Sunday, November 2, 2008

Debt Rattle, November 2 2008: Conquering Spree

Theodor Jung Three Ladies April 1936
Sunday afternoon stroll in Jackson Ohio

Ilargi: These are busy times for the IMF. Delegations from the fund are visiting countries all over the planet, offering loans and demanding their usual agenda in return. In exchange for a few billion dollars, governments are forced to raise taxes, cut all social programs and subsidies, and above all, give US and other western companies unlimited acces to their economies, banking systems and resources.

They call this free market economics. No matter that the US, today governed almost exclusively by lobbyists, can no longer even seriously pretend to participate in free trade. If ever it has.

The IMF has a war chest of less than $250 billion. It has so far lent out about $30 billion, to Hungary, the Ukraine and Iceland. Still, it is clear that the remaining billions are by no menas enough for all the countries that will need loans in order to avert defaulting on their international debt. Published estimates mention a total amount required of $1 trillion, but you can bet your behind that it will be much more than that. These things always are.

Gordon Brown is in Saudi Arabia, trying to get the House of Saud and its Gulf oil allies to pour hundreds of billions into the IMF coffers. Presumably, the Anglo-Saxon banking cabal would rather borrow from their buddies in the desert than let significant other parties in on the deal, like China or even Japan, who would surely demand far more say in the dealings of the IMF, and challenge the US veto in all decisions.

Still, even without that, there may be a snag or two in the making, a few handfuls of sand in the grease. The Arabs are reluctant to lend too much into a US-vetoed organization. They might pose the same conditions as China and Japan: break the US dominance. That would threaten the entire usefulness of the Fund for US and UK purposes. Also, the Gulf states have one of the ugliest housing bubbles in the world, their oil revenues have been cut in half in recent days, and they face domestic bank runs.

But a deal will get done, the awards are simply too promising. Dozens of countries in the world have nowhere else left to turn, and in many cases it's a matter of mere weeks or months. They'll do anything the IMF asks of them. In their plush offices in Geneva, there must be a spacious room reserved for an oversized version of one of these board games.

Funny that at the same time the US is flushing itself down the casino toilet, it has embarked on the biggest conquering spree the planet has ever seen, and it's being financed entirely by third parties.

Ben Bernanke will make things a lot worse by repeating Alan Greenspan's mistakes
It may have slipped your mind, but this week the United States chooses a new president. The selection of the world's most powerful politician is, by any standards, a hugely significant event. For the first time, someone who isn't white could soon be running the White House – making Tuesday's vote even more historic. Yet few of us seem to be watching, not in Europe anyway. So concerned are we about the credit crunch, and the impact it will have on our jobs, shares and mortgages, that political history is passing us by.

The airwaves are full of breathless updates from America's campaign trail, with reporters almost imploring us to take an interest. But we find it difficult to focus on Pennsylvania, Florida and Ohio. The real story is that the 44th President of the United States will inherit an economy more grim and fraught with challenges than any since Franklin D Roosevelt took office in 1933. And we know that's bad news for us. The shape of global commerce is changing. At some point over the next 20 to 30 years, America will cease to be top dog. But, for now, the US remains easily the world's biggest economy.

And here in Britain, we're particularly exposed, with the US accounting for almost a fifth of our trade, not to mention the corporate and cultural ties that bind our economic fate. Last week the Federal Reserve cut US interest rates by another 50 basis points. In little more than a year, they have fallen from 5.25pc to 1pc. Now, more than at any time since FDR was in power, we need that rate cut to boost America's economic prospects. But the Fed's latest move will harm the US and, in turn, the rest of the world. New data shows American GDP contracted 0.3pc between July and September.

It could have been worse. Total output shrank $2bn in the third quarter – in an economy that turns over $11,700bn a year. But let us be in no doubt, the US is heading south fast. Third-quarter consumption plunged 3.1pc. This represents the biggest fall since 1980. And that predates October, which was the bleakest month of the credit crunch so far. If consumer confidence is collapsing, corporate earnings already have. With the third-quarter reporting season in full swing, the numbers are truly dire.

Back in July, amidst hope the crunch had been broken, industry surveys predicted 12pc earnings growth during the third quarter. But with many of America's top listed companies having rep orted, the grim reality is that third-quarter earnings are down a staggering 24pc on last year. Since mid 2007, US company profits have now suffered to a similar extent as in 2001/02, when the 9/11 atrocities combined with the dot-com collapse. But, of course, this time there's worse still to come.

I take my life into my hands as I venture this – but are US base rates of 1pc really the answer? I would argue emphatically not.
Rates hit 1pc after 2001/02, when then Fed chairman Alan Greenspan swung his monetary chainsaw willy-nilly. And that unleashed the biggest credit bubble the world has ever seen. I thought we all understood that. However, now Ben Bernanke risks repeating his predecessor's mistake. In the US and across the world banks aren't lending to each other due to fears about the hidden sub-prime toxic waste that lurks on each other's balance sheets. Cutting base rates does nothing to curb that problem.

In fact, by giving US banking executives hope that the economy may recover before they have to write down the full extent of the losses they have buried, the Fed only further delays what is so badly needed – a thorough purging and consolidation of America's banking system. And as central banks elsewhere follow the Fed and slash rates, this debilitating torpor is exported. Like so many Western economies, the US needs to save more and borrow less. Rate cuts undermine both objectives. With inflation standing at 4.9pc, American savers have long received negative real returns – and now the Fed has just made such returns even worse, widening the already gaping mismatch between the supply and demand for funds.

While US firms and consumers face high credit costs, the price of money on the interbank markets, and therefore the broader economy, has become completely detached from base rates, despite months of Fed cuts. Dollar Libor has eased only very slightly in recent weeks as the banks have started lending out the government's bail-out money. We will see if the interbank rate keeps falling when the banks return to lending their own cash, once the bail-out pot runs dry.

Almost every economist I know backs the Fed's latest emergency rate cut. Even if they accept the arguments which I have laid out above, they claim that Fed chairman Mr Bernanke has stopped America's situation from getting worse. Really? The US still has a big inflationary problem. And now we have both a monetary and fiscal policy that is wildly expansionary. That could easily spark more inflation, despite the economic slowdown, undermine real income and prolong America's slump.

Having lowered rates to 1pc and having vowed to avoid a zero interest rate policy, the Fed now also has almost no more ammunition. While the markets clamor for cuts, rates this low send out a chilling signal. How much sub-prime is out there? Just what does the Fed really know? This week, the Bank of England is likely to follow the Fed's example, so intense is the pressure to do something. But, just as in the US, deep cuts in Britain will not address the real issue and could well make matters worse.

Ex-IMF chief economist: Emerging markets may need $1 trillion to deal with crisis
A former chief economist for the International Monetary Fund is dispelling any notion that the global financial crisis will not have significant ripples for the developing world. Simon Johnson, former IMF chief economist, said emerging market countries may need as much as $1 trillion, given difficulty accessing money in international credit markets.

"If we are really facing the problem I think we are, you need about $1 trillion," Johnson said. This week the IMF announced it's establishing an emergency loan program, an IMF Short-Term Liquidity Facility (SLF), that almost doubles borrowing maximums for emerging market countries. The goal is to prevent contagion, or the collapse of developing nation economies -- including overcome short-term liquidity problems -- due to the financial crisis.

"Exceptional times call for an exceptional response," IMF Managing Director Dominique Strauss-Kahn said in a statement. "The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position." Only nations in good standing with the IMF will be eligible for the program. Currently, the IMF has about $210 billion available for loans, with the typical loan term being 3 to 5 years.

Economist Richard Felson said the IMF's SLF is needed "given the nature of the problem regional economies face. "For a short time, we thought that emerging markets would be immune to the financial crisis. How wrong we were, and the crisis also has demonstrated that some emerging markets, despite previous robust GDP growth rates, might actually be more vulnerable to the crisis than either Europe or America," Felson said.

"Economist Johnson's $1 trillion capital estimate for emerging markets may prove to be accurate. The crisis has revealed that many of these economies are too dependent on exports sales, with home-country middle classes too small to make up for the expected slow down in international trade. The IMF's SLF will ease short-term liquidity problems."

Longer-term, Felson said both overall and special-purpose funding will have to increase to accommodate the larger role the IMF is expected to play in the new global financial system, after the financial crisis has ended. That will require significant increases in IMF contributions from emerging market powers, China, India, Russia, and Brazil, and several Middle East nations, he said.

Emerging markets face financing crunch
Emerging market companies are feeling the pinch of the credit crisis and next year face the pain of refinancing $450-billion (U.S.) in notes, bonds and loans. The debts coming due next year, with another $487-billion maturing in 2010 according to Dealogic, threaten the investment commitments some companies have made. But capital markets are largely shut and even when they reopen are not expected to be as robust as they were before the global credit crisis began a year ago.

A steep slide in emerging market currencies compounds the funding problem, as bad bets in the derivatives market have caused some companies to report losses with limited ability to finance their way out of trouble. Between bonds and syndicated loans, emerging market companies have borrowed roughly $1.3-trillion in the last three years or so, according to various industry estimates. “All of that will come due by 2014, pretty much,” said David Spegel, global head of emerging markets strategy at ING in New York. He added these bonds and loans carry $60-billion of interest payments through the end of 2009.

“The prospects of all of this debt being rolled over are very slim. Banks are not going to be able to lend at the same levels they were and borrowers were accustomed to in the past. That is not going to change for a long time,” said Mr. Spegel, Fears a brewing global recession will cut into earnings and cash flow will limit how much self-funding companies can do to keep growing. At the same time, the collapse in commodity prices is restricting earnings and cash flow also, reinforcing the risks these companies face gaining access to financing.

“Talking to clients in the last few days, the single biggest concern I hear is about rollover risk in the face of a continued refinancing freeze,” Alan Ruskin, chief international strategist at RBS Global Banking in Greenwich, Connecticut, wrote clients. “Nowhere is this more acute than the foreign currency financing in the emerging world, where carry blow-ups have added substantially to foreign currency payments and future rollover costs,” Mr. Ruskin wrote. Emerging market economies have had 10 years since the last financial crisis to shore up their finances. Governments are in a more stable position, but corporations remain vulnerable to default, especially as world economic growth slows.

The International Monetary Funds's forecast for emerging and developing economies calls for growth of 6.9 per cent in 2008, dropping to 6.1 per cent in 2009, compared to 8 per cent in 2007. The difference between the current crisis and the last time emerging markets were under pressure, during the Russian and Asian crises of 1998, is that developed markets are the cause. The huge flight-to-safety move into U.S. Treasuries and the U.S. dollar in recent months is cascading into a problem for emerging market companies frozen out of the credit markets.

The high-yielding emerging market currencies that were a favourite investment for yield-hungry investors have suffered violent readjustments and in turn have caused some companies to declare bankruptcy and threatening the solvency of others. For example, the Brazilian real has dropped about 30 per cent and the Mexican peso more than 26 per cent against the lower-yielding U.S. dollar in the last three months. At the same time, the Hungarian forint is down 15 per cent while the the Polish zloty has dropped over 16 per cent against the euro, which also carries a lower yield.

As a result, companies across emerging markets have reported big losses due to leveraged currency positions. Mexican retailer Comercial Mexicana, or Comerci , filed for court protection from creditors last month after disclosing its debt had ballooned to $2-billion following massive losses on bets against the U.S. dollar. CITIC Pacific, a steel-to-property conglomerate majority owned by the Chinese Government, disclosed potential losses of $2-billion from unauthorized currency trading. Brazilian pulp producer Aracruz Celulose reported a massive quarterly loss because of wrong currency bets, prompting it to cut investments and dividend payments to preserve cash.

“It is difficult to estimate the extent to which emerging market corporates are exposed to such derivatives but given what we have seen so far, it is likely that we will see more corporates reporting such losses,” said Warren Mar, co-head of emerging market corporate research at JPMorgan in New York. “While it doesn't mean that all mark-to-market losses will crystalize into actual losses, it is another reason for investors to be cautious,” said Mr. Mar. JPMorgan estimates an emerging market corporate bond default rate of 1 per cent, up from 0.7 per cent this year, on $518-billion worth of bonds outstanding.

The bank said that a recent analysis, which factored in the sensitivities to refinancing risks, currency depreciation, weaker commodity prices, and stalling growth prospects, had turned up some vulnerable corporate sectors. Those with the highest risk segments included Russian private banks, Asian real estate, and Latin American industrials and agricultural exporters. However oil and gas and utilities companies “scored relatively well across emerging markets, as did telecoms firms, given their counter-cyclical characteristics.” Even with the currency-related losses and the refinancing bulge making its way through the system, one analyst said the picture isn't completely bleak.

“The large majority of companies in Latin America have very good liquidity positions,” said Anne Milne, head of Latin American corporate debt research at Deutsche Bank in New York. “Almost all the Brazilians and Mexicans have enough cash to meet their short-term debt requirements, or they have credit lines, or free cash flow from their operations,” she said. Some companies are succeeding in lining up financing. Brazil's largest petrochemical company, Braskem, raised $725-million, more than the $500-million it had initially hoped to obtain, in an export prepayment facility on Oct. 9. U.S. power producer AES Corp.'s Chilean subsidiary Aes Gener landed a $1-billion syndicated loan last week to help finance a 518-megawatt coal-fired plant in northern Chile's power-hungry mining region.

And while those deals have happened, they appear the exception in the marketplace and do not take into account a potential black hole in the not too distant future. “If we are talking about additional funding that might be required to fund these large derivatives losses that some of them have, that is another story. I think the lack of liquidity in the market could be a problem for those companies,” said Ms. Milne.

Global Credit and the IMF Short-term Liquidity Plan
The IMF and the Federal Reserve System are working in tandem to bolster global liquidity and shore up confidence in a rapidly deteriorating economic environment. To this end, the IMF announced a plan Oct. 29 involving offering rapidly disbursed loans through its new short-term liquidity facility to eligible countries. The move should help thaw the global freeze-up of credit.

The International Monetary Fund (IMF) announced Oct. 29 that it will offer rapidly disbursed loans through its new short-term liquidity facility (SLF) to relatively creditworthy countries suffering from the acute effects of the global liquidity crisis. In creating this liquidity facility, the IMF breaks with its traditional role of forcing economic reforms on potential borrowers. The announcement, made just hours after the Federal Reserve Board cut its key lending rate 50 basis points, follows a series of meetings between the two agencies on the growing threat of collapse in key emerging market economies. Working in concert, the IMF and the Fed have taken steps to bolster global liquidity and shore up confidence in a rapidly deteriorating economic environment.

Acting to stem a global domino effect of failing currencies and sovereign credit, the U.S.-dominated IMF has moved to assist Iceland, Hungary and Ukraine with loans of $2.1 billion, $15.7 billion and $16.5 billion, respectively. Other nations — Belarus, Serbia and Pakistan are in talks — will also most likely receive some sort of a package. So far the IMF has only issued traditional loans that place stringent requirements that the country asking for the loan improve its fiscal management and cut spending. None of the targeted countries have claimed the distinction of being the first to tap the new $100 billion SLF. There are, however, plenty of candidates.

The IMF broadly states that countries eligible for SLF should have “track records of sound policies, access to capital markets and sustainable debt burdens,” and that recent reviews by the IMF must have been favorable. These criteria should end up being malleable, as varying political considerations certainly will dictate the lucky recipients of this package. A second category of countries particularly positioned to transmit the economic virus to their neighbors — such as Hungary and most of Central European countries — also could be eligible.

In the first category are countries like Bulgaria and Estonia , which are running budget surpluses and sustaining relatively light external governmental debt burdens. This sort of country is a shoo-in for a package with minimal strings attached like the SLF. This lenience comes from an understanding that the global credit crunch is significantly impacting even well-run countries, hence the few requirements for reform attached (given that these countries may not need reform, just money to tide them over for a while). Brazil — with a huge debt burden but otherwise with a record of solid fiscal management — could also fit in the first category. So, too, could Mexico , a relatively well-run country fiscally speaking, but which could face serious political problems in the event of a recession.

The second category includes — but is not limited to — countries within the eurozone with significant problems. Greece (banking problems, high budget deficit and public debt) in particular and Portugal (high budget deficit and public debt) probably would be eligible for the SLF. Poland and Czech Republic , outside the eurozone but inside the European Union, do not have significant problems yet. Exposure to a worldwide demand drop and regional credit crisis brewing in Hungary, however, could make them candidates for the SLF as well.

Similarly, countries vital for U.S. (and wider Western) geopolitical interests most likely will be allowed to draw at least part of their total rescue package from the facility. Turkey , a country with the simultaneous problems of a rapidly depreciating currency, falling equity markets and a slowing economy, appears nearly ready to strike a deal. It remains to be seen whether Turkey will obtain a fairly condition-free loan from the SLF or wind up with a more intrusive deal. An intrusive deal may make sense from the IMF perspective, but politically it also makes sense to prop up a traditional U.S. military ally and European economic partner.

At a minimum, cuts in government spending could be required if Turkey fails to qualify. Serbia, another country already in talks with the IMF and currently ruled by a pro-Western coalition — seems to also fit the somewhat-nebulous SLF criteria. Clearly in need, but in no shape to make use of the SLF, are Egypt, Pakistan and Nicaragua . Each carries a sizable debt burden, and none looks to be improving on its own. If these countries were to request IMF assistance, any loan packages on offer would assuredly entail mandatory economic reforms.

This fact is most evident in beleaguered Pakistan , which has seen economic growth slow and spending increase to the point that it had just over $8 billion in currency reserves Oct. 16, a figure that by now has certainly decreased significantly. This amount represents approximately two months worth of expenses, and effectively puts the state on bankruptcy watch.

In light of the global nature of the crisis, expanding the SLF, or creating new facilities, could be the eventual outcome — but only if the IMF can raise the funds. IMF fundraising boils down to: asking member states (probably Western, although Asian and Arab states with large cash surpluses could be tapped) to cough up more funds; issuing bonds; or expanding liquidity by issuing a type of credit called special drawing rights.

Aside from the SLF, the Fed already has done some of the heavy lifting. Concurrent with the announcement of the SLF, the Fed unveiled yet another credit facility — this time a line of reciprocal exchange agreements (aka currency swaps, in which the United States gives out dollars in return for the borrower’s currency) with Brazil, Mexico, South Korea and Singapore . This move should boost the availability of dollar liquidity in these key markets, further thawing the global freeze-up of credit. In the final tally, the IMF’s proposed SLF may help to sequester (and hopefully resolve) localized liquidity freeze-ups while the Fed’s expanded line of currency swaps attack the problem from another angle.

A quick fix
“Exceptional times call for an exceptional response” said Dominique Strauss-Kahn, the IMF's boss, of a new short-term lending facility for emerging economies facing temporary liquidity problems in capital markets. Under the “short-term liquidity facility” (SLF), approved on Wednesday October 29th, qualifying countries will be eligible for a loan at short notice of up to 500% of their IMF quota, the maximum amount a country is obliged to provide to the IMF. The three-month loans will come with a minimum of conditions relating to economic policy; they are also intended to be made available with a rapidity not usually associated with the organisation.

All this is music to the ears of those, including many within the IMF, who have been arguing that the Fund needs to match its lending to changing global circumstances. The new facility goes some way towards adressing an obvious shortcoming in the IMF’s arsenal of lending instruments. Until now, the Fund had nothing it could deploy aimed at countries facing a temporary shortage of liquidity in spite of sound macroeconomic fundamentals. Yet this situation had become much more likely, even without a paralysing credit crisis, because of increasing global financial interdependence.

A country lacking short-term liquidity would be loth to approach the IMF for a loan under the “stand-by arrangement” (SBA), the mainstay of the IMF’s crisis lending. The SBA carries a stigma, because requesting such a loan is assumed to reflect badly on the recipient’s economic management. But the new loan facility will only be available those countries that the IMF deem to be in sound macroeconomic health. If anything, qualification should serve to reassure outsiders that the country’s policies are essentially sound, and that the difficulties it faces are temporary and a result of factors beyond its control. By this method, the IMF has also precluded the need for the type of onerous conditions which usually accompany loans under the SBA.

The second feature of the SBA that makes it less well suited to dealing with temporary liquidity crises is that funding is usually released in phased tranches. In a liquidity crisis brought on by a collapse in confidence a large loan, quickly administered, is the best method for restoring confidence in a short period of time—exactly how the new loans should work. Most will cheer the IMF for introducing flexible loanmaking without onerous conditionality but concerns remain. Some economists fear that the funds available for the IMF to dole out, which in September stood at $255 billion, may not be enough if several emerging markets come under stress at the same time.

Deutsche Bank estimates that a single large emerging market may face a financing gap of up to $90 billion, depending on roll-over rates for credit lines, liquidation of foreign positions in bond and equity markets, and domestic capital flight. Under these circumstances, the IMF’s pockets, which seemed enviously deep just a short while ago, might not be deep enough. Simon Johnson, a former IMF chief economist, reckons that it may need upto $1 trillion. The IMF acknowledges the problem and says it is prepared to “work with others to generate additional resources to make sure that countries have the money they need to restore confidence and maintain stability”.

Just as important, it remains to be seen how difficult it will be to qualify for a loan under the SLF. It is unclear how strictly the IMF will set the criteria for certifying that a country’s economic management is sound. As a result there may be a number of vulnerable countries that do not qualify for the scheme. As with any programme of this kind, the devil is in the details. The question, then is whether the IMF’s new facility is as good in practice as it seems to be in theory.

Britain's PM Brown seeks IMF boost, crisis knocks at China's door
British Prime Minister Gordon Brown on Sunday called for billions of dollars in extra funding for the International Monetary Fund to prop up struggling economies, while Premier Wen Jiabao said maintaining China's strong domestic growth was his top priority.

Leaders from Mumbai to Moscow and Berlin moved to support their own economies on Saturday, with India's central bank cutting interest rates for the second time in two weeks, Russia putting 170 billion roubles ($6.4 billion) into a state bank and German Chancellor Angela Merkel pledging support for an "extensive investment package" to boost Europe's largest economy. Britain's Brown, speaking in Riyadh, said oil-rich Gulf States and China should contribute money for the IMF to lend to countries at risk of financial collapse. "If we are to stop the spread of the financial crisis, we need a better global insurance policy to help distressed economies," Brown said.

Chinese Premier Wen, writing in the ruling Communist Party's ideological journal, warned of growing domestic social risks from a global economic downturn. "Against the current international financial and economic turmoil, we must give even greater priority to maintaining our country's steady and relatively fast economic development," Wen wrote in Seeking Truth (Qiushi). "We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development...and factors damaging social stability will grow."

China cut interest rates on Wednesday for the third time in six weeks to help the world's fourth-largest economy ride out the reverberations of the global financial crisis. In India -- like China, a magnet for foreign investment in recent years as their economies roared -- the central bank on Saturday cut its main lending rate for the second time in as many weeks to ease a cash squeeze and spur economic growth. Analysts said the surprise move showed Indian concern that strains on its economy were quickly becoming more severe.

"These actions were necessary (and had) to be taken on the liquidity front ... the situation was getting worse," said Vikas Agarwal, a strategist at JP Morgan. The central bank cut the repo rate, its main short-term lending rate, by 0.5 percentage point to 7.5 percent and banks' cash reserve requirements by 1 percentage point to 5.5 percent. "The global financial turmoil has had knock-on effects on our financial markets; this has reinforced the importance of focusing on preserving financial stability," the bank said.

Policymakers around the world have slashed interest rates in recent weeks and injected huge amounts into their banking systems to try to combat the spillover effects of the global crisis, which has caused credit markets to freeze up and threatens to plunge the world economy into recession. In South Korea, where there have been concerns about banks' exposure to the global liquidity squeeze, the central bank said the financial system remained sound. "There does not seem to be a likelihood of the unrest in domestic financial markets that originated in the international financial markets developing into a crisis for the Korean financial system as a whole," the Bank of Korea said in a scheduled report.

Banks everywhere have been racing to shore up their balance sheets after a spate of collapses and hastily arranged mergers prompted by heavy losses from bad mortgages and financial derivatives related to them. In Riyadh, Brown said he welcomed investment by foreign countries, after British bank Barclays tapped Abu Dhabi and Qatar for the bulk of a $12 billion investment on Friday. "As long as they play by our rules and operate in a commercial manner, we welcome investment from sovereign wealth funds in the UK," Brown said. Brown's tour of the Gulf precedes a global summit in Washington on November 15 at which he and some other world leaders will press for reform in the international financial system.

On Saturday, Russia's Finance Ministry said it placed 170 billion roubles ($6.41 billion) from its National Wealth Fund with state bank VEB as part of a plan to allow for state purchases of shares and corporate bonds. The news of state share purchases helped Russian shares rise sharply, lifting them to a 50 percent gain for the week. Shares were trading on Saturday because Monday and Tuesday are public holidays. Also on Saturday, Germany's Merkel promised support for an "extensive" package to help ordinary Germans, which a government paper said would give the economy a 50 billion euro boost. Germany put together a 500 billion euro ($638.9 billion) rescue package for banks last month. Merkel and Brown will meet in London on Thursday.

The global crisis has overshadowed the election to find a successor for U.S. President George W. Bush, who leaves office in January. Republican John McCain and Democrat Barack Obama swept through battleground states on Saturday in a last-minute push before Tuesday's vote. The developments in the worst financial crisis in eight decades followed signs in the past week that world markets were stabilizing, with interbank rates falling and U.S. stocks posting their biggest weekly gain in 34 years.

British prime minister expects Saudi help for IMF
British Prime Minister Gordon Brown said Sunday he expects Saudi Arabia to contribute to the International Monetary Fund's bailout reserves after he promised business leaders in the Gulf that they would have a say in any future new world economic order.

Brown is leading calls for oil-rich Middle Eastern countries to be among the biggest donors to the IMF's coffers, which at $250 billion have already been depleted by emergency cash calls from Iceland, Hungary and the Ukraine totaling some $30 billion. "The Saudis will I think contribute so we can have a bigger fund worldwide," he said after a meeting with Saudi Arabia's King Abdullah late Saturday and business leaders early Sunday.

Analysts have argued that Gulf states will feel little impetus to bolster the IMF fund, given its domination by the United States and the G7 industrialized nations. Kuwait's finance minister, Mostafa al-Shimali, told Al-Anbaa daily in comments published Sunday that Kuwait was prepared to listen to what Brown had to offer. "The matter of supporting world markets depends on investment opportunities on offer and their possible returns," he said.

Any funds from Gulf states are unlikely to be pledged before a meeting of G-20 nations to hammer out potential reform of the global financial system to prevent a repeat of the current crisis, scheduled for November 15 in Washington D.C., which will also be attended by Abdullah. "I believe that your country has a crucial role to play and your voice must be heard," Brown earlier told business leaders in a breakfast address on the first stop of a tour of the Gulf that also takes in Qatar and the United Arab Emirates.

Business Secretary Peter Mandelson, who is traveling with Brown and a delegation of more than 20 senior British executives, said Brown's 20-minute one-on-one chat with Abdullah stressed the importance of the situation. "They are getting each other on to the same page of analysis and the agreed response and Saudi Arabia's active participation in getting the world through this first financial crisis of the global age," Mandelson told reporters. "But that is a process, not an event." Brown said that the Middle East "will want to invest both in helping the world get through this very difficult period of time but I also think people want to work with us so we are less dependent on oil and have more stability in oil prices."

Brown, who has drawn ire from some oil producing states for criticizing a recent decision by OPEC to cut production to lift prices, told business leaders here that it was in everyone's interest to have a stable crude price. He said that the meeting of oil producers and consumers led by Saudi Arabia's Abdullah in Jeddah in July "broke new ground in recognizing ... that we have common interests as producers and consumers in more stable energy prices and the need for a sustainable transition to a more low carbon emissions economy for the longer-term."

OPEC last month cut oil production by 1.5 billion barrels per day to lift the oil price, warning that investment in key production was under threat because of the sharp drop in the price from a high of $147 at the time of the Jeddah summit in July to under $70 currently. Britain is planning a summit in London in December to follow up that meeting. The London gathering was initially to be held at heads of state level, but amid controversy over whom had — or had not — been invited from the oil producing states, Downing St. said it would be held at ministerial level.

China May Provide Funds to Support IMF's Bailout Efforts
Facing the global financial crisis, China, with the largest forex reserve in the world, at almost $2 trillion nearly double second place Japan’s, has finally declared it would use it to offer help within its power. China will probably announce a plan to inject funds into the International Monetary Fund (IMF) at the G20 summit meeting, to be held in Washington on November 15.

The IMF fund of $250 billion is now being used to help over ten countries suffering from the crisis, but European leaders believe far more money is needed. UK Prime Minister Gordon Brown said he would contact leaders of China and the Gulf countries, hoping to get at least $100 billion additional capital for IMF from them. European Union President José Manuel Barroso said on October 29 that China and Gulf countries could do more to help IMF rescue countries affected by the crisis.

A more important role in any new international monetary system and financial order for China’s is a crucial part of French President Nicolas Sarkozy’s idea for a new “Bretton Woods” arrangement. Ministry of Foreign Affairs spokeswoman Jiang Yu said that, as an IMF member, China has always been willing to offer funds to ailing countries through IMF’s fund trade plan. She also said China was willing to take an active part in an international rescue plan.

“The financial crisis is doing serious harm to the global financial system and to economic development. The international community should work closely together to cope with the crisis. China is willing to reinforce cooperation with governments and major international financial organizations, including IMF, to maintain global financial stability and promote global economic growth,” she said.

Since the outbreak of the crisis, China has emphasized cooperation with the US and other countries, and has cut interest rate three times within six weeks. But China has set forth no policy to offer credit to the global economy from its oceanic forex reserve. Instead, it has always so far emphasized that the rapid and stable development of China’s own economy was the biggest contribution it could make to the stability of the world’s economy, and in fact still has no other clear strategy to aid in the rescue and the reform of the global financial order.

Chinese Premier Wen Jiabao was recently in talks with Russian leaders while attending the 3rd China-Russia Economic and Trade Forum. He said in Moscow that international society should cooperate closely to maintain the global economic and financial stability and promote global economic growth. “Meanwhile, we should learn a good lesson from the crisis and improve the global financial system, reform the global financial supervisory system, promote the establishment of a diversified global monetary system, and establish a new global financial order,” he added.

Earlier, during the seventh Asia-Europe Meeting held in Beijing, countries attending the meeting issued a joint statement on international financial situation. Wen Jiabao said then that as the global economic crisis was spreading quickly, the rapid and stable development of the Chinese economy was China’s biggest contribution to the world.

China has been hesitating about whether it should help to rescue a financial order led by the US and western countries. In Moscow, Russian Prime Minister Putin even suggested the two countries should use their own currencies, instead of USD, to settle bilateral trade.

Wen Jiabao told a Russian news service, “My visit this time focuses on communicating with Russian leaders, coordinating positions, and discussing how to cope with the global financial crisis. We have not only reached wide consensus, but also coordinated positions and discussed measures of cooperation. We believe closer trade and financial cooperation between our two countries under the current situation is not only realistic, but also strategic.”

“I just want to emphasize one point. Since most of the countries in the world are developing countries, they should have more discourse power in international affairs,” said Wen Jiabao.

Japan ready with money for IMF bailout
Japan is ready to provide some of its ample cash for any International Monetary Fund bailouts for struggling nations to help stabilize the growing global financial crisis, the finance minister said Friday. Japan will make that offer along with proposals about accounting standards and other regulatory adjustments needed to fix the growing economic woes at a world summit in Washington Nov. 15, Finance Minister Shoichi Nakagawa told reporters.

Nakagawa did not say the acceptance of its proposals would be needed to get any of the money but he said Japan expects to play a greater international leadership role on the international stage. He said the IMF has about $210 billion funds but that may not be enough. "Japan is ready if that proves insufficient," he said, adding that Japan has $1 trillion in possible funding from its foreign currency reserves. "We see lending to the IMF basically as risk-free."

He did not give specifics of what Japan's proposals may be, stressing that Prime Minister Taro Aso was still hammering out details. Nakagawa reiterated his earlier remarks and the views of other Japanese politicians that Japan wishes to exercise political leadership in offering its money and experience in wresting itself out of its bad debt woes of the 1990s. He said Europe and the U.S. have historical experience with the Great Depression, but Japan has more recent experience and is in a better position to share its expertise.

"We were able to get ourselves out of our problems without help from any other nation," he said at the Japan Press Center.
Earlier this week British Prime Minister Gordon Brown and German Chancellor Angela Merkel said the International Monetary Fund needs more money to bail out struggling countries. Brown has called on countries such as China and the oil-rich Persian Gulf states to fund the bulk of an increase in the International Monetary Fund's bailout pot. The IMF is giving Hungary, Iceland and Ukraine loans and is in discussions with Belarus.

The International Monetary Fund said Wednesday it is creating a new program to get money quickly to developing countries with strong economies that are facing cash crunches in the global financial crisis. Nakagawa said countries need to respond quickly and work together to get out of the financial problems that started with the U.S. subprime mortgage crisis and is now spreading around the world.

"Japan is taking leadership," he said. He said Japan was also doing its part domestically with stimulus spending packages and regulatory changes to prevent a further plunge on the Tokyo stock market. On Thursday, Tokyo unveiled a stimulus package worth 27 trillion yen ($275 billion) to shore up the world's No. 2 economy, including benefits to households, loans to small- and mid-sized businesses and discounts on highway tolls.

Zardari prefers 'Friends of Pakistan' help over IMF
President Asif Ali Zardari says that while cash-strapped Pakistan is still averse to resorting to IMF aid, the country must consider the IMF option as a cure for its ailing economy. Zardari is to visit Saudi Arabia on Tuesday for talks with King Abdullah Bin Abdul Aziz, Custodian of the Two Holy Mosques, to solicit support for the Friends of Pakistan initiative and the oil-facility requested by Pakistan.

Speaking to Saudi Gazette in an exclusive interview ahead of the visit, Zardari said “Saudi Arabia has always provided assistance to Pakistan in difficult times.” And these are very difficult times for  Pakistan, which needs up to $4.5 billion to deal with a balance of payments crisis, raising the prospect that the violence-hit country will default on its foreign debts. “I would solicit Saudi support for the Friends of Pakistan initiative,” the President said. “I sincerely hope that with the steadfast support of the Saudi government, it will achieve the desired objectives.”

The Friends of Pakistan will meet in Abu Dhabi on Nov. 17 to decide on economic aid for the country, an ally in the global “war on terror.” Pakistan’s friends include Britain, France, Germany, the United States, China, the United Arab Emirates, Canada, Turkey, Australia and Italy plus the United Nations and the European Union. Additionally, “Pakistan is supported through a series of negotiations by various world economic bodies – World Bank, Islamic Development Bank, Asian Development Bank and the UK’s Department for International Development,” Zardari said, suggesting that options remain open for his country to avoid a loan from the International Monetary Fund (IMF).

“Getting aid from the IMF is our last option,” Zardari said. However, he added after a pause: “Actually, we must consider the IMF option as a medicine that will ultimately cure our ailing economy.” An IMF loan is often tied to stringent conditions, chief of which is elimination of subsidies. In September, the IMF recommended that Pakistan’s fiscal deficit be reduced to 4.7 percent of the GDP and electricity subsidies be eliminated.

And that’s Zardari’s concern. “In just five years, our oil bill has increased from $3 billion to over $12 billion, thus creating pressures on our balance of payments, he said. “Such an increase is also creating difficulties for our budget as we have tried to protect our people from the rising cost of energy by subsidizing fuel and electricity in the given limits of the budget.” If Pakistan cuts its electricity subsidies as sought by the IMF, its energy bill – for mainly oil – will get passed on to the people, leading to price rises.

“Global food inflation is hovering between 35 and 40 percent and Pakistan is no exception,” Zardari pointed out while explaining his government’s struggle to control food prices in the midst of various initiatives to return Pakistan on a high growth trajectory. “Unfortunately, for decades Pakistan was being managed by people who had no perspective or imagination,” Zardari said. “Otherwise, Pakistan is rich in all sorts of resources.”

Pakistan accepts IMF conditions for financial aid
Pakistan has accepted most of the conditions of the International Monetary Fund (IMF) for aid to overcome its balance of payment crisis. The IMF had proposed 16 conditions for financial assistance to Pakistan during the talks in Dubai last month, and “11 of them have been accepted with slight changes,” The News daily Sunday quoted a finance official as saying.

According to the conditions, the Pakistan government has agreed to gradually impose the central excise duty (CED) on services and agriculture sectors at the rate of eight to 18 percent in place of the general sales tax (GST), the finance official told the newspaper. The Pakistani currency will also be devalued after slight changes in the discount rate and exchange rate will be decreased officially by six to seven percent, the official said.

Pakistan, which said an IMF loan would be its last option, has been lobbying for financial help from friendly countries and financial institutions as it is faced with plunging foreign exchange reserves and high inflation. However, it has failed to get positive response from those countries. Analysts said the country’s foreign exchange reserves could only afford two months’ imports.

The rating agency Standard & Poor’s has downgraded the country’s sovereign debt to the level of CCC-plus, close to defaulting on its commitments of external loan repayment. Shaukat Tareen, advisor to prime minister on finance, said Oct 23 that Pakistan needed upto $5 billion in 30 days for stabilizing the country’s economy.

IMF tells Pakistan to cut defence budget
The International Monetary Fund (IMF) has asked Pakistan to cut its defence expenditure. Adviser to Prime Minister on Finance, Shaukat Tareen has said that Pakistan is at war on its western border and no effort should be made to slash down the defence expenditure at this critical juncture.

"If the armed forces keep their expenditures within the envisaged allocated amount for this fiscal year, it will be a great achievement on their part," he said. The adviser hinted at raising the discount rate in the near future, as insisted by the IMF, saying the core inflation stood at 17 per cent while the discount rate was 13 per cent at the moment, which could be reviewed to tackle the inflationary pressure in a more effective manner.

The economy of Pakistan has been facing many serious challenges such as trade deficits, galloping inflation, increase in the level of poverty, power outages, water shortages, closure of industries and food insecurity. The country's inflation is running at around 25 per cent, and its foreign currency reserves are rapidly depleting, forcing the government to seek emergency cash advance from friendly countries and international financial institutions.

The government of Pakistan has already said it would seek the IMF loan only as a last resort if it cannot secure some US$5 billion it needs to stabilize its economy. "Within the first seven days of November, we will complete the indoor consultation for formally approaching the IMF," Tareen has said. However, if the current "political realities", are analyzed, Pakistan seems to have little option but to go to the IMF. The United States also wants Pakistan to work with the IMF.

An IMF-backed plan would require Pakistan's government to cut spending and raise taxes, among other measures, which could hurt the poor. The government of Pakistan has already taken steps to reduce expenditures keeping in view the difficult economic situation being faced by the country. It is said that all the other expenditures of the country would have to be brought down to reduce the fiscal deficit from 7.4 per cent of the GDP to 4.3 per cent on June 30, 2009.

There are other non-development expenditures as well that could be reduced such as the reducing the fuel limit for bureaucrats, continuation of the ban to purchase cars. For imposing the agriculture tax, the government will have to move a constitutional amendment in the Parliament for seeking a nod before imposing this tax and if the PPP government could devise a mechanism in this regard during its five-year term, it would be an achievement on their part.

Turkey to continue reforms with or without IMF deal- minister says
Turkey would continue its progress to fulfill reforms with or without the International Monetary Fund (IMF), Turkey's Economy Minister Mehmet Simsek said on Sunday, the Anatolian Agency reported.

"We will do everything that is to the advantage of Turkey. The Turkish government is eager for any program that will restrict the impact of the global crisis on Turkey and at the same time strengthen the reform process," Simsek said when asked about a possible IMF deal in the southeastern province of Gaziantep.
Turkey has been holding talks with the IMF for a potential precautionary stand-by loan to partly address market worries. However the government is extremely reluctant to sign a new deal and claims the economy is sound despite the global economic crisis. Turkey's previous $10 billion IMF stand-by deal -- which stipulated conditions related to loans -- expired in May. "We have earlier fulfilled reforms without the IMF. We made social security and energy market reforms. However, if the presence of the IMF is to limit the impact of the crisis, we do not have any prejudice against this," Simsek said.
Simsek said "rapid growth", "negative effects caused by rising energy prices", and the "current account deficit" are cyclical fragilities of Turkey, adding that, "in order to prevent the fragilities in question to become a problem, we will improve fundamental macro economic structure of the country, we will continue to make reforms and we will progress."
Business leaders have called on the government to secure another loan deal to help limit the fallout from the global financial crisis that has already forced Ukraine, Iceland and Hungary to seek IMF help. Prime Minister Tayyip Erdogan had also earlier said that a deal with IMF was not necessary and that the government would not accept harsh agreement terms, adding that only a flexible deal would be only be considered.

IMF to visit Romania, no assistance talks planned
The International Monetary Fund and the World Bank will visit Romania between Nov. 3-14 to evaluate its financial system, but no financial assistance for Bucharest will be discussed, the IMF said on Saturday. Some economists have said Romania may have to seek international help, including from the IMF, to shore up investor sentiment and safeguard its economy from the impact of the global financial crisis.

However, both Bucharest and the IMF have so far said no agreement was in the works. Romania's neighbours Hungary and Ukraine have both sought help from the lender. "The Romanian authorities requested this follow-up mission long ago, and its actual timing was decided last year," the IMF said in a statement. "The mission will not discuss or negotiate IMF financial assistance to Romania."

IMF: no bail-out talks with Bulgaria
The International Monetary Fund (IMF) said on October 31 that it was not in talks with Bulgaria concerning the prospect of Sofia borrowing money. "We are aware of recent references in the international press to countries, including Bulgaria, that are supposedly in talks with the IMF about financial support," the IMF said in a statement.

"We do not have discussions about such financial support underway with Bulgaria," it went to say before adding that "all members of the IMF have the right to ask for financial support at any time." The IMF has resumed its role of lender of last resort after the global financial crisis took a turn for the worse in September. In Eastern Europe, it has already extended credit lines under standby agreements to Hungary and Ukraine earlier in the week.

Analysts see Bulgaria, as well as Romania an the three Baltic states, as the most vulnerable European Union member states in the current global financial turmoil. Running large current account deficits, the five countries would suffer most from a withdrawal of foreign investors and tightening cross-border credit.

But finance ministers Plamen Oresharski in Sofia and Varujan Vosganian in Bucharest both have come out to deny media reports that the EU's most recently-joined member states were in bail-out talks with the IMF. The IMF will carry out its annual Article IV consultation with Bulgaria during the first half of December, the Fund said in its statement.

Mozambique: IMF Warns of Economic Slowdown
The International Monetary Fund (IMF) has found that Mozambique has been hit by rising international food and fuel prices, which have slowed growth. Visiting the country in the last two weeks of October, an IMF mission found that the economy remains strong, and that core inflation, which excludes energy and food, is running at below four per cent a year, according to an IMF press release.

However, once food and energy are included, inflation jumps to over ten per cent. Projections for economic growth in 2008 stand at 6.5 per cent, down from last year's seven per cent. The IMF team came to Mozambique to review its three-year Policy Support Instrument (PSI) and to discuss its support for the country's economic reforms. It found that all the programme's targets and benchmarks were met, and that "important progress has been made in strengthening public finance management, in improving the operational capacity of the revenue administration and in broadening the tax base".

However, the IMF team warned that the country is not immune to the financial turmoil currently buffeting the international economy. The financial crisis essentially derives from the corrupt lending practices of American banks, which the IMF would never tolerate for a moment if they happened in an African country. The IMF stated that Mozambique faces "considerable risks arising from the impact of the current global financial crisis. Large variations in international prices and the recent substantial price declines for commodities have a substantial impact on Mozambique's external trade and a deeper slowdown in global demand would also affect export volumes".

The release added that "the global financial crisis may adversely affect private capital inflows. In addition, the economy remains heavily dependent on inflows from the international donor community. This support is key to help Mozambique progress toward the Millennium Development Goals". Welcoming the government's "prudent" fiscal and monetary policies, the IMF notes that next year's budget sees the reinstatement of the fuel taxes that were suspended earlier this year to cope with soaring international oil prices. Oil prices at one pint hit 147 US dollars a barrel, but have now slumped to around 65 dollars a barrel.

The IMF reported that increased revenue from taxes will enable the government to hire 12,000 new teachers and 1,500 new health workers in 2009. The PSI is designed to support Mozambique's economic reform as the country receives increased flows of foreign aid, promoting structural reforms. It is also intended to support the government's poverty reduction programme. The PSI is a vehicle for the IMF to support low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring, and endorsement of their policies.

Will Cyprus need IMF aid?
Gone are the days when the International Monetary Fund would be a lender of last resort for the world’s poorest states, most of them dogged by problems of free rule and hampered by spending on arms, ignoring the need for national development and prosperity. Nowadays, with the IMF having reduced its lending to more than a tenth of what it churned out in more than a decade, the world’s biggest financier is cash-rich and can finally resume its role of maintaining stability in global markets by funding rescue packages for developed economies in Europe and Asia, some of which would never dream of an IMF loan in the past.

It all has to start from somewhere. If the forex sector is suffering because of a collapse in government efforts to maintain a fixed exchange rate, the IMF can now help a state inject more money to prop-up foreign currency reserves. But if the equity crash ought to be dealt with at first, then governments can now reach out for financial aid in order to pump more cash into conglomerates that drive a nation’s economy. Corporate giants, be they industrials, banks or travel companies, are the ones who are hostage to the volatile commodity prices, primarily crude oil and materials for good aimed at exports.

Many emerging economies had improved their state of health, getting their house in order since the crises of the 1990s, building reserves and borrowing in their own currencies. What Cyprus needs to do is consider that equity crashes are often followed by bubble-like overvaluation, something we lived through in 1999/2000, but continued not to learn from that mistake allowing property prices to rise artificially with the market now turning dry and causing a chain-effect that has spread into the other sectors.

If President Christofias and Finance Minister Stavrakis seem so confident that the island’s bank’s are rock solid, despite the growing fear that foreign funds and Russian investors are seriously contemplating withdrawing their deposits here, then perhaps it is time that the government implemented the last few reforms recommended by the IMF in order to qualify for a low-risk loan for development programmes. Unless of course the present administration continues to resist on issues such as abolition of the COLA automatic wage indexation system and avoid a public riot, at the cost of employers constantly hiking their costs and becoming less competitive by the day, resulting in more layoffs.

The choice is now between a rock and a hard place and whether this administration wants the economy to prosper, with or without international aid.

S&P cuts Argentina's debt rating
Standard & Poor's cut Argentina's sovereign credit rating for the second time in less than three months Friday, sending it deeper into junk bond territory on worries of greater investor risk. Citing heightened concerns about deteriorating economic and political environment and fiscal pressures, S&P cut the bonds to “B”, six notches into junk bond territory.

Argentina's new rating stands one notch above a clutch of ratings where a country's debt is considered to be predominantly speculative, hold substantial risk or be in actual default. S&P kept its outlook on Argentina as stable. In credit markets, the cost of insuring Argentine debt against default rose 112 basis points to 3985 points via five-year credit default swap . That means an investor would have to annually pay 39.85 per cent of the face value of Argentine government bonds over a five-year period for the default insurance. Over the course of this week, the cost to insure Argentine debt has risen 7.4 per cent, according to Markit.

Argentina's centre-left government last week announced a plan to nationalize private pensions, sending local financial markets into a tailspin and raising fresh doubts about the country's ability to weather the global financial crisis. Foreign investors read the plan as a desperate effort to find funds to meet billions of dollars of debt obligations next year. Some analysts have speculated the funds takeover is a bid to stave off the prospect of default. Argentina defaulted on about $100-billion (U.S.) in debt in 2002 and reached agreement on a restructuring with most creditors in 2005.

S&P credit analyst David Beers said: “The downgrade reflects our heightened concerns about the deteriorating economic and political environment in Argentina and the resulting increased fiscal stress.” The agency said the government's unexpected proposal to transfer the private pension system back into government hands “has shaken the local financial markets and overall confidence”. “Any significant fiscal slippage would complicate the government's financing program, possibly leading to a downgrade,” Mr. Beers added. Argentine bonds have crumbled an average of 64 per cent on average in local markets this month, hit by the pension plan and the international credit crunch.

Local analysts said they did not see the S&P downgrade making much difference to investor sentiment, which is already low. “I don't think it will have much more impact on the economy and to a certain extent it was predictable,” said Fausto Spotorno, an analyst at the Buenos Aires-based economic consulting firm Orlando Ferreres and Associates. Following the announcement, locally traded sovereign debt – which ended higher Thursday after 11 straight losses – traded down by an average of 0.5 per cent in early trade.

Overseas, Argentina's dollar-denominated global benchmark gained. The Discount bond maturing in 2033 rose 0.812 to bid 24.750. The Par bond maturing in 2038 rose 0.750 to 17.625 with a yield of 16.887 per cent. JP Morgan's benchmark Emerging Markets Bond Index Plus showed returns on Argentine global bonds jumped 3.59 per cent. Returns are based on price and factor in coupon payments. Argentine global bonds' yield spreads over U.S. Treasuries narrowed 107 basis points to 1785 basis points. Narrowing spreads reflect greater investor confidence.

Sears, Home Depot May Lose 8% of Holiday Sales on Credit Limits
Home Depot Inc., Sears Holdings Corp. and other retailers may lose as much as 8 percent of their holiday sales this year because lenders and stores are clamping down on financing. Almost a quarter of shoppers say banks cut the spending limits on their credit cards, according to a survey by America's Research Group, which also provided the sales-loss estimate. More people are being rejected for new cards, hurting sales for bigger purchases.

Demand is being pinched just as retailers prepare to enter the holiday selling season, which accounts for as much as 35 percent of their annual revenue. "Banks just don't have the money," said David Bassuk, a New York-based managing director at consulting firm AlixPartners LLP. The tightening credit is putting retailers "at big risk to lose those sales or lose those customers," he said. "There is a big concern there with the holiday spending."

U.S. consumer spending, the biggest part of the economy, tumbled in September, and a purchasing managers' survey showed the biggest deterioration since 1968. That foreshadows a deeper slump for gross domestic product, which contracted at a 0.3 percent pace in the third quarter. About two-thirds of holiday purchases are made using credit cards, estimates America's Research Group Chairman Britt Beemer. That excludes gift cards, three-quarters of which are also bought using credit cards, he said. His Charleston, South Carolina-based firm surveys 10,000 consumers a week.

Beemer predicts holiday sales will decrease at least 4 percent, the first decline since he started forecasting in 1979, as consumers grapple with sinking home and stock values. His projections have been correct in 16 of the past 17 years. Retailers that offer zero- or low-interest financing --which is often backed by banks -- may also rein in the credit they extend to shoppers to avoid being left with bad loans when customers can't pay them back.

If financing is "offered, it's going to be to a much smaller segment of the population," said Red Gillen, a senior analyst at Boston consulting firm Celent LLC. "It's great to attract customers with these financing deals, but you don't want to be holding delinquencies." A quarter of consumers polled in a Standard & Poor's survey released Oct. 15 said they're at or near the limits on their primary credit card, and 20 percent said they're approaching the limit on their secondary cards.

Purchasing may shrink further as more lenders follow Citigroup Inc. and JPMorgan Chase & Co. and impose tougher lending standards to conserve capital. Wal-Mart Stores Inc. executives told analysts at a meeting this week that customers have "maxed out" their credit cards. Outstanding credit-card debt has risen 75 percent since 1999, while real wages have grown 4 percent in the same period, according to a report last month by Innovest Strategic Value Advisors, headquartered in New York.

Consumer credit outstanding fell in August for the first month since January 1998, the Federal Reserve said Oct. 7. Best Buy Co. and other sellers of big-ticket items such as flat-screen televisions may be the hardest hit as in-store financing becomes less available and shoppers seek out cheaper items, said George Whalin, president of Retail Management Consultants in Carlsbad, California. Buying pricier products would push many to their credit limits, he said.

Best Buy is offering at least 18 months of zero-interest credit for purchases exceeding $499. The chain's bank, HSBC Holdings Plc, hasn't tightened lending standards or started rejecting more applicants, said Ryan Robinson, chief financial officer of Best Buy's U.S. business. Shoppers will probably spend less this Christmas than in previous years, said Chief Operating Officer Brian Dunn. "I don't think we're going to fundamentally pull anyone off the sideline that can't play right now," Dunn said.

Target Corp., the second-biggest U.S. discount chain, is cutting credit lines and granting fewer increases to store-card holders to cope with the "very difficult credit environment," said Chief Financial Officer Douglas Scovanner. Credit ratings on new accounts have declined, particularly in areas like Florida and California that were hurt the most by the housing shakeout, Kohl's Corp. Chief Executive Officer Kevin Mansell said in an Oct. 29 interview. Kohl's has lowered approval rates in those regions, he said. Sales haven't suffered because Kohl's customers have "minimal" store-card credit limits and don't usually reach them, Mansell said. Kohl's is adding promotions linked to its card this year.

Banks are mailing fewer card applications to consumers, according to Synovate Mail Monitor, a division of New York research firm Synovate. In the three months through June, the most recent data available, the number of mailed credit-card offers dropped 17 percent, to 1.27 billion, from a year earlier, it said. That's the lowest since late 2003. Lenders may be overcompensating for the more liberal approval rates of the past, said Ken Simon, a managing director at Loughlin Meghji & Co., a New York restructuring firm. "Before they get back to where they should be, they're going to swing the other way," Simon said.

Synovate predicts a further decline in mailed applications this year "as issuers continue to cut back due to economic uncertainty," Vice President Andrew Davidson said in an e-mail. Citigroup said last month that it's reducing credit limits, tightening underwriting requirements and insisting on higher credit scores for cash advances. Chase Card Services, a unit of JPMorgan, "has lowered the credit limits of customers who have shown signs of increased risk," spokeswoman Tanya Madison said in an e-mail. It's still boosting them for its most credit-worthy customers.

Even so, holiday sales will be "bleak" as consumers become increasingly cautious about incurring more debt, S&P Chief Economist David Wyss said in an interview. The less credit available to consumers, the more it "impacts their confidence," National Retail Federation spokesman Scott Krugman said. Credit "is their safety net."

New Data Will Report Credit Swaps Tied to Bonds
Starting in the coming week, the public will get a glimpse into a slice of the credit-default-swap market that hasn't been visible even to most investors that trade these insurance-like contracts. The Depository Trust & Clearing Corp. said it will publish weekly data showing the volume of outstanding credit-default swaps tied to many individual bonds and loans. Starting Tuesday, it will release information on its Web site for 1,000 debt issuers -- such as companies and countries -- that swaps have been written on.

The move is part of a broad effort by large banks and other market participants to increase transparency and reduce risk in the credit-default-swap market. A lack of information about swap volumes on individual bonds has contributed to investor worries about this market in recent weeks. On Friday, industry players released a letter to the Federal Reserve Bank of New York, pledging to do more to reduce volumes of outstanding swaps and to start clearing trades through a central clearinghouse by November or December.

Credit-default swaps are contracts that trade directly between firms and provide protection against bond and loan defaults. As of June 30, such swaps had been written on $55 trillion worth of debt, and until recently that number had been growing exponentially, causing concern among regulators that some players in the market couldn't fully gauge their risk exposures. Unlike stocks and bonds, there isn't a fixed supply of swaps outstanding, and dealers continually create new contracts with each other or with their customers such as hedge funds.

In a statement Friday, the New York Fed said firms have been instructed to reduce outstanding trades by "tearing up," or canceling, contracts that effectively offset each other. In the year to date, these tear-ups eliminated over $24 trillion in trades, with around $17 trillion occurring in the first half. Wall Street players also agreed on new targets to log credit-default-swap trades more swiftly and to broaden that effort across the derivatives asset class.

The DTCC's statistics already have helped dispel some fears surrounding credit-default swaps, such as the ability of financial institutions and hedge funds to make swap payouts tied to defaulted Lehman Brothers bonds. Estimates of the value of contracts on the failed investment bank ran as high as $400 billion. The DTCC's numbers showed that the volumes outstanding were closer to $70 billion and the amount that ultimately changed hands to settle the contracts was a fraction of that.

U.S. Eyeing Troubles Of Insurers
Several big insurance companies this week reported big losses on investments in the last quarter, raising fresh questions about the financial stability of the firms as the U.S. government considers investing in them. Hartford Financial Services Group, a Connecticut insurer, lost $2.63 billion in the third quarter. Prudential Financial, the New Jersey insurer, lost $108 million. Assurant, a New York provider of specialty insurance, lost $111.4 million.

The companies saw their investments in mortgage-related securities and other assets suffer with the market downturn. Some analysts have warned that several firms are treading on increasingly weak ground and will have difficulty raising needed cash to continue operations. The companies' shares plunged this week before a modest rally yesterday. The poor financial results came after insurance executives met with Treasury Secretary Henry M. Paulson Jr. to ask for access to a government capital injection program that has already provided $164 billion to the nation's largest banks.

Several insurance companies have publicly stated that they are likely to seek government funding should it become available. "We feel very well capitalized," Hartford chief financial officer Lizabeth Zlatkus told analysts on a conference call earlier this week. "But in terms of would we access the [Capital Purchase Program] if that's available? We certainly think there are favorable terms as we see it, and we would look to do that." In the case of banks, a prerequisite for such funding is that the institutions be on firm financial footing in order to ensure that the taxpayer investment is not wasted. But judging the health of insurers may be trickier.

Banks are regulated by an extensive and mature network of federal agencies, some of which have examiners working inside banks. By contrast, many insurers are regulated by state authorities, though some are registered as thrift-holding companies and therefore subject to oversight by the Treasury's Office of Thrift Supervision. If an insurer faltered, the direct impact on most consumers would probably be minimal. Most policies, such as car and home insurance, would be transferred to another company. But in many states, the cash value of life insurance policies and a widely held retirement insurance product called a fixed annuity is guaranteed only up to $100,000.

Insurance firms not only provide financial security and guarantees to many consumers and businesses, but they also use premiums collected to buy and hold vast amounts of securities, helping foster liquidity in the financial markets. The near collapse of the big insurer American International Group in September -- before being saved through a Federal Reserve loan package that now totals $144 billion -- sent a chill through the insurance industry. Some analysts warn that other firms could be on as weak ground, though they're not as big as AIG and therefore don't pose as much of a risk.

Some of the closest scrutiny has fallen on Hartford. The company, which offers auto, homeowner's and life insurance, as well as annuities and other products, has written down the value of some of its bad investments on mortgage securities and derivatives. But it still has $11.5 billion in unrealized losses, leaving the company with little cushion to absorb further losses.

Barclays Capital analyst Eric N. Berg wrote in a research note that "there are precious few options available to Hartford to raise the capital it needs to avoid a rating-agency downgrade." A rating-agency downgrade might scare away customers and could make it difficult for the company to fund itself. Hartford and other financial firms say that despite their troubles, they are well capitalized and can meet their commitments.

America and Europe headed for severe recessions
As recently as a month ago, there were still hopes that America and Europe might just pull back from the precipice of a recession. Those hopes have been dashed. The economies of the rich world seem to have fallen off a cliff. The question now is the height of the drop.

Central banks are trying to cushion the fall. On October 29th the Federal Reserve lowered its target for the federal funds rate to 1%, matching the trough it reached in 2003. It may cut again. With remarkable speed, worries have shifted from inflation, which is still around 5%, to deflation. Fed officials still think that, if even pessimistic forecasts came to pass, inflation would not fall below zero.

But Macroeconomic Advisers, a forecaster, now reckons that core inflation will fall to 1.3% by 2010, too close to zero for the Fed’s comfort. They expect the Fed to cut the federal funds rate to 0.5% in December and then, with scant room for more cuts, that it may try to stimulate growth using unconventional measures such as further expanding its lending facilities to banks and other firms.

The rate cut was needed. America’s economic data have become starkly weaker since the bankruptcy of Lehman Brothers in mid-September. The latest GDP numbers, released on October 30th, showed that output fell by an annualised 0.3% in the third quarter. Surveys of manufacturing activity have shifted down. Weekly initial claims for unemployment benefits have shot up. A monthly index of consumer attitudes compiled by the Conference Board, a research group, plummeted to a record low of 38 in October, down from 61.4 in September.

Confidence surveys are unreliable predictors of consumer spending. But the destruction of wealth through falling stockmarkets and tightening credit conditions are already having an effect. On a seasonally adjusted basis, light-vehicle sales in September were the lowest since 1992, according to Autodata Corp, a research firm. On October 28th Whirlpool, an appliance maker, gave warning that low home sales would cut revenue and Royal Caribbean Cruises, a cruise operator, lowered profit estimates because of “a significant deterioration recently in new bookings”.

A similar downward lurch is under way in Europe, where the European Central Bank seems poised to cut interest rates for the second time this autumn on November 6th. The Munich Ifo Institute’s index, which measures the mood of German businesses, sank to its lowest level for more than five years in October. Volvo wins the prize for statistic of the crunch to date. The Swedish firm said it had received a mere 115 orders for heavy trucks in Europe in the third quarter, down by 99.7% on the 41,970 order bookings during the same period of 2007.

America and Europe cannot count on exports to make up for faltering domestic demand, because the crisis has spread to emerging markets. Airbus and Boeing, for example, had counted on orders of 300 aircraft from India in the next five years to help offset slower demand in Europe and America. Some of those are in jeopardy. Jet Airways, India’s largest domestic carrier, announced its biggest quarterly loss in more than three years on October 25th.

Economists disagree about how bad it will get. Dean Maki of Barclays Capital says that falling wealth tends to affect consumer spending over many years rather than right away. It is just the opposite with changes in real income because of petrol prices. Consumer spending could conceivably be lifted by the sharp drop in oil prices that has unfolded since July, which Macroeconomic Advisers estimates to be worth more than $100 billion on an annualised basis. Mr Maki notes that consumer confidence plunged after the September 11th terrorist attacks but that Fed rate cuts enabled interest-free loans which dramatically boosted car sales.

Another small positive sign is that home sales rose slightly in September and that house prices have actually risen in a few cities. These glimmers may be snuffed out by the unprecedented tightening in credit now under way. According to Ed McKelvey of Goldman Sachs, the only comparable modern precedent is the federal government’s short-lived imposition of credit controls in early 1980, which produced a dramatic downturn in American consumer spending.

That episode ended when controls were removed. Today, credit restraint chiefly depends on how long it takes the private sector to respond to policy actions such as the Fed’s commercial-paper purchases and the widespread recapitalisation of weakened banks. “Government is working as hard as it can, but in the end it’s the private sector that does the lending,” he says.

Would GM or Renault-Nissan keep more auto jobs in Detroit?
Even with all they've been through with a previous overseas owner, many current and former Chrysler workers would rather see their company sold to Paris- and Tokyo-based Renault-Nissan than Detroit-based General Motors Corp. "I would be for Renault-Nissan," said Winston Upchurch, 61, of Detroit, who retired from Chrysler in April 2001. "It should still be the Big Three ...It's about saving jobs."

An acquisition by GM could lead to an estimated 80,000 to 90,000 jobs lost among Chrysler and suppliers, according to a study released Thursday by Grant Thornton's advisory and restructuring practice. Chrysler operates 13 assembly plants and 18 parts or engine manufacturing plants in North America. Half of those assembly plants would likely close under a GM acquisition, according to the Grant Thornton study. That's why, if something must occur, some workers prefer a tie-up with Renault-Nissan. "All of the employees are praying for it," one hourly worker said, declining to be named because the sensitive situation inside Chrysler facilities. "I am able to hold my composure a little bit at work, but I am watching guys with 19, 20 years that are big tough guys, breaking down crying. We want to work."

Word emerged Oct. 10 that Chrysler is for sale for the third time in just over a decade. The Free Press has reported that Cerberus Capital Management, which owns 80.1% of Chrysler, is in talks with both GM and Renault-Nissan about a sale of all or some of Chrysler, with Cerberus preferring a sale to GM. With new buyout offers on the table for white-collar employees, several salaried workers talked to the Free Press in confidence about their anxiety about the future. Some said they could see themselves taking the buyout package and starting something new, perhaps going back to school. They also worry that if they pass on a buyout offer that they will lose their jobs anyway through layoffs and expressed concern that the only people who stay will be those who cannot find better alternatives.

At Chrysler's Sterling Heights Assembly Plant, workers are talking openly about the tremendous job losses that could come from a GM deal. "Everybody is concerned about it," said Andre Scott, 47, of Detroit. "They are thinking if they buy in, that so many plants would close." The UAW has not commented on the possibility of a deal with Renault-Nissan, but UAW President Ron Gettelfinger has spoken forcefully against the idea of GM buying Chrysler. "I think it would be better for our members if we could keep all three companies separate," Gettelfinger told the Free Press last month. "Any time you're going to combine, it's going to have a dramatic impact on everybody."

Harley Shaiken, a union expert from the University of California-Berkeley, said the UAW would probably prefer to find a way to keep Chrysler independent. But if forced to choose between Renault-Nissan and GM, the preservation of jobs trumps all other concerns, even when it might mean another deal with a foreign-owned company. "It seems to be a bit of a contradiction, but it makes perfect sense," Shaiken said. "The sense is the merger with GM would cause most Chrysler jobs to be eliminated ... It is less certain what Renault-Nissan would do, but it is more likely, given their smaller U.S. presence, that they keep a larger part of Chrysler going."

Nissan has had its troubles this year, but remains a very different company today from what it was in 1999. Nissan had been losing money for 10 years and was on the brink of bankruptcy when it formed an alliance with Renault SA. Renault owns 44% of Nissan Motor Co. and Nissan owns 15% of Renault. Under the leadership of Carlos Ghosn, CEO of both Renault and Nissan, the Japanese automaker is again profitable. On Friday, Nissan cut its profit outlook for the year in half to $1.51 billion and reported a 38.8% decline in net income to $692.7 million.

Renault said on Oct. 23 its third-quarter revenue fell 2.2% due to slowing sales in European markets and a global financial crisis. It cut its year-end operating margin target from 4.5% to between 2.5% and 3%. Those challenges pale in comparison with GM's problems. The Detroit automaker in August reported a second-quarter net loss of $15.5 billion, and through the first half of the year GM burned through $1.05 billion a month in cash. Those are the kinds of problems that make Duane Henderson, 36, of Detroit, nervous about GM. Henderson, a Chrysler employee since 1995, was laid off from the Jefferson North Assembly Plant in January. "I would be more worried about GM because they are doing just as bad" as Chrysler, Henderson said.

The Credit Crisis Endgame
It looks increasingly likely that the endgame in the credit crisis will be a bloody standoff between investors and governments. Their battlefield will be the market for government bonds, where countries all around the world finance their deficits.

To see how this is likely to come about, it helps to revisit the various stages of the credit crunch.  It began in 2007 with the drying-up of liquidity in esoteric, structured-finance securities, linked to riskier types of mortgages.  From there it spread to more mainstream mortgage bonds, structured finance in general, and other types of debt issued by financial institutions.  By early summer 2008 the crisis was affecting many non-financial corporate names, who found difficulties refinancing loans.  By the end of the summer the crisis had spread to sovereign names – a whole host of governments found themselves in trouble.  So far the most acute problems have arisen in countries with high current account deficits – Ukraine, Hungary – and in Iceland, where financial sector problems threaten to overwhelm state finances.

But just as tingling and numbness in the extremities of the body can give advance warning of a heart attack, the way credit market problems have developed – from specialist subsectors to ever more mainstream areas - is giving us clear warning that the crisis may be heading for the very centre of the global finance system, the major economies’ bond markets. Any textbook on finance and investing will introduce early on the concept of a risk-free rate of return, and then use it as the basis for many financial ratios and analyses.  For the risk-free rate, analysts have traditionally used the yield on a short-maturity government bond.  The excess returns on other financial instruments are then interpreted as risk premia over the government bond (which is considered free of default risk).

Historically this led to a comfortable stratification of debt securities, with higher-risk, lower-rated bonds layered on top of other, safer ones.  Built on a bottom stratum of AAA-rated US treasuries, yield spreads increased steadily through each layer, to reach the riskiest, junk issues on top. The idea of a stable layering of risk premia, based on credit agency ratings, has been thrown into disarray over the last year, as the ratings themselves proved to be completely unreliable. Yet in recent months something disturbing has started to go wrong with the groundrock itself – the major government bond markets.  The tectonic plates underlying the whole superstructure of debt have started to shift.

On the surface nothing remarkable is happening – the 30 year US Treasury bond yield recently hit an all-time low of 3.88%, as investors sought a safe haven during equity market turbulence.  Yet while nominal bond yields have declined, the credit risk component of US Treasuries has been on an increasing trend since last year.  According to data provided by CMA DataVision, the credit specialists, the 10-year credit default swap spread – a form of insurance contract against issuer default – has risen steadily - from 1.6 basis points (0.016%) in July 2007, to 16 basis points in March 2008, to 30 basis points in September, to over 40 basis points on October 27 – see the chart below for the spread history so far this year.  In other words the cost of insuring against a US government default has risen by 25 times in little over a year. Similar trends have been evident in the UK and German government bond markets.

This has perplexed, and even amused, some market observers.  How, they ask, could a private sector contract against default be expected to pay out in the case of a US government default – which would be the equivalent of a nuclear explosion in the financial markets?  So what’s the point of buying such a contract? Moreover, how could the US government ever renege on its debts?  After all, it supplies the world’s reserve currency, and the Federal Reserve Chairman reminded us a few years ago of the US authorities’ ability to print money in unlimited quantities.  Any “default” would at least be through the time-tested mechanism of inflation and currency devaluation, according to this view.

On the other hand a longer-term examination of debt markets reminds us that, throughout human history, regular default is the rule than the exception.  And while sovereign defaults on external, foreign-currency debt are most common, Carmen Reinhart and Kenneth Rogoff demonstrated in a paper released earlier this year that defaults on domestic debt have happened far more often than might have been expected, particularly in times of severe economic duress.

In both the US and UK, budget deficits are poised to explode, for a number of reasons.  The recession is hitting tax revenues, while government entitlement programmes should soar in cost.  Then there is the steadily increasing bill for the wars being fought in Iraq and Afghanistan.  But the really big impact is coming from the rescue packages being thrown at the financial sector.  Morgan Stanley recently estimated that the 2009 fiscal deficit in the US would reach 12.5%, over double the previous record of 6%, set in 1983.  Under the Bush administration, the US national debt has risen from $5.7 trillion, to over $10 trillion currently.  The terms of the recently-passed bailout legislation increased the statutory debt ceiling to over $11.3 trillion.

When measured as a percentage of GDP, the US national debt is expected to pass 70% next year, which, though much higher than recent years, is still short of the record 122% registered in 1946, at the end of the Second World War.  Some observers point to this comparison as an argument for the sustainability of the current position. Yet others argue that government debt must be seen in the context of, and as part of, the overall debt burden on the economy.  With the US private debt to GDP ratio at levels never seen before – close to 300%, according to Steve Keen, the Australian economist – the question is surely whether the whole debt pyramid can avoid crashing down via a violent and uncontrollable chain of defaults, dragging the government bond market down with it. 

If this seems far-fetched, it helps to remember that the Latin root of the word credit comes from credere – to believe, but also to trust.  For large sections of the private sector bond market, it is precisely that trust which has disappeared over the last year and a half.  To suggest that such “credit revulsion”, to use an old term, might spread to governments’ debt obligations is surely not beyond the realms of possibility Signs of strain in the US Treasury market are already there, despite the current low yields. 

Recent auctions have shown poor bid-to-cover ratios, and long tails (the difference between the average accepted yield, and highest yield), both signs of shallow demand.  Delivery failures in the secondary market have also hit record levels, a sign of poor liquidity.  Market observers should keep a close eye on the progress of future auctions, particularly as the issuance schedule picks up.

How can investors take cover if concerns over government solvency spread?  For the early part of any credit-related decline in bond prices, there are obvious hedges, such as credit default swaps, short Treasury bond futures positions and inverse Treasury ETFs.  But ultimately a US debt default would have cataclysmic consequences for the financial economy, bankrupting the entire system.  So the ultimate safe haven is in the precious metals, which would rapidly regain monetary status in such a scenario. 

RBS and HBOS to write downs billions more as economy weakens
Two of the banks which are to receive more than £30bn of taxpayers' money will this week announce billions of pounds in asset writedowns and warn the City that full-year profits are likely to be lower than previously expected. The news from HBOS and Royal Bank of Scotland, which will update the market on recent trading tomorrow and Tuesday respectively, will exacerbate the pessimism which has engulfed the banking sector in recent months.

Last night, further uncertainty emerged with the disclosure that a former HBOS executive has been approached by an unnamed foreign financial institution for assistance in assembling a rival offer to help to scupper Lloyds TSB's proposed takeover of HBOS. The move involves Jim Spowart, a former director at HBOS's Intelligent Finance operation. Spowart declined to name the overseas bank but insisted he had been assured by the Government that he would be granted "an even playing field" if a serious counterbid were to materialise.

HBOS will say that the declining value of Treasury assets will force it to write down an additional £5bn, highlighting its need for capital. RBS, which will publish the prospectus for its £20bn capital-raising, will stop short of providing a full-year profit estimate because of what it will say is the continuing chronic uncertainty in the global banking system. The bank is expected to make a significant loss for the full year, partly because the lack of equity and debt markets activity has put the brakes on a large proportion of RBS's ordinary revenues.

One insider said: "The final writedowns and impairments won't be known yet, only that the numbers will be big. The only certainty is there won't be any good news." In the first half of 2008, RBS's £5.1bn profit was wiped out by writedowns and impairments of £5.9bn. Analysts predict that RBS may be forced to write off as much as £10bn for the second half of the year. Opinion among analysts is divided, but even the most optimistic estimations expect the bank's writedowns to be at least £5bn for the second half.

One glimmer of light could emerge for RBS if the US government elects to bail out America's monoline insurers, such as Ambac, to which it and other leading international banks have significant exposure.

Germans freeze £21bn property funds in sign of probable collapse of UK commercial real estate market in 2009
Nearly €30bn of German property funds were frozen between Tuesday and Friday last week in what industry experts fear could foreshadow a UK commercial real estate collapse. A series of "open-ended" – meaning that investors can withdraw their money whenever they choose – property funds were temporarily shut down, including those run in Germany by AXA, UBS and Morgan Stanley.

The 11 funds involved suffered from a string of major investors pulling their cash to raise liquidity. In order to redeem the money, the funds have to sell assets in their property portfolios, which is costly as the real estate market is in freefall. The funds responded by not allowing redemptions for three to six months. According to data provided by the BVI, which represents the German investment fund industry, 10 of the funds asset values were worth €27bn combined as of 30 September. The remaining fund, run by Catella Property Group, is worth €390m.

The move is significant for the UK, as German funds have been among the most active in snapping up City of London and West End properties this year. A leading financial restructuring expert said that similar problems are likely to hit UK property funds. "Commercial real estate is going to be the really big sector for our line of work in 2009," he said. A commercial property analyst said: "German funds are big buyers of London offices. They were forced to sell assets, and the funds would have closed down, had they not implemented the freeze."

Stefan Seip, director general at the BVI, said this was the worst week for fund closures he could recall. "We have never had a situation comparable to this," he said: But he denied the German market was in long-lasting trouble: "To a lesser extent, losses in equity and bond investments led to an over-allocation in real estate and the need for rebalancing these portfolios. In this way, the open-ended real estate investment funds became a victim of the crisis."

DEGI, a part of the London-quoted Aberdeen Asset Management, was the last of the 11 funds to close, late on Friday afternoon, when it froze two of its four German-based funds: DEGI Europa and International, worth €4.3bn combined. In a statement, DEGI said: "Many investors started to meet their liquidity needs by redeeming their shares in, then as now, profitable and stable investment vehicles, which include open-ended property funds. For this reason, open-ended property funds have been experiencing above-average unit redemptions, and in consequence a shrinking of their liquidity."

DEGI has suspended redemptions for three months, "for the time being". Catella said it had suspended redemptions "for the protection of its investors", stating the freeze was a response to temporary closures, which were a result of a loss of confidence in such property funds. Catella's fund, "Focus Nordic Cities", for example, had "registered an unusually high number of redemption requests, which the fund management found impossible to meet with the available cash on hand".

Economic icon Heizo Takenaka needs listening to now
You've probably never heard of Heizo Takenaka. But for economic nerds like me, the man is a god. From 2001 until 2005, Takenaka was Japan's economics minister in Junichiro Koizumi's government. More than any other individual, this softly-spoken academic pulled the world's second-largest economy out of its decade-long slump of the 1990s.

How? By demanding - requiring - the country's then moribund banks to confess to their losses and write down hundreds of billions of dollars in bad loans. By insisting on this, and banging the table until the banks "fessed-up", Takenaka restored a degree of inter-bank trust, thus rebuilding those crucial credit lines to households and firms.

Takenaka's actions hold important lessons now. As he said last week, "the balance sheets of international institutions aren't so reliable at the moment". In other words, many bank bosses are still hiding their losses in the hope that asset prices will recover, lifting their insolvent banks off the rocks.

But the Western world won't move while the inter-bank market is iced up. And it won't thaw until the banks reveal to each other the extent of their possible sub-prime losses. Authorities can then broker deals privately, with stronger banks subsuming the weak. That's how capitalism works. We need to heed Takenaka's warning and make it happen.

City of London meltdown turns to a chill wind in the North
As workers emerged from the gleaming, glass-clad offices of Lehman Brothers, clutching their chattels in cardboard boxes, Britain quailed, fearful the UK economy was about to collapse around our ears. But while the perfect storm of the credit crunch, rising bills and stalled house prices now blowing through the UK economy is expected to devastate City jobs, so far it is doing its worst damage several hundred miles north of Lehman's Canary Wharf offices.

To date, the South has pulled its belt in a notch or two: fewer people shopping at Waitrose, more at Lidl. But the London-based media fanfare surrounding the opening last week of Westfield, Europe's biggest inner-city shopping centre, suggested a surreal unwillingness to acknowledge the coming storm. Some 250 miles to the north, in Sunderland, the picture is very different. The downturn is hitting hard, and with crushing effect.

Mark Cassidy and his wife, Nicola, moved from Scunthorpe to Sunderland with their three children, after Mark was offered a major contract as a joiner. He had been told there were lots of building projects coming up in the city, but when they arrived the project he was hired for was abandoned. Now there is no work at all. "Everything's come to a grinding halt," he explains. "All the cranes are still there, but there's just no building going on. I've no idea what to do... my wife left her job to move up here. Christmas is round the corner, and we're thinking, how are we going to get money for presents? I've been applying for other work, but I don't know anything else, apart from wood."

Sunderland experienced something of a renaissance in the New Labour boom years. Despite suffering major job losses in the Eighties and Nineties following the decline of the ship building and coal industries, the situation was improving. In the past decade, it had the fastest-growing economy in the north-east, had secured a great deal of private and public investment, and seen unemployment fall.

But now all this good work has come to a halt. Last week, Nissan announced cuts for shift workers, as production slowed, threatening some 800 jobs. The blow followed September's round of redundancies at Northern Rock, which left 1,300 in the North-east without jobs overnight – most of whom were based at the bank's Sunderland call-centre. CitiFinancial also let 400 staff go at the end of the summer, and now the Inland Revenue is planning to cut 800 jobs, as two Sunderland offices that moved from London as part of a regeneration plan face closure.

Between July and September, the number of people claiming Jobseeker's Allowance leapt by 11 per cent – one in 13 is unemployed – and a further rise is expected. And even those in work are struggling against the rising cost of food and fuel. Average weekly earnings in the North-east are £400 – the lowest in the country. The received opinion among the chattering classes suffering job losses in the financial sector is that the South of England is at the front line of the credit crunch. This could not be further from the truth.

Neil Lee, senior researcher at the Work Foundation think tank, said: "Places like Sunderland are going to experience a lot of pain in the credit crunch; more so than London and the South-east because they never caught up economically. Sunderland has had something of a resurgence. But this crisis will show that it's a shallow foundation. A lot of northern cities will feel the pain of the crisis, which has not been of their own making."

Clare Jose, a money advice worker at the Citizens Advice Bureau in Washington, says the service has been inundated with people who have found themselves out of work in the past few weeks. "We've had a major influx of people saying they've lost their jobs, especially from Northern Rock. They're struggling to find work, but there's nothing to be had," she says. "We're seeing 30 new people coming to our drop-in service each day, and the problems don't stop with people who have been made redundant. It's also those who can't get overtime any more and then can't pay their debts."

Glenn Robinson, 40, is one of hundreds of workers at the Nissan car factory who have bowed to pressure from bosses and taken next year's holiday allowance, while a fortnight's freeze on production continues. Passing his new-found free time in the New Tavern in Washington, he says workers are worried about what the future will hold if Nissan hits hard times. "They've cut right down on production and it doesn't look good. I've been there 10 years, so I'm feeling pretty secure; but I wouldn't want to be one of the temporary staff now. Around a third of the staff are temporary and they've said they'll be the first ones hit."

Danny Dorling, professor of human geography at Sheffield University, says that, far from being a southern problem, the credit crunch is likely to be felt far worse in the north: "Things have gone well for affluent people in the South, so the downturn will come as a bit of a shock, but the first casualties are always in the northern cities and poorest areas. "If you look at the what's provided in the North – such as call-centre and warehouse work, and branches rather than headquarters – these are all easy to cut. The North-South divide is widening. It will all unravel in the next few months."

Since the regional development agency One NorthEast began work on the city's economy in 1999, it has claimed much success. But the region is now struggling to hold on to the leaps it made, as the global market gets tougher. "In the past 10 years, Sunderland has undergone some fairly large-scale foreign and indigenous investment and had been on a steep upward curve," explains Ian Williams, director of business and industry at One NorthEast. "But investments have slowed ... and we've seen numbers claiming Jobseeker's Allowance. We know there are tough times ahead."

For many, the tough times are here. Susanne Harrison was on maternity leave last Christmas when the Pyrex factory she had worked in for seven years closed. The 25-year-old now has to support her baby daughter, Millie, by herself and has found it impossible to find work. "Half the factories have closed and it's really hard to get a job." As she pushes her daughter through The Bridges, the city's glittering shopping centre, she can only look at what's on sale. "It's a struggle to buy the things we need. I'm just trying to get through each day."

Reza Mohammed looks over the polished chrome and leather of his deserted hair salon in Sunderland High Street. The 30-year-old moved from Iran in 2001 and set up shop three years ago when the city's economy was booming. Back then, there seemed to be a market for a luxury salon, but now the neighbouring shops are bookies and pound stores, and his profits are down 20 per cent from last year. "It's a very scary time. At the end of the month I can see I'm not making the profit I used to. I've had to drop my prices by 20 per cent, which is making it hard to balance the books.

"I'd say about a third of my clients have been made redundant this year: everyone's talking about it. There are plenty of hairdressers in Sunderland and lots of competition. If people are struggling and other salons are offering haircuts for £12, they'll go there. If I survive until next year, then I think I'll be OK, but this is a very bad period. "I've still got my regular clients, but now they only come every few months. People don't concentrate on having a haircut when they're trying to pay bills or get food."

Porsche crashes into controversy in the ultimate 'short squeeze'
For old-timers, the "short squeeze" at the Stutz Motor Company is a favourite from financial folklore. Combining legendary status - the cars won races such as Le Mans - with speed, reliability and beauty, they were the object of every ambitious young man's desire. But the emergence of mass production competitors at the end of the First World War spelt trouble for Stutz and financiers knew it. The smart money bet that the stock would fall.

Alan A Ryan, who controlled the company through family holdings, secretly started buying stock, often through options and opaque holding companies until, in 1920, he announced he controlled 105pc of Stutz. When Ryan declared he would settle with the shorts at his price, the whole financial system reeled: as well as the trapped traders, a raft of brokers and intermediaries in the middle of the trade faced bankruptcy too. Eventually, the New York Stock Exchange intervened, setting the settlement price itself. Ryan ended up buying an expensive 100pc of a declining car company and went bust. Financiers thought they'd never see the trick attempted again.

Extraordinarily, the plot - or the first part at least - was last week almost replayed at Volkswagen. Shortly after 3pm on Sunday afternoon, Porsche, the German maker of the iconic 911 sports car, revealed it had secretly bought 31.5pc of VW through a series of cash-settled options with a range of investment banks. Added to its known holding of 42.6pc, the options handed Porsche control of nearly 75pc of its bigger rival. The news shot through the global hedge fund industry. With shares in VW trading far above the company's fair value and a recession hitting every other car manufacturer, traders had bet millions of euros that the stock would fall.

But the statement screamed the opposite. With nearly 20pc of the share register held by the state of Lower Saxony and another estimated 6pc held by index trackers, traders calculated a cornered market. As one said: "With over 100pc of the stock tied up and nearly 13pc shorted, the correct price of any available stock was infinity. It was the ultimate squeeze." The stock lurched violently, punishing the rest of the DAX index of Germany's leading companies. Hedge funds were estimated to have taken a €30bn hit, with the investment banks sustaining heavy losses, too.

The German regulator belatedly agreed in the face of the turmoil that there could be a case of market manipulation to answer. Even so, this weekend the reputations not just of Porsche and its advisers, but of regulators and corporate Germany as a whole, are badly damaged. Sources close to Porsche insist that the company never intended to cause the rumpus and has acted entirely within the rules. Other observers disagreed. "This is the culmination of long-held plans to take over VW. Porsche engineered the squeeze as one of the most brilliantly conceived wealth transfers ever: they've got the hedge funds positioned to pay for Porsche's acquisition of VW. The only thing they underestimated was the scale of the fallout," said an insider.

So how has a sports car maker become an options trader? Will Porsche now buy VW, or has it crashed on the last corner? And even if not, will traders ever buy another Porsche again? The development of Porsche from car maker to financial engineer has been driven by an extraordinary combination of powerful ambitions.

The first is that of Ferdinand Piech, 74, grandson of Ferdinand Porsche, who founded Porsche and also designed the iconic VW Beetle, Adolf Hitler's "Car for the People". Confusingly Piech, who now controls 50pc of Porsche's equity and 100pc of its voting rights, spent most of his career at VW where he is head of the supervisory board. After getting a degree in engineering in the 1960s Piech started his career at Porsche and then moved to Audi in1972. In 1993 he became chairman and chief executive of VW until his retirement in 2002 to the supervisory board. One insider said: "Piech considers VW his life's work and Porsche his family name. He passionately wants to see the two combined before he dies."

His ambition has been matched only by that of the indomitable Wendelin Wiedeking, chief executive of Porsche since 1991. Mr Wiedeking, reportedly the best paid director in Europe with a paypacket of €72.6m (£56.7m) last year, made Porsche into the most efficient private company in the automobile industry, winning international plaudits. In addition, unlike the stereotypical German corporate boss, he gained a reputation for being a maverick and anti-establishment.

In his book Anders ist Besser (Different is better) and his autobiography, he laid out his Machiavellian philosophy which revealed a pride in breaking rules, winding up other business leaders and a pleasure in the unconventional. The theme of David and Goliath is one of his favourites, while he shows a withering lack of respect for politicians. However, despite punching above its weight, Porsche in recent years has fallen behind its rivals, particularly hampered by a lack of access to research and development and technological expertise.

Mr Wiedeking eyed VW's vast R&D capabilities enviously and started hatching a plan to get shared access to it via owning a stake. One insider said: "Wiedeking's designs on VW were motivated by industrial logic. But the way to pay for it came from Holger Harter." Mr Harter, Porsche's innovative chief financial officer, started looking at the financial markets as a way of boosting the company's income. He started a radical overhaul of Porsche's treasury operations which he described in 2002 as a "vital milestone" for the company. Harter's taste and talent for options trading started attracting attention.

As early as 2003, Max Warburton, an analyst at Bernstein, had already coined the phrase "a hedge fund with a car showroom" in describing Porsche. Meanwhile Porsche set its sights on taking over the whole of VW. Ostensibly, it seemed an impossible task since the so-called "VW Law" sets the threshold for enforcing a so-called domination agreement at 80pc control, rather than 75pc, which is common for German companies. Lower Saxony's 20pc stake gave it the power to veto any domination agreement. This was not just an historic holding but one of vital political importance to the state whose stated aim has been to protect its VW workers. In September 2005, Porsche announced it had bought a 20pc stake in VW.

Even then, analysts like Mr Warburton reckoned the amount was probably far more. No one could tell because in buying options, Porsche gained the right to own stock without having to declare it. This suited Porsche perfectly, not least because it could deflect much of the direct anger from Lower Saxony's trade unions who vowed to fight any hint of a change of control. A year later, pre-tax profits in the year to July 2007 had soared from €2.1bn the year before to €5.9bn, with €3.6bn coming from earnings on stock options trades - more than three times the amount made on selling cars.

Porsche kept buying shares, this time crucially with the knowledge that the vital VW Law was being reviewed and expected to be withdrawn within the next few years. As one analyst said: "To Piech and Wiedeking buying VW finally looked possible. They needed to buy 75pc of the company and sit tight for the law to change, whereupon Lower Saxony could no longer object. Mr Harter got to work." Attention from his options trading was distracted by ferocious rows between Mr Piech and his cousin, Wolfgang Porsche, who is head of Porsche's supervisory board, about how a takeover of VW would work. Meanwhile, VW's shares were attracting real hedge fund investors as well as Porsche. The unusual double class of shares offered the chance of an easy arbitrageur to bet on the spread between the ordinary and preference shares.

The onslaught of the financial crisis, in particular the meltdown among the American carmakers, meant VW attracted even more hedge funds who believed that the stock, which was far higher than others in the sector, was bound to fall. The emergence of the hedge funds in big numbers presented Harter with a new ambitious financial engineering opportunity. For each VW share they shorted, hedge funds needed to borrow a real one as collateral. By allowing the banks that held their current stake to lend shares, Porsche was already earning incremental income this way.

Secretly, Mr Harter had instructed six investment banks to each buy options on 4.99pc of VW shares to bring Porsche's stake up from 35pc to the magic 75pc level. Now he allowed the banks to lend this stock too to make even more money from the hedge funds. It has been speculated that, as the hedge funds piled in, he foresaw the opportunity of cornering the short-sellers, therefore being able to name his price to settle and force billions out of them, but there is no evidence of this. In hindsight, hedge funds should have realised something was going on behind the scenes because of the steady share price, but instead they blindly piled in, short-selling 13pc of VW's market value.

Again, Mr Warburton was first to unearth the truth. Three weeks ago, in a note called "Fruit Machine: A Possible Explanation for VW's Inexorable Rise", Mr Warburton said he believed Porsche had now bought options on as much as 75pc of VW; that the daily volume that was being traded in VW was in fact just short-sellers, who were then borrowing stock from Porsche or its banks, and that Porsche was making money out of the transactions. Stung at being caught out in its clever game, Porsche dismissed Mr Warburton's views as "fairy tales".

Even so, the questions wouldn't go away. Last Sunday, perhaps with a nudge from regulators demanding clarity, Porsche admitted its secret: the company had in recent months lined up six investment banks, buying through each of them options to buy 4.99pc of VW shares. The company said they are "cash-settled" options, meaning that when exercised the banks have to deliver the value of the shares in cash rather than the shares themselves, as in normal options. The cash generated by the options is then used to buy the physical shares if Porsche wanted to.

While Porsche ponders its next move in silence, the extent of the damage of its move is beginning to emerge. The squeeze on hedge funds was the most visible pain. But behind the scenes, Porsche's six banks are thought to have taken a big knock too. In addition, Merrill Lynch, Porsche's adviser, is being boycotted by hedge funds in protest. The jokes that have already been made about traders now boycotting the cars themselves are not far from the truth. The volatility also damaged other German stocks and in turn the index trackers.

But the greatest damage is to the reputation of Germany's capital markets where regulators are now belatedly investigating what went on. As one commentator said: "In any other country this would be illegal. And this isn't some small firm, it's Germany's biggest. It's a return to the wild west." Mr Warburton says the key lies with the VW Law: "If it goes, Porsche can move in and buy its 75pc and take control of VW. If the law stays, we're probably in for a long stalemate of political lobbying."

Porsche to slow production at year-end
The German automaker Porsche AG said Sunday it will slow production at its main plant for upgrade work at the end of the year and acknowledged that the global financial crisis had hit the auto industry hard. Car makers across Europe are cutting production and jobs because of the economic crisis. German competitors Daimler AG and BMW AG said last month they would cut production, change deliveries or temporarily shut plants to accommodate a fall in demand.

Porsche spokesman Christian Dau said the company would stop work at its Stuttgart plant from Dec. 22 to Jan. 9, three days longer than previously planned. The plant is Porsche's main factory and employs about 1,000 workers. “We always take a break during the holidays, and the extra days will allow for an equipment upgrade,” he said. Volkswagen AG is also considering slowing production at the end of this year by closing for extra days around the Christmas and New Year holidays.

Porsche announced last week that it would increase its ownership stake in Volkswagen to around 70 per cent of the company from 42.6 per cent. Porsche wants to keep increasing its stake until it reaches 75 per cent of Volkswagen — Europe's biggest automaker by sales — some time in 2009.

In the court of 'Dr Doom'- Nouriel Roubini
Nouriel Roubini may dress up as Dr Doom for Halloween." That was the New York University economics professor's Facebook status heading into last night – a fear-stalked night of gloom and ghoulishness that one might assume is his favourite time of year. He has also posted a link to one Facebook user's suggestion that people should blow up and cut out a picture of him to wear as a terrifying mask to their Halloween party.

He is poking fun at himself, of course. After years on the too-bearish-to-bear wing of his profession, Mr Roubini is suddenly the most famous and in-demand economist in the US, precisely because of the unremitting gloom of his predictions for the country. And because he was right. The housing bubble he predicted in 2006 would go pop? Well, didn't it just. The investment banking business model that he said early this year was leveraged to the point of instability and could not survive? In September, even Goldman Sachs and Morgan Stanley abandoned it in favour of becoming traditional banks.

And as for the recession that Mr Roubini has long predicted would be the worst since the Great Depression? At every opportunity this year he has said "if it walks and quacks like a recession duck, it is a recession duck". Well, Thursday's US GDP figure, showing the economy starting to contract, was a pretty loud quack.

"This crisis was caused by the largest leveraged asset bubble and credit bubble in history," Mr Roubini told the joint economic committee of Congress this week. "Leveraging and bubbles were not limited to the US housing market but also characterised housing markets in other countries. Moreover, beyond the housing market, excessive borrowing by financial institutions and some segments of the corporate and public sectors occurred in many economies. As a result, a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble and a hedge funds bubble are all now bursting simultaneously."

Congress summoned the professor to gauge his views on an economic stimulus package it is considering. For the record, he is in favour and thinks it should plough up to $400bn into government spending projects, because businesses and consumers are too tied up in their financial problems to provide the spending that the economy needs.

Congress is not alone. Mr Roubini has been trotting around the globe, speaking to other economists and advising policy wonksters and, of course to the media, to whom he is suddenly a darling. For someone who doesn't own a television, he is on it a lot, each performance out-bearing the previous one. The unique accent – mixed and matched from his four languages – is the same but the hair seems to get wilder each time, the countenance more grave.

New York, where he has lived since becoming professor of economics and international business at the university in Greenwich Village 13 years ago, seems the perfect home for a global wanderer who was born in Turkey to Iranian parents, and who lived in Tehran and Tel Aviv and Italy before his schooldays were done, and who, at 49, remains single. In Manhattan, where his loft apartment in the chi-chi Tribeca neighbourhood is in the same building as the actress Scarlett Johansson, he is something of a man about town, patronising the arts, hosting "high brow and low brow" salons, film screenings and parties, and collecting sculpture.

As his public profile has risen this year, he got himself into an entertaining little spat with Gawker, the celebrity gossip website run by the journalist Nick Denton, which called him a "roué" and recently declared that "the professor's gloomy public image is entirely at odds with his playboy lifestyle and the frequent parties at his Tribeca loft – an apartment with walls indented with plaster vulvas, incidentally."

In a 700-word rant penned in the small hours, Mr Roubini fired back that Mr Denton was "a loser and an intellectual dwarf who cannot engage me on my widely respected views on the economy and financial markets". Oh, and as for those "vagina-studded walls", he wrote: "Too bad that this tasteful art piece that he has never seen has been created by one the best Latin American feminist Jewish artists of her generation, an artist whose work has been showcased in many museums in Latin America and in a show on feminist and post-feminist art in the prestigious White Columns art space in New York."

Mr Roubini's well-regarded economics blog, RGE Monitor, is just as rip-roaring a read, at least as far as is possible for a site about the global financial markets. "The optimists were wrong literally at least six times in a row as the crisis, as I consistently predicted here over the last year, became worse and worse," he said recently, adding: "We are nowhere near the end of the crisis tunnel."

His concerns are now switching to the emerging economies of the Far East and Eastern Europe, where International Monetary Fund bail-outs have been required recently. This speaks to his own background as an economist of emerging market debt crises, studies he forged in the 1990s as country after country defaulted on its sovereign debt and which he used to advise the IMF in a paper aimed at helping it predict the next blow-up.

It is precisely that background, and an insistence on using international comparisons and historical analysis, that led him to predict the current dire state of America's debt-burdened economy and the recession he says will last until nearly the end of next year. Now, he says, even the better-performing emerging markets, like Brazil, Russia, India and China, are at risk of a hard landing, too. Many emerging markets could face a severe financial crisis. The odds of a global recession are going up, not down, he insists. Oh, and happy Halloween.

Nouriel Roubini: In his own words
*A housing hard landing will lead to a sharp and severe recession. It may also lead to a banking and financial crisis that may be more acute – and cause a more severe credit crunch – than the Savings and Loan crisis of the 1980s and early 1990s that led to the 1990-1991 recession.
August 2006

*Aggregate demand is sharply falling below aggregate supply. Unemployment is sharply up. Commodity prices are sharply down and likely to fall much more as the advanced economies recession is becoming global. Deflation and stag-deflation will in six months become the main concern of policy authorities.
October 2008

It Can Be Worse than the Great Depression
This is the worst global asset bubble and financial panic since the Great Depression of 1929–33. Still, almost all argue that it cannot become equally bad, because we have learned those lessons. Analytically, that statement does not hold. True, our policymakers are not likely to repeat the same mistakes of the Great Depression, but they may commit other mistakes. Bank deposit insurance has come to stay for good, but not all advances represent progress, and many create new vulnerabilities.

One 1930s mistake was to defend exchange rates by all means. Today, most exchange rates float freely. Right now, we are seeing an unprecedented US dollar surge, which is not warranted by fundamentals but reflects a desperate search for a safe haven. The new hazard might be excessive and destabilizing exchange rate fluctuations caused by financial panic. If so, the major financial powers need to intervene to stabilize exchange rates.

Milton Friedman attacked the Fed for allowing the nominal monetary supply to contract sharply during the Depression, and John Maynard Keynes argued for more public expenditures through budget deficits, while the prevailing policy was budget surplus. The monetary expansion and budget deficits may become excessive this time.

Deficit spending and monetary expansion are supposed to boost demand, but people spend less in a financial panic, rendering increased public expenditures rather ineffective. We learned the limitation of Keynesianism in the 1970s. In recent decades, some former communist and Latin American countries have shown how the expansion of public expenditure beyond the permissible can lead to state default.

In the 1930s, states did not go bankrupt, fearful of the consequences of those who had done so in the wake of the First World War. Now, major states, such as Italy, have public debt of more than 100 percent of GDP even before the crisis, rendering major state bankruptcies a real danger. Fiscal and monetary stimulation are needed and deflation must be avoided, but currently fiscal considerations are disregarded altogether, which is a recipe for disaster. State default can easily lead to hyperinflation, which is far worse than deflation.

The global financial system is so much deeper and more sophisticated than in the 1920s, but that is a problem. The 1920s had its version of subprime loans, but it did not have nontransparent collateralized debt obligations. The many derivatives have created the mother of all bubbles. The deeper the financial system, the harder we may fall. Although the Great Depression had worldwide reach, it largely emanated from two countries, the United States and Germany. Never before has the world seen such a monstrous and truly global bubble. The real estate bubble is probably worst in the Persian Gulf and Moscow, while also extreme in Britain, Spain, and Ireland.

Never have big financial institutions been as overleveraged as Fannie Mae and Freddie Mac or the former US investment banks, not to mention the hedge funds. The excessive leverage is now being unwound by financial panic, apart from what is countered with recapitalization. The 1930s protectionism must not be repeated, but frozen finances have already left countries such as Iceland and Ukraine temporarily outside of the world financial system. Such exclusion must not be allowed to become permanent.

In the 1920s, both the US dollar and gold were unchallenged sources of value. Today, the US dollar is neither stable nor an uncontested world currency. At 10, the euro is too young to be a debutant, and the biggest question is will it hold together in this rough financial weather, especially if one or several euro countries default. Everybody from Milton Friedman to John Kenneth Galbraith has criticized the Federal Reserve and US President Herbert Hoover for their policies during the Depression, but at least they were policymakers and stood for principles.

As if to illustrate their impotence, President George W. Bush is assembling the political leaders of the group of 20 large countries for a photo opportunity in Washington on November 15. Their failure to come up with anything but vanity could unleash untold financial panic. This crisis envelops the whole world, but global financial governance is missing.

Finally, the 1920s had neither television nor the internet. Information, decisions, and implementation can now be carried out in seconds, which harms the quality of decisions and nerves. Transparency is usually preferable, but unmitigated speed might be harmful. CNBC and Bloomberg can spread worldwide panic instantly. We must not repeat the mistakes of the Great Depression, but we need to ascertain that new policies are not even worse.

Latin American’s ‘New Left’ In Crises As the ‘Free Market’ Collapses
Latin America is entering a period of profound economic recession, financial crises, collapsing stock market quotations, prices, deep devaluation of its currencies, growing unemployment, declining revenues and the prospect of a prolonged socio-economic recession.

The economic breakdown, which is still unfolding, affects the entire political spectrum, extending from the far-right Uribe regime in Colombia to the social-liberal Chilean and Brazilian governments of Bachelet and Lula da Silva to the ‘center-left’ regimes of Evo Morales in Bolivia and Rafael Correa in Ecuador and even to the leftist government of Hugo Chavez. It is not surprising to see that rightist regimes1, embracing neo-liberal doctrines and deeply enmeshed in free trade agreements with the US, following its path to economic collapse. The deepening crisis has affected, with equal or greater force, the so-called ‘center-left’ regimes of Brazil, Ecuador, Argentina, Bolivia and Nicaragua.

The uniformity of the collapse of Latin American economies raises important questions about the changes and claims of independence, decoupling and post-liberal models, which many regime leaders, ideologues and progressive US-European Latin American writers made over the past several years. The collapse of what some writers have referred to as Latin America’s ‘pink tide’ and other more exuberant publicists referred to as the new ‘revolutionary regimes’ (and other more prudent analysts called the ‘post-neo-liberal’ democracies) raises serious questions about the emergence of a new dynamic heterodox model no longer subordinated to the US.

The simultaneous economic crises in Latin America and US/Europe call into question the degree of structural changes that were implemented by the center-left Latin American regimes. More specifically, the breakdown focuses attention on the continuities in financial systems, trade patterns, productive structure and free trade policies with their predecessor neo-liberal regimes. The claims of ‘de-coupling’ put forth by the pundits of the center-left have been proven to be without substance.

Faced with the collapse of the center-left economies, their former ideological cheerleaders have alternated between a deafening silence and avoidance of any structural explanations, and/or to simply project ‘blame’ on the ‘casino capitalism’ of the US. The latter posture begs the question of the center-left regimes’ domestic policies which opened their economies and made them excessively vulnerable to Wall Street speculation. Up to the recent collapse, the intellectual defenders of the ‘center-left’ had little to say about the Wall Street linkages, busying themselves with the temporary high growth rates, which they attributed to the ‘new heterodox model’.

The problem avoidance and external finger pointing adopted by the ideologues of the ‘New Latin American Left’ reflects a fundamental misunderstanding or ignorance of what was really going on within these countries. They substituted emotional gratification at rhetoric flourishes and symbolic changes and privileged invitations to private soirees with the ‘center-left’ presidents over hard analyses of substantive policies and structural continuities. Disentangling illusions from reality is the first step to coming to terms with the existing collapse affecting the region and the disastrous consequences for the great majority of wage, salaried and informal workers and peasants.

Despite the extensive and, in some cases, profound differences in social structure, levels of economic development and sheer wealth among Latin America’s ‘center-left’ regimes2 – their publicists, advocates and adversaries claimed they were breaking with neo-liberalism and pursuing a vastly different socio-economic model, a break with the past, a heterodox economic strategy which combined ‘market’ and ‘state’ in pursuit of what some claimed was ‘Twenty-First Century Socialism’.

This line of argument defined the ‘novelty’ of the new center-left by identifying twelve areas of ‘transformation’ or change. The ‘new center-left’ ideologues argued that, in contrast to the previous neo-liberal regimes (NLR), the center-left regimes (CLR):

1.Adopted a new more socially responsive economic model that pursued ‘mass inclusion’, cultural diversity and social justice;

2.Put an end to ‘free market neo-liberalism’ and replaced it with a ‘state-market model’;

3.Began a process of ‘social transformation’ (Argentina), a ‘democratic and cultural revolution’ (Bolivia), ‘twenty-first century socialism’ (Ecuador), and a process of long-term high growth based on fiscal responsibility and social justice (Brazil);

4.Ended discrimination and exploitation of the indigenous people (Brazil and Ecuador) and empowered the Indian communities (Bolivia);

5.Moved to replace dependence on the Western markets and ended Wall Street domination through the pursuit of regional integration;

6.Developed regional political and economic organizations like ALBA, UNASUR and PETROCARIBE, which marked the construction of a new independent alternative regional economic architecture;

7.Promoted a new kind of participatory democracy in which the popular classes had a bigger direct say in the formulation of government policy;

8.Developed diversified markets, especially with Asia (China particularly), Europe and the Middle East based on greater economic independence, effectively ‘decoupling’ from the US economy and ending US ‘hegemony’;

9.Accumulated vast foreign reserves (tens of billions) based on promotion of an agro-mineral export strategy, thus creating long-term insurance against future downward movements in the prices and demand for export commodities;

10.Amassed large-scale budget surpluses through fiscal discipline and avoidance of ‘populist’ spending on large social and infrastructure programs;

11.Pursued policies favoring greater social equality of opportunity, pro-labor income policies, easy credit, increased consumer imports and increased spending on food programs for pensioners, children and the poor;

12.Formed public-private partnerships between the state and foreign multinationals replacing foreign domination by equal partners and increasing benefits to the home country.

According to the promoters of the ‘center-left’ regimes, the ‘proof’ of the progressive, sustainable and dynamic character of these regimes was demonstrated by the period between 2005-2007 where high growth, high income, budget and trade surpluses and repeated electoral victories were the norm.

End of an Illusion: 2008 The Year of Reckoning

The success claimed by the center-left regimes (CLR) and their apologists were based on an entirely false set of assumptions and temporary and volatile set of structural relations with regard to trade, investment and financial linkages. When the onset of the financial collapse and economic recession first struck the US and Europe, the first response of the CLR was to deny that the crisis would affect their economies. For example, President Lula da Silva of Brazil at first blamed the ‘casino capitalism’ of the US and claimed that the Brazilian economy under his rule was healthy, protected by large reserves and would be hardly affected.

As the effects of the financial breakdown and economic recession in Europe and Wall Street deepened and spread to Latin America, the CLR regimes and their intellectual defenders adopted a different posture. On the one hand they sought to deflect all the blame to the US financial system and thus avoid facing the structural weaknesses of their economic policies. On the other hand some writers looked to some of the recent regional organizations, like Bancosur and ALBA, as alternative sources for salvation or as mechanisms to ameliorate the effects of the crisis. Neither the CLR nor their intellectual defenders have demonstrated any willingness to confront the structural weaknesses and vulnerabilities of their socio-economic strategies over the past half decade. More specifically the CLR and their defenders refused to admit that the claims of ‘change’, and construction of 21st Century Socialism were in fact built on illusory assumptions.

The spread of the crisis from the US-Europe to Latin America is a result of the CLR’s continuities of the neo-liberal policies, the maintenance of the same ruling economic classes and the pursuit of economic strategies dependent on inflows of speculative capital, debt financing and the agro-mineral export elites.3

Despite the rhetoric of ‘21st Century Socialism’ (Chavez in Venezuela, Morales in Bolivia, Correa in Ecuador and Ortega in Nicaragua), ‘independent model’ (Lula Da Silva in Brazil), and the ‘social-liberal’ model (Bachelet in Chile and Vazquez in Uruguay), the above-mentioned regimes retained and even deepened the principle structural features and policies of the neo-liberal model. They remained highly dependent on the global market: in fact they all accentuated its worst features by emphasizing primary goods exports (agro-mining commodities) to take advantage of the temporary spike in prices. As a result they vastly increased their vulnerability to external shocks. With the onset of the world recession in 2008, the collapse of demand put an end to the big trade surpluses and provoked a big slide in all the related economic factors: Foreign reserves plummeted. Government revenues based on export taxes declined precipitously. Local currency was devalued as both foreign and domestic investors fled to what they perceived as stronger currencies and safe havens.

All of the CLR based their development strategies on a strategic partnership between the nationalist capitalist class, the state and foreign investors contrary to the populist-nationalist imagery of Western intellectuals. At the very onset of the financial collapse, foreign capital began its massive flight outwards and upwards driving down the stock markets in Brazil and Argentina by over 50% and forcing a de facto devaluation as local savers and investors converted local currency into dollars, euros and yen. With the onset of the recession in the real economies of the EU and the US, national capitalists and financial elites responded by reducing investment in the productive sectors anticipating a sharp decline in demand for their primary commodity exports. This provoked a multiplier effect in satellite and related domestic manufacturing and service industries.

The double exposure to financial shocks and world recession was a direct result of the one-sided export market policies pursued by the CLR. The leaders of the CLR paid lip service to ‘regional integration’ (ALBA, MERCOSUR, UNASUR), even setting up an entire administrative structure and initially investing marginal resources to the effort. The regional rhetoric was dwarfed by the ongoing and growing ‘integration’ in the world market, which remained the motor force of their growth. Given their deep involvement in the primary commodity boom, the regimes maximized the importance of markets outside of the Latin American region. With the downturn, even the regional integration scheme (MERCOSUR) faces disintegration as Argentina turns protectionist.

The temporary trade and budget surpluses were used to further deepen the primary sector expansion (expanding infrastructure to and from productive sites to shipping centers on the coast), increase the wealth of the agro-mineral elites, and encourage a huge influx of speculative investors who inflated stock valuations (doubling and tripling prices in the course of two and three years: Price/earnings ratios reached bubble proportions.

The reactionary/retrograde model of the CLR, built on the ‘primarization’ of the economy and the boom in speculative investment, was ignored by almost all Western intellectuals who were dazzled by and chose to focus on marginal ‘populist’ measures: Lula’s $30 dollar (45 Reales) monthly food basket for 10 million poor families (who became part of his electoral client machine in the Northeast); Kirchner’s promotion of human rights and 150 Peso ($50 USD) monthly unemployment benefit; Evo Morrales cultural indigenismo and ‘joint ventures’ with the international oil and gas companies (falsely dubbed ‘nationalization’) and Rafael Correa’s declarations in favor of 21st Century Socialism and increased social spending.

The ideologues of the CLR failed to analyze the fact that these marginal increases in social spending took place within a socio-economic and political framework, which retained all the structural features of a neo-liberal economy. With the collapse of overseas primary commodity prices, the first reductions in government programs are directed at…the poverty programs that provided a fig leaf to the rapacious speculator-agro-mineral driven economic model. The entire ‘left spectrum’ ignored the fact that the balance of payments and budget surpluses, which funded social reforms, were dependent on the inflow of ‘hot money’. The latter, by its nature, enters easily and flees rapidly, particularly in response to any adversity in their ‘home market’, not to mention in the face of a worldwide financial crash. Thus the already meager social measures adopted by the CLR were fragile to begin with, highly dependent on the volatile behavior of highly speculative capital and world markets.

The claim of the CLR that Latin America was de-coupling from the US market, through greater ties with Asia (China, Korea, Japan and India) and developing into a world power (as part of the BRIC bloc – Brazil, Russia, India and China) has been demonstrated to be false. Brazil’s agro-mineral exports to Asia were highly dependent on world prices determined by demand from the US, EU as well as many other regions and countries. The deep world recession and credit collapse has profoundly affected Asia’s exports to the US and EU, which, in turn, has led to a decline of Latin America’s primary exports to Asia. None of the Asian countries can maintain their commodity imports from Latin America because they are not able to substitute domestic demand. The class polarities and class rigidities in China limit mass consumption.

Latin America did not ‘de-couple’ – it was part of a global chain, which tied it to the vagaries of the US and EU economies. The attempts by Brazil’s President Lula to blame Brazil’s crises on US ‘casino capitalism’ in order to deflect criticism from his policies of deep structural dependency on primary commodity exports and hot money is besides the point: The Brazilian regime’s policies opened the door wide to the full adverse effects of the downfall of US speculative capital.

None of the CLR deviated from the neo-liberal ‘export model’ nor did they make any effort to dynamize the domestic market or mass consumption via redistributive policies. Industrialization was subordinated to commodity exports. Urban incomes between capital/labor favored profits over wages. Interest and royalties remained highly skewed in favor of capital thus weakening domestic demand. Support of the agro-export elite and the rejection of agrarian reform, undermined the domestic purchasing power of millions of landless and subsistence peasants, rural laborers and small farmers. Tax subsidies and incentives, not progressive taxation, eliminated the possibility of rebuilding social services (public health, education, pension and social security programs), which could have expanded domestic production and investment. The CLR did not invest in a production grid linking complementary internal regions and economic sectors. The CLR’s investments linked local domestic sites to ports connected to overseas markets.

The CLR strategies weakened their domestic markets relative to the big push toward exports thus avoiding structural changes. This emphasis on social payments was contingent on the performance of the agro-mineral export sector of the big bourgeoisie. Even their ‘social transfers’ have proved to be unsustainable. Without the meager poverty programs there is little to distinguish the CLR from their traditional neo-liberal predecessors.

During the boom in commodity prices several CLR regimes, namely Brazil and Argentina, diverted billions of dollars in earnings to early pay-offs of their debts to the IMF and other official lenders, claiming this ‘freed’ them to pursue ‘independent policies’. In fact the IMF was very happy to re-capitalize their treasury while the levels of poverty continued at alarming levels and public facilities, like housing, transport, schools and hospitals deteriorated. While some aspects of foreign external debt declined, others, mainly private foreign debt in dollars and Euros, skyrocketed, encouraged by the CLR. Given the regimes’ high domestic interest rates, foreign overseas borrowing by domestic businesses rose precipitously and foreign speculators, lenders and overseas subsidiaries of US and EU banks loosened lending standards. With the financial crash in the US and EU, foreign flows of capital dried up and short-term notes were called. Foreign inflows turned into massive outflows, driving down the value of the currency. The Brazilian and Argentine stock markets fell by over 50% in less than 5 months (June-October 2008) and the credit crunch began to squeeze investment.

The crash in commodity prices, deeply affected state revenues as prices for copper declined by 60% (from $9,000 USD a ton in June 2008 to $3,900 USD in October 2008 and oil fell from $147 USD a barrel to $64 USD during the same period). What is worse, the decrease in the CLR’s foreign debt was matched by a vast increase in domestic debt – that is borrowing from foreign banks’ subsidiaries and local financial groups. The latter lent to the regimes by borrowing from overseas banks and thus the entire credit/finance chain continued to depend on private financial institutions in the US and Europe. Rather than reflect a break with the financial dependence of the past neo-liberal regimes, the CLR reproduced it via local intermediaries. Combined with the collapse of commodity prices, the financial crisis revealed the abject integration and subordination of the CLR to the empire-centered marketplace. The sustained fall in stock prices and the massive flight from local currencies to dollars revealed the entire precariousness and profoundly ‘liberal’ nature of the CLR economic policies.

The CLR regimes diverted the major part of their windfall profits to building up their foreign reserves to attract foreign loans, credit and investors and to cushion the effects of a downturn in the economy rather than in large-scale investments in human resources and the domestic market. As a result, the foreign reserves provide a temporary lifesaver in the face of the decline in revenues from export earnings. Nonetheless, the regimes are using the foreign reserves to keep afloat the private banking system and to pacify panic-stricken investors seeking to convert local currency into dollars and euros. As the reserves are depleted, the CLR are resorting to class-selective reactionary fiscal policies. Once again the negative impact of the financial panic reveals another negative (‘liberal’) component of the CLR strategy: its dependence on an unregulated stock market highly susceptible to any downturns in the valuations of commodities and commodity prices.

The CLR economic policies and the major private economic actors were deeply enmeshed in the world of speculation just as any ‘neo-liberal’ regime would be. The total absence of any popular movement oversight of the CLR policies was a result of their total exclusion from all governmental positions making economic decision (Central Bank, Ministers of Economy, Finance, Commerce, Industry, Agriculture and Mining). The claims of participatory democracy were revealed to be a total farce. Moreover, the CLR (with the partial exception of Venezuela) granted ‘autonomy’ to the Central Banks, eliminating Congressional oversight and facilitating closer ties between Central Banks and the private financial elite.

As the capitalist financial system crashes throughout most of the world and a global recession spreads from the imperial countries to Latin America, the leading center-left regimes are not immune to the double shocks. Because they opted for a primary commodity export model they are especially exposed and vulnerable to the rapid fall in world demand and prices. While it is true that conservative fiscal policies allowed them to build up their foreign reserves, thus providing them with a partial and temporary cushion to weather the first wave of capital flight and to finance dollar-denominated debt, it should be remembered that the other side of the ‘prudent fiscal policies’ was the neglect of the social problems and economic diversification. Poverty reduction, through investment in productive employment, agrarian reform for landless peasants and the development of the internal market, in the medium run, could have lessened the impact of the crisis in the North.

The attempts by Lula, Evo Morales and political leaders to pin the blame entirely on the crises in the imperial countries, ring hollow after years of their hobnobbing with the economic elite in Davos and focusing exclusively on trade and investment agreements with MNC, ‘hot money’ from Wall Street and betting on agro-mineral exports. The spread of the crisis in Latin America, from early 2008 onward, is playing itself out gradually. The high level reserves, the relatively high prices (despite the 70% decline from record prices), the temporary return of partial liquidity and the slight loosening of credit in world markets as a result of over $1.5 Trillion USD injection of public funds by the US and EU has slowed the fall into an inevitable recession.

What is crucial however is not where Latin America’s CLR stand at any given moment in time, but the direction they are moving and the inherent negative structural features, which are driving the economies toward a deep recession. As the reserves dwindle and as the agro-mineral elites disinvest in the face of declining prices, a serious negative multiplier effect sets in, battering satellite industries and driving dependent sectors into bankruptcy. Equally important, the economic recession is leading to deep and widespread state spending cuts. Given the fiscal conservatism built into the personnel of the key economic ministries and central banks, it is highly improbable that the CLR will reverse course and run fiscal deficits, increase large-scale, long-term public investments, restructure their economies and re-configure the social basis of public policy.

By the end of 2009, Latin America’s CLR will feel the full brunt of the world economic recession, precisely when its depleted foreign reserves will have further discouraged overseas and local capital investment. No long able to rely on its principle ‘economic motor force’, the agro-mineral elite to finance imports and lacking overseas investment and credits for its exporters and banks, Latin America’s CLRs will be confronted with powerful pressures from below. Workers and employees losing their jobs, local banks facing bankruptcy, manufacturers closing plants and indebted consumers and mortgage holders with few assets to sustain demand and living standards will be on the streets clamoring for state intervention: From the left and from the right.

Faced with the collapse of the ‘heterodox model’ of neo-liberal ‘primarization’ of the economy with ‘modest social transfers’, two options are possible for the CLRs: One would involve large-scale bailouts in order to save dominant financial-agro-mineral elites. The regime could try to impose the costs on the backs of the workers, urban poor, peasants and public employees through social cutbacks, firing of public employees, wage reductions and large-scale reductions in public investments. The second option would involve a revival of import substitution strategy including public investments in industry accompanying the nationalization of bankrupt banks and strategic economic sectors and large-scale shift in state policy from financing the bankrupt agro-exporters to co-operatives, family farms producing for the domestic market.

The first option would, by necessity, require greater state repression, in the face of social resistance to cuts in living standards and would probably lead to the demise of the CLR regimes. The more reactionary right is in the ‘wings’ ready to seize power and confront the burgeoning social movements reacting to the crises.

The second option would require a major shift in the internal class composition of the CLR regimes, a rupture with existing political allies and large-scale social mobilization of the ‘popular classes’.

The second option would depend on a fragile coalition of local business groups, manufacturers, debtors, trade unions, left parties and peasant movements – the emergence of a ‘nationalist-populist’ coalition (NPC) prepared to jettison the agro-mineral export model, to shelve overseas debt obligations and to pursue deficit financed economic recovery.

However, under the stress of a prolonged world credit squeeze and recession, the linkages between big and small capital with labor and subsistence farmers and peasants may dissolve and lead to demands that go beyond ‘Keynesian’ capitalism to the socialization of the economy. The latter option will be favored by the prolonged and deepening nature of the world recession, the further decline in foreign trade, the drying up of private credit, the decline of living standards and the profound and widespread discrediting of capitalism clearly associated in the public mind with speculative excesses, financial collapse, lost savings and the bankruptcy of private firms.

A final caveat: Though the world recession and financial collapse reveals that the center-left regimes were neither popular, nationalist, nor a break with neo-liberalism, this does not mean a near term turn to the left – for the simple reason that the CLR severely undermined independent class mobilizations. Renewed ‘statism’ of the right or left variants and obligatory import substitution policies may temporarily moderate the worst impacts of the world crisis. However, the failure of Keynesianism could lead to fascistic repressive ‘restorationist regimes’ or to a radical/socialist solution.

In this crisis all political options are ‘open’ given the ‘fragmentation’ caused by CR regimes and the ‘shock’ of the depth of the crisis. Future political economic outcomes are not governed by any speculative notions of ‘grand historical waves’. Political outcomes are contingent on the class struggle and the struggle for state power. The current unpredictable outcome of social struggle is a result of the lack of preparation by any left-social movements to take the lead over the wreckage of a world capitalist breakdown.


Anonymous said...

Stoneleigh, Ilargi et al,
Should I bother voting and if so, who do I vote for? It seems a though we are heading in a direction that no one can stop. I know a number of people who believe that the election will make a difference. How many times do we have to go through this?

Chaos said...

Didn't I see something in the last few days that the IMF had, essentially, the ability to print its own money? I may have been wearing my tinfoil hat at the time, but if true, seems inconsistent with IMF seeking new sources of funds. On another unrelated note, has the unwinding of the Yen carry trade/strengthening of US Dollar vis a vis emerging markets currencies finished or is there more left?

Anonymous said...

The election will mostly
not make a difference,
but I would vote for Obama,
if only to prevent a
"too close to call" scenario

McCain seems too far behind now,
so why not increase the winning distance of the democratic puppet

the primary function of the electoral process in the US
has now become
(or always was)
the prevention or postponement of violent revolution, so go with the puppet that seems most likely to appease a majority of the us citizens and least likely to
enrage the rest of the world.

el gallinazo said...


We can all print our own money. My money is titled De La Federacion de Los Pollos y Los Neanderthales. Now - if I could only buy dozen eggs with it :-(

EBrown said...

El Pollo,
Regarding your question from yesterday's rattle about why New England?. My reasoning goes like this: My wife and I are not too old yet (late 20s) and there is a reasonable chance that global warming will affect climate dramatically before we die. We're setting up shop for a long time, and while there is no way to predict the specific effects of climate change on a given locality I'm prepared to take my chances on a wet, cold climate getting warmer rather than a wet, humid climate getting hotter or drier. That is one reason. Another is tropical diseases. I don't want to live somewhere that Yellow Fever will move into as the climate warms. I'd rather hedge on the cold side than go borderline now and catch something nasty in 20 years.
Another reason is ease. We are culturally "New Englandy" even though we grew up in Pennsylvania. I'm inclined toward a "live and let live attitude" and that ethic runs very deep in the area we are looking at settling. We lived in Vermont for a year and easily made friends and liked the people/climate/rural nature of the area we lived.
Another reason is the our friends who have a farm and we may collaborate with to expand on their operation.
I'm well aware that trying to use wood to power existing heating arrangements in New England is a non-starter, but if we can afford enough of a woodlot to heat our sturctures then this is not an issue I have to "solve" for anyone but myself and my immediate circle.
The land we're looking at is partly hill, partly river bottom, so the soils are not all "poor", though much of NE does have poor soil.
Again and again I come back to the point that each place is going to have its own particular set of advantages and disadvantages. For us, I think N. Vermont could be a good place. Though we are still not set on going there (we are working on extended family issues right now since VT is far from PA).

Anonymous said...

Shib said: "Should I bother voting and if so, who do I vote for? "

Sometimes it's good to approach the issue from the opposite side to 'see the way'. So...

Let's say for example I was some amoral lowlife creep (someone like Carl Rove for example) and I was 'tasked' with getting some clueless buffoon (say like George W Bush) elected el presidente. Now I know my guys - the religious right, the predator class, the totally clueless etc. are going to show up and vote so the fewer of the other guys that vote the better for me. Therefore I will do what I can to make sure that the 'other guys' don't vote. Among a host of other things this could include encouraging the idea that your vote doesn't count, everybody's the same, it's useless etc.

Therefore (in my old age) I have decided to always vote no matter what just to be a pain in the ass for TPTB. Of course up here in Canada we have much more choice in parties so it's makes this easier.

Other reasons to vote:
1) say you had voted against GWB in the last two elections you could self righteously hold your head high and say "Don't look at me I voted against that asshole every chance I got"
2) always try to 'vote the bastards out'

If I was in America I would vote Obama not because I thought he was some kind of savior but because he MIGHT not be as bad as the other guys and because the other guys have been so bad that they MUST BE PUNISHED.


Anonymous said...

Is china now set to become the moneylender of last resort?If they will be funding the IMF then this will be a dramatic shift in power eastwards ,as they wont do it for gratis...

My wife has a interest in a hacienda in Columbia...her father left it to the kids,and during her last visit,she looked it over carefully. The place is big enough for 3-5 families w/land ect.I have little desire to land in Columbia,but if it goes completly mad max here,We have a option.

I think would rather stick it out here though.It may get grim,but I know this land from my childhood,and I am never home anywhere else.And,Oregon is where everyone hopes the new economy will start.
Now if I can just get my bees to co-operate....


Anonymous said...

“MCM: What immediately drew my interest was the overwhelmingly obvious fact that the 2004 election was stolen. We already know the 2000 election was stolen because the Supreme Court intervened so flagrantly, but I think the 2004 election was stolen on an even grander scale. What struck me was not just that fact, but no less, the general refusal to admit it which was evident not only throughout the corporate media but on the left as well. Even now I can't quite get over how the left fell into line and dismissed the evidence as "conspiracy theory" on the basis of very sloppy reporting by very good reporters in progressive circles.

So the immediate reason why I got into it was because of this staggering miscarriage of proper civic procedure and a betrayal of democracy. The more I thought about it, the more I also came to believe that this is the most important issue, precisely because we can make no progress on any other front if we don't have the right to pick our representatives, and more importantly, reject those who don't represent our interests. That's vital, so I often say in my talks that regardless of what your issue is, you're kidding yourself if you think you can get anywhere when government is able to act with impunity.

CB: So what are the maybe top half-dozen pieces of evidence that the 2004 election was stolen?

MCM: Well primarily, there is the audit of the vote in 18 counties of Ohio that was carried out by Richard Hayes Phillips who published Witness To A Crime which is…”

Anonymous said...

There's always a laugh to be had on the way to the end of the world as we know it.

If you have the bandwith check out Bremner, Bird and Fortune from Channel 4 UK. Programme lasts nearly an hour and is hilarious but sadly too close to reality for comfort.

Apologies link is not formatted - enjoy.

Ilargi said...


We can't view that in North America apparently. Guess someone has to post it to YouTube.

el gallinazo said...


They will only stream it to the UK and Ireland. I love these guys. Bumma!

Ilargi said...

Chaos, the IMF can issue bonds or Special Drawing Rights. But they would still need to be covered, likely at hight interest. So they'll first go for direct infusions. Whether that'll be enough is questionable, and then you'll see them use their other powers.. Mind you, the IMF's status and credibility is not very high, and that could cause them a lot of trouble. China could opt to directly inject credit in various countries in exchange fore power and influence. Could be an interesting story.

Your second question I don't think I understand.

Chaos said...

Thank you for your response, and sorry for the confusion. Was asking your opinion on the unwinding of yen carry trade (which resulted in strengthening of yen) and the emerging markets currency flight to US dollars (resulting in strengthening of US dollar); if either or both of these have run their course or if there is more left of this phenomenon?

Ilargi said...


The carry trade has quite a distance to unwind yet, even though it's already the number one debilitating force in credit markets. Japan has nowhere left to cut its currency, and we'll see rate cuts elsewhere that nobody would have believed possible a few weeks back. The UK talks of full percent cuts, same for the EU. Still, the yen is hugely undervalued, and will keep rising for a while.

Mind you, it's all as volatile as can be, powder keg material.

Interestingly, you will also see lots of countries raising their rates in order to protect their currencies. Some of their own accord, Iceland, Norway, some on orders from the IMF's loan conditions.

The flight into the dollar looks set to last as well, but again: volatility. The situation in Europe right now is very uncertain, having 20 countries with one currency but highly divergent economic realities is not a confidence booster.

The period between the US election and the New Year promises to be a wild ride. We can't predict the details, nobody can, since it will be less and less a purely financial playing field. But we can be sure that he trends are down down down. There are untold trillions left to go poof in the night. They must and they will.

This is a credit crisis, credit is vanishing, and that means banks will lend less, until they hardly lend anything at all. The ultimate threat for a system based on credit. It can lead to one thing only: empty shelves. And that in turn will make people realize in full what I've said for months: that this is a crisis of the legitimacy of our governments. Lose control of your economy, and you lose control of your people.

And in the process the strong will eat the weak.

Anonymous said...

Dedicated to the US:

YouTube: Leonard Cohen - Democracy

It's coming through a hole in the air,
from those nights in Tiananmen Square.
It's coming from the feel
that this ain't exactly real,
or it's real, but it ain't exactly there.
From the wars against disorder,
from the sirens night and day,
from the fires of the homeless,
from the ashes of the gay:
Democracy is coming to the U.S.A.

Chaos said...

Thank you for your thoughts...I am following your thinking here. Obviously, The Shock Doctrine was required reading this year.

Anonymous said...

Looks like the US treasury turns down GM's request for money(10B) to "aid" the prospective combining with Chrylser.

Is this meaningful?

Ilargi said...

The Boss Pays Tribute to 'The One'

In addition to his gorgeous singing and strumming, Bruce Springsteen paid homage to Sen. Barack Obama, D-Ill., this evening to a crowd of roughly 80,000 in downtown Cleveland. Following is what we were able to make out in a sincere but occasionally mumbly homage to Obama, whom the McCain campaign derisively refers to on occasion as "The One."

If you were able to better pick up the Bard of New Jersey's remarks, please let us know and we will update.
"It’s an honor to be here with Senator Obama, I want to thank him for inviting me. I've spent 35 years writing about America and its people, what it means to be an American, which I do (mumble) responsibilities - one of the reasonable expectations when we live in a free society.

I really never saw myself as a partisan (inaudible) or a set of ideas. Economic and social justice. America as a positive influence around the world. Truth, transparency and integrity in government. A right of every American to have a job, a living wage, to be educated in a decent school. And to allow (inaudible) with the dignity to work (inaudible) from the sanctity of home. And I think are the things we think of on the deepest level when we think about our freedoms.

"But (inaudible) ‘cause they’ve been damaged by eight years of a thoughtless, reckless and morally adrift administration. But we’re at a crossroads today. I've spent most of my life as a musician measuring the distance in my music between the American dream and American reality. When I look around today, many Americans are today losing their jobs, and their homes, or seeing their retirement funds disappear, and don’t have healthcare, who have been abandoned in our inner cities.

The distance between that dream and that reality has grown greater and more painful than ever. I believe Senator Obama has taken the measure of that distance in his own life and in his own work. And I believe he understands, in his heart, the cost of that distance, in blood and in suffering, in the lives of everyday Americans. I believe as president, he’ll work to bring that promise back to life, in many of the lives of our fellow Americans who have justifiably lost faith in its meaning.

"Now In my job, I travel the world, and I occasionally play big stadiums and crowds like this, just like Senator Obama does. And I've continued to find, wherever I go, America remains a repository for people's hopes and desires, and remains a house of dreams. And a thousand George Bushes and one thousand Dick Cheneys will never be able to tear that house down!

"That’s something that only we can do and we’re not gonna let that happen. This administration will be leaving office – that’s good news. The bad news is they’re going to be dumping in our laps the national tragedies of Katrina, Iraq, and our financial crisis. Our house of dreams has been abused, it’s been looted, and it’s been left in a terrible state of disrepair. It needs (affinity?), it needs someone who’s gonna sell it down the river for power, for influence, for a quick buck. It needs strong arms, strong hearts, strong minds. It needs someone with Senator Obama's understanding, his temperateness, his deliberativeness, his maturity, his pragmatism, his toughness, and his faith.

"But most of all, it needs us, it needs you and it needs me. (inaudible) (inaudible) that keeps it from coming apart is the social promise between us, and (inaudible). It resides in our connection with one another in honoring the life and the hopes and the dreams of a man and a woman up the street and across town. That’s where we make that small claim upon (inaudible).

"And on recent years that social contract’s been shredded, and when you look around today you can see it shredding before our eyes. But tonight and today here we are at a crossroads. We are at a crossroads. And it’s a long, long time coming. I’m honored to be here on the same stage as Senator Obama. From the beginning there’s been something that Senator Obama has called upon our better angels, and I suspect he’s (inaudible) ‘cause he’s had to so often had to call on his better angels.

"And we’re going to need all the angels we can get on the hard road ahead. So Senator Obama help us rebuild our house (cheers) big enough for the dreams of all our citizens. It’s how we’ll accomplish this task (inaudible) what it means to be an American in the new century, what the stakes are and what it means to live in a free society.

So I don’t’ know about you, but I want my country back, I want my dream back, I want my America back! Now is the time to stand with Barack Obama and Joe Biden, roll up our sleeves, and come our sleeves, and come on up for the rising."

Ilargi said...

"Looks like the US treasury turns down GM's request for money(10B) to "aid" the prospective combining with Chrylser.

Is this meaningful?"

Hard to say, one program rejected, and the next one sped up. Detroit is dead and gone, but there;s no doctor volunteering to sign the certificate.

I have said all along that the Nov 4- Jan 20 window is the only reasonable space to pull the plug, since it would not put all the blame on one president, they could both fault each other.

Still, Obama seems to want to keep the corpse alive. It would be a terribly bad decision. The Big Incredibly Shrinking Three won't last another 4 years.

The Lizard said...

Born In The USA: "A right of every American to have a job, a living wage, to be educated in a decent school."

Has the Legend In A T-shirt failed to notice that no such rights exist?
Not one of those three things is the right of an American citizen.

Neither an Obama nor a "Country First" McCain administration is likely to make them rights.

An old saying: "Please understand the rules before breaking them".

Anonymous said...

You're an optimist at heart! Admit it...I read the Boss's words that you quoted. Why would you even bother with it if you did't believe it? You want to believe. You do believe it. But it's hard to change course once you get the momentum going for this type of website. Yes, it's easier to keep it running, just like Ford, GM, and Chrysler want to keep it running. It's easier to try to keep it running than it is to change. Can you change Ilargi? Can you change Stoneleigh?
Can I change? How about me? That is the only question I should be asking. Can I change? Can I, change? really change? I hope so. I think so. I want to. So much. So. So. Sort of. I really do. Really sort of. Yes, it is hard. To let go. For we let go more of us than we want to. More than we are prepared for. More than we are comfortable with. Yes, it's much easier to just sit back and criticize, Ford, GM, Bush, Oprah, the Federal Reserve, anyone but us, but you, but me. But now is the time, for you Ilargi, for you Stoneleigh, and for me, especially for me, now is the time. Not because I am especially special, I know that I am not, but because I know that I am all that I know. I know that I am all that I have known. I know that I am all that I have ever known, and I am all that I know, all that I will ever know; now is the time, to know that well, we know all that we know, and no, we do know what is the future. Because no one can know that. Not you, Ilargi, not you, Stoneleigh, not me, who am I anyway? and therein lies the mystery, the fun, the adventure. Is't is great to be alive?

Anonymous said...


From yesterday

On the SSA website. They have many online booklets with most rules. It can get complicated because the rules vary depending on some weird criteria, you really need to spend some time on the website.
I ended up letting my lawyer figure it out as far as how it applies to me.

Anonymous said...

Martin Weiss posted the following today re housing:

No matter how far home prices in your area have already fallen and no matter how cheap they may appear, they could still fall a lot further.

In the hardest hit regions, an individual home that was once priced for $400,000 at its peak could fall to as low as $200,000 by the end of Phase 1. But don't blindly assume that's the bottom. In Phase 2, it could fall in half again, to $100,000. And in Phase 3, it could fall by at least half for a third time, to as low as $50,000 or $40,000.

Homes with peak prices of $1 million could sell for as little as $100,000; some, originally priced for $10 million may have no buyers at all — even with asking prices as low as $1 million.

Nationwide, the median home price will not fall nearly that far. But that factoid alone will do nothing for homeowners in bubble areas like Florida, Nevada or California. Nor will it help those in blighted regions where factories are closed and unemployment rises far above the national average.

Never before in history have we witnessed home price declines of this magnitude! But that fact alone does not make them implausible, let alone impossible.

Remember: Never before in history has so much debt, speculation, government manipulation, fraud, corruption and consumer abuse been heaped onto any housing market! And if there's one thing that history teaches us, it's that unprecedented causes lead to unprecedented consequences.

His 3 phases are:
Phase 1. The bust in the subprime mortgage market. This is now history.

Phase 2. A severe U.S. recession. As of this writing, this phase is just beginning.

Phase 3. Depression and deflation. Still ahead.

Anonymous said...

Thanks for the post, Ilargi.

I voted for Obama on Saturday. Of course, I'm not delusional about him being "the one." It would be next to impossible for any politician to go against the military-industrial-financial complex that dominates the U.S. I know, too, that politicians who try are often threatened or assassinated, such as John F. Kennedy who may have had plans to abolish the Federal Reserve, or many altruistic foreign leaders who rejected U.S. hegemony. (Allende of Chile comes to mind.)

So why did I vote for Obama? Why did I bother to vote if deep inside I feel that it is probably too late, that we have descended too far into the precipice in so many ways? The main reason I voted for Obama is because he represents a certain hope. A hope that may not seem realistic to those who have not been victims of racial/ethnic bigotry in this country. I do remember segregation, the times (early 1960s) when "colored" people were forced to use different water fountains and bathrooms. Yes, the fact that many whites are voting for a black person is in and of itself a symbol of progress and hope.

To me McCain/Palin are reactionaries who represent the worse of American culture -- bigotry, violence, elitism, corrupt and exclusivist religiosity, etc. To vote for Obama, even if simply attempting to hinder the ascendance of the reactionary McCain/Palin ticket, is a worthy act.


Ilargi said...

"Nationwide, the median home price will not fall nearly that far."

Please, Martin Weiss, explain to me what would halt the drop in prices. It's really really staring to get on my nerves that no-one who predicts a sudden bottom slash plateau ever tells me where they get that idea.

And you, Weiss, are one of the smarter cookies in the jar. It's so disappointing that you do the same as the stale old Oreo's.

Anonymous said...

RE: " who predicts a sudden bottom slash plateau ever tells me where they get that idea..."

I'll go one further. No one (or very very few) who ever predicts ANYTHING with regard to "bottoms" in general ever gives data. Instead they pull some ideas out of their tushies in an attempt to either (a) get some attention, (b) be able to say 'see, I told you so' if their GUESS happens to be right, or (c) because they are trying to capitalize on being charlatans and make some $$$ off of it.

That is why I RELY upon I&S: the numbers do not lie, and neither do I&S.

Also, just as an aside: there is one immutable fact that, IMO, trumps virtually all others in this ongoing conversation. That is, that our "leaders" are throwing money at a problem that came about because of "democratic capitalism" actually being code for a 100 Trillion $$$ trip to Foxwoods, where none of the gamblers ever goes broke because they assume ZERO risk.

And now the addicts are doing everything they can to hide their addiction from the rest of us...and they're willing to let us die rather than admit the truth.

Anonymous said...

Effectiveness of AIG's $143 Billion Rescue Questioned

"The company also may be forced to sell many more assets at low, fire-sale prices. As part of its loan deal, AIG was to sell some assets -- valued at $1 trillion before the crisis -- to raise cash to pay off the loan.

AIG's Financial Products division is the primary villain in the company's free-fall. It made tens of billions of disastrously bad bets on mortgage investments but may not have carefully hedged those bets or properly estimated its risk. The company's rapid burn of $90 billion also suggests that it grossly undervalued its obligations to counterparties in a worst-case scenario."


But David Schiff of Schiff's Insurance Observer said he could not see how bankruptcy would have been a better solution.

"The point isn't to save AIG; it's to save the U.S. financial system. I think they were afraid to find out who else goes under if you let AIG fail," he said. "But right now, no one knows if this is going to work."

Anonymous said...

So, this guy steals a car. And about a year after stealing it, the 'chack engine' light comes on...and then he starts to hear funny noises coming from under the hood. So this guy tries to figure out whether or not he should get the car serviced, or maybe wait and see what happens.

But, the point here is that IT'S NOT HIS CAR! The decision about what to do with the car isn't his...even though he assumes it is his because he has come to somehow believe that it is his car...which it isn't!!!!!!!!

kind of like Amerika in Iraq. Our "leaders"---Dems and Reps---sit around and try to decide what to do 'with' Iraq. BUT IT'S NOT OUR COUNTRY!!! Having a conversation about what to do with a country that isn't ours is totally insane.

Same goes for the economic cluster %$@% in which we currently find ourselves. All of the conversations by all of our "leaders" about how to save the economy are just like the dude with the stolen car...Our leaders are thieves. They have stolen OUR $$$, and now they are sitting around talking about what to do with OUR stolen $$$.

And we let them do it. Insane.

el gallinazo said...


Thanks for your link.

"If you work or own a business outside the U.S. and are younger than full retirement age, notify the nearest U.S. Embassy or consulate or Social Security office right away. If you do not, it could result in a penalty that could cause the loss of benefits. This loss of benefits is in addition to benefits that may be withheld under one of the work tests explained on the following pages."

It would not be my intension to work or own a business if I expatriate, so I don't think I would be affected by the restrictions which you are concerned with.

Anonymous said...

Still, Obama seems to want to keep the corpse alive. It would be a terribly bad decision. The Big Incredibly Shrinking Three won't last another 4 years.

And expect a lot more of that line of thinking to come during this next four years. We ain't seen noth'n yet!

Your #1 reason for voting for Obama is "hope." This seems to be the main reason all voters vote for the messiah. Yet, I don't think the media or any voter could explain with concrete reasons, that "hope". I challenge you to tell us what lies behind your reasoning, citing examples of Obama's record to date. Interesting how many of these same voters denounce religion and everything it represents.

el gallinazo said...


If I could vote for president (which I can't as a resident of the USVI) I would vote for Obama for one simple reason. I would go stark raving, f*cking batshit if I had to listen to McCain's voice for four years. He sounds like Satan masquerading as Winnie the Pooh. Obama is a sock puppet for Wall Street, but at least I wouldn't have to blow up my TV if he is elected to protect what remains of my sanity.

I assume everyone has listened to the Barracuda and our Canadian Sarkozy spoofers. The spoofer wanted to go hunting with her, but told her not to invite Cheney :-)


Re Anon 10:11 and Martin Weiss

Couldn't find the original article, but I read Anon's comment three times and I couldn't find substance for your beef. He is predicting that in what he refers to as phase 3, full depression and deflation, peak housing vlaues will fall as low as 10%. That is what you predict. Where's the beef?

Anonymous said...

Thanks for everyone's comments about voting. You have made good points.
I would not vote for McCain for obvious
reasons, many mentioned here. Even though things won't change for the better, you have made valid reasons to
vote for Obama.

Anonymous said...

I voted early for Obama...though w/out joy. He reminds me of Lowell Weicker...more of a moderate Republican than a Democrat. I would've voted excitedly for Kucinich.

Anonymous said...

Give it up. If voting really mattered, you wouldn't be allowed to vote.

""You know, comrades," says Stalin, "that I think in regard to this: I consider it completely unimportant who in the party will vote, or how; but what is extraordinarily important is this —- who will count the votes, and how.""

Anonymous said...

Ah a Stalin quote from

filed under dubiousquotes

That inspires confidence.

When I reflect on the meaning of voting within our clearly imperfect system, what I really want to help me understand the situation is a dubious quote from a reprehensible guy from another country and era...

Greenpa said...

"Even though things won't change for the better, you have made valid reasons to vote for Obama."

Which is why I hang out here- the general level of intelligence is excellent. :-)

Anonymous said...

Ahimsa writes:

"To me McCain/Palin are reactionaries who represent the worse of American culture -- bigotry, violence, elitism..."

Ahimsa, you have an admirable economy of cant. In 16 words you exhaled 5 nullities: most folks would need at least twice the space. Now I'm going to pour some meaning into your empty words:

1. "reactionaries" - Marxists have used this word from the 1860s. Anyone thwarting the Marxist will to power, for any reason, has been "reactionary" in the eyes of Marxists. When Marxists rule, a reactionary is a man marked for prison, exile or death.

2. "represent" - Symbols represent. Humans embody. But symbols are easier to manipulate than human bodies. Hence the love of the power-hungry for symbolic opponents.

3. "bigotry" - Bigotry is utter intolerance of any differing creed, belief, or opinion. It is not disagreement. It is not disbelief. It is not mockery. It's _utter_ intolerance, as seen for example in the Marxist punishment of "reactionaries". But in the political careers of McCain & Palin? No.

4. "violence" - McCain has intimate experience with violence in its cruelest form. No doubt his strong aversion to the use of torture, even upon the most unprincipled of enemies, stems from his personal experience with such violence.

5. "elitism" - Again, no. See: "Barbie, Caribou".

So what's my beef? Meaning. Use words with meaning, and use them appropriately. Else your self-expression becomes meaningless, your voice a mere tool of the powerful. Orwell explains.

OK, that's my one OT political outburst. We now return to the Economic Poseidon Adventure, in progress.

Reluctant Poseidon Hamster