Tuesday, January 6, 2009

January 6 2009: Vulnerable Volatility

Lewis Wickes Hine Straw Bed Shack 1909
Straw beds and footlockers in shack occupied by berry pickers. Anne Arundel County, Maryland

Ilargi: There are two major issues we should discuss today. First, the Obama stimulus plan and how it will be financed, and second, the plunging car sales numbers.

About the stimulus: There is an interesting discussion brewing about the future of the US dollar and other world currencies, in which respectable and respected voices stand on opposite sides of the spectrum. Martin Weiss and Jack Crooks are convinced that the dollar will soar and come out the big winner. Willem Buiter , on the other hand, foresees an imminent collapse of the greenback. Some of the disparity in views is undoubtedly due to where the various people live: Buiter is European, the others are not. Then again, the Telegraph's Evans-Pritchard is a European who claims the US will emerge victorious.

It should be clear that when you look at currencies, the main initial focus is exchange rates. And all that happens there is relative: if one goes up, the other goes down. Since there are many currencies, this is overly simplistic, but still. When oil prices rose to $147 last summer, the US dollar went down, which means that the price rises were much less hard on the EU than on the US. In fact, from a European view, the prices weren't all that devastating. Since oil is sold in dollars, and they could buy more dollar per Euro, they had a cushion.

Weiss and Crooks emphasize the problems in the EU, and assume these will be greater than those in the US. Buiter has another point of view, but not simply the opposite. He says that the current US debt level, combined with the present and future need to borrow more, will severely undermine the ability of the US to use the dollar's status as world reserve currency to get favorable loan rates. In other words, the US will have to pay -much- more to sell its debt.

So far, all is clear. Than today, we see that the US intends to sell a record $2 trillion in additional debt in 2009, putting the total US marketable debt at $5.82 trillion in November, the most ever, up $1.28 trillion in just one year. The US aims to do this by issuing Treasuries. Now, the key word in all this is volatility. I don't believe that either Weiss nor Buiter have the proper tea leaves in their offices to be 100% sure.

If a truly large corporation fails on either side of the Atlantic, or a serious war breaks out somewhere in the world, things can shift on a dime, and in seconds. That said, I do think Buiter's analysis deserves more scrutiny than it gets. When I see an analyst state that Treasury yields are hurt by the fact that "The impression seems to be that the U.S. will be the first major economy to come out of recession ..”, I raise either of my brows.

Really? What would that impression be based on? On the record added debt issues? Will they lift the US out of its recession? What I think is that the US is taking an enormous gamble with their taxpayers’ (-children’s) money, and there is no guarantee whatsoever that it will work. The Fed’s Janet Yellen this week admitted as much, calling the current measures and plans "experimental".

Talking about the Fed, they're buying $80-$10 billion in failed mortgages per month these days. And if the US government debt can't be sold, maybe they'll buy that too. And when the 40-odd bankrupt states then come knocking, why not but their debt? Municipalities, newspapers, shopping malls, the steel industry, you name it. But if that scenario pans out, we get right back to Buiter. Who will buy your debt if it's clear you're sinking ever deeper into it? All your previous buyers are hurting from the same depression that you are.

As I said, it's all very volatile, but I don't think all parties pay enough attention to the vulnerability of the US right now. There's always be those who say: just print. But they should read Buiter: the more you print, the higher the downward pressure on the dollar. Something for nothing doesn't work, not even when you're the strongest party in the bond markets.

Oh yeah, I was going to talk about the US car sales as well. How about I let the facts speak: "GM’s 2008 U.S. sales of 2.95 million light vehicles were its fewest in 49 years, and Ford’s tally sagged to a 47- year low". GM sold as many cars as they did in 1960. They've been thrown back in time half a century. Chrysler sales went down 53% in a year. And who's going to be buying cars right now? The million people per month who will lose their jobs? Or the 15 million who are afraid they will? Sales were 13 million in 2008. I'll make a prediction: sales will fall to 7-8 million. And that means the end of Detroit.

In short: I know the auto sales will continue to plummet in 2009. The winner in the debt sales and currencies battle is less clear, because a million factors could come into play. For one thing, the US is the biggest arms manufacturer and dealer. But just talking about economics, I think there’s a lot of value in Willem Buiter’s doubts about the future of the US dollar. The more you depend on declining foreign money influx, the more vulnerable you are. Somewhere down that line, you will need to look at your domestic manufacturing base.

Treasuries Drop as U.S. Prepares to Sell Record Amount of Debt
Ten-year Treasuries fell for a fourth day, pushing yields to near the highest level in three weeks, as the U.S. prepared to sell a record amount of debt to pay for government efforts to snap the recession. U.S. spending plans pushed benchmark note yields up almost half a percentage point in less than a week, the biggest increase since October. Yields climbed after President-elect Barack Obama told House Speaker Nancy Pelosi yesterday he favors a $775 billion economic package. This year’s note sales begin with $8 billion of 10-year Treasury Inflation Protected Securities today. "Treasuries are being driven lower by the massive supply issues in the U.S. and the staggering size of Obama’s stimulus package," said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. "The impression seems to be that the U.S. will be the first major economy to come out of recession and that of course is hurting Treasuries."

The 10-year note yielded 2.49 percent by 10:03 a.m. in London, according to BGCantor Market Data. The 3.75 percent security due November 2018 fell 4/32, or $1.25 per $1,000 face amount, to 110 30/32. The two-year yield increased four basis points to 0.82 percent. U.S. yields indicate forecasts for inflation, which erodes the value of bonds’ fixed payments, are tumbling. The difference between rates on 10-year Treasury inflation protected securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, narrowed to 13 basis points from 2.54 percentage points six months ago. At the last 10-year TIPS sale on Oct. 8, investors bid for 2.22 times the amount of debt on offer. The average for the past 10 auctions is 1.95. This week’s sales include a record $30 billion of three-year notes tomorrow and $16 billion of 10-year conventional debt the next day.

The Treasury Department has estimated it will auction as much as $2 trillion of debt this fiscal year, which began Oct. 1. U.S. marketable debt climbed to $5.82 trillion in November, the most ever, from $4.54 trillion a year earlier. Obama, who plans to deliver a speech on the economy Jan. 8, met with congressional leaders from both parties at the Capitol in Washington to help craft a two-year plan to boost growth. "Yields will rebound," said Kevin Yang, a fund manager at Shinkong Life Insurance Co. in Taipei, Taiwan’s second-largest life insurer. "The Obama plan and supply will control the market in the first half of 2009." Shinkong Life, with $30 billion in assets, sold Treasuries last week, Yang said. Yields suggest banks are becoming more willing to lend. The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 1.30 percentage points, from a peak of 4.64 percentage points in October.

Hong Kong’s three-month interbank rate, or Hibor, fell to 0.89 percent, the lowest since 2005, from 0.9 percent yesterday. Singapore’s three-month rate for U.S. funds declined one basis point to 1.41 percent, not seen since 2004. The Federal Reserve Bank of New York started buying mortgage-backed securities yesterday as part of a $500 billion program to support the U.S. housing market. The U.S. central bank cut its target for overnight loans between banks to a range of zero to 0.25 percent on Dec. 16. It is scheduled to release the minutes of that meeting at 2 p.m. in Washington. Notes will probably recoup losses and rally after the Labor Department’s employment report Jan. 9 because it will show U.S. job losses are deepening, said John Lonski, chief economist at Moody’s Capital Markets Group in New York. Ten-year yields may drop to 2 percent, Lonski said in an interview yesterday. "There’s a very good chance that that will happen, especially after Friday’s report on payrolls that in all likelihood is going to be a scary figure."

Payrolls fell 500,000 in December, bringing last year’s job losses to 2.4 million, the most since 1945, according to the median estimate of 67 economists surveyed by Bloomberg News. The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the U.S. economy, dropped to 36.5, the lowest level since records began in 1997, a separate survey showed. The data are due to be released at 10 a.m. in New York. "The market will rally again," said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan’s second-biggest investment bank. "Consumer spending will worsen because of the employment situation." Katayama said he added to his Treasury holdings in October and November.

Longer maturities led the decline. Two-year yields, which are influenced more by what the Fed does with short-term borrowing costs, haven’t risen as fast. The spread between two- and 10-year rates has widened to 1.67 percentage points, from 1.25 percentage points on Dec. 26. "The long end of the curve is under a lot of pressure," Richard Bryant, a trader of 30-year bonds at Citigroup Global Markets Inc., one of the 17 primary government security traders that deal with the Fed, said yesterday.

Fed Aims to Narrow Spread Between Consumer, Corporate Rates and Treasuries
Federal Reserve officials are focused on driving down the spreads between U.S. Treasury yields and consumer and corporate loans, after cutting the main interest rate to almost zero failed to revive lending. Credit costs for households and businesses haven’t followed yields on government debt lower. Fifteen-year fixed-rate mortgages were at 5.06 percent last week, 2.59 percentage points above 10-year Treasury yields; the spread averaged 0.88 point in 2003, when the Fed slashed rates to 1 percent. Chairman Ben S. Bernanke sees the thawing of frozen credit markets as critical to a recovery, and is determined to try to prevent a second wave of credit distress as the U.S. weathers bad economic news over the next two quarters. The Fed is now looking at ways to revive lending by using its balance sheet to hold loans and bonds that investors don’t want.

"Investors in general don’t want to take on the risk," said Richard Schlanger, who helps manage $15 billion in fixed income securities at Pioneer Investments in Boston. "It is going to reach the point where the Fed will intervene again." One of the options under consideration: reviving the asset- purchase plan originally envisaged under the $700 billion Troubled Asset Relief Program run by the Treasury. The purchases could be combined with fresh injections of capital into banks, and the use of TARP money to help struggling home owners avoid foreclosure. President-elect Barack Obama’s transition team and central bank officials have discussed such a strategy. Obama, who has advocated a broad-based approach to tackling the issue, takes office Jan. 20. He has picked New York Fed President Timothy Geithner as his Treasury chief, with former Treasury Secretary Lawrence Summers as White House economics director.

The Fed may today offer further insight into officials’ deliberations last month on shifting to using the amount and type of debt the central bank buys as the main tool of monetary policy. Minutes of the Dec. 16 Federal Open Market Committee meeting are scheduled for release at 2 p.m. in Washington. At that session, the FOMC reduced its target rate for overnight loans between banks to zero to 0.25 percent, the lowest level on record. The panel also indicated readiness to expand programs to alleviate the credit crunch, or set up new ones, such as direct purchases of Treasuries. The Fed yesterday began a frontal attack to drive down home-loan costs, buying mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The effort was part of a $600 billion plan, which also includes purchases of Fannie and Freddie bonds. Mortgage rates "should be in the low 4s right now based on Fed rates," said Ben Fox, executive vice president of Premier Mortgage Co. in Fairfax, Virginia. "They are not even close."

Even after a $1.34 trillion increase in assets on the Fed’s balance sheet last year, private borrowing costs remain at unusually high spreads over U.S. Treasury benchmarks. Gauges of corporate borrowing costs, which reached record levels in the fourth quarter of 2008, remain three to five times their long-run averages. The spread on investment-grade corporate bonds is 6.03 percentage points, down from a record 6.56 percentage points on Dec. 5, Merrill Lynch & Co. data show. That compares with an average of 1.23 percentage points in the previous decade. "With the likelihood that the worst news is ahead of us -- as far as the economy, corporate earnings and bankruptcies -- investors are hard-pressed to take on more portfolio risk at this time," said Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, which manages about $21 billion. Financial companies around the world have already logged $1.1 trillion in losses and writedowns since the subprime mortgage crisis roiled markets from August 2007. A deteriorating economy means that figure is likely to keep rising.

Macroeconomic Advisers LLC, a St. Louis forecasting firm, estimates the economy contracted at a 5.5 percent annual rate in the fourth quarter, the worst performance since 1982. Laurence Meyer, a former Fed governor and a founder of Macroeconomic Advisors, said purchases of longer-term Treasuries by the Fed would help keep yields down even as the Obama administration implements its planned fiscal stimulus. The economic recovery package may be at least $800 billion. Obama "indicated that there’s at least 20 economists that he’s talked with, and all but one of those believe it should be from $800 billion to $1.2 trillion or $1.3 trillion," Senate Majority Leader Harry Reid said after meeting with Obama yesterday. "The Fed will want to make monetary policy as potent as it possibly can be" by holding down long-term yields, Meyer said. "I certainly don’t think the Fed is done."

Among other options for the Fed are expanding its planned $200 billion program to finance new securities backed by credit- card, automobile and student loans. That effort, supported with TARP money, is scheduled to start in early February, and the central bank has said it could be widened to include commercial mortgage-backed securities. Another scenario is using the TARP to remove toxic assets from banks’ balance sheets. The Treasury, possibly in combination with the Fed, could buy the securities, insure them on banks’ balance sheets -- as officials did with Citigroup Inc. in November -- or set up a so-called bad bank to take on the investments. One challenge: the amount of purchases required to clear the securities would be so big that it could dwarf the remaining TARP funds, which are now less than $350 billion.

Treasury Secretary Henry Paulson originally envisaged using the $700 billion authorized by Congress under the TARP in October to buy troubled assets. He quickly shelved that plan as the crisis intensified, instead opting to directly put capital into the banks in exchange for preferred shares and warrants. The Washington-based Institute of International Finance, which represents the world’s largest commercial and investment banks, has called for revival of the asset purchase plan, arguing that it would help restore the health of the financial system.

Obama Is Said to Favor About $775 Billion for Stimulus Plan
President-elect Barack Obama told House Speaker Nancy Pelosi he favors a price tag of about $775 billion for the U.S. economic stimulus plan, a Democratic aide said. Obama met with congressional leaders from both parties at the Capitol yesterday to help craft and shore up support for a two-year plan to boost the sagging economy. He said the plan would cut taxes for individuals and businesses and spend money on government programs to rebuild the nation’s infrastructure. “We have to act now to address this crisis and break the momentum of the recession, or the next few years could be dramatically worse," Obama told reporters after a separate meeting with top economic advisers. He plans to deliver a speech on the economy on Jan. 8.

The plan would attempt to boost consumer demand by providing tax breaks worth $500 for individuals and $1,000 for couples. The change would come by altering tax-withholding rules so workers would see an immediate increase in their take-home pay. Cutting the payroll tax “would be more efficient" in helping the economy, Michael Darda, chief economist for MKM Partners LP, said on Bloomberg Television, while cautioning that “there is no silver bullet." Senate Republican leader Mitch McConnell of Kentucky said there will be “widespread Republican enthusiasm" to include tax relief as a large part of the stimulus package. “The atmosphere for bipartisan cooperation was sincere on all sides," McConnell, 66, said after meeting with Obama. He was “interested in what Republican ideas might be offered to the stimulus package," McConnell said.

The package would also fulfill Obama’s promise to boost jobs with spending on improvements to roads, bridges and power grids, as well as aid to states being hit by budget shortfalls. Obama, 47, said he wants lawmakers to finish most of their work on the plan, including tax cuts and spending, by the end of this month or no later than the first week of February. The president-elect is asking that tax cuts make up 40 percent of the plan, Democratic aides and a transition official said. Senate Majority Leader Harry Reid said Obama told the lawmakers that economists are suggesting a U.S. stimulus plan may have to be as large as $1.3 trillion. Obama “has indicated that there’s at least 20 economists that he’s talked with, and all but one of those believe it should be from $800 billion to $1.2 trillion or $1.3 trillion," Reid said after the meeting. Even so, Obama press secretary Robert Gibbs said, “The $800 billion is not far from the upper end that we’ve talked about."

“The point that he was making was simply that this is a range of economists that have been polled in terms of what needs to happen to get this economy moving again, but he also added that this is not what he’s put forth," Gibbs said. “Our number hasn’t changed." The president-elect met with his economic advisers, including Treasury Secretary-designate Tim Geithner and Lawrence Summers, whom Obama picked as his director of the National Economic Council. Obama, who takes office Jan. 20, was accompanied to the Capitol by Vice President-elect Joe Biden.

Obama plans to meet again today with advisers including Geithner and Summers on budget issues and health-care costs. Obama pledged “unprecedented transparency" as policymakers hash out the stimulus plan. He said he is considering publishing online “very detailed information about all the projects that are taking place." Deficit-wary lawmakers should accept a fiscal stimulus measure of at least $775 billion to avoid long-term damage caused by a sustained economic slump, said Charles Rangel, the New York Democrat who is chairman of the tax-writing House Ways and Means Committee.

“We’re very sick, and indeed if we die we won’t be able to pay back anything to anybody," Rangel said in a Bloomberg Television interview yesterday. House Minority Leader John Boehner said the plan’s overall size remains a concern to Republicans. “This is not a package that’s ever going to be paid for by the current generation," he said. “It’s going to be paid for by our kids and grandkids." Boehner added, though, that he thinks Congress can agree to something within six weeks and send legislation to Obama for his signature. The stimulus package probably will increase federal college aid to low-income families, said House Education and Labor Committee Chairman George Miller, a California Democrat. He said lawmakers are concerned about a recession-driven surge in demand for the so-called Pell Grant tuition awards.

Pelosi, 68, of California told reporters that all sides will work with a “sense of urgency" on a plan. She didn’t predict how soon it might be enacted. McConnell said he suggested to Obama the idea of offering loans to states as part of the plan, much like loans are being offered to troubled financial sectors. He said he assured Obama that a large tax-cut package would help attract bipartisan support. “That clearly is appealing to all Republicans, from Maine to Mississippi," McConnell said.

Stimulus Plan Would Expand Tax Credit for Poor
President-elect Barack Obama met with lawmakers on Capitol Hill Monday to begin selling his economic-stimulus plan as his advisers offered more details, including a proposal to expand the child tax credit for poor families. "We are in one of those periods in American history where we don't have Republican or Democratic problems, we have American problems," Mr. Obama said before a meeting with lawmakers of both parties. He went out of his way Monday to reach out to Republicans. "The monopoly on good ideas does not belong to a single party," he said.

After the meeting, Senate Minority Leader Mitch McConnell said he thought Congress could enact the recovery plan by Mr. Obama's deadline, roughly six weeks from now. "I am convinced as a result of listening to the president-elect that he is interested in what Republican ideas might be for the stimulus package," Mr. McConnell said. Mr. Obama and Democratic leaders are working on a two-year package, which could be as large as $775 billion and include infrastructure investments and up to $300 billion in tax cuts. Mr. Obama's advisers on Monday outlined a potential new feature of the plan to congressional aides, saying they would press for a tax change that would allow more families that earn too little to pay income taxes to claim at least some of the $1,000-per-child tax credit. That would amount to an income subsidy, since it would refund taxes they are too poor to pay.

The plan would grant an estimated 5.5 million poor children access to the credit for the first time, and expand the tax benefit for millions more poor children who currently qualify for only a partial credit, according to its advocates. The change has been sought by Democrats and some moderate Republicans for years. As of Jan. 1, a household must earn $12,500 a year to be eligible to claim any of the child credit. The proposal under discussion would lower that threshold, likely to $3,000, a level favored by top House Democrats, at a possible cost to taxpayers of $18 billion, said individuals familiar with the discussions. Currently, a part-time working mother earning $5,000 a year would get no child credit. With a $3,000 threshold, she would get $300.

But the stimulus plan doesn't address the challenge posed by tight credit markets and the decline in housing values, both underlying causes of the economic slump. Those problems are expected to be confronted in separate legislation that will lay out the conditions for release of the final $350 billion from the $700 billion pool created in the fall to calm financial markets. There is wide dissatisfaction among lawmakers with the way the market-rescue funds have been used, and release of those funds is by no means certain. House Financial Services Chairman Barney Frank (D., Mass.) said he is working on "ways to make it more palatable."

Mr. Frank said he envisions action on a bill -- likely this month -- that would make it explicit that the remaining funds should be used for consumer needs, such as auto financing and student loans, in addition to more aggressive efforts to provide relief to homeowners facing foreclosure. He said there is "a real urgency" to address the foreclosure problem, adding that the issue is "one of the first things we'll deal with" in the new Congress. Mr. Obama and his aides will step up their efforts to sell their plans throughout this week, leading to a speech by Mr. Obama scheduled for Thursday, which aides describe as a major address on the economy. On Wednesday, the House Democratic Policy and Steering Committee will set the table for Mr. Obama by showcasing testimony from conservative Harvard University economist Martin Feldstein, who said Monday that he will embrace the broad parameters of the Obama plan.

"You've got to replace $400 billion in consumer spending, more if you take into account the fall in housing starts," Mr. Feldstein said in an interview. "That's the order of magnitude, [$300 billion] to $400 billion a year." Mr. Feldstein said the tax proposals -- including a $500-per-worker break on payroll taxes, generous tax breaks for businesses suffering losses in 2008 and 2009, and incentives for business investment -- are smart and well-balanced. But he said he is concerned about spending proposals that would be difficult to reverse once the economy recovers. Those include an expansion of unemployment insurance to cover part-time workers and federal health insurance subsidies for laid-off workers.

Businesspeople in various sectors said Monday that they would welcome proposals that would boost government infrastructure investments and expand business tax breaks. Some called for Congress to support a proposal to give rebates to companies of up to 20% of a net operating loss, whether the company had paid taxes in the past or not. A critical issue is whether businesses would use money refunded by the government to hire, or forestall planned layoffs. Joe Comes of Grimes, Iowa, who owns 15 Pizza Hut franchises and one Popeye's Chicken franchise in Iowa and South Dakota, says that if he got a check recouping some of his $45,000 in expected 2008 losses from his Popeye's franchise, he would rehire some of the employees he let go, and make other investments.

But Dyke Messinger, chief executive of Power Curbers Inc., a Salisbury, N.C., maker of machines used to lay cement sidewalks and curbs, says he has seen an unprecedented collapse in his domestic business, and without a rebound in U.S. demand, he says he has no incentive to invest a potential tax refund in new capacity. "I'm reminded of what the banks are doing with theirs," he said. "They just take it and squirrel it away to beef up their balance sheet. Or, if they're a strong bank, they go out and buy somebody."

Fed starts buying securities backed by housing agencies
The Federal Reserve Bank of New York said it has started purchasing agency-backed mortgage-backed securities as part of its efforts to unstick that market and make new home loans more readily available. The hope is that such purchases will support the housing market and improve conditions in the broader financial markets. Under the plan, first announced on Nov. 25, the New York Fed is permitted to buy up to $500 billion in MBS guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Private investment managers—last week revealed to be BlackRock, Goldman Sachs, Pimco and Wellington Management—will make the purchases on behalf of the New York Fed. The Fed is still finalizing a contract for a custodian.

The New York Fed will provide summary data detailing the purchases beginning on Jan. 8 and will update the data on a weekly basis each Thursday, it said in a press release. There’s no specific timetable for the completion of the purchases, which will be made “as market conditions permit," according to a New York Fed spokesman. The program is limited strictly to agency fixed-rate MBS and includes, but isn’t limited to 30-year, 20-year and 15-year securities. Interest rates for 30-year fixed-rate mortgages fell for the ninth straight week in the week ended Dec. 31, according to a separate release from Freddie Mac, which left such rates at their lowest level since Freddie started tracking the data in 1971. As a result, the number of refinancing applications for conventional mortgages jumped over 500% between the weeks of Oct. 31 and Dec. 26, Freddie said.

The months leading up to the easing of mortgage rates and the spike in refinance applications were particularly painful. House prices fell 18% over the 12-month period ending in October, according to the S&P/Case-Shiller index released last week. Each of the 20 cities in the index posted a second consecutive month of decline in October. The composite index is down 23.4% from the peak set in July 2006.

Willem Buiter warns of massive dollar collapse
Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned. The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter. Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession. Writing on his blog, Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said. "The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed." He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.

New US mortgage bankruptcy bill to include 'cram-downs'
Legislation designed to stem foreclosures by allowing bankruptcy judges to erase some mortgage debt will be introduced by Congressional Democrats on Tuesday, and hopes are high that it will pass after a similar plan failed last year.
Democrats in both the U.S. House of Representatives and Senate plan to introduce the legislation. A similar plan failed in the Senate last spring as President George W. Bush and many Republican lawmakers opposed it, but supporters of what has been dubbed "mortgage cram-down" believe that they will prevail as the housing crisis has deepened and President-elect Barack Obama prepares to take office.

"Economic conditions have only worsened since we last debated this plan," said Rep. Brad Miller, a member of the House Financial Services Committee who plans to introduce a bankruptcy reform bill on Tuesday. "Until we stop the slide in foreclosures and falling home prices, the economy will get worse still." Last month, Credit Suisse boosted its estimate of the number of mortgages on which it expects to foreclose through 2012 to 8.1 million -- a 25 percent increase from its April estimate. The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt. While the housing market downswing continues, some in the housing industry have warned that it is the wrong time to write long-lasting mortgage rules.

"Credit markets move like a pendulum so if you accept that there was too much credit a few years ago, there is probably too little credit now," said Francis Creighton, the top lobbyist for the Mortgage Bankers Association. "Cram-down would lock the pendulum at an overly restrictive point." Foes of the cram-down plan argue that it would wrongly invalidate mortgage contracts and raise future costs of borrowing, but that opposition is beginning to wilt in the face of a worsening crisis. "This crisis is so severe that every possible solution must be on the table," Jerry Howard, president of the National Association of Homebuilders, said in a statement last week. In political battles last spring, the homebuilders had used their lobbying heft to help block the bankruptcy plan.

Miller, a North Carolina Democrat, said he is counting on Sen. Richard Durbin of Illinois to help him steer the plan through Congress. Durbin, a member of the Senate leadership, has promised to push for the new bankruptcy rules to be included in an economic stimulus package being crafted by Congressional Democrats. Obama supported the foreclosure-prevention plan last year and has promised new initiatives to help troubled borrowers stay in their homes. The lending industry has said that allowing bankruptcy judges to modify mortgage obligations would change how they weigh risk. Currently a lender knows that it has recourse to foreclosure if a borrower fails to meet mortgage payments, but the lender does not have to factor in the possibility that the payments it receives could be decreased by a judge.

Consumer advocates, though, argue that the plan to give homeowners protection in bankruptcy is a natural extension of current law and urgently needed to stem foreclosures. Courts can generally cut through complex mortgage contracts more aggressively than the private sector, said Wade Henderson, head of the Leadership Conference on Civil Rights, who has testified before Congress on the issue. "The continued erosion of the housing market has probably made adopting this proposal inevitable," he said.

Ilargi: Recently, a research firm whose name I forget predicted US car sales to be about 13 million in 2009. Turns out, we're already there. Present forecasts reach some 10 million for this year, but I think it will be much less than that, even though GM will have aggressive 0% lending. And remember, the formerly Big 3 need total US sales of 15 million or more to be profitable, and they are still losing market share to the Japanese, who themselves are hurting.

U.S. December Auto Sales Dive 36%, Drag Industry to 16-Year Low
U.S. auto sales plunged 36 percent in December, dragging the industry’s volume in 2008 to a 16-year low as the recession ravaged demand. General Motors Corp.’s annual total was the smallest in its home market since 1959. Toyota Motor Corp. and Honda Motor Co. reported their first drop in full-year U.S. sales since the mid-1990s after December declines of at least 35 percent. Chrysler LLC’s 53 percent dive last month led major automakers, while Ford Motor Co. slumped 32 percent and GM and Nissan Motor Co. fell 31 percent. The federal rescue of GM and Chrysler on Dec. 19 couldn’t overcome buyer pessimism and tight credit in the world’s biggest auto market. GM’s 2008 U.S. sales of 2.95 million light vehicles were its fewest in 49 years, and Ford’s tally sagged to a 47- year low, according to trade publication Automotive News.

"It’s one of the worst years ever, and this year will be worse," said Stephanie Brinley, an analyst at consulting firm AutoPacific Inc. in Southfield, Michigan. "It’s not a gas problem. It’s not a credit problem. It’s a consumer confidence problem, and it’s worldwide." Vehicle sales for the year totaled 13.2 million, the fewest since 1992, according to industry-analysis firm Autodata Corp. in Woodcliff Lake, New Jersey. Annual sales for 2007 were 16.1 million. GM, which probably lost its global sales crown in 2008 to Toyota, retained the top spot among automakers in the U.S., followed by Toyota, Ford, Chrysler, Honda and Nissan. The December results for GM beat the average estimate of a 41 percent drop among six analysts surveyed by Bloomberg News. Tempering the decline was a 43 percent surge in deliveries of the Chevrolet Malibu sedan. Sales of GM’s Saab brand, which the Detroit-based automaker says it may sell, fell 57 percent.

Toyota’s U.S. deliveries plummeted 37 percent, as it failed to get a boost from no-interest loans offered on most models since Oct. 2. Sales of its Prius hybrid, the best-selling gasoline-electric car in the U.S., fell 45 percent. The Tundra full-size pickup dropped 52 percent, while Toyota’s Lexus luxury brand finished the month down 32 percent. Honda, No. 2 in Japan behind Toyota, said U.S. sales slid 35 percent. Toyota hadn’t posted an annual U.S. sales decline since 1995, while Honda’s last full-year drop came in 1993. U.S. automakers accounted for 47.5 percent of domestic sales in 2008, the first year in which their combined market share was less than 50 percent, Autodata estimated. Last year’s figure was 51 percent. Asian automakers had 44.6 percent of the market, while European brands had 7.8 percent, Autodata said. Last month’s seasonally adjusted annual sales rate was 10.3 million, Autodata said. The November rate was 10.2 million. The December results extended a streak of monthly declines of at least 25 percent dating to September.

"We are at the bottom now," said Tom Libby, an automotive analyst at consumer-research firm J.D. Power & Associates in Troy, Michigan. "People have just stopped buying and I don’t blame them. When you have such a decline in savings and net worth, it just doesn’t surprise me sales have fallen so much." U.S. jobless rolls reached a 26-year high in the week ended Dec. 20, signaling a worsening labor market as the economy heads into the second year of a recession. That weakness adds to the strain on automakers after record fuel prices in 2008’s first half damped demand for full-size pickups and sport-utility vehicles. Yesterday’s results also showed the industry’s performance for the month in which GM and Chrysler received commitments for as much as $17.4 billion in U.S. loans, averting what they said would have been a collapse by this month without federal aid.

European brands joined the decline among U.S. and Asian automakers. Sales of Daimler AG’s Mercedes-Benz and Smart minicar fell 24 percent last month. Volkswagen AG was down 14 percent, while its Audi unit was off 9.3 percent. Bayerische Motoren Werke AG’s BMW- and Mini-brand autos dropped 36 percent. December’s industry plunge may have been eased by the resumption of low-cost financing from GM last week, auto- research firm Edmunds.com said, citing a surge in vehicle inquiries on its site and dealer surveys. Ford’s U.S. sales were "strong" in the last two weeks of the month, Executive Vice President Mark Fields told reporters yesterday in Dearborn, Michigan, where the automaker is based. Ford discounted its remaining F-150 pickups from the 2008 model year after a redesigned version debuted in October. The F-series kept its title as the top-selling U.S. truck for a 32nd consecutive year, with 515,513 deliveries, Ford said. GM said its Silverado sold 465,065 units. Sales of both models fell 25 percent.

At Chrysler, a lack of capital at lender Chrysler Financial may be accounting for a sales decline as much as 25 percent, Steve Landry, vice president of sales for North America, said in a call with reporters. Chrysler intentionally pared sales of unprofitable fleet vehicles by 63 percent last month, he said. Consumer concern that GM and Auburn Hills, Michigan-based Chrysler would fail to get government aid and be forced into bankruptcy may have contributed to December’s slump, Patrick Archambault, a Goldman, Sachs & Co. analyst based in New York, said in a Dec. 28 research note. President George W. Bush announced Dec. 19 that GM and Chrysler would get the emergency loans in exchange for restructuring their businesses. GM had said it might run out of operating funds by the end of 2008, while Chrysler had said it might fall short by the middle of this month.

Canadian auto sales sag 21% in December
Makers of new cars and trucks have done a brisk business in Canada since 2005, enjoying sector-wide sales gains every year as buyers feeling secure about the future made a beeline to auto dealerships from Comox to Campbelltown. But the party sure looks like it's over now. Auto sales in Canada fell 1.1% to 1.636 million vehicles in 2008, punctuated by an ugly December that saw industry deliveries plunge 21% after a 10% drop in November. The carnage in December spilled from one end of the industry to the other. Honda Motor Co. fared the worst among major manufacturers during the month, dropping 41% year over year. Toyota Motor Corp. fell 35.4%. Both automakers boast the country's most popular cars, the Civic and the Corolla, proving the downturn is hitting even the industry's former untouchables.

With only 94,423 vehicles sold, automakers on Monday reported their worst Canadian sales since December 1996, when then U.S. President Bill Clinton was still basking in his election win over Republican Challenger Bob Dole. Canada's auto industry is now finally seeing the same double-digit sales declines that have blasted the United States for months. "Consumer confidence is certainly low," said Bill Harbottle, president of the Jim Pattison Auto Group, which sells eight car brands in 18 retail locations in British Columbia. He added that a shortage of key products and weird weather also kept buyers away from showrooms. "In the West, particularly in the lower mainland, we're into our third solid week of snow which we normally never have. And that's really affected traffic and the sales pace in the latter half of the month."

U.S. auto sales fell last year to 13.2 million vehicles, their lowest level since 1992, according to Scotiabank Group. But as the recession deepens, the annual selling rate is now tracking at about 10.6 million units, Ford Motor Co. said. Dealers haven't seen sales activity that slow since 1981. The pace will make it all the more difficult for the Detroit manufacturers to engineer the dramatic overhaul they promised to win a rescue loans package worth $21.4-billion from the Canadian and U.S. governments. Chrysler LLC said Monday its U.S. December sales fell 53% year over year. GM was unable to shake the negativity surrounding its possible collapse, reporting a 31% drop in sales. Its 2008 tally was the worst in 49 years.

"The first quarter is going to be bad no matter how you look at it," Ford economist Emily Kolinski Morris said on a conference call. "There is business out there. But the business has been reduced first and foremost because consumers are concerned about their employment status," added Ford sales analyst George Pipas. That same worry is now gripping Canada, said Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ont. "If you are unemployed or are threatened with unemployment the last thing you would do is go out and buy a new vehicle."
Employment growth slowed to 0.8% in Canada through the first 11 months of 2008, according to Statistics Canada's latest labour force survey. The economy shed 71,000 jobs in November.

Ottawa and Washington are now scrambling to develop economic stimulus packages to revive growth. Ford urged the Canada's Conservative government to consider tax holidays for new vehicle purchases and incentives to push consumers to trade in their old cars. Stephen Harper, the Prime Minister, said last month that his government will free up money to support access to credit for consumers, with particular attention paid to improve the accessibility of car loans and dealer financing. "What we saw in December is certainly concerning," said Richard Gauthier, president of the Canadian Automobile Dealers Association. "But are buyers running scared? We can't say for sure yet... I'm not ready to say the bottom has fallen out of the market."

Toyota Extends Production Halt, Announces Further Output Cuts
Toyota Motor Corp. on Tuesday announced further cutbacks in its domestic output and said it will halt production for 11 days in February and March, revealing growing pessimism about flagging global auto demand. Japan's largest car maker by volume said it will suspend production for four weekdays and two Saturdays in February. In March, it will stop production for three weekdays as well as two Saturdays. Although it is still working out the details of the plan, Toyota intends to temporarily suspend output at all of its 12 plants in Japan, including four that roll out vehicles.

The company has already decided to halt production for three days at 11 of its domestic plants in January, with the exception of one auto parts plant. "We`ve already informed our parts suppliers about the production halt," said a Toyota spokesman. The extended suspension shows just how much of an impact plummeting auto demand and the soaring yen are having on Japan's car makers. Given Toyota's prominence in the global auto market, it also suggests that other domestic rivals may follow suit.

Last month, Toyota forecast its first-ever operating loss in the current fiscal year through March, as it feels the pinch from the strength in the yen and a recession-induced slump in vehicle sales in key markets like the U.S., Europe and Japan. Toyota now expects a consolidated operating loss of 150 billion yen, or about $1.61 billion, in the current fiscal year ended March 31, compared with a profit of 2.270 trillion yen in the last fiscal year. For the calendar year 2008, Toyota also estimated its global sales will total 8.69 million vehicles, down 4% from the previous year, and world-wide production to come to 9.23 million vehicles, down 3%.

For Car Companies, It Was a Year to Forget
A dismal December caps off the auto industry's worst year since 1992. Cars outsold trucks and SUVs for the first time since 2000. General Motors closed out its centennial year having to ask the U.S. taxpayers for loans to survive. Chrysler closed out its first full year owned by a private equity firm by hiring bankruptcy lawyers. And Toyota's (TM) miserable U.S. performance led the Japanese company to project its first worldwide operating loss since the end of World War II, and to the likely ouster of its chief executive. In short, it was a year, and a financial quarter, to forget. U.S. car and truck sales fell 18% industrywide in 2008, to 13.24 million units, according to Autodata. That's the worst year for vehicle sales since 1992, and the worst year-over-year dropoff since 1974. "The best thing about 2008 is that it's over," said Toyota Motor Sales USA President Jim Lentz.

For the first time since 2000, Americans bought more cars than trucks and SUVs—passenger cars accounted for 50.8% of total U.S. sales in 2008, vs. 46.3% in 2007. Spurred along by the summer spike in gas prices, sales of small cars rose from 17% of the industry total in 2007 to 20.5% last year. "We used to think that trucks and SUVs had permanently supplanted cars as the majority vehicle in the U.S., but now we think trucks and SUVs will remain in the minority for good," said Ford's (F) chief sales analyst, George Pipas. Sales fell so sharply toward the end of 2008 that automakers were unable to chop their production fast enough to keep up with dropping demand. In the first quarter of 2008, U.S. sales were humming along at an annual pace to sell 15.6 million vehicles. But the fourth quarter's selling rate, if projected across the whole year, was just 10.6 million.

GM's 2008 sales in the U.S. were down 22.9% from 2007, to a 49-year low. Ford sales fell 21%; Chrysler was off by 30%. And while Japanese rivals outperformed Detroit for much of the year, by yearend Toyota sales were down 16% and Nissan (NSANY) was off 10.9%. Dismal as December was, for GM and Ford it marked a slight improvement from the two previous months. GM sales were still down 31.4%; Ford's were off 32%. Toyota fell 37%, Honda (HMC) 34%, and Chrysler a stunning 53%. "It was like two different years in one," said Chrysler Vice-Chairman James Press. Press said the company was on track with its sales and financial restructuring plans in the first half of the year. But the credit squeeze that dried up lending and leasing from the car companies' finance subsidiaries, plus the recession and stock market collapse, slaughtered business in the second half.

GMAC, GM's credit arm, which usually provides loans to about half of the company's customers, was doing just 3% of GM's lending business in October and November. The automaker hopes the recent infusion of capital to GMAC by the Treasury Dept. will make more loans available for car shoppers and offset those sales that are being lost as unemployment rises. The publicity around the Detroit Three in the past two months has only made car buyers less likely to plunk down tens of thousands of dollars for a long-term investment in a vehicle. Auto CEOs asked the government for loans and lines of credit to stem the cash depletion that threatened to drive GM and Chrysler to Chapter 11 bankruptcy filings in early 2009. A $17.4 billion loan commitment from the Treasury to the two companies came through last month. "Certainly, all the negative coverage is very hard to quantify," says Mark LaNeve, GM's vice-president for North American sales and marketing. "On the margin, all that kind of discussion hasn't been a help for us." The surge in gas prices to more than $4 a gallon sent sales of GM's profitable pickup-truck and SUV business down almost 28%.

When fuel prices started falling back to earth in the second half, a credit crunch and economic slump hammered sales of any kind of vehicle. GM's share of the overall U.S. market fell to 22%, down from 23.5% a year earlier. GM, Ford, and Chrysler are rapidly increasing their supply of small cars and car-based utility vehicles. But pickups and full-size SUVs have long supplied the best profits per vehicle, which is why their rapid decline has been so painful. Sales of full-size pickups dropped from 2.21 million in 2007 to 1.61 million last year. GM lost $18.5 billion in the first nine months of the year. The pain was hardly exclusive to Detroit. Nissan announced last year that it will exit the business of building its own full-size pickup, and instead rebadge Dodge Rams as Nissans after 2010. Toyota sales were down 16% for the year, forcing the company to idle its new pickup plant in Texas for three months. By yearend, the economy was so frozen that Toyota even delayed the start of a new plant in Mississippi that is expected to build its fuel-sipping Prius hybrids.

Often in a recession luxury vehicle sales hold up better than mass-market brands. That's because the wealthy usually still have money in a down market, they often lease cars that need to be replaced no matter what the economy is doing, and they seldom trade down out of luxury brands. But little of that holds today: Mercedes-Benz (DAI) reported that its sales fell 11.2%. BMW (BMWG) cut back in shipments from Germany to the U.S. as it saw sales decline 15.2%. Toyota's Lexus division dropped 21%, and Porsche was off 25% for the year. One bright spot was BMW's MINI division, which gained 28.6%. Total sales of luxury brand vehicles fell from 1.91 million in 2007 to 1.52 million last year. December was especially bad for luxury: Mercedes sales were down 32%, and BMW fell 40% from the same month a year earlier. "This is a different kind of recession," says independent marketing consultant Dennis Keene. "It is not a cyclical recession that people anticipated, but rather one that is altering the whole structure of the financial markets, banks, and companies, and I'd expect luxury vehicle sales to be soft for the next three years at least."

Car companies and analysts were left searching for good news anywhere they could find it. Ford noted that it, along with Toyota and Honda, were the only companies in the top six that increased their market share in the horrible fourth quarter. Subaru of America said its U.S. sales crept higher in 2008, poising the Japanese company to be the only major automaker with a yearly sales increase. Subaru's U.S. sales rose by 0.3%, to 187,699 vehicles from 187,208 in 2007, as consumers snapped up its top-selling Forester and Impreza models. Edmunds.com, a Web site that gives car-buying information to consumers, said there was an unusually large spurt of inquiries on its site and at dealers in the final days of December. Some dealers reported making 40% of their entire month's sales in the final week and that site research on GM vehicles rose more than for other brands. That seemed to follow news that the government was not going to let GM go bankrupt. "In the current environment I would say that [the burst of late sales activity] is dramatically good news," said David Tompkins, a senior analyst with Edmunds.com.

Ilargi: Protectionism in many shapes and forms is an inevitable future. The US bail-outs for its carmakers and other industries put it in an awkward position when it comes to protesting what other countries do.

US Tempers Rise Over Trade With China
U.S. trade hawks are putting the heat on Barack Obama to get tough with China about import dumping. Global recessions can bring out the worst in trading partners. Plunging domestic demand in both China and the U.S. has left manufacturers in both countries plagued with overcapacity. American companies are now accusing their Chinese rivals of dumping products—selling at below-market prices—in the U.S. The clash could provide the first trade challenge for incoming President Barack Obama, who must balance his promises to be tougher with Beijing against America's need for Chinese funds to finance a projected $1 trillion federal budget deficit. Stoking the controversy is the sudden activism of the Bush Administration, which U.S. manufacturing lobbyists often accused of being soft on China. The Bush White House filed lots of dumping cases but tried to head off bigger trade disputes with quiet diplomacy.

But on Dec. 19, in one of her last acts as U.S. Trade Representative, Susan C. Schwab filed a sweeping petition with the World Trade Organization alleging that China illegally aids local exporters of Chinese-branded products, from appliances to apparel, with such subsidies as cash grants and cheap loans. "The programs are coordinated by agencies in the central government and have tentacles reaching deep into the provinces and cities," says a U.S. trade official. "We are talking about hundreds of companies." China has denied the charges, but many U.S. companies are spoiling for a fight. The U.S. textile industry says China grabbed more than half of the U.S. apparel market for the first time this year by pumping $10 billion into new export subsidies since July. Industry lobbyists want Obama to be far more aggressive with Beijing, both in enforcing trade laws and applying diplomatic pressure. The biggest brawl promises to be in steel. In December, the U.S. International Trade Commission, in an action separate from Schwab's petition, assessed duties of 35% to 40% on certain Chinese steel products to compensate for alleged subsidies.

"Steel is often an early indicator of other trade problems," says Scott N. Paul, executive director of Alliance for American Manufacturing, a Washington trade group. "We need to send a signal that there will be consequences if China resorts to dumping." Beijing is challenging Washington's findings in the WTO. Since April, Chinese monthly steel exports to the U.S. have nearly tripled. The biggest surges, in fact, occurred in the fall—even though the U.S. economy by then was sliding into deep recession. In October, Chinese steel exports to the U.S. hit an all-time high. At the same time, U.S. steel mills are running at 43% of capacity, their lowest level in 25 years, and dozens of mills have shut. After reporting record profits in 2007, U.S. Steel (X) on Dec. 2 shut mills in Michigan, Minnesota, and Missouri, idling 3,500 workers.

Trade hawks claim part of the problem is Beijing's use of subsidies, currency manipulation, and tax breaks for exporters in a bid to stem unemployment and preserve stability. The data suggest China is on track for a further jump in steel exports in 2009, says Barry D. Solarz, senior vice-president for trade and economic policy at the American Iron & Steel Institute. "Our fear," he says, "is that China will try to export its way out of this crisis by dumping here." Washington trade attorney William H. Barringer, who represents Chinese steel producers, says most of the autumn's import bulge consisted of pipes for oil-drilling equipment. The orders were placed months earlier, when oil prices were high, he notes. Now Chinese steel shipments are falling. Barringer contends American producers are trying to make China a scapegoat. "This is what the U.S. steel industry historically does," he says. "There always is a crisis coming."

Several factors make China the prime target in trade disputes. America's record trade deficit with China—at $233 billion for 2008 through October—tops the list. And since entering the WTO in 2002, China has become a manufacturing juggernaut. Six years ago, China exported little steel. It has since added capacity that's more than double America's total output. China now makes 40% of the world's steel. Beijing hasn't helped its case by pushing policies that juice exports. In November, it began offering partial rebates of value-added taxes for thousands of goods produced for export. China had scaled back that controversial perk in 2007. Beijing also stopped letting the yuan rise against U.S. dollar.

While none of these moves may violate WTO rules, the fact that China is pushing exports while global industries are reeling has raised alarms. Beijing University finance professor Michael Pettis goes so far as to liken China's tax-rebate move to the Smoot-Hawley Tariff Act of 1930, the U.S. law that sharply hiked tariffs to protect American manufacturers. Smoot-Hawley is widely blamed for a wave of global protectionism that helped usher in the Great Depression. Back then, America was the world's workshop and suffered from huge overcapacity at a time of global contraction. "China is in the same position today," says Pettis. "So far, China is acting like it thinks it can export its way out of this problem. I am very, very worried."

German Parties Nearing Deal on Massive Stimulus Package
After five hours of talks on Monday, Germany's ruling parties said they were nearing agreement on a new economic stimulus program totalling up to €50 billion. They still disagree on whether to cut taxes but expect to reach a deal by January 12. Germany's ruling coalition parties came closer on Monday night to agreeing a new stimulus package of up to €50 billion ($68.4 billion) to help Europe's largest economy weather the looming recession, but they remain divided over whether the package should include tax cuts. After five hours of talks in Berlin, the leaders of Chancellor Angela Merkel's conservative Christian Democrats (CDU) and of the center-left Social Democrats said they agreed on most main points to spend public money on infrastructure projects such as school refurbishment and road building to protect jobs and spur growth.

The party leaders said they were confident they could reach a final deal at their next scheduled meeting on January 12, even though they remain divided on whether to cut taxes as part of the program. The SPD opposes conservative demands for an increase in the tax-free threshold -- effectively a tax cut -- and other measures to lighten the tax burden. Instead, the SPD wants to lower welfare contributions, and is even calling for higher taxes for high earners. "An agreement by next Monday is possible," said Volker Kauder, the CDU's parliamentary floor leader. Merkel's government pushed through a €31 billion package only last month but critics dismissed it as too small.

She was initially opposed to tax cuts but has since bowed to pressure from her allies in the Christian Social Union, the Bavarian sister party to her CDU, which had insisted on lightening the tax burden. Despite criticism of her handling of the financial and economic crisis so far, Merkel remains the country's most trusted politician ahead of a year that will see numerous regional elections culminating in the general election in September. A poll by the Forsa institute released last week showed Merkel topping the list of politicians Germans trusted the most with 63 out of 100 points, ahead of her main rival Frank-Walter Steinmeier, Germany's foreign minister and the SPD's candidate to run against her in September. But Steinmeier is close behind at 60 points.

UK firms face 45% fall in earnings, says Citigroup
UK companies face a 45pc drop in earnings as the credit crisis chokes the economy this year, according to Citigroup. But most of the damage is already reflected in today's battered share prices. The US bank said Britain would the pay the price for letting consumer debt reach the highest levels of the G8 bloc while also running a large fiscal deficit at the top of the cycle. "This is not a good place to start," said the bank's equity team. House prices are likely to fall a further 15pc, with a high risk of an "overshoot" with traumatic effects on consumer psychology.

Consumer spending in Britain has had an 80pc gearing to house prices over the last quarter century, compared to nearer 50pc in the US, 10pc in Germany, and 5pc in Italy. The sectors likely to suffer most as profits crumble in 2009 are automobiles and parts (-82pc), banks (-79pc), industrial metals (-70pc), forestry and paper (-70pc), retailers (-65pc), construction (-60pc), mining (-60pc) and oil and gas producers (-60pc). Among the rare safe-havens are healthcare (+25pc), tobacco (+5pc), electricity (-5pc) and gas and water (-8pc). The figures are from peak to trough.

Citigroup said the rate of return on equities will halve from 19pc to 8.7pc as the recession hits emerging markets, which have been an engine of profit growth for UK firms in recent years. The price-to-earnings ratio (trailing) has already fallen below 7, the lowest since the 1970s. "The market does not believe that historic profits are sustainable. Neither do we," said the bank's UK equity strategist, Adrian Cattley. Dividends may be cut by 15pc, with risk of greater damage if oil falls below $40 a barrel and eats into the earnings of BP and Royal Dutch Shell, the two big listings on the London Stock Exchange.

This is worse than in past recessions, when inflation flattered the picture. This time a deflationary backdrop will cause absolute falls in pay-outs. Britain is now in such a mess that it will take until 2011 or even 2012 to purge the excesses and return to normal growth, despite help from a weak pound. "The problems in the banks are now coursing through the veins of the economy. Credit availability has declined sharply. Mortgage approvals are at all-time lows. Measures of corporate liquidity suggest a nasty correction. These point towards a deep and lengthy recession," Citigroup said.

Weakness of pound a further blow for UK retailers
Retailers engaged in the biggest discounting frenzy in memory are facing the further nightmare of sharp increases in the prices they will pay for products in 2009 following the fall in the value of sterling. Britain's retailers buy many of their products from China and the Far East, paying in dollars, and the slump in the value of the pound versus the US currency has left companies facing sharply higher bills. "The recent death of full-price retailing in the UK is a major worry," said Pali International analyst Nick Bubb, adding that the worst of the impact would be felt in the Autumn of 2009. "Retailers will either have to absorb big increases in import costs from their Far East suppliers or try to pass price increases on to unwilling consumers, whose confidence has been badly shaken by job cuts and the collapse in house prices." The vast majority of retailers will have hedged their currency exposure to protect themselves in 2008 but many of those hedges will come off this year and leave companies facing sharply higher costs.

High street chains are already under pressure as consumers tighten their belts in the wake of the economic downturn but the fall in the value of sterling from $1.99 against the dollar at the beginning of 2008 to nearer $1.45 leaves them further exposed. "Most retailers are hedged on their Far East buying at $1.85/$1.90 until around mid-year, but after that there will be a lot of pain," said Mr Bubb. Argos-owner Home Retail Group is among those feeling the squeeze. The retailer sources about £1.8bn of its goods in dollars each year and every one-cent rise in the US currency increases its buying costs by about £5m. While the weakness of the pound has hit retailers with predominantly British operations, those with overseas interests have fared better. B&Q owner Kingfisher and Comet's parent Kesa, which both have big French operations, have seen their profits boosted by around 20pc following the appreciation of the euro.

Senior retail executives warned last year of the danger of sterling slipping through the $1.80 mark, forecasting that it could prove the final straw for many cash-strapped companies. With the pound trading around $1.45 on Monday, industry insiders have warned that the effect of the pound below the $1.50 mark could be dire, as currency hedges expire. Few industry experts expect trading conditions to pick up markedly over the first half of the year but they will be aware that any increase in consumer confidence would likely be dampened by a jump in prices on the high street. Analysts will be keen to learn how the already struggling industry will deal with this latest problem as retailers update shareholders on the all-important Christmas and New Year trading period over the coming days and weeks. Sir Stuart Rose, executive chairman of Marks & Spencer is likely to face questions about the difficulties posed by a weak pound and the strength of the dollar this week.

FSA to lift ban on short-selling but disclosure rule will remain
A ban on the short-selling of financial shares will be lifted by the Financial Services Authority (FSA) this month, but compulsory disclosure will remain in place for a further six months, the regulator said. The ban on short-selling the shares of 34 companies will be allowed to expire on January 16, after the temporary measure was introduced in September in an attempt to halt volatility in the financial markets. The regulator will extend rules that force short-sellers – investors who aim to profit by selling shares they have "borrowed" for a fee in the hope of buying them back cheaper at a later date – to disclose their positions until June 30. Sally Dewar, FSA managing director of wholesale and institutional markets, said that the regulator would take further action to prevent large swings in share prices. "We will not hesitate to reinstate the ban if necessary," she said. "We believe that these proposals are the right measures for maintaining orderly markets."

The move comes in the face of calls to extend the ban from some politicians, including chairman of the Treasury select committee John Mc Fall and Liberal Democrat Treasury spokesman Vince Cable. Companies on the FSA's short-selling disclosure list include Barclays, Aviva and Schroders. The Association of British Insurers, the trade body for the insurance industry whose members control about 15pc of the UK stock market, welcomed the FSA's decision to extend the short-selling disclosure. Director of investment affairs, Peter Montagnon, said the ABI believes that short-selling "usually provides a useful role in the market" but there is also a need for transparency. "It is important to know who is taking a short position," he said. The FSA said it plans to publish a consultation paper within a month, setting out its proposals for a long-term regime on short-selling.

How to get banks lending once more
The Government and the Bank of England have tried flooding the system with cash, they've tried cutting interest rates, they've tried the special liquidity scheme, they've forced the banks to recapitalise, and they've tried guaranteeing interbank, small business and export lending, yet still the banking system won't lend in the way and in the quantities it used to. What more can be done? In comments made over the weekend, Gordon Brown, the Prime Minister, suggested that further policy action could be expected over the next month, yet even by his own admission, it's going to be quite a challenge.

As part of last October's recapitalisation, mainstream British banks agreed to maintain their mortgage and small business lending at 2007 levels, and by and large they've kept their promise. Indeed, most of them claim actually to have increased their lending in these categories over the past year. So how come lending is still being squeezed? In the main, it's down to the withdrawal of more marginal players from the market. The nationalisation of Northern Rock alone removed a player which at its peak was writing around one in five UK mortgages. Foreign-owned banks have also largely withdrawn from UK corporate and SME lending. At the same time, wholesale money markets remain largely closed to all mortgage, consumer and SME lending. Taking all these factors together removes around 20 to 25 per cent of small business and mortgage lending from the British market.

In order to compensate for the gaping hole left in the credit markets, the mainstream banks need to lend not just a bit more than they used to but a lot more. At the same time, these banks face their own "deleveraging" challenge. None of them are able to borrow with the ease that they used to, so nor can they lend in the same way either. Even if they had the capital and the inclination to fill the gap, persuading them to do so would remain a big ask. You might reasonably think that, during the boom, banks abandoned all standards of prudential lending, but all of them will still have rigid rules, now being applied much more vigorously than they were, on what may be lent to whom and in what quantities. For practical and prudential reasons, it's not realistic to expect the mainstream banks overnight to expand their lending by the amount required to return credit conditions to boom-time levels. And is that really what the banks would want to do in any case?

For the time being, the big British banks are trying to square the circle by applying the deleveraging not to ordinary domestic lending but to international and capital markets business. The process is particularly visible at Royal Bank of Scotland, where the new chief executive, Stephen Hester, has put the expansionary ambitions in capital markets of his predecessor, Sir Fred Goodwin, sharply into reverse. As these businesses are shrunk down to size, that should free up more capital for plain vanilla British lending. Yet as I say, it's just not practical or prudential for any bank to let rip and greatly increase their exposures to particular types of domestic lending, especially when there is a recession in full swing. Pressurising banks to apply their deleveraging to international and capital markets business so they can lend more domestically is in any case pretty much a zero-sum game if all countries do the same thing. What countries gain by forcing their banks to lend more domestically they lose when foreign banks are forced to play the same game.

Mr Brown rightly warns against a slide into protectionism, yet what is forcing banks to trim their international lending so that they can apply more money to their home markets other than a form of economic protectionism? So what does the Treasury intend to do about it all? As Mr Brown seemed to suggest over the weekend, another recapitalisation would not be the first port of call. The Government has done it once, and although it may have saved the banks from oblivion, it hasn't made the banks lend appreciably more. That may be because the rising tide of bad debt is already swamping out the new capital. Yet in circumstances where it is an absence of funding as much as capital which is causing credit to shrink, it is not certain that obliging the banks to raise yet more of the stuff will significantly ease the problem.

Sometimes it seems as if policymakers are living back in the 1970s when most bank lending was domestic and funded by locally generated retail deposits. Yet today, most banks are heavily international in their lending and have come to rely on international money markets for their funding. These markets remain problematic. You can pile up the banks with all the capital you like, and still the money markets might be reluctant to fund them. The British authorities may have acted decisively in recapitalising the banks, but throughout this crisis their approach to the funding, or liquidity, issue, has been piecemeal and reluctant. This needs to change if the Government is to stand any chance of getting on top of the crisis. There are a number of ways in which the Government can address the lending famine.

One possibility would be simply to ease the rules on capital so that the banks could operate with lower ratios. In theory, this would allow the banks to lend more. On the other hand, markets might react badly to the smaller capital buffers, making it even more difficult for the banks to fund themselves than it is already. Another would be to set up "bad bank" arrangements under which the toxic debt would be bought up by a Government agency and held to maturity. Yet as has been discovered in the US with the "Troubled Asset Relief Programme" (Tarp), defining which assets should be bought and at what prices is a minefield. With UK banks, it would be particularly awkward, as some of the worst-performing debts are in overseas mortgage and commercial lending. Applying UK taxpayers' money to buying up US sub-prime mortgages would be controversial, to put it mildly.

It therefore seems to me quite likely that the Treasury will eventually settle on something close to the idea that has been taken up by the Tories, of guaranteeing a bigger pool of new mortgage and business credit. We are in any case halfway there with the scheme that guarantees interbank lending. Such an approach would not be without its dangers. The implicit state guarantee carried by securities issued by Fannie Mae and Freddie Mac are these days regarded in the US as one of the root causes of the whole crisis. Do we really want to recreate state-subsidised credit machines of potentially such monstrous proportions? The Government is already up to its neck in debt. To act as a substitute for the banks in credit provision might further undermine the Government's perceived creditworthiness and could potentially end up bankrupting the entire country.

All the same, the Government has to do something to ease the lending famine, and this may well be the least worst solution. A variation of the same idea would be the one suggested by Jim O'Neill, chief economist at Goldman Sachs, whereby the Government would set up an entirely new, state-sponsored bank which would provide the same purpose of injecting more credit into the system. It's a strange kind of solution which attempts to cure a crisis caused by an excess of debt by providing even more of the stuff, yet it is hard to see how else to ease the deleveraging process. In any case, I hope Treasury officials managed to get themselves some rest over the Christmas break. If they aren't already again burning the midnight oil, they soon will be. The immediate financial crisis may have abated, but the wider crisis in an economy which has become overly dependent on now scarce credit has only just begun.

Canadian banks won't loosen credit
Canada's banks are refusing to loosen consumer and business lending standards despite criticism their "prudent" credit practices are worsening the economic slump. The Canadian Bankers Association issued a statement yesterday following a private meeting with Finance Minister Jim Flaherty in Toronto, arguing that protecting customer deposits remains a key concern for banks. Flaherty convened the talks with top industry executives partly to discuss persistently tight credit conditions at a time when the government is taking action to prop up lending. Just two weeks ago, he billed the availability and affordability of credit as a "major issue." Yesterday, however, Flaherty remained mum. His silence left banks to refute mounting criticism that they are unfairly constraining the flow of credit amid the worsening economic slump.

"While banks understand the importance of providing credit to individuals and businesses, banks also have a responsibility to protect their depositors' money," bankers association president and CEO Nancy Hughes Anthony said in a release. "Banks in Canada have been prudent lenders and, because of this, largely avoided the financial difficulties and sub-prime mortgage issues that have plagued banks in other countries. It is in everyone's best interest that banks stick to these sound, fundamental principles of prudent lending during this recessionary period." Glenn Thibeault, the NDP's consumer protection critic, said that type of "status quo" response is unacceptable given that banks are busy hiking some interest rates and fees for already squeezed consumers and small businesses. "Basically what they are telling Canadian families who are struggling is that the big banks aren't there right now when Canadian families need them," said Thibeault (Sudbury).

Banks have argued lending has remained robust even as financial markets and the economy have deteriorated. But Catherine Swift, head of the Canadian Federation of Independent Business, said yesterday "there's no question it's tightening." She said a CFIB survey of its small-business members found 28 per cent were worried about access to credit in December, up from 18 per cent in September and 13 per cent in December 2007. A banking source, speaking on the condition of anonymity, said the industry is eager to defuse tensions with Ottawa. "Everyone was trying to lower the temperature a bit," he said of the meeting. Flaherty's spokesperson also tried to downplay the significance of the meeting by saying the minister meets "semi-regularly" with bank executives.

The federal government has taken significant action to keep credit flowing in Canada by agreeing to buy up as much as $75 billion in mortgages and backstop more than $200 billion in interbank loans. That taxpayer-funded assistance means that banks should be seeking a "happy medium" in their conservative lending practices, said Bruce Cran, spokesperson for the Consumers' Association of Canada. "That money came from Canadian taxpayers and that should be surely considered by banks when they are deciding on their lending policies," he said. Flaherty has already suggested that he may not continue with those programs if they prove ineffective, and he has noted he's hearing complaints about access to credit from across the country. "We are planning to work with the financial institutions to ensure that there's adequate availability and affordability of credit in Canada," he told reporters last month. "It is a major issue going into 2009."

Canadians received fresh evidence yesterday of the country's darkening economic prospects. New data suggested the auto industry suffered a miserable holiday sales season despite eye-popping incentives. Results show consumers closed their wallets and showroom sales plunged 21.2 per cent, or more than 25,000 vehicles, to 94,423 in December from the same month in 2007. The results marked the worst decline in auto sales for any month since 2003. It was also the lowest level for a December in 12 years. Analysts are forecasting more big declines in the first half of this year before the market shows some signs of a recovery. "I'm predicting double digit declines for the next six months before things start to improve," said industry watcher Dennis DesRosiers.

The economic outlook south of the border also grew increasingly grim. U.S. President-elect Barack Obama declared the economy was "bad and getting worse" as he began crisis talks with congressional leaders on emergency action. He predicted lawmakers would approve hundreds of billions of dollars in new spending and tax cuts within two weeks of his taking office. Obama's proposal to stimulate the economy includes tax cuts of up to $300 billion (U.S.), including $500 for most workers and $1,000 for couples, as well as more than $100 billion for businesses, an Obama official said. The total value of the tax cuts would be significantly higher than had been signalled earlier.

There is only one alternative to the dollar
The great challenge confronting the foreign exchange market at the start of 2009 is finding a good alternative to the US dollar. One of the ironies of market events during 2008 was that the US financial crisis produced a flight to safety in the dollar. The dollar emerged triumphant from a financial debacle that centred on $1,300bn (€960bn, £890bn) of subprime US mortgage loans. The fallout has triggered a $32,000bn decline in global stock market capitalisation and driven all the Group of Seven leading industrialised countries into recession. The dollar slumped against the euro during the final weeks of 2008 but fears about the financial system still drove US Treasury yields down to zero on three-month paper and less than 2.1 per cent on 10-year notes. This fear factor is likely to sustain demand for the dollar during the early months of 2009.

There is not now a clear alternative to the dollar because all big economies have slid into recession. Real gross domestic product could contract by 1.5 per cent in both the US and Europe during 2009 and by as much as 2.5 per cent in Japan. The decline in world trade and commodity prices will also reduce significantly the growth rates of the emerging market economies. South Korea and Taiwan are already in severe slumps. The growth rate of China could halve. The US economy could be the first to emerge from recession this year because it appears to be headed for a far more aggressive macroeconomic stimulus programme than any other country. Barack Obama’s administration will announce a $700bn-$800bn multi-year fiscal package focusing on cuts in payroll taxes, aid to state and local governments and infrastructure investment.

The Federal Reserve is also engaging in a programme of unprecedented monetary stimulus. It has slashed its core lending rate to zero and tripled the size of its balance sheet since August. Ben Bernanke, the Fed chairman, has also stated his willingness to engage in further large liquidity injections to buy mortgages, consumer loans and government securities. Mortgage rates have recently eased to 5.1 per cent after remaining above 6 per cent during the past year. The European response to the recession has been far less aggressive. The European Central Bank is still under the influence of the Bundesbank and will ease monetary policy far more gradually than the Fed. Some Bundesbankers are opposed to cutting interest rates at this month’s meeting. The ECB policy could produce political tensions because interest rate spreads on Greek and Spanish bonds have risen sharply compared with German bonds. Japan’s government has been announcing modest fiscal policy changes but it cannot act decisively since it no longer controls the upper house of the Diet. And an election, before September, could produce a change of government.

The Kevin Rudd government in Australia announced a fiscal stimulus programme in October and Canada will announce a big fiscal package at the end of this month. But both currencies are dominated by market perceptions of the outlook for Chinese industrial production and commodity prices, not domestic economic policy. If the US stimulus policy revives the economy by spring or summer, the dollar could rally further. The risk posed by US policy comes from potential market concerns about monetary policy becoming inflationary. The current growth rate of the Fed’s balance sheet is totally unprecedented. As a result of the Obama fiscal policy and the troubled asset relief programme, the Federal government’s borrowing requirement could rise to $1,500bn-$1,700bn this year. Government bond yields have collapsed because of investor fears about the safety of the financial system but they could rebound when conditions normalise. The current level of yields is the lowest since the period of official interest rate controls during the second world war.

Mr Bernanke has indicated that he would be prepared to return to the wartime policy of restraining yields. What remains unclear is whether such a policy of accommodation would provoke fears about inflation and encourage dollar selling, which could in turn drive up bond yields. Foreign central banks could play an important role in the US government bond market because they already own about half of the existing debt stock. China recently displaced Japan to become the largest holder of US government securities because of its long-standing policy of intervening to manage its exchange rate against the US dollar policy. As a result of the downturn in its economy, China has recently begun to lose foreign exchange reserves and may not need to intervene in the market again to restrain the renminbi.

Japan, by contrast, has been experiencing significant upward pressure against the yen despite the severe downturn in its exports and output growth. Japan has not intervened since 2003 but, if the yen rallies another 5 per cent, the country could be forced to spend large sums restraining its currency. If it does, Japan could provide $200bn-$300bn of funding for the US deficit during 2009 while Chinese demand for US securities fades. As a result of the global scope of the recession, there is no country that wants its exchange rate to appreciate. The clear alternative to the dollar in 2009 is not other currencies but that ancient form of money: gold. Precious metals could emerge as a hedge for investors suspicious of central banks and fearful that inflation will be the simplest solution to the challenge of global deleveraging.

US Foreclosure Sales Tripled in First 10 Months of 2008 as Banks Dumped Homes
Foreclosure sales in the 25 largest U.S. metropolitan areas almost tripled in the first 10 months of last year as rising unemployment and falling home values made it tougher for homeowners to sell or refinance their mortgages. Motivated sales, which include foreclosure auctions and banks selling homes taken over for non-payment, increased 193 percent from January to October 2008 from a year earlier, New York-based real estate data company Radar Logic Inc. said today in a report. Conventional sales rose 6 percent in that period. "Lenders are motivated to sell foreclosed houses as quickly as possible to get as much of the loan recovered as possible," Radar Logic Chief Executive Officer Michael Feder said in an interview. "They have a tendency to accept deeper discounts relative to other sales, to the point where motivated sales are driving the market."

Home prices fell in 24 of 25 U.S. metropolitan areas in October, Radar Logic said, as unemployment hit a 15-year high in November. Almost half the homeowners who bought in 2006 now owe more on their mortgages than their houses are worth, making it difficult for them to refinance without bringing cash to the closing, according to Seattle-based real estate data company Zillow.com. Forty-one percent of October home sales in Los Angeles and Phoenix were foreclosure auctions or financial firms trying to recoup lost loan value, Radar Logic said. U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record, according to RealtyTrac Inc., a Irvine, California-based provider of default data.

The RPX Monthly Housing Market Report, published by Radar Logic, measures home values using price per square foot. The data reflects 28-day aggregated values, the company said. California was home to five of the seven steepest metro area home-price declines in October from a year earlier, Radar Logic said. San Francisco, with a loss of 34.4 percent, was followed by Las Vegas, Phoenix, Sacramento, Los Angeles, San Diego and San Jose.
Milwaukee, with a gain of 5.3 percent compared with October 2007, was the only region where values increased. Prices are the basis for property derivatives traded on the Residential Property Index with a volume of almost $3 billion, Feder said. The index allows investors to benefit from the movement of metro area home prices without owning land or physical property. Investors are betting that home prices will continue to decline nationally through 2010, Radar Logic said. Prices will stabilize in Los Angeles and Phoenix in 2010, while values will fall further in Miami and New York, the data company said. "What the forward contracts are saying is we’re expecting further pain in New York due to further pain in the financial services industry," Feder said.

Service Industries in U.S. Probably Contracted Most on Record
U.S. service industries probably shrank in December at the fastest pace on record as consumers retrenched and the housing slump worsened, economists said before reports today. The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 36.5, the lowest level since records began in 1997, according to the median forecast in a Bloomberg News survey. Fewer Americans signed contracts to buy existing homes in November and factory orders fell, other reports may show. Mounting unemployment, plunging home values and frozen credit markets will keep stifling businesses from banks to builders, and retailers faced what may have been the worst holiday shopping season in at least four decades. President-elect Barack Obama has called for stimulus of unprecedented proportion to prevent the recession from deepening much more.

"The recession is turning out to be a pronounced one," said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. "There are multiple problems and multiple sources of the downturn, and things are feeding on one another." The Tempe, Arizona-based group’s report is due at 10 a.m. New York time. Estimates in the Bloomberg survey of 61 economists ranged from 34 to 42, following a reading of 37.3 in November. Figures less than 50 signal a contraction. Also at 10 a.m., the National Association of Realtors’ index of signed purchase agreements, or pending home resales, fell 1 percent in November, according to the survey median. The drop would be the fourth in the past five months. Orders to factories fell 2.3 percent in November, a fourth consecutive drop, according to the median forecast ahead of a Commerce Department report also due at 10 a.m.

The contraction in services reinforces the deteriorating outlook. The economy probably lost jobs in December for a 12th month as firings rippled from factories and construction companies to retailers and banks, economists project the Labor Department’s Jan. 9 employment report will show. Manufacturing, which makes up the other 12 percent of the economy, shrank in December at the fastest pace in 28 years as new orders for products from cars to furniture reached the lowest level since records began in 1948, ISM reported last week. "We have an extraordinary challenge ahead of us," Obama said yesterday in Washington, where he met lawmakers to garner support and craft a recovery effort that includes tax cuts and spending on roads, schools and energy supplies. The plan aims to create or save 3 million jobs and may cost as much as $850 billion.

The Federal Reserve, which has cut the benchmark interest- rate to as low as zero, yesterday began buying mortgage-backed securities as part of its plan to trim borrowing costs and unclog credit. Minutes of the Fed’s December meeting are scheduled to be released today at 2 p.m. Expectations that policy makers’ actions will be effective in limiting the damage has pushed up the Standard and Poor’s Supercomposite Homebuilding Index by 66 percent from an eight- year low reached on Nov. 21, 2008. Still, economists project homebuilding, part of the services index, may decline for a fourth year as foreclosures mount. Retailers also suffered at the end of 2008. Merchants from Macy’s Inc. to AnnTaylor Stores Corp. were among those slashing prices by 70 percent or more to attract holiday shoppers. Sears Holdings Corp. was among chains closing underperforming stores. "A lot of businesses have been caught flat-footed by how deep and accelerated this recession has been," Bill Taubman, chief operating officer of shopping-mall owner Taubman Centers Inc., said in a Dec. 26 interview on Bloomberg Television.

Ilargi: While the US services sector plummets most on record, its UK counterpart would have improved? I’d like to see the data on that. Think maybe British burger-flippers now also count as service workers?

UK services sector shows surprise improvement in December
Service data published this morning showed a surprise improvement in conditions in December, but economists are still betting on an interest rate cut on Thursday. The closely-watched services Purchasing Managers' Index (PMI) which measures output and orders came in at 40.2 last month, where anything below 50 is a contraction, compared with 40.1 in November. The figure was better than the 39 expected by economists, but signalled the end of the worst year for services since the CIPS/Markit series began 12 years ago. The services sector, which accounts for three-quarters of the UK economy, is facing a very tough 2009 hit by the ongoing financial crisis, housing market slump, and the fall in consumer spending. As a result those surveyed for the PMI forecast the sharpest reduction in employment in the history of the survey.

Economists believe that the ongoing weakness in services will contribute to a decision by the Bank of England's to cut interest rates to below 2pc for the first time in UK history this week. "With the service sector survey pointing to substantially contracting economic activity and sharply waning inflationary pressures, we believe the Bank of England is highly likely to slash interest rates by at least another 75 basis points from 2pc to 1.25pc on Thursday," said Howard Archer, chief economist at IHS Global Insight. Vicky Redwood at Capital Economics said after the services data were published that a 100 basis points cut to 1pc was "still very possible."

The prices service providers had to pay for their goods and materials continued to rise in December, albeit at a slower rate, partly reflecting the rising cost of imports caused by a weaker pound. At the same time falling demand and heightened competition contributed to a fall in the prices charged by companies for their services. Roy Ayliffe, a director at CIPS, said: "The festive period did little to bolster the service sector in December, with 2008 witnessing its poorest annual performance since data was first collected over twelve years ago. "Understandably, companies reduced workforces further to reduce costs and brace themselves against what is expected to be a gruelling year."

FASB panel slams FASB proposal to ease fair-value rules
A Financial Accounting Standards Board advisory committee that represents investors has taken issue with a board proposal to relax fair-value accounting standards. Late last month, FASB proposed that companies need not include in their earnings the results of impairment testing of securitized financial instruments that are designated as available for sale, as required under current rules. The board also proposed that the comment period for the suggested revision be limited to 10 days—a much shorter period than usual—so that banks facing losses on these sorts of investments could take advantage of the leeway in 2008.

The proposal to ease off on fair-value rules was triggered by the Securities and Exchange Commission. In recent months, the SEC has faced mounting industry complaints that fair-value rules have exaggerated losses at banks. But a letter to the board—sent by FASB’s Investor Technical Advisory Committee on Dec. 30—described the proposal as inimical to the interests of investors and said it would undermine confidence in banks’ financial results. "The addition of this item to the board’s agenda at this time, coupled with an unusually limited comment period, gives the appearance that both the commission and the board have conceded to the wishes of a vocal industry group, to the detriment of investors," said the letter, which was signed by Jack Ciesielski, a committee member and principal in R.G. Associates, an investment advisory firm based in Baltimore.

"The board has clearly acted without thorough due process and consideration of the ramifications of the issues, and without any clear articulation of benefits to the investing public," the letter added, noting that "these actions have the unfortunate effect of undermining the credibility of the standard-setting process and the trust that is essential." Not surprisingly, comment letters from banks were supportive of the move. Federal bank regulators also applauded FASB for addressing complaints made during panel discussions on the topic that were held last fall. "We appreciate your efforts to respond to the input you received during the recent roundtables on the global financial crisis," said a letter signed by accountants from the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration.

A 259-page report on fair-value accounting issued by the SEC last week voiced general support for the rules. But the report—mandated by Congress in its $700 billion bailout of the U.S. banking sector—urged FASB to relax those for impairment testing of financial instruments. The SEC made that recommendation even though it found that the accounting rules played little or no role in bank failures, such as those of Lehman Brothers, Washington Mutual and IndyMac. "Our detailed analysis of bank failures indicates that for substantially all failed banks studied, fair-value accounting was applied to only a small minority of assets, and losses recorded as a result of applying fair-value accounting did not have a significant impact on the banks’ capital," the SEC report stated. It added that "in each case studied, it does not appear that the application of fair value can be considered to have been a proximate cause of the failure."

Nevertheless, the SEC cited criticism that it received from investors and other parties when it urged FASB to make changes to its fair-value rules. Indeed, the commission singled out the different treatment of impairment of financial instruments that are designated as held to maturity versus those classified as available for sale. Some members of FASB acknowledged during a meeting late last month that the impetus for its proposal was pressure from financial regulators. At the annual meeting of the American Institute of Certified Public Accountants in Washington in early December, SEC chairman Christopher Cox urged the standard-setter to take such action "in time for the preparation of financial results for this year." It is unclear when FASB will vote on the proposal.

Gulf takes wrong currency path
The end-of-year meeting of the Gulf Cooperation Council (GCC) in Muscat apparently saw another step along the road to the creation of a GCC currency designed along the lines of the euro. It is surprising, to say the least, that the GCC is not taking a cool step back and reviewing the project from first principles in the light of the continuing global credit crash, which is about to enter its next phase of a wave of defaults in the world of commercial property and private equity. The answer can only be that the GCC - composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - perceives that there is no alternative.

A lucky reader of the Financial Times recently won 10,000 pounds (US$14,500) for identifying what a panel of judges agreed would be the "Next Big Thing" in financial products. This, the judges realized perhaps five years after the IT world recognized the model, is "peer-to-peer" financing - such as www.zopa.com - which directly connects borrowers with lenders, and investors with investments. In this model, the financial service provider ceases to be a middleman, or credit intermediary, and becomes a pure service provider. The fact is that in the Internet age there is no need for credit intermediaries, whether private banks or central banks. Indeed, Hong Kong managed quite well without a central bank (or lender of last resort) at all, with bank credit creation under the stern control of a monetary authority. The 21st century alternative to the central banking model first implemented by John Law in France in 1719 will be a peer-to-peer "Gulf Clearing Union". To reach this destination, we must take a swift detour via Switzerland.

Few have ever heard of it, but most Swiss businesses are members of the Wirtschaftsring-Genossenschaft or WIR. Since 1934, small and medium-sized businesses in Switzerland have routinely extended each other credit - for many years interest-free - and settled this credit in goods and services, rather than in Swiss francs. So transactions are not settled conventionally in Swiss francs created as interest-bearing credit by Swiss banks, or as non interest-bearing Swiss francs minted by the Swiss central bank. In fact, no Swiss francs change hands at all: transactions take place by reference to the Swiss franc as a value unit. The pragmatic Swiss are not prepared to rely purely on trust in the ability or willingness of their members to settle debit balances. WIR members are obliged to give security over their property by way of collateral. In other words, the WIR is a monetary system that is "property-backed". It is but a short step from the WIR to a Gulf Clearing Union.

The GCC members produce between them some 16 million barrels of crude oil per day, and possess some 45% of known oil reserves. In addition, members, particularly Qatar, also have immense reserves of natural gas. The key innovation that will enable a Gulf Clearing Union is the simple expedient of creating - within a suitable legal framework - a "petro" unit redeemable in a constant amount of energy value, let's say the energy released by burning 100ml (measured at 20 Centigrade) of n-octane. Such a definition of an energy value unit provides a straightforward benchmark for both domestic and international buyers of oil, gas, petroleum products, and even electricity, to use petros - as well as, or instead of, US dollars - in settlement for purchases of GCC production.

Gulf business-to-business transactions would take place on credit terms within a GCC state-sponsored mutual guarantee framework. No interest as such would be paid, but a provision would be made by both sellers and buyers into a "pool". Service providers formerly known as banks would no longer put capital at risk by creating credit based on it, but would act as service providers in return for a fee, managing the system, setting guarantee limits, and handling defaults. Settlement of credit would take place in petros, in goods or services by reference to the petro, or in dollars or other currency acceptable to the seller.

GCC use of carbon-based energy is staggeringly profligate and increasing rapidly. Introduction of the petro offers a way in which energy prices may be raised to global levels, and suitable distributions made in the form of a "petro dividend" to consumers and businesses, who would then be incentivized to cut back on carbon-based energy use since this would literally save them money. Moreover, part of the energy pool could be invested in renewable energy and energy-saving technology: thereby monetizing value which will cost nothing to redeem in the future. In this way, a new economic route for GCC countries to transition to a post-carbon economy becomes possible. The GCC members are essentially able to make the rest of the world an offer it cannot refuse and can lead the way to a new global settlement, by a transition to an international clearing union configured around the petro as a global reserve currency and value unit.

The US could then be invited to repay its energy debt to the rest of the world and to do so by turning swords to ploughshares. That is to say, the huge US capacity in human and other resources currently wasted in staggeringly profligate military expenditure could be turned to the peaceful, but profitable, purpose of creating new generations of energy-saving technology and renewable energy production. The GCC members should remember what they have either forgotten or never understood: that oil is not priced in dollars; dollars are priced in oil. And they should act accordingly to create a Gulf clearing union.

Ilargi: For an excellnt background analysis of the Ukraine-Russia ongoing quarrel, see Jerome à Paris at The Oil Drum Europe.

Gazprom Dispute With Ukraine Entangles Europe
Russia’s gas price dispute with Ukraine escalated Tuesday, disrupting deliveries to the European Union in the midst of a bitter cold spell, with a number of countries reporting that gas supplies had been suspended or reduced, and Germany predicting a possible shortage. Bulgaria, Romania, Greece, the Czech Republic, Austria and other countries including Croatia, Macedonia and Turkey reported that gas supplies had been suspended or reduced after Gazprom, the Russian gas monopoly, reduced gas shipments through Ukraine. Aleksandr I. Medvedev, a deputy chief executive of Gazprom, said at a news conference in London that three export pipelines within Ukraine had been shut down early Tuesday morning.

“The flow to Europe through the Ukraine is now about seven times less than the norm and the situation continues to deteriorate," Mr. Medvedev said. “The Ukraine is in obvious breach of its commitments." “We face this challenge together with our European colleagues," he added. “It’s a question of absolute irresponsibility," and he called on the European Union to “go after Ukraine." Nonetheless, he said, Gazprom is “ready to go to the negotiation table any day, any minute." The European Commission and the European Union presidency responded to the Russian move with a statement demanding that “gas supplies be restored immediately to the E.U. and that the two parties resume negotiations at once with a view to a definitive settlement of their bilateral commercial dispute." They said the E.U. would seek to “intensify the dialogue with both parties so that they can reach an agreement swiftly".

E.ON Ruhrgas, the German gas company, said its gas supplies via Ukraine at its Waidhaus station had been “massively reduced," and predicted that deliveries would completely stop in the next few days. E.ON said it would soon be unable to meet demand if supplies were not restored and temperatures remained low. The Bulgarian Energy Ministry said that its deliveries were suspended early Tuesday, including gas intended for transit to Turkey, Greece and Macedonia. Bulgaria gets the vast majority of its gas from Russia, and has only a few days of supply in reserve. The Turkish energy minister, Hilmi Guler, on Tuesday told reporters in Ankara that the Russian gas from a pipeline that transits Ukraine had been completely cut. But Turkey is seeking to increase deliveries of Russian gas via a Black Sea pipeline, he said.

In Prague, the Czech pipeline operator RWE Transgas said the flow of gas “delivered by the transit pipe line system through the Ukraine and Slovakia to the Czech republic and other EU countries has dropped significantly." It said it would increase purchases of Norwegian gas delivered via another pipeline. The Romanian Economy Ministry also released a statement saying that a pipeline delivering Gazprom gas had been shut down. A second pipeline in the north of the country continues to operate, however. In Vienna, the Austrian energy company OMV said its supply of Russian gas via Gazprom was down 90 percent Tuesday. Werner Auli, a member of the OMV board said in a statement: “The supply of natural gas to our customers is still secured for the time being."

Gazprom began reducing deliveries Monday for transit through Ukraine to Western European customers, saying it was seeking to make up for gas stolen by Ukraine. The Gazprom chief executive, Aleksei B. Miller, said in a conversation with Prime Minister Vladimir V. Putin broadcast Monday on Russian state television that Gazprom would reduce exports bound for Western Europe through Ukrainian pipes by the same amount that it accused Ukraine of diverting. Gazprom had already cut off all fuel supplies meant for Ukraine over the dispute. It said that any countries that suffer shortages as a result should blame Ukraine for not paying a fair price for Russia’s natural gas. Russia and Ukraine, which has a pro-Western government, have been haggling over gas prices for years, in disputes that often carry political overtones. In the current fracas, Ukraine resisted an increase in Russian gas to $250 per 1,000 cubic meters from the current $179.50. Russia then raised the price to $418 for the same volume and again to $450.

The Russian announcement Monday was, in essence, a partial Russian fuel embargo of Europe, something policy makers in Western capitals have feared for some time as relations with Moscow bottomed out last summer following the war in Georgia. The announcement took the form of a conversation between Mr. Putin and Mr. Miller during an evening newscast. As they have in the past, the men accused Ukraine of diverting gas from pipelines that send it through Ukraine to Europe, something the Ukrainian government has denied doing. Mr. Putin asked Mr. Miller how much Ukraine had diverted. About 65.3 million cubic meters of natural gas since Jan. 1, the executive said. “What are you going to do?" Mr. Putin then asked. Mr. Miller responded that he was considering ordering Gazprom to immediately cut exports bound for Western Europe through Ukrainian pipes by this same amount.

He said Gazprom would seek to mitigate shortages by shipping more gas through Belarus and Turkey, and by withdrawing gas from storage. But he suggested that European nations should blame Ukraine for likely deficits of heating fuel. Mr. Putin asked, “How about the supplies to our Western European consumers under long-term contracts?" Mr. Miller said that Europe would only lack what “Ukraine had stolen." Mr. Putin then said: “Good, I agree, cut it from today." In the days ahead, Mr. Miller added, Gazprom would each day reduce the volume of gas supplied at Ukraine’s border and intended for re-export to Europe by the amount it suspects Ukraine of diverting from the pipelines. Russia diminished the flow of gas to Ukraine on Jan. 1 by about 100 million cubic meters per day. Since then, Russia has accused Ukraine of withdrawing gas from the export pipelines.

Ukraine countered that it was diverting only enough fuel, about 21 million cubic meters, to power compressors. Authorities in Kiev said they were meeting internal demand from reserves and domestic production. While ostensibly intended to force higher payments on Ukraine, the latest cuts directly affect gas bound for Western markets, something that energy experts said was seemingly designed to drag the European Union into the dispute, forcing it to assume a mediating role, assist Ukraine with payments or face shortages in its member nations’ markets. In 2006, a similar dispute prompted the European Union to side with Kiev. This time the bloc has urged a swift end to the crisis, but it has so far refused to get involved. “It has to be resolved by the two parties," said Ferran Tarradellas Espuny, an energy spokesman for the European Commission in Brussels. The global recession has reduced demand for energy and allowed many countries to salt away stockpiles in national reserves, making any embargo easier to weather than in 2006.

Canadian oil-sand mines stuck as crude price plummets
Canada's once booming oil sands industry is cooling fast as the plunging oil price undermines investment. More than US$60 billion (£41 billion) worth of projects to extract oil from the bitumen-rich sands of northern Alberta have been delayed in the past three months, according to a study of industry figures by The Times. A string of companies, including Royal Dutch Shell, Petro-Canada and SunCor, have been among those that have frozen multibillion dollar projects - in some cases indefinitely. As much as 175 billion barrels of oil are contained in the oil-rich sands of the Athabasca region - second only to Saudi Arabia in a ranking of different countries' proven oil reserves. But the process of extracting crude from sand, either by mining or injecting steam to recover it in situ, is both environmentally controversial, requiring the use of huge amounts of energy and water, and expensive.

The cost of production can be as high as $70 a barrel compared with $5 a barrel for some of the largest onshore oilfields in the Middle-East. Last year, bolstered by soaring crude prices, which rose as high as $147 per barrel in July, investment poured into projects such as Petro-Canada's Fort Hills development. But some companies have paused projects as the recession saps global energy demand, driving oil prices down by more than $100. On Friday, US crude for delivery next month was trading around $41 a barrel. Annette Hester, a Calgary-based energy economist at the Centre for International Governance Innovation and a leading independent expert on the industry, said a number of factors had contributed to the slowdown, including high costs and a less attractive royalty regime introduced last year by Alberta's state government.

The global credit crunch has also affected the ability of some companies to raise finance for oil sands projects. "We are absolutely seeing a slowdown in new projects although existing projects are continuing," she said. Connacher Oil and Gas of Calgary announced last month that it was suspending one of its projects, the Algar oil sands facility near Fort McMurray. The group cited "the rapid and recent deterioration" in oil prices. Shell, the Anglo-Dutch oil group, said in October that it was delaying a second expansion of its oil sands project, a decision that independent experts said would affect about $11 billion of investment. The development, which is located east of Edmonton in the Fort Saskatchewan area, involves the construction of pipelines, extraction plants and an enlarged upgrader which turns viscous bitumen into synthetic crude oil.

A spokesman for Shell said that the group remained committed to the industry and is continuing to invest in construction of facilities that will allow it to produce 250,000 barrels of crude a day by 2010. He said the secondary expansion had been delayed because of high costs and an unfavourable economic environment. Petro-Canada has also deferred construction of an upgrader for its $17 billion Fort Hills project. Other projects that have been affected include SunCor's $17 billion expansion of its Voyageur oil sands upgrader unit. The expansion is on hold for a year. Ms Hester said there was also a growing wariness within the industry about the position Barack Obama, the US President-elect, will take on crude oil produced from oil sands and the possibility of more restrictive environmental legislation.

She said some companies were exploring the possibility of shifting some of their processing facilities inside the US in order to make a stronger case defending the industry. Environmentalists have welcomed the delays affecting the industry. A spokeswoman for the WWF said that there were growing questions about long-term viability of oil sands. "Carbon-intensive businesses do not look suited to a government which is serious about tackling climate change. A high carbon price under a cap and trade system will have a more significant effect with low oil prices," she said.

Citgo Stops U.S. Oil Gifts in Sign Chávez Feels Pain
Citgo Petroleum Corp., the U.S. refiner owned by the Venezuelan government, will suspend charitable contributions of home heating oil to poor U.S. households -- a sign that falling oil prices may hamstring Venezuelan President Hugo Chávez, whose administration has used an oil windfall to win voters' loyalty at home and allies abroad. In a surprise announcement, former U.S. Rep. Joseph P. Kennedy II said Venezuela would stop deliveries to his Boston-based nonprofit, Citizens' Energy, which last winter received $100 million of fuel that was distributed throughout the Northeast. Mr. Kennedy said Citgo cited falling oil prices and the world economic crisis for forcing the company "to re-evaluate all of its social programs." Neither Citgo nor the Venezuelan government had any comment.

The move raises questions about whether Mr. Chavez can afford to continue his oil-fueled largess. Venezuela gives cut-priced fuel to many Latin American nations and sends some 100,000 barrels a day of oil and oil products to Cuba in exchange, in part, for the services of 30,000 Cuban doctors, nurses, dentists, and sports trainers. In 2007, Cuba valued total Venezuelan aid at $7.8 billion. Some analysts say Venezuela is now as big a donor to cash-strapped Cuba as the U.S.S.R. was back in the Cold War. As crude prices have plunged in the past six months, spot prices for heating oil at New York Harbor have collapsed more than 60% to around $1.30 a gallon. That has considerably lowered heating costs, reducing the need for the program.

The oil-price slide is likely to crimp Venezuela's spending plans this year. The government calculated its $78 billion budget for 2009 using an oil-price forecast of $60 a barrel, almost twice the current $32.14 a barrel for Venezuela's crude basket. Venezuela has some cushion. Over the weekend, the central bank said the country's international reserves topped $42 billion at the end of 2008 -- up 25% over 2007, the highest level on record -- thanks to lofty oil prices for most of the year.

Hedge funds face more pain
Hedge funds are suffering a New Year hangover of record proportions after an end-of-year rush to suspend or restrict withdrawals of money and the first of what is expected to be a wave of closures. Funds from London managers GLG Partners, RWC Partners and Oceanwood Capital all introduced last-minute restrictions as the year ended, while Finnish fund Ilmatar on Monday said it would close. Hedge funds are facing a meagre year after their worst 12 months on record left most needing to make back hefty losses before they begin earning performance fees. More than 150 – including funds from some of the biggest names in the industry, such as Tudor Investment Corp, Citadel, Cerberus Capital and Highbridge Capital – have limited redemptions.

Prime brokers, which provide services to hedge funds, and managers predict continued selling pressure into the markets from suspended funds for months to come as they try to cash in hard-to-sell assets. Withdrawals are widely expected to continue to the end of the first quarter. Ilmatar is to close after losing 73.6 per cent in the year to the end of November, leaving it with just $9m under management. Jukka-Pekka Leppä, chief executive, said the fund was closing because of the rising costs of operating in eastern Europe and Russia, its main markets. “It is too expensive to keep the fund going," he said.

Oceanwood, founded by a team from Tudor, and RWC’s Pilgrim fund will both withhold about 12 per cent of pay-outs from withdrawals until hard-to-sell assets can be realised, an increasingly common restriction. GLG on Monday said it suspended withdrawals from its Event Driven fund on New Year’s eve, taking the total number of funds suspended or restricted by the company to nine. Event Driven was mainly invested in another restricted GLG fund, European Long-Short. Just before Christmas, New Star, the stricken fund manager currently for sale, presented investors with plans to close the geared version of a fund investing in Royal Bank of Canada’s Hedge 250 index of hedge funds.

New Star – which also closed its Apollo hedge fund – said assets in the fund had plunged from $63m a year ago to less than $12m after it lost more than 70 per cent in the year to December 17, and it was no longer viable. There was a small piece of good news for hedge funds Monday when London’s Financial Services Authority dropped its ban on short-selling, or betting against, banks and insurers, instead introducing a tighter disclosure regime.

US construction spending shows gains but outlook grim
Construction spending fell less than expected in November as record activity on nonresidential projects helped offset another steep decline in housing. But the outlook remains bleak as credit is tight for builders trying to stay afloat amid a recession entering its second year. Construction spending fell 0.6 percent in November, the Commerce Department reported Monday, less than half of the 1.3 percent decline economists had expected. While housing took another sharp tumble, dropping 4.2 percent, this was partially offset by a surprisingly strong 0.7 percent rise in nonresidential activity. But the pickup in nonresidential construction — which includes office buildings, shopping centers and hotels — was seen as a temporary blip.

Analysts said cutbacks in commercial construction are inevitable with builders having a hard time getting financing amid the worst financial crisis since the 1930s. "We feel that it is only a matter of time before commercial construction starts to decline," said Nigel Gault, chief U.S. economist at IHS Global Insight. "Once the projects already under way get completed, there is not much left in the pipeline." Gault said he expects a steep decline on construction spending this year as the severe housing slump continues and nonresidential activity begins to fall because of the weak economy. "The outlook for retail spending is very bad so we don't need more retail space at the moment and with employment falling sharply, we don't need more office construction," he said.

General Growth Properties Inc., the country's second-largest mall owner, last month hired a commercial real estate firm to put prominent retail centers in Boston, New York and Baltimore up for sale in a desperate attempt to shore up its finances. The Chicago-based company is saddled with huge amounts of debt it took on during the market's boom years when it aggressively bought assets. Economists expect housing, which has been in a slump for two years, to continue to struggle in coming months as sales and home prices keep falling, hurt by the weak economy, tighter lending standards and rising mortgage foreclosures dumping more unsold homes on an already glutted market.

The 0.6 percent decline in total construction followed a 0.4 percent fall in October. The back-to-back declines left construction at a seasonally adjusted annual rate of $1.078 trillion, down 3.3 percent from a year ago. The 4.2 percent drop in home construction was the biggest setback since a 6.2 percent plunge in July and left residential activity at a seasonally adjusted annual rate of $328.3 billion, down 23.4 percent from a year ago. The nation's homebuilders have been reporting large financial losses as demand keeps falling. Hovnanian Enterprises Inc., based in Red Bank, N.J., said last month that its fiscal fourth-quarter loss totaled $450.5 million as revenue fell by 48 percent. The 0.7 percent rise in nonresidential building left that sector at an all-time high of $428.2 billion at an annual rate, following a 0.4 percent drop in October. Strength in construction activity at power plants, factories and office buildings helped to offset weakness at shopping centers and amusement parks.

Underscoring the financing bind occurring because of the credit crunch, nearly 40 percent of real estate investors need to refinance part of their portfolios this year, according to investors surveyed in October by Marcus & Millichap Real Estate Investment Services and National Real Estate Investor magazine. These investors also expect prices to decline 15 percent on average this year. The Commerce Department's construction report showed that spending on government projects kept rising in November, climbing 1.4 percent to a record annual rate of $321.95 billion. State and local construction rose by 1 percent to a record $295.2 billion rate, while federal construction was up 6 percent to an all-time high annual rate of $26.8 billion.

President-elect Barack Obama is pushing for a massive stimulus plan to keep the economy from falling into an even deeper recession. Part of that plan would involve increased spending for "shovel ready" infrastructure projects including roads and bridges. Some economists said they believed the jump in November may have partly reflected an anticipation that Congress will approve significant increases in infrastructure spending. Bernard Baumohl, managing director of the Economic Outlook Group, said that local and state governments may be moving ahead with some projects "confident that the checks from Washington to pay for all of this activity will soon be in the mail."

As Vacant Office Space Grows, So Does Lenders’ Crisis
Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders. With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market "since the wrenching 1991-1992 industry depression."

Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year. The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults. The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. "Each one by itself is not significant," he said, "but the cumulative effect will put tremendous stress on the financial sector." Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.

Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data. Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities. Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests. By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks. Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.

"The economic recession is so widespread that we believe virtually every market in the country will see a rise in vacancy rates of between 2 and 5 percentage points by mid-2009," said Bill Goade, chief executive of CresaPartners, which advises corporations on leasing and buying office space. There is no relief in sight for Orange County, where subprime lenders and title companies once dominated the market but are now shedding space because their business has dried up, and big banks are now shrinking because of a wave of mergers. The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa area should match this month, local real estate brokers say.

In New York, where rents had risen the highest as financial companies gobbled up office space, vacancy rates are floating above 10 percent for the first time in years. What looked like the worst possible case a few weeks ago for Chicago now appears to be the most likely outcome, said Bill Rogers, a managing director at Jones Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable at 10 percent, is now rising quickly and could hit 17 percent in 2009, he said. "A lot of companies are trying to shed excess space ahead of what is expected to be a worse market in 2009," Mr. Rogers said. Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas to rise to 19 percent this year, from 16.3 percent. Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt.

Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising. "I see a wave of troubled assets coming out of Texas in the near future," said Dan Fasulo, managing director of Real Capital Analytics, a real estate research firm. Effective rents, after free rent and other landlord concessions, have already started to fall and are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts. That is making it all the more difficult for owners, who projected ever-rising rents when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.

Without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders. Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market. The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. In recent weeks, a group led by the New York developer William Rudin has pleaded with Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and others to have the government include commercial real estate in a new $200 billion program intended to spur lending.

Mr. DeBoer, the roundtable’s leader, said building owners are by and large making their loan payments. It is the refinancing that is worrisome. Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, Mr. DeBoer said. Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on payments and can make an equity payment to compensate for the decline in the building’s value. Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to a report by Real Capital Analytics.

New York, the biggest market by far, leads the pack with 268 troubled properties valued at $12 billion. But there are 19 more cities, including Atlanta, Denver and Seattle, with more than $1 billion worth of distressed commercial properties. Analysts are especially concerned about buildings like 666 Fifth Avenue, One Park Avenue and the Riverton complex in New York, the Pacifica Tower in San Diego and the Sears Tower in Chicago, which were acquired in 2006 and 2007 with mortgage-backed financing based on future rents rather than existing income. "Many of those buildings are basically underwater," said Mr. Goade of CresaPartners. "The price they paid was too high to begin with. There’s no way anyone would lend that kind of money today."

Ilargi: Mish found this little song and dance routine. And I agree that the media make the crisis worse. But not for the reasons these folks like to entertain. The media worsens the crisis by not telling people the truth about how bad it is and will get. Which in turn keeps their audience from making the right decisions. When I think of our own audience here at TAE, and how much money they have saved by following us, and our advice, I’m confident they feel better now than they would otherwise have, simply because they are less deep in the hole.

77% of Americans blame media for making economic crisis worse
Seventy-seven percent of Americans believe that the U.S. media is making the economic situation worse by projecting fear into people's minds. The majority of those surveyed feel that the financial press, by focusing on and embellishing negative news, is damaging consumer confidence and damping investment, making a difficult situation much worse. The poll was conducted via telephone, December 4 - 7. The US survey of 1000 adults was conducted by Opinion Research Corporation and is statistically representative of the total U.S. population. The survey question: "Do you think the financial press is making the economic crisis worse by projecting fear into people's minds?" While the overall response indicated that 77% of Americans answered YES, here are highlights of note:
Household Incomes:
  $25k - $35k -- 79% answered YES
  $35k - $50k -- 88% answered YES
  $50k - $75k -- 76% answered YES
  $75k - more -- 78% answered YES
  85% of young adults (18-24 yrs old) answered YES
  77% of males and females alike answered YES
  65% of blacks answered YES

Richard Scheff, a national expert on corporate liability and white collar crime issues, warns media that they could potentially be exposed to liability despite apparent constitutional protections: "Although statements by the media are protected by the First Amendment, the survey results demonstrate that the public believes that the press bears some responsibility for the lack of confidence in the economy. One would hope that the media would act less out of self-interest in these times of national crisis," said Mr. Scheff, vice chairman and partner with Philadelphia-based law firm Montgomery McCracken Walker & Rhoads.

RBR/TVBR observation: Let’s face it, you just can’t get away from the gloom and doom reporting and talk topics. People are getting sick of it and frankly, from what we’ve heard, are just turning off the news (may affect ratings). Indeed, it is a self-fulfilling prophecy: If you keep telling viewers and listeners no one is spending money in retail because of economic fears, they will eventually stop doing it. Yes, people are definitely suffering, but let’s take some of the focus off of it day-in and day-out. It does make it worse.

Keynes vs. Von Mises
In 'Is your recession really necessary?' the FT editors demonstrate their misunderstanding both of the errors in Keynes's delusions, and of the true value of the only economic analysis of business cycles that actually gets it right. Keynes's idea, according to the article, is that
[g]overnments must respond [to signs of recession] by supporting demand with loosened monetary and fiscal policy. These weapons are slow-acting blunderbusses; they do not allow for rapid responses or fine-tuning. ... It is not possible to liquidate the malinvestment without risking allowing unemployment to spiral out of control and demand to fall with it. ... [G]overnments must work together, internationally, to sustain demand. They must not sit idly by.

On the other side of the issue, the article quotes the Austrian Ludwig von Mises as disagreeing:
[P]olicy that aimed to 'bolster up undertakings that would otherwise have succumbed to the crisis, and on the other hand to give an artificial stimulus to economic life by public works schemes ... eliminated just those forces which in previous times of depression have ... paved the way for recovery'.

The editorial critics dismiss the Austrians as "liquidationists," gloom-and-doomers who believe in the Biblical dictum that you reap what you sow. Economists like von Mises and von Hayek, they think, are no more than repressed social conservatives who confuse science with religion. But the editors have misjudged two things: (1) the solidity of the Keynesian formula, and (2) the thrust of the Austrian argument. The Keynesian formula advises attempting to "restore demand," something the Austrians think is futile, to wit impossible, and counterproductive. Sure, they say, you can find holes to fill and keep workers busy; but ultimately government spending drains the financial markets of the very capital that private enterprises will need in order to do a better and quicker job of recovery.

Too many factors influenced the confluence of events following the 1929 crash to enable either side to prove their argument. No one (except Ben Bernanke) pretends that he fully understands what happened. Who really knows how long the Great Depression would have lasted had legislators not imposed the Smoot-Hawley tariffs in 1930, or had Roosevelt not imposed the Keynesian-inspired New Deal in 1933? But what is certain is that the effects of both the tariffs and the New Deal have been long-lasting and distinctly harmful. To be specific, the New Deal brought us (among other things):
  • The Federal Deposit Insurance Corporation (FDIC), backed now by our tax dollars, i.e. bailed out;
  • The Federal Housing Administration [FHA], bailed out;
  • The Tennessee Valley Authority [TVA], a government-owned power company that could have been privately created and owned just as well and with a lot less controversy;
  • The public Social Security System, an unsound pay-as-you-go arrangement that is ready to go bankrupt within a few years;
  • The Securities and Exchange Commission (SEC), the one that didn't catch Madoff (or much else for that matter) and that in fact lends Madoff and his ilk an aura of "Certified Okay by the U.S. Government";
  • Fannie Mae, that led to Freddie Mac, Ginnie Mae, and Sallie Mae, all bankrupt;
  • An acceptance of the corrupting, embezzling, wealth-redistributing influence (in the wrong direction) of chronic inflation on our economy and, by extension, on the stability of our society;
  • An expansion of the role of central bankers to the monetary and political power-brokers they are today; and last but not least,
  • The abandonment of the gold standard, the most long-standing, underestimated, and maligned financial tool the world has ever known.

What positive things do we have to say about these entities and notions, about the results of their implementation, and about the place they occupy in our nation's economy? Of course, no one objects to the ideas behind them. After all, the purpose of each is laudable. Even Milton Friedman, the man behind the theory of a chronic two- to five-percent inflation rate, had good intentions, as did Keynes with his flippant relegation of the gold standard to the trash bin of outmoded relics. But it's the format that is defective in each case. None of these implementations has gone through the refinement process that competition brings. And look where they have gotten us today.

The Austrians do not prescribe a bitter pill of unemployment and depression; they merely state the fact that recovery comes through liquidation of excess, and that this liquidation will take place no matter what the legislators and government agents do. Recovery will occur, not through a fiction of temporary occupational busywork, but through the natural cyclical nature of the business cycle. Government usurpation of the wherewithal to finance it will just slow it down. Von Mises's understanding is not moralistic; it is simply realistic. And no amount of hysterical government grandstanding will change reality--although it can change people's perception of it, which is what the politicians want.

Our dear friend Keynes, consciously or not, played right into the hands of the big-government legislators who are always on the lookout for a new gimmick to impress the electorate. His formula for state spending is only a stopgap measure, something to keep our mind off our problems, while the system clears itself of past misallocations of resources and the politicians insure their own future. And this time, it's state spending on a grand scale. The new administration plans to allocate almost a trillion debt-inflating-dollars to spend our way back to prosperity; and that's over and above the $700 billion already allocated by Congress, plus the additional billions created by the Federal Reserve to lend to financial institutions, to buy Ginnie's mortgages, and to purchase Treasuries.

To put that into perspective, just the $700 billion we have already allocated for bailouts represents a check for $71,000 for each unemployed person in the nation. If this latest business cycle goes the way of the 1930s, Keynes's ideas will survive this rebirth and reach their culmination in another flight from paper currency, just as they did in the 1970s. Then when prices and/ or bubbles begin to rise again and the central banks find they cannot control them, the Austrians will find favor once more--or so one hopes. This time, however, I doubt it will take 40 years.


Anonymous said...

I am familiar with the tone of this blog - deflation, deflation and yet more deflation. This has proven to be correct.

What I would appreciate an opinion on is the likely fate of gold.

I read the FT article about gold being the only alternative to the dollar as a reverse currency. While it may make sense. How many people who read the FT take it seriously?

Anonymous said...

I am a novice here but after reading the first article why would I buy Treasury certificates?
If I had some actual cash and a business owner asked me to loan him some money because he had too much debt and his sales were down significantly, would I go for it?

Would I not look at more tangible investments, such as resources, land, or actual profitable businesses?

Are these treasuries actually going to sell? The way I see it you would have to be a fool to look at this as an investment... Or is it a gamble against other currencies?

What happens if no one buys them?


el gallinazo said...

Linda S.

From yesterday

"I think maybe you misunderstood my intention with my earlier comment."

I will go along with you that ad hominem (or perhaps it's ad hominid) attacks on this or any other blog (with the exception of reaction to egregious comments) don't do anyone any good. But the last thing I would want to see is that this blog become "moderate." We have thousands of moderate, economic blogs and newspapers and they have advised moderate, conventional people to lose trillions of dollars.

I am sure that there are plenty of lurkers on this blog who were chastised and criticized by over demanding, critical parents, and now are afraid of rebukes on a blog posting by absolute strangers under cover of near anonymity. Well here is an opportunity to get over it and assert your own opinions and let the feathers
fly :->0


Stoneleigh has expressed an opinion several times this week on gold. She feels that it will be affected downward as a commodity in the near future due to the destruction of the money-credit supply, but will (along with oil) be one of the first commodities to recover upwards, long before the others.


Short term treasuries are essentially the same as currency. If they go down the tubes, so does a stash of hundreds.

Ilargi figures real estate at 10-20% of peak price in a couple of years. Not the greatest of investments unless it's a doomstead free and clear.

Not many currently profitable businesses are going to stay profitable as deflation unwinds and credit becomes non-existent. No one wants debt destruction if they are holding the debt as a loan to others.

Like a foreign language, you have to read this blog conscientiously for a month or two to catch on. Why bother? Because it has predicted future events better than any other of any form of media.

EBrown said...

I just finished reading The Panic of 1907 by Bruner and Carr and thought TAE crowd would probably enjoy a brief book review. Much of the book delves into the details of actions JP Morgan took to quell the crisis. The 1907 panic occurred six years prior to the establishment of the Federal Reserve so there was no single, over-arching monetary authority that could step in to provide leadership. Morgan, being the foremost financier of his day filled this position by marshalling the heads of banks and trusts in his personal home several times and brokering deals to support their weaker brethren during runs.
While the structure of the financial system of the USA was quite different 100 years ago the authors identify seven key elements that allow a panic to develop and unfold.
1. System-like architecture. Financial systems by their very nature must have a degree of inter-connectedness and some level of complexity. Connections enable panic to spread, complexity adds fuel to the fire because of “information asymmetry”. The financial system is truly a global beast today, but even 100 years ago banks across the US were highly connected to one another and to major money centers in Europe through “pyramiding”, which is where small local banks placed some of their deposits with larger regional banks to earn interest and these regional banks then placed a portion of their deposits with the big money banks in NY. As money was withdrawn from small banks all over the country it placed major strains on the big financial instutions’ ability to make good on their obligations. As for complexity, iIf one does not know the level of impairment that a counterparty carries on its books it is safer to sell first and ask questions later rather than be a bagholder. Information asymmetry also allows the better informed to exploit the ignorant, otherwise known as adverse selection (Stiglitz et al received the Nobel Prize in 2001 for work in this area).
2. Bouyant Growth. Rapid growth engenders optimism about markets and institutions. All major panics occur after a period of rapid growth. Eventually even the most optimistic and reckless run out of places to put their money in new investements. An inflection point is reached and households and businesses pay down debt, reduce inventories, and liquidate unprofitable enterprises. 1907 was one such inflection year as the previous five + years had been a time of great expansion in the US economy.
3. Inadequate Safety Buffers. The boom part of any credit cycle tends to erode the cushions and circuit breakers set in place during previous busts. In 1907 there were many small banks which had little or no ability to raise money outside of their respective depositors. There was no explicit back-up for small or large financial institutions of the day – two large trusts (the Knickerbocker Trust and the Trust Company of America) and many smaller banks failed during the panic due to runs by depositors. Regulations on assest allocation and reserve capital differed for trusts and banks (more lax on trusts), which allowed for riskier investments to concentrate in the trusts’ portfolios. During the boom years they paid a higher return on depositors’ money, but they also floundered more quickly once hard times arrived.
4. Adverse Leadership. Roosevelt and the Trust busting progressives of the day are blamed by some for the onset of the 1907 crisis. The idea being that they made the political climate uncertain for capitalists and thereby inhibited future investment plans. The authors quote from Friedman and Schwartz to support this point.
5. Real Economic Shock. Bruner and Carr cast about for a supportive data point on this point. What caused the constriction of capital large enough to initiate the panic? Was it the 1906 earthquake and resulting fire insurance claims in San Francisco that drew huge amounts of capital from NY, London, Paris, and Frankfurt ? Was it the failure of the Knickerbocker Trust Company? They do not propose an answer.
6. Undue Fear, Greed, and Other Behavioral Aberrations. The authors hold tightly to their idea that large market swings are “aberrations,” as in this quote about stocks from 1998-2001 and real estate from 2002-2006: “The extent to which these shifts were consistent with changes in economic fundamentals remains a subject of research, though conventional wisdom seems to hold that these swings were aberrations rather than rational movements in the markets”. Implicit in this quote is the belief that there is a rational driver of markets most of the time, a position TAE clearly does not espouse.
7. Failure of collective action. Here they suggest that if all market participants will work together and look to the long term rather than immediate peril panics could be avoided. Having an overarching authority is a good thing in their opinion. They believe Morgan helped provide for the ultimate stabilization of financial markets in 1907-08, and that the Fed should properly perform a similar role today.

If I were a teacher I’d give this book a solid a grade of C. It covers a few pertinent points about panics and supports the arguments for numbers 1-3 with data and examples. Numbers 4-7 are not supported very well with either examples or data. They also waste pages detailing the daily movements and actions of JP Morgan and his associates, painting all his actions in the most flatter light possible. It was alleged later that Morgan and Co made a bunch of money in suspicious ways during the Panic. I’m no expert on early 20th century financial history, but there is a chance that some of the accusations of profiteering from the crisis made in later years may have some merit. Bruner and Carr dismiss these as unlikely without providing rationale for their position other than the fact that Morgan was willing to commit much of his own money to quelling the panic, and he cajoled and forced other capitalists to do so too. The hero worship engaged in by the authors is slightly sickening.
I don’t recommend you read this book. It provided me with a little insight into the operations of Trust companies and banks prior to the Federal Reserve’s creation, but other than that there is not much of value. Use your reading time on more substantial tomes.

Anonymous said...

El g:

Thanks for your opinion. But in reality if all the sources of state income (taxes) are going down the tube, what makes these Treasury's any better?

So I buy T's to park my money until I can pick something else up at fire sale prices; i.e. a home at 10 cents on the dollar?

If it comes to that there won't be any government because the only income they are going to have is from people buying Treasurys. There will be no tax payers at that point. Just rioters.

In the end Treasuries will be worth nothing as well.


Gravity said...

I have a problem,
the people running my town
don't read your blog.

The new years reception
in the town hall was predictable,
everyone there seemed to enjoy
a comforting state of denial.

When asked about any plans to prevent mass unemployment, the
wait and see approach was popular.

By the time they figure out the depth of this abyss, next year,
we'll be in free-fall, with maybe one in three out of work.

The damage sustained so far cannot be undone in less that ten years, if at all.

When I suggest this,
they presume Im too pessimistic,
and repeat the two to three years recession theme, mostly to convince themselves.

Is it possible to convince these optimists of our common reality before mass starvation occurs?

Anonymous said...

@ el gallinazo,

I do not want this blog to become more "moderate." But, not everyone responds well to "letting the feathers fly" approach to blog forums. I agree with your point that it takes months of carefully reading this blog and the comments to start making sense of what's going on. That's why offhand dismissal of poorly phrased but well intentioned questions is something to be curtailed. The anonymity of the internet cuts 2 ways - it does foster debate and discussion BUT it also means that it can take longer for people to come to rely on a source as reliable. I don't think responses that verbally assault someone asking a question are helpful in getting people to trust this as a reliable source or in having them invest the amount of time required to get the full benefits of becoming a regular reader and participant.

These issues are simply too important and I don't want to end up driving people away who don't want to have to survive full on commenter-to -commenter combat for a few months as some sort of test of worthiness.

Linda S.

The Lizard said...

To meet the new Media Joy And Buoyancy requirements:

Happy Days are Here Again!

All together now...

el gallinazo said...


Thank you for the interesting review. My only beef is that there is no Nobel Prize for Economics, only a The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, not established until 1968, 50 odd years after the others. . The money doesn't come from the Alfred Nobel Foundation but from the Bank of Sweden which set it up. It is essentially fraudulent, in the sense that its founders intended the confusion that is taking place. Nobel himself undoubtedly had good reasons for not having economics as one of his prizes. If any of them (economists) were worth a damn, they could win a peace prize, but that didn't happen for 50 years. And look at the creeps who have won it. The founders of the greatest economic crisis of the 1990's LTCM, and Milton ( I love my buddy Augusto Pinochet) Friedman, who should have won the pseudoNobel Prize for Human Excrement.

The prize should be referred to colloquially as the pseudoNobel Prize in Economics.


"In the end Treasuries will be worth nothing as well.

Not to worry. In the end we are all dead.

There will come a time to bail out of treasuries. That is why St. Stoneleigh writes to only go for short term ones despite the low nominal interest. Not so much because they will default soon, but because they are going to eventually have to start paying some serious interest to suck out any remaining money that hasn't gone up the chimney. As to state bonds. All levels of government bonds in the USA, below federal, can (and will) default. It is nearly impossible for Treasuries to actually default, as their partners in crime (joined at the hip), the Fed can print up the interest as needed. A default of the Treasury is a game/set/match event and I don't see it happening before the center fails and the land mass referred previously to as the USA breaks apart politically.

Bigelow said...

Thanks for the Keynes vs. Von Mises article. “The Austrians do not prescribe a bitter pill of unemployment and depression; they merely state the fact that recovery comes through liquidation of excess, and that this liquidation will take place no matter what the legislators and government agents do.” Same end result however.

The problem is expecting any solution to the human condition to come out of economics. It is a jungle out there. Yet we can imagine worlds whose masters are something other than cold and starvation or money.

Anonymous said...

Wild Gypsy's predictions - 2009 - The year in Farce

Front runners the first week of January:

1) Fed starts buying securities backing by housing agencies...

2) Burris denied senate seat...

3) Got 'paper' ???

4) "No thanks, we are planning to just wait for outside investors with deep pockets!"

-- Yeh, lots of us are holding out for management positions too.

Anonymous said...

The USD should go up over the course of the year, because the other economies are contracting even worse than America. Japan and Singapore faced a 12%+ contraction in GDP in the 4th quarter. I assume that China is contracting at 9% in the 4th quarter given the fall in electricity use.

The Euro has many structural instabilities, each country within the eurozone is competiting with the other. Britain faces a nightmare with its over the top debt load.

Also Australia and NZ are too small and their main exports are commodities which will come over heavy pressure due to slumping demand.

I see the dollar going up in value based on the fact that, other countries have worsened considerably faster since the fall of Lehman.

So far this year, the dollar has slid, but the moment the DOW starts crashing again along with other stocks, the USD will rise. It's the only "safe haven" given the size of the US and the fact that everyone else seems to be faring worse IMO, we don't really have much good data for many countries (tends to be hidden)

willnotbill said...

In regards to Gravity's assertion that the people running his town read tae. Last spring I went to a 5 year planning session for my town. The majority of time was taken by trivial complaints. I sat there aghast. Decided to get out right then and there. Sold at the top. But as bad as I thought it might get, it's getting worse. Starting reading this blog 2 months ago [ made a deserved donation] thanks for the straight goods it's too bad more people can't handle the truth.

Anonymous said...

El g:

(with a chuckle)

I get it I think. It is like jumping in the lifeboat that will sink last with the hope that you last long enough to sight land.


Anonymous said...

Will the dollar really be a safe haven when the rest of the world gets wind of the trillions and trillions of deficit spending that the Obama Administration is saying must take place in the future to "save" the US? I have my doubts. But hey all I know to do is get the garden ready for spring and trim back the fruit trees and blackberry bushes. John

Ilargi said...


We have said as long as we're here, and before, that short-term (3-6 month) treasuries are the only feasible instruments. Nobody wants 30-year, they can't sell them no matter what the interest.


Sounds almost smart, but I doubt you have read either my intro today or Buiter's long article at the top of yesterday's TAE. One thing is sure: a sure opinion such as yours is built on shaky assumptions that you cannot prove.

Whether the dollar does well or not depends on a million outside events, as well as on the state of the US economy. Saying that other economies are doing worse is once again nothing but an assumption. There are way too many lies out there. There is no solvent bank left in the US; but there may still be a few elsewhere in the world. If US banks get called out by international finance, the whole castle can drop dead in days. It's in the US that most data remain hidden, that's how they set up the system.

As I tried to say in my intro, Weiss and Crooks see the motes in the others' eyes, but are blind to their own. Buiter's approach things truer, because he tries to define what makes the USD weak. Geopolitical events, think war, may prevent the scenario the paints, but his is certainly the best argued argument.

Everyone likes to point to the problems Germany has as an indicator for the entire EU, but who ever notices that Germany never has a housing bubble, and its citizens therefore are not nearly as indebted as US/UK citizens? In the middle of a collapsing world, that may yet prove to be a decisive factor.

I'm not saying that I know, nobody does, too many things play into the issue. For that reason, your opinion, and that's all it is, lacks value, it's just belief.

el gallinazo said...

The one thing that we can be reasonably sure of is that the value of money in a deflation increases. It is axiomatic. Since the major currency countries including the EU are in deflation, while the deflation lasts, the value of your money will increase (assuming that you can hold onto it). That is why Stoneleigh advises that you stay in short term treasuries of your country of residence. If you intend to live in another country in the near future, as I do, especially a so-called "emerging market" country, then things get a little more complicated.

Anonymous said...

Journalists of the London's Telegraph are very suspect and none more than Ambrose E-P, as the newspaper is owned by Barclays Bank and Ambrose has been telling us about the demise of the euro since the day it was invented.

Anonymous said...

Illargi, I think I remember you saying just after the collapse of Lehman Brothers, correct me if I am wrong, that things would be very different by x-mas. At that point, did you expect the bail outs to be of such severity as we have seen and for how long do you think the governments can keep bailing out every bank and major corporation with red numbers?


Anonymous said...

Hi, I am YUMA, also known as the US of A, and EE.UU. I'm not going to drop dead, but you don't need to die to be real sick, so you British and the Spanish and the other Europeans look after your own lives, because I'm going to be very busy treating the clap that Bush has given me.

I'm not going to buy anything from you foreigners, and you'd better give money to GM and Ford or the metal workers are going to really beat you up and the people will kick you out of the government.
If you didn't get the message from what happened in Greece my stooges will do the same to you in every capital of Europe, in this life the only spontaneous thing is sneezing.

To the Islamists, nothing is going to save you from the fury of the Hebrews, and if my Israeli children need more bombs of 20,000 pounds, YUMA shall give them all they need.

I'm very angry, I'm getting pissed off.

Everything I have done for the World and all, you ungrateful people, I don't deserve all this. If my tits get swollen, I'm going to tax each and everyone of you and I'm saved, and if anybody doesn't pay up I'm going to burn him with the torch of Liberty, but atomic.
You are warned, I'm not going to repeat this twice.

I'm going now to Washington, DC, to keep my date with a very handsome young man who is going to lay his fist on you, you foreign smurfs.

SPDWatcher said...

The last thing you said today is the one thing you have said alot that is actually a positive, though it appears you don't believe so. If the US is going to have to depend on itself soon(manufacturing, food production), especially in light of how obviously international trade is going to (has already) shut down, that is good for jobs and for the US all around, good for savings albeit on less income, and Lord help us, it will change immigration policy. People won't see it that way initially, but it still will be true.

Just because the dollar goes down in value versus other currencies doesn't have to mean much (to the US citizens) if trade with those countries shuts down too. The only trade that won't shut down is Oil and that is traded in US dollars anyway.

I don't suppose a fall in the dollar (or crash even) would affect energy policy, would it?

LOL! This is my first time to reply, I will donate as soon as my wife gets a new job (which could be soon actually).

Ilargi said...

"Anonymous said...
Illargi, I think I remember you saying just after the collapse of Lehman Brothers, correct me if I am wrong, that things would be very different by x-mas. "

They were, weren't they?

At that point, did you expect the bail outs to be of such severity as we have seen and for how long do you think the governments can keep bailing out every bank and major corporation with red numbers?


You expect stupidity as little as you do the Spanish Inquisition. I had hoped that Obama would be smart enough to not let Bush saddle him with the legacy of a failing Detroit. That is more surprising than the fact that Paulson bails out his friends. I had also hoped that Obama's finance people would not be the same old same old crew. But they are.

Everybody in charge to date depends for their lifestyles on a continuation of the failed system. So that was and is predictable. Maybe what surprises me is that no-one raises his or her voice. The whole "policy" is so obviously doomed, and so obviously harmful for the people. It looks like Lehman was dropped for a personal and/or political reason, and when it did it wasn’t clear that everybody else would be bought. Still, whether that would have happened or not, it was clear since Bear Stearns that things would never be the same. The only thing that is the same is that Goldman and CIti still pull the levers.

What has changed a lot is the size of the numbers that are thrown around. Nobody would have talked about, or believed, let alone accepted, a $1 trillion bail out for anything at all. Now Obama's trillion dollar stimulus plans inspire confidence, That's a big turn around in three months time.

If he would have talked like this in September, he'd been laughed all the way back to Hawaii, and someone else would be president.

Greenpa said...

Gravity- I have an answer for you! It should greatly relieve your burden of worry! Based with absolute solidity on all human history!

"Is it possible to convince these optimists of our common reality before mass starvation occurs?"


Unknown said...

Hi Ilargi:

Before I forget to tell you -- your introduction to yesterday's news page was the best read I've had in ages. Smarter than any of the news and opinions below it. That one got printed out for my hall of fame.

Regarding your first reference, today, it's Jack Crooks, not Jake. I've been trading with his currency picks off and on for a couple of years, now. (Not always, tho, because our predictions diverge, as is the case today.)

Anonymous said...


About the apparent contradiction between Weiss/Crooks on the one hand and Buiter on the other, I think we must keep the respective time lines in mind.

W&C see the dollar rising in step with deflation, i.e. in the months to come, as deflation bites, the dollar will rise. This is supported with arguments based on past experience. Crooks says: "Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency." He is probably right about the dollar rising as long as it retains those qualities. So it probably will rise (overall) over the next few months.

Buiter is saying something very different. First, his time line is not the same. He writes: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets".

Secondly, he is saying that the dollar will fall (later) precisely because it will have lost those qualities that will enable it to rise in the near future.

So, my take is that W&C are correct in the short term (note also that this does not contradict Buiter), but that Buiter will be correct in the long term and 1. this does contradict W&C, 2. the long term is more important.

Note also that Buiter's analysis ties in well with what Stoneleigh has been saying for a long time, i.e. that the U.S. bond market (and the dollar) will crash, but not right away.

So, if you are into forex (I personally would not touch it), go for it, but do not forget the time lines.


Anonymous said...

Hi Ilargi,

I did read the piece you wrote today that is why I mentioned the dollar. Read snippets of Buiter's argument on nakedcapitalism as well and here on TAE.

Indeed I am assuming many things but atleast over the next year, the dollar should be stable within a range of 80-90.

I am indeed assuming that everywhere will be far worse reason being that China's stability is dependent on growth, that Oil prices will remain low for some time thus nullifying Russia, Iran as threats. Yes Germany had no housing bust, but Spain, Ireland did. Greece and Italy face a lot of youth unemployment. France has it's share of problems, tourism will slow down and all over europe industry is in contraction.

This does not bode well for the euro, as each country is on its own. Germany is the only country which is making any sense in this crisis but the rest want to have fiscal stimuli to their hearts content and thus destabilize the euro.

I also wonder whether countries require less of a premium on returns from America given that it's military is so dominant. Kind of like a security tax?

America's military is still a mighty weapon, just today National Geographic had this program on how the largest carrier can stay at sea for 20 years continuously and carry 90 aircraft.

It's all quite interlinked, If the American consumer stops buying, the chinese/japanese/german/south korean manufacturer shuts down, raising unemployment. Thus demand for commodities from Australia/ Brazil/ Chile etc slumps. Thus leading to further contraction.
Tourism will shrink heavily affecting all major destinations.

All this will favor the dollar I believe as it still retains world currency status for the time being, it is the seniorage currency. Thus will do well (relatively)

As it is 2/3rds of credit will remain unavailable even if banks restart lending due to securitization being semi-dead. If I was a lender i'd rather give money to the world's only superpower rather than it's immitators, simply because IMO, you'd rather have influence and good relations with the "Chief Thug" rather than the lower rung cronies.

What I do wonder as well is, if you don't lend the US money, which country is actually "safe"? Which country's currency can actually act as the reserve currency?

China, Brazil and India still have a long way to go in terms of development and building legal and financial networks. Australia, Canada and NZ are too small. The Euro IMO can not last, too many structutal imbalances. The UK has a gigantic external debt load of 400% of GDP.

No African or Gulf country can yet take up the mantle and I seriously doubt people would accept the ruble.

The US is the best out of a bad bunch I guess.

Ilargi said...

Thanks for your kind words.
And I changed the name.

Anonymous said...

New US mortgage bankruptcy bill to include 'cram-downs'

Legislation designed to stem foreclosures by allowing bankruptcy judges to erase some mortgage debt will be introduced by Congressional Democrats on Tuesday...

ah yes - decreasing the principle

ok I won't say it

Stoneleigh said...


I agree with your analysis. That's how I see the timelines as well.

Submit your advice said...
This comment has been removed by the author.
Unknown said...

I am surprised to find myself completely on the "other" side here, when it comes to the Dollar and specifically "Treasuries" -- even those as short as 3 months. Why oh why would anyone buy a three month treasury? For what purpose?

I know that the main concern in the undercurrent here (and everywhere) is to put wealth into a place where it will not lose value over the next few years. To me, that is the easy part. The hard part is that the investment community cannot make the shift to using a new tool from the toolbag. They're still armed with "hammers" and see the economy as a nail.

It hasn't been a "nail" for a very long time, which is why pension funds, for example, are going to collapse completely and be taken over by the government -- just as they were in Argentina a few months ago.

To use another analogy, the investment mindset is still playing checkers with the wealth of the people, although the game switched to chess well over two years ago. The object of the game is to protect wealth, not to make money. If you're portfolio is designed to do the former -- you will most certainly achieve opposite of the latter.

Back to the Dollar and the digital "IOUs" you get when you hand over your cash to the government in exchange for a Treasury. I'm sure in a galaxy far, far away, a long time ago, the underlying fundamentals for such an exchange made sense. But now, the US government is little more than a broken money addict hanging on day by day by his fingernails. Plus, the addict openly promises to return less value than you gave him if you wait 3 months. Some deal.

All that this misguided "flight to safety" (for the past six months) has done is increase foreign claims on US assets and created a mega bubble with negative debt and no asset value beneath it. I'm amazed that anyone could think that dollars and treasuries are safe.

In the past 6 months, foreign claims on US assets most likely increased at least 600 billion as a result of the US's trade and current account deficits. (and our trade deficits grows faster than ever because the dollar is too strong to compete in global trade. Our crap is too expensive for others to buy.)

A favorite fundamentalist of mine recently remarked: "The amount the US owes the world more than doubled in 2008, from 2.5 trillion to 5+ trillion. Since our GDP for 2008 is likely to shrink to close to 10 trillion, the US now owes around half its GDP to the rest of the world."

This is not only kills the dollar but it makes it impossible to service our debt. Where I differ with Jack Crooks is that he thinks the dollar is the world's reserve currency. It's not.

Who buys oil in dollars anymore? Or better put: What country would even want to accept them?

Unknown said...

@ugh! To clarify a mis-statement, above, it should read:

"The object of the game is to protect wealth, not to make money. If you're portfolio is designed to do the latter -- you will most certainly achieve the opposite of the former."

Not that it's any less clumsy.

Ilargi said...


Billionaire Merckle commits suicide

Anonymous said...

1st rule of investing is don't loose money. Keep your savings in very short government notes, because if the government can't give you your money back in a week or three months chances are that is the least of your problems.

Frank said...


That headline on the British service sector is misleading. I read the story as saying that it shrank less than expected, and indeed less than it had the month before. But there is no claim that it got bigger.

Reading more carefully than the headline writer did, I believe that index measures the rate of change, not the absolute level.

EBrown said...

El Gallinazo,
I'm glad you enjoyed the review. A few weeks ago I thought I was going to write a comparison piece between this depression and the Great one of the 1930s, so I thought I'd read up on some history. So far I haven't made the time to write an adequate article... but it might spring forth yet. I'm still working my way through a few primer's (from the recommeded list here).

As for the suicide talk - Galbraith claims in the beginning of one of his books (can't remember which off the top of my head) that the suicide rate changed little in the Great Depression. Offing onself just makes for dramatic headlines when money troubles present themselves and provides an obvious reason to family and friends. Seen from an epidemiological standpoint economic hardship doesn't dramatically raise the suicide rate. From an anecdotal place it sure as heck does though. I saw my first successful suicide at my work two days ago, and the reason given by family was definatley "financial". He was in car sales, owned his business for a 30+ years, and as we all know car sales have been bad recently. I guess he was going to lose his business soon....

My advice is don't commit suicide. If you are disinclined to follow that advice at least don't use a 22, it doesn't work that well.

Anonymous said...

Does anyone have a link to a good primer or intro to how U.S. treasuries market works, what affects prices/rates, etc. ?

Anonymous said...

And similiarly, foreign currency exchange markets...?

All this stuff Ilargi writes is good, I'd just like to wrap my head around it is all!

Anonymous said...

Watching the theater that is the news is becoming more shadow... and less reality based every day.There exists enough people ,[rational,sane,educated people]now,who,in a sane rational voice are saying "its all over"."Man the lifeboats!"
How much longer before the TV and the radio tell the truth.?

Do all of you think that this, this Kabuki dance will continue until they start covering hunger riots in the major cities?

I keep getting a disconnect,a denial in some public sense that I can not pin down...like so many are trying so hard to will away whats happening.Everyone is aware...but the reactions are so far off the charts that consensus of what our "reality"is skewed.

.I don't know if this is based in the fact that most young folks[under 30]do not have a clue just how bad "bad" is.They have no idea,no basis for comparison...and this scares me silly.At what point will they just say"Well its mad max time,break out the guns,and lets party!!"

We,as a species do better at immediate emergency's.This slow motion train wreck is the kind of thing that is hard to keep focused on,The mind wanders,seeking relief from the stark reality of the destruction of a way of life that is all that is known to one.

You want to think of pleasant warm summer days,fine meals,and good company....not cold winds,emergency food supplies,and figuring out how to approach a real hard question,who will you share with...and who will you turn away,with force if necessary.

The deepest rage I have is tied to that last question.Those in power,in the soon-to-be-history administration may force me into choices that no one should ever have to make.This is unforgivable.

Be good,or be careful


Cassandra Syndrome said...

@ Kenneth
After 5 7/8 of them the plural is most certainly beers. Or perhpas beeeerrrzzz.

Anonymous said...

something is working well re the tone of the comments and posters, the quality of the last week's comments have been extremely high. If this is the result of clearing out those incapable of putting forth rational views, fantastic, no loss.

I use kunstler's unreadable comment threads as a counter-example.

Amazing stuff going on, the thing that's really making me wonder, and thanks for your link Energy, Finance.. stoneleigh, well written analysis.

What I'm starting to wonder is this: given that Saudi Arabia had basically the only excess capacity in the world, and that is made of lower grade heavy crudes, and assuming Simmons was right about the damage it did long term to the Saudi oil fields to jack up production in the past to help 'stabilize' oil markets and prices, isn't it not only possible, but in fact quite likely, that in the greater than 100 a barrel days now passed, Saudi Arabia once again pushed into its emergency short term output boosts, and now has dropped them, and will keep them dropped, which is why they appear to be more or less obeying the lowered quotas?

This would fit with most of the more interestingly reasonable assumptions guys like Simmons are making about the true state of the current production levels in Saudi Arabia.

And this could be very bad, very soon, the problem is, as some have alluded to here, these issues are moving just below our emergency response mechanisms, just a bit too slow for us to register.

One thing that struck me, and made me slightly ill, was seeing a woman recently driving an SUV down the road, with this somewhat smug smirk on her face that suggested a child able to play with its toy even though it was told by the grown ups it couldn't...

Just a bit longer.

So many great posts lately though, this is one of the few comment threads worth actually tracking and reading, constant food for thought, el gallinazo, I find your ability to sometimes take the words out of my mouth somewhat distressing, hah hah.

Anonymous said...

"I use kunstler's unreadable comment threads as a counter-example."

Kunstler is too lazy to have his comments moderated. He doesn't really give a crap and it shows in his blog. He rationalizes at as 'an example of the chaos to come' but it's really just not a very serious effort, he only has to knock off a paragraph or two a week and go fishing.

Anonymous said...

The media is only giving the bright colors of the spectrum of the opinions. The blogs are filling the whole spectrum.

Until I found the blogs ... everything was just fine... just a normal correction of the market.

Anonymous said...

@willnotbill: it's too bad more people can't handle the truth.

The real problem is that more people are not aware of the truth, and a large part of the reason is that our "leaders" think, incorrectly, that we can't handle the truth. For example, there is a grotesque caricature of Americans that we are all bratty children who will pitch a terrible fit if told we can't eat a diet of nothing but cookies and ice cream. But I don't know hardly any Americans like that. Most of the people I know are sensible, level-headed folks who just want to know what the real deal is, so they can get busy preparing and doing the neeeded work to get by.

The idea that Americans would take to the streets and start lynching politicians or turn into a bunch of deranged zombies, killing and burning everything around them, is a ridiculous fiction.

The idea that people can't handle the truth is a fiction. The vast majority of people want to be told the stark, absolute truth and will handle it just fine.

Of course, another part of the problem is that most of our "leaders" either don't know or can't recognize the truth themselves, and some of the blindness may indeed be willful; I think "leaders" have far more trouble facing reality than the general public.

Anonymous said...

I've been wondering how the blue collar, heavy construction crowd in my area has been interpreting the financial meltdown. Normally, it is not a big point of discussion down at the diner over coffee in the mornings.

But recently, a steel worker friend I've known for years actually approached me about it, something totally out of character for him to do. He is a very hard working man, has a high school degree, and no formal training in financial matters.

Never heard him ever mention "Wall St" since I've known him. He launches into a fairly sophisticated rant about the 'bank bailout' then wraps it up by saying,"what these bankers have done is no different than terrorism, it's financial terrorism."
He might not have a command of the nuanced details but it is very telling to me that he grasped as much as he did.

He then tells a variation on an old joke,"What's the difference between a wagon full of bowling balls and a wagon full of Wall St bankers?"

"You can't load the bowling balls with a pitch fork."

And this man and his friends have and really know how to use a pitch forks.

Just a little note from the trenches.

Anonymous said...

This is not my area of expertise at all, but it seems to me that there are already rumblings from Asia (China) and Europe (France) that the dollar should be dumped as the world's primary reserve currency.

If such a move took place, whether official policy or simply by action, wouldn't that remove a substantial amount of the underlying protection the dollar and the US economy have enjoyed? It seems to me that, given the extraordinary (and skyrocketing) US debt, that would precipitate a serious flight from the dollar and a major sell-off of US-denominated assets (with the requisite price collapse). Is that completely off base or somewhat in the ballpark?

I suppose that one thing keeping the US dollar and debt in some demand is the US role as consumer of last resort. A good portion of the world needs the US to continue to consume, but the US cannot do that without borrowing (as neither assets or exports are sufficient to generate sufficient capital), so it is necessary to continue to lend money to the US and to operate in dollars. Would this be sufficient to keep the dollar as the reserve currency or keep from crashing if it were replaced?

Again, this is way outside my area so any thoughts will be most helpful in building my understanding of the dynamics here.



Anonymous said...

Anonymous: Illargi, I think I remember you saying just after the collapse of Lehman Brothers, correct me if I am wrong, that things would be very different by x-mas. "

Ilargi: They were, weren't they?

No, they really weren't.

Actually the exact quote (Ilargi said this Sept. 27) was, "By Christmas, you’ll be lucky if you recognize the town you live in."

I'd have to say that Ilargi's penchant for overblown rhetoric got the best of him there. I still recognize my town. Hasn't changed much at all, really. Everyone I know still recognizes their towns. I guess we're all just extremely "lucky"

You do have to take Ilargi with a grain of salt sometimes. He exaggerates a lot (e.g., today's "There is no solvent bank left in the US" -- as a bit of spicy rhetoric, that's got some zing to it, but as a factual matter, it's plainly untrue).

Not to say that things might eventually get so bad that my town will become unrecognizable, I could imagine that potentially coming to pass, but it was obviously kind of silly for Ilargi to suggest that it would happen in 3 months time.

*** said...

belated Mexican new year blessing
internet forward, author unknown, my translation
Después de una seria y cautelosa consideración... Quiero notificarte que tu "Contrato de Amistad" ha sido renovado para el Nuevo Año 2009!!!!!
Fue una decisión muy dura de tomar...
Así que trata de no violar este convenio!!!!!!!
Mis deseos para ti en el 2009:
Que la Paz asalte tu casa y que los ladrones vengan y se roben todas tus deudas.

Que los bolsillos de tu vestuario sean un imán que sólo atraigan billetes de a $ 1,000.00.
Que el Amor se pegue en tu cara como vaselina y que la sonrisa sea una plaga incurable en tus labios.
Que tu ropa huela a éxito y que la felicidad te cachetee el rostro y si hay lágrimas que sólo sean de alegría.
Y que los problemas extravíen la dirección de tu casa para que nunca lleguen!

En pocas palabras:
Que el 2009 sea el Mejor Año de tu Vida!!!!!

After serious and cautious consideration, I want to notify you that your “contract of friendship” has been renewed for the new year of 2009.

It was a decision that was long in the making, therefore try not to break this agreement!

My hopes for you in 2009:

That peace assault your house and that burglars come and rob your debts.

That your clothes pockets be a magnet that only attract $1,000 bills.

That love stick to your face like Vaseline and the smile be an incurable plague upon your lips.

That your clothing reek of success and that happiness slap your face and that if there are tears they should only be for joy.

And that problems should lose their way in coming to your home and never arrive.

In short:

May 2009 be the best year of your life!

Anonymous said...

John Singler says:

"Americans that we are all bratty children who will pitch a terrible fit if told we can't eat a diet of nothing but cookies and ice cream. But I don't know hardly any Americans like that. Most of the people I know are sensible, level-headed folks who just want to know what the real deal is, so they can get busy preparing and doing the neeeded work to get by."

In my discussions with the incredulous, I refer them to the fact that when social order breaks down over something as pedestrian as the loss of a Stanley Cup playoff game, when people are hungry and cold, how in the world to you think they are going to react?

Anonymous said...

Almost All building construction and house sales have stopped dead cold in their tracks in My Town from one year ago.

Yeh, it Looks the same in a very Superficial way, it can be recognized, but a lot of people are beginning to suspect that Something is Very Wrong with This Picture.

Jon S must love living in his Potemkin Village.

Honest John said...

I'm in the middle of reading Hard Times by Studs Terkel and highly recommend it, it was written in the early seventies. Studs interviews dozens of different people who lived through the Great Depression. You can also listen to the actual interviews here
There is quite a cross section of experiences and viewpoints of what went on, and how it affected everyone. Studs was a master at getting people to open up and it gives a unique perspective.

Anonymous said...

@Dr J: the fact that when social order breaks down over something as pedestrian as the loss of a Stanley Cup playoff game

That's just it. That's not a fact. I don't know what incident you're referring to, but I assume it was some incident where a crowd of knuckleheads burned or broke some things, fought with some cops, etc. What it most certainly was not (or I would have heard about it) was anything that could remotely be considered the social order breaking down. A few knuckleheads blowing off steam in the midst of a rock-solid social order does not constitute that order breaking down in any but the most ephemeral and trivial way.

when people are hungry and cold, how in the world to you think they are going to react?

I expect the vast majority of people to react in a sensible, level-headed manner. That's the way the majority of people almost always react to adversity. Will there be some riots and some bloodshed? I'm sure there will be. But only a small minority of people are going to engage in such destructive and unproductive activity. The majority, as I said, will be engaged in constructive, productive tasks.

(And, for the record, I wasn't talking about how people will react to actual hardship, I was merely talking about how people would react to being told the truth about the very real likelihood of having to deal with adversity in the near future.)

Unknown said...


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What a great New Year's wish. Thanks. Hope you enjoy the same.

*** said...

Pardon my overenthusiasm, if that is the case, towards this culture.

We're in Mexico, and it hasn't hit here yet to the extent we hear of in the US. They simply adjust prices; the dollar becomes the tide that lifts the ships. Construction is still buzzing away anywhere we look.

Once thing about Mexico is the amount of true free trade - an amazing amount of homes have small candy or roasted chicken ventures out the front door.

In that sense the US street economic is too hobbled by overregulation to enjoy that kind of instant economic vitality. I abhor the thought of living in that kind of environment post-wt#htf.

We're talking about the demise of the lemonaid stand in many places.

"All we'd have is land and food" one young Mexican friend said, pondering the potential domino effect on Mexico of economic collapse up north.

He had no idea how much he said.

*** said...

John Singler,

"when people are hungry and cold, how in the world to you think they are going to react?

I expect the vast majority of people to react in a sensible, level-headed manner. That's the way the majority of people almost always react to adversity. Will there be some riots and some bloodshed? I'm sure there will be. But only a small minority of people are going to engage in such destructive and unproductive activity. The majority, as I said, will be engaged in constructive, productive tasks.

Where do you live?

I grew up in Montana/Wyoming and I regret telling you that I don't see it playing out like that in the west, but especially the extreme southwest.

My husband grew up in Minnesota, where none of his family or friends had guns. He never saw one until he was drafted.

Until I traded POVs with him I never realized how saturated the west is, by comparison, with gun culture. I'm talking about people who teach toddlers to shoot.

I believe the eastern US has no clue how different it is out there.

Unknown said...


I say this with guarded promise:

It looks to me like Mexico (like almost all of Latin America and South America) are going to escape the suffering. China and Russia (and a few strategic-minded nations) spent 2008 making special trading treaties with these nations, including Mexico.

Mexico will have problems, of course, but they still have some strong reserves, and the people have hidden wealth to rely on. But mostly, as you say, they have food and land and a lifestyle that won't change dramatically.

You're in a good place to ride out the storm.

Anonymous said...

@Jon Singler - from Wikipedia:

The 1994 Stanley Cup Riot occurred in Downtown Vancouver, British Columbia, Canada, on the evening of June 14, 1994 and continued into the following morning. The riot arose after Game 7 of the 1994 Stanley Cup Finals in which the Vancouver Canucks lost to the New York Rangers.
After the NHL contest was concluded, 50,000 to 70,000 individuals reportedly converged upon Downtown Vancouver. What initially was a gathering developed into a riot at Robson and Thurlow Street. This happened after an accident involving one or more victims who fell through scaffolding related to construction of a building on the corner, and later spread to surrounding areas of downtown.[1][2] Total damage to the downtown core was estimated at $1.1 million CAD. Like other Robson and surrounding retailers, the then Eaton's department store had more than 50 of its storefront windows smashed.
Subduing the crowd required the efforts of both the Vancouver Police Department and Royal Canadian Mounted Police officers. In all, 540 officers were directly involved with the riot. Many individuals were arrested and charged, and up to 200 individuals were injured.

If that doesn't move you, have a look at this:


I rest my case.

Stoneleigh said...


Your scenario #2 from yesterday is all too possible. I would be surprised if the DJIA was above 1000 by the end of next year. Right now we're in a slow-motion train wreck, but positive feedback spirals feed on themselves and pick up momentum. This is why we see periodic cascades, where huge losses can happen in a short space of time. I am expecting several such cascades over the next couple of years.

As for disinflation and deflation, the former leads to a 'Goldilocks economy' and the latter to disaster (although disinflation commonly doesn't measure credit expansion properly and so can mis-describe asset bubbles). Deflation is the collapse of money and credit, which can happen very abruptly.

Stoneleigh said...

Greenpa (from yesterday),

I would expect the price of fertilizer to bottom quite early in a depression, along with energy. Even though we're on the brink of demand collapse for many things, even essentials (due to a lack of purchasing power not a lack of want), the situation with natural gas (from which much fertilizer is derived) is still very serious in North America. The supply collapse could come more quickly with natural gas than with oil, as natural gas falls off the gas cliff rather than depleting slowly.

The Canadian government's own figures indicate that we have 8 years supply left at the current rate of consumption. Although this will fall in a depression, we also won't be doing the drilling that would replace the rapidly depleting supply. Natural gas peaked in North America in 2001, after which the US built $100 billion worth of gas-fired generation capacity that they won't have the gas to run in a few years. The North-east is particularly vulnerable as they are heavily dependent on natural gas for both heat and power.

Much of the fertilizer industry left after the last spike in gas prices, and migrated to the stranded gas deposits of the Middle East. With the unfolding collapse of trade, supply will be harder and harder to come by. The effects of greatly reduced fertilizer will be greatly reduced crop yields.

Stranded Wind wrote a good diary on this topic over at Daily Kos a while ago.

Stoneleigh said...


Gold will hold its value over the long term as it has for thousands of years. An ounce of gold would have bought you a good toga in Rome and it would buy you a good suit now.

In the short term it is likely to fall, but I would expect it to bottom relatively early in a depression. Gold ownership is likely to be complicated by confiscation without compensation, however, as happened in the 1930s. That wouldn't stop you owning it, but it would make it difficult and dangerous to trade for things you might need.

Essentially, you need to be able to sit on your gold for a very long time before it could be of practical use to you, which is fine if you have enough money to be able to squirrel a large amount away in this form and not need to touch it for perhaps twenty years. For most of us this isn't practical though. Getting rid of debt, holding liquidity and building self-sufficiency are higher priorities for ordinary people.

Stoneleigh said...


Short term treasuries are a cash equivalent, and cash is king in a deflation. Liquidity will be essential.

I don't recommend long term bonds as you would indeed have to find a buyer at a time when prices could have fallen a very long way, or wait thirty years for Uncle Sam to repay you (and what are the odds of that?). You typically don't need to find a buyer for short term debt instruments, as you simply decide whether or not to roll them over.

Eventually we are likely to see a significant dislocation in the bond market, but not yet. When we do, interest rates are likely to skyrocket, and the resulting destruction of credit will be highly deflationary, despite the effect on the dollar at the time.

Stoneleigh said...


Thanks for the review - much appreciated :)

Stoneleigh said...

My view of currencies is that the USD will continue to benefit from a flight to safety, as irrational is that seems (and is, considering the state of the US's finances). Such things are simply not rational decisions, but knee-jerk emotional responses to a threat. IMO the fundamentals don't drive market moves - social mood drives markets and the effects create the fundamentals.

I expect the euro to fall, and perhaps fall apart, as the internal stresses build in Europe (and I say that as a Europhile who welcomed the creation of the EU and the single currency). Countries such as Ireland, Greece, Italy and Spain will simply not be able to remain part of it as their economies implode, while Germany (which never had a housing bubble) does far better.

If the euro does survive, I would expect it to be used by a much smaller group of countries. I don't see it becoming a reserve currency though. I think, after a period of interregnem, a new global reserve currency will come out of Asia, but not any time soon. It's also possible that there may not be another global reserve currency, but rather regional reserve currencies, depending on the impact of global depression and the war that is likely to result from it.

As for which countries do worse, the housing bubbles in many European countries dwarfed that of the US. Consequently, I expect them to suffer far more as their housing markets collapse. The UK, Ireland and Spain come to mind in particular. (This is why I no longer live in the UK.) The US is in for a world of hurt, but may yet be better off than many places - not that it will seem that way for those in the middle of it though.

*** said...

Hola Pluto,

Que recibe un abrazo. Yo también ya renové tu contrato de amistad.

Anonymous said...

Haven't heard much about the baltic dry index lately. Are shelves going to be empty by Jan. 20? Starcade, care to comment?

Anonymous said...

@Dan W: If that doesn't move you, have a look at this:
I rest my case.

That doesn't move me, and neither does the list. You can't rest your case, because you haven't made one -- actually you made my case.

That riot is exactly what I assumed it to be -- a one-night blowing off of steam by a small number of knuckleheads (the crowd wasn't all rioting, you know -- most of the crowd was just out in the streets for the occasion), that caused a minor amount of damage, and was over and done with the next day.

All that riot demonstrates is just how solid and entrenched social order is. Such episodes are no more than a pebble tossed in a pond; the ripples do not portend the evaporation of the pond.

Get real. Trying to extrapolate from a crowd going temporarily crazy after a sporting event to the break down of the social order is absurd.

Stoneleigh said...

Jon Singler,

The veneer of civilization is actually quite thin. Social order appears entrenched now, but could easily be disrupted, for instance by empty shelves.

Social response to events depends on collective mood. In good times people react to adversity in a civilized manner, but not so in bad times. Contrast the blackout of 2003 with the previous eastern seaboard blackout. In 2003 people looked after each other and order was easily maintained. The previous time there was widespread looting and chaos in some cities.

I think the likelihood of an eventual breakdown in social order is very high (at least temporarily), but I wouldn't say it was imminent. My longer term view is currently that we could see such an event this autumn (following a spike low, a substantial sucker rally and the return of the larger decline).

Anonymous said...

I agree with stoneleigh.The veneer of "civilization gets thinner every meal missed.I think It was the french [who know a thing or 2 about revolution]who say that "Every country is 3 meals away from a revolution".Being hungry yourself is one thing.Seeing YOUR kids look like something out of Nat.Geographic article will send some into the ether


Anonymous said...

Jon S,

Here are a couple of Wikipedia articles on the Watts Riot in LA in 1965 and the 1992 LA riots.



These were definitely more than some knuckleheads letting off steam for a few hours as a result of a sporting event.

I would expect LA to be one of the first places to see the breakdown of social order as a result of the financial collapse and natural resource restraints.

California is in bad shape with water now, and if we don't get some good storms this spring, it will go from bad to worse. I imagine talking away folks' easy access to water is not going to sit well along with everything else.


scandia said...

I recommend a film in response to the question as to when the media will tell the truth. It is a film about propaganda. I realized more keenly that the propaganda will intensify rather than err on the side of facts/reality/truth.
" The Goebbel's Experiment", a film by Lutz Hachmeister & Michael Kloft, narrated by Kenneth Branagh.
I was able to get it from the library system at no charge here in Ontario.I think if you live in Ontario you can put in a request for it at your local library branch.

Anonymous said...

@ stoneleigh, jon singler and riotous anonymous.

The question I'd like to pose is, if the veneer of society is so thin, than how has civilization lasted so long?

From chaos springs order. Every revolution, conflict, riot, culture movement, disorder etc has resulted in order and stability.

Sure humans may have a "dark heart" but we also have a "light heart". I mean humans take care of each other, all over the world most people have fallen in love, helped someone out, done something for charity, laughed and partied together. Sure you get bouts of madness and insanity but you also get spells of co-operation and brotherhood.

One of the things i'd like to ask about "social mood" is how that concept fits in with the built in optimism bias that we have in our brain. 90% of people call themselves optimists, hence since we almost always feel good we must make progress!? Yet there have been many periods in history where man made no progress.

Was it a lack of optimism and positive social mood? Hardly!
We are genetically pre-disposed to be slightly happy and positive (good for the body and mind).There are many other things at play apart from "social mood".

I mean my country Kenya was ranked the most optimistic place on earth after the 2002 elections according to the BBC, you could feel the joy in the air. That social mood got lifted very quickly by the constant bickering amongst our political parties. Wasn't social mood supposed to propel us to greater heights?

And as for social mood in western countries, i've only been to Australia, France and the UK. But these are hardly places bubbling with joy. Take a seat in any public transportation and you can see a constant battle in the mind.

Recently in 2003, the BBC said Nigeria was the happiest place on earth. Now isn't that place an island of peace,stability and equality? ;-)

Social mood might explain some events but it should be taken with a grain of salt.

willnotbill said...

jon singler. My point in regards to people not being to handle the truth is this. If people seek truth they know they must look for it from more than one source ie: corporate media. The vast majority of posters here seek truth. I talk to people, who's knowledge of this "credit crunch" is pathetic and they never ask where to find truth. And once you find truth you can never turn your back on it. Sorry but I don't believe the majority really cares, not until their stomach is empty.

Ilargi said...


"Illargi, I think I remember you saying just after the collapse of Lehman Brothers, correct me if I am wrong, that things would be very different by x-mas. "

Ilargi: They were, weren't they?

No, they really weren't.

If you think your world hasn't changed dramatically in the past three months, I'd say keep reading and pay attention.

"Actually the exact quote (Ilargi said this Sept. 27) was, "By Christmas, you’ll be lucky if you recognize the town you live in."

I'd have to say that Ilargi's penchant for overblown rhetoric got the best of him there. I still recognize my town. Hasn't changed much at all, really. Everyone I know still recognizes their towns. I guess we're all just extremely "lucky""

All the luck that $8.4 trillion in public money could buy. More's on the way, much more. But money doesn't really buy you luck, just a bit of time. And if it takes almost half of GDP to buy three months of relative quiet, that is not a great deal.

"You do have to take Ilargi with a grain of salt sometimes. He exaggerates a lot (e.g., today's "There is no solvent bank left in the US" -- as a bit of spicy rhetoric, that's got some zing to it, but as a factual matter, it's plainly untrue)."

It's not untrue, they've simply been given your money in order to hide their insolvency. WHile it's true that there may be a handful who otherwise might have lived, the wave of failures will wash them away too.

People often wonder why not more banks have fallen yet. Well, look at the FED balance sheets, the borrowed reserve stats, the $350 billion TARP, the $152 billion pumped into AIG. These are all policies aimed at delaying the opening of the books. So they live a few more months. And that's not such a great thing once you realize that it's your future money that keeps your present money afloat. It could have been used to guarantee you access to your money, but it definitely has not. When these banks go poof now, you'll have lost both.

"Not to say that things might eventually get so bad that my town will become unrecognizable, I could imagine that potentially coming to pass, but it was obviously kind of silly for Ilargi to suggest that it would happen in 3 months time."

We all know about facades, that's why we have the media industry we do. Without pledging your children's funds, it would have happened in three months. And there's nothing silly about suggesting it could happen. I never said it would, just that the risk was there. Now you're $8.4 trillion+ poorer, and the risk is still there. Count your blessings. And your luck.

el gallinazo said...

"Jon Singler" was third mate on the Titanic in his most recent past life. He was noted by the survivors for urging calm as the ship sank. It is unclear whether he threw any women or children out of the life boats to find a place for himself, as did the other officers. The details are lost in the haze of the Akashic records. However, the entity did survive the incident and lived to the age of 97 :-)

Anonymous said...

From an article in the January 7th Cleveland Plain Dealer:

Headline Jobless overwhelm Web site, phones

". . . On a usual day the agency gets about 7,500 calls, but for the past week or so it has been getting 80,000 calls a day, or more than 10 times the usual volume.
Harter said that in December 2007 the agency took 138,563 calls for the month. In December 2008 the number had grown to 885,501.
. . .
And on Sunday a record number of people - 181,000- filed claims online. That number has drastically increased from October, when 75,000 people filed online on Sundays- the first day of the agency's filing week.

Stoneleigh said...

El Gallinazo,

I haven't heard anyone mention the Akashic records since the last staff meeting I sat through at the Steiner school my kids used to go to and where I used to teach French and handwork. Next you'll be talking about the sixth post-Atlantean epoch ;)

el gallinazo said...


I will restrict myself solely to the financial aspects of the epoch. I believe that the fractional reserve system was invented in that period.

Stoneleigh said...


Social mood is a powerful driver. It's not as simple as happy or sad though. It's a tug-of-war between optimism, trust, inclusion, greed, and risk-blindness, versus pessimism, distrust, exclusion, fear and risk-aversion.

It also has to do with how high one's discount rate is (ie to what extent one values the future), which is a measure of perceived stability. A relatively low discount rate, allowing the luxury of the long term view (relatively speaking), derives from trust in continued peace, stability and sufficient access to resources. Unfortunately, it takes a long time to develop and relatively little time to destroy.

Both the optimistic and the pessimistic side of the coin can create self-fulfilling prophecies to some extent, although the big picture is much more complicated than that of course. The interaction of an optimistic mood and an inheritance of fossil fuels has been been quite spectacular in its synergistic effects, allowing us to reach an unprecedented peak of socioeconomic complexity and order.

We are past that peak now though, and rapidly sliding in the other direction. The degree of disorder we are heading for will be (to say the least) acutely uncomfortable for people raised in a low-risk environment.

Anonymous said...

First time posting here. Found this place couple weeks back and it is great.

Just want to say Thanks.

Stoneleigh said...

El Gallinazo,

To each his own ;)

Anthroposophy wasn't my thing, but my kids did learn the useful practical skills I sent them there for.

Anonymous said...

Regarding the "thin veneer" of civilization discussed above:

To make sense of this issue, it helps to distinguish civilization from culture. Civilization, loosely speaking, is that which enables societies to store and mobilize resources on a large scale and maintain big systems. Culture, loosely speaking, is the way people think and talk, and the values that guide their actions even if they can't be articulated. Culture is thick and civilization is thin.

Civilization easily breaks down where 1) it is perceived to be weak or to have broken down already (for example, in hockey riots, on anonymous streets, where the police are badly outnumbered); and 2) where it is perceived as oppressive and illegitimate. When civilization breaks down, culture becomes the entire basis of life.

Culture instills solidarity among people who share the same culture. A big danger we face in the current world is: most advanced societies are now highly multi-cultural, with diverse populations mixed in the same physical space. When civilization breaks down, even temporarily, the threat perceived from people who look different or are different can be very strong, leading to streets running with blood until people can manage to separate themselves.

There will be no riots in Japan whatever happens, because it is a xenophobic, monocultural place. People feel strong solidarity and will cooperate through adversity. In LA, anything could happen, much of it bad. A lot of people who comment here have retreated to rural areas where everyone is white American or Canadian, so cultural solidarity will seem through a breakdown of civilization.

Anonymous said...

I am more inclined to agree with John Singler as a matter of choice and assertion. Most acts of riot are either self-limiting emotional responses (such as after sporting events) or they are sparked by an event of gross injustice piled high upon event and event and event and event -- that becomes a last straw event.

The latter is less likely to sparked by hunger as it is pure oppression. The more FEMA fails to respond to the needs of the already extremely poor and marginalized people (people of color, of poverty and currently of incarceration), the more fat cats line their pockets with tax dollars that may not ever find their way back down the 'trickle' and the more hospitals fail to respond to people's need while police increasingly clamp down... these are the types of things (hubris) that breed the intolerable conditions that do not merely lead to, but truly incite to riot.

I have heard some discussion here and there of concerns of a heavily armed population with strong currents of race and class conflicts. Well, I supposed I could 'imagine' a situation where the peasantry get so angry at TPTB they shut down shipping, grab pitchforks and raize the institutions of entrenched self-interest. If that happened, I would not be worried as much as startled and I suspect most folks would be also. It flies directly in the face of the cultural belief "ah but, that will never happen."

Far more concerning I would think would be long term pressures and the deliberate stirring of religious and race intolerance among a heavily armed population causing us to turn upon each other in some sort of ethnic/class cleansing...

Sadly, I could 'imagine' that in some outside possibility. It's the kind of thing that causes a human to grab a machete or whatever and rise up against his neighbor rather than the real oppressor (kicking the proverbial dog instead of da boss-man).

This is something 'we' have to fight against within ourselves as much as making sure 'they' don't plaster swastika logos all over everything. The real challenge, IMO, is for US to learn how to lose a little gracefully... lose a few pounds, lose a few dollars, lose face even for the greater good.

-My 0.00000002 cents (adjusted for deflation)


"It has always seemed strange to me...The things we admire in men, kindness and generosity, openness, honesty, understanding and feeling, are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest, are the traits of success."

Anonymous said...

Sorry, that last quote is John Steinbeck, Cannery Row

Unknown said...

I am more inclined to agree with John Singler

As far as riots are concerned, I am as well.

I believe Illargi is correct in his assessments of our future. That said, I don't think it wise to attach specific dates to prognostications. Events that may be inevitable can easily be hastened or delayed by the unexpected.

Anonymous said...

These are the kinda crashes I expect we will see more and more of in the coming days...


BTW, the beginning of the new year sees our food pantries looking pretty bare and local small biz's scrambling to find funds for fees or imminently folding. Who will be the last man standing in this great war of attrition?