Debt Rattle, May 11 2008: It's a new game

Dorothea Lange: Texodus 1936.
Drought refugees from Abilene, Texas, following the crops of California as migratory workers. Said the father: "The finest people in this world live in Texas but I just can't seem to accomplish nothin' there.
Two year drought, then a crop, then two years drought and so on.
I got two brothers still trying to make it back there."

Ilargi: It’s still hard for many people to figure out what a slump in the US dollar value means for prices across the board, both at home and in international markets. I find it striking to see how hard. It's apparently as difficult to grasp as the reason why (hyper-)inflation in the US and EU is impossible under present circumstances. I'll get back to the latter point later today in a separate post.

When a currency plunges 40% in a few years versus other -main- currencies, the impact will inevitably be widespread. And if many other currencies are pegged to it, and trade in a broad spectrum of commodities is denominated in it, the effects are necessarily sweeping.

It’s far too easy to say that oil is at a record high, and grains and gold are too. That may seem true in US dollars, sure, but it’s a myopic view. In the Eurozone, the perspective is completely different. Just take the gold price in Euro’s, delete 40%, and see what you end up with.

There is a hurricane strength move out of anything dollar and dollar denominated, and that hugely reinforces hikes in commodities; all this money has to go somewhere. Much of that will turn out to be short term. The Euro may sink a bit (if only because the ECB wants it), but it won’t lose 40% as fast as it gained it; the US dollar has no foundations left to build that kind of momentum on.

And all the stories about China desperately trying to hold on to their US market, I don’t buy that either. The Chinese know very well that that market is gone forever, that Americans will get poorer, and fast, and soon too. They will use their dollar reserves to buy up land and influence and Lebensraum across the globe. And that’s also where their markets will be.

It's not merely the same old game with different rules and players, they've all gone. It's a new game.


A peek behind the price at the U.S. gas pump

From Capitol Hill to Wall Street to the campaign trail, the recent surge in oil prices is quickly threatening to supplant the mortgage crisis as the country's leading economic issue. Last week, prices for crude set another record, finishing at $125.96 a barrel on Friday, while gasoline prices closed in on $4 a gallon.

But even as the presidential candidates debate whether to cut federal gas taxes this summer and legislators look at other ways to ease prices at the pump, a harder-to-control factor is emerging as a main reason behind the increase in energy costs: the sinking dollar. While no one disputes that China and other emerging economies are craving more crude, the stunning rise of oil from $62 a year ago is hard to explain as only a matter of supply and demand. After all, analysts have noted adequate inventories.

Over the same period, the dollar has declined nearly 15 percent against the euro, and the jump in oil prices "is very much driven by the dollar," says Roger Diwan, a managing director at PFC Energy, a consulting firm in Washington. Simply put, buying oil has become a way for hedge funds, pension funds and other institutional investors to offset their exposure to dollar-based assets like United States stocks and bonds, Diwan says. And many traders have followed the market's momentum, aggravating the trend.

"The problem is that the market for dollar-denominated assets is orders of magnitude bigger than the oil market," Diwan says, so this hedging can have a disproportionate effect on oil prices. "It's like a lake and a pond, and the lake is overflowing into the pond." While it's hard to pinpoint the impact, it's clear that money has been pouring into commodities over the last five years. In the first quarter of 2008 alone, commodity assets under management rose $30 billion, to $225 billion, according to estimates by Barclays Capital.

Much of that increase can be attributed to simple price appreciation, but five years ago, total commodity assets under management equaled just $20 billion, according to Barclays. The dollar's weakness isn't affecting just oil. Other commodities that are priced in dollars — like wheat, rice and other foodstuffs — are also soaring, with ramifications felt worldwide.

"I don't think there's any doubt that the devaluation of the dollar is having an impact on all global commodities, including oil," says James Newsome, president of the New York Mercantile Exchange, where energy and metals are traded.

While critics say that short-term investors — some would call them "speculators" — drive up prices unfairly or manipulate the market, Newsome doesn't buy it. "The dollar has become a fundamental," he says. "And the floor of the exchange is littered with former funds and traders who tried to bet against fundamentals and failed."

Based on more traditional fundamentals like the cost of finding, producing and shipping crude, oil should be in the mid-$60s, says William H. Brown III, an independent energy consultant in Chappaqua, New York, who monitors investment flows in the energy sector. "I'm not blaming anyone," he says, "but this price is hard to justify."

---

Beijing and Riyadh will call the shots on ailing dollar's future

Only a month ago the dollar slumped to an all-time low against the euro. And it's just five weeks since the greenback hit a 12-year low against the yen. But now, the US currency has started to strengthen - with the markets talking about a "turning point".

On Wednesday, the dollar reached a six-week high against the European single currency, closing in on $1.53 - an improvement of more than 5 cents. And on the same day, the greenback climbed to a 10-week peak against the pound. But does the dollar remain in danger? Could "the rope slip" and the world's pivotal currency still go into freefall?

That would plunge America beyond recession and into depression - as inflation ballooned amid soaring import costs, forcing the Federal Reserve to raise rates in the teeth of shuddering slowdown. A plummeting US currency would also cause chaos globally, as central banks sought to protect the value of their reserves. And after the inevitable overshoot, the currency would snap back, sending financial markets into a tailspin, and threatening a fully-blown global slump.

That danger has been averted for now, but could soon come back with a vengeance. And while policymakers in Washington will be content with the current situation, those elsewhere shouldn't be. It's instructive that the main reason for the dollar's "recovery" has little to do with the US economy. The greenback's relative strength is less about the robustness of America, than the weakness of the eurozone.

It's been widely assumed Europe has escaped the worst of the credit crisis. And with the exception of UBS et al, the writedowns suffered by Continental banks have been much less than those in the States. But a slew of bad data has lately challenged such assumptions. Eurozone retail sales fell heavily in both February and March. Last month, the PMI Euro-manufacturing survey dropped to its lowest level since August 2005.

New data shows the bellwether IFO index tumbling in April - contrary to market expectations. And in Germany, the eurozone's powerhouse, factory orders have just contracted for the fourth month in a row. So while the US growth outlook has barely improved in absolute terms, its position now looks rosier relative to the eurozone - which, of course, pushes the dollar up.


And while the European Central Bank last week held interest rates at 4 per cent, it's surely only a matter of time before political pressures prevail and euro borrowing costs fall. And, once again, that prospect makes the dollar look relatively more attractive. As if to help the dollar's recovery, the European Commission last week published some interesting data. The eurozone suffers when the dollar is weak, of course - as its exports are less competitive.

So I smiled when I saw the graph opposite in a Commission report on the 10th anniversary of the euro, showing America's superior growth performance. Eurocrats usually hate admitting the US grows faster than Europe. But in the current climate, in a bid to reflate the dollar, they're shouting it from the rooftops. Brussels is even prepared to forecast that faster US growth will continue into the medium-term too.

After months of squabbling, not least at last month's G7 summit, an agreement has been struck that the greenback has become so weak it could soon slip into freefall. So, in a co-ordinated move, ECB and Fed officials are now talking the currency up, whispering to journalists and the markets that if the dollar doesn't strengthen there'll be "intervention" - which, for now at least, bolsters the greenback.

---

The dollar's dominance called into question

If the United States were any other country, these would surely be days of panic and austerity in Washington. With debts spiraling higher, a trade deficit exceeding $700 billion a year, and its currency plunging for years, the government would be forced to cut spending and jack up interest rates in a frantic bid to attract investment.

But the United States is not any other country. For more than half a century, Americans have enjoyed a unique privilege in the global economy: The dollar has been the world's dominant currency, the money used in most transactions and the repository for the national savings of many countries, including China, Japan and Saudi Arabia. Come what may — a financial crisis here, a military misadventure there — Americans could count on money sloshing up thick on their shores.

Virtually limitless demand for American government bonds has supported the dollar's value, and kept domestic interest rates down. Americans have been emboldened to spend in blissful disregard of their debts, secure that foreigners would always supply finance. And that devil-may-care spending has in turn fueled economic growth around the world. This dynamic may be so deeply embedded in the workings of the global economy that it could endure for many years to come: The costs of weaning the United States from its credit habit would ripple far and wide.

But what are the chances that a day of reckoning is coming, when the dollar would be so weak that America would have to play by the rules that apply to every other country? Recent signs do suggest some fraying in the American relationship with its many foreign creditors. The balance of trade has gotten so lopsided and the question marks hovering over the American economy so thick that some foreign governments are beginning to hedge their bets on the dollar.

Russia has been diversifying its hoard of foreign exchange, plunking more into other currencies like the rising euro. In the oil-drenched Middle East, signs suggest a slight shifting to other flavors of money. And markets have been parsing every utterance from Beijing for hints that China may moderate its voracious appetite for dollars. Meanwhile, China, Russia and Middle Eastern nations have been injecting hundreds of billions of dollars into state-controlled investment pools known as sovereign wealth funds, which have mandates to seek out better gains on their capital than they get from American government bonds."[..]

When Americans head to the mall, backed by foreign largesse, they drive there burning gasoline made from oil pumped abroad, notably the Middle East. They drive home carrying electronics and clothing churned out in Chinese and Japanese factories. Making these goods absorbs commodities — energy from Australia and Africa; cotton from Texas and California; iron ore from Brazil and India.

Keeping this global assembly line humming has become a primary development strategy for China, as it continues a wrenching transformation from a predominantly agricultural nation into a rapidly industrializing trading power whose factories employ millions of poor farmers streaming toward cities. China subsidizes many factories, handing out low-interest loans and making land available at below-market prices.

Buying up United States Treasury bills helps goose production: China's central bank buys dollars in part to keep the yuan valued lower, making Chinese goods cheaper on world markets. And by helping keep interest rates lower in the United States, China ensures that American consumers can keep buying. The Chinese "recognize that they have to lend us the money if they want to maintain those markets," said Michael Dooley, an economist and a partner in Cabezon Capital, a hedge fund specializing in emerging markets.

China's leaders fear anything that threatens to crimp exports; that would eliminate jobs and send angry peasants back to their villages. So, with more than $1 trillion already invested in dollar-denominated assets, China is loath to do anything that could drive the dollar down precipitously. If it started selling dollars, that could trigger a panic that would send the dollar plummeting.

But some analysts wonder how much longer China can continue to win at this game. Investing money in the United States requires spending that much less on enormous problems at home, like pollution and a shortage of health care.

By indirectly making mortgages cheap in the United States, China has helped foster the boom that saturated Miami with glittering condos even as tens of millions of Chinese live in dilapidated concrete block apartments. On this side of the Pacific, the great real estate bonanza has, of course, ended badly. Some economists point to the real estate bubble as a prime example of the dangers of too much cheap money washing in: Speculators drive prices sky-high, setting markets up for a punishing fall.

"You can have too much of a good thing," said Brad Setser, a former Treasury official now at the Council on Foreign Relations. In this view, if the dollar maintains its status as the global reserve currency, that would be good news for Americans only in the way that another offer for a credit card is good news for a family about to land in bankruptcy: It may stave off foreclosure for another spell, but it makes the ultimate day of reckoning that much worse.

---

Bank of England warns of two years of stagflation

The Bank of England will this week admit for the first time that it is set to breach its inflation target in the coming months and warn that Britain is destined for two years of soaring costs and weak growth. Mervyn King, the Bank's Governor, is poised to unveil new forecasts showing that the Consumer Price Index (CPI) will rise above 3 per cent over the next six months, forcing him to write a letter of explanation to the Chancellor.

In a further blow to Alistair Darling's credibility, the Bank will cut its economic growth forecasts for both this year and next. The changes will spark fears of "stagflation" - weak growth twinned with high inflation - and will be unveiled in the Bank's quarterly Inflation Report on Wednesday, which will set the tone for the economy for the next three months. They come amid warnings that Britain now faces a US-style housing crash, with plummeting prices and rising repossessions.

The Budget forecast that the economy would grow by 2 per cent this year and 2.25 per cent next, but the Bank is likely to forecast growth of well below 2 per cent in both years. Despite the higher rate of inflation, the Bank is likely to indicate its readiness to cut borrowing costs again at least once - perhaps twice - in the coming months.

Although the Bank is duty-bound to keep the CPI within a percentage point of its 2 per cent target, it will this week forecast that the index will rise above 3 per cent in the coming months, economists predict. It will be the second time that the Bank has missed its target. However, Michael Saunders of Citigroup said that this time the Governor would insist that the increase had not come as a surprise.

Warning that the Bank would raise the inflation forecast to above 3 per cent not just for this year but also for 2009, he added: "The difficulty for the MPC [Monetary Policy Committee] and the economy is that shocks facing the UK both remain severe - downside growth from the credit crunch, housing implosion and high private debts and upside inflation risks from global cost pressures, the weak pound and surging inflation expectations. If anything, the shocks continue to worsen."

He added: "Although details in the US and UK differ, we suspect that the UK is starting to experience a US-style housing collapse, in terms of an extended period of extreme weakness in demand, turnover and prices."
King said in the last Inflation Report that there was a 50/50 chance of the Bank missing its target, but since then oil prices have leapt more sharply than in any previous quarter, while food prices are also on the rise.

The slump in sterling is also expected to push prices higher. Philip Shaw, the chief economist at Investec, said: "The other worry is the spectre of further gas and electricity price increases. When utility companies move, they do so not in small increments but by big margins.

---

Ilargi: UK banks keep oozing bad fluids, and you have to wonder: What else is in the pipeline?

HSBC to Make $4.6 Billion Provision, Observer Reports

HSBC Holdings Plc, Europe's biggest bank, tomorrow will announce a provision of $4.6 billion linked to losses against mortgages, credit cards and other loans to U.S. consumers, the Observer said, without specifying where it got the information. The bank, based in London, may have to make write-offs totaling $15 billion this year, taking the total to $27 billion over two years, the British newspaper said, citing James Hutson, an analyst at Keefe Bruyette & Woods.

"That's absolutely within the realms of possibility," Alex Potter, a London-based analyst at Collins Stewart, said today, commenting on the possibility of HSBC posting a $4.6-billion provision tomorrow. "The idea that they'd do another big reserve build, i.e. put money aside in expectation of losses, is what the market is thinking."

The world's biggest banks and securities firms have reported asset writedowns and credit losses of $323 billion linked to the collapse of the U.S. subprime mortgage market since the beginning of 2007. HSBC paid $15.5 billion for Household International Inc. in 2003, becoming one of the largest U.S. subprime lenders. The 142-year-old bank took $10.6 billion in loan losses across the company in 2006 and $17.2 billion last year.

---

City waits on rights issue as analysts say Barclays needs £5 billion

Barclays will this week disclose whether it plans to go ahead with the third rights issue by a big British bank in a month, when it gives an interim trading update on Thursday. A dramatic jump in write-downs linked to the credit crunch could force the bank to tap shareholders for cash, or more probably see funds from an outside investor such as Singapore's Temasek or China's Development Bank brought in.

Barclays chief executive John Varley is said to have met with the state-backed Korean Investment Corporation over a possible cash call to shore up its ailing capital position. Analysts have predicted the bank will need to raise around £5bn to align its capital ratios with those of other European banks. They have also forecast that Barclays is likely to pay dividends in the form of shares, rather than cash too.

Barclays has already been forced to write down £1.3bn worth of assets because of the turmoil in the credit markets. Shares in Barclays closed down 2.48 per cent on Friday at 451.5p, reflecting concerns that a fund-raising of some kind could be announced next week. In a busy week for banks, HSBC will tomorrow disclose the extent to which troubles at its American business have further eaten into profits, when it publishes first-quarter results for the US division in 2008.

On Tuesday Alliance & Leicester chiefs will deliver a trading update at the bank's annual general meeting, where scrutiny of the its longer-term funding is likely to figure strongly. Meanwhile, an information memorandum will tomorrow be issued to interested bidders in Royal Bank of Scotland's (RBS) insurance marques, including the likes of Direct Line, Privilege and Churchill, which have been put up for sale.

The investment banks Merrill Lynch and Goldman Sachs, which are conducting the auction for RBS, will hope to raise as much as £7bn for embattled chief executive Sir Fred Goodwin, whose reputation has been hammered in the wake of the bank's recent £12bn rights issue.

---

Disaster faces UK estate agents as housing crashes

1,800 firms may go to the wall as banks are accused of 'squeezing the life out of the market' amid fears of a decade-long slump

Up to 1,800 estate agents may go bust by the end of the year unless lenders ease up their squeeze on new mortgages, as fears grow that the UK is heading for a full-scale housing crash, with price falls of up to a fifth. The warning comes from Nick Salmon, a board member of the National Federation of Property Professionals, who said last week that banks had "over-reacted" to the credit crunch and were in effect strangling the life out of the property market.

Mr Salmon said: "Lenders do not seem to be in the business of lending any more. They are the ones who lent irresponsibly and now the public and our industry are paying the price." But senior bankers are not likely to rush back into the home loans market, with many forecasting that it will be several years before mortgages are readily available again.

Even Mervyn King, Governor of the Bank of England, is understood to believe that it will be up to a decade before the mortgage lending and housing market fully recovers. Sterling's weakness and fears of rising inflation were the main reasons the Bank held rates at 5 per cent last week. This week it publishes its quarterly growth and inflation forecast, which is likely to show that inflation may go above 3 per cent.

More evidence of a marked slowdown in economic activity is provided today, with the release of the latest quarterly survey from the British Chambers of Commerce. The BCC economist David Kern warned that this year and next would be tougher than previously thought and predicted that the Government could break its own fiscal rules within two to three years.

Mr Kern said: "The Government must adopt pro-active policy measures aimed at countering the threats to growth. Public finances remain stretched. There are large current deficits and excessive levels of total borrowing." He added that priority must be given to reducing the risk of a major economic downturn, and urged the authorities to make sure loans remained available to UK businesses, particularly small firms, which are vulnerable when banks are under pressure.

"Recent tax changes have undermined business confidence and they will face a difficult and risky climate over the next year," said Mr Kern. He added that demands to increase the minimum wage, to make up for the scrapping of the 10 per cent income tax band, could be dangerous with such a sharp downturn in growth.

The BCC survey reports that average UK GDP growth is forecast to collapse from 3 per cent last year to 1.7 per cent this year, and then 1.6 per cent next year. The combination of falling house prices and higher fuel and food costs is leading to a squeeze on personal spending; this year is likely to see household consumption growth fall to 1.1 per cent.

The BCC's warning comes after new figures revealing a sharp deterioration in housebuilding since the beginning of the year and a 17 per cent rise in home repossessions. Figures from the National House-Building Council, disclosed yesterday, showed that the number of applications from builders to start new homes in the UK fell by almost a third year on year, with Northern Ireland worst affected. According to the Ministry of Justice, the number of repossessions rose to 27,530, up from 23,438 last year.

---

'It will surprise people.' FSA gets to heart of HBOS share scandal

Financial Services Authority chiefs are believed to have found the "smoking gun" in the recent share-shorting incident that caused the value of HBOS to slump by a fifth in one day. The regulator is set to go public on its findings by the end of the month, with a source close to the body saying: "It's now known what happened. It will surprise people what's been found."

The FSA is believed to have pulled more than a day's worth of emails sent by City dealers on the Bloomberg trading platform, when rumours sent the shares into a tailspin on 19 March. Meanwhile, the regulator's clampdown on insider trading will be demonstrated when a second criminal prosecution is launched before the summer, after one earlier in the year over insider dealing linked to shares in Motorola.

The FSA recently revealed that it had doubled its roster of criminal prosecutors for pursuing insider dealing cases, following last year's introduction of a computer system called Sabre, which attempts to identify abnormal share-trading patterns. The FSA is also set to publish new guidelines for mergers and acquisitions, with a so-called "principles of good execution" likely to be issued in early June.

Last year the regulator investigated a number of high-profile deals, including the purchase of Associated British Ports by a private equity consortium led by Goldman Sachs. City public relations firms were visited in an attempt to curb leaks of potentially price- sensitive information.

Last week outgoing FSA chairman Sir Callum McCarthy admitted concerns to the influential Treasury Select Committee that firms in the Square Mile were in effect turning a blind eye to abuses. Asked whether City companies took the issue seriously, he said: "I would say no." Sir Callum asked for a speeding up of the legislative process that would enable the regulator to engage in American-style plea bargaining, which many believe would increase the number of successful prosecutions brought relating to market abuse.

---

As Gazprom's chairman moves up, so does Russia's most powerful firm

It's hard to overemphasize Gazprom's role in the Russian economy. It's a sprawling company that raked in $91 billion last year; it employs 432,000 people, pays taxes equal to 20 percent of the Russian budget and has subsidiaries in industries as disparate as farming and aviation. The company is a major supplier of natural gas to Europe, and it is becoming an important source of gas to fast-growing Asian markets like China and South Korea.

In 2005, at the urging of the Kremlin, it bought Russia's fifth-largest oil company from the tycoon Roman Abramovich. If crude oil and natural gas are considered together, Gazprom's combined daily production of energy is greater than that of Saudi Arabia. With energy prices continuing to hit record highs, Gazprom is more influential than ever, both at home and abroad. Gazprom says that before 2014 it will surpass Exxon Mobil as the world's largest publicly traded company — a goal that Medvedev himself endorsed before he became president.

When Putin was still president, he used Gazprom's wealth and economic might to fight political enemies inside Russia, to reassert influence over former Soviet republics, to gain leverage over West European countries by increasing their dependence on Russian gas, and to wrest Russian energy assets back from foreign companies. Now that Russia is seeking to reclaim the geopolitical clout it had in Soviet days, it is wielding its vast energy resources, rather than missiles, to reassert itself. More often than not, its most potent artillery is Gazprom itself.

In a news conference last year, Putin denied that Russia uses its economic might to achieve foreign policy goals. But others disagree. "Energy should not be used for a policy tool, but it is," said Vladimir Milov, president of the Institute of Energy Policy, an independent research organization in Moscow, and a former deputy minister of energy. Gazprom, he said, has at times been a "tool of punishment for neighboring countries."[..]

Over the next two years, Gazprom plans to triple its capital outlays in its core business of exploring, extracting and transporting gas just to maintain its current production levels. Investments will rise to 969 billion rubles, or $45 billion, in 2010 from 330 billion rubles, or $14 billion, last year. To help finance a heady expansion into the Arctic, Gazprom is working on ways to push up natural gas prices in Russia and in the export market. Last year, it floated the idea of creating a cartel for natural gas, similar to OPEC's oil cartel. Iran supports the idea, but Algeria, Qatar and others are uncommitted.

A gas cartel would allow Russia to increase its influence in global energy markets, but at this point it's unclear how hard it will push the concept. Gazprom's ties to the government are already paying dividends in the domestic market. Under a policy championed by Medvedev when he served as deputy prime minister, Russian consumers are going to have to pay starkly higher prices for natural gas. Prices are set to rise about 25 percent a year, starting this year, with the goal of reaching parity with world energy prices by 2011.

Policies like this mean that average Russians won't continue enjoying their traditional access to cheap energy, and they offer a stark example of the government's willingness to give Gazprom a leg up regardless of the social fallout. Just as Gazprom's riches make it a proxy for Russia's newfound power and prestige around the world, the company also epitomizes the risks of state capitalism: waste and inefficiency.

Back in the 1990s, Gazprom was the archetype of the unreformed Soviet enterprise. While oil companies were being privatized and sold to Russian, and even foreign, investors, Gazprom stayed intact and under government control. It bankrolled many of the Kremlin's pet projects and the high-rolling lifestyle of a generation of company executives. Gazprom says that many of the investments that critics once labeled political, such as the purchase of television stations and newspapers, have in fact turned out highly profitable.

Now Russian leaders consider Gazprom the template for a new industrial policy. In a globalized world, their thinking goes, strategic Russian companies should be controlled by the government, yet open to the capital and skill of Western investors ? just as Gazprom is. It's a throwback to the Soviet economic model, with an emphasis on gigantism and economies of scale and faith in the pricing power of monopolies.

---

British soldiers need loans to eat, report reveals

A highly sensitive internal report into the state of the British Army has revealed that many soldiers are living in poverty. Some are so poor that they are unable to eat and are forced to rely on emergency food voucher schemes set up by the Ministry of Defence (MoD).

Some of Britain's most senior military figures reacted angrily yesterday to the revelations in the report, criticising the Government's treatment of its fighting forces. The disturbing findings outlined in the briefing team report written for Sir Richard Dannatt, the Chief of the General Staff, include an admission that many junior officers are being forced to leave the Army because they simply cannot afford to stay on.

Pressure from an undermanned army is "having a serious impact on retention in infantry battalions", with nearly half of all soldiers unable to take all their annual leave as they try to cover the gaps. The analysis, described by General Dannatt as "a comprehensive and accurate portrayal of the views and concerns of the Army at large", states: "More and more single-income soldiers in the UK are now close to the UK government definition of poverty."

It reveals that "a number of soldiers were not eating properly because they had run out of money by the end of the month". Commanders are attempting to tackle the problem through "Hungry Soldier" schemes, under which destitute soldiers are given loans to enable them to eat. The scheme symbolises a change from the tradition of soldiers getting three square meals a day for free.

Now hard-up soldiers have to fill out a form which entitles them to a voucher. The cost is deducted from their future wages, adding to the problems of soldiers on low pay. The controversial Pay as You Dine (PAYD) regime, which requires soldiers not on active duty to pay for their meals, has seen commanding officers inundated with complaints from soldiers unhappy at the quality of food that they get and the amount of paperwork involved.

Despite numerous assurances by the Government to look after wounded soldiers, the report warns of deep resentment over a cap on the amount of compensation that wounded soldiers receive. It outlines the "deep frustration" at the inadequate amount being spent on accommodation. The level of accidental deaths also comes under fire. "Ten potentially avoidable accident fatalities in operational theatres in one year [2007] is not acceptable," said General Dannatt.

He added: "I am concerned at the comments from the chain of command, some elements of which clearly believe that they will lose influence over their soldiers and that this will impact on unit cohesion." He also described improvements to equipment as being of "little use" because there is not enough for soldiers to be trained in using it until they are deployed.

Army chiefs and politicians claimed the document proved the Government was failing to meet its responsibilities towards Britain's servicemen and women, laid out in the Military Covenant. They say it is a damning indictment of an army that is losing its edge and close to breaking point as it struggles to keep pace with fighting a war on two fronts.

Patrick Mercer, a Tory MP and former army colonel, said the report reinforced widespread anxieties over conditions for the troops and that many top-ranking officers are breaking ranks to express their fears. "I've been talking to some very senior officers recently, all of whom privately have said to me that the Army is running on empty; the money has run out."

---

Ilargi: India has its very own housing collapse; that’s what a 20% drop in 3 months is called. They can try to call it “stabilization”, “correction” and “opportunity to get your dream home”, but in reality it’s nothing but widespread hurt.

India realty does reality check, prices fall 15-20% in Q1

If high prices have been holding you from buying your dream house all these years, here’s something to cheer about. In the first quarter of this year, there has been a 15-20% price correction in markets across the country, especially in the residential segment. In fact, in many markets, the level of transactions have gone down drastically, which has resulted in this dip. This is also because residential capital values in some micro markets in the metros have shown a negative growth in the last one quarter.

After tracking capital values in metros such as Mumbai, Chennai, Bangalore as well as Pune and the National Capital Region (NCR), the result was that either there has been a fall in prices of residential values or they have not increased in the last three months. In fact, places like Gurgaon have seen a dip of 15%, while the plot rates have come down by 20% in Noida. Even prime areas in Delhi such as Friends Colony, Maharani Bagh, GK I & II, Prithviraj Road and Hauz Khas have witnessed a 5-10% fall in the prices.

However, in Mumbai, prices at Colaba, Cuffe Parade, Central Worli, Bandra and Juhu have remained stable in the last three months. The story is the same in Bangalore, Hyderabad and Chennai where the market has not witnessed an increase in the last one quarter. In Pune, localities like Kalyani Nagar have witnessed a dip of 15% in residential values in the last three months.

Says Shveta Jain associate director (residential) Cushman & Wakefield India: “The exceedingly high price points and spiralling interest rates have contributed to a reduction in interest from speculative investors due to decrease in holding power, resulting in a clear shift to a largely end-user-led demand. More price sensitive locations and developments in certain parts of the country have been witnessing a rationalisation of capital values in recent months, wherein the market is finally reaching price thresholds.”

---

No sympathy lost between Bear Stearns titans

After 59 years, Alan Greenberg is still trading away at Bear Stearns, the troubled Wall Street bank that is about to disappear. Ask about his retirement plans, and he laughs. "I'm in the noon of my career!" Greenberg, who at 80 is almost as old as Bear, said in a recent interview in his spacious office near the trading floor.

Colleagues lost jobs and fortunes when the investment bank collapsed into the arms of JPMorgan Chase this year, and Greenberg, Bear's former chairman, said he felt terrible about it. But his sympathy has its limit when it comes to James Cayne, the man who wrested Bear from him and presided over its dying days. Told that Cayne, with whom he has worked for four decades, had lost much of his net worth and was suffering personally, Greenberg's eyes turned cold. "Oh, really? Goodness, that's a shame," he deadpanned.

In June, shareholders are expected to approve JPMorgan's acquisition of Bear Stearns, and as that moment draws closer, an air of resentment and unease is building within Bear. Employees talk of cycles of grief in elevators and share teary hugs in hallways as they confront the prospect of finding work in the worst Wall Street job market in decades. As for Greenberg and Cayne, their sometimes tumultuous relationship has boiled over into an outright feud — stoked by Greenberg's claim that Cayne ignored his counsel last year as the credit crisis hit Bear.

"Jimmy was not interested in my point of view," Greenberg said. "He was a one-man show. That is when the real break took place." Such comments have angered Cayne, who has told associates that Greenberg, a director of Bear, never voiced such concern. Whatever the case, the two men's fortunes have sharply diverged. Greenberg, who cashed out the bulk of his Bear fortune through regular sales over the years, has just signed a lucrative agreement with JPMorgan to stay on as vice-chairman emeritus.

He will be paid 40 per cent of the trading commissions he generates. And he recently began work on his memoirs. Cayne, by contrast, has become a public pinata — blamed by Bear employees, a presidential candidate and others for the firm's untimely end. His ties with Bear will be formally severed in June. Although he still holds the title of chairman, he spends his days in relative seclusion, seeing few other than his family, his two assistants and his lawyers.

He personally lost about $US900 million when Bear Stearns's stock price collapsed. Greenberg wondered about Cayne's presence at Bear Stearns. "I don't understand why he comes in," Greenberg said. "He is not employed here any more." That view has infuriated Cayne, who is said to be wary of the broadside that Greenberg may fire in his book. Cayne recently asked his close friend and Bear's lead director, Vincent Tese, to call Greenberg's lawyer and explain that his verbal agreement with the firm allows him the use of his office and two assistants. Greenberg, who sits on the board, said he had no knowledge of such an agreement.

Cayne declined to comment on his relationship with Greenberg. It is a clash of wills between two ageing Wall Street titans who once symbolised the quirky charm of Bear and today suggest a more nuanced truth. The demise of the firm they loved was not so much the fault of either man. Instead, it was a collective failure of the governing five-man executive committee that over the years became so fixated on increasing the firm's book value — and expecting the stock price to follow — that it lost sight of the concentrated, under-hedged exposure to the home mortgage market that left Bear vulnerable.

While Cayne has always given Greenberg credit for his contributions to the firm, he has poked fun at his offbeat personality, including his nickname, Ace, which Cayne made a point never to use. He has a standing order among some of his closer associates: anyone who uses the name Ace in his presence owes Cayne $US100.

The final straw for Cayne was Greenberg's decision to charge him a commission of $US77,000 for the sale of his 6 million shares of Bear stock, a rate far above the maximum $US2500 commission that employees pay for a single trade. Since Cayne was not an employee any more, he did not deserve such a rate, Greenberg said. "If he doesn't like it, he should do his future business elsewhere."

---

Brentwood the poster child for housing bust

Roger Abraham stands in his driveway, one hand holding the newspaper, the other sweeping across the homes on Brentwood's Solitude Street. "This one," he points, "this one, this one." All empty.

This farming community on the eastern edge of the Bay Area absorbed an outsize portion of the region's growth during the prolonged housing and development boom, adding 40,000 residents in the past 16 years as subdivisions and strip malls overtook agricultural land. It regularly ranked among the state's fastest-growing cities. Now, Brentwood is suffering disproportionately from the bust.

Hundreds of families have lost their homes to foreclosure since the beginning of last year, and in a sign of more to come, at least 1 out of every 16 households has received default notices. For the neighbors left behind, the dreams of the pretty, tight-knit community that lured many there in the first place have dissolved.

In new neighborhoods, "Foreclosure," "For sale" and "For rent" signs dot the streets, weeds sprout and newspapers pile up at empty homes as new residents cycle in and out. In projects halted by the downturn, handfuls of houses stand alone amid acres of dirt. Promised parks and community centers remain unfinished or fenced in.

The city, hooked on ever-increasing permit fees and property values, laid off staff for the first time. Title companies and furniture stores have gone out of business, and owners of downtown shops and restaurants have watched sales plunge.

City Hall stands on the northeast end, abutting Brentwood Park. Probably no single institution has been so hard hit by the local real estate downturn. "Brentwood is kind of the poster child for what's going on in the housing market," said Howard Sword, the former community development director. "We were so active in the years where the subprime finance creative tools got rolled out, we were issuing like 1,400 to 1,600 building permits a year."

This year, the city has issued nine permits for single-family homes. It expects to collect $21.3 million less in permit and impact fees than it did two years ago, said Pamela Ehler, director of the finance and information systems. Brentwood's total general budget is about $40 million. "This was a complete meltdown," she said. Brentwood has laid off eight employees so far this year, including Sword.

Partially built housing projects and neighborhoods filled with foreclosed homes have created separate problems for the city.
Last year, Police Department time was tied up with thefts of copper wire from building sites, Sgt. Mark Misquez said. This year, the growing problem is marijuana farming inside foreclosed properties.

The blight caused by unkempt lawns and landscaping became such a concern that the city passed three separate ordinances. Now, if an owner doesn't respond to the city's requests to maintain the property, the city will do the work itself and place a lien against the home for the cost. "Believe me, before we weren't getting much cooperation from the banks," Sword said. "This gets their attention real quickly."

Median prices for resale homes in Brentwood stood at $375,000 last month, down 33 percent from a year earlier, according to DataQuick Information Systems. That compares with a 20.4 percent decline for all of the Bay Area.

---

Ilargi: Think this will remain a peaceful process?

After the boomers, meet the children dubbed 'baby losers’

Across Spain, France and Italy, young middle-class professionals with good degrees and diplomas are facing a lifetime on low salaries with unrewarding jobs, forever poorer than their parents.

The kids learning to swim at the pool near Via Casilina, in a working-class suburb of Rome, could not ask for better qualified instructors. One is a literature graduate with a masters in communications from Brussels, while another, Antonio di Martino, is an aerospace engineer. Di Martino, 30, still has to finish his degree, but with a one-year-old baby and another child on the way, and afternoons and evenings working at the pool to bring in €1,100 (£870) a month, something had to give.

'Some of the pressure to graduate also slipped away when I saw one friend get his degree and then only earn €500 a month at an Italian space firm and another get €800 a month at the European Space Agency,' said Di Martino, bouncing his son on his knee as his partner, Mattia, rushes out the door to her teaching job, which pays €1,200 a month. 'My parents bought me my flat, making me one of the lucky ones since prices are crazy and I would never get a mortgage,' he said. 'I spent two years of savings on doing up the bathroom and now I worry about my son. One problem, one unforeseen expense and things get serious.'

He said price checking in supermarkets was the norm - 'something my mother never did'. And the family thinks hard before travelling. 'With petrol and tolls, even a trip to my parents in southern Italy now costs €100.' Di Martino is part of a new phenomenon sweeping Europe. As he spoke, Africa Garcia Arias, 32, was nearing the end of a 45-hour week in a busy Madrid hospital. Six months pregnant, Arias will scale back her working week in the coming month. But, though she is exhausted, this is hardly much relief. Her salary of €1,600 will drop to €1,000 a month.

On Friday night, Lorenzo, 35, was on a train heading to work a nightshift for a major American sales website's Berlin branch. He trained as a historian and a photographer. 'The pay is just about OK - €2,700 a month for a 40-hour week - but it is hardly the job I dreamed of doing,' he said. And in Paris, Nathalie, 24, was sitting in a friend's tiny rented flat in the rundown 20th arrondissement, the poorest district of the city, having finished another month of unpaid 'work experience' for a major publishing company.

Tomorrow she will be at the second home of her parents in Brittany to sit in the sun in the garden, read and swim. 'I look at how they live, and how they lived when they were my age or a few years older, and I realise that I will never have any of that,' she said. 'I am not sure whether to be angry, sad or simply resigned.'

With inflation soaring, property prices sky high, wages relatively static, labour markets gridlocked and sluggish or slowing economies, Nathalie, Lorenzo, Arias and Di Martino are among tens of millions of Europeans raised to expect that their degrees and diplomas will assure them a relatively high quality of life who are now realising that the world has changed. The disappointment is a shock with big political, social, cultural, even demographic consequences.

'I am angry. I know a lot of people who are in the same situation and our qualifications are not being rewarded,' said Arias. For Nathalie, the weekend in her parents' seaside home will leave 'a bitter taste in my mouth'. Freelance architect Emilio Tinoco Vertiz, 32, earns just €1,000 a month. 'Who needs architects when no one wants to build houses?' he said. In Spain people such as Emilio are known from their pay as the 'mileuristas' (thousand euro-ers).

In France they are the 'babylosers' - a term coined by sociologist Louis Chauvel to contrast them with 'babyboomers'. According to Chauvel, 41, a sociologist at the National Foundation for Political Science, for the first time in recent history a generation of French citizens aged between 20 and 40 can expect a lower standard of living than the one before. 'Mileuristas or babylosers: it's the same story,' he said. 'They have an average of three years more education than their parents, a worse job and a lower standard of living.'

---

Surging food prices bite across Asia

From the rice paddies of Asia to the wheat fields of Australia, the soaring prices of food are breaking the budgets of the poor and raising the specters of hunger and unrest, experts warn. A billion people in Asia are seriously affected by the surging costs of daily staples such as rice and bread, the director general of the Asian Development Bank, Rajat Nag, has said.

“This includes roughly about 600 million people who live on just under a dollar a day, which is the definition of poverty, and another 400 million who are just above that borderline,” he said. Globally, the World Bank last month estimated that 33 countries were threatened with political and social unrest because of the skyrocketing costs of food and energy.

Across Asia, workers made a campaign against high food prices their May Day battle cry in marches through cities including the capitals of Indonesia, the Philippines and Thailand. While the demonstrations were mainly peaceful, concern is growing over the potential for political instability and unrest if high prices persist.
“Once people get hungry they start also getting quite desperate and take desperate measures,” Damien Kingsbury of Australia’s Deakin University told Agence France-Presse.

India’s top farm scientist and architect of the 1960s “Green Revolution,” Monkombu Sambasivan Swaminathan, said India needs a second agricultural revolution to boost food supplies or face huge social turmoil. Experts blame the high food prices on a confluence of factors, including increased demand from a changing diet in Asia, droughts, the rising use of crops for biofuels, and growing energy and fertilizer costs.

In Australia, which usually ranks second after the United States as a global wheat exporter, several years of drought cut harvests to just 13 million tons last year from an average of 22 million tons. So while consumers are struggling, Australian farmers are not getting rich on the backs of the poor, said National Farmers Federation chief executive Ben Fargher. “It’s been the worst drought in our history and many, many farming families are under significant financial and emotional stress and it will take our communities a long time to recover,” he said.

And even in a relatively prosperous country like Australia, people are feeling the squeeze in the supermarkets, prompting the government to launch an inquiry into how to stem rising grocery prices. Around the rest of the region, the impact varies from traumatic to minimal. In Afghanistan, millions are finding it “problematic” to meet their basic food needs with prices of the staple, wheat, doubling in some areas over recent months, the World Food Program (WFP) has said.

About 400 people demonstrated in eastern Afghanistan last month, blocking a key road linking the eastern town of Jalalabad to the capital Kabul, and demanding the government step in to control prices at food markets. In Bangladesh, one of the world’s poorest nations, the prices of the main staple, rice, in the past year has doubled, and many low paid workers say they have been forced to make do with only one meal a day.

Last month about 20,000 garment workers rioted near the capital Dhaka for higher wages to cover food prices. In Cambodia, soaring rice prices have forced the WFP to indefinitely suspend a program supplying free breakfasts to 450,000 poor Cambodian schoolchildren. In China, a nation on its way to prosperity, Premier Wen Jiabao told a meeting of the State Council last month that high prices were the biggest problem in the domestic economy.

---