears in the JOE2008 and JOE2010 reports. Nevertheless, the IEA is not basing this on a fall in Saudi production. The supposed gap is due to the decline, between now and 2015, in other major regions of oil production — and that this decline is already widely acknowledged (North America,North Sea), or that is is all but official (Russia, China, Venezuela, etc.).
Glen Sweenam, the author of this EIA document, recognizes that “there is a chance that we will experience a decline” in world production of liquid fuels between 2011 and 2015 “if the investments are lacking”, according to an exclusive interview published in March on this blog.
In April, energy secretary Steven Chu refused to comment on the statement of Mr. Sweenam’s, his number one expert on estimates for the future.
Three weeks after the publication of this interview, Mr. Sweetnam was moved without warning to the National Security Council, the White House strategic planning group charged with advising President Obama. Neither the White House nor the American Department of Energy wished to comment on the reasons for this transfer, in spite of my repeated requests, as well as those of journalist Julia Harte, from the American site SoveClimateNews .
A think tank of military experts close to the White House published a study in October that emphasized the necessity for the American armed forces to exit from petroleum between now and 2040. The Center for a new American Century explicitly makes reference to a near-term decline in the world’s production capacity in black gold.
A former vice-president of Saudi Aramco, Sadad Al-Husseini, maintains that the world production of black gold will no longer increase, but without stating anything tangible concerning the future production of his previous company.
Several major publications on international economics recently indicated a readiness to take seriously the hypothesis of an imminent and potentially severe energy crisis. For example, the Financial Times web site, which has twice made reference to the interview with Glen Sweetnam, or then again the Bloomberg agency, which has published on November 1 a dispatch providing a rather discouraging analysis of the Morgan Stanley bank.
Currency War Hits Mexico as Carstens Signals Rate Cuts
By Jens Erik Gould and Andres R. Martinez
The peso’s biggest rally on record may prompt Mexico’s central bank to cut interest rates next year to boost exports after other Latin American policy makers raised borrowing costs to cool their economies.
Governor Agustin Carstens signaled during a Nov. 2 meeting with economists in New York that he would consider cutting rates should the peso keep gaining, according to analysts from Barclays Capital, Deutsche Bank AG and UBS AG who attended the meeting. The bank may lower borrowing costs a quarter percentage point to 4.25 percent by March, Mexican futures trading show.
Foreign investment in short-term Mexican notes known as Cetes has risen more than six-fold since the end of 2009 as investors looked for alternatives to near-zero interest rates in the U.S. and Europe. Inflows almost doubled last month to 70.4 billion pesos ($5.78 billion) as international investors anticipated the Federal Reserve would pump additional liquidity into the U.S. economy. China said this week the Fed’s decision to purchase $600 billion in U.S. Treasuries threatens to “shock” emerging markets with “hot money.”
“Mexico runs the risk of being slammed by the markets,” said Alonso Cervera, a Latin American economist at Credit Suisse Group in Mexico City who attended the meeting with Carstens in New York. “If there’s a rally in the peso, we shouldn’t be surprised if they choose to cut rates.”
Defending Exports
In seeking to curb the peso’s 7.7 percent advance against the dollar over the past 10 weeks with a rate cut, Carstens would be defending his country’s exports from what Brazilian Finance Minister Guido Mantega has called a global “currency war,” said Jimena Zuniga, an economist at Barclays.
“If the central bank perceives it is left alone in the currency war and the peso is losing competitiveness, then the central bank might consider measures including using monetary policy to discourage inflows,” said Zuniga, who was at the New York meeting with Carstens.
The yield on Mexico’s 9 percent bond due in 2012 dropped 10 basis points the day after Carstens’ meetings with economists and investors.
Still, Standard & Poor’s doesn’t see changes in Mexican interest rates next year, Lisa Schineller, director for Latin America, said at the Bloomberg Mexico Economic Summit today in Mexico City. Sergio Luna, chief economist for Citigroup Inc.’s Banamex unit, also said he didn’t expect a change in rates.
Domestic Demand
Mexico’s domestic demand remains weaker than regional peers including Brazil and Chile even as stronger exports to the U.S. have led the central bank to forecast 5 percent growth in 2010 after the economy contracted 6.5 percent last year, the worst slump since 1932. While consumer confidence and retail sales have increased, and unemployment fallen, they remain below levels before the Sept. 2008 collapse of Lehman Brothers Holdings Inc.
Mexico’s IPC index of 35 stocks has climbed 13 percent this year, exceeding the 4 percent gain for Brazil’s Bovespa index.
The March 2011 futures contract for the 28-day interbank rate, known as TIIE, fell 23 basis points since the end of September to 4.74 percent Nov. 8, suggesting policy makers may cut borrowing costs 25 basis points. The futures rate rose to 4.77 percent yesterday. In the past five years, the spread between the TIIE and benchmark has averaged 38 basis points.
The peso has gained 6.7 percent this year, on pace for the biggest annual rally on record. The currency rose 0.3 percent to 12.2667 per U.S. dollar at 12:27 a.m. New York time.
Currency Gains
Only the Colombian peso has gained more among major Latin American currencies, rising 10 percent since Dec. 31. A stronger currency hurts exporters by making their goods become more expensive in dollar terms.
Countries from Brazil to Thailand to Colombia are imposing levies on foreign capital, ending tax exemptions for foreigners or stepping up dollar purchases in the currency market. Carstens criticized such moves in an Oct. 27 radio interview.
“We would try to avoid falling into these circumstances, although you can never discard all possibilities,” Carstens said. Currency wars are “very destructive,” he told Radio Formula.
The central bank declined to comment on Carstens’s meeting last week with economists.
Brazil’s 10.75 percent benchmark rate and Mexico’s 4.5 percent rate are luring foreign investors seeking to bolster returns on their cash. Banco de Mexico has kept the benchmark interest rate unchanged since July 2009.
Inflation Forecasts
Inflation, while quickening to 4 percent in October, is below the bank’s forecasts, and policy makers have said the economy remains vulnerable to the slowdown in the U.S., which buys 80 percent of Mexico’s exports.
On Oct. 27, the central bank changed its 2011 inflation forecast of 2.75 percent to 3.25 percent to an estimate of 3 percent plus or minus one percentage point. For Morgan Stanley, the change gave the central bank “room to justify a potential rate cut,” according to a Nov. 1 report.
Foreign investment in Cetes, zero-coupon bonds with a maturity of as long as two years, almost doubled to 70.4 billion pesos on Oct. 27 from 37.7 billion pesos a month earlier, according to the central bank’s website. Foreign investment in Cetes was 11.6 billion pesos at the end of 2009.
“This is the first sign of speculation, which is what the central bank wants to avoid,” Cervera said. “It’s money that won’t be there to help you fund 10-year mortgages or long-term investment projects.”
Bucking Trend
A rate cut would set Mexico apart from Brazil, Chile and Peru, where policy makers raised rates after the global financial crisis ended. In Colombia, economists at Banco Popular SA and Interbolsa SA have speculated the central bank may reduce its rate from 3 percent after consumer prices fell in October.
Deutsche Bank expects the central bank to lower the interest rate by a half point at its final policy meeting of the year on Nov. 26.
“In the meeting with Carstens there was nothing that could make us doubt our call,” Mauro Roca, an economist at Deutsche Bank, said in a telephone interview from New York.
Deutsche is one of only two of 23 firms polled in a Nov. 4 survey by Citigroup Inc.’s Banamex unit predicting the bank’s next move will be a rate reduction.
Banco de Mexico last month cut its inflation forecast for the next two quarters, saying the country was experiencing only moderate wage increases and limited external pressure on prices.
The central bank won’t reduce borrowing costs unless it’s certain that foreign investment will keep pouring in, Carstens said at the New York meeting, according to Rafael de la Fuente, a senior economist for Latin America at UBS.
“The message is that they are not comfortable at all with the peso’s appreciation,” said Bertrand Delgado, an economist at Roubini Global Economics LLC in New York, who didn’t attend the gathering. “This is a form of verbal intervention.”
'Redback' to rival U.S. dollar
By: Eric Lam
Original Article by FINANCIAL POST
As the G20 begs China to let the renminbi appreciate amid a simmering currency row, the world’s fastest-growing economy is already building up a framework that could make the “redback” a credible alternative to the slumping greenback.
The renminbi, or yuan as it is also known, will become one of the world’s top three global trading currencies within the next three to five years as China ramps up its efforts to make it an instrument of trade — especially in emerging Asia, said Qu Hongbin, chief economist for China and co-head of Asian economics at HSBC Holdings PLC.
“If there is to be a rival to the dollar as the world’s reserve currency in the 21st century, it surely must be the Chinese renminbi,” Mr. Qu said in a new report. “To date, its currency has been severely underrepresented in global trade and capital markets. Yet we may be on the verge of a financial revolution of truly epic proportions.”
Mr. Qu’s report comes as the G20 heads into a summit in Seoul and the United States urges China to let the yuan appreciate and become more of a destination for global exports.
Other nations accuse the United States of manipulating its currency lower and talk swells over making gold a part of a new global currency system.
Meanwhile, China is quietly building up the appartus to make its currency a bigger part of global trade
China does 55% of its total trade with emerging markets, but less than 3% is settled using the yuan. Mr. Qu said that could reach more than 50% in the next three to five years.
“In other words, nearly US$2-trillion worth of trade flows could be settled in renminbi annually, making it one of the top three global trading currencies,” he said.
China has already taken steps to encourage cross-border trade using the renminbi, beginning with a pilot program in 2009 allowing renminbi trade settlements between five Chinese cities and Hong Kong, Macau and some Southeast Asian nations. That program has since been expanded to all foreign trade partners and 20 Chinese provinces.
Hong Kong, now a Special Administrative Region for China that serves as one of the most important free financial centres in Asia, is quickly becoming ground zero for the renminbi.
In the past three months, several Chinese and foreign institutions have issued renminbi-denominated bonds in Hong Kong, including McDonald’s Corp. There is also spot trading in the currency and total deposits in the Hong Kong banking system have risen 240% to almost 150-billion yuan in the first nine months of 2010.
“As a strategic priority, Chinese policymakers have already [and will continue to] introduce multiple accommodative taxation, trade finance and capital account measures to facilitate the renminbi internationalization process,” Mr. Qu said. “A switch from the dollar to the renminbi for trade settlement is likely to be an appealing option for emerging nations eager to bolster their relations with the fast-growing Middle Kingdom.”
Pedro Bastos, chief executive with HSBC Global Asset Management in Brazil, said there has been plenty of discussion about bilateral trades between the two countries using redbacks instead of greenbacks, accelerated in part by the financial crisis.
“There’s a clear need to have global reserves in place that better reflect trading flows around the world. It’s a fundamental change as a result of globalization and the sheer size of the Chinese economy,” he said from São Paolo.
Recent initiatives to micro-reform state banks, develop foreign exchange markets and deepen local capital markets are also steps in the right direction, Mr. Qu said.
Wendy Dobson, a professor at the Rotman School of Management and expert on monetary systems, said China still has a lot of work to do before its currency could be considered on the same level as the U.S. dollar.
“First, the renminbi has to be used more in the Asian region by creating financial instruments and renminbi markets as is now happening in Hong Kong. Then China has to modernize further its bank-dominated financial system to be less government-owned and directed,” she said in an e-mail. China will also need to keep its exchange rate flexible and open up its capital accounts.
She estimates the renminbi will be used much more extensively in Asia by 2020.
The issue is a matter of trust, Mr. Bastos said. The financial crisis and subsequent depreciation of the greenback has left investors shaken.
“People know risk is inevitable, crises happen, but if you can diversify that a little bit and not be dependent on one specific economy then bilateral agreements might make sense,” he said.
Read more: http://www.financialpost.com/Redback+rival+dollar/3803096/story.html#ixzz15UErxeyw
China's Dagong Lowers U.S. Credit Rating on Fed Monetary Policy
By Joshua Fellman and Ye Xie
China’s Dagong Global Credit Rating Co. reduced its credit rating for the U.S. to A+ from AA, citing a deteriorating intent and ability to repay debt obligations after the Federal Reserve announced more monetary easing.
The credit outlook for the U.S. is “negative,” as the Fed’s plan to buy government debt will erode the value of the dollar and “entirely encroaches” on the interests of creditors, analysts at Dagong, one of China’s three largest ratings companies, said in a statement. The U.S. is rated Aaa and AAA by Moody’s Investors Service and Standard Poor’s Corp., the highest credit ratings of the New York-based companies.
The downgrade came before a meeting of leaders of the Group of 20 nations this week in Seoul and as the U.S. steps up pressure for China to let the yuan strengthen to help reduce the U.S. trade deficit. China countered the criticism by saying U.S. economic policies threaten the stability of developing nations.
“The general market perception is that there’s a risk that the Chinese rating agency is playing a bit more political game than providing independent analysis,” said Ian Lyngen, a government bond strategist in Stamford, Connecticut, at CRT Capital Group LLC, in a telephone interview. “I don’t think it has the same ramification as a downgrade by mainstream rating agencies such as S&P and Moody’s. That said, the reasons that the credit rating of the U.S. may come under pressure are obvious to most people.”
‘Some Justification’
The privately owned Dagong, founded in Beijing in 1994, is the only one of China’s three largest ratings companies that doesn’t have a foreign partner. The company, seeking to become an alternative to S&P, Moody’s and Fitch Ratings, gave China’s debt a higher rating than that of the U.S. and Japan in the nation’s first sovereign ranking in July, citing widening deficits in the developed world.
“Sovereign ratings have become Dagong’s business focus as its market share in corporate ratings is much smaller than its peers with foreign partners,” said Shi Lei, the head of fixed- income research in Shenzhen at Ping An Securities Co., a subsidiary of China’s second-largest insurer. “Its downgrading of the U.S. rating has some justification as printing money to help with the fiscal deficit is even worse than keeping a high deficit.”
Yields on benchmark 10-year U.S. Treasury notes rose 11 basis points yesterday as bidding declined at a $24 billion sale of new securities. The yield on the 2.625 percent Treasury due in August 2020 fell four basis points today to 2.62 percent. A basis point is 0.01 percentage point.
‘Serious Defects’
The downgrade for the U.S. “reflects its deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment,” analysts Lu Sinan and Du Mingyan wrote in the statement. “The serious defects in the U.S. economic development and management model will lead to the long-term recession of its national economy, fundamentally lowering the national solvency.”
Chinese central bank adviser Xia Bin said Nov. 4 that the Fed’s $600 billion of planned Treasury debt purchases is “uncontrolled” money printing, and Vice Finance Minister Zhu Guangyao said yesterday that the program could “shock” emerging markets by flooding them with capital.
“Many countries are worried about the impact of the policy on their economies,” Vice Foreign Minister Cui Tiankai said at a press briefing in Beijing Nov. 5. “It would be appropriate for someone to step forward and give us an explanation, otherwise international confidence in the recovery and growth of the global economy might be hurt.”
Global ratings methodology is “irrational,” Dagong Chairman Guan Jianzhong said in July, and “cannot truly reflect repayment ability.”
In September, the Securities and Exchange Commission turned down Dagong’s application to become a Nationally Recognized Statistical Rating Organization in the U.S.
Deficit Plan Matches $3.8 Trillion Math With Tough Politics
By Heidi Przybyla and Brian Faler
A plan offered by the leaders of President Barack Obama’s commission to reduce the federal deficit might work. It just won’t happen.
The co-chairmen proposed a $3.8 trillion deficit-cutting plan yesterday that would trim Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction. It would reduce the annual deficit from $1.3 trillion this year to about $400 billion by 2015 and start reducing the $13.7 trillion national debt.
“Mathematically it apparently works,” said Stan Collender, a former Democratic House and Senate budget analyst and managing director of Qorvis Communications in Washington. “Politically, it is going to have a lot of trouble getting support from more than just the two co-chairs.”
The plan would raise the gas tax, slash defense spending and farm subsidies and bring down health-care costs by clamping down on medical malpractice suits. The Social Security retirement age would rise to 68 in about 2050 and 69 in about 2075.
Its release created instant opposition from Democrats, some Republicans and groups such as the Mortgage Bankers Association and the Aerospace Industries Association.
Democratic House Speaker Nancy Pelosi called the targeting of Social Security and Medicare “simply unacceptable,” and Republican Representative Jeb Hensarling of Texas expressed opposition to proposals to raise taxes.
Obama Reaction
Obama, in Seoul as part of a 10-day tour of Asia, said he had yet to read the plan and that critics should withhold their judgment until the final report. He urged congressional leaders to match rhetoric with action and join him in making difficult decisions about taxes and spending.
“So before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts,” Obama said at a press conference with South Korean counterpart Lee Myung-Bak. “If people are, in fact, concerned about spending, debt, deficits and the future of our country, then they’re going to need to be armed with the information about the kinds of choices that are going to be involved.”
Panel co-chairman Erskine Bowles, former chief of staff to President Bill Clinton, joked that he and co-chairman Alan Simpson, a Republican former Wyoming senator, would have to enter a “witness protection program.”
‘Harpooned Every Whale’
“We have harpooned every whale in the ocean and some of the minnows,” said Simpson. The plan, he said, is sure to be unpopular. He and Bowles said the proposals should be viewed as a starting point for negotiations. The panel meets again next week to consider changes.
“Is America ready for an adult conversation on the deficit?” said Representative Jim Cooper, a Tennessee Democrat. “It’s ‘put up or shut up’ time.”
None of the proposals would take effect next year to avoid disrupting the economic recovery. The savings would come between 2012 and 2020, cutting the deficit from the current 9 percent of the nation’s gross domestic product to about 2.2 percent in 2015, exceeding Obama’s goal of a reductions to 3 percent of GDP.
$8 Trillion
The government is projected to run $8 trillion in deficits over the next 10 years, which would push the national debt to more than $20 trillion. If the proposal were adopted without change, the government still would have deficits of $350 billion a year.
“It puts out there how big and real the problems are,” said Oklahoma Republican Senator Tom Coburn, a member of the committee.
Under one option, income-tax rates would be reduced to three levels: 8 percent, 14 percent and 23 percent. Now there are six tax levels ranging from 10 percent to 35 percent. The corporate income-tax rate would be cut to 26 percent from 35 percent.
The plan includes two less sweeping alternatives to ending all tax breaks, including one in which a pared back mortgage tax deduction would be retained. Under that proposal, homeowners could not take the break for second homes, mortgages worth more than $500,000 or home equity loans.
Wiping out all tax breaks, including the home mortgage- interest deduction, while lowering rates would cost taxpayers $100 billion a year. Members of the panel could decide to keep some of the breaks by offering offsetting cuts, Bowles said.
‘Not the Time’
John Courson, chief executive officer of the Mortgage Bankers Association in Washington, said eliminating or reducing the mortgage deduction would drive down home values.
“Of all the times to do it, now is not the time,” he said in an interview.
Still, Michael Ettlinger, vice president for economic policy at the Center for American Progress in Washington, said the fact that the deduction disproportionately benefits wealthier homeowners might create political will to revise it.
Overall, yesterday’s proposal would raise taxes by $751 billion over 10 years, including a 15-cent increase in the gas tax that would be phased in starting in 2013. Farm subsidies would be cut by $3 billion a year.
The plan calls for discretionary spending to be cut by $1.4 trillion over 10 years, while mandatory spending -- including Social Security, Medicare for the elderly and Medicaid for the poor -- would be reduced by $733 billion.
John Rother, executive vice president for policy at the senior citizens’ group AARP, said his group would oppose the plan because it would be “dramatically lowering benefits over time” in Social Security and Medicare.
‘Drop Dead’
Bowles and Simpson “just told working Americans to ‘drop dead,’” said AFL-CIO President Richard Trumka. “The very people who want to slash Social Security and Medicare spent this week clamoring for more unpaid Bush tax cuts for millionaires.”
The plan spells out $100 billion in defense cuts, including freezing Defense Department salaries and noncombat military pay at 2011 levels for three years, cutting overseas bases by one- third and doubling proposed cuts in defense contracting.
The Aerospace Industries Association, the trade group for U.S. defense contractors, said it had “grave concerns” about proposals to reduce funds for purchasing, research and development. “We cannot abandon the security of future generations,” said the group, which represents Lockheed Martin Corp., Boeing Co., and Northrop Grumman Corp.
Bowles said about three-quarters of the savings would come from spending cuts, with the remainder from tax increases.
Freeze Federal Salaries
It would reduce congressional and White House budgets by 15 percent, freeze federal salaries for three years and cut the federal workforce by 10 percent. House Republican leader John Boehner of Ohio, who will become speaker in January, said before the plan’s release that he supported a freeze on federal hiring and government workers’ pay.
The proposal would also end government funding of National Public Radio and the Public Broadcasting Service, begin charging fees to visitors to the Smithsonian Institution museums in Washington, raise fees at national parks and merge the Department of Commerce with the Small Business Administration.
It would eliminate the Office of Safe and Drug-Free Schools, whose budget Obama proposed more than doubling from 2008 levels. The plan said that “while school safety should be protected, violence and drug abuse are problems that occur far less on school grounds than elsewhere.”
Agreement Needed
The panel needs agreement from 14 of its 18 members before a plan can be sent for an up-or-down vote in Congress.
Dan Seiver, a finance professor at San Diego State University, said the plan’s strength is its attack on many budget areas long considered untouchable. “You’re not really going to get fiscal sanity without goring everybody -- everybody has to sacrifice,” he said.
Orin Kramer, general partner of hedge fund Boston Provident Partners LP and a Democratic Party fund-raiser, said he doubts an agreement can be reached.
“The most central question that somebody should ask is: ‘What are the prospects for a grand bargain that will change the path of federal fiscal policy?’” Kramer said. “And the chances of that under current conditions are zero.”
There Was a Fed Chairman Who Swallowed a Fly
By: Peter Schiff
Original Article on EURO PACIFIC
While it’s true that history repeats itself, the patterns should always be separated by a generation or two to keep things respectable. Unfortunately, in today’s economic world, it seems the cycle can be counted in months.
On July 24, 2009, just as the Federal Reserve unleashed its first quantitative easing campaign (now called “QE1” – an echo of the reclassification of the Great War after still more destructive subsequent developments), Fed Chairman Ben Bernanke wrote an opinion piece in the Wall Street Journal to soothe growing concerns about excess liquidity. He assured the public that the Fed had an “exit strategy.”
In a response entitled “No Exit for Ben”, I called the Chairman’s bluff. I argued that the Fed had no exit strategy, and that Bernanke was trying to fool the market into believing that quantitative easing was not debt monetization.
Just 16 months later, Bernanke is at it again, penning another op-ed to defend his second round of QE. Except this time, instead of feigning an exit strategy, he just outlines a path to expand the program in perpetuity.
In recent months, Fed economists have taken great pains to tell us how much better off the economy is now than it was in the first half of 2009. Given this supposed good news, what prompted the current turnaround in policy? Could it be, perhaps, that perpetual easing was the policy all along?
Should we expect another op-ed in a few months in which Bernanke tries to reassure us that QE3 will not over-liquefy the market? How much longer can the Fed play this game before the public and the markets wise up?
The reason I knew QE1 would fail, and that the Fed had no exit strategy (other than more rounds of easing), is because the remedy is totally flawed. If Bernanke’s predecessor, Alan Greenspan, had engaged in prudent monetary policy, we never would have arrived at the point of desperation that made quantitative easing a palatable option. However, we did, and Bernanke’s understanding of economics is so remedial that making the right choice is essentially impossible for him. Now, we are caught in a vicious circle of spending, borrowing, and easing.
In his most recent op-ed, Bernanke rather envisions a “virtuous circle” in which QE2 causes stock prices to rise, which then “boost[s] consumer wealth, and increase[s] confidence.” The wealth effect, in turn, “spur[s] spending and produce[s] higher incomes and profits,” which finally “support[s] economic expansion and promote[s] increased employment.”
Despite the devastation of the Fed’s previous burst bubbles (stocks in ’99 and real estate in ‘08), Bernanke still believes in the virtue of pumping. His current policy is to inflate another stock market bubble to cure the recession that resulted from the bursting of the housing bubble, which was itself inflated to counter the effects of the bursting tech stock bubble. Does the story of the old lady who swallowed the fly come to mind? She eventually tried swallowing a horse, and we know how that ended. It’s hard to decide who is more culpable for the strategy: Bernanke for selling it or the country for buying it.
In the 16 months since Bernanke assured us that QE1 would not jeopardize price stability, oats prices are up 40%, concentrated orange juice up 45%, gold and rice up 50%, corn up 55%, coffee up 60%, copper up 70%, sugar up 90%, and cotton and silver up 100%! (The sluggish Dow Jones Industrials are “only” up 30%.)
Last week, Kraft Foods reported a 26% rise in third quarter revenue; however, because of steeply rising material costs, profits actually dropped 8.5% over the same period. If Bernanke is correct in assuming that consumer prices will stay low, the only way Kraft shares could go up would be for the market to assign much higher multiples to lower earnings. You can hope that will happen, but it’s not a wise bet.
Given that QE2 will also push down the dollar against foreign currencies, companies exporting to the US will face the same bind as Kraft. If foreign suppliers don’t raise prices, a weaker dollar will cut into their profits.
My guess is that neither foreign nor domestic companies will take the hit, but pass the costs along to consumers. Rising prices will soon became a daily occurrence on Main Street, not just in the stock market.
For all the wrangling over extending the Bush tax cuts, no one seems bothered by the continuation of the Bernanke tax increases. For the typical American wage earner, the inflation tax will more than offset the benefits of slightly lower income taxes. Savers and retirees will suffer the most as the interest paid on their assets continues to fall and the purchasing power of their principal is eroded.
In reality, quantitative easing will produce the exact opposite of its intended result. In the short-run, it may create the illusion of economic growth and temporarily add some service sector jobs, but once the QE ends, the growth and jobs will vanish. Then, the Fed will most likely try once again to douse the fire it started with another round of QE gasoline, creating an even larger and less manageable inferno. Let’s hope we can change policy before the whole economy burns to a cinder.
Fed Fires $600 Billion Stimulus Shot
By JON HILSENRATH
Original Article at THE WALL STREET JOURNAL
The Federal Reserve, in a dramatic effort to rev up a "disappointingly slow" economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth.
Many outside the Fed, and some inside, see the move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly unconventional policies during the financial crisis to ward off a financial-system collapse. But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.
The Fed left open the possibility of doing more if growth and inflation don't perk up in the months ahead. The $75 billion a month in new purchases of Treasury debt come on top of $35 billion a month the Fed is expected to spend to replace mortgage bonds in its portfolio that are being retired.
The Dow Jones Industrial Average Wednesday continued a climb that began in August, when Mr. Bernanke signaled that a bond-buying program was possible. The index rose 26.41 points, or 0.24%, to a two-year high of 11215.13. Yields on 10-year notes, which have fallen from just under 3% in early August, finished the day at 2.62%. The value of the dollar has fallen in anticipation of a flood of new American currency hitting global financial markets.
These market reactions are seen inside the Fed as being stimulative to the economy. In addition to the impact of cheaper borrowing, higher stock prices could encourage households to spend more and businesses to invest more, and a weak dollar could make U.S. exports cheaper and thus easier to sell abroad.
"All of these things are part of what the Fed is trying to do, and I think it has been successful," said Laurence Kantor, head of research at Barclays Capital in New York.
The moves announced Wednesday were broadly in line with the expectations of economists, although some had expected total spending to be a bit less and to come more quickly.
There are immense unknowns and many risks.
In essence, the Fed now will print money to buy as much as $900 billion in U.S. government bonds through June—an amount roughly equal to the government's total projected borrowing needs over that period.
In normal times, a Fed spending spree on government bonds would be highly inflationary, because it would flood the economy with money and raise worries about too much government spending. The mere worry of too much inflation in financial markets could drive long-term interest rates higher and cause the Fed's program to backfire.
Prices in commodities markets have marched higher since late August. Crude-oil futures prices, for instance, have risen 15% since then, to $85 per barrel.
Michael Pence, a top Republican in the House of Representatives, said the Fed was taking an "incalculable risk."
Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, who described the move before the meeting as a "bargain with the devil," was the lone dissenter in a 10-1 vote of the Fed's policy committee. He said the risks of additional government bond purchases outweighed the benefits.
But Fed officials are betting that inflation is still being pushed strongly in the other direction because there is so much spare capacity in the economy—including an unemployment rate at 9.6%, a real-estate landscape littered with more than 14 million unoccupied homes, and manufacturers operating with 28% of their productive capacity going unused.
The latest economic data suggest the economy is expanding, but not at a very fast pace. Figures Wednesday from payroll firm Automatic Data Processing Inc. and consultancy Macroeconomic Advisers showed that companies added 43,000 private-sector jobs in October.
In a post-meeting statement, the Fed said it was acting to "promote a stronger pace of economic recovery" and to ensure that inflation, now running at around a 1% annual rate, moves toward the Fed's informal objective of 2%.
This is the Fed's second experiment with a big bond-buying program. Between January 2009 and March of this year, the central bank purchased roughly $1.7 trillion worth of government and mortgage bonds. That move also sparked worries about inflation, which so far hasn't materialized. The bond-buying program is known in some corners as quantitative easing.
"This approach eased financial conditions in the past and, so far, looks to be effective again," Mr. Bernanke said in an opinion piece scheduled to be published in Thursday's Washington Post.
By buying a lot of bonds and taking them off the market, the Fed expects to push up their prices and push down their yields. The Fed hopes that will result in lower interest rates for homeowners, consumers and businesses, which in turn will encourage more of them to borrow, spend and invest. The Fed figures it will also drive investors into stocks, corporate bonds and other riskier investments offering higher returns.
The Fed normally would push down short-term interest rates when the economy is weak. But it has already pushed those rates to near zero, leaving it to resort to unconventional measures.
The planned bond buying, by Fed calculations, will have an economic impact roughly equivalent to cutting short-term interest rates by three-quarters of a percentage point.
The Fed will be buying bonds with maturities of as long as 30 years, but will concentrate its purchases in the five-year to six-year range. Some bond-market participants were disappointed with that decision because they wanted the Fed to focus on buying longer-term bonds. But doing so could leave the Fed more exposed to losses if interest rates rise.
There are other risks.
Critics say a weaker dollar isn't in U.S. interests, and that a swift decline in the value of the currency could drive up U.S. interest rates. Fed officials have seen the dollar's drop to date as being orderly and supportive of growth.
Some critics also argue that by purchasing government bonds, the Fed is taking pressure off the White House and Congress to address long-term deficit problems, but Mr. Bernanke is trying to avoid such political calculations.
U.S. trading partners, particularly in the developing world, openly worry that the Fed's money pumping is creating inflation in their own economies and a risk of asset-price bubbles. Fed officials say a strong U.S. economy is in everyone's interest.
In recent weeks, China, India, Australia and others have pushed their own interest rates higher to tamp down inflation forces. Authorities in Brazil and Thailand have imposed taxes on capital flooding into their economies to prevent an asset bubble. And Japanese authorities have intervened in currency markets to prevent the yen from appreciating too much against the dollar.
There is an alternate risk that officials wrestled with in their latest two-day meeting, which concluded before lunch Wednesday: They might not be doing enough.
Economists at the research firm Macroeconomic Advisers LLC calculated that even if the Fed purchases $1.5 trillion worth of Treasury bonds—which some economists say remains a distinct possibility—it would only bring the unemployment rate down by 0.2 percentage points by the end of 2011.
"This instrument doesn't give them a lot of power, especially on the scale which they're prepared to use," said Laurence Meyer, of Macroeconomic Advisers, after the decision.
For the Fed, it was a middle ground that emerged after months of internal debate about the costs and benefits of restarting the program.
Trichet's Exit Faces Fed Roadblock as Bernanke Clouds Outlook
By Jana Randow
Federal Reserve Chairman Ben S. Bernanke is making it harder for Jean-Claude Trichet to lead the European Central Bank out of crisis mode.
Last night’s decision by the Fed to buy an additional $600 billion of Treasuries through June to bolster the U.S. economy may force the ECB to delay the withdrawal of its own stimulus measures, economists said. The Fed’s second round of so-called quantitative easing risks driving the euro higher, threatening Europe’s export-led recovery.
“It’s complicating the ECB’s exit and council members really need to think hard about their strategy,” said Julian Callow, chief European economist at Barclays Capital in London. “They may have to reconsider their plans.”
The Frankfurt-based central bank has said it intends to continue withdrawing its emergency measures, with some policy makers voicing concern about the risks of leaving them in place too long. At the same time, economic divergences within the 16- nation euro region are growing as Germany outpaces debt-strapped nations such as Portugal, Ireland and Greece.
The Fed’s move, which pushed the euro to a nine-month high against the dollar, may have added another headwind.
“The Fed is diluting its currency,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “The ECB won’t be too delighted about a rising euro.”
33-Hour Marathon
The single currency climbed as high as $1.4179 immediately after yesterday’s Fed announcement, which kick-started a 33-hour central banking marathon. The euro has risen about 18 percent against the dollar since early June and Citigroup predicts it will appreciate to $1.44 by the end of the year. It traded at $1.4132 at 8:44 a.m. in Frankfurt.
The ECB will leave its benchmark interest rate at a record low of 1 percent today, according to all 55 economists in a Bloomberg News survey. The decision is due at 1:45 p.m. in Frankfurt and Trichet holds a press conference 45 minutes later. The Bank of England will release its policy decision at noon in London and the Bank of Japan makes its announcement at about noon in Tokyo tomorrow.
The ECB meets after Executive Board member Juergen Stark said on Oct. 27 that the bank’s emergency policy settings “will absolutely not be kept longer than necessary.”
While the ECB’s tightening bias sets it apart from the world’s other major central banks, it is still more cautious than those in India and Australia, which this week raised interest rates to stem inflation pressures.
Weakening Economy
The euro-region economy is showing signs of weakening after expanding at the fastest pace in four years in the second quarter. Growth in the manufacturing industry has slowed from a peak in April and unemployment climbed to a 12-year high of 10.1 percent in September. Exports from Germany, Europe’s largest economy, declined for a second month in August.
A “persistently strong” euro is hurting manufacturers’ price competitiveness, Thomas Lindner, president of Germany’s VDMA machine makers’ association, said this week.
The International Monetary Fund forecasts euro-area growth will slow from 1.7 percent this year to 1.5 percent in 2011, while U.S. expansion will cool from 2.6 percent to 2.3 percent.
“The economies are not performing too differently and still the Fed and the ECB are going in almost exactly opposite directions,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “That reflects a deep-seated difference in central bank philosophies. The ECB is happy with moderate growth and moderate inflation; the Fed finds it totally unacceptable.”
Looking to Exit
The Fed’s decision came as voter anxiety over the U.S. economy and unemployment, as well as concerns about President Barack Obama’s fiscal stimulus, helped Republicans seize control of the House of Representatives in mid-term elections.
In Europe, ECB policy makers from Germany, Luxembourg, Belgium, Austria, Italy and the Netherlands have warned against keeping interest rates too low for too long and said further exit steps may be taken in the first quarter of next year.
Up for discussion is when the ECB will return to a bidding process in its lending procedures. It has committed to provide banks with unlimited liquidity in its weekly, monthly and three- month refinancing operations until the end of the year after abandoning its six- and 12-month loans.
Money markets are normalizing, with the rate banks charge each other for three-month loans, or Euribor, rising to 1.049 percent from 0.63 percent in March.
That’s a good reason for the ECB to stop offering banks three-month cash at its benchmark rate of 1 percent because it discourages interbank lending, said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan.
Widening Spreads
Bundesbank President Axel Weber has also called for an end to the ECB’s bond-purchase program, arguing its risks outweigh any benefits.
Investors have continued to dump Irish, Portuguese and Greek government bonds even after the ECB started buying them on the secondary market in May to ease tensions. The premium on Irish 10-year bonds over German bunds stood at 505 basis points at 8:53 a.m. in Frankfurt, Portugal’s spread was at 386 basis points and Greece’s reached 838 basis points.
“Weber has a point but it’s too early for the ECB to adopt the line and embark on an official tightening policy,” said Karsten Junius, senior economist at Dekabank in Frankfurt. “If the euro gains considerably and tensions on bond markets persist, the ECB may have to extend its support for the banking system well into 2011 and keep rates at a record low into 2012.”
Inflation Pressure
Still, a stronger euro may not fully shield Europe from rising inflation pressures. The Fed’s monetary easing may spur investors to seek higher-yielding assets such as commodities, boosting prices that are already rising due to stronger demand in emerging economies.
Crude oil prices denominated in dollars have jumped 17 percent since Aug. 31 and are up 6.3 percent in euro terms. That pushed euro-area inflation to 1.9 percent in October, the highest level in almost two years. The ECB aims to keep the rate just below 2 percent.
“The time will come for the ECB to look at inflation again,” said Laurent Bilke, global head of inflation strategy at Nomura in London, who expects a breach of 2 percent at the beginning of next year. “It doesn’t mean they’ll raise rates in the next three months, but we’re approaching levels the ECB will pay attention to.”
The age of the dollar is drawing to a close
By Jeremy Warner
Original Article at TELEGRAPH CO UK
Right from the start of the financial crisis, it was apparent that one of its biggest long-term casualties would be the mighty dollar, and with it, very possibly, American economic hegemony. The process would take time – possibly a decade or more – but the starting gun had been fired.
At next week's meeting in Seoul of the G20's leaders, there will be no last rites – this hopelessly unwieldy exercise in global government wouldn't recognise a corpse if stood before it in a coffin – but it seems clear that this tragedy is already approaching its denouement.
To understand why, you have to go back to the origins of the credit crunch, which lay in the giant trade and capital imbalances that have long ruled the world economy. Over the past 20 years, the globe has become divided in highly dangerous ways into surplus and deficit nations: those that produced a surplus of goods and savings, and those that borrowed the savings to buy the goods.
It's a strange, Alice in Wonderland world that sees one of the planet's richest economies borrowing from one of the poorest to pay for goods way beyond the reach of the people actually producing them. But that process, in effect, came to define the relationship between America and China. The resulting credit-fuelled glut in productive capacity was almost bound to end in a corrective global recession, even without the unsustainable real-estate bubble that the excess of savings also produced. And sure enough, that's exactly what happened.
When politicians see a problem, especially one on this scale, they feel obliged to regulate it. But so far, they've been unable to make headway. This is mainly because the surplus nations are jealous defenders of their essentially mercantilist economic models. Exporting to the deficit nations has served them well, and they are reluctant to change.
Ironically, one effect of the policies adopted to fight the downturn has been to reinforce the imbalances. Fiscal and monetary stimulus in the US is sucking in imports at near-record levels. The fresh dose of quantitative easing announced this week by the Federal Reserve will only turn up the heat further.
What can be done? China won't accept the currency appreciation that might, in time, reduce the imbalances, for that would undermine the competitiveness of its export industries. In any case, it probably wouldn't do the trick: surplus nations have a habit of maintaining competitiveness even in the face of an appreciating currency.
Unable to tackle the problem through currency reform, the US has turned instead to the idea of measures to limit the imbalances directly, through monitoring nations' current accounts. This has already gained some traction with the G20, which has agreed to assess the proposal ahead of the meeting in Seoul. As a way of defusing hot-headed calls in the US for the imposition of import tariffs, the idea is very much to be welcomed, as a trade war would be a disaster for all concerned. China, for one, has embraced the concept with evident relief.
Unfortunately, the limits as proposed would be highly unlikely to solve the underlying problem. Similar rules have failed hopelessly to maintain fiscal discipline in the eurozone. What chance for a global equivalent on trade? With or without sanctions, the limits would be manipulated to death. And even if they weren't, the proposed 4 per cent cap on surpluses and deficits would only marginally affect the worst offenders: for a big economy, a trade gap of 4 per cent of GDP is still a massive number, easily capable of creating unsafe flows of surplus savings.
No, globally imposed regulation, even if it could rise above lowest-common-denominator impotence, is unlikely to solve the problem, although it might possibly stop it getting significantly worse. But what would certainly fix things would be the dollar's demise as the global reserve currency of choice.
As we now know, dollar hegemony was itself a major cause of both the imbalances and the crisis, for it allowed more or less unbounded borrowing by the US from the rest of the world, at very favourable rates. As long as the US remained far and away the world's dominant economy, a global system based on the dollar still made some sense. But America has squandered this advantage on credit-fuelled spending; with the developing world expected to represent more than half of the global economy within five years, dollar hegemony no longer makes any sense.
The rest of the world is now openly questioning the merits of a global currency whose value is governed by America's perceived domestic needs, while the growth that once underpinned confidence in its ability to repay its debts has never looked more fragile.
Already, there are calls for alternatives. Unwilling to wait for one, the world's central banks are beginning to diversify their currency reserves. This, in turn, will eventually exert its own form of market discipline on the US, whose ability to soak the rest of the world by issuing ever more greenbacks will be correspondingly harmed.
These are seismic changes, of a type not seen for a generation or more. I hate to end with a cliché, but we do indeed live in interesting times.
G20 warned of protectionism, currency tension
Jonathan Lynn, Reuters · Thursday, Nov. 4, 2010
Original Article at FINANCIAL POST
GENEVA - The global economy is threatened by "dark clouds" of intensifying protectionist pressures, the heads of three international organizations said on Thursday in a warning to leaders of the G20.
These pressures are driven by high unemployment, macroeconomic imbalances and tensions over foreign exchange rates, said the heads of the World Trade Organization (WTO), Organization for Economic Co-operation and Development (OECD) and United Nations Conference on Trade and Development (UNCTAD).
"The stability of the trading system will be put at considerable risk if currencies move in what some perceive as the pursuit of an exchange-rate-induced comparative advantage," they said in a summary of reports ordered by the G20 for its summit in Seoul next week.
"We urge G20 governments to address these risks," WTO Director-General Pascal Lamy, OECD Secretary-General Angel Gurria and UNCTAD Secretary-General Supachai Panitchpakdi said in the summary, whose message was reported by Reuters on Wednesday.
The G20 committed to keeping markets open at its first summit in Washington two years ago to deal with the financial crisis and also at subsequent meetings. It commissioned regular reports from the three Organizations to monitor trade and investment policy for protectionism.
Previous reports from the three had concluded that protectionism was being held in check, so Thursday’s warning marks a significant shift in tone.
The WTO forecasts that global export volumes will rebound by an unprecedented 13.5% this year. But trade, both a motor and reflection of recovery, has slowed in recent months and is at risk from economic uncertainty and protectionism.
WTO chief Lamy and UNCTAD officials have warned in recent weeks specifically of the risks to the economy of currency tension, but the direct warning from the three heads to the G20 in the report shows just how strong these concerns have become.
Tensions over exchange rates and monetary policy have bedevilled U.S.-Chinese relations for months and many other countries, including G20-host South Korea, Japan and Brazil have also sounded the alarm about their partners’ policies.
The Federal Reserve launched a new effort on Wednesday to support the U.S. economy by printing money to buy bonds, but critics fear the policy will lead to high inflation and worry low interest rates in the United States could fuel asset bubbles in other countries and destabilize currencies.
In a report on trade, the WTO said G20 countries had continued to exercise restraint in imposing new restrictions since their last summit in Toronto at the end of June.
New measures, increasing but at a slower rate, covered 0.3 percent of G20 imports and 0.2% of total world imports.
But the steady accumulation of measures since the financial crisis burst in 2008 meant restrictions now covered 1.8% of G20 imports, and only 15% of them had been withdrawn.
"This is too low. G20 governments need to give priority to removing those measures," the three heads said.
On foreign investment, UNCTAD and the OECD said the G20 countries were resisting protectionism, with the majority of measures taken by 17 G20 states since the last summit aiming to facilitate and encourage investment flows.
But James Zhan, who heads UNCTAD’s investment and enterprise division, said this assessment did not include the protectionist way in which governments were handling existing rules.
"We do observe a kind of covert investment protectionism in the implementation of existing investment policies," he told a news conference. He noted approval of new investment projects was particularly subject to obstacles — an apparent reference to Canada’s decision to block BHP Billiton’s US$39-billion bid for Potash Corp.
The share of restrictive measures in total investment policies had risen to 30% in 2009 from 2 percent in 2008.
Flows to G20 countries of foreign direct investment such as cross-border mergers and greenfield investments plunged 36 percent in the second quarter of this year.
Mr. Zhan said this included a rise of 20% of investment flows to China and 30% to Russia.
But overall UNCTAD was sticking to its view that global FDI flows would stagnate at about US$1.2-trillion this year — still 25% below the average in 2005-2007, the three years before the crisis — with no significant recovery in sight.
Central Bank Treads Into Once-Taboo Realm
By JON HILSENRATH
Original Article on THE WALL STREET JOURNAL
The Federal Reserve will print money to buy nearly as much U.S. Treasury debt in the next eight months as the U.S. government will issue.
The Fed's decision this week to buy $600 billion more of U.S. Treasury debt is setting off a debate about the risks of a central bank entwining its policies so tightly with the government's fiscal fortunes. The Fed is essentially lending enough money to the government to fund its operations for several months, something called "monetizing the debt."
In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.
The central bank is betting these aren't normal times. Financial markets Thursday responded warmly to the Fed move, but outspoken critics of the policy issued full-throated critiques.
"It is doubtful the Fed decision will produce any results," Brazilian Finance Minister Guido Mantega told reporters following a cabinet meeting with Brazilian President Luiz Inacio Lula da Silva. Officials in Brazil, which averaged 850% annual inflation in the 1990s, have been critical of the Fed's easy-money policies because they are spurring price pressures abroad and could encourage new asset bubbles outside the U.S.
"Throwing money out of a helicopter doesn't do any good," Mr. Mantega said.
Thomas Hoenig, president of the Kansas City Federal Reserve and the lone dissenter in Wednesday's decision, said in an interview Thursday that he worried the Fed would be too slow to reverse the policy and that would cause new problems.
"Leaving it in there longer than—in hindsight—we will think was appropriate, will create the next series of problems, whatever those are," he said.
Fed Chairman Ben Bernanke and his allies argue that today's economy is too weak and banks too reluctant to lend to generate much inflation. They also vow that the Fed will buy bonds only as long as inflation lingers below the central bank's implicit target of 2%. And they say the purchases are temporary. When the economy returns to health or if inflation rises much, the Fed plans to stop buying and possibly to sell the bonds in the market.
Between now and June, the Fed will be purchasing $110 billion of Treasury notes and bonds a month, $75 billion a month in its new program and $35 billion a month to replace mortgage bonds in its portfolio that are maturing. In the same period, the Treasury will be issuing about $114 billion of new debt each month, estimates Louis Crandall, an analyst at Wrightson ICAP LLC.
Central banks regularly buy and sell government bonds to influence short-term interest rates, but rarely on such a large scale to influence long-term rates.
The markets don't seem alarmed. Although commodities and gold prices are rising—crude-oil prices have risen 6% in just four days—bond markets aren't signaling big inflation worries among investors.
Yields on two-year Treasury notes fell to 0.33%, the lowest in more than five decades. The market for inflation-protected Treasury securities, which compensate investors for future inflation, suggests investors expect just 1.5% inflation over the next five years, according to calculations by Michael Pond of Barclays Capital. That is up from 1.15% in August, but still relatively low.
If investors saw a big inflation risk, yields would be higher.
"At the moment, people clearly don't have conviction that there is going to be high inflation because if they did, the government would be paying much higher interest rates.…We wouldn't have the 10-year borrowing rate at 2.5%," said Kenneth Rogoff, a Harvard University economist.
This isn't the first time the Fed has taken large amounts of U.S. government bonds. In the 1940s, it bought enough bonds to keep the interest rate the government paid on long-term bonds at 2.25%.
"The Fed was virtually an arm of the Treasury," said Michael Bordo, an economic historian at Rutgers University. "Its balance sheet was swollen with Treasury securities, like today."
Annual inflation during the 1940s averaged 5%, driven by a temporary burst following World War II. The peg was ended in an accord between the Fed and the Treasury in 1951, and inflation slowed to less than 2% until the late 1960s.
The central bank is independent today and its officials note that the Treasury isn't demanding that the Fed buy government debt. Fed officials say that puts them in a position to sell the bonds when they want to.
The Fed's big gamble: Here's what could go wrong
Matthew Craft, AP Business Writer, On Wednesday November 3, 2010
Original Article on YAHOO! FINANCE
The Federal Reserve is making a high-stakes bet in the hope of getting the economy steaming along again. Nobody is sure the Fed's best efforts will work, and they may actually backfire.
The Fed announced a plan to buy $600 billion in government debt, aimed at driving already low long-term interest rates even lower. The central bank would buy the debt in chunks of $75 billion a month through June of next year.
Economists call it "quantitative easing." The latest package gets the name "QE2" -- like the ship -- because it's the second round. The Fed spent about $1.7 trillion from 2008 to earlier this year to take bonds off the hands of banks and stabilize them.
Here's how it's supposed to work this time: The Fed buys Treasury bonds from banks, providing them cash to lend to customers. Buying so many bonds also lowers interest rates because demand for Treasurys leads to higher prices and lower yields. Interest rates on consumer loans are tied to Treasury yields. Lower rates entice people to take out a mortgage or another loan.
At the same time, lower interest rates make relatively safe investments like bonds and cash less appealing, so companies and investors take the cash and buy equipment or other investments, like stocks. The S&P 500 takes off and Americans celebrate with a shopping spree. Businesses see a rise in sales and begin hiring again, and a virtuous cycle of more spending and more hiring ensues.
But many analysts and even supporters of the plan see dangers. It could make the weak dollar even weaker and lead to trade disputes with other countries. It could lead bond traders to believe that inflation will run wild, and they derail the Fed's efforts by pushing rates higher. Many investors argue that it may create bubbles as hedge funds and other speculators borrow cheaply and make even bigger bets on stocks, commodities and markets in developing countries like Brazil.
"It's a desperate act," says Jeremy Grantham, co-founder of the investment firm GMO. Grantham says it's a clear message from the Fed to the rest of the world: "The U.S. doesn't care if the dollar weakens."
Here is a look at two ways the Fed's strategy could go wrong:
--DOLLAR DROP
As word trickled out over recent months that the Fed was planning a new round of bond purchases, the dollar sank. It hit a 15-year low to the Japanese yen Nov. 1. Why? In the simplest terms, a country that cuts interest rates makes its currency less attractive to the worlds' investors. The interest rate is also the investors' yield, the payout they receive. When that yield falls, the world's banks move their money into countries with higher rates. They may exchange U.S. dollars for Australian dollars then invest the money in higher-paying Australian bonds.
"The Fed aims to push up the prices of stocks, bonds, real estate, and you name it," says Bill O'Donnell, head of U.S. government bond strategy at the Royal Bank of Scotland. "Everything is going to go up but the dollar."
A drop in the dollar can help companies like Ford that sell their products abroad. When the dollar weakens against the euro, for example, one euro buys more dollars than before. Foreign customers notice the price of the Explorer they've been eyeing is lower in their currency, yet Ford still pockets the same number of dollars for every sale.
The downside is that a weakened dollar pinches people in the U.S. because anything produced in other countries becomes more expensive, like oranges from Spain or toys from China.
"Look around you," says Thomas Atteberry, a fund manager at First Pacific Advisors. "How many things can you find that were made in the U.S.A?"
--BLOWING BUBBLES
Buying bundles of Treasurys knocks down interest rates, making borrowing cheap. But it also motivates investors to move out of safe investments into riskier ones in search of better returns. The stock market, for instance, rises in value and everyone with savings in stocks feels wealthier. Ideally, it produces what economists call a "wealth effect": People who feel better off spend more.
The problem, according to some critics, is that cheap borrowing costs and buoyant markets make a fertile environment for bubbles, which eventually pop. "The effort to help the economy sets up another more dangerous bubble," says Grantham, who warned of Japan's surging real estate and stock markets in the 1980s, soaring Internet stocks in the 1990s and the housing market in the 2000s.
Stocks in developing countries are a likely candidate for the next bubble. Cash from Europe and the U.S. has plowed into emerging markets, such as Brazil and Chile, since the financial crisis, largely because these countries have less debt and faster economic growth than in the developed world.
Another concern: Hedge funds borrowing cheap money can magnify their bets, taking a loan at 2 percent to buy a security that's rising 10 percent. They sell the security, pay off the bank and pocket the rest. That's true whenever interest rates remain low. Falling rates allow speculators to borrow larger amounts. In the extreme, losses from hedge funds and other borrowers can put their banks at risk and leave governments to clean up the mess.
The game only works as long as the investment keeps climbing. When the bubble breaks, the fallout can devastate an economy.
"I think bubbles are the main villain in this piece," Grantham says.
Cheap debt provided the fuel for the housing bubble, allowing home buyers to take out larger loans on the belief that somebody else would buy the house at a higher price. Fed chief Ben Bernanke's answer, Grantham said, is to start the cycle over again by blowing a new bubble. "All they can do is replace one bubble with another one," he said.
Bernanke Faces Greater Scrutiny After Republican Election Gains
By Joshua Zumbrun - Nov 3, 2010
Federal Reserve Chairman Ben S. Bernanke may have to renew his battle to preserve the central bank’s independence after Republican victories in yesterday’s congressional elections.
With Republicans reclaiming a majority in the House of Representatives and eroding Democrats’ hold on the Senate, Tea Party candidates who campaigned in part against the Fed get an opportunity to call Bernanke to task for taking part in the unpopular financial rescues that helped propel them to office.
“There’s certainly going to be more hearings and more pressure,” said Mark Calabria, a former Republican Senate Banking Committee aide who is now director of financial- regulation studies at the Cato Institute, a policy research group in Washington that favors free markets.
One new Fed opponent in Congress is Kentucky Senator-elect Rand Paul, who has criticized the Fed for imposing “the sneakiest tax of all -- inflation.” He joins South Carolina’s Jim DeMint, an advocate for Tea Party candidates who backed an unsuccessful bill to subject the Fed’s monetary policy to congressional audits.
The Fed has long faced pressure from the left to help spur growth and jobs. Now, the central bank’s most vocal critics are likely to be conservatives calling for greater scrutiny of its decisions, including its role in bailouts of American International Group Inc. and Bear Stearns Cos.
Six out of 10 self-identified Tea Party supporters who said they were likely to vote supported overhauling or abolishing the Fed, according to a Bloomberg News national poll conducted Oct. 7-10.
Treasuries Rise
Treasuries rose today, sending the yield on 30-year bonds three basis points lower to 3.9 percent. That’s the lowest in more than a week. Two-year notes yielded 0.35 percent, and the yield on the 10-year note fell two basis points to 2.57 percent. The Stoxx Europe 600 Index rose 0.4 percent to 268.66 as of 10:19 a.m. in London, a fifth straight advance.
In an unscientific survey of participants at an August Tea Party rally in Washington that was organized by Fox News commentator Glenn Beck, respondents by a two-to-one margin favored abolishing the Fed. “It’s so secretive,” said Joanne Budynkiewicz, 52, of Chicopee, Mass.
The Senate in May rejected a House-passed measure to audit the Fed that was proposed by Republican Representative Ron Paul of Texas, Rand Paul’s father. Congress ended up approving a compromise that requires disclosure of details of the Fed’s emergency lending and monetary-policy actions during the financial crisis. Information on future bank loans and asset purchases must be released with a two-year lag.
Bernanke Argued
Bernanke argued that audits of monetary policy would compromise the independence of the central bank. A letter he sent to DeMint in May warned that audits would “seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.”
Darrell Issa, who would take over as the chairman of the House Oversight and Government Reform Committee and be the Republican’s chief inquisitor of administration, already has the Fed in his sights. This year, he’s pressed the central bank for documents related to the AIG rescue and demanded Bernanke explain his role in authorizing payments to the insurer’s counterparties, calling him an “unindicted co-conspirator” in the bailout.
Scrutiny of the central bank will continue, Issa pledged in an interview last month, saying that Congress must “look in- depth behind the curtain, rather than simply have the Fed chairman come up and lecture us.”
Free Market
As Rand Paul extolled the merits of the free market on the campaign trail, he blamed the recession on the Fed, saying it sent “bad signals” to markets.
“It wasn’t that the home builder was stupid, or the mortgage broker was stupid,” he said during a July appearance in Kentucky. “It was that they got the wrong signal from the monetary policy of the government.”
Fed policy makers today will announce plans to resume large-scale purchases of securities in a bid to boost economic growth and employment, according to 53 of 56 economists surveyed by Bloomberg News last week. Twenty nine of those surveyed said the Fed will buy at least $500 billion.
Republicans seized control of the U.S. House and, while falling short of winning the Senate, narrowed the chamber’s Democratic majority.
Republicans gained at least 60 House seats yesterday across the country, capitalizing on concerns about government spending and delivering a rebuke to President Barack Obama’s domestic agenda.
Overhaul Debated
As the Senate debated an overhaul of the financial regulatory system this year, support for audits of the Fed came from lawmakers as varied as Bernard Sanders, a Vermont Independent and self-declared socialist, DeMint and Louisiana Republican David Vitter, as well as Democrats like Wisconsin’s Russ Feingold and Oregon’s Ron Wyden.
“You had a really strange alliance last year that supported the audit of the Fed and that may come back into play,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
Bernanke, first appointed by President George W. Bush, was reappointed by Obama and won approval for a second four-year term in January with the most congressional opponents since the Senate began confirming Fed chairmen in 1978. Bernanke was opposed by 18 Republicans and 12 members of the Democratic caucus. He was supported by 22 Republicans.
President Barack Obama and his top economic advisers -- including Treasury Secretary Timothy F. Geithner, a former president of the New York Fed -- would oppose any effort to weaken the Fed, said Greg Valliere, chief political strategist at the Potomac Research Group in Washington.
“In the highly unlikely event that an anti-Fed bill passed both houses, it would face an almost-certain veto from President Obama,” said Valliere. “There will be plenty of defenders in both parties, and of course Geithner and the president realize that the Fed is beyond reproach. The middle will hold against the far right and far left when it comes to Fed policy.”
Federal Reserve
Republicans in Congress will also have the ability to hold up Obama’s appointments to the Federal Reserve board.
The nomination of Peter Diamond, a Massachusetts Institute of Technology professor, hasn’t yet been confirmed in the Senate because of opposition from Republicans such as Alabama Senator Richard Shelby, who questioned Diamond’s qualifications.
Last month, Diamond was awarded the Nobel Prize in economics along with two other economists.
China to Add Emerging-Market Currencies to Reserves
By Ye Xie and Lilian Karunungan - Oct 11, 2010 9:33 AM PT
China is moving to add more emerging-market currencies to its foreign-exchange reserves, a strategy central banks around the world are following to diversify their $8.7 trillion in holdings.
“We can diversify more the foreign reserves, to consider not only smaller countries, but some emerging-market economies,” central bank Governor Zhou Xiaochuan said at an event during a meeting of the International Monetary Fund in Washington yesterday. With increased assets, “you can shift some to riskier, but higher-return investment instruments,” said Zhou.
China almost tripled its holdings of South Korean government bonds to 5.15 trillion won ($4.6 billion) in the first nine months of this year, according to South Korea’s Financial Supervisory Service. Peruvian central bank President Julio Velarde said in an interview in August he is “surprised” to see several monetary authorities buying government bonds denominated in the sol.
The desire among policy makers to diversify into developing nations’ currencies comes as the U.S. economy is hobbled by job losses and Europe faces widening budget deficits. The IMF forecast this month that developing nations will expand 6.4 percent next year, outstripping growth of 2.2 percent among advanced economies.
Greater Volatility
“The Chinese authorities are some of the smartest in the world,” Kenneth Akintewe, a Singapore-based investment manager at Aberdeen Asset Management Plc that oversees $261 billion globally, said in an interview on Oct. 11. “If you look at the fundamentals of a lot of these emerging markets, they are considerably better than developed markets. Who wants to be holding U.S. dollars at this stage?”
Emerging-market currencies have rallied in the past month, with the Hungarian forint gaining 13.6 percent, India’s rupee rising 4.7 percent, Brazil’s real 3.5 percent and China’s yuan 1.5 percent.
The move may add more “volatility” to emerging-market currencies as developing nations from Brazil to South Korea attempt to slow capital inflows and stem their currency appreciation, according to Arminio Fraga, Brazil’s former central bank president.
“It seems to be a natural evolution,” Fraga, now chairman of BM&F Bovespa SA in Sao Paulo, which owns Brazil’s securities exchange, said in an interview. “There has been an increase in the importance and quality of investment opportunities in emerging countries and I believe the central banks see that too.”
International Reserves
China’s international reserves, the world’s largest, increased 15 percent over the past year to almost $2.5 trillion as of June as the central bank bought the dollar to keep the yuan from appreciating. China is the biggest holder of U.S. Treasuries, with $846.7 billion in August. It started a sovereign wealth fund, China Investment Corp., in September 2007 to help diversify the reserves to generate better returns.
Mexico is seeing “very active” interest from Chinese investors in the country’s local-currency government bonds, Octavio Lara, deputy general director of debt issuance at Mexico’s Ministry of Finance, said Sept. 15.
In the 1990s, developing nations were beset by currency crises. Mexico devalued its currency in 1994, sending the peso down 55 percent in a year. During the Asian financial crisis in 1997 and 1998, South Koreans lined up to donate jewelry to help the central bank build dollar reserves and stem a flight of capital.
Leading Gainers
Now, emerging-market currencies are leading gainers after developing nations cut foreign debt to 26 percent of gross domestic product last year from 41 percent in 1999, IMF data show. The Brazilian real appreciated 61 percent since January 2005, Colombia’s peso climbed 31 percent and Thailand’s baht rose 30 percent. Those gains compare with an advance of 3.5 percent in the euro.
Global foreign reserves have more doubled from $4 trillion at the end of 2005, according to data compiled by Bloomberg and the IMF. Developing nations held $5.5 trillion as of June.
Diversification is in line with the “multi-polar” development of the global economy, said China’s Zhou. As foreign reserves grow, “you don’t need to keep a large” share in “very liquid assets,” he said.
Currencies other than the dollar, the euro, the pound, the yen and the Swiss franc jumped to 3.8 percent of global foreign reserves as of June, the most since the IMF started to compile such data in 1999.
Dollar’s Share
The dollar’s share has declined to 62 percent in June, from 73 percent in 2001, according to data compiled by the IMF. The share of euro, the world’s second-largest reserve currency, fell to 26.5 percent in June this year, from a record 28 percent in September 2009, as Greece received a $110 billion euro ($153 billion) bailout to finance its budget deficit that is equivalent to almost 14 percent the size of its economy.
“Reserve currencies have to be a good store of value, good medium of exchange, in great demand, in great supply, etc.,” Philippine central bank Deputy Governor Diwa Guinigundo said in an interview. “The Chinese yuan and Russia’s ruble are strong currencies, and it will just be a matter of time before they qualify as reserve currencies.”
China is also moving to promote the yuan’s role in international trade and financial markets. The central bank said last month it will allow more regions and companies to settle cross-border trade in the nation’s currency and boost offshore usage of the yuan. Bank of Thailand Assistant Governor Suchada Kirakul said the bank plans to buy yuan-denominated bond.
“What we will see is probably a future with more and more currencies within the reserves,” said Peruvian central bank President Velarde. “Diversification makes all the sense.”
There will be as many as 40 currencies in central banks’ foreign reserves in the next two decades, according to Velarde.
UK Government's Oil Shock Warning
by Matthew Wild
Original Article on ENERGY BULLETIN
A UK government minister is preparing for a coming global oil shock – a possible doubling of the price of oil.
As Monday’s UK Daily Telegraph newspaper reported, "Energy Secretary, Chris Huhne, told the Liberal Democrat conference last week that in a world facing economic "shocks" it was possible that the price of oil would double from its current level of about $75 a barrel and that he had ordered his officials to look at the impact of a Seventies-style oil price spike on the British economy."
According to Huhne (right), the UK government is creating an internal report on "what the impact. . . might be in terms of British business, businesses that have nothing to do with energy." This evaluation of the likely economic fallout of oil price volatility follows on from reports that the UK go