Monday, December 15, 2008

Debt Rattle, December 15 2008: A Loaded Freight Train

Unknown Shanghai Funeral June 22 1932
Ward Road, Shanghai

Ilargi: I’ll do a different sort of intro today. Michael Pettis puts his fingers on all the most painful spots in the article below, and that deserves as much attention as he can get, in my view. It's important that people start to understand what he talks about. Over the past year, I have repeatedly written about the dangers facing China in the current global financial crisis, the last time a few days ago in The Great Fall of China. And every time there have been reactions from people who for one reason or the other are convinced that China will hardly be affected, and even emerge a winner of sorts.

A frequent claim is that the Chinese can 'simply' turn their production capacity around to focus on their domestic markets. But that claim is clearly erroneous. Those markets are far too small to absorb what falls away because of declining foreign demand for Chinese products. Another claim: the Chinese $500 billion stimulus package will keep the country afloat. It won't: Chinese building things for other Chinese is only feasible if and when the economy that has produced the budget surplus continues to do so. If it doesn't, it would be a very bad decision to spend the existing surplus this way.

The Chinese economy can best be compared to a huge and loaded high-speed freight train about to run into an equally huge wall. Then the political problems will start. And the boom of the past 20 years may soon come to look like a distant memory. Alternatively, the government can opt to divert attention from its problems through foreign aggression. Not good either, and certainly not a way to get the train rolling again.

Maybe people are more likely to believe Pettis, a professor of finance at Peking University.

Asia faces a tough 2009 as output decreases
With the recent sharp decline in Chinese manufacturing output, the global decoupling theory seems to have died a well-deserved death. The idea that developing countries had become less dependent on US economic conditions, and so were insulated from the US crisis, was based on a potent combination of bad analysis and wishful thinking. In fact the first stage of the crisis has primarily affected trade-deficit countries, which included many of the rich countries. The second stage will see the crisis move to trade-surplus countries, most of which are in the developing world.

The dependence of developing countries on US demand should have been obvious from the global balance of payments data, which show the US trade deficit and developing country trade surpluses rising as a share of global gross domestic product in an almost unbroken line from 1997 to 2007. This suggests that there is a lot more of the crisis to come. To date the crisis has mainly involved adjustment among the large over-consuming countries: the US, Spain, the UK, France, Italy and Australia. In each case the credit crisis has all but eliminated the debt-fuelled consumption binge that enabled their large trade deficits. But that cannot be the end of the story. The global balance of payments must balance, and a reduction of consumption by one sector in the global balance must come with a corresponding adjustment.

There are three ways the system can adjust. One way is for the underlying global imbalances to remain in place. Governments from the US and other trade-deficit countries can borrow and spend aggressively to replace contracting household consumption. But as debt-fuelled consumption by the likes of the US has been one of the fundamental problems, simply replacing one overconsuming American entity by another cannot be a long-term solution.

The second way is for trade-surplus countries to engineer sharp increases in domestic consumption, most likely though massive fiscal expansion, that match the decline in US household consumption and so reduce the overcapacity problem. The problem with this solution is that the scale of the adjustment is beyond the capacity of most countries. A decline in US consumption equal to 5 per cent of US GDP, for example (which is a low estimate), would require an increase in Chinese consumption equal to 17 per cent of Chinese GDP – or a nearly 40 per cent growth in consumption. This is clearly unlikely.

That leaves one other way to adjust – a sharp decline in global production, with massive factory bankruptcies to end overcapacity. The burden of the adjustment will fall on trade-surplus countries, unless trade-deficit countries are willing to absorb a large part of it. But given political realities it is Asian production which is most likely to decline. The economic pain will be high and potentially destabilising. Before this happens there is a grave risk that individual Asian countries will try to avoid the contraction in demand by increasing their ability to export overcapacity by enacting trade-related measures – export subsidies, subsidised financing, currency depreciation, import tariffs – that enable them to force the overcapacity adjustment on to their trading partners.

This was the US strategy when, under similar circumstances to China today, it was forced to adjust to the 1929-31 crisis. In 1929 it was the US that had the serious overcapacity problem. For much of the 1920s it was able to export overcapacity by running large trade surpluses, but when the 1929-31 financial crisis eliminated the ability of trade deficit countries to finance their absorption of US overcapacity, the US, as the leading overcapacity nation, faced an ugly adjustment.

The US tried to avoid the adjustment by enacting trade tariffs – most notoriously the Smoot-Hawley bill of 1930 – and in so doing force the contraction in production on to the rest of the world. Trade-deficit countries did not co-operate, with the result that international trade all but collapsed. That forced the US into adjusting domestically, which it did via a collapse in production – a process we call the Great Depression. There is a great risk that we see a repeat of this sorry story. US overconsumption was a fundamental part of the recent global imbalance and one way or the other US consumption must decline and savings rise. But just as US overconsumption must decline, so must Asian overproduction. This can only happen with an increase in Asian consumption or a drop in production. Next year will be difficult for Asia.

China factory output growth hits record low
China's factory output growth slowed more sharply than anticipated in November, setting the weakest pace for a non-holiday month on record and raising expectations for more stimulus measures for the world's fourth-biggest economy. Industrial output rose just 5.4 percent from a year earlier, well off the 8.2 percent pace in October and lower than economists' forecasts for a rise of 7.1 percent.

That was the worst reading since the start of 1999, the earliest date for which monthly data is available, excluding distortions caused by the timing of the Lunar New Year holiday, which falls in January some years but in February in others."Five percent GDP growth in the first half next year is now a reality, not a risk," said Ben Simpfendorfer, strategist with Royal Bank of Scotland in Hong Kong. "There's little doubt the data will look ugly over the next six months."

The abrupt slowdown in the country's factory activity reflected data last week that showed unexpected declines in both exports and imports, marking their biggest falls in years. The economic deterioration will likely set off alarm bells in Beijing, where policy makers all the way up to President Hu Jintao have expressed concern over mounting job losses that could undermine social stability. Aiming to maintain growth at the 8 percent pace officials consider necessary to create enough new jobs, the government last month unveiled a 4 trillion yuan ($586 billion) stimulus package.

The People's Bank of China (PBOC) has also cut benchmark lending rates by a total of 1.89 percentage points since mid-September. They stand at 5.58 percent. But most economists expect the slowdown to accelerate, after annual growth in GDP weakened to 9 percent in the third quarter from 11.9 percent for all of last year. A breakdown of the output data suggested cause for concern: Output for export delivery fell 5.2 percent from a year earlier in November, production of motor vehicles fell 15.9 percent, while power output dropped 9.6 percent, the fastest pace on record, the National Bureau of Statistics said.

"I don't think there are any signs the drop will stop," said Qi Jinmei, senior economist at the State Information Centre in Beijing. "Next year will be a really harsh year." The data weighed on shares. While the Shanghai Composite Index ended up 0.52 percent, it underperformed regional markets. Tokyo's main index .N225 rose 5.2 percent and other Asian shares were up 3.1 percent at 0909 GMT. Jiming Ha with China International Capital Corp in Beijing said he was revising his fourth-quarter economic growth forecast downward to 5.0-5.5 percent from his original forecast of 6.3-7.5 percent. He expects the economy to expand by 7.3 percent in 2009.

"The problems of overcapacity and unemployment will become even more prominent due to the economic slowdown," Ha said in a research note. He expects another 108 basis points in interest rate cuts by the middle of 2009. If there is any positive news for the economy in the November data so far, it is that banks extended 476.9 billion yuan ($70 billion) in new domestic-currency loans during the month, rebounding sharply from 181.9 billion yuan in October.

"This means that the PBOC's U-turn in its policy over the last two months seems to be starting to take effect," said Qu Hongbin, chief China economist with HSBC in Hong Kong. "That ... is very important, because the concern is that if we see economic growth continue to decelerate and then banks become even more cautious on lending, then you start to have a negative feedback process."

Still, money supply growth continued to weaken. The broad M2 measure grew by 14.8 percent from a year earlier in November, the slowest in over three years. That is well below the 17 percent pace the State Council, or cabinet, said over the weekend it was targeting for next year, as it pledged a host of financial innovations to make it easier for companies to obtain credit. As the existing fiscal and monetary measures start to work their way through the economy, many economists expect to see signs of stabilisation in the second half of next year.

However, Lu Zhengwei, chief economist with Industrial Bank in Shanghai, cautioned against complacency, saying he expected the central bank to be compelled to cut interest rates by 54 basis points by the end of this month. "China has to loosen its policies quickly enough to ensure that its economy recovers earlier than other countries in the next round of growth," Lu said. "Otherwise, it will be trapped in stagflation."

US home values to lose well over $2 trillion during 2008
Homes in the United States have lost trillions of dollars in value during 2008, with nearly 11.7 million American households now owing more on their mortgage than their homes are worth, real estate website said on Monday. U.S. homes are set to lose well over $2 trillion in value during 2008, according to an analysis of recent Zillow Real Estate Market Reports. Home values declined 8.4 percent year-over-year during the first three quarters of this year, compared to the same period in 2007, the reports showed.

U.S. home values lost $1.9 trillion from the first of the year through the end of the third quarter, and will probably fall further in the fourth quarter. One in seven of all homeowners, or 14.3 percent, were "underwater" by the end of the third quarter, the reports showed. "This year marked the acceleration of the market correction, and is likely to end with the eighth consecutive quarter of declines in home values," Dr. Stan Humphries, Zillow's vice president of data and analytics, said in a statement.

"In general, homeowners in most areas we cover are struggling with foreclosures pouring into the market, large amounts of negative equity and dropping home values. On the positive side, in the third quarter, some markets - particularly those hit hardest in the downturn - showed smaller year-over-year declines than in the prior quarter," he said. "Our optimism here, though, must be tempered by the knowledge that the larger economic problems that emerged in the fourth quarter will likely further challenge the real estate market," he said.

The U.S. housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes, tighter lending standards and record foreclosures push down home prices. Thirty of the 163 metropolitan statistical areas, or MSAs, covered in the Zillow Real Estate Market Reports showed gains in the Zillow Home Value Index, or median value of all homes in the area, over the first three quarters of the year, with the Jacksonville, North Carolina region seeing year-over-year appreciation of 4.9 percent. The change in value was calculated by averaging the year-over-year change in each of the first three quarters of the year, the reports showed.

The U.S. housing market, with falling prices, rising foreclosures, and large numbers of "underwater" mortgages, remains the largest unresolved issue for the global economy. The Stockton, California region fared the worst in the first three quarters of 2008, with home values sliding 32.3 percent year-over-year. The Merced, California area followed with home values declining 31.2 percent year-over-year in the first three quarters of 2008, the reports showed.

At Fed's 2-Day Meeting, Target Rate Could Be Sliced to Near Zero
The Federal Reserve is expected this week to cut the fed-funds target rate to levels not seen in decades, but that is unlikely to impress Treasury-market investors. Instead, as rates approach zero while financing costs in the broader economy remain high, investors will await any word from central bankers about other efforts to help heal the economy and credit markets. The market expects the Fed to cut its key lending rate to 0.50%. But, more important, investors want to know whether there "are more aggressive quantitative moves soon to come, or are they further down the road," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

The Fed is scheduled to meet Monday and Tuesday, with its interest-rate decision coming Tuesday at 2:15 p.m. EST. Aware that its scope to cut interest rates is limited, the Fed already has tiptoed into the arena of quantitative easing, essentially printing money and using the cash to fund lending. This month, it started to buy debt sold by federally chartered mortgage-finance companies to help drive mortgage rates down. The last central bank to engage in these types of policies was the Bank of Japan earlier this decade.

"Conventional monetary-policy measures have been deployed without the desired effects on the real economy," said Citi Global Wealth Management Chief Investment Officer Jeff Applegate. "Quantitative easing is a crucial component in the multifaceted campaign to normalize the credit markets and ultimately spur the next recovery in economic activity." Any allusions to such efforts -- in particular any reiteration of comments made by Fed Chairman Ben Bernanke this month that the Fed could buy longer-term Treasury or agency debt on the open market -- would likely add to the Treasury-buying spree that market participants already envision continuing into the end of the year.

Chris Ahrens, rates strategist at UBS Securities, said buying Treasurys may not actually lower the cost of borrowing for consumers. That is more likely to be achieved by the Federal Reserve's plan to buy $500 billion in mortgage-backed securities, announced earlier this month and set to start by the end of the year. "The more targeted their approach is specifically to address the problem of deterioration in housing assets, the better the results will be," Mr. Ahrens said. "The more they broaden out, the more they'll have unintended consequences."

No matter what the Fed discloses, the rally in government debt is expected to continue until year's end, driven by recession fears and year-end buying. At year end, market participants typically rush into government debt in an effort to tidy up their books. Since mid-November, investors' penchant for Treasurys has continued to take yields, which move inversely to prices, to historic lows. The yield on the three-month Treasury bill briefly turned negative this week, highlighting market participants' desire to keep money safe. Such buying pushed two-year yields to an intraday historic low of 0.66% Friday, ending at 0.785%. The 10-year Treasury note's yield briefly touched a 45-year low of 2.47% before ending at 2.590%.

Fed's Rate Cuts Threaten to Chill Japanese Investment
As the Federal Reserve considers rate cuts Tuesday, U.S. interest rates are approaching those of Japan, the nation which for years boasted the most easy monetary policy among major economies. The shrinking rate gap could drive Japanese investors from the U.S., leading to a further weakening of the dollar. Many economists expect the Fed to cut its policy rate by half a percentage point to 0.5% Tuesday, nearing the Bank of Japan's 0.3%. The U.S. rate hasn't been lower than Japan's since 1993.

Higher rates in the U.S. have lured many Japanese investors, including its giant insurance companies and pension funds, into dollar-based assets such as U.S. Treasurys. Japan held $573 billion of U.S. Treasury securities in September, according to Treasury Department data, making it the world's second largest investor after China. Rate cuts in the U.S. could eventually push down returns on these assets and eliminate their appeal for Japanese investors. The yield differential has already been reversed for government securities with short maturities. On Tuesday, the U.S. Treasury Department sold four-week bills in an auction at a yield of zero for the first time as investors poured into what they saw as the ultimate safe haven. "It would be hard to imagine a more propitious environment for a buyers' strike of U.S. paper," said Peter Tasker, an analyst for Dresdner Kleinwort in Tokyo.

While few experts expect an immediate exodus of Japanese investors from Treasurys, there are some signs Japanese investors are beginning to reduce investments abroad. Between September and November, Japanese mutual funds sold medium-term and long-term foreign bonds worth 899 billion yen ($9.87 billion) on a net basis, compared with a net purchase of 593 billion yen during the same period a year earlier. A move away from U.S. assets would push the dollar lower against the yen, which has already appreciated considerably in recent months. That would be bad news for Japan's exporters and its export-driven economy, which is in a recession. On Friday, the dollar temporarily fell to a 13-year low of 88.10 yen, before settling at 91.04 yen, down 18.3% this year. The benchmark Nikkei 225 Stock Average fell 5.6% amid worries that the yen's rise would clobber exporters such as Toyota Motor Corp.

In late October, the Bank of Japan cut rates for the first time during the current crisis by 0.2 percentage point, rather than 0.25 percentage point. Economists speculated the central wanted to leave room for one more cut before the rate reached zero. Meanwhile, the Fed is starting to take other steps that seem to resemble Japan's moves to shore up its economy in the first half of this decade, when its policy rate was kept at zero as it tried to lift the nation's economy from its long slump. For example, the Fed is beginning to inject liquidity through the purchase of everything from Treasurys to mortgage-backed securities -- which many economists see as quantitative easing.

Dollar Staggers as U.S. Unleashes Flood, Deficits Increase, Fed Cuts Rates
The biggest foreign-exchange strategists and investors say the best may be over for the dollar after a four-month, 24 percent rally. The currency weakened 5.9 percent measured by the trade- weighted Dollar Index after strengthening between July and November as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit. Ever since peaking on Nov. 21, the dollar fell against all 16 of the most-widely traded currencies, according to data compiled by Bloomberg.

U.S. policy makers are flooding the world with an extra $8.5 trillion through 23 different plans designed to bail out the financial system and pump up the economy. The decline shows that the increased supply of money may be overwhelming investors just as the government steps up debt sales, the trade and budget deficits grow and de-leveraging by investors slows. "The dollar will go to new lows as the U.S. attacks its currency," said John Taylor, chairman of New York-based FX Concepts Inc., which manages about $14.5 billion of currencies. Citigroup Inc., Goldman Sachs Group Inc., BNP Paribas SA and Bank of America Corp. predict further weakness. Last week was the first time in almost a month that consensus estimates for the dollar against the euro through 2009 fell, according to the median forecast of 47 strategists surveyed by Bloomberg.

Taylor, whose firm manages the biggest hedge fund focusing on foreign exchange, said while the dollar may strengthen next year, it will fall to a record low against the euro in 2010 and to a 13-year low of 80 per yen as soon as 2009. Speculation that the dollar has peaked gained steam last week as the currency plunged 4.9 percent against the euro to $1.3369, its biggest drop since Europe’s common currency was created in 1999. It weakened 1.75 percent versus the yen. "We’re at a turning point in terms of dollar dynamics," said Jens Nordvig, a New York-based strategist at Goldman Sachs, the biggest U.S. securities firm to convert to a bank. "The dollar shortage has been addressed and we’ll see people start to focus on other things and those are all dollar negative."

After rising from $250 billion in September and October, dollar cash positions at U.S.-based banks have stayed at about $800 billion since Nov. 1, according to Nordvig. A survey last month by New York-based Sanford C. Bernstein & Co. found that 63 percent of hedge-fund managers said they are about half done selling securities to reduce their use of borrowed money after financial companies cut back on credit following almost $1 trillion in writedowns and losses since the start of 2007. Twenty-three percent said they were three- quarters finished. Goldman Sachs says the dollar may weaken to $1.45 per euro by the end of next year. Up until Dec. 11, the firm forecast that it would end 2009 at $1.30. The median estimate in a Bloomberg survey is for the currency to finish next year at $1.25.

Dollar bulls say it’s a mistake to bet against the currency now because Treasury yields are falling to record lows even as the government prepares to sell more than $1 trillion of debt, a sign there’s no end in sight to demand for the safest U.S. assets. They also say the yen, which typically rallies as risky assets decline, is appreciating. "The yen’s strength falls into our theory that the risk- aversion trade is not off the table," said Peter Rosenstreich, chief market analyst at Geneva-based currency trading firm ACM Advanced Currency Markets. "The fact that the yen continues to gain strength validates our theory in the longer term, the dollar safe-haven trade is not done yet." Robert Sinche, the head of global currency strategy at Bank of America in New York, the third-largest U.S. bank, says the dollar is bound to weaken because investors are starting to focus on traditional measures of value such as relative interest rates, budget deficits and trade balances.

As more loans are repaid, there is less need for dollars, forcing investors to value the currency on metrics such as relative interest rates, budget deficits and trade balances. By those measures, the greenback should weaken, according to Sinche. "A lot of the reasons why the dollar went up are not sustainable and have started to disappear," said Sinche, who predicts the currency will weaken to $1.44 per euro as early as March 31. "Bad news about the U.S. economy is beginning to be bad news for the dollar." The Federal Reserve will cut its target rate for overnight loans between banks in half to 0.5 percent on Dec. 16, the lowest level since 1958, according to the median estimate of 84 economists in a Bloomberg survey. The European Central Bank’s target rate, currently 2.5 percent, will bottom in 2009 at 1.75 percent, according to a Bloomberg survey of economists, making the euro relatively more attractive.

Treasuries due in two years yield 1.49 percentage points less than German bunds of similar maturity, near the most since mid-October. Three-month bill rates fell below zero last week for the first time. Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund, said "Treasuries have some bubble characteristics." "The government and the Fed cannot continue to talk about trillions of dollars of financing and expansion of the Fed’s balance sheet without the dollar going south," Gross said in a Dec. 10 interview with Bloomberg Television Spending to shore up the financial system caused the U.S. government’s budget deficit for the first two months of fiscal 2009 that started in October to balloon to $401.6 billion, the Treasury Department said Dec. 10. "It’s absolutely going to get worse before it gets better," said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. "We’re looking at a $1 trillion deficit, and that’s before the next stimulus package. If Treasury spends all of TARP, it could be $1.2 trillion to $1.3 trillion."

The $700 billion Troubled Assets Relief Program is one of the programs set up by the government and the Fed to try to bring the economy out of the worst recession since World War II. President-elect Barack Obama also plans a stimulus package that House Speaker Nancy Pelosi said may total $500 billion to $600 billion. The dollar’s rally may have hurt the trade balance, and earnings of companies that depend on sales overseas. U.S. exports slid to a seven-month low in October, causing the trade deficit to swell to $57.2 billion, the Commerce Department said Dec. 11. American exports dropped 2.2 percent to $151.7 billion as foreign purchases of U.S. aircraft, automobiles, chemicals and food waned. The trade gap was projected to be $53.5 billion. The U.S. economy may contract 3.9 percent this quarter and 2 percent in the first three months of 2009, according to the median estimate in a Bloomberg poll.

"Rapid deterioration in the U.S. economy, coupled with the adverse effects of monetary and fiscal stimuli, do not bode well for the dollar," Citigroup strategists Todd Elmer, Michael Hart, James McCormick and Aerin Williams wrote in a report from New York on Dec. 12. The New York-based bank "foresees short- term dollar weakness, against both Group of 10 and emerging- market currencies," they wrote. The Citigroup strategists predicted on Nov. 6 that the euro, which was trading at $1.2715, would rally toward $1.33. Paris-based BNP Paribas, Europe’s third-largest bank, recommends buying the euro versus the dollar amid signs that equity markets may be stabilizing. The MSCI World Index is up 16.6 percent since falling to a 5 1/2-year low on Nov. 21, the same day the Dollar Index peaked. "With equity markets broadly stable with a positive bias and volatility easing, we expect the euro-versus-dollar declines to be capped at the $1.28" level, a team of strategists headed by Hans-Guenter Redeker in London wrote in a report Dec. 10.

Like Goldman Sachs, London-based Barclays Plc, the U.K.’s third-biggest bank, forecasts the dollar will weaken to $1.45 per euro by the end of 2009, according to data compiled by Bloomberg. New York-based Morgan Stanley strategists Stephen Jen and Spyros Andreopoulos, who in August advised clients to buy the dollar, said in a Dec. 11 report that the currency may strengthen in the first half of 2009, before "underperforming most other currencies" as the global economy recovers. "We’re seeing that correlation between equities and the dollar break down," said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader, according to a 2008 Euromoney Institutional Investor Plc survey. "The fact that the dollar is weakening in this environment probably tells you a bit more focus is coming back on the fundamentals of the U.S. economy."

White House Sizes Up Auto Rescue
In weighing a much larger rescue effort for U.S. auto makers than originally envisioned, the Bush administration faces a complex set of decisions over what terms to seek -- including whether to push the companies to file for bankruptcy -- and how to raise necessary funds. The administration is trying to determine how much money it will take to help the car companies, and is discussing a rescue totaling $10 billion to $40 billion or more.

One possible source of funding is the Treasury Department's $700 billion fund set up to rescue the financial industry. Only about $15 billion remains uncommitted from the first tranche of $350 billion, so the Bush administration could be forced to request the second half to cover the car companies' needs, people familiar with the situation said. That likely would compel the administration to outline its plans for a range of other needs, including foreclosure prevention for struggling homeowners and possibly aid for state and local governments. That could spark another confrontation with lawmakers, who are increasingly divided over industry bailouts. Senate Republicans blocked a proposed bailout for the auto makers last week.

With Detroit's car makers facing bleak short-term prospects due to a collapse in consumer demand for vehicles, the Bush administration was rushing to determine the extent of the companies' financial problems. Late last week, some officials thought the government might be able to provide as little as $8 billion to tide the companies over until early next year. On Sunday, a person familiar with the situation said the companies' collective needs could range from $10 billion to more than $30 billion. The administration spent the weekend poring over the auto makers' books to assess their financial needs. The Bush administration must also figure out whether, and how, to try to wring concessions from affected parties, including factory workers, dealers and holders of the companies' debt. Without such concessions, the companies are likely to need cash infusions long into the future, congressional critics say.

The Bush administration can try to demand concessions upfront as a condition for making initial rescue loans. But it is unlikely Treasury can extract concessions from all the affected parties as part of a loan deal. A more effective way to gain those concessions likely would be for the government to put together some sort of prearranged bankruptcy agreement for one or more of the companies. Going to bankruptcy court would give the companies, and the government, more leverage, because creditors' legal and contractual rights are generally subject to being rewritten in bankruptcy. "The one thing that concerns us is a disorderly bankruptcy," a senior administration official said Sunday. "Every other option is open."

General Motors Corp. officials expressed optimism during the weekend that they could obtain some sort of bridge financing, and said there was no indication that the White House or Treasury would require a prepackaged bankruptcy. Chrysler LLC officials, meanwhile, were asking dealers, former executives, suppliers and employees to bombard the White House with emails urging government support. Forcing one or more of the companies to seek bankruptcy protection could tarnish the companies' reputations and discourage consumers from buying cars, some analysts say. As a result, the administration might simply provide the financing necessary to get the companies into the new year, while obtaining whatever concessions it can. That would leave it to the incoming Obama administration and new Congress to decide the next moves.

One possibility under consideration is to break the money into two or three short-term loans "sized on need and duration," said one bankruptcy professional familiar with the talks. Two people familiar with the situation said the government is also considering requiring any auto makers seeking aid to file for bankruptcy. Under such a scenario, the money would be used as so-called debtor-in-possession financing. Outside experts said such financing could require $50 billion or more for GM and Chrysler combined.

Bush feels heat over auto loan
President George W. Bush was on Sunday facing growing pressure from his own party to impose wage cuts and debt write-downs on the US’s troubled auto industry as conditions of the $14bn-$15bn emergency loan Detroit says it needs. Republicans have stepped up their calls for Mr Bush to go far beyond legislation that failed in Congress last week and set tough demands on General Motors and Chrysler for lower labour costs and a debt/equity exchange.

"The Bush administration has a historic opportunity over the next few days," Bob Corker, the Republican Senator who led the negotiations in the chamber last week, told Fox News. "The president has to decide: is he still running the White House or is the United Auto Workers?" Republican Senators last week scuttled legislation to lend Detroit $14bn, although the bill had been endorsed by the White House and backed by the House of Representatives. In response, the Bush administration announced it was unilaterally ready to provide funds to prevent what the White House said could be a "precipitous collapse" of the industry.

On Sunday, as the administration worked on the details of a loan, John Ensign, the Republican Senator from Nevada, insisted that the legislation as originally framed would not "have made the companies come out stronger again". The Treasury has signalled that while it expects to impose conditions in return for a loan, it may not replicate the precise conditions set out in the failed legislation. In contrast with recent financial interventions, which have sometimes been pulled together over a weekend, the Treasury is proceeding deliberately over the conditions of the loan.

In such circumstances, the White House has particular leverage, since any demands on the industry can be imposed as a condition of a loan rather than having to be negotiated with Congress. "I hope that if they choose not to do it through Congress but themselves, that they’ll put in place exactly the same concepts that we almost agreed to the other night," said Mr Corker, referring to negotiations between himself and Ron Gettelfinger, UAW president, that foundered over disagreements over cutting labour costs.

"That is, if the bond holders do not agree to taking 30 cents on the dollar by March the 15th, they have to file [for] bankruptcy. If labour and management cannot agree that they would be competitive [with the labour costs of foreign manufacturers in the US] by date-certain ... they will go into bankruptcy."

Auto Bailout's Hidden Danger
The key to any magic trick is to focus the audience's attention away from where the action is actually taking place. That is what Congress did in the failed auto bailout bill. Language in the proposed legislation seemed to uphold the rights of existing car-company creditors while also protecting any taxpayer funds used to prop up Detroit. In reality, the bill raised a chilling prospect for debt investors: that in extreme situations the government could upend the traditional pecking order of the bankruptcy process.

The result could be further instability in credit markets, which the government has been trying to thaw for more than a year. "If someone is thinking of providing a secured loan to another company, they can't ignore this development," said Mark Brodsky, head of Aurelius Capital, which focuses on distressed investments. "It introduces a tremendous amount of uncertainty." Creditors' rights became an issue in the proposed automotive bailout because the government planned to put its money first in line for repayment in the event of bankruptcy. That seems like a no-brainer for taxpayers. They clearly wouldn't want to shoulder losses before banks.

But such a move could contravene the way corporate debt structures work and possibly the U.S. Constitution since senior lenders have their debt secured against company assets. In response to opposition from the banks, legislators compromised in the bailout bill originally passed by the House of Representatives, but which appears to have died in the Senate. The new language ostensibly made any government loan subordinate to senior, secured lenders. Problem solved? Not quite. What the government gave with one hand, it took with the other. It also added in some extraordinary protections for any government loans.

These included a provision that, in the case of bankruptcy, the government would be exempt from a legal stay, which freezes creditor claims until the court divides up the assets. It also included language saying the government's loans couldn't be haircut, as often happens to debts in bankruptcy. These protections mean that in any bankruptcy, the government "would have a strong blocking position that is going to make them the dominant player," said Randy Picker, a professor at the University of Chicago Law School. The exemption from a stay in bankruptcy is especially significant, he adds, because it would let the government seize assets when everyone else has to stand put.

In effect, the language creates a new kind of debt and subordinates the senior, secured holders. That is a possible outcome debt investors now have to keep in mind when investing in industries the government may ultimately have to prop up. The financial crisis already has shaken the confidence of debt investors in everything from ratings to asset values on bank balance sheets. If the government wants to get markets working again, the last thing it needs to do is give these already skittish investors yet another reason to worry.

States’ Funds for Jobless Are Drying Up
With unemployment claims reaching their highest levels in decades, states are running out of money to pay benefits, and some are turning to the federal government for loans or increasing taxes on businesses to make the payments. Thirty states are at risk of having the funds that pay out unemployment benefits become insolvent over the next few months, according to the National Association of State Workforce Agencies. Funds in two states, Indiana and Michigan, have already dried up, and both states are borrowing from the federal government to make payments to the unemployed.

Unemployment taxes are collected by states from employers, but the rate varies from state to state per employee. In good times states build up trust funds so that when unemployment is high there is enough money to cover the requests for benefits, which are guaranteed by the federal government. "You don’t expect the loans to happen this early in a jobs slump," said Andrew Stettner, the deputy director of the National Employment Law Project, an advocacy organization for low-wage workers. "You would expect that the states should, even when they are not well prepared, to have savings."

The Labor Department said last week that initial applications for jobless benefits rose to 573,000, the highest reading since November 1982. It is recommended that states keep at least one year of peak-level benefits in their trusts, but many have not, and already some states are far worse off than others. Indiana’s unemployment trust fund went insolvent last month, and has borrowed twice from Washington since then — the first such loans to the state since 1983. It also expects to request an additional $330 million early next year. Michigan, which has been borrowing money from the federal government for the past few years to replenish its fund, is now $508.8 million in the hole and unable to repay it. Next month the state, where the unemployment rate is more than 9 percent, will begin levying a special "solvency tax" against some employers to replenish its trust fund.

California, New York, Ohio, Rhode Island and other states are inching toward insolvency as well, and may have to borrow from the federal government to get through at least the first quarter of 2009. In South Carolina, officials recently requested a $15 million line of credit. "Right now we have $40 million in our trust fund, and we are paying out around $11 million a week," said Allen Larson, deputy executive director for the unemployment insurance program at the South Carolina Employment Security Commission. "So we think it is going to be very close as to whether or not we can get through this year. We have never experienced anything like this."

Officials in New York said the state’s trust fund has about $314 million, compared with $595 million last year, and will most likely have to borrow from the federal government in January. The situation puts states, many of them facing huge deficits, in an even tighter vise. As more people lose their jobs, the revenue base that the benefits are drawn from shrinks, making it harder to pay claims. Adding to that burden is that states will eventually have to pay back what they borrow. Some states are worried about next year because the lion’s share of unemployment taxes are collected early in each year, and they are not sure the money will stretch through the end of the next year. The maximum amount of income the federal government can tax employers for each worker is $7,000. (The amount ranges from about $7,000 to about $25,000 for state taxes.)

"It is something that we are concerned about," said Kim Brannock, a spokeswoman for the Office of Employment and Training in Kentucky, where the unemployment trust fund balance now sits at $133 million, compared with $250 million a year ago. The fund has not borrowed money from the federal government since the 1980s. "At this point we are solvent," she said, "but we are monitoring the situation." States that come up short have the option of borrowing from the federal government, but if the loan is not paid back within the federal fiscal year, 4.7 percent interest is accrued, which cuts into states’ general funds. "With longer term solvency issues due to the sharp increase in unemployment, federal borrowing quickly becomes expensive," said Loree Levy, a spokeswoman for the Employment Development Department in California, which is already facing a multibillion dollar budget gap. "We are anticipating interest payments of $20 million in 2009-10 and if nothing is done to revise the revenue generation model the interest would be $150 million in 2010-11."

As such, they are then forced to raise taxes or cut services, or both. Robert Vincent, a spokesman for the Gtech Corporation, a technology company for the lottery industry based in Rhode Island, said, "Unemployment taxes are one of a number of taxes that make it difficult to do business here." In many cases, states that have kept unemployment tax rates artificially low — or in some instances decreased them — find themselves in the worst pickle now. Indiana legislators, for example, reduced the tax rates to businesses by 25 percent in 2001. "So, frankly, they created the perfect storm," said John Ruckelshaus, the deputy commissioner for the Indiana Department of Workforce Development. "The Legislature will have to go in and look at the whole unemployment trust find first thing when they begin their session."

At the same time payments have gone up in some states. To recalibrate the balance, several states are raising taxes on businesses — often through an automatic increase that is triggered when fund levels are endangered — to keep the unemployment checks flowing. An example is the Michigan solvency tax, which will be levied against employers whose workers have received more in benefits than the companies have contributed in unemployment insurance taxes, to the tune of $67.50 per employee. In Rhode Island, where the unemployment rate is 9.3 percent, the taxable wage base will go to $18,000 from $14,000 in 2009, the highest rate in a decade. "There is a possibility that we might be slightly under the funds we need come the end of the first quarter," said Raymond Filippone, the assistant director of income support at the Rhode Island Department of Labor and Training. The state has not borrowed from the federal government since 1980, he said.

"Many states have not raised that tax in years," said Scott Pattison, executive director of the National Association of State Budget Officers in Washington. "Some states have automatic triggers. But then of course you have businesses saying, ‘Whoa, you are raising taxes on me when we are having a tough time and it is a recession, too.’ " Still, some said they were thinking beyond the dollars. "In these times of financial stress every extra cost is a concern," said Linda Shelton, the spokeswoman for Lifespan, a large health care system in Rhode Island. "However there are many things that worry us even more. We are much more concerned about Rhode Island’s budget crisis, about rising unemployment, the rising number of uninsured and the continuing cuts to health care."

More Pain at Goldman And Morgan Stanley
Goldman Sachs Group Inc. and Morgan Stanley recently converted into bank-holding companies. Investors are about to find out that life as a bank is just as painful as when the pair were brokerage houses. The duo is scheduled to report fourth-quarter fiscal results this week; Goldman on Tuesday and Morgan Stanley on Wednesday. Analysts polled by Thomson Reuters predict Morgan Stanley is heading toward a loss of 37 cents a share and Goldman will log a loss of $3.50 a share. However, in the case of Goldman industry insiders have suggested the loss will be closer to $5 a share, or approximately $2 billion.

It was a tough quarter for all securities firms, as global equity markets plunged and investment banking slowed significantly. In September, Goldman and Morgan, whose stocks were under pressure in the wake of the collapse of Lehman Brothers Holdings Inc., converted into bank-holding companies. The move results in more regulatory oversight of the companies and allows them to use customer deposits to fund certain operations, something they couldn't do before. The move to bank status should bring more stability to the two over time.

Still, it was likely a rocky quarter for both. Goldman faces write-downs on the value of holdings for everything from private equity to commercial real estate. If analysts are right, this will be Goldman's first quarterly loss since it went public in 1999. One area that has given Goldman headaches in the quarter ended Nov. 28 is its "book" of so-called distressed investments. Over the years, Goldman has invested in things as varied as troubled auto loans in Thailand and struggling golf courses in Japan. This business of distressed investments was once a big profit center, but many assets have recently fallen in value, prompting write-downs.

Morgan isn't as exposed to private investments, but it too has exposure to beaten-down assets that took a further hit in October and November. In the third quarter, ended Aug. 31, for instance, it raised its net exposure to commercial real estate to $7.7 billion, up about 20% from the $6.4 billion of May 31. Commercial real-estate assets were hit hard in recent weeks. Overall, Morgan is expected to suffer mark-to-market losses of about $4 billion, including $1.4 billion in commercial mortgage-backed securities, $1 billion in principal investments and $700 million in residential mortgages, said Deutsche Bank analyst Mike Mayo in a report Dec. 1.

Ilargi: The US credit card industry is nothing but a loan shark racket. The "reforms" don't go nearly far enough. The industry should be forced to restitute all the ridiculous charges to customers over the past decade. And then vanish. That would be justice.

Banks and consumers brace for new credit card rules
The U.S. credit card industry, harshly criticized for imposing surprise fees and interest rate hikes on consumers, may face a day of reckoning on Thursday. The Federal Reserve is to vote on credit card reforms that may bring some relief to customers who face a variety of ways for being hit with late fees, universal defaults, shorter payment periods and confusing payment allocations for different balances. Credit card users likely also would see easier-to-read tables in their monthly statements as a result of the changes.

The new rules, which were proposed earlier this year, are expected to total some 1,000 pages. They need approval of the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration, which all are expected to act on Thursday. Consumer groups say practices of credit card companies blindside consumers and U.S. lawmakers have threatened legislation if regulators did not use their consumer protection powers to reform the industry.

With Democrats strengthening their control of the next Congress that convenes in January and the financial services sector in turmoil, credit card companies that resisted the changes increasingly have accepted them as inevitable. They have warned that interest rates charged on credit cards will rise for all borrowers and that borrowing limits may be reduce because of the changes. The industry maintains that credit cards provide a service to consumers with convenience and sometimes free loans. "The new rules will be a challenge to the business," said Peter Garuccio, director of public relations at the American Bankers Association trade group.

In 2007, Americans were using an estimated 694.4 billion credit cards with Visa, MasterCard, American Express and Discover logos, according to the Card Industry Directory. Banking regulators have been using focus groups to test the impact of changing credit card rules for the past couple of years and on Thursday are expected finalize some changes. They are expected to prohibit credit card companies from increasing rates at will, with some exceptions such as those that apply to people who fail to pay a bill within 30 days.

So-called universal default, which permits changing card terms if the borrower defaults on another bill such as utilities or a gym membership, also is expected to be banned. Double-cycle billing, in which card companies reach back to earlier billing cycles to help calculate interest charged in the current cycle, also is expected to be eliminated. With the U.S. economy in recession, the market that trades in credit card asset-backed securities faces increasing stress as more consumers fall behind on payments.

As delinquencies and charge-offs -- balances written off as uncollectible -- on credit cards rise, investors demand higher yield spreads for credit card-backed securities. The ABA represents the biggest issuers of Visa and MasterCard. Citigroup, Bank of America and JPMorgan Chase enjoyed almost 70 percent of the credit card market at the end of 2007, according to the Card Industry Directory.

Credit card reforms ‘to cost banks billions’
The US banking industry could lose billions of dollars in annual interest payments, according to a study that warns of credit card lenders raising prices after a regulatory overhaul. The Federal Reserve board will meet this week to finalise changes to rules governing the $970bn credit card business. Widely hailed by consumer groups as urgently needed reforms to protect borrowers, the changes could lead to the banking industry losing more than $10 billion in annual interest payments, says a study by the law firm Morrison & Foerster.

This could prompt credit card lenders to raise prices and tighten lending standards, reducing the availability of credit for US consumers. The proposed rules, which are expected to pass with only minor changes when the Fed meets on Thursday, will impose strict disclosure standards on credit card lenders and prohibit common pricing practices that have drawn fire for exposing borrowers to unforeseen costs. Consumer groups and lawmakers have welcomed efforts to shield borrowers from lending practices such as raising interest rates on existing balances and applying payments to lower interest balances first.

The proposed rules would also require lenders to give borrowers more time to pay their bills and more notice of changes to interest rates for future borrowing. The result might be that credit cards could become more expensive for all borrowers. By restricting credit card lenders’ ability to re-price loans for risky borrowers, lenders have warned that the new regulations are likely to prompt credit card issuers to raise interest rates, cut credit lines and reduce promotional offers to make up for lost revenue. Tighter lending standards could put credit cards out of reach for 45m consumers and reduce credit lines by $931 billion, according to Morrison & Foerster

European Banks Brace for Madoff Losses
European banks, including Spain's Grupo Santander SA and France's BNP Paribas, said Sunday their clients and shareholders face billions of euros of losses on investments with Bernard Madoff, underscoring the global reach of the alleged Ponzi scheme run by the veteran New York money manager. Santander, the euro-zone's largest bank by market value, said its clients had an exposure of €2.33 billion ($3.1 billion) to Mr. Madoff's investment funds, mainly through its Optimal Strategic US Equity fund. More than €2 billion belongs to institutional investors and international clients of its private-banking business, which provides services to wealthy individuals, it said. The remaining €320 million belongs to private-banking customers in Spain, where Santander is based.

BNP, France's largest bank by market value, said it could lose as much as €350 million as a result of the alleged fraud. The bank said it has no investment of its own in the hedge funds managed by Bernard Madoff Investment Services. BNP Paribas, however, said it is exposed to these funds through its trading business and lending to hedge funds that had invested in Mr. Madoff's funds. French peers Société Générale and Crédit Agricole both said their exposure is negligible, below €10 million. However, Natixis, France's fourth-largest bank, said its indirect net maximum exposure to Madoff was estimated at around €450 million.

The U.K.'s Royal Bank of Scotland Group PLC said it stands to lose about £400 million ($597.9 million) as a result of its exposure to hedge funds managed by Madoff. Man Group PLC, the world's largest publicly traded hedge-fund manager, said it has $360 million invested in two funds that are directly or indirectly sub-advised by Madoff Securities and for which Madoff Securities acts as broker-dealer executing the investment strategy. Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest financial group, said it faces losses of up to €300 million if Mr. Madoff's funds were found to be inexistent. Italy's UniCredit SpA said its exposure to Madoff is about €75 million and that its Dublin-based asset management Pioneer Investments is indirectly exposed to Mr. Madoff's funds via feeder funds.

The losses could prove particularly embarrassing for banks' private-banking businesses, which charge high fees to wealthy investors in return for what is supposed to be superior advice and due diligence. Most of the European banks' exposures were on client investments they managed, rather than on the banks' own balance sheets. It's not yet clear how much, if anything, investors in Madoff's funds may be able to recover. Santander, which has so far survived the global financial crisis relatively unscathed, said it had hired Mr. Madoff's firm to execute the Optimal fund's investments. Santander vowed to "undertake the legal actions which may be needed to defend the interests of investors." The bank said its own direct exposure was only €17 million.

Exposures to Madoff's funds have also emerged among a growing number of smaller European private banks. In a letter published on its website, the Swiss private bank Reichmuth & Co. said its clients had an exposure of some 385 million Swiss francs to Madoff funds. The bank said Reichmuth Matterhorn, a fund that invests in other hedge funds, faced a potential loss of about 8.6% on its exposure to Madoff. That amount represented about 3.5% of the 11 billion Swiss francs Reichmuth & Co. has under management, the bank said. Another European bank, Geneva-based Union Bancaire Privée, has investment vehicles designed for wealthy individuals that invested in Mr. Madoff's funds, according to a person familiar with the matter. A UBP spokesman said the bank's clients have "limited" losses related to Madoff, but wouldn't be more specific or comment further.

Through private-banking networks, EIM Group, the European investment manager with about $11 billion in assets, had a number of non-U.S. investors into funds overseen by Mr. Madoff, according to people familiar with the matter. Overall, EIM assets at risk are less than 2% of what it manages, which means losses could top $200 million, according to a person familiar with the firm. Swiss bank UBS AG has "very limited" direct exposure to the Madoff funds, according to a person familiar with the matter. But the Zurich-based bank's wealth-management arm helped clients in Europe and possibly elsewhere invest with Mr. Madoff, according to investment professionals in Europe who spoke with some of these clients.

UBS is currently reviewing its clients' exposure to Mr. Madoff's funds, according to the person familiar with the matter. The person said the funds weren't on UBS's list of "recommended" investments for its U.S. clients, but that they may have been among the firm's suggested investments for overseas clients. The Madoff debacle could pose another black eye for UBS's giant wealth-management business, which has suffered an exodus of clients as the bank has suffered heavy losses and become the target of a U.S. investigation into alleged tax evasion by its U.S. clients.

Madoff and the Global Economy
For years, Bernie Madoff, all-around nice guy, pulled billions of dollars of foreign and domestic money into his investment fund. His lure? He promised the implausible combination of good returns and low risk—and people believed him. Painfully, the allegations of fraud surrounding the Madoff affair are also exposing the fundamental fallacy of the global economy. Like Madoff's trusting investors, the rest of the world was willing to assume that the U.S. economy as a whole was a low-risk, good-return investment. This belief drove the entire structure of global trade and finance for the past 10 years. And when the subprime crisis showed this assumption of low risk to be false, the financial crisis resulted.

Consider this: Since the Asian financial crisis of 1997-98, the rest of the world has been willing to lend money to finance the U.S.'s huge and growing trade deficit. Not just small amounts of cash either: over the past decade, the U.S. borrowed a cumulative total of $5 trillion from foreigners at relatively low interest rates. Without this flow of easy money into the U.S., globalization in its current form would not have been possible. The U.S. was the consumer of last resort, absorbing cars from Germany and Japan, electronics from Taiwan and Korea, and clothes and furniture from China. The earth was flat, and why not? Pluck a laptop from Taiwan and pay for it with a home equity loan, which—if you trace back the connections—was at least partly funded with foreign money, too.

The big unanswered question, for years, was why this money flow persisted. Why the heck were foreign investors willing to lend the U.S. such large amounts of money on such good terms? Economists and journalists spun out hypothesis after hypothesis (we'll see more below), but there was no agreement on why. Now we see what happened. Wall Street firms—big operators like Lehman and relatively small fish like Madoff—told foreign investors they could put their money into the U.S.—the world's safest economy—and still make decent returns. Madoff, of course, appears to have lied. He allegedly ran an investment scam that has resulted in billions of dollars of losses reported around the world, including $4 billion in Switzerland and $3 billion in Spain.

But it wasn't simply Madoff. The Wall Street boom of recent years was built, as far as I can figure out, on selling the low-risk story to foreign investors. In fact, most of the financial innovations of recent years were about making investments in the U.S. 'safer' for foreign investors. The enormous growth of foreign exchange derivatives enabled those abroad to protect their U.S. investments from exchange-rate fluctuations. The sudden increase in credit default swaps could be used to protect foreign bond investors from problems with individual countries. And collateralized debt obligations, which could be divided into high-risk and low-risk pieces, increased the supply of low-risk investments to be sold outside the U.S.

This low-risk, good-return story attracted investors from around the world. One example: Lehman sold $2 billion in 'mini-bonds' to Hong Kong investors, including many retirees. However, the low-risk, good-return story simply wasn't true, for two key reasons: First, the U.S. economy was supposed to be on the cutting edge of innovation. Innovation through technological change, by nature, is a very risky activity. Sometimes it pays off and sometimes it doesn't. If the investment in innovation pays off, the economy booms, as it did during the second half of the 1990s. But innovation has fallen short in recent years. Biotech and nanotech still have not come to fruition, and alternative energy is moving slowly. As a result, the U.S. economy has fallen short of expectations. The income isn't there, and the debt just piles up.

The second reason why the low-risk, good-return story wasn't true: the breakdown of regulation. And that's where we come back to the alleged Madoff scam. His was no complicated global securitization, based on black-box rocket science. Instead, it appears to be a good old-fashioned Ponzi scheme, enabled by a lack of government supervision. What comes next? The fallacy is punctured. Globalization will be seen as what it is—a game with risks that can't be wished away. And U.S. prosperity will depend on the success or failure of its ability to innovate—not its ability to tell an implausible story to foreign investors.

Losses in Madoff Case Spread
Investigators dug through financial records at Bernard Madoff's investment firm as the list of victims of his alleged Ponzi scheme widened to include real-estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, Sen. Frank Lautenberg and a charity of movie director Steven Spielberg. The scandal reverberated around the world, with banks including Spain's Grupo Santander and France's BNP Paribas saying on Sunday that their clients and shareholders together face billions of euros of losses. Monday morning in Tokyo, Nomura Holdings Inc. said its exposure to investments with Mr. Madoff totaled 27.5 billion yen ($302 million). A spokesman described the firm's potential losses as "limited."

At Mr. Madoff's office in midtown Manhattan, guards have been positioned 24 hours a day. Investigators from the Federal Bureau of Investigation, Securities and Exchange Commission and the Financial Industry Regulatory Authority are trying to identify if any assets remain, a person familiar with the matter said. The office has been sealed since Thursday, when the 70-year-old Mr. Madoff was arrested and, according to authorities, admitted he had carried out a $50 billion Ponzi scheme. Mr. Madoff's track record of steady investment returns attracted high-profile clients to invest billions of dollars over the course of decades.

One question facing investigators and regulators, who missed a stream of red flags over more than 20 years, is how Mr. Madoff could have gotten away with a scheme this big, and for so long. In a sign of the pain that investors are feeling, some are rushing to raise cash. In the wealthy Florida enclave of Palm Beach, four multimillion-dollar condos at Two Breakers Row, a peach-colored complex just north of the landmark Breakers hotel, on Friday and Saturday were put up for sale by owners who had invested with Mr. Madoff, said Nadine House, a prominent local real-estate agent.

Bernard L. Madoff Investment Securities, founded by Mr. Madoff in 1960, has long handled stock trades for banks and investment houses. In recent years, the firm has also expanded its business managing money for wealthy individuals and institutions -- and it's that operation now swept up in scandal. Despite common ownership, the two businesses were largely kept separate, a person familiar with the matter said. As soon as Monday, the Securities Investor Protection Corp., a nonprofit funded by the securities industry to aid investors affected by failed firms, could start the process of liquidating the Madoff brokerage firm, people familiar with the matter say. SIPC covers some losses up to $500,000 per customer in limited cases, but it's unclear the extent to which SIPC will cover the investment adviser accounts.

A person familiar with the firm says employees of the trading arm have been told to come to work Monday while the firm's receiver attempts to find out whether the trading operation was truly separate from its investment-advisory business, as Mr. Madoff's sons told the FBI it was. If it is determined that the trading arm was independent, it might represent a valuable asset whose sale could benefit investors, that person said. Mr. Zuckerman, the chairman of real-estate firm Boston Properties and owner of the New York Daily News and U.S. News & World Report, had significant exposure through a fund that invested substantially all of its assets with Mr. Madoff, according to a person familiar with his investments. A spokesman for Mr. Zuckerman declined to comment.

The Spielberg charity, the Wunderkinder Foundation, in the past appears to have invested a significant portion of its assets with Mr. Madoff, based on regulatory filings. In 2006, the Madoff firm accounted for roughly 70% of the foundation's interest and dividend income, according to regulatory filings. A representative of Mr. Spielberg confirmed that the foundation has suffered losses on its investments with the Madoff firm. He said he didn't know the size of the losses and couldn't comment further, including on whether Mr. Spielberg had any of his own money invested with the Madoff firm. Jewish schools and charities have been particularly hard hit by losses that government authorities estimated last week at $50 billion. Among them: the Elie Wiesel Foundation for Humanity, founded by the famed Holocaust survivor and writer, according to two people familiar with the organization's investments.

Another investor was New Jersey's Sen. Lautenberg and his family foundation. "Sen. Lautenberg was an investor in Bernard Madoff's investment fund, primarily in the form of his family's charitable foundation," said an aide to the senator. The Lautenberg foundation has donated to the Breast Cancer Research Foundation, Catholic Relief Services and the New Jersey Performing Arts Center. Much of Mr. Madoff's assets appear to have come from big banks and investment advisers that steer clients' money into investments such as the accounts that Mr. Madoff managed. These banks and advisers now face monetary losses and angry clients, and perhaps lawsuits challenging whether they vetted Mr. Madoff's services sufficiently.

Santander, one of Europe's largest banks by market value, said its clients held €2.33 billion ($3.11 billion) in the Madoff investment funds, mainly through its Optimal Strategic US Equity fund. More than €2 billion belongs to institutional investors and international clients of its private-banking business, which provides services to wealthy individuals, it said. The remaining €320 million belongs to private-banking customers in Spain, where Santander is based. BNP, France's biggest bank by market value, said it could lose as much as €350 million as a result of the alleged fraud. The bank said it has no investment of its own in the accounts and funds managed by Mr. Madoff's firm. BNP Paribas, however, said it is exposed through its trading business and lending to hedge funds that had invested in Mr. Madoff's funds.

Swiss private bank Reichmuth & Co. said its clients had an exposure of some 385 million Swiss francs to Madoff funds. The bank said Reichmuth Matterhorn, a fund that invests in other hedge funds, faced a potential loss of about 8.6% on its exposure to Madoff funds. That amount represented about 3.5% of the 11 billion Swiss francs ($9.3 billion) Reichmuth & Co. has under management, the bank said. Through private-banking networks, EIM Group, the European investment manager with about $11 billion in assets, had a number of non-U.S. investors in funds overseen by Mr. Madoff, according to people familiar with the matter. Overall, EIM assets at risk are less than 2% of what it manages, according to a person familiar with the firm.
Swiss bank UBS AG has "very limited" direct exposure to the Madoff funds, according to a person familiar with the matter. But the Zurich-based bank's wealth-management arm helped clients in Europe and possibly elsewhere invest with Mr. Madoff, according to investment professionals in Europe who spoke with some of these clients.

Lawyers were gathering clients and trying to determine how to recover lost investments. Scott Berman, a New York lawyer, has been retained by investors in investment-management firms Tremont Capital Management and Fairfield Greenwich Advisors, which were heavily invested in Mr. Madoff's firm. Among the issues Mr. Berman says he is looking into: whether the investment-management firms told clients that their investments were diversified, when in fact they were primarily only in Mr. Madoff's funds. He is also looking into whether the firms failed to perform adequate due diligence on Mr. Madoff's business. "Tremont was victimized by not just a person but also a scheme and a complex process designed to deceive individuals and organizations, managers and analysts -- including some of the largest and sophisticated financial institutions in the world," said Tremont spokesman Montieth Illingworth.

A Fairfield spokesman said in a statement that investors in Fairfield Sentry, the fund with the most exposure to Mr. Madoff's firm, "knew that Madoff was executing broker, and they understood they were getting a portfolio operated by Madoff." Marc Kasowitz, a lawyer for Fairfield, said in a statement that the firm "conducted extensive due diligence and risk monitoring in its investments and dealings" with Mr. Madoff's firm. Government investigators are trying to determine whether other individuals at Mr. Madoff's firm had any involvement in the alleged fraud, according to people familiar with the inquiry.

According to the criminal complaint, the scheme came to light when Mr. Madoff told two people about it last week, and they contacted a lawyer and then the authorities. According to people familiar with the matter, those two people were Mr. Madoff's sons. Several other family members have worked at the firm, including Mr. Madoff's brother and niece. None have been implicated in the case. Mr. Madoff's two sons, Mark and Andrew, both worked on the trading side of the firm. Mark Madoff told at least one client of the trading business in recent years that the money-management operation didn't impact how customer orders were handled in trading, according to a person familiar with the matter. In recent days, he said he believed the money-management operation traded through European counterparties, not the Madoff trading firm, this person added.

Banks and charities scrambled to assess the damage. The Elie Wiesel foundation, whose stated mission is combating "indifference, intolerance and injustice," reported roughly $10 million in assets at the end of 2007, according to tax records. Emails and telephone calls to its treasurer Elisha Weisel, a managing director at Goldman Sachs, weren't returned.

Investors and others exposed to losses include:
• Fred Wilpon, owner of New York Mets
• Norman Braman, former owner of Philadelphia Eagles
• Carl Shapiro, founder and former chairman of apparel company Kay Windsor Inc., and his wife
• Sen. Frank Lautenberg and his family foundation
• Leonard Feinstein, co-founder of retailer Bed Bath & Beyond
• J. Ezra Merkin, GMAC chairman
• The Elie Wiesel Foundation for Humanity
• Yeshiva University
• Grupo Santander
• BNP Paribas SA
• Nomura Holdings
• Union Bancaire Privée
• Neue Privat Bank
• EIM Group
• Fairfield Greenwich Advisors Tremont Capital Management
• Maxam Capital Management Ascot Partners

OPEC Races to Get Ahead of Declining Oil Demand
The world's big crude-oil exporters are caught in a downward race against falling demand as they scramble to keep prices from slipping still lower in the face of a weakening world economy. At a pivotal summit in Algeria this week, ministers from the Organization of Petroleum Exporting Countries could move to cut as much as two million barrels a day from production, having already agreed to slice a similar amount since prices began to drop in late July. OPEC furnishes about 40% of the world's daily consumption of about 86 million barrels. OPEC's moves to rein in production have been drowned out by a cascade of gloomy economic data from around the world. Oil stockpiles are building rapidly from China to the U.S. Gulf Coast as the global economic slowdown continues to eat away at demand, which just months ago still looked to be increasing at an unstoppable rate.

The challenge now facing OPEC is whether the cartel -- after weeks of muddled messages -- can send a strong and credible-enough signal to arrest the steep drop in crude-oil prices, which have tumbled 68% since the record high in July. In November, OPEC members shaved their output by about 825,000 barrels a day, according to the International Energy Agency. Some analysts say members have cut much more since August. The price of U.S. benchmark crude, which closed at $46.28 a barrel Friday on the New York Mercantile Exchange, has dropped by nearly a quarter since OPEC met last month in Cairo to debate its next steps. The most ominous news for OPEC is China's sudden slowdown, which was raised vividly last week with reports that China's exports fell in November for the first time in seven years.

The world's second-biggest oil consumer after the U.S., China is facing its slowest economic growth rate in almost 20 years as financial problems in the U.S. and elsewhere diminish demand for Chinese exports and force manufacturers there to ax capacity and energy use. A lingering question is whether any non-OPEC nations such as Norway and Russia will help OPEC and cut their own output. Russian President Dmitry Medvedev said Thursday that his country, the world's biggest oil producer outside OPEC, was considering whether to lower its oil output to support crude prices and to seek OPEC membership. Russian Deputy Prime Minister Igor Sechin and Energy Minister Sergey Shmatko are scheduled to attend the OPEC meeting. But how meaningful any announced cut by Russia would be is a question mark. Because its oil output is falling naturally because of underinvestment, Russia already is, in effect, helping OPEC without actually turning off any taps. Any reduction from Russia, depending on the size, could simply be repackaging naturally declining output as a "cut."

Some economists now compare OPEC's plight to that of the early 1980s, when soaring crude prices helped spur a recession in the U.S. and Europe. Oil demand fell sharply, as did oil prices. It took nearly 15 years for U.S. consumption to return to 1980 levels. Many forecasters now predict that global oil demand next year will be the weakest in more than two decades, another sharp turnaround from expectations earlier in the year. In January, the U.S. Energy Department's forecasting arm put global oil demand next year at just over 89 million barrels a day. It now estimates that demand in 2009 will be 3.7 million barrels a day less than that.

Energy economist Philip Verleger has a much darker view, arguing in a recent report that oil demand next year could prove so weak that OPEC in the next year will need to trim at least five million barrels a day from production to avoid oversupply. The cartel has hinted it would announce substantial cuts this week, but ministers have offered few specifics. In Cairo last month, Saudi oil minister Ali Naimi said the "fair price" of oil should be around $75 a barrel -- a target many analysts contend may be out of reach next year unless the economy turns around markedly. "We're looking for OPEC to cut by at least another one million barrels a day early next year in order to have an impact on prices," said Michael Wittner, senior oil analyst at Société Générale in London. "And they could have to do more depending on what demand does."

Saudi Arabia, accounting for more than one-third of OPEC's total production, will be forced to shoulder most of the cutting burden, as has usually been the case, Mr. Wittner said. But getting the cuts just right to account for falling demand will be tricky. The economic downturn is hurting capital expenditure and forcing the shelving of a slew of drilling operations, not just in the U.S. but also in some OPEC countries. Oppenheimer & Co. senior oil analyst Fadel Gheit estimates world oil supply is likely to drop by three million to five million barrels a day in 2009, due to OPEC cuts and smaller companies slashing production, compared with a decline of just one million to two million barrels a day in global oil demand.

This scenario of overtightening supply relative to demand would reduce global oil inventories a record 10% to 30%, pushing crude prices significantly higher later in 2009, Mr. Gheit said. While many analysts contend oil prices will remain low next year, and possibly through 2010, the market continues to anticipate higher prices, with contracts for oil to be delivered several years in the future selling for significantly higher prices than oil for delivery early next year.

UK house prices to crash 30%, Barclays CEO warns
House prices will crash a further 15 per cent next year, the boss of high street bank Barclays has admitted. In a remarkably candid interview, John Varley, the group chief executive of Barclays, warned that Britain is only mid way through the house price slump - meaning the total fall could be as much as 30 per cent. He described as "madness" the previous lending policies' of banks, in which 100 per cent mortgages and beyond were approved.

Mr Varley admitted that banks were partly to blame for the current recession, saying it was time they showed "humility" and said "sorry" to customers for their role in the sharp economic downturn. He said banks needed "to take their share of responsibility". It is the first time that the chief executive of a major bank has spoken so openly in the current climate about the role lenders have played in the sharp turnaround in home owners' fortunes. The admission comes on the back of the Government giving banks billions of pounds of financial support following the worst banking crisis since 1929. Barclays did not receive government funding.

Mr Varley's comments, made to Jeff Randall, the Daily Telegraph's editor-at-large and to be shown on Sky News this evening, are a dire warning to families across Britain who have already seen the value of their savings and homes plummet amid the credit crisis. They could dissuade potential buyers from seeking loans or moving home. Jonathan Cornell, of mortgage brokers Hamptons Mortgages, said Mr Varley's comments could aggravate the situation further. The average home in Britain has already dropped £36,000 in value since August last year, according to the country's biggest lenders Halifax. Its latest figures show the average value is now just £163,605.

A further 15 per cent fall would see the average value of a home crash by an additional £25,000 to less than £140,000 based on these figures. Mr Varley said: "Our view was that from the top to the bottom, you would see a fall of something like 25 to 30 per cent. I suspect we're about halfway through that at the moment. I mean that slowdown, the negative house price inflation started in 2007, it's accelerated in 2008. "We're probably about halfway through that period, so in other words we've got another 10 to 15 per cent to fall between now and the end of next year. That would be our assessment."

The house price crash has already left many homeowners in negative equity, where the value of their home is worth less than their mortgage. In the early 1990s, when house prices fell by 10.6 per cent over a prolonged period, 1.8 million home owners had to stay put or face losing thousands when they sold up. The borrowers who are most vulnerable are those who bought a home with a loan of at least 100 per cent of the value of their property. At the height of the property boom, when banks were more willing to lend, loans were available at 125 per cent of the value of a property. Asked for his reaction to the practice, Mr Varley said: "Looking back on it, madness."

Mortgage experts said that lenders would need to offer a wider range of deals to borrowers before the property market showed any signs of recovery. Melanie Bien, of mortgage brokers Savills Private Finance, said: "Those hoping that the bottom of the housing market had already been reached will have to wait a bit longer with around another 10 per cent drop in prices in 2009 forecast. "It will then be a while before prices recover but once the bottom has been reached, potential buyers will once again show an interest in purchasing. All we need then is more choice of product at 90 per cent loan-to-value with better rates than are currently available to help first-time buyers in particular onto the housing ladder."

Home sellers have been forced to lower their asking prices dramatically in the past month to achieve a sale. Around £5,000 was knocked off the average price of a home in the past month, according to property website Rightmove. It said the average value of a home in Britain dropped from £222,979 in November to £217,808 this month, a fall of 2.3 per cent. House prices are now 10.2 per cent down from May this year. The figures are higher than those produced by Halifax as they are based on asking prices rather than completions. Rightmove forecasts that house prices will fall an extra 10 per cent by the end of next year. However, its survey also suggested that the sale prices actually being achieved by estate agents is already down 25 per cent since May.

Bank of England warns British households struggling with debt
The Bank of England is to warn that continued instability in the global financial system has pushed more UK households into "negative equity" and left many struggling to cope with their debts. In the Bank's Quarterly Bulletin, chief economist Spencer Dale said that a key issue facing the Monetary Policy Committee was how the financial situation of households has changed over the past year, with falling disposable incomes and diminishing savings. Real incomes had been squeezed by higher food and energy prices, and pressure was compounded by higher borrowing costs for some mortgage holders and lack of credit availability.

"Many households thought that credit had become harder to access over the course of the year, which had caused some to lower their spending. And more households were finding their debt to be a burden to them," he said. However, a survey carried out by NMG Research on behalf of the Bank shortly after the collapse of Lehman Brothers on September 15 showed that despite greater pressure on finances, only 3pc of the 2,500 households surveyed admitted they had fallen behind on bill or debt payment, well below the peak levels recorded during the last recession in the early 1990s.

People most likely to be in that position were those who rented their homes and those with high loan-to-value mortgages and the biggest reason cited was higher-than-expected household bills. Almost 80pc of those with a mortgage thought the value of their home had fallen over the past year, while one-third thought that the value had fallen by more than 10pc. NMG Research estimates that around 4pc of mortgages were in negative equity – when the value of the mortgage is more than the value of the house – in late September.

The Bulletin catalogued a series of nasty "shocks" which started with Lehman and filtered through into the wider economy. The Bank admitted that while measures initiated by authorities around the world since October helped to restore some stability, conditions remained "far from normal." The future for house prices was uncertain, it said.

The true extent of Britain's debt
How much is Britain’s true national debt? Gordon Brown says 37% of GDP, the ONS says 43% of GDP – but this is just government debt. The reason Britain is in so much trouble is that our corporate and household debts are huge. It is the combination that makes us such a credit liability – but no one has ever put together a combination. Until now.

Michael Saunders from CitiGroup has calculated ‘external debt’ – ie, what Britain owes the rest of the world. It is not 40% but 400% of GDP, the highest in the G7 by some margin. The next down, France, is 176%. America, flagellating itself for blowing such a debt bubble, is just 100%. Japan is about half America. The below graph shows ‘external debt’ – both in mid-2008, and five years ago.

G7 Countries - external debt/GDP ratios, 2003Q2 - 2008 Q2

Narrow it down to short-term debt, ie IOUs that have to be paid back within a year, and the picture grows even bleaker. It adds up to 300% of GDP – six times that of France whose loans are long-term. Saunders says, with some understatement, that this makes “the UK economy and financial system highly vulnerable when, as now, global banking and capital flows dries up.” Here is the picture, narrowed down to short- term debt (ie, due by next Christmas).

G7 Countries - ratios of short-term external debt/GDP, 2003Q2 - 2008 Q2

I believe that an IMF bailout is highly unlikely. But the highly unlikely has been happening rather a lot lately. There is a fairly clear apocalypse scenario emerging: that Britain becomes reliant on new borrowing, that the Arabs/Chinese get sick of buying IOU notes in devaluing sterling, and refuse to buy more debt at anything other than loan shark rates. Then Britain has to go to the IMF. For a country with as much short-term debt requirements as Britain, there is nothing fantastical about this.

Financing Britain is an issue. Our creditors will be looking at Britain with its 400% debt/GDP ratio and ask how this island country with its mammoth trade deficit is going to pay the money back, especially if its Prime Minister prescribes more debt as the solution. But this crisis has taught us to pay heed to the highly unlikely, to watch out for the Black Swans. It could come in the form of UK banks being unable to raise capital from the markets, from liquidity issues in UK gilts, whatever.

P.S. To answer CoffeeHousers' query, this is "external debt" by the IMF definition, which is gross. (And does not include contingent liability, just debt). One must take into account that Britain is likely to have proportionately greater foreign assets whose value would be amplified by sterling's plunge. But how much greater? I'll keep hunting. Every crisis is different, and each has its own metrics. It was our concentration on the metrics of the last crisis (inflation) that blinded so many to the causes of this crisis (debt).

ECB chief calls for stability as Ireland joins wave of bail-outs
European policy makers must not tear up the rule book when launching emergency rescue packages, the European Central Bank president, Jean-Claude Trichet, says today. Fiscal indiscipline could threaten already fragile economic confidence and increase capital market nervousness about governments' funding needs, Trichet warns. His defence of the European Union's stability and growth pact, which sets limits on public sector deficits and debt, comes in an interview with the Financial Times today, and will be seen as supporting attacks by German government ministers on Britain's strategy of increasing public borrowing and spending to counter the economic downturn.

However, the Irish government last night last night announced that it was launching a €10bn (£9bn) fund to recapitalise the republic's financial institutions, along the lines of bail-outs already undertaken in the UK. The finance department in Dublin said the state may use money from the national pension reserve fund for the scheme, which it said would help boost the flow of funds to the beleaguered economy and limit the impact of financial market upset on businesses and individuals. Existing shareholders and private investors will also be asked to contribute. "The state's investment may take the form of preference shares and/or ordinary shares, and the state may where appropriate participate on an underwriting basis. "In principle, existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the government."

Trichet argues that the stability pact does offer flexibility to some states, those with stronger finances. But, he says: "We would destroy confidence if we blew up the stability and growth pact." He accepts that the global financial market crisis has posed a serious threat to industrialised economies, but says: "We cannot afford in future to put the concept of the market economy at risk as we did … The fragility, not only of global finance but of the global economy itself, is something that we should reflect on."

Policy makers have a duty "to eliminate as completely as possible, all the inbuilt elements in global finance that are amplifying the booms and the busts". The ECB has been slower than many central banks to cut interest rates, making 1.75 percentage point reductions in the past two months . Trichet defends such caution by claiming that after the bursting of the dotcom bubble there was "a degree of excessive pessimism". He says central banks came under pressure then to lower official borrowing costs — only for low interest rates to help fuel an asset bubble.

Ilargi: Right. Krugman. Think he's still sitting in a bar in Stockholm? He's said some silly things lately, if you ask me. Today, the fake Nobelista -along with the Telegraph's Evans-Pritchard- takes aim at those silly stubborn Germans, who apparently do everything wrong. Their biggest no-no is that they are unwilling to pump hundreds of billions of euros into rescue plans, either for the EU as a whole or for their own economy.

Since the Americans -and the British- DO pump those kinds of amounts into their economy, I’m concluding that Krugman thinks his own country has made the right choice. Problem is, from where I'm sitting, that is not working. At all. So now I'm wondering what made Krugman get up from his barstool to write today's column. Chiding a government for NOT doing what does NOT work looks, eh, silly.

Perhaps there is a possibility that Steinbrück and Merkel will be proven wrong sometime in the future, and Bernanke, Paulson and Gordon Brown win one of those fake Nobels for saving their countries and being right. But I have my doubts, and it certainly has not been proven to date. The only thing the US and UK have achieved so far is that their taxpayers have been burdened with a lot more debt. Germany never had a housing boom, which means most of its citizens are much less indebted than those of neighbouring countries, or the US and UK. But now they have to get into debt anyway, to save the nations that did eat from the tree??

Unless Krugman admist he has a political agenda to push, I'd suggest he get back to his barstool and tone it down a few notches.

European Crass Warfare
So here’s the situation: the economy is facing its worst slump in decades. The usual response to an economic downturn, cutting interest rates, isn’t working. Large-scale government aid looks like the only way to end the economic nosedive. But there’s a problem: conservative politicians, clinging to an out-of-date ideology - and, perhaps, betting (wrongly) that their constituents are relatively well positioned to ride out the storm - are standing in the way of action. No, I’m not talking about Bob Corker, the Senator from Nissan - I mean Tennessee - and his fellow Republicans, who torpedoed last week’s attempt to buy some time for the U.S. auto industry. (Why was the plan blocked? An e-mail message circulated among Senate Republicans declared that denying the auto industry a loan was an opportunity for Republicans to “take their first shot against organized labor.”)

I am, instead, talking about Angela Merkel, the German chancellor, and her economic officials, who have become the biggest obstacles to a much-needed European rescue plan. The European economic mess isn’t getting very much attention here, because we’re understandably focused on our own problems. But the world’s other economic superpower — America and the European Union have roughly the same G.D.P. — is arguably in as much trouble as we are. The most acute problems are on Europe’s periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina; Ukraine is the new Indonesia. But the pain has also reached the big economies of Western Europe: Britain, France, Italy and, the biggest of all, Germany.

As in the United States, monetary policy — cutting interest rates in an effort to perk up the economy — is rapidly reaching its limit. That leaves, as the only way to avert the worst slump since the Great Depression, the aggressive use of fiscal policy: increasing spending or cutting taxes to boost demand. Right now everyone sees the need for a large, pan-European fiscal stimulus. Everyone, that is, except the Germans. Mrs. Merkel has become Frau Nein: if there is to be a rescue of the European economy, she wants no part of it, telling a party meeting that “we’re not going to participate in this senseless race for billions.”

Last week Peer Steinbrück, Mrs. Merkel’s finance minister, went even further. Not content with refusing to develop a serious stimulus plan for his own country, he denounced the plans of other European nations. He accused Britain, in particular, of engaging in “crass Keynesianism.” Germany’s leaders seem to believe that their own economy is in good shape, and in no need of major help. They’re almost certainly wrong about that. The really bad thing, however, isn’t their misjudgment of their own situation; it’s the way Germany’s opposition is preventing a common European approach to the economic crisis.

To understand the problem, think of what would happen if, say, New Jersey were to attempt to boost its economy through tax cuts or public works, without this state-level stimulus being part of a nationwide program. Clearly, much of the stimulus would “leak” away to neighboring states, so that New Jersey would end up with all of the debt while other states got many if not most of the jobs. Individual European countries are in much the same situation. Any one government acting unilaterally faces the strong possibility that it will run up a lot of debt without creating much domestic employment.

For the European economy as a whole, however, this kind of leakage is much less of a problem: two-thirds of the average European Union member’s imports come from other European nations, so that the continent as a whole is no more import-dependent than the United States. This means that a coordinated stimulus effort, in which each country counts on its neighbors to match its own efforts, would offer much more bang for the euro than individual, uncoordinated efforts. But you can’t have a coordinated European effort if Europe’s biggest economy not only refuses to go along, but heaps scorn on its neighbors’ attempts to contain the crisis.

Germany’s big Nein won’t last forever. Last week Ifo, a highly respected research institute, warned that Germany will soon be facing its worst economic crisis since the 1940s. If and when this happens, Mrs. Merkel and her ministers will surely reconsider their position. But in Europe, as in the United States, the issue is time. Across the world, economies are sinking fast, while we wait for someone, anyone, to offer an effective policy response. How much damage will be done before that response finally comes?

Bullying Germany gets a free ride with its beggar-thy-neighbour policy
For the first time in my life, I am starting to feel twinges of anti-German sentiment. This does not come naturally. My father insisted on German au pair girls during my childhood as his gesture towards post-War comity. I later did a stint at Mainz University dabbling in Kant (great) and Hegel (a fraud). But even Teutophiles who think that Germany has played an enlightened role for 60 years are losing patience with the antics of the finance ministry and Bundesbank, and with the dictatorial turn in Berlin's EU strategy. Put bluntly, Germany is pursuing a beggar-thy-neighbour policy. It is not fulfilling its responsibilities as the world's top exporter and pivotal power of Europe's monetary union. It is leaching off global demand, even as it patronizes Anglo-Saxons, Latins, and Slavs.

No doubt binge debtors in the Anglosphere are much to blame for this crisis. But Germany rode the boom too. It made those Porsches and BMWs driven by the new rich. Its banks are among the most leveraged in the world. Nor should we not forget that the European Central Bank set interest rates at recklessly low levels early this decade to help Germany out of a slump. Can this be separated from the property bubbles in Club Med, Holland, Ireland, Scandinavia, and Eastern Europe now causing such grief? Within the EMU, Germany has gained a competitive edge against France, Italy, and Spain for year after year by screwing down wages. In pre-euro days the North-South rift did not matter. The D-Mark revalued. Balance was restored. In monetary union it is toxic.

Germany now has a current account surplus of 7pc of GDP. It is hollowing the industrial core of Latin Europe. Yes, Club Med needs to pull its socks up, but the flip side of the coin is that Germany is in breach of EMU's implicit contract. The rules of the game are that surplus countries should boost demand. The Gold Standard collapsed in the early 1930s because they – then the US and France – refused to do so. The burden of adjustment fell on deficit states, who had to tighten yet harder. The downward spiral dragged everybody into depression. Germany and China are today's violators. Their trade surpluses over the last 12 months have been $283bn and $279bn, respectively. They are exporting excess capacity.

Peer Steinbrück, Germany's finance minister, seems in no mood to yield, preferring to mock the "crass Keynesianism" of the British. Nobel Laureate Paul Krugman was so disgusted that he broke away from his Stockholm banquet to pen The Economic Consequences of Herr Steinbrück. "The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There's a huge multiplier effect at work; it is multiplying the impact of German boneheadedness," he said.

Meanwhile, the Bundesbank has been doing its bit for depression. Germany's two ECB members – caught in a 1970s time-warp – orchestrated the mad rate rise in July. They are now trying to head off cuts in January, saying the ECB cannot risk using up its ammo. Even Switzerland's uber-hawks have ditched that doctrine. Worst of all is Germany's nefast role in dredging up the EU Constitution (Lisbon Treaty) after it had been rejected by French and Dutch voters. Having made one blunder, they are now making another by refusing to accept the Irish verdict as well. Why are they so maniacal about this? Because the treaty establishes German primacy in the EU's voting structure. This is raw national interest – camouflaged, of course.

So Brian Cowen – already the most reviled Taoiseach since the creation of the Irish state – is bludgeoned into a second vote. This is what now passes for EU statecraft. A tactical case can be made, that fear will induce Irish voters to change their minds as GDP contracts by 4pc next year. Even if that proves correct, will it convince anybody that the European Project is advancing with democratic assent? What if the Irish vote 'No' again? Will Germany carry out its threat to "suspend" them from the EU, and thereby risk a final revulsion against Europe and the unravelling of the post-War order? One notes that Germany has acquired the taste for bullying small nations. Mr Steinbrück threatened to "take a whip" to Switzerland. The sooner Germans take a whip to Mr Steinbrück and all he stands for, the better. Otherwise the rest of us will have to start examining our options.

Japan’s Manufacturing Confidence Index Drops Sharply
A key measure of business confidence released on Monday foreshadowed more bad news ahead for the Japanese economy, which is already in recession and struggling to maintain competitiveness in the face of a steadily-appreciating currency. The Tankan survey of leading manufacturers suffered its sharpest fall in decades, and is now at its lowest level in seven years, reported the Bank of Japan, which compiles the closely-watched quarterly survey.

The deterioration in sentiment was in line with what economists had expected. Japan, the United States and much of Europe have slid into recession as a global credit crunch hampered consumers and companies’ willingness and ability to invest. However, the speed of the fall in Japan’s sentiment — the index for large manufacturers plunged to minus 24 from minus 3 in the September survey — also highlights how rapidly the crisis has swept into the Asia-Pacific region in recent months. The region’s export-oriented economies, like Japan’s, have seen demand for cars, consumer goods and IT evaporate in their key U.S. and European export markets, with weak demand at home unable to compensate.

Japanese exporters have suffered the added burden of a steadily appreciating currency, which makes their goods more expensive in the United States and Europe. The yen last Friday hit a 13-year high against the dollar, and was trading at 90.85 to the dollar on Monday morning. A year ago, it was at 111.60. Japan’s stock market shrugged off the survey results, and rose Monday morning amid hopes that the struggling U.S. auto industry may receive a lifeline. The Nikkei 225 gained 5.2 percent. Other markets in the region rose as well. The Kospi in South Korea registered a 4.9 percent advance, Hong Kong’s Hang Seng was up 3.1 percent and the S&P/ASX 200 in Australia rose 2.3 percent.

Nevertheless, the overall outlook is gloomy, and Monday’s Tankan survey ensured that Japanese companies will tighten their belts further as the extent of the downturn becomes apparent. Sony last week announced it would shed 8,000 jobs at its ailing consumer electronics unit, which has suffered especially badly from shoppers’ unwillingness to open their wallets for anything but the bare essentials. Further job losses are likely, economists say — and this in turn will depress consumer sentiment in Japan, already at a record low, even further.

The government has announced a series of stimulus measures in a bid to stimulate the economy, most recently with a beefed-up package on Friday, and the Bank of Japan has cut its already low interest rates to 0.3 percent. This leaves the BOJ with little leeway to cut rates further it its next policy meeting on Thursday and Friday.

Third of Hedge Funds Face 'Wipe Out' After Slump
Almost a third of hedge funds will shut or merge after the $1.5 trillion industry posted its worst ever performance this year, according to IGS Group, which advises hedge funds on raising money. "The failure rate is going to go up, the closure rate is going up, and the merger rate is going up," IGS Chief Executive Officer John Godden said in an interview in London. "It’s going to be a 30 percent wipe out." The number of hedge funds more than tripled in the last decade to a record 10,233 at the end of June, according to Chicago-based Hedge Fund Research Inc. That number will likely tumble after funds dropped 18 percent in the year through November, the worst year since HFR started its Fund Weighted Composite Index in 1990.

IGS will team up with Grisons Peak, a financial advisory firm to start Alternative Investment Management Banking, a firm that will advise hedge fund managers on mergers. Godden and Paul Sullivan, a partner at Grisons Peak, will oversee the venture, with each firm contributing three to four employees. The firm aims to advise on six to eight transactions next year. Hedge funds typically charge a 2 percent management fee and keep 20 percent of profits, while funds-of-hedge-funds typically charge 1 percent and 10 percent of profits. Profits are usually based on high-water marks that could take years to reach again.

Many funds may have been "cavalier" about actually charging management fees, giving rebates to large investors or distributors on the expectation the fund manager would more than make up the shortfall through performance fees, said Godden. Prime brokers, the banks that provide loans and handle fund administration, are cutting off firms they don’t expect to be profitable clients, Godden added. Hedge funds will need to manage at least $300 million in assets, up from $100 million a year ago to stay in business, Sullivan said. Funds of hedge funds, in particular, are likely to combine, Godden added. There are roughly three funds-of-funds for every single hedge fund, up from one to seven in 2001, according HFR.

"And even one to seven was too many," said Godden. "It’s a very, very crowded space with way too much overlap. The only thing that would threaten it was a change to the economic environment which is what we’ve got." Godden and Sullivan said they expect more transactions such as fund-of-fund Pacific Alternative Asset Management Co.’s decision this month to hire the investment team of KBC Alpha Asset Management, adding $700 million in client assets to the $9 billion it already oversaw.

U.S. Drilling Activity Off Sharply
As oil and gas prices fall, drilling activity in the U.S. is slowing more than expected, battering shares of drilling companies, hurting economies in energy-producing states and sowing the seeds for supply shortages when the economy recovers. In its weekly accounting, Baker Hughes Inc. reported Friday that the number of drilling rigs working in the U.S. had fallen to 1,790, down 12% from the September peak and down 2% from the same time last year. It was just the second time the weekly report reflected a year-over-year decline in the past five years. Most industry analysts now expect hundreds more rigs to fall idle by the middle of next year. Some industry experts suggest a drop of as many as 1,000 rigs, which would represent a 50% decline from the peak set in September. That would leave fewer rigs running than at any time since 2003.

The slowdown is being driven by the collapse in energy prices, which has made many higher-cost oil and gas fields uneconomic while companies have less cash to pursue even those wells that are still worth drilling. At the same time, the credit crisis has made it harder for companies to borrow money, further constraining spending. "This whole thing is happening more at videogame speed than real life," said Bob Simpson, chairman of oil and gas producer XTO Energy Inc. The worsening crisis has meant that many producers that began cutting their drilling budgets in September or October, when prices began falling, have been forced to cut again, in some cases multiple times. Chesapeake Energy Corp., the largest U.S. gas producer, has reduced its drilling budget four times since September, and has said it will do so again if necessary. "These things take time to play out, and we have been reacting for the last four months to worsening credit conditions," Chesapeake chief executive Aubrey McClendon said.

The sudden slowdown is sending shock waves through economies in Texas, Oklahoma and other states that had been until recently relatively insulated from the national economic slowdown by their strong energy sectors. Onshore drilling rigs directly employ around 20 workers, and create dozens more jobs for everyone from equipment manufacturers and truck drivers to geologists, engineers and accountants. "Those are high-paying jobs and that's high-impact activity," said Karr Ingham, a petroleum economist based in Amarillo, Texas. "It's had a lot to do with economic growth in Texas. ...Now the tables are going to be turned a little bit." The drop-off in activity is also bad news for oilfield service providers, especially drilling companies such as Patterson-UTI Energy Inc. and Nabors Industries Ltd.

Not everywhere will be equally affected. Oil prices have fallen faster than natural-gas prices, and oil projects tend to be more expensive, so most analysts expect them to be canceled first. Older, less productive fields in Oklahoma, West Texas and elsewhere will see activity decline faster than newer, less expensive fields. If prices remain at current levels or fall further, though, the effects will be felt across the U.S. industry. Oil prices of "$40 to $60, that pretty much doesn't work in the U.S.," said Bill Herbert, an analyst with energy-focused investment bank Simmons & Co. Most production in the U.S. is natural gas, not oil, and industry analysts are counting on the drilling slowdown to ease a gas glut that has helped drive down prices. That hasn't happened yet, as the slowing economy has cut into demand for electricity and for the products from diapers to fertilizer that are made using natural gas.

At the same time, recently discovered gas fields are producing at an unprecedented rate. "We are asking Santa for fewer drilling rigs, less supply and a bit more demand," investment bank Tudor Pickering Holt & Co. wrote in a research note Friday. Industry executives, however, warn that restoring production takes longer than cutting it. That means the drop-off in drilling activity could lead to supply shortages -- and rapidly rising prices -- when the economy recovers. "This sets up, I kind of think, the mother of all price recoveries," Chesapeake's Mr. McClendon said.

New York Gov. Paterson to Propose $4 Billion in Taxes and Fees to Close Deficit
Gov. David A. Paterson will propose a $4 billion package of taxes and fees on a range of items, from sugary soft drinks made by Coca-Cola and Pepsi to luxury items like furs and boats, when he unveils his plan to close a deficit that has ballooned to $15 billion, people with knowledge of the plan said on Sunday. Higher taxes will also be imposed on health insurers and a sales tax exemption on clothing and footwear under $115 will be eliminated, though the administration will propose a two-week holiday for goods under $500, under the budget the governor will introduce on Tuesday.

A number of fees will be increased, with users of the Department of Motor Vehicles and the state parks bearing much of the burden, people with knowledge of the plan said. Tuition at the State University of New York and the City University of New York will also be increased. The governor’s executive budget, which is subject to approval by the Legislature, is sure to touch off months of protests from an array of interest groups, as well as battles with lawmakers. One element that Mr. Paterson left out of his budget was any broad-based tax increase affecting people in higher income brackets, a measure that some in Albany believed would be part of the plan. But ever since taking over as the state’s chief executive in March, Mr. Paterson has steadfastly opposed raising income taxes as a way to prop up the state’s worsening finances.

Mr. Paterson said his plan is meant to fill a budget gap totaling $15 billion for the rest of the current fiscal year, which ends March 31, and the following fiscal year. State law requires that the budget be balanced. Mr. Paterson’s plan relies most heavily on cuts — roughly $9 billion, with the largest amounts aimed at state aid to education and Medicaid. The governor will also propose rollbacks of benefits for state workers, a measure that will almost certainly lead to a standoff with powerful public-employee unions. The administration is also expected to propose eliminating the controversial Empire Zone program, which offers tax incentives for business development across the state, but has often been criticized for failing to deliver promised job growth.

"It is just prohibitive and it’s painful to have to make some of these decisions," Mr. Paterson said at an appearance on Sunday night in Manhattan. "I’ve been forced to veto legislation that I’ve sponsored." He called tuition increases at state schools "a very hard step to take." "We’re going to try to remediate that with some other services to the colleges and universities, but when a person whose whole career has basically been for the advocacy of higher education, such as myself, has to take that kind of step, it gives you an idea of what kind of a number $15 billion is." Trying to put the best face on what will be a bleak budget year, the Paterson administration gave a limited budget briefing on Sunday in which administration officials discussed a small number of social initiatives whose financing would be increased. Several of the initiatives were aimed at helping the poor through what is certain to be a trying economic future.

"The nation and the state are in midst of the greatest economic crisis we have endured since the Great Depression, and there are families struggling to provide basic needs for their loved ones," the governor said in a statement on Sunday. The most significant move was a proposed increase to welfare grants for the first time in 18 years, though more money would not be made available until the beginning of 2010. The administration plans to seek a 30 percent increase over three years, with the eventual cost of the increase exceeding $100 million a year. The basic welfare grant would eventually rise to $387 a month from $291 for a family of three, or $3,492 per year, where it has remained since 1990. That the administration was pushing the measure foretold how little money was available this year; the increased welfare grants will have little impact on the budget for the coming fiscal year, which ends in March 2010.

The administration also said it would expand a state-financed health insurance program, Family Health Plus, to cover 19- and 20-year-olds who no longer live with their parents. Enrolling in such programs would also be made easier by, among other things, ending requirements for face-to-face interviews. Those who provided details about Mr. Paterson’s plan did so on condition of anonymity because the plan has yet to be made public. In describing the fees on nondiet soft drinks, those familiar with Mr. Paterson’s plan called them an "obesity tax." Expecting a protracted battle with lawmakers and interest groups, the governor is introducing his budget more than a month earlier than is traditional. Assembly leaders were expected to push for broader-based tax increases to offset cuts to social programs, and spent much of last year advocating tax increases for the richest New Yorkers.

One of the biggest obstacles Mr. Paterson will have to overcome is a Senate narrowly divided between Democrats and Republicans that has yet to settle on a leader for next year, amid continued wrangling among Democrats. Hospitals, nursing homes and other health care centers, already pinched by the first round of budget cuts earlier this year, are bracing for a fight. "I expect it to be an unmitigated disaster for health care institutions in New York," Kenneth E. Raske, president of the Greater New York Hospital Association, said in an interview on Friday. "I expect we will see a significant downsizing of the health care delivery system, and it’s at a time when people can least afford the cutbacks."

Layoffs among health care workers are seen as likely. A recent survey by the Health Care Association of New York State found that 18 percent of hospitals are considering letting employees go to cope with their financial problems, 30 percent are weighing service cuts and 68 percent are contemplating scaling back improvement projects. "Our hospital system is already short nurses, lab technicians and physicians," said Dan Sisto, president of the health care association, a hospital advocacy group. "So it’s very difficult to cut back on a labor force that is already complaining about being shorthanded." Education advocates offered a similarly bleak view.

"We understand there will be cuts," Randi Weingarten, president of the United Federation of Teachers, said on Friday. "The real question is, will there be cuts, not just cuts against growth, but real cuts that will turn back the clock?" Billy Easton, executive director of the Alliance for Quality Education, an advocacy group, agreed. "School districts now have to plan that they’re not going to get the money that’s due to them." Education advocates are particularly concerned that the depth of the expected cuts will risk core educational programs and not just extracurricular activities, which are often the first to be slashed when budgets tighten. "It takes a lot to help make sure there’s programs for kids," Ms. Weingarten said, "but it takes very little to have this whole thing collapse."

Ilargi: People flocking to churches is relatively harmless on most cases. But hard times also see them gather in all sorts of extremism, policial, religious, alcohol and so on.

Bad Times Draw Bigger Crowds to Churches
The sudden crush of worshipers packing the small evangelical Shelter Rock Church in Manhasset, N.Y. — a Long Island hamlet of yacht clubs and hedge fund managers — forced the pastor to set up an overflow room with closed-circuit TV and 100 folding chairs, which have been filled for six Sundays straight. In Seattle, the Mars Hill Church, one of the fastest-growing evangelical churches in the country, grew to 7,000 members this fall, up 1,000 in a year. At the Life Christian Church in West Orange, N.J., prayer requests have doubled — almost all of them aimed at getting or keeping jobs.

Like evangelical churches around the country, the three churches have enjoyed steady growth over the last decade. But since September, pastors nationwide say they have seen such a burst of new interest that they find themselves contending with powerful conflicting emotions — deep empathy and quiet excitement — as they re-encounter an old piece of religious lore: Bad times are good for evangelical churches. "It’s a wonderful time, a great evangelistic opportunity for us," said the Rev. A. R. Bernard, founder and senior pastor of the Christian Cultural Center in Brooklyn, New York’s largest evangelical congregation, where regulars are arriving earlier to get a seat. "When people are shaken to the core, it can open doors."

Nationwide, congregations large and small are presenting programs of practical advice for people in fiscal straits — from a homegrown series on "Financial Peace" at a Midtown Manhattan church called the Journey, to the "Good Sense" program developed at the 20,000-member Willow Creek Community Church in South Barrington, Ill., and now offered at churches all over the country. Many ministers have for the moment jettisoned standard sermons on marriage and the Beatitudes to preach instead about the theological meaning of the downturn. The Jehovah’s Witnesses, who moved much of their door-to-door evangelizing to the night shift 10 years ago because so few people were home during the day, returned to daylight witnessing this year. "People are out of work, and they are answering the door," said a spokesman, J. R. Brown.

Mr. Bernard plans to start 100 prayer groups next year, using a model conceived by the megachurch pastor Rick Warren, to "foster spiritual dialogue in these times" in small gatherings around the city. A recent spot check of some large Roman Catholic parishes and mainline Protestant churches around the nation indicated attendance increases there, too. But they were nowhere near as striking as those reported by congregations describing themselves as evangelical, a term generally applied to churches that stress the literal authority of Scripture and the importance of personal conversion, or being "born again." Part of the evangelicals’ new excitement is rooted in a communal belief that the big Christian revivals of the 19th century, known as the second and third Great Awakenings, were touched off by economic panics. Historians of religion do not buy it, but the notion "has always lived in the lore of evangelism," said Tony Carnes, a sociologist who studies religion.

A study last year may lend some credence to the legend. In "Praying for Recession: The Business Cycle and Protestant Religiosity in the United States," David Beckworth, an assistant professor of economics at Texas State University, looked at long-established trend lines showing the growth of evangelical congregations and the decline of mainline churches and found a more telling detail: During each recession cycle between 1968 and 2004, the rate of growth in evangelical churches jumped by 50 percent. By comparison, mainline Protestant churches continued their decline during recessions, though a bit more slowly. The little-noticed study began receiving attention from some preachers in September, when the stock market began its free fall. With the swelling attendance they were seeing, and a sense that worldwide calamities come along only once in an evangelist’s lifetime, the study has encouraged some to think big.

"I found it very exciting, and I called up that fellow to tell him so," said the Rev. Don MacKintosh, a Seventh Day Adventist televangelist in California who contacted Dr. Beckworth a few weeks ago after hearing word of his paper from another preacher. "We need to leverage this moment, because every Christian revival in this country’s history has come off a period of rampant greed and fear. That’s what we’re in today — the time of fear and greed." Frank O’Neill, 54, a manager who lost his job at Morgan Stanley this year, said the "humbling experience" of unemployment made him cast about for a more personal relationship with God than he was able to find in the Catholicism of his youth. In joining the Shelter Rock Church on Long Island, he said, he found a deeper sense of "God’s authority over everything — I feel him walking with me."

The sense of historic moment is underscored especially for evangelicals in New York who celebrated the 150th anniversary last year of the Fulton Street Prayer Revival, one of the major religious resurgences in America. Also known as the Businessmen’s Revival, it started during the Panic of 1857 with a noon prayer meeting among traders and financiers in Manhattan’s financial district. Over the next few years, it led to tens of thousands of conversions in the United States, and inspired the volunteerism movement behind the founding of the Salvation Army, said the Rev. McKenzie Pier, president of the New York City Leadership Center, an evangelical pastors’ group that marked the anniversary with a three-day conference at the Hilton New York. "The conditions of the Businessmen’s Revival bear great similarities to what’s going on today," he said. "People are losing a lot of money."

But why the evangelical churches seem to thrive especially in hard times is a Rorschach test of perspective. For some evangelicals, the answer is obvious. "We have the greatest product on earth," said the Rev. Steve Tomlinson, senior pastor of the Shelter Rock Church. Dr. Beckworth, a macroeconomist, posited another theory: though expanding demographically since becoming the nation’s largest religious group in the 1990s, evangelicals as a whole still tend to be less affluent than members of mainline churches, and therefore depend on their church communities more during tough times, for material as well as spiritual support. In good times, he said, they are more likely to work on Sundays, which may explain a slower rate of growth among evangelical churches in nonrecession years.

Msgr. Thomas McSweeney, who writes columns for Catholic publications and appears on MSNBC as a religion consultant, said the growth is fed by evangelicals’ flexibility: "Their tradition allows them to do things from the pulpit we don’t do — like ‘Hey! I need somebody to take Mrs. McSweeney to the doctor on Tuesday,’ or ‘We need volunteers at the soup kitchen tomorrow.’ " In a cascading financial crisis, he said, a pastor can discard a sermon prescribed by the liturgical calendar and directly address the anxiety in the air. "I know a lot of you are feeling pain today," he said, as if speaking from the pulpit. "And we’re going to do something about that." But a recession also means fewer dollars in the collection basket. Few evangelical churches have endowments to compare with the older mainline Protestant congregations.

"We are at the front end of a $10 million building program," said the Rev. Terry Smith, pastor of the Life Christian Church in West Orange, N.J. "Am I worried about that? Yes. But right now, I’m more worried about my congregation." A husband and wife, he said, were both fired the same day from Goldman Sachs; another man inherited the workload of four co-workers who were let go, and expects to be the next to leave. "Having the conversations I’m having," Mr. Smith said, "it’s hard to think about anything else." At the Shelter Rock Church, many newcomers have been invited by members who knew they had recently lost jobs. On a recent Sunday, new faces included a hedge fund manager and an investment banker, both laid off, who were friends of Steve Leondis, a cheerful business executive who has been a church member for four years. The two newcomers, both Catholics, declined to be interviewed, but Mr. Leondis said they agreed to attend Shelter Rock to hear Mr. Tomlinson’s sermon series, "Faith in Unstable Times."

"They wanted something that pertained to them," he said, "some comfort that pertained to their situations." Mr. Tomlinson and his staff in Manhasset and at a satellite church in nearby Syosset have recently discussed hiring an executive pastor to take over administrative work, so they can spend more time pastoring. "There are a lot of walking wounded in this town," he said.


Anonymous said...

No one owns a congregation, we serve them. John

Jan Steinman said...

In Auto Bailout's Hidden Danger, it's implied that government being in "first position" for repayment is something new and unusual.

As any business person who has contemplated bankruptcy knows well, the government has always been in first place, when it comes to taxes. Your payroll taxes come out first, before any lender or shareholder gets a cent.

So simply structure these bailout loans as taxes, and the government gets in first position without any change in the established order.

(Not that I want the auto industry to get any bail-out money that way! I think the government should use that money to tender offers for railway and public transportation, and let the auto companies bid on those offers. Give them the money, and I'll bet they'll simply produce more unwanted SUVs.)

Anonymous said...

I read last weekend an interesting article in the FT. It was an interview with a Chinese dissident/writer over a meal. His name is Ma Jian and he speaks no English despite living in London for many years and having a British wife!

I think it ties in with the opinions expressed on TAE. I put the article for you on one of my sites as it is behind a paywall.

"This is a painful kind of existence"

Anonymous said...

Ilargi,i just stumbled across your website you must live a depressing life!! to write about negative news and Bull@#$% news stories all day long from accross the world. you know that old saying dont always belive what you read,i belive that world governments are communist behind the seen they just want to put a fear factor into eveybody's lives for there own advantages

Unknown said...

I like the analogy of a loaded freight train speeding towards a brick wall (although of course it had better be a granite wall of considerable thickness to be of any consequence!), both dreadful and electrifying in metaphor. It makes me think of the time I had the privilege of being at the helm of a loaded freight train myself, many miles in length, travelling across a good part of Saskatchewan. It's difficult to describe the awesome sense of being at the head of such a ponderous, momentum-laden beast. Rail crossings are anxious affairs, as farmers playing beat-the-train are a perennial tragedy in that province.

The idea of being at the helm of such a thing and knowing there is an abrupt stop coming just ahead is a truly frightening prospect. I don't envy national leaders of China or any other nation right now. Rather, I pity them.

Anonymous said...

Anon @ 1223

Bahaahahahaha! Of course! The commies are behind all this bad news. We should'a known.

Frank said...

Jan Steinman,

And providers of financing for the bankruptcy have always been in front of pre-bankruptcy creditors. This is just the banksters trying to steal a little more from the taxpayers.

Anonymous said...

Irrationality will not let us heal the process of all this mayhem.

The primitive response of a mechanised body to shock or loss is for the body to produce 'growth' (i.e. China), and this growth is at such a large rate that it becomes a cancer and the 'body' enters into turmoil and a terminal fate.

Rationalisation will help, and may end up becoming as Ilargi suggests - people helping each other - but the rulers of this world can't finish a cycle and, ultimately,armageddon will happen.

I hope Illargi is correct.

Ilargi said...

"I like the analogy of a loaded freight train speeding towards a brick wallI like the analogy of a loaded freight train speeding towards a brick wall...."

Yeah, it's appropriate, like the oceanliner I talked about last week. I try to convey the fact that the Chinese economy has enormous "forward momentum", and that is what puts it at so much risk. It's not only stopping it that takes a lot of energy, slowing it down does as well.

Only weeks ago we posted stuff here that talked of slowing down to a 5% growth rate as being untenable for China. It's already at 5.4% now, and falling fast going into 2009, with predictions for 0%, and even claims that the country is already there.

This after years of 12-15% growth rates. Imagine how industries have invested with those rates in mind, and how much of that can't be paid back. The Achilles heel of the Chinese financial system has been, for a long time, the amount of bad loans carry on their books. A lot more will be added soon. There are stories of tens of thousands of factories closing these days. Eerie.

Bigelow said...

Learn real church history:

“This beautifully crafted film is an in-depth look at the witch-hunts that swept through Europe just a few hundred years ago. False accusations and trials led to massive torture and burnings at the stake, and ultimately to the destruction of an organic way of life. The film advances the theory that widespread violence against women and the neglect of our environment today can be traced back to those times.” --The Burning Times, National Film Board of Canada

The Burning Times Documentary - Part 1

Ilargi said...

"Jan Steinman said...
In Auto Bailout's Hidden Danger, it's implied that government being in "first position" for repayment is something new and unusual."

I think the author talks about the fact that the bail-out money is the new factor, not just any money owed to the government. This may mean for creditors, including banks, that they get sidelined at the last minute. Depending on a number of factors, it's possible that if GM gets $10 billion, and spends or reserves $5 billion for instance for legal costs, senior creditors may risk getting $5 billion less than they would otherwise. Shady territory.

Anonymous said...


Ambrose Evans-Pritchard, author of the "Bullying Germany" article above, is taking a beating in the comments section over on the Daily Telegraph.

Most people commenting would be happy to have Steinbrück as their finance minister. Brown and Darling are savaged.

Pretty much my feelings as well.


Anonymous said...

Ilargi, Forgive me for cross linking to another blog, but I just returned from China and I have posted my impressions here:

A Dragon on Winter's Eve

Summary, my first hand look at China echoes yours and Prof. Pettis' conclusions - asking China to adjust so quickly is very problematic.

Anonymous said...

It is a bit rich of Evans-Pritchard to complain that Steinbrück is patronising, when British economists and Gordon Brown himself have done nothing but lecture continental Europeans for more than a decade.

I also find this dogmatic support for unlimited bail-outs, fiscal give-aways and zero interest rates quite disturbing. But then any dogmatism is disturbing.

Houyhnhnm said...

Anonymous said...

>[I] beli[e]ve that world governments are >[C]ommunist. {B]ehind the [scene] they just >want to put a fear factor into eveybody's lives >for [their] own advantages[.]

I always suspected George Bush et al were closet Communists--the type reminiscent of Stalin.

Anonymous said...

Watched John Fords' classic, The Grapes of Wrath, last night and found it stunningly heart-breaking. For those not familiar with it, it's a depression-era tale written by John Steinbeck about Oklahoma sharecroppers kicked off the land they had worked for generations. They drive to California to find work, only to find rich growers paying starvation wages--and labor camps patrolled by thugs. The family disintegrates--and the final scene in the book (not the movie) is a woman who after having a stillborn child, tries to save the life of a starving man by breast-feeding him. (The movie ends on the lighter theme that 'people will endure....')

The book was banned and burned when it came out because it seemed to promote a socialist agenda and present California growers in an unfavorable light. Steinbeck reports he toned down his descriptions of the horrendous life in the camps to make the book more palatable. I recommend the movie (and book) to anyone interested in a full-frontal portrayal of a family who loses everything in a world turned against them.

Anonymous said...

'Pettis puts his fingers on all the most painful spots...'

And, maybe too fine a point. I see China in the catbird seat:

Command economy.
The developed world including us, in less than a month, will trot out a new team that is guaranteed to waste a few trillion committing the same nonsense the Fuhrer (Roosevelt)
did in '33. Jobs, Jobs, Jobs. Once more, but slowly this time; the toxic crap must unravel at pace with the fraudster derivatives.
Chinese savings rates approach 80%.
United States: -5%-15%.
National attitudes.
China: Harmony
U.S. : Arrogance
The U.S. while it occupies most of this hemisphere via world bank and IMF slots, may fine arm twisting during a collapse or depression a tough sell.
China should enjoy econ regional cooperation looking forward.

These are a few just for giggles.

Ilargi said...

"National attitudes
China: Harmony
U.S. : Arrogance"

Here's hoping you're an aspiring comedian.

ex VRWC said...

China - Harmony

No. The only harmony in China has been the pursuit of the almighty dollar (RMB), Unfortunately, this as a means of unity will soon be a sad memory for them.

I don't like to think about whats next, but they do have a capacity for surviving turmoil there. But, no, they need to find themselves before they become the 'wave of the future'.

Greenpa said...

Ilargi: "China: Harmony
U.S. : Arrogance"

Here's hoping you're an aspiring comedian."

What?? Next you'll tell me that you don't believe all Native Americans are Noble Savages!

Everybody knows those inscrutable Celestials are like, really into Tao, and Zen, and stuff. And T-bills.

Ilargi said...

"What?? Next you'll tell me that you don't believe all Native Americans are Noble Savages!

Everybody knows those inscrutable Celestials are like, really into Tao, and Zen, and stuff. And T-bills."

Don't take it personal, but I thought the other guy was funnier.

Anonymous said...

Ilargi, Stomeleigh,
What would happen if the US defaults on debt? How does this affect the USD and other currencies etc?

Unknown said...

I was speaking with a guy on Saturday, who is married to a Chinese woman and has spent quite a bit of time in country.
One of his interesting comments was that Mao was a brilliant general, but a lousy government leader. His idealistic policies did not translate to quality of life for the people.
On the other hand, Deng has adopted policies that have improved the living conditions for many people. However they have not always got it right.
An example with the new dams recently contructed, the villagers were moved from the fertile valleys about to be flooded up onto the hillsides. The problem though was the soils was barren up there and exposed to wind-storms. The result these people dispersed to other areas, often cities.
These people won't have a farm to go back to, if they were dependant on one of the 10,000's of closed factories.

Re Chinese harmony - yes it is a target principal, but can also be translated as 'submission to the will of the ruling government'. Anyone thinking differently is liable for severe penalty.

. said...

China will choose war, both internal and external. Thanks largely to the bias towards sons and the single child policy female infanticide has left the country with a surplus of forty million men. 3% of the population unattached but wishing to be is as bad as the situation the Romans faced when 5% of their population was 'barbarian'.

The ignition spark will be the economic collapse but then it'll take off. Taiwan is the obvious first target, but what will the U.S. and Japan do?

Scary days in the East China Sea await us ...

Anonymous said...

"Taiwan is the obvious first target, but what will the U.S. and Japan do?"

Nothing, of course. There has never been the slightest possibility that the U.S. would risk nuclear war over Taiwan, and what is Japan going to do about it, catapult plasma TVs across the China Sea? Taiwan is and always has been entirely on its own. Here's hoping the folks in Taiwan realize that.

Unknown said...

I agree on Taiwan, but it could be reasonably bloodless from a military standpoint. Relations between China & Taiwan have eased recently, and it may be more of an 'offer they can't refuse' rather than outright invasion.

That way they will keep the US & Japan somewhat out of it.

I also agree on the gender imbalance, but not sure of the timing or their most likely targets.

Regarding potential conflicts elsewhere, I had this same discussion last night. Biggest threats could be;
1. North Korea v South Korea
2. Pakistan v India (nuclear powers)
3. Indonesia v Papua (or Western Australia)
4. Somalia into neighbouring countries.

Where-ever it happens you can bet that Russia will supply arms to one side, and the US to the other side. This will keep their war industries rolling and push oil price up. The winner on oil will be Russia.

Stoneleigh said...

Iowa Boy,

I completely agree - a huge surplus of unattached, and unattachable, young men is always a recipe for war. When Europe had a surplus of younger sons and didn't want to subdivide the great estates, they whipped them up into a religious fervour and sent them off on the Crusades.

Stoneleigh said...


Russia's oil supplies are as depleted as those of the US. They peaked at least 20 years ago. Their gas supplies are in better shape, fortunately for Europe, but the monolithic Soviet-era pipeline infrastructure is crumbling, leaking huge amounts of methane into the atmosphere. Russia's long-term energy future is not a rosy as people generally think.

. said...

@kerrysl agree re: N./S. Korea with North Korean implosion, India/Pakistan with Pakistani implosion, but Somalia?

Puntland and Somalialand are all but independent of the south and the rump Somalia has all it can do to make mischief in its own borders. Ethiopia will produce an entire barrel of whoop ass if they start messing up cross border ... don't let that embarrassing retreat to Baidoa fool you.

If you want to envision trouble in the horn of Africa take a look at the Eritreans getting military aide from Iran ... that'll be another major seaway with Iranian missiles and naval forces choking it if they so choose.

Unknown said...

Hi Stoneleigh,
I don't deny any of that however with their existing production they need a higher price for it to be profitable. A war anywhere could be the easiest way to achieve that.

Of course, I would hope not, but one thing I guess the 20th century taught us is that after all this time we have not yet learnt how to live together. The wars of the 20th century, I think resulted in more deaths than all the other 19 centuries put together.

I could be wrong on that, but I think it is close.

Stoneleigh said...

Anyone interested in a fascinating first-hand account of modern Chinese history would do well to read Jung Chang's remarkable book Wild Swans - Three Daughters of China. It's about the lives and times of her grandmother (a concubine to a warlord) her mother (a communist revolutionary) and herself (an erstwhile Red Guard and Mao devotee-turned-critic who now lives in London). Her accounts of the Great Leap Forward and the Cultural Revolution are simply heartbreaking.

Unknown said...

I have been reading TAE daily since early Sept, and first off I would like to say kudos to I&S for all the hard work, top notch analysis, and excellent writing that go into this site. I will be making a donation as soon as Christmas is over and I figure out what I can afford. (Its a frugal, no credit card Christmas). I have read alot here recently about overproduction (the big three, China etc.). There is an article in the New Internationalist about how overcapacity is the natural bugbear of a captalist system and the rise of "finacialism" is a response to it.

I would be interested any feedback/analysis on this. Also on a personal note, I just returned from Fort Mcmurray where the market is flooded with people trying to sell there $650k homes (nothing is selling), and a welder I know was laid off and went to Edmonton to find work. What an incredible change from 6 months ago, when there were multiple (above asking price) offers on any property for sale, and being a welder was considered the most gold plated, bulletproof occupation in town. The bloom is definitley off the rose.........

The Lizard said...

ric:"Steinbeck reports he toned down his descriptions of the horrendous life in the camps to make the book more palatable. I recommend the movie (and book) to anyone interested in a full-frontal portrayal of a family who loses everything in a world turned against them."

Seconded. The Nobel Peace and Literature Prize seems sometimes to be awarded as backhanded commentary about the social darwinism of American society. But Steinbeck's prize was "nobly" earned.

Great art may issue from these times as well.

Stoneleigh said...


All the oil producing countries have large holes in their budgets and will over-produce where possible to make up for the decline in price, despite agreements to the contrary. Otherwise unrest among their own populations could become a serious threat. Combined with falling demand, prices could still fall significantly, but IMO supply collapse is also coming, so that oil prices could bottom quite early in the coming depression.

I agree about nasty proxy wars between client states. I think we're heading into a three-way cold war for the time being (China, Russia and the US), quite likely with a hot war to follow.

Brandon said...

Ilargi, Stoneleigh, and others--my husband and I found your blog a couple of weeks ago--thank you for the time and effort that you have put into this site. We are still picking our jaws up off the floor. Please forgive my ignorance, but why is this information not deemed newsworthy by the mainstream media??!! And why are people not being told about how to prepare for deflation, peak oil, or climate change? I feel like we are living in an alternate universe. One on hand, everyone acts as if nothing is wrong. On the other hand, there are these harsh realities that people need to heed. Instead, on NBC's Nightly News in their "What Works" segment, they presented a man who has successfully created ethanol from the infamous cudzu plant. The segment ended by showing how his tractor worked just fine on this fuel and his saying that the South could be the next Saudi Arabia. They presented a similar story a couple of weeks ago about oil from algae. In this segment, they showed a man pouring the algae-derived oil right into the tank of his truck. So easy, right? The stories had a patronizing quality about them--almost as if they were saying, "It's alright, little children, things will be just fine." So, my question is: what are they not telling us? And at what point do you think the public will be told the truth? Thank you, again, for all your time and effort!

Stoneleigh said...


We've been warning people for ages that Canadian property, especially in the west, was in an enormous bubble, and that the tar sands would not be profitable at a much lower oil price, with significant consequences for Alberta. It's always interesting to hear a frontline description of how things are playing out in practice.

Fort MacMurray is in a particularly awful position, as it's both highly over-valued and not a nice place to live, for reasons of over-stretched infrastructure and environmental destruction.

Stoneleigh said...


They're basically not telling you anything that you need to know. In some cases they genuinely don't know themselves, as the mass media is often poorly informed, and in other cases they don't want to cause a panic, so they cheerlead instead of informing. After all, if papers were full of stories about where the banking industry is headed, we would get there much faster.

Governments and central bankers are engaged in a desperate game of smoke-and-mirrors, where they try everything to maintain public confidence, in the knowledge that confidence is the key. Unfortunately, markets have a nasty habit of calling bluffs, and as each one is called, it makes the next one look more desperate. Ultimately confidence will be lost on a grand scale during the great deleveraging that is already underway.

Anonymous said...

This video by Fred Thompson (The Former Republican Presidential Candidate is AWESOME!)

Hilarious. He gets it!

Chaos said...

I noticed Jim Cramer has, as of today, given up on doomerism and positively declared that we are not about to experience the Great Depression II. Of course, what this means is that we are, absolutely, positively about to experience the Second Great Depression. The only thing worse would be Bernanke or Paulson declaring that "our financial system is sound."

Anonymous said...


It's all about NET energy. Just as when we look at the profit of a company, we look at net profit and not gross profit.

Similarly all the cheap and easily accessible energy with a high NET energy has already been accessed/ is being accessed.

Now we're chasing the low hanging fruit, the tar sands produce 3 barrels of oil for every barrel you put in energy wise. According to some estimates. While the Oil coming from Saudi Arabia in the early 60's and 70's produced as much as 100 barrels of energy for every barrel invested. Huge NET surplus of energy.

What the MSM does is to portray that we can reduce our dependency on oil anytime, that there are plenty of alternatives, we can "drill, baby drill"

But what they don't tell you is that no amount of alternative energy can ever match up to fossil fuels in the time scale we need. We can't scale it up fast enough and so many adverse feedback loops begin on the downslope of peak oil that its ridiculous.

The credit crunch is going to crunch alternatives even more.

PS-On a surreal note, I went to book my an airline ticket today and the lady at the counter told me they were having huge business since August (This is in Australia, with Emirates Airline) So left me scratching my head.

Maybe next year we'll start seeing the more serious effects of the credit crunch downunder???

Anonymous said...

Michael Pettis's article proves that even a professor of finance at Beijing University is not immune to foot-in-mouth disease. It's the GIGO problem: garbage in, garbage out. If his assumptions are wrong, his conclusions will stink.

Incidentally, Pettis was at one time a high-level executive for Bear Sterns, the funny-money investment bank that collapsed recently. He could not have risen so high if he hadn't drunk a lot of that company's koolaid. And that alone should make anybody suspicious of what he says.

Pettis' biggest mistake is to focus on China's exports, completely ignoring the rest of the economy. Exports are a minor part of China's GDP (13% to 20%), not the overwhelmingly important part that so many in the West have been brainwashed into believing. Even if export growth were to fall to zero, China's overall growth rate would only drop by 1% to 2% a year. The dip in growth will be made up for easily by the $580 billion stimulus, which is intended to boost the 80% of GDP that isn't involved in shipping China's wealth to the U.S.A. in return for bits of worthless paper. After a period of adjustment to lower exports, China will actually be richer for not giving so much real wealth to the US in exchange for basically nothing.

One of Pettis's minor gaffes (I'm going to ignore the rest) is to write

"A decline in US consumption equal to 5 per cent of US GDP, for example (which is a low estimate), would require an increase in Chinese consumption equal to 17 per cent of Chinese GDP - or a nearly 40 per cent growth in consumption. This is clearly unlikely."

Pettis is assuming that all of the US's consumption is imported, that there is no internal source of goods and services. This is clearly ridiculous, especially if you remember that the US's GDP is $14 trillion and its imports are only a fraction of that figure. Where is the rest of the economy?

Pettis's article is only another example of Bear Stern's delusional thinking. With executive judgement like that, it's no wonder that the bank is dead now.

Anonymous said...

The solutions that China could employ to fix its financial crisis are more diverse than what can be done in the west. They do not want to see everything go to zero.
It must be remembered that China is governed differently …
They have a history of acting preemptively, quickly and decisively.

The new rich could easily find that they have “displeased” the ruler by their financial mismanagement and as a result that they and their relatives will get all of their newly acquired wealth seized and that their family name could be “extinguished” to the fifth generation.

The people may find that they have an oil shortage but the gov. will not have an oil shortage.

The army will always be feed irregardless of the sufferings caused in the country side.
The starving cities could be evacuated to the country side.
A 10-20% reduction of the troublesome under 30 yrs can easily be achieved by immigration, forced labor camps etc.

What they could do and what they will do will depend on what they perceive as danger to the Chinese society.


When push comes to shove, who knows what could happen in the west.

Anonymous said...

Damn, I accidentally chopped off a bit of my conclusion. Phone calls can be so distracting...

Please replace everything after the sentence "Where is the rest of the economy?":

It should be obvious that a 5% drop in US consumption is not going to affect China by even 5%, let alone 17%. I have no idea how a "professor of finance" can be so plainly wrong.

Pettis's article is only another example of Bear Stern's delusional thinking. With executive judgement like that, it's no wonder that the bank is dead now.

Anonymous said...

Hmm... I wonder if Pettis had any influence on CITIC's $1 billion investment in Bear Sterns, which turned out to be a total waste. If he had, his credibility in China must be dropping fast.

Anonymous said...

The above post (re: Pettis and CITIC) was mine.

Anonymous said...

Ilargi wrote: "Only weeks ago we posted stuff here that talked of slowing down to a 5% growth rate as being untenable for China. It's already at 5.4% now, and falling fast going into 2009, with predictions for 0%, and even claims that the country is already there."

Soon enough we'll see how large the drop was in reality, as opposed to what you think it is.

As for the overinvestment problem, why do you think China relaxed its money supply by 17%?

trichter said...

Hello Ilargi and Stoneleigh, hello all!

I have been a regular visitor here since the beginning (moving with I&S from TOD), but have only now brought myself to write a comment. Firstly, many thanks to Ilargi, Stoneleigh and the others who help keep this site going. I will make a donation in the new year to encourage the site's continuation.

I have currently got my nose in George Walden's "A Wolf in the World?", but my knowledge of China is too poor to assess this one-time diplomat's account of China's trajectory since the 60s with any authority. Here is an interview with Walden:

The subject fascinates me and is particularly relevant as I am located in Western Australia which exports many resources to China such as high-grade iron ore. Recently a ban was lifted on uranium mining here in W.A. as well, so perhaps they will soon be exporting that to China from here too.

Regarding VK's comment up top about Emirates Airline doing good business to Australia, perhaps one reason is that Arab businessmen are flocking to Australia looking to spend up big on things like rural property. Saudi individuals want to spend billions on farmland here in W.A. and export the crops back to the Arabian Peninsula. I think they are going to find the task a little more difficult than simply writing checks though, but their haste is palpable in light of the threat of food shortages.

The general economy here in Western Australia is comparatively strong. Retailers seem to be doing decent Christmas trade. Prices in stores have not been seriously slashed - as others have anecdotally assested. Unemployment in the state has just crept above 3% - lower than the national average. After living in Europe until recently, it feels like Hobbiton only warmer.

However dark clouds are forming in the real estate sector with many more properties on sale and many being passed in at auction, prices dropping and selling times growing. There seems to be a quiet awareness that things have changed, but nobody is saying much yet. Many people have put off retirement in 2009 because of loses in their superannuation funds. Delinquent clients are mounting for businesses, but as yet they are mainly overseas in the U.K. and U.S. Rio Tinto's recent annoucement that they will cut jobs has put an end to the 'endless resources boom' myth but it feels like reality is suspended here as everyone waits to see how the 'GFC' stands to affect them.

Ilargi and Stoneleigh, can either of you provide an overview of what you see developing in the mining and resources industries in Canada and Australia? Surely certain resources will be more affected than others. Some must have far bigger margins than others and the energy intensity of resource extraction must vary greatly. Could you break this down for us at all? Thanks.

Anonymous said...

perhaps one reason is that Arab businessmen are flocking to Australia looking to spend up big on things like rural property. Saudi individuals want to spend billions on farmland here in W.A. and export the crops back to the Arabian Peninsula.

The Arabs might not have discovered, yet, that the Congo basin, Sudan, Ethiopia, Mozambique and Tanzania as the place to invest, laying railroads and digging mines and buying million acre mega farms, but India, China and Japan have and are doing it.
Buying the world
Nov 19th 2008
From The World in 2009 print edition
By Max Rodenbeck, DUBAI
The Gulf’s plans for its petrodollars
As most countries tighten their belts, the Arab monarchies along the Persian Gulf face a different problem: what to do with the $4.7 trillion-$8.8 trillion that their oil sales are expected to garner by 2020 (based on an oil price of $50-$100 a barrel). Whatever the actual sum—and cheaper oil will mean some belt-tightening even in the Gulf—that is a great deal of cash, and even more so considering that the six-nation Gulf Co-operation Council is home to fewer than 40m people.

Anonymous said...

Her is an update on China From The Economist print edition.
China's reforms
The second Long March
Dec 11th 2008

China has been transformed by the changes ushered in by Deng Xiaoping 30 years ago. But the biggest step has yet to be dared

porsena said...

Exports are a minor part of China's GDP (13% to 20%), not the overwhelmingly important part that so many in the West have been brainwashed into believing.
Does anyone know what proportion of China's GDP is made up of exports to the USA and western Europe?

Anonymous said...

Yesterday I was looking for a weather report on TV and chanced on a scientific explanation for the destruction of Sodom and Gemorrah (this is not going to be a religious rant). It showed a dramatization of Sodom's citizens watching this amazing spectacle in the sky. Oohing and aahing, all in rapture, (no, not that kind of rapture) only seconds before the huge flaming balls hit their city did they figure out what this really meant, i.e. they were all toast. Everyone ran for their lives but none escaped (except Lot, who left earlier and hid in a cave). This so much resembled what I see today. Everyone I know is watching this economic spectacle, oohing and aahing, but none realize what it really means and by the time they do, we will all be toast. Better find a cave.

Unknown said...

A check at both wikipedia and the Economist strongly suggest that China's current exports are about 40% GDP, not 20% or less. Exp

The USA apparently accounts for 20% of those exports, the EU another 18%.

Unknown said...

The Straits Times says that 30% of China's exports go to Europe and Japan.

Economies in both of those areas are also hurting so demand would also be off, like it is from the USA.

While I can't put a number on it, the global demand of China's exports is definitely less now than it was a few months ago.

. said...

There were words about Edmonton in today's comments. I recently wrote a tidbit about them and their trash.

Anonymous said...

Fill your hearts content with China Facts fellow bloggers.

The world banks quarterly report will make your hearts merry! :D

Anonymous said...

The Age has a good article and quite bold, China Flirts with recession.

CHINA'S industrial output has slumped to a new low, as leading economists say its previously irrepressible economy is probably shrinking this quarter and will contract again in the first quarter of next year.

Industrial production, one of the most closely watched economic indicators, grew just 5.4 per cent over the year to November - implying a sharp contraction since mid-year, when the annual rate was running at 17 per cent.

Electricity production was down by 9.6 per cent over the year, which analysts say is the sharpest slump in 30 years of economic reform.

The accelerating industrial downturn comes despite a partial rebound in steel output, as steel makers and downstream users appear to have finished the process of liquidating stocks.

Gross domestic product this quarter "must be contracting; everything is pretty bad," said Macquarie Bank's China economist, Paul Cavey. "And we're not at the worst point yet."

Mr Cavey said industrial production may have reached its nadir but he is most concerned about a precipitous fall in real estate construction, which has been a prime force in the economy. "Real estate construction is currently contracting by 20 per cent year-on-year and by early next year it will be 30 per cent."

Carry on reading article at the link above.

Anonymous said...

Ilargi said "This may mean for creditors, including banks, that they get sidelined at the last minute. "

I think Frank's point is correct. This is similar to DIP (Debtor In Possession) financing in a reorganization bankruptcy which takes precedence over existing creditors. It has to be that way or no one would lend because they suffer an immediate loss. The difference here is simply that these protections are being extended to a creditor before bankruptcy is declared in an effort to prevent bankruptcy. The reality is that the creditors are no worse off except to the extent bankruptcy is delayed and remaining assets are used or depreciated during the delay. But it is not illogical that the new infusion of cash should take precedence over the positions of prior creditors in order to allow that new infusion to take place.

Gravity said...

Good work Ilargi and crew.
This is one of the most reasonable blogs on the net.

(waves hand)
You dont want to sell me death swaps,
you want to go home and rethink your lifeboat.

Anonymous said...

rumor wrote: "A check at both wikipedia and the Economist strongly suggest that China's current exports are about 40% GDP, not 20% or less."

As I have written previously, you get the 40% of GDP figure if you measure China's exports in U.S. dollars. However, everybody knows that China's currency is heavily undervalued by a factor of two or three, so their economy is larger than the U.S. dollar figure by a factor of two or three. Therefore their exports must be a smaller percentage of their true GDP by a similar factor, i.e. the true figure is 13% to 20% of GDP.

Anonymous said...

The previous posting (re: China's exports) was mine.

Anonymous said...

The truth lies between the facts and the opinions.
Catherine Deveny, December 17, 2008

WHY are people so threatened by opinions? I'm not talking about statistics. We all know 97% of statistics (such as this one!) are fabricated on the spot.

And I'm not talking about facts. If you're knee-deep in conversation and get on to a topic involving facts, you won't get a balanced discussion unless you're boned up on the other side or if you know for sure the facts are not actually a fraction too much fiction. You probably won't care. You'll just hop on the side you like and barrack. That's what we tend to do. But we hate to admit it.

I'm talking opinions. Which are basically just "I reckon". Opinions are a mix of what we know, what we feel, what we've experienced and gut instinct.

Why clarify what opinions are? Well, I'll let you in on a secret: most people are idiots. I'm constantly having to remind these idiots that this page is called "opinion" and not "fact" after they have a hilarious go at me saying because I'm a journalist (I'm not) I have a responsibility to produce a balanced argument (I don't). You lose. I win.

Opinions are so confronting that they're becoming extinct. But when opinions mirror our own they are so comforting we elevate them to the realm of fact. No questions asked.

No one seems to have opinions any more. Most of what passes for opinion these days are often hermetically sealed arguments difficult to bite back at or engage with. Hermetically sealed "opinion" is generally nothing of the sort, just a list of facts that make people think, "Well that's sorted. No need for me to think."

I love the blurters of the world: people who shoot first and don't bother asking questions, the bomb throwers. That's where the meat in life is, the rigorous discussion, the heated debate. The blurters provoke us into thinking. I'll tell you something for free, it's far more enlightening and invigorating than nodding and vaguing out as people bang on about their renovations, kids or health problems. Get off the fence and let's wrestle in my backyard. Or yours. I don't care.

Answers and truths come about by being stimulated into rigorous debate, rational thinking and soul searching. Usually because something seems a bit wonky. It jars a little. And if it jars a little it's time to question what you believe. If you're game. Keep in mind the word is believe.

Some people tell me they get cathartic relief from reading my weekly cries for help on the opinion page. They say, "You say the things we're too scared to." "Why are you scared?" I ask. "We don't want to offend people." But how can you offend people by saying "This is what I reckon"? By saying we both have opinions, mine's just different to yours? How fragile are people if they can't cope with someone thinking differently? It's either an alternative view that may enlighten or an opposing one that gives you an opportunity to question what's informing your own opinion.

A woman accosted me the other day and said "I love your writing because I agree with everything you say." That's not a good reason to like someone's writing. There's stuff that's well written that I don't agree with. And stuff that's badly written that I think is right on the money. "He's a crap writer because I don't agree with what he says." What? How threatened are you? "She's a great writer because I agree with everything she says." The fragile ego is fickle and easily stroked.

People who can't cope with an opinion that is in opposition to their own beliefs and just write off the person show how shaky are the motivations behind their own actions. And their unwillingness to confront, question and take themselves to task.

We are almost entirely motivated by our subconscious. We make decisions emotionally and defend them rationally. When you question a person about why they have done something, the truth is that most the time people have no idea. They decide to do or think something and then just find a flimsy and convenient excuse to back it up. And in a lot of cases you'll find when you start questioning, even yourself, many of the motivations and excuses are not what you expect. And if you're honest, not what you're comfortable with.

They say it's impolite to discuss sex, politics and religion. Stuff that. They're the only things worth talking about.

If someone asks for your opinion, chances are they don't want it. They want their opinion. In the same way if a woman asks "Does my bum look big in this?" The answer is always no.

Anonymous said...

Well, well. I speculated whether Michael Pettis, who used to be a high executive at Bear Sterns, might have had some influence in CITIC's wasted $1 billion investment in that bank. It seems likely that he might have, as shown by what he wrote a week before the investment:

"Nonetheless from a strategic point of view CITIC would gain a huge amount of international credibility and would certainly be in a position to learn a lot from the tie-up. Bear Stearns, in spite of the recent sub-prime embarrassment, is an excellent bank with what I think is the best risk management of any major Wall Street firm."

Pettis' credibility in China is now probably worth about as much as Bear Sterns' stock.

Anonymous said...

Here is some confirmation of China's exports relative to its true GDP. It's 17%, according to the CIA Factbook
( You would have to measure China's GDP in Purchasing Power Parity (PPP) terms, i.e. in terms of what the money will buy inside China.

In PPP terms, China has the second largest economy in the world, not the fourth.

Anonymous said...

jal @ 11:07

One very positive thing that has come from our economic woes is people beginning to re-engage in public conversation about issues again. For a long time, discussion of politics and the economy were verboten while hyper-attention was paid to celebrities and television fluff. Now, in places where the lines used to be silent: food banks, convenience stores, restaurants and doctor offices people spontaneously bring up concerns and observations. It's like a breath of fresh air!

Anonymous said...

Hi Wild Gypsy!
It's like a breath of fresh air!
It's nice to be alive.

Anonymous said...


I've read Wild Swans. It's an incredible book. I second your recommendation.

Also the Bonesetter's Daughter by Amy Tan is an interesting read.

I've been concerned with China for a few years. The surplus of unattached males and recent rhetoric from fringe groups is scary.