Wednesday, January 7, 2009

January 7 2009: The name is Bonds. Obama Bonds.

Lewis Wickes Hine I'm de whole show 1913
Waco, Texas. Isaac Boyett, twelve-year-old proprietor, manager and messenger of the Club Messenger Service in the heart of the Red Light district where he delivers messages several times a day. Said he knows the houses and some of the inmates. Has been doing this for one year, working until 9:30 P.M. Saturdays. Not so late on other nights. Makes from six to ten dollars a week.

Ilargi: The US lost 693.000 jobs in December, according to ADP. The official non-farm payrolls report is due Friday. And so we set the tone for 2009. The numbers for January are certain to be much worse. A lot of businesses held on for dear life in the last month of last year, especially retailers and their suppliers. Well, we know the shopping season was dismal. The UK expects that one in every seven stores will be empty by the end of this year. 60% of its 22 million jobs are in retail, meaning 2 million people could get laid off in retail alone. Supposing the same set of numbers would apply to the US, the country would shed 10 million jobs. Just in retail. By then, it's not that important anymore whether 50% or 60% work in stores, whether the number is 9 or 10 million lost jobs. That is because if this scenario pans out, there are other things to worry about.

In China, the state media have started warning of social strife and mass protests, presumably in an attempt to stay ahead of developments. The country, which has about 4 times the US population, has already seen those 10 million workers fired last year. With another 7 million looking for work today, the officially projected 8% economic growth would create just 8 million jobs. The chances of meeting that target are zero; the economy is shrinking fast. On the other hand, much media maligned Germany saw its first net job loss in three years. There are 82 million people in Germany, about 27% of the US population. While the US lost 693.000 jobs in December, Germany’s loss was 18.000 jobs. Something tells me perhaps the Germans aren't doing that poorly.

Obama warns of a $1 trillion US deficit this year. It’s obvious the deficit will be nearer $2 trillion, but you have to feed it to them bite-size. It'll easily be more than ten times the 2007 deficit of $162 billion, in an economy with a rapidly shrinking GDP. Obama expects the deficit to remain over $1 trillion (read: way over) for many years to come. But in a stark warning to Obama and the US, the Financial Times reports that the first German (10-year) bond issue of the year failed. Yes, that's the country with the far more favorable job numbers. There are far less questions about German solvency than there are about the US, and you can bet that Washington pays attention to news like that.

The FT claims that $3 trillion in -sovereign debt- bonds will be issued globally, three times more than in 2008, as national governments frantically try to plug the behemoth size black holes in their budgets. But the paper is way too conservative; unless the failures come early and fast, total attempted government bond issuance will far surpass $3 trillion. The money has to come from somewhere. But common sense indicates that economic prosperity and bond markets move largely in sync.

Therefore, as economies worldwide plunge, the bond markets will provide hard and bleak proof that they do not constitute a bottomless well. The UK is about to be the next one to find that out. The US will soon follow. And as I’ve said before, we're not yet talking about all the corporations, municipalities, states and provinces around the globe who rely on bond markets to fund their day-to-day expenses. What are all these hopefuls going to do? Offer double digit rates in a time when deflation keeps real interest rates below zero? That would be a slow suicide recipe. The market for municipal bonds in the US sort of ground to a halt last year, while corporate bonds fared little better.

What's more, you need to look at who the big buyers are. You've got your pension-, mutual- and other funds, but they've all suffered big hits last year. They'll be lucky not to lose another 40-50% of their holdings. Not exactly the sort of party to buy 3 times as many bonds now. The other main buyers are foreign banks and governments, in particular Japan, China, Germany and the oil states. The first two have been the biggest buyers, but are now just trying to keep their heads above water. Their purchases will go down, not up. Germany needs to focus on the EU, and the Middle East will have its own set of problems if oil prices don’t start rising real soon.

So who's going to finance Obama’s stimulus package? The only party left is you, but you're already much poorer than you realize. Maybe if they don't tell you that, you’ll play their game a bit longer.

In a nice little extra, here’s the Dec 1. graph from the St. Louis Fed series of borrowed vs non- borrowed reserves that banks have outstanding at the Fed. Merci, François. As you can see, there are dramatic movements going on. Three things:
  1. From negative infinity to a healthy account with giddy laughter and rosy cheeks, all in a matter of weeks. Who said your money isn't well spent?
  2. Striking to see that the TARP and other funny money than banks receive doen't count as borrowed. What is it, a gift? Wasn't it a loan? Henry?
  3. At least the fact that it's sitting at the Fed doing nothing is proof positive that they're not lending it out, as they are supposedly supposed to do.

Click the pic

Obama Predicts Years of Deficits Over $1 Trillion
Slowing tax revenues and a historic bailout of the U.S. financial system will send the budget deficit soaring toward $1 trillion this year, President-elect Barack Obama said yesterday, and the red ink stands to get substantially deeper if Obama wins approval of a massive economic stimulus plan. Even if the package of spending and tax cuts helps restore the nation's immediate economic health, Obama said, the government is likely to be left with "trillion-dollar deficits for years to come" unless policymakers "make a change in the way that Washington does business." "We're going to have to stop talking about budget reform. We're going to have to totally embrace it. It's an absolute necessity," the president-elect told reporters a day before the Congressional Budget Office is set to release its outlook for the coming year.

Obama faces the twin challenges of managing the deficit, the annual gap between tax revenues and spending, and the swelling national debt, the amount of money that the government has borrowed to finance years of deficits. His task is made all the more difficult because new spending is widely viewed as the best way to pull the nation out of the recession. While Obama has declined to say how he intends to deal with such challenges, an economic adviser said yesterday that the president-elect plans to unveil "major initiatives" designed to eventually bring the deficit under control as part of his first budget proposal, which he will submit to Congress next month. Obama also has scheduled a news conference for today to make a "personnel announcement" related to budget reform, aides said.

In the meantime, Obama said he will incorporate a trio of provisions in the nearly $800 billion stimulus package under review by Congress -- dubbed the American Recovery and Reinvestment Act -- to ensure that the money is not wasted. The provisions include establishing a special panel to monitor use of the money; a Web site that will allow taxpayers to monitor use of the money; and a ban on lawmakers' pet projects, known as earmarks. "We're going to be investing an extraordinary amount of money to jump-start our economy, save or create 3 million new jobs, mostly in the private sector, and lay a solid foundation for future growth. But we're not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well," Obama said after an hour-long meeting with his economic team.

Today's CBO report will provide the first official estimate of how Washington's various economic salvage operations have affected the nation's finances. One of the primary participants in yesterday's meeting was Peter Orszag, who stepped down as CBO director in November to serve as Obama's budget chief. Orszag should be intimately familiar with the forthcoming CBO report; Obama said Orszag advised him of the grim deficit forecast. In announcing the news a day early, Obama cast himself as the unfortunate heir to President Bush's fiscal "irresponsibility," saying Bush's policies have doubled the national debt over the past eight years and delivered "the worst economic crisis that we've seen since the Great Depression."

Though Obama plans to keep some of Bush's most expensive policies -- including many of the tax cuts enacted during Bush's first term in office -- Obama has vowed to scour the budget for wasteful spending. "We are going to bring a long-overdue sense of responsibility and accountability to Washington," Obama said. "We are going to stop talking about government reform, and we're actually going to start executing." Bush's tax cuts helped eliminate the surpluses of the Clinton years and helped drive the annual budget deficit to a record $413 billion in 2004. The deficit later plummeted to $162 billion in 2007 but soared to $455 billion in the fiscal year that ended in September, largely because of a small stimulus package enacted last February, slowing tax revenues and rising expenses in Iraq and Afghanistan.

Initial projections suggested that the deficit for the fiscal year that began Oct. 1 would be about $550 billion. But since then, the budget outlook has only gotten bleaker. As the economy has weakened, tax collections have slowed, and spending on food stamps and unemployment benefits have increased. Meanwhile, Congress approved a $700 billion bailout to stabilize fragile financial markets by purchasing the stock and assets of banks, insurance companies and other institutions. Though much of that money is invested in assets that eventually will be sold, returning at least some of the money to the government, the bailout is likely to add another $200 billion to the deficit this year, according to a letter CBO analysts sent last month to House Majority Leader Steny H. Hoyer (D-Md.).

Those developments alone are pushing this year's deficit toward $1 trillion, said an Obama economic adviser. If approved, Obama's stimulus package would clearly add hundreds of billions of dollars to the deficit in 2009, the adviser said. Even if only half the stimulus money is spent this year, the deficit could easily top $1.4 trillion, or nearly 10 percent of the economy -- a budget hole not seen since the end of World War II. Many Wall Street analysts expect the deficit to go higher, however; a recent Treasury survey found that major bond dealers expect the nation to borrow as much as $2 trillion by the end of September.

The mounting debt has raised an alarm on Capitol Hill, where some Republicans and moderate Democrats are pressing Obama to tackle the looming challenge of skyrocketing Medicare and Social Security spending, and to adopt tough new budget rules to prevent future deficits from ballooning. Congressional aides said one possibility would be a return to the stringent budget rules of the late-1980s, when overspending automatically triggered across-the-board cuts to federal programs, a process known as "sequestering." Hoyer, a champion of fiscally conservative Democrats in the House, acknowledged that sequestering is an option. But it's "not something lawmakers are eager to approve," he said, because it would take control over federal spending out of the hands of Congress.

Fed predicts economy will get worse
The U.S. economy is likely to deteriorate further this year and unemployment will rise into 2010, according to the latest forecasts from the staff of the Federal Reserve. This bleak forecast was presented to Fed policymakers when they met last month and lowered interest rates to near zero. Low interest rates are one key tool the central bank uses to try to spur economic activity. According to the minutes from that meeting, the central bank is now predicting that gross domestic product, the broadest measure of economic activity, will fall in 2009.

"I think that the Fed is really very scared right now -- like everybody else -- and they want to pull out all the stops," said David Wyss, chief economist for Standard & Poor's. The Fed indicated that most members at its meeting expected a slow recovery to begin in the second half of the year, but that unemployment would still rise "significantly" into 2010. Employers cut 1.9 million jobs over the first 11 months of 2008, which took the unemployment rate up to 6.7%. The December report will be released by the Labor Department Friday and economists surveyed by expect a loss of 475,000 jobs and that the unemployment rate will rise to 7%, which would mark a 15-year high.

The Fed cited a multitude of problems dragging down the economy besides rising unemployment, including stock market declines, low consumer confidence, weakened household balance sheets and tight credit conditions. It said business spending is also likely to fall due to weak retail sales and the credit crunch. In addition, some members of the Fed expressed concerns that the economy could worsen even more than currently expected. "Meeting participants generally agreed that the uncertainty surrounding the outlook was considerable and that downside risks to even this weak trajectory for economic activity were a serious concern," the Fed said in the minutes.

If the current recession, which began in December 2007, lasts throughout 2009, that would make it the longest U.S. economic downturn since the Great Depression. Wyss said he thinks there is now little debate among policymakers about the problems in the economy and the need to take unprecedented action. "They're already jumping, they're just asking how high," said Wyss. The minutes also showed that some Fed members are now more worried about the threat posed by deflation, or falling prices, than they are about inflation. Deflation can slow economic activity dramatically since it could lead to businesses to cut their production plans in the wake of lower prices.

The Fed also revealed more details about other moves it plans to make to boost the economy now that it has lowered rates as far as it can. According to the minutes, the Fed anticipates completing previously announced purchases of $600 billion in debt and mortgage backed securities from firms such as Fannie Mae and Freddie Mac by the end of June 2009. The plan to buy back these securities has already helped to lower mortgage rates in recent weeks. 

Jobs survey heightens Wall Street recession fears
Wall Street stocks could struggle on Wednesday to cling to a two-month high after a dire labour market survey heightened concerns over the depth of the recession. A report by ADP Employer Services showed US companies cut an estimated 693,000 jobs last month. The decline was much worse than Wall Street’s expectations of 495,000 and was the largest since the measure began in 2001. The glum reading also sparked fears that Friday’s closely-watched non-farm payrolls report would be worse than already low expectations. Last month, Labor Department figures showed employers slashed payrolls by 533,000 in November, the deepest contraction since December 1974 and much worse than expected. Less than an hour before the opening bell, S&P 500 futures were down 13.3 points at 917.20, Nasdaq 100 futures were down 20 points at 1,251, while futures for the Dow Jones Industrial Average were down 104 points at 8,846. However, futures were above ‘fair value’, which takes into account interest rates, dividends and time to expiration on the contract.

A strong performance by technology shares helped the benchmark S&P 500 in the previous session reach its highest level since November and some in the market remain optimistic that stocks will rally at the start of the year. Bulls have argued the market is no longer surprised when economic data are even worse than already low forecasts, since stocks had already priced in bleak news. Yet the media sector could come under pressure on Wednesday after Time Warner warned it expected to suffer a non-cash impairment charge of about $25bn in the fourth quarter, sending the shares down 6.7 per cent to $10.25 in pre-market trade. The group said it would make a net loss in 2008 as a result, rather than a profit from continuing operations as previously forecast, and cited "goodwill and identifiable intangible assets at the Cable, Publishing and AOL segments”. Also weighing on sentiment on Wednesday was the admission from the chairman of Satyam Computer Services, the Indian outsourcing firm whose shares are listed in the US, that he had fixed the books for years.

India’s first major fraud case to emerge following the global financial crisis pushed the country’s stock market down by more than 5 per cent in spite of a wider rally in Asian equity markets. US-listed shares in Satyam sank 80.8 per cent to $1.80 ahead of the open on Wall Street. Meanwhile, Alcoa became the latest company to unveil plans for sweeping job cuts, with the intention to cut about 15,000 positions. The shares fell 6.5 per cent to $11.33 in pre-market trade after the materials group also disclosed its third cut in production in as many months. Elsewhere in the sector, Rohm & Haas lost 2.5 per cent to $60 after the Financial Times reported on Wednesday that Dow Chemical was prepared to miss next week’s deadline to seal the $15bn takeover of its rival.

A delay could allow Dow raise enough cash to complete the deal without taking on too much debt, but failure to meet next Monday’s deadline would result in penalties as the original agreement signed in July requires the group to pay about $100m more for every further month. Shares in Dow dipped 0.6 per cent to $15.96. European stocks were lower ahead of the open on Wall Street, snapping a six session winning streak. The FTSE Eurofirst 300 index fell 0.7 per cent to 883.41. Bond yields were higher. The yield on the two-year Treasury note was 5 basis points higher at 0.811 per cent while the 10-year Treasury note was 4 basis points higher at 2.482 per cent. The dollar was lower against major currencies early in New York, a sign its recent rally may be running out of steam. The dollar fell 0.4 per cent to $1.3583, lost 0.5 per cent to Y93.21 against the yen and dropped 0.9 per cent to SFr1.1030 against the Swiss franc. Gold was trading $2.20 lower at $865 per troy ounce. Oil prices edged higher early in New York. US crude prices were up $0.38 at $48.96 a barrel.

German December Unemployment Shows First Gain in Three Years
German unemployment rose for the first time in almost three years in December as the labor market caught up with an economy that shrank during most of 2008. The number of people out of work, adjusted for seasonal swings, rose 18,000 last month, the Nuremberg-based Federal Labor Agency said today. Economists expected an increase of 10,000, according to the median of 30 estimates in a Bloomberg News survey. The adjusted unemployment rate rose to 7.6 percent from 7.5 percent. The increase "is a trend change," Volker Treier, chief economist at the DIHK business association that represents 3.6 million companies, said in an interview. "The only question is how sharp we’re going in the other direction."

Companies such as Siemens AG are cutting factory production and jobs as evidence mounts that the global financial crisis is pushing Europe’s largest economy deeper into recession. Cooling growth and rising unemployment increase pressure on the European Central Bank to continue cutting interest rates and may harm Chancellor Angela Merkel’s chances of securing a second term in September’s national election. Germany’s export-driven economy is in a so-called technical recession after shrinking in the second and third quarters of 2008. The economy may have contracted by up to 1.75 percent in the final three months of the year, the Frankfurter Allgemeine Zeitung reported Dec. 15, citing an Economy Ministry forecast.

Business confidence dropped to the lowest in more than a quarter century in December and exports, industrial output and manufacturing orders all declined in October. Economists are divided over how much unemployment will increase this year. The Kiel-based IfW economic institute, predicting an economic contraction of 2.7 percent, said the number of job seekers will rise by 400,000 on average from 2008. The Berlin-based DIW institute sees an increase of 200,000. "Up until now, the labor market has been spared from recession," said DIW economist Christian Dreger, who forecasts the economy will shrink around 1 percent this year. "That suggests that most companies assume they’re facing only a temporary crisis." Bad news from the labor market and the broader economy may dominate the campaigns in elections this year that culminate in a federal ballot in September.

Merkel’s government has already taken measures to help keep staff on payrolls even amid slumping business. In its first economic stimulus package, which went into effect on Jan. 1, it extended labor agency aid to workers affected by shortened shifts to 18 months from six months. Merkel proposed a second set of measures that include the government paying half of employers’ social insurance contributions for short-shift workers. The package -- as much as 50 billion euros ($68 billion) over two years -- was agreed in principle by leaders of Merkel’s coalition on Jan. 5. Still, slumping orders abroad and at home for German cars and machinery are sending ripples through the economy. Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, on Jan. 5 said U.S. sales fell 36 percent last month from a year earlier.

Daimler AG said U.S. sales at its Mercedes-Benz Cars unit fell 24 percent from a year earlier. While Germany’s biggest companies have pledged a "voluntary no-firing policy" after a meeting with Merkel on Dec. 15, associations representing smaller businesses have said they can’t guarantee that jobs will be saved. A drop in oil prices from a record in July is cooling inflation across the euro area, giving the ECB leeway to reduce borrowing costs. Investors indicate they expect the ECB to cut its key interest rate by at least 50 basis points at its Jan. 15 meeting, according to Eonia forward contracts. The central bank has already lowered the rate by 175 basis points to 2.5 percent since early October. According to the latest comparable data from the Organization for Economic Cooperation and Development, Germany’s jobless rate was 7.1 percent in October, compared with 8.2 percent in France and 6.5 percent in the U.S. In the euro region, unemployment probably rose to 7.8 percent in November from 7.7 percent in October, economists’ forecast. The EU statistics office in Luxembourg will publish that data tomorrow at 11 a.m. In western Germany, the number of people out of work rose by a seasonally adjusted 19,000 in December, while the number in eastern Germany fell by 1,000, today’s report showed.

Investors shun German bond auction
Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction failed in a warning for governments seeking to raise record amounts of debt to stimulate their slowing economies. It is the first eurozone bond auction of the year and an ominous sign of potential trouble ahead for governments around the world, with an estimated $3,000bn expected to be issued in sovereign debt this year – three times more than in 2008. The auction of 10-year bonds failed to attract enough bids to reach the €6bn the government wanted to raise. Although a number of German bond auctions failed last year, it was almost unheard of before the credit crisis.

Meyrick Chapman, a fixed-income strategist at UBS, said: "When a German bond auction fails, then that does suggest there is trouble ahead for governments wanting to raise money in the debt markets. There was certainly a supply/demand imbalance because of the large amount of issuance in the last quarter of 2008 and the large amount due in the coming months. Before the financial crisis, German bond auctions just did not fail.” Although government bond yields are trading at historically low levels, because of fears of deflation and investor demand for safe government paper in an uncertain climate, the failed German auction is a sign that appetite for these bonds is starting to diminish.

A number of countries, including the UK, Italy, Spain, Austria, Belgium and the Netherlands, have either struggled to sell bonds or been forced to cancel debt offerings because of a lack of demand. The UK successfully sold £2bn in gilts due to mature in 2038 on Wednesday. However, Robert Stheeman, chief executive of the UK Debt Management Office, warned last month that the ÜK government could also struggle to sell bonds because of the vast amount of bond issuance in the pipeline. The UK is planning to raise £146bn in bonds this financial year – three times more than last year.

Record U.K. Bond Sales Raise Risk of Auction Failures
Britain may overwhelm bond investors with a record number of quarterly debt sales, risking the first failed auctions since 2002 as the economy sinks into the worst recession since World War II. "I’m not predicting that we will have failed auctions, but I can’t rule that out," Robert Stheeman, chief executive officer of the U.K. Debt Management Office, or DMO, said in an interview last month. "It’s a big amount of debt to be sold. We are in a very different world than we were six months or a year ago. But I believe it’s a challenge that both we as an organization and the market will be able to meet."

The DMO, which oversees auctions of so-called gilts for the Treasury, today held the first of 20 sales earmarked for January through March, selling 2 billion pounds ($2.98 billion) of 4.75 percent bonds due 2038. The U.K. said it plans an unprecedented 146.4 billion pounds of debt sales in the fiscal year ending March 31 as Prime Minister Gordon Brown’s government seeks to finance bank bailouts and revive the shrinking economy amid a decline in tax revenue. The U.K. had two failed auctions in the past 10 years, the most recent in September 2002 when the DMO received bids for 95 percent of the 900 million pounds of 30-year inflation-protected bonds offered, according to the agency’s Web site. The other failure came in 1999, when it tried to sell 500 million pounds of inflation-protected bonds maturing in 2030.

The London-based DMO held nine auctions in the first three months of last year and the first quarter average in the past five years was eight. A failed, or uncovered, auction, is "nothing more than a market event" that would show supply isn’t balanced against demand on the day of a sale, Stheeman, 49, who joined the DMO from Frankfurt-based Deutsche Bank AG in 2003, said Dec. 5. "What’s slightly different is if you have a series of failed auctions," said Stheeman, whose first job as an 18-year- old apprentice at Vereins-und Westbank in Hamburg involved cutting the coupons off bond certificates so that interest payments could be cashed. "That means the program we have announced may need to be changed and we wouldn’t want that to happen. At a time like this, we have to have our ears very close to the market."

The 2038 gilts sold today attracted bids 1.7 times the securities offered, the DMO said. The so-called yield tail, or the difference between the yield at the lowest accepted price minus the average price, was less than a basis point, indicating dealers generally bid at higher prices. The sale "met with a strong response," Charles Diebel, head of European interest-rate strategy in London at Nomura, said in an e-mailed note today. "While the merits of this issue were clear, we have 10-year supply next week and with 51 billion pounds to get away in the first quarter, we are not convinced that consequent issues will fare as well." Yields on 30-year gilts, which rose for a fourth day yesterday, fell one basis point to 3.97 percent after the auction. The price of the 4.75 percent security due in December 2038 climbed 0.22, or 2.2 pounds per 1,000-pound face amount, to 113.62. The U.K. issued 58.4 billion pounds of securities last year and 62.5 billion pounds the previous year. It has sold 94.67 billion pounds this fiscal year, leaving 51.73 billion pounds left to be issued, which would be a record for one quarter.

The DMO is selling a record amount of debt as governments around the world increase borrowing. The U.S. may sell as much as $2 trillion this fiscal year ending Sept. 30, Treasury Assistant Secretary Karthik Ramanathan said Dec. 10, citing analysts’ estimates. Germany’s Federal Finance Agency will issue a record 323 billion euros ($434 billion) of debt including 149 billion euros in bonds, it said Dec. 18. Japan’s Ministry of Finance said Dec. 20 it will offer 113.3 trillion yen ($1.2 trillion) of bonds in the 12 months starting April 1, up from 106.3 trillion this fiscal year. Britain’s economy will probably contract 2.9 percent this year, the most since 1946, driving 32,300 companies out of business and doubling the number of people receiving jobless benefits to 2 million, the Centre for Economics and Business Research, a London-based study group, said on Jan. 1. The median of 13 forecasts compiled by Bloomberg is for gross domestic product to fall 1.4 percent in 2009, from 0.8 percent growth in 2008 and 3 percent expansion in 2007.

Brown, who took over as prime minister from Tony Blair in June 2007, unveiled a 50 billion-pound program in October to bolster the finances of three of the U.K.’s biggest banks as credit dried up amid $1 trillion of writedowns and losses worldwide by financial companies since the start of 2007. In November, he announced a 25.6 billion-pound package of tax cuts and spending increases. "It isn’t obvious to everybody the spending package will translate into an enormous size of debt issuance," said Jason Simpson, a fixed-income strategist in London at Royal Bank of Scotland Group Plc, one of the 15 primary dealers that bid at government debt auctions. "Ultimately, that will have to be paid back. The DMO has been successful so far, but it’s conceivable an auction isn’t fully covered at some point."

The government was forced to increase its annual gilt- issuance plan twice as the nation’s budget deficit ballooned to 56.1 billion pounds in the first eight months of the year, the most since at least 1993 and double the 29.2 billion pounds a year earlier. In March, it expected to sell 80 billion pounds of debt. In October, it estimated 110 billion pounds of issuance. Gilt sales are unlikely to drop below 100 billion pounds anytime soon, according to Deutsche Bank, another primary dealer. Issuance will be 130 billion pounds next fiscal year and 140 billion pounds the year after, George Buckley, chief U.K. economist in London at Deutsche Bank, said Nov. 24, the day the government published its pre-budget report. "I don’t think anybody could have foreseen the overall quantum of financing that we have to raise," said Stheeman. "In a strange way, the whole world has been thrown upside down" by the credit crisis, he said.

Sales will be skewed toward securities maturing within seven years, the DMO said in November. Short-dated notes will account for 62.8 billion pounds, or 43 percent, of the issuance, medium-dated notes 23 percent and long-dated bonds 21 percent. Fourteen percent of the issuance will be inflation-protected bonds. Soaring demand for the safety of government bonds pushed down yields on two-year gilts about 330 basis points, or 3.30 percentage points, last year, the biggest annual decline since at least 1993. The DMO sold bonds due in 2011 at a yield of 2.57 percent on Dec. 18, the lowest level in almost 60 years. "Yields are so low that short-dated gilts offer no value at all," said John Anderson, head of interest-rate investments in London at Rensburg Fund Management, which has about $3 billion of sterling-denominated assets. "There will only be huge appetite for bonds at these yield levels if you think the world is coming to an end."

Tax Cuts Aren't Off Obama's Table
The incoming Administration may be looking beyond infrastructure spending to business and personal tax cuts to pump nearly $1 trillion into the economy. As the economy heads deeper into a recessionary abyss, business tax cut ideas that seemed to be nonstarters just a few short months ago are suddenly back on the table. Take the incoming Obama Administration's embrace of a measure that would lengthen the period for money-losing companies to write off net operating losses against profits from the current two years to four or five years. The proposal, floated on Dec. 5 following a meeting between Obama and congressional leaders, was originally discussed last spring when the Bush Administration assembled a stimulus package. (The idea was modeled after a similar measure enacted after the September 11 terrorist attacks.) But the provision was viewed as a giant giveaway to banks and money-losing homebuilders and it was scrapped from the package.

Now, with the incoming Administration looking to pump something close to $1 trillion into the economy, business and personal tax cuts of as much as $300 billion—with perhaps $100 billion aimed at business—are seen as quick ways to inject money. While infrastructure spending is getting a lot of attention, business groups note that this stimulus can go only so far. Aric Newhouse, senior vice-president for policy and government relations for the National Association of Manufacturers (NAM), said that he has heard projections of stimulus spending reaching $1.3 trillion over two years. "The idea of spending $1.3 trillion—it's hard to think about how you would spend that all on infrastructure alone," he says. "The last highway bill was about $270 billion for all highway projects, for five years total." The business tax cuts would get strong political and business support—in particular, the net operating loss provision is favored by Max Baucus (D-Mont.), chairman of the Senate Finance Committee.

Other business tax cuts Obama is considering would extend so-called bonus depreciation, which allows profitable companies to write off investments more quickly, and give companies that hire new workers a one-year tax credit at a total cost of $40 billion to $50 billion over two years. But many around Washington are dubious about whether a new jobs tax credit would produce a lot of hiring that wouldn't take place otherwise. "I don't think a $2,000 or $3,000 credit will create a job," said John Engler, president of the NAM. "You need a business reason first. A job credit by itself is not a business reason." The Obama team has not fixed a dollar figure on the net operating loss provision. When Congress considered the same idea last year, carrying back losses to offset profits in the previous five years would have provided businesses an estimated $25.5 billion in refunds.

"Extending bonus depreciation and extending net operating loss will help get Republicans on board," says Dan Clifton, head of policy research for Strategas Research Partners. "There's no question a stimulus bill will pass. The question is whether it looks bipartisan or not." Clifton, in a report on the net operating loss provision, says it would be a "net positive" for homebuilders, regional banks, automakers, and other companies that made money in recent years but are now facing losses. Among companies Clifton thinks could potentially benefit from the stimulus provision are Sprint Nextel; General Motors; Citigroup; CBS; Ford; MBIA; Coca-Cola Enterprises and D.R. Horton. "The government is just pouring money into these companies," Clifton says. "It remains to be seen if it will be enough to get them investing again—or it just stops further destruction of their financial position."

'Buy USA' push may see America slip from free trade church
America is slipping away from the free trade church. The new wave of radical Democrats sweeping into Capitol Hill are insisting on a "Buy American" clause in the $750bn (£503bn) fiscal package being prepared by President-Elect Barack Obama. The $17bn bail-out of General Motors and Chrysler last month was already a step across the Rubicon towards a protectionist industrial policy, even if that was not the motive. The EU is exploring a World Trade Organisation complaint over "illegal state aid." But the latest Buy American move is much more explicit.

"This is quite dangerous," said Peter Sutherland, chairman of Goldman Sachs International and a former director-general of the General Agreement on Tariffs and Trade (GATT). "The US is the key to keeping a one-world trading system, but there is always the tendency to go for protectionism in a recession, and this is the worst one I've ever seen." Hans Redeker, currency chief at BNP Paribas, says the US risks setting off a collapse in discipline across the world. "The US has a leading role so this could set off a huge response in other countries," he said. "There is already talk of a €100bn (£91bn) fund in Germany to save its industry from being sold off cheap."

French president Nicolas Sarkozy has proposed a "strategic investment fund" to fend off "predators" – a euphemism for sovereign wealth funds from Asia and Russia – hoping to snap up France's crown jewels. "We will intervene massively whenever a strategic enterprise needs our money," he said. Nationalist measures are becoming ever more brazen in emerging markets. Indonesia is resorting to special "licences" to choke off imports. Russia has reacted to the collapse in oil prices by imposing tariffs of 30pc on cars and 15pc on farm machinery. India and Vietnam have imposed duties on steel. Pascal Lamy, the WTO chief, is so worried he has taken to displaying portraits of Willis C. Hawley and Reed Smoot at his Green Room in Geneva, evoking the arch-villains of the Smoot-Hawley Tariff Act that set off the trade wars of the Great Depression. The Act was forced upon a disgusted President Herbert Hoover in June 1930. This is the pattern in democracies. Lawmakers – with a constituency base – are the first to push for protection.

The question today is whether Mr Obama will try to stop it. His top advisers – Larry Summers, Tim Geithner, Peter Orszag – are free-traders with a global outlook. But Mr Obama himself dabbled in protectionism during the campaign. It is not clear how much political capital he will risk by threatening a trade veto within days of taking office. So far his team has been evasive, saying it is "reviewing the Buy American proposal". "In the mind of Congress, almost anything that targets China is now considered fair game," said Professor Gary Hufbauer, from Washington's Institute of International Economics. Mr Obama shares the irritation with Beijing. "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for US firms and workers, not good for the world," he said in October.

China's actions since then seem designed to test his mettle. Beijing is holding down the yuan again, even though China now has a surplus of $40bn a month. "My guess is that there is a fierce debate within the Obama team," said Prof Hufbauer. "This could be very serious. The US can do what it wants under government procurement rules. Unfortunately the rest of the world is going to notice: they'll get their own lawyers to find ways of doing the same thing," he said. "I am hopeful this move to protectionism will be slower to take hold than in the 1930s,but it is a race against time. If the sun doesn't start to come up on the economy and we're still grinding along in mid-2010, then I'll be worried," he said. For the great exporters –China, Japan, Germany – a trade war would be a crippling blow to industry. For the great importers – the US, UK, Southern Europe – it could set off a bond meltdown as capital flows from Asia dry up. The two sides are bound together by imbalances. It is hard to see who can "win" if discipline breaks down.

No V-Shaped Recovery
This weekend, Barron’s declared the existence of a Treasury bubble, encouraging its readers to consider high yield municipal and corporate bonds as an alternative. Everywhere I turn, I find another market pundit suggesting the equity market has bottomed, or the commodity bust is over. And -- for a short-term trade -- I don’t necessarily disagree. But for one to believe we have truly bottomed at this point, you have to believe in a V-shaped recovery. Put simply, I don’t. In fact, I am somewhere between a U-  and an L-shaped recovery - certainly nowhere near a "V." But rather than beat old drums,, let me offer a new thought. The following is a list of the world’s 25 largest financial institutions as of the end of 2007:

I hope it's immediately clear that every one of these firms has been adversely affected by the current crisis - some enormously so. By my count, 4 have been fully nationalized; all the rest have received what I consider to be "controlling" interests by their home governments. More importantly, these firms -- along with maybe another 10 or 15 financial-services firms (all of whom have been similarly affected), dominate the global credit markets and represent somewhere between 60% and 75% of the world’s total lending capacity. So, to put things very simply: Credit = government, at least until further notice.

While I will leave it to others to debate whether this outcome is a just reward for management negligence, at best -- or malfeasance, at worst -- like it or not, strategic decisions for these firms and their ilk aren't going to be made by private-sector capitalists on Wall Street or in Canary Wharf. Instead, they'll be made by the public servants of the largest governments around the world. And here's where the rubber meets the road - or doesn’t, as the case may be. In watching the behavior of governments worldwide, it appears their general operating principle right now comes from A Field of Dreams: "If we build it, they will come." That is, if banks would just make money available, people would borrow anew, and the global economy would quickly recover. But the bubble that just burst was a credit bubble, and more credit isn't going to make everything better.

Banks need to recognize their losses and rebuild capital, so that they will ultimately be in a position to lend when asset prices finish falling. In the hands of government, however, I highly doubt this will happen anytime soon - particularly as loss recognition calls the adequacy of government oversight into question. Instead, under government influence, we will do whatever we can to postpone our losses. Having spent a considerable amount of time in Japan during the early 1990s, I watched this happen firsthand and in real time: Bankers and bureaucrats both unwilling to face reality for fear of losing face. It was immensely frustrating, but it gave me great insight into how governments handle large-scale crises. So, to all those declaring a market bottom: You are putting your fate in the hands of government. As for me, with history as my guide, I will gladly sit this one out - and watch "V" become "U," and, if we aren’t careful, "L."

Asia to Have 'V-shaped' Recovery, BNP Paribas Says
Asian economic growth, after slowing this year, will probably rebound in 2010 as government spending and interest rate cuts spur demand, BNP Paribas SA said today Asia, excluding Japan and China, will grow 4.3 percent next year after a 1.4 percent expansion in 2009, Richard Iley, an economist at the bank, wrote in a report. Public spending in China, Taiwan and South Korea, combined with increasingly loose monetary policy, should help to drive a "reasonably vibrant" recovery, he said. Asian governments are planning more measures to boost growth as a slump in global demand hurts exports, deepening the region's economic slowdown. South Korea has pledged about $30 billion in extra spending and tax cuts since September. China may follow a 4 trillion yuan ($585 billion) spending package announced November with a second plan as early as this month.

"The scale of the global policy response -- monetary and fiscal -- should ensure the recovery is more V than U-shaped," Iley said. "In many instances, economies will experience a 6 to 7 percentage point swing in growth rates." The MSCI AC Asia Pacific Index rose 1.9 percent at 1:43 p.m. in Tokyo today, taking its gain since reaching a five-year low in October to 23 percent. Iley's report, titled "Asia: Apocalypse Now," said that before improving, Asia's economic growth would deteriorate in 2009. "Global industrial production appears to have collapsed at a 30-40 percent annualized rate since September," he said, referring to the "biggest demand shock since the 1930s." As a result of the drop in output, BNP Paribas cut its 2008 forecast for Asian economic growth to 1.4 percent from a November prediction of 3.9 percent. The region comprises Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand, according to BNP Paribas.

Iley said China will grow about 7.7 percent in 2009, helped by the November fiscal package "worth an eye-popping" 14 percent of gross domestic product over two years. The economy probably expanded 9.3 percent in 2008, slowing from 11.9 percent the year before. He predicted 8.1 percent growth in 2010. Hong Kong will grow 3.5 percent in 2010 after shrinking 3.4 percent this year, the bank predicted. Taiwan will expand 3.9 percent after contracting 3.3 percent; Singapore will grow 4.4 percent after declining 2.8 percent this year. South Korea will expand 3.2 percent, rebounding from a 2.4 percent contraction.

Taiwan’s Exports Drop By Record 41.9% on Global Slump
Taiwan’s exports slumped by a record 41.9 percent in December on weaker demand from the U.S. and China for laptops, mobile phones and computer chips. Shipments fell for a fourth month, extending the longest losing streak in almost seven years, the Ministry of Finance said in Taipei today. The drop was more than the median estimate of a 30 percent decline in a Bloomberg survey of 13 economists. The central bank slashed its benchmark interest rate today to the lowest level since 2004 after plunging exports added to signs the economy is in a recession. The global economic slowdown has reduced orders for companies including Taiwan Semiconductor Manufacturing Co. and AU Optronics Co., prompting some to shut factories, freeze wages and pare employment.

"Exports are likely to remain in the doldrums in the first quarter," said Cheng Cheng-mount, an economist at Citigroup Inc. in Taipei. "Taiwan exports are mostly tech-related and demand has fallen as consumers stop buying because they aren’t confident of what’s ahead." The central bank cut its key rate to 1.5 percent from 2 percent, the sixth reduction since late September. The economy shrank 1 percent in the third quarter from a year earlier, the first contraction since 2003. Taiwan’s export decline is being mirrored in economies across Asia. The World Bank forecasts international trade will shrink in 2009 for the first time in more than 25 years. Malaysia’s shipments fell 4.9 percent in November, the second straight drop, its trade ministry said today. South Korea’s overseas sales plunged 17.4 percent last month, a Jan. 2 report showed.

Taiwan’s exports fell to $13.6 billion last month, compared with $16.8 billion in November. Imports declined 44.6 percent to $11.8 billion, resulting in a trade surplus of $1.86 billion. The report was released after the close of trading on the stock exchange. The Taiex stock index rose 1.3 percent to 4,789.84. Taiwan’s dollar gained 0.2 percent to NT$32.957 against the U.S. dollar. "Slower exports will weaken domestic demand by generating less income for households and businesses," Sean Yokota, an economist at UBS AG in Hong Kong, wrote in a report today. "We expect the economy to fall into a recession." Shipments to China decreased 57.1 percent because of weaker demand for electronic components used in products assembled by the mainland for export. Shipments to the U.S. declined 23.5 percent from a year earlier. Exports to Europe fell 29.5 percent.

China and the U.S. are Taiwan’s two biggest markets. Exports are equivalent to about 70 percent of the island’s gross domestic product. "Exports in the first half are likely to remain weak, before picking up in the second half," Lin Lee-Jen, director of the statistics department at the Ministry of Finance, told reporters. Taiwan Semiconductor, the world’s largest producer of chips designed by other companies, on Dec. 1 cut estimates for fourth- quarter sales and profits after shipments fell. The chipmaker asked employees to take unpaid leave, extending cost-cutting moves. Global semiconductor sales will drop 16 percent as consumer spending declines, researcher Gartner Inc. said last month. Taiwan’s exports of electronic products dropped 43.4 percent last month, after falling 25.3 percent in November. Sales of electronics by companies including AU Optronics, the island’s largest flat-panel maker, were worth $3.2 billion.

More Money for Robert Rubin
It looks like President-elect Obama is picking up President Clinton's promise to end welfare as we know it. Back in those pre-welfare reform days, welfare checks went to poor families. Welfare as we know it now seems to involve giving taxpayer dollars to Citigroup and other banks. The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to the Washington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years, as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007. Did the political connections of Robert Rubin and others in the financial industry have anything to do with the decision of Obama's economic team to be so generous to them? I don't have an answer to that question, but the media should be asking it.

Obama Pitches Stimulus Plan
President-elect Barack Obama arrived on Capitol Hill yesterday and immediately set to work reassuring skeptical Republicans about his massive economic stimulus package -- part of a campaign that earned him praise for seeking their input but questions from those averse to hundreds of billions of dollars in new spending. Pitching a plan that is expected to include $300 billion in tax cuts, Obama pledged to consult Republican leaders, who until yesterday had been left out of negotiations between the president-elect's advisers and congressional Democratic staff. "The monopoly on good ideas does not belong to a single party. If it's a good idea, we will consider it," Obama told House and Senate leaders at an hour-long closed-door meeting, according to one attendee.

Obama, making his pitch two weeks before taking office, won generally favorable reviews from GOP leaders, particularly because of his decision to increase the tax-cut ratio to 40 percent of the overall package. Senate Minority Leader Mitch McConnell (R-Ky.) and House Minority Leader John A. Boehner (R-Ohio) told reporters they were convinced that Obama was sincere in his invitation to let Republicans help craft the nearly $800 billion package to create jobs and lift the nation out of recession. But they also expressed concerns about the size of the package, as well as particular elements under discussion between Obama and Democratic lawmakers. "I remain concerned about wasteful spending that might be attached to the tax relief. Simply put, we should not bury future generations under mountains of debt," Boehner said.

Boehner suggested the legislation would likely be signed into law by mid-February, but the president-elect said yesterday that he would like the House and Senate to present him with a bill by the end of January or beginning of February. "The economy is very sick," Obama said. "The situation is getting worse. . . . We have to act and act now to break the momentum of this recession." As described by his advisers, Obama is proposing a package of tax cuts to benefit families and businesses. Like the overall spending proposal, the tax cuts would be designed to put cash in people's pockets over the next two years and kick-start the economy. Working families would be eligible for a tax credit worth up to $1,000. Individuals would be eligible for a $500 credit. Businesses would get an extension of expired tax breaks from the 2008 stimulus package signed by President Bush, including a "bonus depreciation" break that allows businesses to write off more of their purchases more quickly and an increase in small-business expensing limits.

Businesses could apply current losses to taxes paid back as far as five years ago, reaping an immediate cash windfall. And they would receive a $3,000 tax credit for every job they create or preserve. Key details of the stimulus proposal remain unresolved. For instance, upper-income individuals would not be eligible for the income tax credit, but the income threshold for phasing out the benefit has not been set. Obama officials said it would likely be about $200,000 a year, the range set during the campaign. Obama officials said they tried to keep the package ideologically neutral, rejecting an option supported by many progressives to make people who are not working eligible for a "refundable" tax credit. And they passed up conservative provisions such as estate tax relief and capital gains tax cuts that disproportionately benefit wealthier individuals.

After a lunchtime session with his economic advisers, Obama rejected suggestions that the tax cuts were designed to win over GOP votes. "The notion that me wanting to include relief for working families in this plan is somehow a political ploy, when this was a centerpiece of my plan for the last two years doesn't make too much sense," he told reporters. Some prominent Republicans expressed reservations about the tax proposals' specifics. Jon Kyl (Ariz.), a member of the Senate Republican leadership team, said he hadn't studied the list of proposed cuts, but that he favored reducing corporate and capital gains taxes, and providing more generous small-business incentives. And, he said, "These changes should be permanent, rather than just temporary." Sen. Charles E. Grassley (Iowa), the senior Republican on the tax-writing Senate Finance Committee, said he would prefer a tax package that is "inclusive rather than exclusive" and that offers relief to "as many as taxpayers as possible." One option, according to a senior Grassley aide, would be to include a $75 billion provision to prevent the alternative minimum tax from applying to millions of additional families.

It is also not clear that tax cuts are the most effective way to win GOP votes. Two key Republican moderates in the Senate -- Susan Collins and Olympia J. Snowe, both of Maine -- have not focused on tax breaks as the best solution to the economic crisis. In a letter to Obama last month, Collins outlined her stimulus priorities as transportation construction projects, energy-efficiency investments and a temporary increase in Medicaid assistance to states. In conversations with Obama and his Treasury secretary-designate Timothy F. Geithner, Snowe has urged the inclusion of unemployment assistance, mortgage relief for strapped homeowners and programs to ease the credit crunch facing small businesses. "With more than 10.3 million people currently out of work, Congress must swiftly enact economic recovery legislation that will create jobs, assist the unemployed and reduce the devastating rate of home foreclosures," Snowe said.

Obama bounced across the Capitol yesterday to take part in three meetings, beginning with a one-on-one meeting with House Speaker Nancy Pelosi (D-Calif.) in the morning and a sit-down in the early afternoon with Senate Majority Leader Harry M. Reid (D-Nev.). The final meeting was with the bipartisan leadership from both chambers. Democrats described the atmosphere as markedly different than the confrontational tone of recent battles with the Bush White House, in part because the new administration is run by former senators. "They understand the Senate, they understand the Capitol. It wasn't as if someone new was coming to town," Sen. Richard J. Durbin (D-Ill.), the majority whip and close Obama ally, said afterward. Some Republicans, while saying they were pleased by Obama's attempt to open dialogue, questioned whether the spending side of the plan would be transparent enough. Rahm Emanuel, Obama's chief of staff, pledged to put details of the spending plan online, including the creation of a monitoring system for the progress on some of the projects, according to one attendee.

Some independent analysts joined GOP aides in questioning Obama's tax credit for job creation, saying it's unclear how such a provision would be crafted. "When somebody lays off 10,000 people but hires back 1,000, should they get a tax credit? That doesn't really seem fair," said Leonard Burman, a director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. "The problem with these things is defining what qualifies." Meanwhile, some Republicans and moderate Democrats are pushing Obama to commit to addressing the nation's long-term budget problems even as his stimulus package pushes the government deeper into debt. With congressional budget analysts expected to announce later this week that this year's deficit is likely to soar well over $1 trillion, a commitment to reducing future deficits is critical, said Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee. "At some point here, you have to pivot and face up to these long-term problems," said Conrad, who along with Sen. Judd Gregg (R-N.H.) is proposing a commission to re-examine the expensive entitlement programs Social Security, Medicare and Medicaid.

Factory Orders in the U.S. Tumble More Than Forecast
Orders placed with U.S. factories in November fell twice as much as forecast, signaling businesses are cutting back on investments as the recession deepens. Demand fell 4.6 percent after a revised 6 percent decrease in October that was larger than previously estimated, the Commerce Department said today in Washington. The back-to-back decline was the biggest since records began in 1992. Companies are likely to pare spending further as access to credit dries up and global demand slows. President-elect Barack Obama has proposed a two-year economic stimulus package, costing as much as $850 billion, with an emphasis on infrastructure projects that may give manufacturing a boost.

"Consumer-durable spending is way down as credit is more difficult to get," said Douglas Smith, chief economist for the Americas at Standard Chartered Bank in New York, said in an interview with Bloomberg Television. "With weakness overseas, you’re also seeing fewer orders for U.S. manufactured goods." Factory orders were forecast to fall 2.3 percent, after a previously reported 5.1 percent drop the prior month, according to the median estimate of 60 economists surveyed by Bloomberg News. Projections ranged from declines of 0.4 percent to 6.5 percent. Factory sales plunged 5.3 percent in November, the biggest drop on record. Orders for durable goods, which are those meant to last at least three years and make up just less than half of total factory demand, dropped 1.5 percent. Commerce estimated the decline at 1 percent in a Dec. 24 report.

Boeing Co., the world’s second-biggest commercial-airplane maker, said it received 7 orders for aircraft in November, down from 14 the previous month. The Chicago-based company resolved an 8-week strike on Nov. 1 by 27,000 machinists that may have weighed on that month’s orders.
Bookings for autos and parts declined 0.1 percent. U.S. automakers remain in a slump. Automakers sold 10.3 million light vehicles at an annual rate in December, capping the worst year for the industry since 1982, according to industry figures released yesterday. Excluding transportation gear, bookings dropped for a fourth consecutive month. Demand for capital goods excluding aircraft and military equipment, a measure of future business investment, increased 3.9 percent, less than Commerce estimated in last month’s durable goods report. Shipments of those goods, used to calculate gross domestic product, dropped 0.2 percent, wiping out the previously estimated gain.

Orders for non-durable goods plunged 7.4 percent, paced by declining demand for petroleum, chemicals and plastics that partly reflecting falling commodity costs. Orders for petroleum and coal products fell 21 percent. The bad news probably continued last month. Factory activity contracted in December at the fastest pace since 1980, the Tempe, Arizona-based Institute for Supply Management said last week. The group’s measure for new orders reached its lowest level since record-keeping began in 1948, and prices slid the most since 1949. Worthington Industries Inc., the largest U.S. maker of steel frames for cars and buildings, on Dec. 18 reported a second- quarter loss of $159.5 million compared with a $14.7 million profit a year earlier as the global recession sapped demand for automobiles and buildings.

The U.S. economy contracted at a 0.5 percent annual rate in the third quarter, the Commerce Department said Dec. 23. The economy probably shrank at a 4.3 percent annual rate in the last three months of 2008, the biggest contraction since 1982, according to the median estimate of 51 economists surveyed last month by Bloomberg. Factory inventories decreased 0.3 percent, and manufacturers had enough goods on hand to last 1.41 months at the current sales pace, up from 1.33 months in October. The jump in the inventory-to-sales ratio "indicates excess inventories that will need to be worked off," Steven Wood, president of Insight Economics LLC in Danville, California, wrote in a note to clients. "The manufacturing sector is mired in a deep recession that is unlikely to be quickly resolved."

GM to get another $5.4 billion from Treasury on Jan. 16
General Motors Corp will receive a second $5.4 billion installment of its government loan on Jan. 16, the U.S. Treasury said on Monday. In a transaction report for its bailout fund, the Treasury said it has approved the release of a total of $9.4 billion for GM, including $4 billion disbursed on Dec. 31 and $5.4 billion to be funded on Jan. 16. The Treasury has agreed to lend GM another $4 billion, but those funds would come from a second $350 billion tranche of the $700 billion Troubled Asset Relief Program, which Congress could block.

GM on Monday reported a 31 percent decline in U.S. sales in December compared with a year earlier, capping a 23 percent decline for all of 2008. The Treasury report also confirmed disbursement of $20 billion to Citigroup and $15 billion to seven U.S. banks, including $7.58 billion to PNC Financial Services Group and $3.41 billion to Fifth Third Bancorp. Other banks receiving TARP funds included: commercial finance firm CIT Group Inc; SunTrust Banks; Hampton Roads Bankshares; First Banks Inc and West Bancorp.

To date, the Treasury has released nearly $257 billion for payment from the TARP fund, including a $4 billion loan for Chrysler LLC that closed on Friday. However, the Treasury has allocated in excess of the TARP's first tranche of $350 billion. If it must make good on all of its pledges and Congress denies or delays the release of a second tranche, some institutions could face a reduction in requested funds. The outlays so far include $177.54 billion in capital injections into banks, excluding $10 billion pledged, but not paid to Merrill Lynch, now owned by Bank of America.

Under the Capital Purchase Program, allocated at $250 billion, the Treasury purchases preferred stock and warrants from participating institutions. Including the Chrysler loan, it has disbursed $19.4 billion under its Automotive Industry Financing Program. This program also includes the GM loans, $6 billion of support for finance firm GMAC LLC. The Treasury said it has also provided $40 billion to American International Group and $20 billion for Citigroup under separate programs.

General Motors May Not Require Further U.S. Loans to Survive
General Motors Corp. has enough government loans to cover the worst-case scenario it described last month and says it won’t need more if the economy holds up. The U.S. Treasury has pledged as much as $13.4 billion in aid to help GM pay its bills and $6 billion to prop up lender GMAC LLC, which GM relies on for auto loans and dealer support. President George W. Bush agreed to the rescue after the biggest U.S. automaker said it wouldn’t have enough money to pay bills in December. "The U.S. Treasury’s $13.4 billion bridge loan to GM, coupled with the separate transaction for GMAC, meets our liquidity needs under the scenarios outlined in our December plan to Congress," GM spokesman Greg Martin said yesterday.

GM is trying to win concessions from its biggest union, cut its debt level in half, and trim brands and dealerships as part of a restructuring plan to show it will be able to repay the money. A progress report is due Feb. 17 to the Treasury Department, and a final report is due March 31. If the plan doesn’t pass government scrutiny, GM has to repay the loans. "It all depends on a lot of difficult-to-forecast factors, like the size of the market," said John Casesa, a former Merrill Lynch auto analyst who’s now a partner at consulting firm Casesa Shapiro Group in New York. GM’s market share, the health of the economy and action by competitors are all unknowns, he said.

The Detroit automaker said Dec. 2 that its worst-case scenario for 2009 U.S. auto sales is 10.5 million vehicles. GM reiterated Jan. 5 that U.S. sales will range from 10.5 million to 12 million this year, based on the current economic expectation. GM received the first $4 billion Dec. 31 from the Troubled Asset Relief Program administered by Treasury. GM is spending that money to pay bills, mostly to its 3,000 suppliers, said spokeswoman Renee Rashid-Merem. The automaker is due to receive an additional $5.4 billion this month. Should Congress agree to release a second $350 billion in TARP funds, GM will get $4 billion more in February. The Treasury Department also gave Chrysler LLC $4 billion Jan. 2 to help it stay in business and said Dec. 31 it has drafted broad guidelines for aid to the auto industry that would let officials provide funds to any company they deem important to making or financing cars.

With both companies saying they were only weeks away from insolvency, the White House stepped in after a compromise plan backed by Bush and House Democrats stalled in the Senate, raising the prospect of a collapse that would have weakened a U.S. economy already in recession. U.S. automakers are struggling to cut costs after U.S. sales last year fell to 13.2 million units, the lowest level since 1992, as a global credit crunch hurt buyers’ ability to get loans and the slowing economy sapped demand. Chrysler, the No. 3 U.S. automaker, said Dec. 2 it would run out of cash early this year without the loans. Auburn Hills, Michigan-based Chrysler finished the third quarter with $6.1 billion and needs at least $3 billion to operate, Chief Executive Officer Robert Nardelli told Congress Nov. 18.

GM’s losses have amounted to almost $73 billion since 2004. Chrysler says its first-half loss, the most recent information available, totaled $1.08 billion. Chrysler is 80.1 percent owned by Cerberus Capital Management LP, which also owns 51 percent of GMAC. Because it’s closely held, Chrysler isn’t required to release financial results and Chrysler said yesterday it still doesn’t plan to release financial information to the public after getting $4 billion in U.S. loans last month. The terms of the loans require it to release that information to the Treasury department. If GM or Chrysler is unable to develop a viable business plan, the U.S. loan terms also allow the funds to be used as so- called debtor in possession funding to keep operating in bankruptcy. Both automakers have said bankruptcy would result in their liquidation because they wouldn’t be able to get such loans from private banks.

U.S. December Job Cuts Quadruple From Year Ago
Job cuts announced by U.S. employers almost quadrupled in December from a year earlier, paced by declines at financial firms, chemical makers and retailers as the recession rippled through the economy. Firing announcements rose 275 percent last month from December 2007, to 166,348, Chicago-based Challenger. Gray & Christmas Inc. said today. For all of 2008, employers announced 1.22 million job cuts, the most in five years. The economy is caught in a self-perpetuating cycle of rising job losses and declines in consumer spending that threatens to extend and deepen the economic slump this year. President-elect Barack Obama has said his top priority after taking office will be to pass a stimulus package that will save or create 3 million jobs.

"Unfortunately, heavy job-cutting could continue through at least the first half of 2009," John A. Challenger, chief executive officer of the placement company, said in a statement. "Nearly every industry experienced higher job cuts in 2008, as fallout from the collapse of the housing and financial markets spread throughout the economy." The U.S. economy probably lost 500,000 jobs in December, according to the median projection of economists surveyed by Bloomberg News ahead of the Labor Department’s Jan. 9 employment report. That would bring the total decline for last year to 2.4 million, the most since 1945. The number of planned job cuts decreased 8.4 percent last month from November’s almost seven-year high of 181,671, Challenger said. The figures aren’t adjusted for seasonal effects so economists prefer to focus on year-over-year changes instead of monthly numbers.

Financial companies led industries in announced cutbacks, with 39,604 last month, and also had the most announcements for the year at 260,110. It was the third-biggest industry annual total since records began in 1999, Challenger said. Chemical companies and retailers had the next greatest number of job cut announcements in December, with 17,968 and 17,783, according to today’s report. The Christmas holiday shopping season may have been the worst since at least 1970, with same-store sales dropping 1.5 percent to 2 percent in November and December, according to a forecast by the International Council of Shopping Centers. Best Buy Co., the largest U.S. electronics retailer, said Dec. 16 it will offer voluntary severance packages to almost all its corporate employees and will slash spending on new equipment in an effort to cut costs.

If not enough employees participate, some may be fired, the company said. The Challenger report doesn’t always correlate with figures on first-time jobless claims or employment as reported by the government. Many job cuts are carried out through attrition or early retirement. Some employees whose jobs are eliminated find work elsewhere in their companies, and some announced staff reductions never take place because business improves. Challenger’s totals also include foreign affiliates.

IBM May Cut 16.000 Jobs, Employee Group Says
International Business Machines Corp., the biggest technology employer, may cut thousands of jobs this month amid the global economic slowdown, according to the employee group Alliance for IBM. Employees have been hearing that layoffs will take place in late January, said Lee Conrad, national coordinator of the Alliance, an organization seeking union recognition at Armonk, New York-based IBM. The size of the reduction may be larger than those in the past few years, he said today in an interview. "Generally they go in batches of a couple hundred here and a couple hundred there," Conrad said.

A post on the Alliance’s Web site said the company may cut 16,000 jobs, which would top the 15,600 eliminated by Chief Executive Officer Sam Palmisano in 2002. The worldwide slump has tightened companies’ technology budgets and IBM may report a 1.6 percent drop in sales last quarter to $28.4 billion, based on the average analyst estimate. "There’s likely to be production cutbacks at IBM," said Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York. "There will be job cuts. For now, reducing the workforce to benefit the viability and competitiveness of the company makes sense." Solaris, which oversees $2 billion, held 29,000 shares of IBM as of Sept. 30.

IBM has frequently pruned its staff over the past few years. The company had two waves of job cuts in 2007, totaling more than 2,000 positions. IBM had $318 million in job-reduction costs that year, compared with $272 million in 2006. "We constantly rebalance our workforce and continue to invest in growth areas," said Ian Colley, a company spokesman. He declined to comment further when asked about the Alliance posting. IBM had 386,558 employees at the end of 2007. Palo Alto, California-based Hewlett-Packard Co., the world’s largest personal-computer maker, had 321,000 as of Oct. 31, and Panasonic Corp., based in Osaka, Japan, had 313,594 as of Sept. 30.

Alcoa to Cut 15.000 Jobs, Unload Assets
Alcoa Inc. announced the elimination of about 15,000 jobs, more plant closures, plans to sell assets and a 50% cut in capital expenditures to contend with the sustained recession. The moves raise the question of whether other companies that have cut costs also will feel the need to dig deeper. Alcoa, the world's largest aluminum producer, announced a round of cost cutting in October when demand for commodities and the availability of credit began to fall. The combined restructuring will result in a fourth-quarter charge of $900 million to $950 million, or $1.13 to $1.19 a share. The company expects to report fourth-quarter earnings next week. Alcoa earned $632 million, or 75 cents a share, in the fourth quarter of 2007.

"Many of these things are painful and many of these things are drastic," Alcoa Chief Executive Klaus Kleinfeld said in an interview Tuesday. "We will continue to monitor the dynamic market situation to ensure that we adjust capacity to meet any future changes in demand and seize new opportunities." Alcoa lost much of its luster in the recent commodity boom, failing to match the profit rise of other mining and metals companies, including rivals Rio Tinto Aluminum and UC Rusal. Both of those companies have also announced major cuts, shutting operations and selling businesses such as operations in China. Alcoa expects its new moves to generate savings of about $450 million a year. About 15% of the company's employees and contractors will lose their jobs. Alcoa also is freezing salaries and hiring.

The 50% cut in capital spending for this year amounts to about $1.8 billion. The company is shutting down an additional 135,000 tons of smelting capacity, on top of the 615,000-ton shutdown announced in October. The total of 750,000 tons represents about 18% of the company's production. Alcoa also plans to sell its foil, electric-systems, automotive-wheels and European transportation-products businesses. While the company said it had "at least one strong candidate" to buy each of the four operations, no timetable was given. Indeed, in light of the tight credit market and global economic weakness, there is no guarantee Alcoa will be able to sell those assets quickly. The company said those four businesses posted a combined loss of about $105 million last year on revenue of $1.8 billion.

Proceeds of the sales are expected to reach about $100 million. Aluminum prices have fallen by half since hitting a record high in July, with prices now hovering about $1,580 a metric ton. Consumption continues to wane and stockpiles in China and Europe continue to grow. Aluminum consumption has been especially hard hit in the automotive and consumer-foil sectors. Alcoa's latest moves represent an attempt to retool and position itself both to weather the recession and emerge stronger financially when demand returns. In recent weeks, Alcoa has tried to move more quickly than its competitors in response to the downturn, idling smelting capacity and reducing downstream, or consumer-related, businesses. Alcoa announced its measures after the close of regular stock trading. The company's shares were down 53 cents after hours, after rising 26 cents to $12.12 in 4 p.m. composite trading on the New York Stock Exchange.

China faces unrest this year: Report
China faces surging protests and riots in 2009 as rising unemployment stokes discontent, a state-run magazine said in a blunt warning of the hazards to Communist Party control from a sharp economic downturn. The unusually stark report in this week’s Outlook (Liaowang) Magazine, issued by the official Xinhua news agency, said faltering growth could spark anger among millions of migrant workers and university graduates left jobless. "Without doubt, now we’re entering a peak period for mass incidents,” a senior Xinhua reporter, Huang Huo, told the magazine, using the official euphemism for riots and protests. "In 2009, Chinese society may face even more conflicts and clashes that will test even more the governing abilities of all levels of the Party and government.”

President Hu Jintao has vowed to make China a "harmonious society”, but his promise is being tested by rising tension over shrinking jobs and incomes, as well as long-standing anger over corruption and land seizures. China also faces a year of politically tense anniversaries, especially the 20th year since the June 1989 crackdown on pro-democracy protesters in Tiananmen Square. That date has already galvanised the "Charter 08” campaign by dissidents and advocates demanding deep democratic reforms. While foreign commentary about risks to China’s recipe of fast economic growth and one-party control are common, the nation’s leaders are usually reticent about such threats. This report and other recent open warnings may be intended to help snap officials to attention, said one Chinese expert. "The candour about these problems reflects the severity of the unemployment problem. It’s meant to attract the attention of all levels of government,” said Mao Shoulong, a professor of public policy at Renmin University in Beijing. "The government wants to show that stability is at the top of its agenda.”

The biggest threats to China’s social fabric will come from graduating university students, facing a shrinking job market and diminished incomes, and from a tide of migrant labourers who have lost their jobs as export-driven factories have shut. Factory closures, sackings and difficulties paying social security had already unleashed a surge of protests, the report said. Officials in provinces that have provided tens of millions of low-paid workers for coastal factories have reported a leap in the number returning to their farm homes without work. State statistical authorities estimated that close to 10 million rural migrant workers had lost their jobs, the magazine said, without specifying when the sackings happened.

Including students who graduated in 2008 and had not found work, there would be more than 7 million university and college graduates hunting for jobs this year, Huang calculated. The government’s goal of annual GDP growth for 2009 of 8 percent would generate only 8 million new jobs for the whole country, he added. In 1989, discontented students formed the core of the pro-democracy protests. "If in 2009 there is a large number of unemployed rural migrant labourers who cannot find work for half a year or longer, milling around in cities with no income, the problem will be even more serious,” said Huang. Huang is Xinhua’s bureau chief in the southwest city of Chongqing, which has long been a cauldron of unrest. Other parts of China have also seen intense but brief and localised protests over police abuses, corruption and factory closures.

Euro Rises as ECB Rates Seen Staying Higher Than U.S., Japan
The euro rose against the dollar and the yen on speculation the European Central Bank will cut interest rates at a slower pace than its major counterparts. The euro also gained against the British pound and the Swedish krona. Derivatives trading showed the ECB will lower borrowing costs by at least 25 basis points at Jan. 15, leaving its benchmark rate higher than the zero-to-0.25 percent in the U.S. and 2 percent in Britain. The dollar held near its strongest level in three weeks against the euro earlier on speculation U.S. President-elect Barack Obama’s $775 billion package of tax cuts and government spending will help the economy recover from a recession.

"The euro sell-off against the dollar in recent days seems to be running its course," said David Powell, a currency strategist in London at Bank of American Corp. "The ECB’s less aggressive easing will continue to support the euro in the near term. We expect the central bank to cut by 50 basis points next week. But if you put that in contrast to the Fed, the ECB is much more restrained." The euro rose to $1.3624 before trading $1.3600 as of 10:11 a.m. in London. The single currency fell to $1.3313 against the dollar yesterday, the lowest since Dec. 12. It rose to 127.36 yen and traded little changed at 126.66 from 126.75 yesterday. Against the pound, the euro strengthened to 91.62 pence from 90.69 pence. The greenback appreciated to 59.72 cents per New Zealand dollar from 59.88 yesterday in New York. The South Korean won strengthened to 1,292.70 per dollar from 1,312.70 as overseas investors added to their holdings of the nation’s stocks.

Powell, who predicts the euro will rise above $1.40 by the end of this quarter, said the Federal Reserve is likely to keep its fed funds rate near zero into early 2010. Economists in a Bloomberg survey forecast the ECB will cut interest rates to 1.50 percent by June, and refrain from reducing borrowing costs beyond that. The ECB cut interest rates by 1.75 percentage points since early October to 2.5 percent as the region entered a recession. Policy makers will lower the main rate by at least a quarter of a percentage point at the next meeting on Jan. 15, according to a Credit Suisse Group AG gauge of probability, based on overnight index-swap rates. The euro also rose against the dollar after Fed policy makers said in the minutes of the Dec. 15-16 meeting that they saw "substantial" risks to the slumping economy last month as they cut the benchmark interest rate to a record low and pledged to expand emergency loans if necessary.

"What is clear from the rise in the euro-dollar from yesterday’s intraday low of 1.3313 is that market participants remain concerned over the scale of easing being undertaken by the Federal Reserve," said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mistsubishi Ltd. in London.
Further declines in the dollar many be limited in the near term after the U.S. Treasury pledged as much as $13.4 billion in aid to help GM pay its bills and $6 billion to prop up lender GMAC LLC, which GM relies on for auto loans and dealer support.

Ukraine says Russia halts all gas to Europe
All gas supplies to Europe via Ukraine were shut down Wednesday as the pricing dispute between Russia and Ukraine escalated. The Ukrainian gas company Naftogaz on Wednesday accused Gazprom, the Russian gas monopoly, of halting all transshipments at 7:44 a.m. But in Berlin, Aleksandr Medvedev, Gazprom's deputy chief executive, told journalists that it was Naftogaz, the Ukrainian company, that had closed a fourth pipeline. "Unfortunately, the situation is continuing to deteriorate," Reuters quoted Medvedev as saying. "Yesterday night, Ukraine completely shut down all export pipelines to Europe via Ukraine."

The shutdown left Slovakia, the Czech Republic, Austria and Romania with no Russian gas supplies amid a bitter cold snap. European Union countries have access to some other sources of gas ? including Russian gas from other pipelines, and gas produced in Britain, Norway and the Netherlands ? but the loss of the Ukrainian pipeline puts the EU under pressure to push for a solution. The cutoff of European gas supplies began Tuesday, causing shortages from France to Turkey. Gazprom said Ukraine was siphoning off for itself supplies meant for Europe, and that it was reducing shipments by an equivalent amount. Russia had already halted all supplies to Ukraine for its own use, saying its western neighbor was not paying enough for the fuel.

Gazprom is seeking to raise the price Ukraine pays for gas to $450 per 1,000 cubic meters from $179.50 last year. It also wants to collect what it says are fines for late payments on previous shipments. In Vienna, the Austrian gas company OMV said Wednesday it was no longer receiving any Russian gas, after its deliveries fell 90 percent Tuesday. Viktor Yuschenko, the Ukrainian president, called for immediate talks in Moscow to restart the flow. The European Commission said Tuesday that the situation was "completely unacceptable" and called for the immediate restoration of the gas supply. Europe depends on Russia for 40 percent of its imported fuel. While each side blamed the other for the scope of the latest drop in gas shipments, Russia's prime minister, Vladimir Putin, had personally announced Monday evening on state television that he was ordering a sharp reduction in gas flows, saying Ukraine was siphoning gas from the pipelines without paying.

For Putin, the escalation comes at a perilous time, as slumping energy prices threaten the fiscal health and political stability that have underpinned his popularity at home. Some analysts of Russian politics had expected Putin to become more conciliatory as energy prices fell. Instead, he has taken a hard line in seeking to raise gas prices in Ukraine and perhaps create panic-buying on the international market, where prices of natural gas and oil, Russia's leading exports, have fallen sharply in recent months. "They're still playing hardball, when they have to realize the rules have changed," Marshall Goldman, a senior scholar in Russian studies at Harvard and the author of the recent book "Petrostate: Putin, Power and the New Russia," said in a telephone interview. "It happened so quickly that I don't think they've had time to realize the implications."

With temperatures plunging, European leaders expressed mounting concern. Some countries announced rationing for industrial customers to reserve enough heating for residential buildings. A spokesman for the European Commission said that the cut had come "without prior warning and in clear contradiction of the reassurances given by the highest Russian and Ukrainian authorities," adding, "This situation is completely unacceptable." The cutoff appears to have multiple aims. Ukraine has angered Russia by seeking membership in the North Atlantic Treaty Organization, as has Georgia, a country Russia fought a brief war against last summer. Putin is also under heavy pressure domestically. Oil and gas exports provide about 60 percent of the Russian budget; oil prices, meanwhile, have fallen by about two-thirds since their peak last summer.

The effects are rippling through the economy. The ruble is being devalued, Russian companies are facing bankruptcy and the government's huge budget surplus will turn into a deficit next year if prices do not rebound, analysts say. At the same time, Russia's relations with the West slumped to post-cold-war lows after Russia sent troops into Georgia in August. Even as Russia will need foreign investment to offset dwindling energy export revenues, options are dwindling for attracting investors to a country that even in the best of times had a poor track record of property rights. "The Russian elite mind-set right now is a residue of petro-confidence slamming into the financial crisis," said Cliff Kupchan, a director at the Eurasia Group, a global risk-consulting firm based in New York. "So in my view, they're confused about whether to seek help from the international financial system to solve their problems that way or continue a bare-knuckled approach to the world."

Gazprom is seeking to raise the price Ukraine pays for gas to $450 per 1,000 cubic meters, from $179.50 last year. It also wants to collect what it says are fines for late payments on previous shipments. Ukraine has in turn demanded that Gazprom pay more to transship gas to Europe. Executives of Gazprom blamed Ukraine. In an announcement on Monday, Putin and Gazprom's chief executive, Aleksei Miller, said they would cut 65.3 million cubic meters of gas supplies for Europe. In fact, the reduction totaled about 240 million cubic meters, according to Gazprom. Company officials said that they had intended to ship more fuel on Tuesday, but that Ukraine had blocked export pipelines. Ukrainian energy officials denied this. "We are shocked that we're not in the position to bring gas to the border of Ukraine because they shut down the pipelines," Medvedev, a deputy chief executive of Gazprom, said at a news conference in London on Tuesday. "There is no reason to blame Russia or Gazprom."

Oleh Dubyna, the director of Ukraine's national energy company, Naftogaz, said he would fly to Moscow on Thursday to resume negotiations. Gazprom's spokesman, Sergei Kupriyanov, said the company was "ready to begin negotiations at any moment." A compromise may be harder to find this year, Thane Gustafson, an expert on Russian energy at Cambridge Energy Research Associates of Massachusetts, said in a telephone interview from Washington. "We're talking about two sides that are under extreme constraint," he said. Among the pipeline routes that were affected the most was the so-called Western Balkan route, affecting supplies to Romania, Bulgaria, Macedonia, Greece and Turkey, said Ferran Tarradellas, a spokesman for the European Union energy commissioner, Andris Piebalgs.

Substantial cuts could also affect Slovakia, Hungary, Slovenia, Italy and Austria, Tarradellas said. In Turkey, flows of gas through a pipeline that runs from Ukraine stopped completely on Tuesday morning, said the country's energy minister, Hilmi Guler. The pipeline is a major source of gas for Turkey, which imports nearly all its energy. Several other sources, including the Blue Stream pipeline, which carries gas to Turkey from Russia under the Black Sea, were unaffected, however.

Europe begins to freeze as gas taps are turned off in energy war
Outside, the temperature plummeted to minus 12. Inside, the gas stopped flowing to homes in some of Europe's eastern cities in the dead of night and stayed off all day while the thermometer stayed below zero. Tens of thousands living on the shores of the Black Sea were the first to feel the bitter impact of Russia's dispute with Ukraine over gas payments on the coldest day of the year. With even icier conditions forecast for this week, the gas flow from Russia dried up during the day to nine countries, leading Bulgaria and Slovakia to consider declaring states of emergency and others to warn that just a few days' reserves remained.

In Britain there were increasing concerns that families could be forced to pay more than expected for their gas and electricity. The "big six" energy suppliers — British Gas, ScottishPower, Scottish and Southern Energy, EDF Energy, npower and E.ON — had been widely expected to cut their retail gas and electricity prices over the next few weeks by about 10 per cent, reflecting a marked drop in the wholesale price of gas last autumn. British wholesale prices leapt sharply yesterday, though, as Russia's decision to withhold gas from Ukraine over unpaid bills and an unsigned contract for 2009 grew into dire shortages farther down the pipelines that take 36 hours to pump gas across the vast former Soviet country.

Italy reported a 90 per cent cut in its Russian gas, France a reduction of 70per cent and two importers in Germany said that they had serious shortfalls. Most countries have stockpiled several weeks' supplies after two mild winters and experience of a similar dispute between Moscow and Kiev in 2006. That row lasted three days but the latest disagreement, which started on New Year's Day, seems to be far from over. There was one glimmer of hope when the head of Ukraine's gas company agreed to go to Moscow for talks tomorrow with Gazprom, the Russian state-controlled monopoly gas supplier.

With the Russian gas supply cut entirely yesterday to Bosnia, Bulgaria, Croatia, Greece, Hungary, Macedonia, Romania, Serbia and Turkey, the EU broke from its diplomatic approach to demand a resolution to the crisis. "Without prior warning and in clear contradiction with the reassurances given by the highest Russian and Ukrainian authorities to the European Union, gas supplies to some EU member states have been substantially cut," the EU said. "This is completely unacceptable. The Czech EU presidency and the European Commission demand that gas supplies be immediately restored to the EU and that the two parties [Russia and Ukraine] resume at once negotiations with a view to a definitive settlement of their bilateral commercial dispute."

Around Europe, both Russia and Ukraine are being blamed for the worsening situation. In Bulgaria, which relies almost completely on Russia for gas and where households in the cities of Varna and Dobrich are already without gas, the Prime Minister said that there was only one week's supply left in reserves and appealed for industry to cut usage. The President even proposed that an ancient nuclear power plant, closed as a condition of Bulgaria joining the EU because it was deemed too dangerous, should be switched back on.

Turkey was seeking gas from Iran and Croatia introduced rations for industrial users to maintain domestic supplies. Austria, which lost 90 per cent of its normal supplies, said that it had three months' reserves but called an emergency meeting at its Economy Ministry. Slovakia, which is entirely dependent on Russia for gas, was considering a state of emergency after deliveries fell by 70 per cent. Russia and Ukraine continued to blame each other for Europe's shortfalls, with no independent verification possible. Ukraine turned off three pipelines because it said that Russian supplies had halved, while Russia said that it was withholding the amount that Kiev was allegedly stealing.

Gazprom has demanded a large price increase for 2009 and says that payment for November and December has not been fully received. It said that it supplied 65 million cubic metres (mcm) to Europe yesterday through Ukraine, a fall of 78 per cent from the 300 mcm that it had been supplying since the dispute started. The Department for Energy and Climate Change at Whitehall called for Moscow and Kiev to urgently work to resolve the dispute. "We back the European Union's call for gas supplies to be restored immediately and that both parties restart negotiations with a view to a speedy resolution of this commercial dispute," a statement said.

The department said that less than 2per cent of gas was imported from Russia and that it did not expect British supplies to be affected. Around 40 per cent of the gas used in Britain will be imported this year, up from 27 per cent in 2007. That proportion is expected to rise to 75 per cent by 2015. Most of these imports come via pipelines from Norway and Holland. Britain is also able to import liquefied natural gas via ships to terminals at the Isle of Grain in Kent and Milford Haven in Wales.

Eastern Europe Limits Gas Use; Germany Meets Demand
Slovakia, Hungary and Bulgaria were among European countries to restrict natural-gas supplies to consumers as Russian exports to Europe via Ukraine halted. Slovensky Plynarensky Priemysel AS, Slovakia’s dominant gas company, said it would curb deliveries to the largest industrial users. Affected companies include refiner Slovnaft AS, which consumes more than 1 million cubic meters of gas a day, spokeswoman Kristina Felova said by telephone. Households aren’t affected, according to Slovensky. Hungary also instructed industrial users to switch to other fuels, according to Janos Zsuga, head of the gas-transmission unit of refiner Mol Nyrt. The order affects companies that use more than 500 cubic meters of gas an hour, Zsuga said today in an e-mailed statement.

OAO Gazprom, Russia’s gas-export monopoly, halted all shipments to Europe via Ukraine at 7:44 a.m. Kiev time today, said Valentyn Zemlyanskiy, a spokesman for Ukraine’s state-run energy company NAK Naftogaz Ukrainy. The exporter had threatened late yesterday to cut supplies if Ukraine held up fuel meant for customers in central and western Europe. Hungary and Slovakia are most exposed to the stoppage because they depend more on the fuel for energy than other European nations, according to UniCredit SpA. Investors should buy protection on debt issued by Slovakia through the market for credit-default swaps, Gyula Toth, an analyst at UniCredit in Vienna, wrote in a research note today.

Bulgaria will also limit supplies, cutting daily gas use to 5.7 million cubic meters from 8 a.m. local time tomorrow, Economy and Energy Minister Petar Dimitrov told a news briefing today. The country will seek compensation for economic losses arising from the disruption, he said. Gazprom Deputy Chief Executive Officer Alexander Medvedev said today that Ukraine shut off a fourth pipeline to Europe after closing three others yesterday. Russia and Ukraine have blamed each other for the supply cuts, which come as the two countries continue to dispute gas pricing and transit fees. Austria, the Czech Republic and Germany were among European countries that pledged to meet domestic demand for gas. OMV AG, Austria’s largest oil and gas producer, said it’s able to meet demand by tapping stockpiles, sourcing imports from elsewhere and using its own output, the Vienna-based company said in an e-mailed statement.

The Czech Republic’s RWE Transgas is using supplies from Norway and underground storage, the gas trader said today in an e-mailed statement. It has also secured extra gas in cooperation with parent company RWE AG, which is arriving via the northern route along with the Norwegian imports, "fully compensating" the situation. RWE, Germany’s second-largest utility, said its gas clients won’t experience any disruption in supply. The company sources about 80 percent of its gas from and through other countries and storage is "well-filled," spokeswoman Annett Urbaczka said by telephone today. Distrigas SA, the biggest gas supplier in neighboring Belgium, said it doesn’t buy Russian gas and isn’t affected by the halt. Fluxys SA, owner of the country’s gas grid, said there’s no shortage of the fuel, according to spokeswoman Berenice Crabs.

French Finance Minister Christine Lagarde said today the country it isn’t "overly concerned" about the impact of the cutoff because utility GDF Suez gets only 15 percent of its supplies from Russia. Swiss gas supply has also "functioned without any constraints," said Daniel Baechtold, a spokesman for industry association Swissgas. "We don’t expect a decrease," he added. Russian gas comes to Switzerland through contracts with other European gas companies, including German utility E.ON Ruhrgas AG. E.ON Ruhrgas didn’t return calls from Bloomberg News. Eni SpA, Italy’s biggest energy provider, has registered a "substantial" interruption in gas supplies from the TAG pipeline beginning at 1 a.m. local time, the company said in a statement.

Romania, which borders Ukraine, was forced to close the second of two gas-import stations today and tap reserves to meet demand after shutting the Isaccea 2 entry point yesterday, the Economy Ministry said in an e-mail. Poland, also a neighbor of Ukraine, is receiving no gas from Russia via the country, Malgorzata Polskowska, a spokeswoman for national pipeline operator Gaz-System SA, said by telephone from Warsaw today. Finland is still receiving gas through a Russian pipeline that doesn’t flow through Ukraine, Minna Ojala, a spokeswoman for utility Gasum Oy, said today.

Germany Considers 100 Billion Euro Fund for Ailing Industry
Chancellor Angela Merkel's government is close to agreeing on the details of a €50 billion economic stimulus package now that Social Democrats have given up their opposition to tax cuts. In addition, Berlin wants a €100 billion fund for German industry. Prior to the holidays, Germany's governing coalition hinted that the new year would see a second economic stimulus package aimed at softening the expected blow from the global financial crisis and resulting economic downturn. This week, Berlin is taking important steps toward hammering out the details of such a package. On Wednesday, reports emerged that the Social Democrats are prepared to drop their categorical opposition to tax cuts as a possible element of the package. Party head Franz Müntefering told German television station ARD on Wednesday morning that his center-left party would be willing to compromise. Referring to Germany's conservative camp, Müntefering said, "if, for neurotic reasons given by the Union, there is no other solution, then it has to be done."

Separately, the Financial Times Deutschland on Wednesday reported that Berlin is weighing the establishment of a €100 billion ($132.7 billion) fund to provide German companies with liquidity should they run into refinancing difficulties. "We can't allow momentary difficulties to drive companies into bankruptcy," an unnamed conservative politician told the paper. According to Wednesday's Süddeutsche Zeitung, Chancellor Angela Merkel's Christian Democratic Union (CDU), together with its Bavarian sister party, the Christian Social Union (CSU), has pulled away from drastic tax cuts. Currently under consideration is an increase to the minimum taxable income from the existing level of €7,664 to €8,000. Other minor adjustments may also be made. The apparent compromise clears one of the major hurdles out of the way of Germany's second stimulus package, likely to be worth €50 billion over two years. The first one, passed last autumn, was widely criticized for being little more than a collection of measures already approved by Merkel's governing coalition. With economic indicators increasingly pointing towards a difficult 2009, pressure had grown on Berlin to come up with a new plan.

The new collection of measures will focus largely on infrastructure investments such as road building and the refurbishment of schools. Chancellor Merkel herself had originally come out against tax cuts of any kind, but recently relented in the face of stiff pressure from within her conservative camp. The SPD shift makes a quick agreement seem likely. The parties hope to reach an agreement by next Monday, paving the way for final passage in February. Chancellor Merkel would also like to see the proposed €100 billion fund for private industry agreed to by next Monday. In addition to making it difficult for banks to maintain liquidity, the financial crisis has also limited the ability of companies to borrow money at reasonable prices. Berlin, according to the Financial Times Deutschland, is concerned that "pillars of German industry" could become endangered.

Concern is growing that the various measures planned by Berlin could result in a breach of the deficit rules imposed on those European countries belonging to the euro single currency zone. The Maastricht Treaty allows budget deficits of no greater than 3 percent of gross domestic product. According to Volker Kauder, floor leader for the CDU, Germany has some €50 billion in leeway before it violates the pact -- roughly the amount of the stimulus package under consideration. A number of euro zone countries have argued recently that the stability pact rules should be loosened.

German lovers – aged six and five – try to elope to Africa
It is a dream that has been shared by lovers across the centuries – the chance to elope to exotic lands. But few would have been as bold and spontaneous as six-year-old Mika and his five-year-old sweetheart Anna-Bell who, after mulling over their options in secret, packed their suitcases on New Year's Eve and set off from the German city of Hanover to tie the knot under the heat of the African sun. The children left their homes at dawn while their unwitting parents were apparently sleeping, and took along Mika's seven-year-old sister, Anna-Lena, as a witness to the wedding.

Donning sunglasses, swimming armbands and dragging a pink blow-up lilo and suitcases on wheels packed with summer clothes, cuddly toys and a few provisions, they walked a kilometre up the road, boarded a tram to Hanover train station and got as far as the express train that would take them to the airport before a suspicious station guard alerted police. "What struck us was that the little ones were completely on their own and that they had lots of swimming gear with them," said Holger Jureczko, a police spokesman. He described Mika and Anna-Bell as "sweethearts" who had "decided to get married in Africa where it is warm, taking with them as a witness Mika's sister".

Anna-Bell told the German television station RTL: "We wanted to get married and so we just thought: 'Let's go there.' " Mika said: "We wanted to take the train to the airport, then we wanted to get on a plane and when we arrived we wanted to unpack the summer things and then we wanted to go for a bit of a stroll in the sun." Mika and Anna-Lena's mother, who was not identified, said she had known nothing of her children's plan. "I'm still in a state of shock. I thought 'I'm playing a part in a bad movie.' When we realised the kids were missing we went looking for them." But only when the police called did they realise what had happened.

Asked why they failed to let their parents know, the children said they thought they would not be gone for long. Mika told police he instigated the plan having been inspired by a winter holiday with his family in Italy. "Based on this the children began to make plans for the future," Jureczko said. To allay their disappointment at being caught, Hanover police gave them a tour of the police headquarters. Jureczko said: "They'll have the chance to put their plan into action at a later date".

UK car sales tumble by 20% amid calls for Government help
The British car industry will suffer a fresh blow today when new figures are expected to show that sales fell by more than 20 per cent last month. The sharp drop coincides with mounting concern over whether the Government will deliver an aid package that had been expected before Christmas. Worries are increasing over the future of components makers that are thought to have been hit badly by the lack of bank lending. Jaguar Land Rover, the luxury car division owned by the Tata conglomerate, has also told the Government that it needs credit urgently.

It is feared that a rescue package for the industry that the Department for Business drafted has caused alarm in the Treasury, which is concerned that industry-specific aid packages could be challenged by other hard-pressed sectors that could make a case for government assistance. Paul Everitt, the chief executive of the Society of Motor Manufacturers and Traders (SMMT), warned before Christmas that the car industry was facing a "national emergency". All British carmakers have been or remain on extended Christmas shutdowns to reduce output in the wake of plummeting sales worldwide.

The 20percent sales drop of last month is in line with the falls of September and October but marks a mild recovery from November, when sales crashed by 37 per cent. It is thought that the reduction in the level of VAT may have enticed some buyers. The December sales figures will take the total new sales for last year to just over 2.1million, down from 2.4million in 2007. However, last year got off to a strong start, with sales falling away badly only from August. Car chiefs are expecting no relief this year, and sales are projected to fall to between 1.8 million and 1.9 million vehicles. In the week before Parliament rose for the Christmas recess, the expectation had been high that there would be government help. Now, however, industry insiders say that the picture is confusing and that there seems to be a reluctance in Government to make a decision.

Industry and the unions are expected to increase the pressure for assistance as the crisis in the sector moves up the political agenda. Industry chiefs, employers' groups and unions will meet Gordon Brown next Monday to try to work out ways of ensuring that the coming surge in unemployment is as short-lived as possible. Up to 100 executives from some of Britain's leading companies, the CBI and the TUC will discuss how people who lose their jobs in the coming months can be supported in the short term and helped to find new jobs with retraining. A senior official said that the Government wanted to prevent a repetition of the recessions of the 1980s and 1990s, during which short-term increases in the jobless totals were allowed to become long-term problems.

"All the evidence shows that once people have become unemployed for a few months, they get used to the idea and it is harder to get them out of it," the government official said. "Yes, unemployment will rise, but tens of thousands of jobs a month are still being created and we need to use that to ensure that people get back into the labour market as soon as possible." Companies that will be represented at the jobs meeting on Monday include IBM, Centrica, Motorola, Rio Tinto and Pfizer. With the Government close to announcing fresh moves to boost lending by the banks, probably through a credit insurance scheme, companies will use the gathering to urge Mr Brown to be as ambitious as possible. John Cridland, the deputy director-general of the CBI, said last night: "You can't have jobs without wages and companies to pay them. The Government must take immediate steps to get credit flowing through the economy again, and this must be the priority."

Toyota has been forced to suspend production at several factories in the face of the strong yen and rapidly collapsing global car markets (Leo Lewis writes). In a move that is likely to be repeated across much of the struggling Japanese automotive industry, the Nagoya-based group said that all 12 of its Japanese plants would close for 11 days between February and March. Industry insiders said that 11 days, over two periods, is the longest a big car plant can be suspended. Any longer and the fixed costs start to demand permanent closures and radical cuts in the workforce. Car sales in Japan have fallen to their lowest levels since the 1970s in a decline that began well before the global economy started to erode.

UK mortgage lenders can't hide the obvious - the housing market is in freefall
You have to hand it to the Nationwide, and, indeed, the Halifax. Both lenders, in producing their monthly reports showing prices fell more than 2% in a single month in December, are saying that things are not as bad as they look. The pace of decline is steadying, they argue, rather than accelerating. The Nationwide said this morning argued that the three-month on three-month fall was "only" 4.2%. That may be true but it would still give you an annualised fall of 17%. Its monthly figure of 2.5% would give you an annualised figure of 30% while the Halifax's December figure of 2.2% down, reported last Friday, gives you an annualised pace of tumble of around 26%.

The truth is you can take your pick but nothing changes the picture that the housing market is in free fall and has considerably further to go given the scarcity of mortgage finance, particularly for first-time buyers, and given the idea that people don't want to buy now when they think they can buy cheaper in year's time. Quite how far house prices will fall is anyone's guess. Prices are down now about a fifth from the peak in autumn 2007. Add in inflation over that period of 5-6% and you have a real-term fall of about a quarter. Some optimists say that the big recent interest rate cuts and the fact that prices have fallen a lot mean we are now quite close to the bottom. Others argue, more realistically, that we are only half way through this process, given that unemployment is rising so strongly, and that prices will probably shed 50% in real terms by the time the market stabilises next year or in 2011.

For now auction prices offer a good indication that prices have further to fall. They are down about 35% or more from the peak. Auctions are interesting because they represent actual cash sales taking place where mortgage finance is not necessary. Some argue that they do not represent the wider market since many of the sellers are "distressed" in the sense that they have to sell at almost any price. But they nevertheless provide a clue as to what realistic buyers are prepared to pay for properties and therefore how much further the wider market will have to fall before it clears.

Elsewhere today, the Chartered Institute of Purchasing and Supply's monthly survey of the dominant services sector was awful and close to November's record low. You could argue that the lack of a further drop shows the sector is beginning to stabilise but that is a brave call. This economy is getting worse at an alarming pace and needs all the help it can get. A majority of City pundits thinks that the Bank of England will cut rates by half a point this week to an all-time low of 1.5%. But that same majority has spent much of the past 12 months getting the economy spectacularly wrong. The Bank is much more likely to cut by a full point to 1% on Thursday.

Desolation row: the demise of one town
The winter sun may have shone brightly on Southend's high street yesterday afternoon but there was little reason for either shoppers or traders to be cheerful as Britain's increasingly gloomy economic situation cast its ugly shadow over the town's main thoroughfare. As Woolworths shut the doors on the last of its 807 stores across the country there was no last-minute frantic buying or farewell drinks parties in this corner of Essex. Southend's Woolies was among the first to be shut down when the firm went into administration in December, putting 76 people out of work in the town. All that remained were the empty, grimy windows of a now-derelict shop and local memories of a store that once was thronged with shoppers. "I never imagined there would be a time when Southend didn't have a Woolies," said Gene Gardener, who was out shopping yesterday with her daughter, Janet.

"I've lived in the area for more than 40 years and this high street has gone from a place where you were happy to shop in, into a place that you only come to if you have to. We used to have Keddies, a locally owned department store, independent shoe shops, butchers, you name it." Consumer apathy and disinterest, combined with the rise of out-of-town shopping centres and internet buying, has led to the steady decline of Britain's high streets and, with the recession now toppling major high-street brands, there are fears that things will only get worse. Yesterday Experian, a property consultancy firm that specialises in the retail sector, estimated that vacancy rates nationwide would soar this year, with up to one in 10 shops standing empty by the end of February alone. By the end of 2009, they believe up to 135,000 stores will be unoccupied, the equivalent of 15 per cent of all Britain's shops. Small market towns are expected to be hit the worst.

A brief walk up Southend's high street reveals the all too familiar picture of a once-busy thoroughfare now desperately struggling to remain a vibrant and attractive place to shop. The recession has yet to create the horror of row upon row of boarded-up shops but look closely and financial casualties still litter the landscape, a closed tanning salon here, a boarded-up amusement centre there. At least seven stores are vacant on the high street alone and two others were temporarily occupied over the Christmas period by "bargain stores". Opposite Woolworths itself, ideally situated at the supposedly busier south end of the high street, next to the town's iconic pier, was a shuttered clothing shop, naked mannequins the only hint to what it once sold there.

"High streets are always difficult places to trade but this year will be particularly tough," said Steve Vincent, who owns the Shake It! milkshake bar, one of the few remaining independent stores still open on the street. "You look outside and see all these people walking to and fro but they're not spending like they might have. I don't know what they're doing, but they're definitely not here to shop." For shopkeepers such as Mr Vincent, it is the lack of consumer confidence that is most frustrating. "There have been some redundancies in the area but generally most people have their jobs and the same amount of cash they had this time last year but they are afraid to part with their money because they don't know what lies around the corner," he said.

Part of Southend's problem, like so many other small towns across Britain, is that shopping centres have steadily eroded the need to head down to your local high street. Lakeside Shopping Centre, a few miles up the A13, has more than 300 shops under one roof and room for 13,000 cars, and Southend itself has two shopping centres which sit, much to the chagrin of local retailers, at either end of high street. But in The Victoria, one of the town's shopping parks, the picture is even more dire. Despite a recent £21.5m refurbishment which turned the area from a dreary outdoor concrete shopping precinct of the 1960s into the sort of warm, indoor retail centre that should attract consumers, yesterday it was virtually deserted of both shoppers and retailers. On the ground floor, at least seven units were unoccupied and on the floor above a further 15 units were empty. Zavvi, which went into administration on New Year's Eve, was one of the few busy shops yesterday, primarily because all the stock had an extra 10 per cent discount, but elsewhere the centre felt more like a ghost town.

Many of the independent retailers in the building said that they feared the demise of brands such as Zavvi and Woolworths would make it even harder to attract shoppers. "It was hard enough to trade when they were refurbishing this place but the recession now means huge numbers of shops in here are vacant," said James Wilson, whose family have been running Higgs' Leathers since the 1960s. "Most of the independent retailers moved out or went bust in the past year and I think the developers thought it wouldn't matter because they thought they would attract the big-name chains. But not even they want to open new stores now." But what can be done to stop more stores disappearing from the high street? "I'll give you one good idea," said Leigh Boyle, who runs Into the Void, a specialist comic bookstore. "The government could temporarily suspend business rates. That would help so many retailers get through the next few months. Instead, they do things like drop the VAT rate which, if you ask anyone round here, hasn't helped us one bit."

Irish public workers face pay cut to plug budget gap
Ireland's finance minister, Brian Lenihan, hinted today that the country's public-sector workers may face pay cuts as the government plans to plug a €12bn (£11bn) gap in the state's finances. Lenihan also ruled out the possibility of a second emergency budget to help Ireland cope with the economic crisis that is crippling the Republic. Rather than raise extra revenue via tax rises, he called for savings in the public sector. He told Irish radio today that a meeting of the social partners – trade unions, business and the government – should be convened to discuss the economic malaise. "Payroll costs in the public sector cannot be immune from the trends we are seeing in the wider economy," Lenihan said.

The minister said there was an "item-by-item" review in the finance department to see where cuts could be made. He blamed much of Ireland's present economic woes on the strength of the euro against sterling. "The fact that the euro has almost approached parity with sterling ... that has put business and consumers under enormous pressures. That is why the only thing we can do as a country is to get our cost base right," the minister said. His warning about deep cuts in the public sector came just before Tara Mines, one of the leading mining companies in Ireland, announced that 700 of its workers were being put on "protective notice".

The Swedish firm Boliden, which owns the mine in Co Meath, said the workers had until 19 January to accept the company's cost-cutting plans or face redundancy. The management of Tara, Europe's largest zinc mine, wants the workforce to agree to lower awards for productivity and reduced shift patterns. The company blames a drop in the price of precious metals and a weakened dollar for a sharp decline in demand. News of threatened redundancies at Tara emerged less than 24 hours after 800 jobs were put in jeopardy following the threatened closure of Waterford Crystal in Ireland's south-east.

Ilargi: Economists say the darndest things. Or something. And they always have solutions to anything that pops up. Not. When I see articles like the next two, I can't believe someone would write stuff like this. Borrow more, spend more,

Choices made in 2009 will shape the globe’s destiny
Welcome to 2009. This is a year in which the fate of the world economy will be determined, maybe for generations. Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade. They are wrong. Our choice is only over what will replace it. It is between a better balanced world economy and disintegration. That choice cannot be postponed. It must be made this year. We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large-scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary – expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.

Already it must be clear even to the most obtuse and complacent that this crisis matches the most serious to have affected advanced countries in the postwar era. In a recent update of a seminal paper, released a year ago, Carmen Reinhart of Maryland University and Kenneth Rogoff of Harvard spell out what this means.* They note the similarities among big financial crises in advanced and emerging countries and, by combining a number of severe cases, reach disturbing conclusions. Banking crises are protracted, they note, with output declining, on average, for two years. Asset market collapses are deep, with real house prices falling, again on average, by 35 per cent over six years and equity prices declining by 55 per cent over 3? years. The rate of unemployment rises, on average, by 7 percentage points over four years, while output falls by 9 per cent.

Not least, the real value of government debt jumps, on average, by 86 per cent (see chart). This is only in small part because of the cost of recapitalising banks. It is far more because of collapses in tax revenues. How far will the present crisis match the worst of the past? The continuing willingness of the world to finance at least the US – though not necessarily the smaller and more peripheral deficit countries, such as the UK – is a reason for optimism. It does allow the US government to mount a vast fiscal and monetary rescue programme. Yet, as Profs Reinhart and Rogoff note in another paper, this is a global crisis, not a regional one (see chart).** It has reminded us that the US is still, for good or ill, the core of the world economy. In the big crises of recent decades, US demand has rescued the world. This was true during the 1990s, after the Asian crisis, and again after the stock market crash of 2000. But who, apart from its government, will rescue the US? And on what scale must it act?

This issue is addressed in another seminal paper, the latest in the series co-written by Wynne Godley and two others for the Levy Economics Institute of Bard College.*** The underlying argument is one with which readers of this column should, by now, be all too familiar. What makes rescue so difficult is the force that drove the crisis: the interplay between persistent external and internal imbalances in the US and the rest of the world. The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services. The rest of the world or, more precisely, a limited number of big surplus countries – particularly China – have the opposite. So demand consistently leaks from the deficit countries to surplus ones. In times of buoyant demand, this is no problem. In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear.

What has happened to US private spending follows from the collapse in borrowing: between the third quarter of 2007 and the third quarter of 2008 net lending to the US private sector fell by about 13 per cent of gross domestic product – by far the steepest fall in the history of the series (see chart). With borrowing out of the picture, private net saving – the difference between income and expenditure – is likely to remain positive for years, as households pay down debt, willingly or not. Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely. And to get to this point the fiscal boost must be huge. A discretionary boost of $760bn (€570bn, £520bn) or 5.3 per cent of GDP is not enough. The authors argue that "even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years”.

Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight. Yet we have a golden opportunity to turn away from such a course. We know better now. The US has, in Barack Obama, a president with vast political capital. His administration is determined to do whatever it can. But the US is not strong enough to rescue the world economy on its own. It needs helpers, particularly in the surplus countries. The US and a few other advanced countries can no longer absorb the world’s surpluses of savings and goods. This crisis is the proof. The world has changed and so must policy. It must do so now.

How to stop the recession
Too much recent commentary has treated the current recession as if it were preordained and unstoppable. Recessions are not Acts of God. On the contrary, nearly all major fluctuations in economic activity are the man-made result of serious errors in economic policy. They can be halted if the right decisions are taken. In their classic work on A Monetary History of the United States Milton Friedman and Anna Schwartz showed that the dominant influence on the slump in output and employment in the USA's Great Depression was a fall in the quantity of money. Between October 1929 and April 1933 the quantity of money dropped from $48,155m to $29,747m or by almost 40pc.

Money takes two forms, legal tender cash (mostly notes) and bank deposits. Holdings of deposits were much larger than those of cash in the early 1930s, just as they are today. Over the October 1929 to April 1933 period deposits slumped from $44,323m to $24,545m or by 45pc. In other words, the Great Depression was due above all to trauma in the American banking system. The virtual halving of the level of bank deposits meant that rich people had too little money in their portfolios, and they sold stocks and shares to straighten their positions. As in a game of pass-the-parcel, such sales merely altered the distribution of money between different investors. Some sort of balance between non-monetary assets and the reduced amount of money was restored only by a crash in the prices of shares, real estate, farmland and so on, with catastrophic impacts on demand and output.

One lesson is that policy must at all times keep the growth rate of money – which means the growth rate of bank deposits, in practice – steady at a moderate rate. In the 14 years from 1992, in which the UK enjoyed unusual macroeconomic stability, the annual rate of money growth was in fact similar to that of national income at about 6pc or 7 pc. But in 2006 the Bank of England lost the plot. A large and violent fluctuation in money growth has occurred in the last three years, and the predictable outcome has been a large and violent boom-bust cycle. In early 2007 the bank deposits of British companies were 15pc higher than a year earlier, but in the last year they have fallen by almost 5pc. This lurch from easy monetary conditions to liquidity squeeze has been an important – perhaps the most important – causal influence on the economic downturn.

What must policy-makers now do? The answer is that they must raise the growth rate of bank deposits in the hands of genuine non-bank agents, such as companies and households. Over the last 20 years new bank deposits have been created mostly as a counterpart to lending to the private sector. When a bank extends a new loan, it adds the same amount to its assets (the loan) and to its liabilities (the deposit). The loan typically stays inert on the bank's books for months or even years. By contrast, the borrower can write cheques against the deposit, moving the money into someone else's deposit. Whereas the loan is only one transaction, the extra deposit is money and can result in endless rounds of transactions. On this basis it is the money – the new bank deposit – that really matters to the economy, not the bank loan.

However, in the last few months the Bank of England has expressed the view that new credit to the private sector, not extra money, plays a vital role in the economy. In recent speeches the Governor, Mervyn King, and the Deputy Governor, Charles Bean, have warned that – unless banks lend more to the private sector – the economy will not recover in 2009. This credit-determines-spending doctrine is false and dangerous. The correct answer is for the government to replace the private sector in the credit process, and so to create new deposits by itself borrowing from the banks and increasing the quantity of money. Since the government has the power of taxation, its own credit-worthiness is not in doubt and it can borrow almost without limit from the banks.

In the first instance the proceeds of the banks' loans to the government would be credited to the government's deposit. But civil servants can then write cheques to the government's suppliers and add to the quantity of money. These suppliers may include some financially hard-pressed small companies, giving them immediate help. But the favourable effects of extra money should soon spread widely. Payments between different companies and individuals are on such a scale that all cash-strained companies ought to find it easier to improve their financial position. We are of course opposed to an excessive rate of monetary growth, because that causes inflation, and favour sound public finances over the medium term. But large-scale government borrowing from the banks in early 2009 – of between, say, £50bn and £100bn – would be simple to organize given the enormous budget deficit now being incurred. That would quickly boost the quantity of money, easing the financial squeeze on British companies, and helping them to maintain jobs and investment.

Authors. Tim Congdon was a member of the Treasury Panel (the so-called 'wise men'), which advised the last Conservative government on economic policy. Gordon Pepper was one of Nigel Lawson's Gooies (group of outside independent economists) whom he describes as having established a private line to Margaret Thatcher.

Calls Grow to Cap Property Taxes
Support for property-tax rollbacks is building from Arizona to New York, fueled by angry homeowners in some locales who are seeing rising tax bills despite plunging home prices. Legislatures in New York, Georgia, Oklahoma and Wyoming are considering taking up proposals to curb property taxes in their 2009 sessions. In Indiana, a cap on property taxes enacted last year became effective Jan. 1, and lawmakers are planning to vote this year on whether to put before voters a constitutional amendment that would cap taxes permanently at 1% of a property's value. In recent months, citizen groups in Montana, Nevada and Arizona have organized to get property-tax-relief measures on state ballots. Florida voters last year amended the state's constitution to increase a number of property-tax exemptions, lowering their assessments.

"We just can't afford these increases in property taxes," said Lynne Weaver, a 59-year-old retired swimsuit saleswoman in Phoenix, who said her investment nest egg "has pretty well been cut in half" by market declines. She is a leading volunteer for Prop. 13 Arizona, an organization collecting signatures seeking a 2010 ballot measure that would roll back home valuations to 2003, before the boom that preceded the bust in home prices, and which would also cap annual property-tax increases at 2% of home value. New York City boosted property taxes by 7% effective Jan. 1, and other towns in the state are also sending out higher bills, even as Gov. David Paterson and some legislative leaders are supporting a recent report that recommended a 4% statewide cap in property-tax increases. A commission empaneled by Gov. Paterson's predecessor called for the cap in response to concern that the state's levies -- among the highest in the nation on property -- were curbing growth and encouraging migration.

Taxes can go up when prices decline because assessed values lag behind market realities. The values that cities and towns use to calculate tax bills are often based on house sales a year or more before the bills are issued. That means that many recent bills don't take into account the meltdown of 2008, when house prices fell by an average of about 20% across the country. In addition, cities and towns are facing a barrage of recession-related financial pressures, including cuts in state aid and investment losses. That is tempting many to look for added revenue from property taxes, one of the few revenue sources they control. That has set the stage for more tension between taxpayers and municipal officials hard-pressed to pay bills.

"It's pretty hard not to institute some increase in property taxes," said Stephen Altieri, town administrator of Mamaroneck, N.Y., whose town board voted Dec. 17 to raise the town property-tax rate in a main part of the New York City suburb to $14.25 per $1,000 in assessed home value, from $10.20. Mr. Altieri said Mamaroneck is facing a "sort of a perfect storm" because of declining investments, and falling revenue from a 1.3% tax it receives on the value of new mortgages. Along with raising property taxes, the town is also trimming its own spending, he says.

In Evans, N.Y., outside Buffalo, October assessments reflected strong home prices through July 1, 2007, and residents were so irked that they picketed Town Hall, started a Web site, and presented the town clerk with a petition calling for the assessments to be thrown out. The town declined to do that, but it says it has been hearing individual appeals. Parts of the country that felt the real-estate bust early have seen some reductions in property taxes, but some residents in communities that were hit by the downturn later are in shock. "Disbelief" is how 55-year-old John Kane, a financial adviser, describes his reaction to the assessed value of his home in Hampton, N.H., which soared 55% to $850,200 recently, from $549,300 in 2007. His annual taxes jumped 30%, to nearly $14,000. "We see empty houses, for-sale signs," Mr. Kane said. "And they value our houses like this?"

About 100 Hampton residents formed a group called the Coalition for a Fair Assessment, and staged a protest at Hampton Harbor, waving tea bags in a mini re-enactment of the Boston Tea Party. The group urged local homeowners to appeal their bills -- which many are doing. They also got on the Town Council's agenda on Monday to advocate a reassessment that reflects the real-estate slump. In Louisiana's St. Tammany Parish, north of New Orleans, tax assessor Patricia Schwarz Core said 15,000 residents have requested a formal review of their 2008 revaluations, compared with 500 in a typical revaluation. On his Web site, Louisiana state Rep. Kevin Pearson, a Republican, calls the 2008 revaluations in St. Tammany ridiculous and says some residents saw their assessed values jump 150% since the revaluation four years ago. In an interview, he said he is working with other legislators to craft an agenda for the next session that may include limits on increases in tax bills and more oversight of local taxing entities.

In Wyoming, rising property assessments have "stirred up some problems, especially for fixed-income people," said state Rep. Rodney Anderson, a Republican who is chairman of the Wyoming House of Representatives' revenue committee. Last month, Mr. Anderson was part of a joint committee of legislative leaders that endorsed a bill that would exempt part of a home's value from property taxes. "People are just astounded that this year, of all years," the assessed value "of their property has increased," said Georgia Rep. Larry O'Neal, a Republican and chairman of the Ways and Means Committee of the state's House of Representatives. Mr. O'Neal said he supports a bill that would bar communities from raising taxes by increasing assessed values, eliminating what he calls "the back-door tax increase." If it passes, entities would have to go through the public -- and often difficult -- process of raising rates to increase revenue. He expects the bill will be taken up by the legislature this year.

In brutal economy, more sell their burial plots
Burial plot brokers are reporting an unprecedented uptick in the business of reselling grave sites, as money troubles prompt a growing number of people to put their burial plots up for sale, often at a loss. Baron Chu, who owns the burial site resale business Plot Brokers, said he is doing nine or 10 times as much business as usual, a jump he attributes to the economic downturn. Chu said people are only getting about a quarter of what their plots would have fetched six months ago because of the increased supply hitting the burial plot market. He said one client, who had just been evicted from her home, got $500 for a plot worth $6,800.

"It allowed her to move into a hotel for a month where she can live and look for work," he said. "It kept her out of Skid Row." In some cases, the sales are breaking up plots that have remained in families for generations. Southern California native Carol Lieberman said she is trying to sell two adjoining plots at a cemetery in the Mission Hills area where her parents and other family members are buried.

"I need the money," Lieberman said. Cal State Northridge psychology Professor Stan Charnofsky said people who sell their burial plots face a difficult dilemma of weighing their financial needs in life against their desire for a peaceful resting place beside family members after death. "It's a decision to make between the history of your family and the current survival of your family," Charnofsky said. "A lot of people are obviously concluding it's more important to survive."

Private equity losses to be revealed
Private equity firms will in the next few weeks send their investors grim letters telling them just how much – or little – the companies they invested in are worth today, with many executives saying the reported fall in value will be 20-30 per cent. According to regulations that are applied this year for the first time, private equity firms are required to value their companies at what they would be worth in the market today rather than merely disclose the original cost of the investment. By some calculations, the actual losses could far exceed 30 per cent, since many of these companies were bought and taken private at the peak of the financial frenzy. In many deals – particularly ones struck in 2006 and 2007 – private equity firms paid a 25 per cent premium to public market levels to take their targets private.

They then put massive amounts of debt money into their companies, suggesting the drop in value should be more like 60 per cent, some industry experts estimate. With public markets down about 40 per cent, the equity may well be worthless today – save for the fact that the private equity firms have years to try to restructure and restore value to their companies. Once year-end figures are known, many cash strapped investors, themselves reeling from losses, are likely to put more pressure on private equity firms to refrain from doing deals that would require them to write more big cheques. These investors are also expected to dump more of their private equity holdings in the secondary market.

In the past, private equity firms had the luxury of valuing the companies they bought at cost until they sold them years later. But today the buy-out firms have been forced to adopt more rigorous accounting. At the same time though, valuations still appear somewhat subjective, with each firm applying the rules with varying degrees of rigour. "While the end-of-year markdowns are sure to reflect their current thinking and are believed to be conservative, as the effects of the downturn continue, the marks will get worse,” said Alan Pardee, chief operating officer of Merrill Lynch Private Equity Funds Group. "It will take four to six quarters for the [private equity firms] to embrace the new valuations.” In a letter to investors on December 23, Jonathan Nelson, founder of Providence Equity Partners, noted that all the active Providence funds experienced valuation declines in the third quarter, as a result of declining public market values and what the firm referred to as "softening financial performance”.

Providence wrote down values in its latest fund by 19 per cent for the period ending September 30. The fourth quarter is expected to be even more brutal. For example, Providence wrote down its stake in Univision to 50 per cent of cost at the end of the third quarter. But other firms are carrying Univision at higher valuations, according to the financial sponsors groups at the banks. At the same time, Clayton Dubilier & Rice marked down nothing as of the end of September, although its December 18 letter to investors warns that at the end of the year it will mark down its investment in Home Depot Supply "to reflect a more severe decline in revenues and profit as well as more diminished market prospects”. Home Depot Supply has been reeling from the downturn in the housing market last year. Other investors in that deal have already marked down their equity.

Porsche takes majority VW stake
The German sports carmaker Porsche upped its stake last night in Volkswagen, Europe's biggest auto manufacturer, to a majority holding. It now holds 50.8%, up from 42.6%, and wants to raise that to 75% later this year. It will also be forced to make a mandatory takeover offer for the Swedish truckmaker Scania, in which VW holds 68.6%. But Porsche made it plain that it had no intention of adding the manufacture of lorries and buses to its fleet of high-performance luxury cars. It will bid only the legal minimum under Swedish law. Late last year Porsche caused panic on European bourses by disclosing that it had acquired options giving it just under 75% of direct and indirect control of VW. With its shares trading at more than €1,000, VW briefly became the world's most valuable private-sector company. Last night's move triggered a further surge in VW shares today, driving the stock up more than 6% to €271.50 this morning. Porsche used its supply of fixed-price options to buy the extra 8.2% of VW's equity, which would normally be worth €6bn at market prices. It is thought it may have paid about €100 a share.

But analysts doubt whether, in the current market turmoil and economic recession, Porsche will raise its stake this year to the 75% which, under German corporate law, would give it full control. Its room for manoeuvre is squeezed by the controversial 20% blocking minority stake still held by the federal state of Lower Saxony, despite a ruling by Europe's highest court that this is illegal. The European commission plans to take Germany to the European court of justice over its refusal to amend the 1960 "VW law" in line with the ECJ ruling. But, with German carmakers clamouring for government assistance as sales collapse, the political mood is hardening in favour of the VW law. "The call for state involvement has become popular ever since the nationalisation of the banks so the wind has turned against Porsche," one analyst said.

Ilargi: A large part of Merckle's multi-billion losses came from shorting VW.

Merckle Paid 'Terrible Price' of Suicide as Strategy Foundered
In December, German billionaire Adolf Merckle gave a rare interview to defend his failing investment strategy. "We are now lumped together with hedge funds, while in fact it was a growth strategy that allowed us to fund companies that are fundamentally healthy," he told Frankfurter Allgemeine Zeitung. "I have already overcome many of these so-called market crashes, but I could not have anticipated a financial and banking crisis of this size." On Jan. 5, Merckle threw himself under a train near the southern German town of Blaubeuren, where in 2005 he lived in a flat-roofed bungalow with a nameplate outside. The suicide was confirmed by a statement from his family, for whom Merckle left a note.

Merckle, 74, spent December negotiating with banks he owed about 5 billion euros ($6.7 billion) to save the family empire he built over four decades. After taking over his grandfather’s business, he created Phoenix Group, Germany’s largest drug wholesaler, and started generic drug maker Ratiopharm GmbH. The family holding company, VEM Vermögensverwaltung GmbH, lost money in 2008 after betting shares of Volkswagen AG, Europe’s biggest carmaker, would fall. In a two-day period in October, Volkswagen’s stock quadrupled after Porsche SE said it would raise its stake. Merckle also controlled HeidelbergCement AG, Germany’s largest cement company, whose shares fell 70 percent last year as the financial crisis hurt demand for building materials and investors shied away from companies with debt. He had a $9.2 billion fortune, Forbes estimated last year.

"It’s a terrible price to pay," said Randel Carlock, director of the Wendel International Centre for Family Enterprises at French business school Insead near Paris. "Entrepreneurs keep scores of their lives based on business performance. Merckle was confronted with serious financial setbacks that pushed him over the edge." Merckle was born in 1934 in Dresden. After studying law, he took charge of the family pharmaceuticals business in the 1960s. The company then employed 80 people and had sales of 4 million deutsche marks ($2.8 million). Merckle’s businesses today employ more than 70,000. In 1973, he founded Ratiopharm, counting on growing demand for cheaper drugs in Germany. Generic drugs, chemically identical to brand-name counterparts, cost less than originals. Ratiopharm had sales of 1.8 billion euros in 2007.

He expanded through acquisitions, adding drug wholesalers across Germany. Phoenix, Merckle’s pharmaceutical group, had 21.6 billion euros in sales in fiscal 2008. In 2007, Merckle paid 9.5 billion pounds ($14 billion) to add British aggregates supplier Hanson Plc to HeidelbergCement. At the time, it was the biggest takeover in the building- materials industry. In Merckle’s home region of Baden-Wuerttemberg, the family is known for promoting the Christian faith and family friendly policies for workers. Ratiopharm employs a priest and every year distributes a book with Bible verses to staff. Employees are allowed to stay at home for as many as six years to raise children. Merckle used family ties to expand outside pharmaceuticals. His wife, Ruth, is a member of the Schleicher family, which controls Schwenk Beteiligungen, once HeidelbergCement’s biggest investor.

Merckle’s mother was part of the Spohn family, the controlling shareholders of Spohn Cement, which Merkle used to make his offer for HeidelbergCement in 2005. "I find it tragic that somebody would take his life because of a series of bad investments, a life that is far more valuable than money," said Wolfgang Gerke, director of the Frankfurt School of Finance and Management. "These days a lot of investment bankers would have to die if this were the standard."

Merckle leaves four children. Ludwig is a director of the holding company, VEM. Philipp was CEO of Ratiopharm from July 2005 to April 2008, when he moved to the advisory board. Tobias runs a center for juvenile offenders. Merckle also has a daughter, Jutta. Family businesses can struggle more than publicly traded companies in difficult times because they are reluctant to fire people, they have a longer term view and their name is on the building, according to Insead’s Carlock. Now the Merckle family has to negotiate with lenders and appoint a new leader. "The family is mourning their loss at the same time as they have to figure out succession," Carlock said. "The family will have to live with this."

Ilargi: Horse, meet barn.

Banks transfer bridge loan to Merckle
A group of banks has transferred a bridge loan worth 400 million euros ($538.7 million) to Germany's Merckle family after weeks of negotiations, two people familiar with the matter told Reuters. The money transfer has been approved, giving the ailing business conglomerate time to restructure its finances, the two people said on Wednesday. "It's in the bag," said one of the sources, who works for one bank involved.

Family patriarch Adolf Merckle commmited suicide on Monday evening in despair over the huge losses suffered by his business empire during the financial crisis, his family had said. VEM Vermoegensverwaltung, one of the family's main investment vehicles, had said on Dec. 30 it would sign within days an agreement to obtain a bridge loan from banks while they worked out a broader restructuring package. Shares in HeidelbergCement, in which the Merckle family holds about 80 percent, were up 5.3 percent at 32.90 euros. "This could of course provide some relief amongst HeidelbergCement investors after all that back and forth in the past weeks, " one trader said.

Credit Suisse Said to Have Urged Clients to Dump Madoff Funds
Credit Suisse Group AG, whose clients lost almost $1 billion in Bernard Madoff’s alleged swindle, urged customers more than eight years ago to withdraw cash from his firm because the bank couldn’t determine how he made money, said three people familiar with the matter. Oswald Gruebel, who headed the private-banking unit of Switzerland’s No. 2 lender at the time, made the recommendation after meeting Madoff in New York in June 2000, the people said, speaking anonymously because the details were private. Credit Suisse customers proceeded to redeem about $250 million from Madoff-run funds, half the total held by the bank’s clients, the people said. Credit Suisse, based in Zurich, risked alienating clients who were reaping annual returns from Madoff of about 11 percent a year, said two of the people at the meeting, which included executives from Fairfield Greenwich Group, a so-called feeder fund for Madoff. The bank couldn’t force clients to pull out their money.

"Some investors allowed greed to overrule the advice of their advisers," said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP. Funds removed from Madoff’s firm as early as 2000 probably won’t have to return it, Geffner said. Corene Sullivan, a spokeswoman for Credit Suisse, said Credit Suisse didn’t actively sell stakes in funds that fed into Madoff’s firm, and that the funds offered by the marketers weren’t on the bank’s recommended list. Gruebel, 65, and two other Credit Suisse executives at the meeting with Madoff raised concern about his use of a little- known auditor who had just one client, two of the people said. The bank also worried about why Madoff served as the custodian of his clients’ assets, they said. Madoff wouldn’t tell Gruebel how much money he managed, saying only that he had 12 people working with him to manage the strategy, along with six senior traders, the people said. Madoff said he didn’t charge clients fees to manage their money, earning a profit instead on trading commissions that equaled as much as 3 percent of assets.

Gruebel declined to comment. He became CEO of Credit Suisse in 2004 and retired in 2007, after doubling the banks earnings in three years. Madoff, 70, was arrested last month and charged with running a $50 billion Ponzi scheme. He is free on bail. The recommendation eight years ago may have angered some of the lender’s own bankers, who were profiting from rebate fees, known as retrocessions, which were paid to them by groups such as Fairfield that marketed the funds. Sullivan, the Credit Suisse spokeswoman, declined to comment on the rebate fees. "These retrocessions are an open secret in the private banking world, and in most cases they aren’t passed on to clients," said Bernhard Bauhofer, founder of Wollerau, Switzerland-based consulting firm Sparring Partners GmbH. "The Swiss private banks depend a lot on these." European banks have reported at least $12 billion of client exposure to Madoff. Lenders such as Credit Suisse, the U.K.’s HSBC Holdings Plc and Banco Santander SA of Spain say clients invested almost $5 billion with Madoff.

Social Security launches online sign-up for flood of retirement applications
Baby boomers have lived through the assassinations of John F. Kennedy Jr. and Martin Luther King Jr., the race to the moon and the Communist threat, Watergate and a few wars. Along the way, most became comfortable using computers and the Internet. Now, as they ease into their golden years, they'll be part of another change: They'll be the first generation who can apply for their Social Security benefits completely online. Yesterday, the Social Security Administration announced that people who reach retirement age, as early as 62, can go to the federal agency's Web site and fill out a benefits application. The agency said the push to offer online enrollment will help it manage a flood of retirement requests in coming years.

Officials estimate that as many as 10,000 people a day will become eligible for retirement benefits over the next 20 years, as the first post-World War II generation eases into retirement. Social Security Administration officials kicked off a public relations blitz yesterday - called Retire Online - with actress Patty Duke, who is volunteering with the agency to help raise awareness about the online effort. A link to the online retirement application is featured at Mark Hinkle, a spokesman for the agency, which is based in Woodlawn, said the push to move the retirement benefits application - and other applications - to the Web is vital.

The agency's 1,300 field offices across the country won't be able to handle the crush of baby boomers signing up for benefits in the future, so automating the process via the Web will help employees manage the workload, he said. "You're talking about more work coming in the door and less people to do it," said Hinkle, who noted that the agency's operations have dealt with a history of underfunding since the late 1990s. "We just don't have the [employee] levels we need in our local field offices to handle all that work that is expected to come in," Hinkle said. The agency has had a less-robust version of an online application for retirement benefits since 2000; the previous method took about 45 minutes to complete online and required people to verify their signature in writing and provide some paper documentation.

The new process is entirely Web-based and secure and can take 15 minutes to complete. Few applicants will likely need to provide follow-up paperwork, Hinkle said. Majd Alwan, director of the Center for Aging Services Technologies in Washington, said baby boomers have generally had enough experience with computers and the Internet to feel comfortable with applying for retirement benefits online. Baby boomers have likely used the Internet at their jobs, bought products from Web sites, and signed up for other services via the Web, he said. There are even social networking Web sites marketed toward baby boomers and senior citizens, he said. "I think it's a step in the right direction," Alwan said.

Oil Traders Seek Another 10 Supertankers for Storage
Oil traders are seeking as many as 10 supertankers to store crude, potentially taking the amount hoarded at sea to almost five days of European Union demand, according to Frontline Ltd., the largest owner of the vessels. About 25 of the carriers, each able to hold about 2 million barrels of crude, were already hired for storage. There are enquiries for 5 to 10 more, Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today.

Thirty-five supertankers represent about 7 percent of the global fleet of very large crude carriers, according to data from London-based Drewry Shipping Consultants Ltd. Storing oil in tankers may buoy rental rates that fell by a record 78 percent last year as slower economic growth sapped demand for energy. "I’ve never before seen storage demand on this scale," said Didier Labat, a Paris-based shipbroker at Barry Rogliano Salles who has worked in tanker markets for about 20 years.

Commodities prices fell the most in five decades last year, with crude dropping more than $100 from the peak of $147.27 a barrel in July, as simultaneous recessions hit the U.S., Europe and Japan. Oil demand in 2008 fell for the first time since 1983, according to the Paris-based International Energy Agency. Traders are seeking to lease ships for three to nine months, Jensen said. Crude oil for December delivery traded at $61.71 a barrel as of 7:35 a.m. in London, about $14 more than the February contract. Oil companies and traders may be able to profit from storing the oil, assuming shipping, insurance and financing costs are covered.

A supertanker would cost about 90 cents a barrel a month for storage depending upon the length of the rental, according to data last month from shipbroker Galbraith’s Ltd. Iran, the second-largest member of the Organization of Petroleum Exporting Countries, idled as many as 15 of its biggest ships in May to store crude. That contributed to three consecutive months of higher rental rates for ships. The cost of delivering Middle East oil to Asia, the world’s busiest route for supertankers, rose yesterday for the first time since Dec. 5, according to the Baltic Exchange in London. EU oil consumption averaged 14.8 million barrels a day in 2007, according to data from BP Plc.

Infrastructure Boom: Potholes Ahead
Before you start making infrastructure investments on the strength of Obama's stimulus program, consider these potential obstacles to a building boom. The incoming Obama Administration has made clear that investing in infrastructure will be a cornerstone of its program to spur a U.S. economic recovery. But before investors rush into all kinds of infrastructure plays—from single stocks like power-gear giant Emerson Electric (EMR) to mutual funds that specialize in toll roads, bridges, and airports—they need to be aware of some things that could derail, or at least significantly delay, any bonanza from public works projects. Here, BusinessWeek looks at six factors that could keep these projects in a holding pattern—an unpleasant prospect for those who wish to see the rebuilding boom begin immediately.

Hobbled Capital Markets President-elect Barack Obama has said he wants to invest in renewable energy sources to reduce this country's dependence on foreign oil imports and vulnerability to the kinds of price spikes in gasoline seen last summer. But many projects have been funded through project finance, a market that has shrunk dramatically as a result of the financial crisis as banks that were major players in this area such as the Royal Bank of Scotland (RBS) have been taken over by government or have otherwise suffered, says George Bilicic, chairman of Power, Utilities & Infrastructure at Lazard (LAZ), the investment bank. Infrastructure is viewed as a relatively defensive asset class—safer, with more stable cash flows, even if returns aren't as high as leveraged buyout vehicles—and tends to benefit more from a flight to quality during more challenged market environments, says John Veech, managing director of private equity at Neuberger Berman. Veech says he expects to see project finance for infrastructure rebound this year but thinks banks will be less aggressive. They may be willing to put up 60% to 70% of the high-grade debt needed to cover the cost of such projects rather than the 80% to 90% they provided in the past. That will translate into lower prices and bigger equity checks from investors in infrastructure, as well as a rise in collaborative partnering deals. "I believe you're going to see project and infrastructure-type debt [deals] return significantly quicker than you'll see high-yield or LBO-type debt come back," which is consistent with prior economic cycles, he adds.

But the amount of private capital that's either been raised to date or contemplated is quite small relative to the overall investment in North American infrastructure that is needed and, in terms of fundamental impact on the economy, wouldn't make a difference without further government stimulus, says Lazard's Bilicic. Private capital is certainly a tool that stimulus programs at the state and local levels should tap into in order to make some projects more viable, however. For example, a city mayor could get a lot of mileage for filling his budget gap by selling off assets like parking garages, which could then provide resources that the city needs for more basic social services, he says. The government has a good chance of getting a fair price for such assets and securing private capital at a fair price to build an infrastructure asset from scratch, which currently isn't true of other industry sectors across the world, he says. There is, however, some political resistance to local governments going after private capital for infrastructure projects, Lazard learned from the results of a survey it sponsored in mid-2008. Even so, Chicago recently sold its Midway Airport and its street-metering system to private interests, he adds.

A Slow Permitting Process If expansion of electrical transmission capacity is to be a key part of the stimulus effort, the authorities will have to find a way to speed up the process by which permits are approved for new power plants, says Bilicic. Any acceleration of those procedures, which have been known to take as long as five to 10 years, would be sure to raise concerns among environmental groups, property owners, and cities and towns about whether it's a good idea to build transmission lines in the area at issue, he says. Building new water treatment plants, for which there's a great need, would face similar challenges, he says. In lieu of accelerating the process, state and local governments might have to choose projects that have been delayed but already have their permits in place, says Bilicic. The 2005 energy bill granted authority to the federal government to overturn local permitting decisions concerning new electric transmission lines and liquefied natural gas import terminals, but the federal government has yet to use that authority, says Veech at Neuberger Berman. A more likely scenario is that energy infrastructure will continue to be built, where permitting allows, in regions like Texas and the Midwest where land is more plentiful. Restrictions on permitting are likely to create more pressure to invest in the build-out of transmission wires in areas such as the Northeast, where it's more difficult to build new plants, he says. It's also easier to add transmission lines along existing rights of way, he adds.

Renewable Energy Project Subsidies Subsidies in the form of production tax credits are the main impediment to renewable energy sources such as solar and wind being able to contribute significantly to the stimulus program. Although the subsidies were recently extended for at least another year, many alternative energy producers aren't yet showing profits and, instead of using those credits themselves, have had to rely on selling them to industries that needed the credits to offset big profits. The primary consumers of those credits had been financial-service firms that have much less need for them since taking enormous losses related to risky assets held on their balance sheets. Hence, the market for those tax credits has largely dried up. Demand for those tax credits could expand to a wider base of energy consumers from industrial sectors that are still earning large profits and need to reduce their tax expenses. Finding a new group of buyers to replace the financial firms will first require an education process, and that might take up to a couple years, says Veech at Neuberger Berman. The other solution would be to move away from tax credits to subsidies such as the feed-in tariff that has become dominant in most industrialized countries. That subsidy requires rate payers to pay a premium for their power usage in order to make renewable energy sources more economically viable. That would also take some time to accomplish. A third possibility is direct government subsidies in the form of loans or construction company guarantees, or the federal government buying subordinated debt to take the place of tax equity in the capital structure of new solar and wind projects, says Veech. Fortunately, permitting hasn't been a hindrance for renewable energy projects. Most wind and solar projects are stalled because of capital constraints rather than permitting, according to Veech.

An Outdated U.S. Transportation System When it comes to investing in the nationwide transportation system, Robert Puentes, senior fellow and director of the Metropolitan Infrastructure Initiative at the Brookings Institution in Washington, sees potential for tension between the need to get money out the door quickly and the desire to reform the system to meet the challenges of the modern era. With the transportation law coming up for reauthorization in August 2009 and in view of talk about bills to address climate change and a shift toward cleaner fuels, "there's a tremendous opportunity to make sure these legislative priorities are all consistent," he says. A report released by the National Surface Transportation Policy & Revenue Study Commission in early 2008 weighed input from transportation industry executives, environmental and social equity constituents, and public advocates, and called for a thorough overhaul of the system before investing in new projects, says Puentes. Among other things, the commission proposed a shift from a cumbersome, overly complex program consisting of 108 individual priorities to a more manageable program comprised of 12 pieces focused on practical outcomes such as traffic congestion relief, metropolitan mobility, and safety. But implementing such reforms won't be so easy. The federal government could decide it wants to spend money on congestion relief, but states aren't set up to do that right now because they're not trained to think in terms of outcomes or performance measures, says Puentes.

"That would require states to think differently about their own transportation programs and that would take some time," he says. Some states, however, including Massachusetts and New Jersey, have histories of giving priority to ensuring that existing systems work properly over building new systems, he adds. Continuing to funnel money into the old system would also run up against the current transportation debate, which largely centers on breaking away from a carbon-based economy, says Kris Nielsen, chairman and president of Pegasus Global Holdings, a Cle Elum (Wash.) firm that consults on infrastructure projects. "Does that mean we should build more transit systems or long-haul railroads or go to other modes that are less petroleum-intensive, or do we invest in continuing what historically we have always done?" he says. That's a question Nielsen is currently addressing for a handful of engineering and construction contractors. How maintenance and repairs of highways across the U.S. are paid for gets to the core of the carbon fuels issue. The highway trust fund, which covers those costs, is funded almost entirely by the gasoline tax, which has been dwindling for the past few years as Americans have been driving less and driving more fuel-efficient vehicles, says Puentes at Brookings. In September 2008, $8 billion had to be shifted from the general fund to cover a shortfall in the highway trust fund, he says. What may be the most viable alternative to using gas taxes to fund the highway trust fund is sure to be a hot political topic this year, predicts Nielsen.

A Tricky Muni-Bond Market Issuance of municipal bonds, which traditionally comprise a significant portion of state and local government funding of infrastructure projects, has fallen sharply, particularly for variable-rate bonds that are a preferred source of short-term funding. While the volume of five-year variable-rate bond issuance more than doubled for all of 2008 from 2007, issuance for December fell 35% from the prior year, says George Friedlander, a muni-bond analyst at Citigroup (C). On the fixed-rate side, stronger credit-quality bonds rallied in the second half of December, widening the discount at which weaker-quality issues are trading. The primary draw of the variable-rate bonds is how low borrowing costs are on the short end of the yield curve. The problem is that many state and local governments don't have access to that part of the market because their credit ratings aren't high enough for their debt to be eligible to be held by money market funds and they require a liquidity backstop from banks, which are scarce and very costly, he says. A bigger challenge for state and local governments than financing infrastructure, however, is getting the funding needed to allow basic government services to continue to be provided, he says. "It would be counterproductive for the states and their subdivisions to be forced to cut spending too much—lay off workers and provide less services," says Friedlander. Unless the states are given support to meet their budget needs, their access to the municipal bond market is sure to erode more quickly as a result of worsening credit problems, he says.

Limited Access for Smaller Contractors There's no shortage of road, bridge, and dam construction projects on the shelf ready to go once federal funds starts flowing. The bigger projects that are typically awarded to the big contracting outfits will probably swallow up most of this money, but more jobs would be created by financing small projects that are usually done by smaller contractors that need to finance every project, says Nielsen at Pegasus. Since advance payments are prohibited by U.S. bidding statutes and since most of these contractors live job to job, they may be passed over by local governments awarding contracts that need to be assured a contractor has the financial wherewithal to complete a project. "Without some change, particularly in public bidding laws, I fear there won't be as quick and as responsive a stimulus as is being forecasted," he says. "I'm not saying at all that pubic bidding laws should be relaxed, but that is something that has to be addressed or considered" in order for a bigger group of cash-strapped contractors to be able to compete for parts of the infrastructure pie, he says.

In the Globalized Crisis, Everyone Shares the Pain
The upheaval in the financial markets has sent shock waves around the globe. Economies in North America, Europe and Asia are closely connected -- for better or for worse. But now the threat of a new protectionism is taking shape. Shortly before trading ended at noon on New Year's Eve, the brokers on Wall Street paused for a moment to gather on the floor of the New York Stock Exchange and sing a song together -- not unlike sailors singing together on a sinking ship. "Wait Till the Sun Shines, Nellie," they sang fervently, a romantic ditty about waiting for the clouds to pass and the sun which will inevitably reappear. It has been the anthem of New York traders for the past 70 years or so, and singing it together on the last day of the year has become a tradition and means of mutual encouragement. Since the days of the Great Depression, its lyrics have never been as appropriate as they are today. The Dow Jones industrial average has lost almost 34 percent of its value within the last 12 months. Within that time period, investors have lost more than $6 trillion (€4.4 trillion). "It was a horrible year," says trader Roger Volz. "No one was prepared for the pace of destruction." And yet the New York Stock Exchange got off relatively lightly.

Germany's DAX 30 index declined by more than 40 percent, Tokyo's Nikkei 225 index fell 42 percent, and share prices in Shanghai plunged by 65 percent. Investors in Moscow saw the value of their shares decline by more than 70 percent. The Moscow stock exchange even had to be temporarily closed to prevent it from collapsing altogether. No trading center has escaped the turbulence, and no one has been untouched by the financial crisis. It is spreading -- from bank to bank, from company to company, from continent to continent -- and fast growing into an event of epochal importance: the first global economic crisis since the Great Depression. Never before in postwar history has there been an economic slump that has dragged down so many economies at the same time, from the major players of the G-7 to economic midgets, from high-tech economies to developing countries. And all of this at an incomprehensible pace. A mere four months ago, it was still inconceivable that scores of banks could be in such dire straits that partial nationalization would be their only salvation.

It was unimaginable that the US Federal Reserve could be forced to reduce its key interest rate practically to zero. And who would have believed that a civilized country like Iceland could become insolvent -- and that a staid financial institution like Germany's Bayerische Landesbank would have to write off hundreds of millions as a result. But now everything has changed, and now everything is possible, ever since the US government refused to bail out the investment bank Lehman Brothers on Sept. 15, 2008. Since then, the status quo -- the system of cheap money, fast credit and the reckless establishment of debt -- has been steadily unraveling. In an op-ed for Newsweek, Yale professor Jeffrey Garten, wrote that the root of the global problem lies in "the fact that banks lent way too much money to too many people and companies that were not worthy." Since that fateful Sept. 15, the flow of capital has run dry, and financial institutions have fallen into something resembling a stupor. For years, the financial sector became more and more disconnected from the real economy, developing a life of its own in its quest for higher and higher returns. This led to the development of an economy of borrowers based on a foundation of debt.

Nevertheless, it all seemed safe enough, because even risks created opportunities to make money. The system made it possible for people to buy houses and companies, for giant corporate empires to be developed and entire economies paid for. America is a case in point. The country lived beyond its means for decades. Asia granted the United States almost unlimited credit, and the Americans bought foreign goods in return. It was the deal that fueled the world economy -- Asia produces, America consumes -- and the banks provided the necessary capital. But it was clear that this kind of imbalance could not last forever. Now US consumers are being forced to re-learn an old virtue: frugality. For now at least, Americans are no longer providing the necessary demand for goods -- and the entire world suffers as a result. At the same time, the inflated financial industry must shrink and reduce its risks; security suddenly takes precedence over profitability. Money has become a scarce commodity once again, and this can jeopardize the very existence of companies that depend on new loans. These developments have rolled across the global economy like shock waves.

They affect the carmakers in Detroit, where employees are worried about their jobs. They have spread to the city of Guangzhou in southern China, where textile factories are laying off workers by the thousands. And they are hitting Russia's nouveau-riche oligarchs, whose vast empires are in fact built on debt. They even impinge on traditional companies like German chemical giant BASF, whose customers are now buying much smaller quantities of plastic parts and insulation materials. No one can escape the maelstrom. It was an illusion to believe that the world economy was broadened by the rise of China, India and Eastern Europe, and that the risks were more evenly distributed as a result. And the hope that the emerging economies could disengage themselves from the economic slump and grow on their own proved to be deceptive. The world has become multipolar, just as the crisis itself is multipolar. Nowadays the economies in North America, Europe and Asia are tightly interwoven, and labor is distributed around the world. Sporting goods maker Adidas, for example, develops its shoes in Portland, among other places, its designers work in New York and Tokyo, and its marketing offices are in Amsterdam. The company's products are mostly made in China -- where else? The People's Republic, responsible for 11.8 percent of global exports, has already become the world's second-largest exporter after the European Union, which accounts for 16.8 percent. The risk of infection is even greater on the financial markets.

If homeowners in Miami default on their mortgages, this can end up bankrupting savers in Munich, whose bank may have bought and sold the toxic debt after it was prettily repackaged as securities. More than ever before, the world economy is proving to share a common fate. Because the individual economies are linked -- for better or for worse -- they tend to drag each other down. But can they also rise up again together? Or is the new motto "every man for himself," with each country developing its own rescue plan, even at the expense of other countries? For economists, this protectionist strategy poses the greatest danger to the world economy. They fear that individual countries will use tariffs and subsidies to protect their own markets, and that the selfish pursuit of national interests will only make the crisis worse. The United States, which has been in a recession for the past year, presumably faces the most difficult path ahead. The optimistic scenarios see the downturn continuing until June. But New York economist Nouriel Roubini takes a significantly more pessimistic view. Even if there is a recovery in 2010 and 2011, the professor told Fortune magazine, the situation will still "feel like a recession." The crisis affects US citizens in several ways: as homeowners whose properties are worth less and less from one month to the next, as investors whose retirement nest eggs are vanishing, and as workers anxious about keeping their jobs. The unemployment rate has grown by half since April 2007. Without an effective social welfare system, this means a descent into poverty for many. When things are going badly in the United States, the effects are felt almost immediately by its neighbors to the south.

Latin America is suffering greatly from weakening demand for its commodities. From Chilean copper to Argentinean soybeans to Brazilian sugarcane, demand has plunged worldwide and prices have declined across the board. The International Monetary Fund expects growth of only 2.5 percent for Latin America this year, which is almost the equivalent of stagnation. Shortly before Christmas, Brazilian President Luiz Inacio Lula da Silva urged his citizens to consume, and even reduced taxes on new cars as an incentive. But people remained cautious. Italian carmaker Fiat, which has a plant in Brazil, even had to rent space at a decommissioned airport to store its many unsellable cars. Venezuela has been especially hard-hit by the crisis. The government there derives more than half of its budget from oil revenues. The government of President Hugo Chavez based its budget calculations on an oil price of $60 (€44) per barrel, but now even that price has declined by a third. Foreign currency reserves are shrinking and could reach a "critical level" in six to eight months, warns José Guerra, a former chief economist with the Venezuelan central bank. What economists refer to as the "resource curse" or "paradox of plenty" is proving itself to be true once again. The thesis holds that countries with large natural resources are especially vulnerable to downturns, because they rely on their resources while neglecting to develop other sectors.

Former Russian prime minister Yegor Gaidar has been warning of this danger for a long time. In a speech to 800 top executives and politicians two years ago, Gaidar sharply criticized the domestic economy's dependence on oil and gas. No one took him seriously at the time, because no one wanted to spoil the party. And nowhere was the party quite as intoxicating as in Moscow. Imports of French cognac grew by 650 percent within a decade, and Moscow was expected to become a prominent financial center, a "Manhattan on the Moskva." As recently as last summer, President Dmitry Medvedev praised his country as an "island of stability." And only a few months ago, Russia even overtook Germany as Europe's largest automotive market. Today this seems like news from another era. The Russian ministry of industry expects auto sales to decline by more than a third this year. Japanese automaker Suzuki has put its plans to build a factory in St. Petersburg on hold. The energy sector has been hardest hit. Gazprom, Russia's massive oil and gas conglomerate, has shrunk to normal proportions. Only recently, management was bragging that Gazprom, worth $1 trillion (€764 billion), would soon become the world's most expensive company.

Today Gazprom is worth a mere $86 billion ($64 billion). At stake is the success of "Putinomics," the economic policies of former President Vladimir Putin, who emphasized the importance of major companies as "national champions." The national budget is expected to slide into deficit territory this year, for the first time in 10 years. Unemployment threatens to climb from 6 to 10 percent, with 400,000 people having lost their jobs in November alone. The prosperity of the new middle class, which has just become accustomed to vacationing in places like Thailand and Egypt, is in jeopardy. According to the Russian public opinion research institute Levada Center, the crisis has already affected one in four Russians in some way -- in the form of job losses, reduced working hours or pay cuts. In light of such figures, former politician Gaidar hopes "the current crisis will bring the government, the elite and citizens to reason." But whether investors will return in the foreseeable future is another story. They are pulling their funds out of Russia and Brazil, whose currencies are now under enormous devaluation pressure. The Brazilian real has lost almost half of its value against the dollar since August, and the Russian ruble is at its lowest point in five years. On the one hand, the devaluation of their currencies places a tremendous burden on newly industrialized countries. The less their own currencies are worth, the more crushing are the debts they have incurred in dollars or euros.

On the other hand, a weak currency makes their own products more competitive, as they become less expensive on the world market. China could also deliberately increase its exports by devaluing the yuan, especially now that the signs of crisis can no longer be overlooked. Exports in November declined by 2.2 percent over the previous year, and workers whose factories are being closed are increasingly taking to the streets. Commerce Minister Chen Deming is still refraining from using the exchange rate instrument, noting that its effectiveness is "limited," given the decline in overseas demand. The Chinese are putting their trust in conventional tools, for the time being. Beijing has indicated that it plans to spend about $600 billion (€444 billion), or about 14 percent of GDP, to stimulate the domestic economy. Other countries can ill afford economic stimulus programs, and yet they see no other alternative. "In this crisis, doing too little poses a greater threat than doing too much," Larry Summers, a former treasury secretary and current economic advisor to President-elect Barack Obama, wrote in an editorial for The Washington Post. Obama has promised what will amount to the biggest US government spending program since Franklin D. Roosevelt's New Deal. More than 70 years later, history is about to be made once again, but this time with the "American Recovery and Reinvestment Plan" being developed by Obama's transition team. The next administration hopes to create at least 3 million jobs with the program, many of them in important cutting-edge industries like environmental technology.

The European Union's €200 billion ($270 billion) program seems almost tiny by comparison. EU Commission President Jose Manuel Barroso hopes to "restore citizens' confidence and counter fears of a long and deep recession," as he puts it. He expects member states to take action quickly and stresses that their individual measures "need to be coordinated." But in the end the member states will probably prefer to strike out on their own. All loyalty to Europe aside, each of the 27 heads of state and government wants to save his own country's banks, companies and jobs -- while securing his or her re-election. French President Nicolas Sarkozy is a perfect example. Sarkozy promised billions to the ailing French automobile industry, and now additional loans and loan guarantees have been promised. The goal is to enable manufacturers to win back market share. But these kinds of measures aimed at protecting the national economy are hardly compatible with the rules of the single European market any more. The protectionist approach is also expensive. The Irish will likely take out loans this year worth 7 percent of their GDP, while Spain is expected to borrow 5 percent of GDP and Great Britain 8 or 9 percent. Nobody seems to care about the fact that, under the EU's Stability and Growth Pact, a member state's annual budget deficit may not exceed 3 percent of GDP. Some Brussels economists are sounding a note of caution.

According to Klaus Gretschmann, director general for competitiveness in the Council of the European Union, the measures may be "well-intentioned" but they "aren't always well-executed." Gretschmann considers many of the national bailout packages to be poorly conceived, especially those for the financial sector. Without new business models, says Gretschmann, there is a risk that the banks will use the fresh capital to act just as negligently as in the past. In the end, everyone in Europe is pursuing his own interests. Many find it difficult "to respect the rules," complains European Commissioner for Competition Neelie Kroes. What is missing is a global strategy against a global recession -- and a body with the authority to coordinate a joint approach. Instead, economies are wasting their energies in national contests for the cheapest currency, the lowest interest rates, the most generous financial aid packages. It's a race that nobody can win. Although the process of globalization is not being reversed, it is slowed down when each country attempts to protect its own market and pass on the negative consequences of the crisis to trading partners, who then follow suit. Economists refer to this as a beggar-my-neighbor policy. "This could trigger a chain reaction," warned Simon Evenett of the University of St. Gallen, Switzerland, in a recent statement. An economist specializing in trade, Evenett already sees signs of such a development. For this reason, Evenett warns, economic leaders should strongly combat protectionist tendencies. He believes there is a lot at stake: "This burgeoning protectionism is threatening a quarter of a century of progress in world trade."

Marbella's Crooked Billionaire Spent Bribes on Stud Farm Guarded by Tiger
As an urban planning adviser in the sun- drenched Spanish resort town of Marbella, Juan Antonio Roca had after- tax income of less than 150,000 euros a year. When he was arrested for corruption in March 2006, police seized assets worth 2.4 billion euros ($3.4 billion), including a century-old palace in Madrid, a country estate equipped with a helipad overlooking the Rock of Gibraltar and a stud farm guarded by a tiger. According to a 451-page July 2007 indictment by Marbella prosecutor Miguel Angel Torres, Roca also owned a ranch to raise fighting bulls, a private jet, a helicopter and a painting by Spanish master Joan Miro. Known in Marbella as "The Boss," Roca has become Spain’s national symbol of municipal corruption amid the boom and bust of the country’s real estate industry.

"Marbella is a special case, but the conditions which allowed it to occur exist across the country," says Jesus Sanchez-Lambas, a law professor and general secretary of Madrid’s Ortega y Gasset University Institute. "Corruption in town planning is institutionalized." Roca, 55, who was convicted of bribing a judge in August by the High Court of Andalusia in Granada, is currently standing trial at Spain’s National Court in Madrid where, along with five other defendants, he’s charged with embezzling 36 million euros of public funds. Prosecutors are preparing to go to trial in connection with the 2007 indictment, dubbed Operation Malaya, against Roca and 85 others in Marbella, Madrid, Barcelona and San Sebastian. The charges include embezzlement, money laundering, dereliction of duty and bribery. Roca’s lawyer, Jose Anibal Alvarez, said in December that none of the evidence proves that Roca took bribes, embezzled from city hall or laundered money. Spanish officials are making him a scapegoat for the corruption that’s widespread in city halls across Spain, he says. In December, Roca was in prison in Alhaurin de la Torre, a village outside Marbella.

Graft and bribery thrived along the Costa del Sol as the country rode a 15-year real estate boom, fueled by a plunge in interest rates, rising incomes and strong demand for second homes by sun-starved Northern Europeans. In 2006 -- the peak of Spain’s real estate surge -- municipalities issued 911,000 building permits, more than the U.K. and Germany combined. "They are swallowing up the coastline and the countryside," Sanchez-Lambas says. "This is the legacy we will leave for our children." Many of these homes have come onto the market in the past year after the global credit crunch curbed the supply of loans. R.R. de Acuna & Asociados, a Madrid-based real estate research firm, estimates that there are more than 1.6 million unsold homes in Spain, while annual demand for housing fell to 220,000 units in 2008 from a peak of 590,000 in 2004.

Spain’s economy contracted for the first time in 15 years in the third quarter of 2008, after growing 3.9 percent in 2006. This year, it faces its worst recession since 1959, according to Dominic Bryant, an economist at BNP Paribas SA in London. Unemployment soared to 12.8 percent in October from 8.5 percent a year earlier. Spanish bank loans in arrears as a proportion of total lending climbed in October to 2.9 percent, or 54.2 billion euros from 0.9 percent a year earlier, according to the Bank of Spain. "We are seeing an intense increase in the ratio of bad loans," Bank of Spain Governor Miguel Angel Fernandez Ordonez said on Oct. 30. "This has been particularly notable in the construction and real estate sectors."

Spain sowed the seeds of its real estate boom when it agreed to swap its currency for the euro. Before joining Europe’s monetary union in 1999, Spain had to impose economic discipline and bring down its inflation rate to European Union standards. After it did, the cost of home loans tumbled as the central bank slashed its benchmark rate to less than 3 percent at the end of 1998 from 13 percent in 1993. Household incomes rose as Spanish women began to enter the workforce, and foreign investment jumped more than 10-fold at its peak in 2007 as the euro brought financial stability. The newfound wealth and borrowing power created a potential bonanza for Spain’s 8,111 town halls, which have limited powers to raise taxes yet have to pay for local police, garbage collection and sports facilities. Spanish law does give the municipalities power to grant all permits for new homes, shopping centers and factories. "All they’ve got is land," says Lorenzo Fernandez Fau, a former mayor of El Escorial, near Madrid. "So they’ve sold it."

Even many legal projects involve the mayor’s cutting a deal with developers, who may agree to build fire stations or put up street lamps in addition to paying for building permits. Some officials also demand bribes. "Local administrators have the power to decide who gets rich and who stays poor," says Victor Torre de Silva, a professor of law at Madrid’s Instituto de Empresa business school. "There’s a great temptation to share in the wealth that you can create." That temptation may have ensnared Roca, who began his career as anything but wealthy. A native of Cartagena in the region of Murcia, which neighbors Andalusia, Roca trained as a mining engineer and then set up a property development company called Comarsa that was declared bankrupt in 1990. The following year, he moved to Marbella. At the time, the town was known for its celebrity residents, including King Fahd of Saudi Arabia, who built a palace modeled after the White House in Washington, except that the bathroom fittings were made of gold, according to Gorka Zamarreno, communications director of real estate company Aifos SA, who attended a party there.

After a century-old extradition treaty with the U.K. expired in 1978, Marbella also became a haven for British criminals. Charlie Wilson, who was convicted for participating in the Great Train Robbery, moved to Marbella in 1984 after serving 10 years of a 30- year prison sentence. Wilson, 57, was shot to death at his villa in 1990. Until shortly before Roca’s arrival, Marbella had also been known for the drug dealers and prostitutes who plied their trades on its streets. Mayor Jesus Gil changed all that. Elected on a platform of cleaning up crime, Gil wanted to attract more wealth to the town whose population was then less than half the current 200,000. "All Gil cared about was capturing investment to create jobs and wealth and boost the economy in Marbella," says Antonio Romero, a former lawmaker in the regional parliament of Andalusia, which includes Marbella. "He didn’t ask or care where the money came from." Romero says Gil visited Russia in a bid to attract new capital from the gangsters emerging from the ruins of the Soviet Union.

Gil hired Roca, a stocky man with dark, greased-back hair splashed with white around the temples, as the head of a property management company owned by the city, Planeamiento 2000, in 1992. The two men then used the company to siphon off 36 million euros from city coffers, according to a press note issued by the National Court on behalf of the prosecutors. Roca took bribes for granting building permits and adjudicating public works contracts at inflated prices to bidders who would pay him under the table, according to Torres, the prosecuting magistrate in Marbella. In the July 2007 indictment, Torres says Roca accepted 230,000 euros from a car-leasing company in exchange for awarding it a contract to provide vehicles to city officials. Roca allowed the leasing company to inflate the rates it charged the town, the indictment says. Roca also sold at a cheap price to his holding companies undeveloped land that belonged to the town, prosecutors say. He then reclassified it as suitable for development and resold it at a huge markup to another developer. For example, Roca bought one parcel of land from the city in 2001 for 132,222 euros, according to Torres’s July 2007 indictment. After reclassification, he sold the land for 1.8 million euros, the indictment says.

As Roca built his wealth, Gil became embroiled in a graft scandal and resigned. (Gil died of a brain hemorrhage in 2004 at the age of 71.) Marbella’s city council elected Julian Munoz to replace Gil. Shortly thereafter, Munoz fired Roca, who then rallied support from the other city council members to oust Munoz. In 2003, the council elected a new mayor who had Roca’s backing. Marisol Yague, a 54-year-old mother of three and professional folk singer, had been on the city council since 1991. Torres described her in a March 31, 2006, decree as "just a puppet" in Roca’s hands. She was accused of bribery and fraud in the July 2007 indictment. Her lawyer, Pablo Luna, didn’t return phone calls seeking comment. He said in 2006 that she was innocent.

As demand for new construction grew, so did the power of municipal firms like Roca’s across Spain. In many places, it could take as much as four years before a developer had all the permits required to begin work on a site, Instituto de Empresa’s Torre says. Builders such as Aifos would start work on projects under the assumption that they would get all of the necessary permits before it came time to occupy the building. Once the builder had spent heavily on the construction, Roca would demand a bribe in return for the permits, prosecutors say. "Roca’s biggest talent was that he knew how to wait," says Francisco Benitez, former director of institutional relations for Aifos. "He’d wait until a developer had invested a huge amount of money in a half-finished project and then swoop in." Benitez’s former employer paid 5 million euros of bribes to Roca over two years in a bid to get him to license two hotel developments in Marbella and Puerto Banus, according to the indictment. In one case, Aifos exceeded the permitted size for its Gran Hotel Guadalpin Banus by 14,000 square feet (1,300 square meters), according to the indictment, giving Roca the ammunition to shut the project down.

Aifos also paid a bribe of 4.4 million euros as part of a deal to purchase a waste treatment facility from city hall adjacent to land holdings in the Guadaiza area of Marbella, the indictment says. In the end, though, the facility was already pledged against various bank loans and city hall didn’t have the authority to complete the sale, according to the indictment. Aifos lost the 4.4 million euros, the indictment says. In January 2004, Aifos’s sales director, Kiko Garcia, took an envelope stuffed with 180,000 euros in cash to a gas station on the outskirts of Marbella and handed it over to a short, balding man he knew only as Salvador, according to Garcia’s sworn testimony to prosecutors on July 26, 2006. Salvador Gardoqui, one of Roca’s associates, has been charged with money laundering in the case. Gardoqui’s former lawyer, Teodoro Garcia, said his former client had pleaded innocent. Gardoqui’s current lawyer could not be reached.

Garcia and Aifos Chairman Jesus Ruiz Casado, who have both been indicted for bribery, declined to comment. Benitez, who hasn’t been charged with any wrongdoing, was laid off by Aifos in October as the company battled to stave off bankruptcy after banks cut their lines of credit to the firm following the bribery scandal. As Roca amassed bribes, he began to acquire the trappings of wealth for himself and his wife, Maria Rosa Jimeno Jimenez, and their two children and various friends. Roca’s wife was charged with money laundering. According to prosecutor Torres, Roca said his fortune was worth about 120 million euros and included enormous estates in Cadiz, Ibiza, Madrid, Majorca and Seville as well as various palaces in the capital that he intended to restore and sell as hotels. He also owned an art collection worth tens of millions of euros, including the Miro and works by Pablo Picasso and Salvador Dali.

Roca’s lavish lifestyle drew the attention of investigators including Torres and Oscar Perez, who took over the case from Torres in November 2007. They began probing Roca’s business connections, particularly his possible links to money launderers, according to the 2007 indictment. In one deal, Roca took a 540,000 euro payment from the Mafia based in Calabria, Italy, while he also did "accounting work" for a drug trafficker identified as Davila, the indictment says. While the investigators closed in, Roca faced additional threats. His Marbella office was broken into in 2005. Roca received an anonymous letter that included a photo collage of his family with all of their heads chopped off, according to testimony from Roca’s bodyguard, Jaime Hachuel. By 2005, rumors were circulating in Marbella that the Russian mafia was menacing the city planning administrator, Hachuel told investigators. "When the mafia saw the net closing in on Roca, their closest collaborator, the threats began," says Romero, the former lawmaker. "If Roca were to sing, that would spell big trouble for them."

Hachuel, 43, a former member of the Spanish royal guard, spent 32,000 euros on eight encrypted mobile phones to prevent Roca’s calls to his colleagues from being tapped. The security guard was trying to procure equipment to detect bugging devices when police taped a Jan. 26, 2006, meeting between Roca and Marbella businessman Ismael Perez Pena in Madrid’s Villa Magna hotel. At the meeting, Roca promised to boost the fees the town paid for the cars it leased from Pena’s company. Roca also signed over to Pena two beachside apartments owned by the city as a repayment for money owed to his company by city hall. In return, Roca wanted a favor -- help repaying another debt to an unnamed party, according to a police transcript of the meeting. "You remember I told you I had to pay 3 million," Roca said. "What can you give me of that?" "In Box A, nothing; In Box B, as much as you want," Pena told him, using the local slang for legal and illegal payments. "I can give you 1.8 million in Box B tomorrow."

Four days later, police stopped a black Audi A6 sedan leaving the Pena office in Getafe, near Madrid, and found 2 million euros in cash inside two cardboard files wrapped in packing tape. The men inside the car were all Roca associates. Pena was charged with bribery and fraud. Neither Pena nor his lawyer could be reached for comment. On March 29, 2006, police arrested Roca on charges of embezzlement, money laundering and bribery. That trial will begin sometime in 2009. A verdict in his separate trial for embezzling 36 million euros from the city is expected in early 2009. The Roca years will have a long-term effect on the economy of Marbella, says Angeles Munoz, who was elected mayor in 2007. Even in Marbella’s waterfront Puerto Banus area, where tourists stop to have their pictures taken in front of Maseratis or megayachts, real estate prices are down 30 percent from their peaks in late 2006. In the race to build without permits, developers wrecked the coastline and city officials neglected infrastructure such as roads, Munoz, 48, says. "People have lived very, very well here," she says. "Imagine what it could have been like if they had invested as they should have."


Anonymous said...

Not to mention Norway, with less than 5 million inhabitants, lost more than 8000 jobs in december 2008. The next Iceland?

Anonymous said...

Brilliant double-entendre in the title, Ilargi. Obama Bonds! Infinite cost, never a yield. "View to a Kill(ing)." "Never say never" (to Hank Paulson). Etc. A new parlor game.

John Hemingway said...

You have to admire the spirit of those kids from Hanover:-)

Ilargi said...

"Anonymous said...
Not to mention Norway, with less than 5 million inhabitants, lost more than 8000 jobs in december 2008. The next Iceland?"

Could be. But then, if those are the criteria, there will be many next Icelands. Think ten times that, in terms relative to populations.

westexas said...

My 2¢ worth has been that a long term and generally accelerating decline in net oil exports has acted as the trigger for, and as an accelerant to, the credit meltdown (the debt buildup was a like a dry forest full of dead underbrush--it was an inevitable fire just waiting for the trigger). It's as if instead of an aerial tanker dropping fire retardant on a raging forest fire, they are dropping napalm.

In any case, with failed government bond auctions around the world, aren't we headed at warp speed toward the point at which the Feds (Federal Reserve + Federal Government) have to either monetize US debt at a breathtaking rate, or massively cut government spending?

Anonymous said...

The writing is on the wall. If the US wants to have oil from the tar sands it will have to pay more than $80/barrel or the tar sands production will shut down and wait until the price goes up.

Russia and the Ukraine has started the ball rolling by setting the example of what is to come. Watch for what the other exporting nations of gas and oil will be doing.

They are not willing to have their economy and their people suffer because of low gas prices. The EU and others are being told to pay a higher price for gas and that their population do not want to have a lower standard of living. It is up to the EU to lower their standard of living.
I’m sure the leaders are getting the message and new clauses will be inserted into the contracts.

Ukraine says Russia halts all gas to Europe

Russia had already halted all supplies to Ukraine for its own use, saying its western neighbor was not paying enough for the fuel.

For Putin, the escalation comes at a perilous time, as slumping energy prices threaten the fiscal health and political stability that have underpinned his popularity at home. Some analysts of Russian politics had expected Putin to become more conciliatory as energy prices fell. Instead, he has taken a hard line in seeking to raise gas prices in Ukraine and perhaps create panic-buying on the international market, where prices of natural gas and oil, Russia's leading exports, have fallen sharply in recent months.

With temperatures plunging, European leaders expressed mounting concern. Some countries announced rationing for industrial customers to reserve enough heating for residential buildings.

The effects are rippling through the economy. The ruble is being devalued, Russian companies are facing bankruptcy and the government's huge budget surplus will turn into a deficit next year if prices do not rebound, analysts say.

Among the pipeline routes that were affected the most was the so-called Western Balkan route, affecting supplies to Romania, Bulgaria, Macedonia, Greece and Turkey, said Ferran Tarradellas, a spokesman for the European Union energy commissioner, Andris Piebalgs.

Substantial cuts could also affect Slovakia, Hungary, Slovenia, Italy and Austria, Tarradellas said.

Tens of thousands living on the shores of the Black Sea were the first to feel the bitter impact of Russia's dispute with Ukraine over gas payments on the coldest day of the year. With even icier conditions forecast for this week, the gas flow from Russia dried up during the day to nine countries, leading Bulgaria and Slovakia to consider declaring states of emergency and others to warn that just a few days' reserves remained.

In Britain there were increasing concerns that families could be forced to pay more than expected for their gas and electricity.

Italy reported a 90 per cent cut in its Russian gas, France a reduction of 70per cent and two importers in Germany said that they had serious shortfalls.

In Bulgaria, which relies almost completely on Russia for gas and where households in the cities of Varna and Dobrich are already without gas, the Prime Minister said that there was only one week's supply left in reserves and appealed for industry to cut usage.

Turkey was seeking gas from Iran and Croatia introduced rations for industrial users to maintain domestic supplies. Austria, which lost 90 per cent of its normal supplies, said that it had three months' reserves but called an emergency meeting at its Economy Ministry. Slovakia, which is entirely dependent on Russia for gas, was considering a state of emergency after deliveries fell by 70 per cent.

Slovakia’s dominant gas company, said it would curb deliveries to the largest industrial users.

Hungary also instructed industrial users to switch to other fuels, according to Janos Zsuga,

Of course, I'm reading between the lines.

willnotbill said...

It would seem certain that a lot of bond offering's will go unmet. My question would be what happens when this occurs?

Ilargi said...

Hey Jeffrey,

"My 2¢ worth has been that a long term and generally accelerating decline in net oil exports has acted as the trigger for, and as an accelerant to, the credit meltdown (the debt buildup was a like a dry forest full of dead underbrush--it was an inevitable fire just waiting for the trigger). It's as if instead of an aerial tanker dropping fire retardant on a raging forest fire, they are dropping napalm. "

We'll never agree on that one. Even with ten times as much oil as now, the present debt situation would have imploded.

In any case, with failed government bond auctions around the world, aren't we headed at warp speed toward the point at which the Feds (Federal Reserve + Federal Government) have to either monetize US debt at a breathtaking rate, or massively cut government spending?"

No, no, what are you thinking, we want to spend trillions a year on road building, so we can all buy GM electric cars at 0% and roll happily along to the homes we just bought. After a quick stop at the diabetes take-out window, of course.

Anonymous said...

In the race to build without permits, developers wrecked the coastline and city officials neglected infrastructure such as roads, Munoz, 48, says. "People have lived very, very well here," she says. "Imagine what it could have been like if they had invested as they should have."

Ilargi said...

"It would seem certain that a lot of bond offering's will go unmet. My question would be what happens when this occurs?"

This game can go on for a while. It'll be a bidding war: Whoever offers most return for investors wins the game. I think the smaller entities, cities, states, will be the first to go. But they can then apply to higher authorities for bail-outs. It's of course a game you cannot win, offering 10% when real interest is at negative 5%, but hey, we're only good at short term, so that's what we'll do.

westexas said...


I agree that the credit contraction was inevitable. The question is what was the match that started the firestorm. We see a clear annual oil price response to the decline in net oil exports from the top five net oil exporters, that started in 2006. Of course, then demand fell. But even at $40 to $50, oil is still up at a double digit rate per year, relative to 1998 (versus GM stock which has declined at about -30%/year since 1998).

In any case, my current line of research is on post-peak cumulative net oil exports. Our middle case is that the top five net oil exporters--Saudi Arabia; Russia; Norway; Iran and the UAE--have already shipped about one-fifth of the post-2005 cumulative net oil exports, in only three years, through 2008. Even if by some miracle, the demand for consumer stuff could re-ignited, we won't have the volume of exported oil necessary to power a rebound.

Anonymous said...

The imploding bond auction story this coming year is huge. I don't fully understand the consequences, though ultimately it means a lower standard of living for everyone, along with many unintended consequences, too unpleasant to think about. This is an elite site, far ahead of the pack elsewhere, in print or online. If only Krugman knew as much.

westexas said...

I agree that the field German bond auction is a huge warning sign. The US government is going to see falling tax revenue, and increased demand for government services, which will make the deficit worse--even without trillions of dollars of bailout spending.

My point is that events may be unfolding faster than most of us thought likely, and my belief is that contracting world net oil exports are acting as an accelerant. At least six of the top 10 net oil exporters--Saudi Arabia; Russia; Norway; Iran; Mexico and Venezuela--are, IMO, in long term or terminal decline, relative to their 2005 net export levels. And net export decline rates tend to accelerate with time.

westexas said...

"failed German bond auction"

Anonymous said...

What will be the consequence of a series of failing bond auctions in terms of mortgage rates?
Can someone connect those dots for me?

willnotbill said...

Illargi thanks for your reply to my question regarding bond failures. I gather you don't want to look too deep into the crystal ball, but if your likely prognosis does occur would'nt real interest rates have to rise further aggravating this meltdown?

*** said...

Hi, TAE;

I'm absolutely baffled. I am trying to go in and review last night's comments. I see 57. I have emailed a friend on this blog; their link to last night's comments shows 82.

What is going on? Was there a massive culling of comments, and the friend's link is some kind of cache?

I apologize for bringing up something outside the scope of today's theme. But this is bizarre.

My 57 comment link is here, and the one with more comments is here.

Perhaps a lot were edited out? I can't figure out what to think.

Thank you for an explanation.

willnotbill said...

The missing comments are at the bottom of yesterdays post. I was wondering what happened too.

*** said...

Thanks willnotbill

over 50 and blonde... and still puzzled as to how this gizmo works.

el gallinazo said...

"This is an elite site, far ahead of the pack elsewhere, in print or online. If only Krugman knew as much."

If Krugman knew as much, he would loose his column in the NY Times and they would revoke his pseudoNobel.

We were raised stupid and we intend to stay stupid, so help us God. (Oath Congress took yesterday.)


"Akashic" is a Sanskrit term and concept going back at least 4000 years. I am not a Steiner groupie. I found his "history" of spiritual evolution a little too bizarre - even for me. Agree - the schools were excellent.

Re strange blog behavior - I am not getting the images embedded in the blog, such as the lead photo (Just placeholders), but am getting the TAE logo and ad images.

*** said...

gung ho for pariah award...

Blonde joke – or – how to use your assets…

So the rich, fur- and lace-dressed blonde shows up at the bank for a $5,000 loan for her two week trip to Europe. After a brief credit and background check, the loan officer and others begin guffawing among themselves at how trifling she is, to be dealing with them when she comes from such wealth. Upon voicing the issue of collateral, she tosses the loan officer the keys to her Mercedes Benz.

Two weeks later she shows up, pays back the loan in cash, as one loan officer leaves to bring her vehicle up from the bank’s parking garage. Now hardly able to stifle themselves, they ask her openly why she would do this.

“How else am I going to park my car near New York City and return to find it in perfect condition for less than the $17 I paid you in interest?”

Ilargi said...

I noticed some graphics not loading a few times today, that came back when reloading. The comments are in two different places, that may be the problem. More than that, I don't know.

Anonymous said...

were you look at the same day? 57 for Jan. 5 and 85 for Jan. 6.

Anonymous said...

Terribly interesting that Sam Palmisano met with Obama recently and came away saying that the new stimulus packages would produce 900,000 jobs just in the area of broadband infrastructure.

If there is really a huge layoff at IBM this month, then what's his game?

Getting rid of expensive workers and hiring shiny new cheap ones? Tens of thousands of them?

Is there any chance at all that an Obama administration would notice that Sam is offshoring jobs on the one hand and "Hiring USA!" (tm) on the other hand?

Anonymous said...

I am throwing it out there and am thinking aloud, but what if someone were to suggest forgiveness of all personal mortgage debt?

The treasury in each country would print the equivalent of the total national mortgage debt and advance it to the appropriate banks. Each citizen would be responsible for looking after their other debts; i.e. credit cards, car loans, etc.

This would give all the banks their liquidity and wipe out personal debt at the same time.

As a taxpayer at least I would get something in return for future taxes and currency devaluation.

It seems the direction being taken is going to leave everyone depleted of assets, taxed to oblivion, unemployed and still in debt. At least paying off mortgages would allow for most people to keep their homes.

Or is idea dismissed because TPTB don't get any personal gain from it?

.... Ready..... Aim..... F


timekeepr said...

Anonymous said...

I am throwing it out there and am thinking aloud, but what if someone were to suggest forgiveness of all personal mortgage debt?

The treasury in each country would print the equivalent of the total national mortgage debt and advance it to the appropriate banks. Each citizen would be responsible for looking after their other debts; i.e. credit cards, car loans, etc.

This would give all the banks their liquidity and wipe out personal debt at the same time.

As a taxpayer at least I would get something in return for future taxes and currency devaluation.

It seems the direction being taken is going to leave everyone depleted of assets, taxed to oblivion, unemployed and still in debt. At least paying off mortgages would allow for most people to keep their homes.

Not fair to people who have no debt or were responsible and did not take out more debt than they could afford!

timekeepr said...

Interesting site:
FED 101

Anonymous said...


Not fair? Is being free of debt a coat of armour?

So Joe Schmo who happened to pay off his mortgage is going to sit in his suburban castle (maybe one out of 20) while every house around him is forclosed, squatted or looted. Would that be fair? Better first through your mortgaged neighbour's pocket than some straight into some black hole of a bank.

The vast majority of people in Canada have been quite conservative and just wanted a decent roof over their families head. Hence they need a mortgage. I don't call that irresponsible.


Frank said...


Money from the sale of preferred stock is equity, not borrowed reserves. The fed graph is not lying, at least not about that.

And I betcha there are literally dozens of solvent small country banks left in the US.

Anonymous said...

Los Vampiros de Marbella -

Anonymous said...

There are place where it one cannot feel any winds of change. I was in one such chamber today.

I was in the high tech university hall named for its corporate sponsor. The colleague I met with talked about the bigger, better, faster, more global. He said, when I asked, that the economic collapse hadn't impact his thoughts at all.

He's on the high tech track to research nirvana. There is so many layers of insulation that he can feel nothing.

There is no recession/depression here. His life and mind are completely insulated from any news of collapse. Sometime ignorance is bliss- brilliant ignorance.

Anonymous said...

@Ontario - this coming from some one with a big mortgage: I agree it would be unfair. On the one hand you have a person who over-extends himself, gets into huge debt to buy a house he cannot really afford, with a mortgage he can never really pay off, while, on the other hand, you have the prudent person who rents and saves until he can buy a modest, affordable house, maybe with a small mortgage that can be paid down by sacrificing and living frugally. How would it be fair to pay off the debt of the profligate spender who would end up owning an asset of greater value while the prudent person who managed his finances well would end up with an asset of lesser value and, to add insult to injury, would have to pay for his neighbor's windfall this through his taxes?

As much as I would love to have my mortgage disappear, this would be a recipe for civil unrest and rightfully so.

Anonymous said...

Dr. J:

With Respect

You Said:

As much as I would love to have my mortgage disappear, this would be a recipe for civil unrest and rightfully so.

I am not saying this is perfect, but the way things are being done now I think we will still end up with civil unrest. Would you rather live in a neighbourhood where people have an ownership stake or in an area with 30% of the homes abandoned or squatted in? That is a recipe for civil unrest.


Anonymous said...


It's a pity that after many hours of reading you select grain and straw and mix them up.

After the article of Jerome a Paris about the gas problem, we don't need more sheet.

The article about Estepona is a bit of sheet about a very old corruption case of last year.

Be right and don't try to emulate the ordinary anglosaxon media, please.


Anonymous said...

@Ontario - At the end of the day, I don't think you can solve a problem by rewarding the behaviours that caused it in the first place. Problems have solutions, dilemmas don't. it's a dliemma.

Anonymous said...

Ilargi,I think what will come with the "new money"will be legislation that will sweep away most things that could slow the implementation of said projects.Things such as permits,true "funding mechanisms" and assorted structural deficiencies will be avoided,ignored,or changed to permit "growth".Or this will fail, even more quickly than most realize.Most of the readers of this blog are savvy enough to realize this actions will result in but a short respite...enough of a breather in each ones preparations/actions for one to look around and take stock of how the world is changing and adjust plans accordingly...


Anonymous said...

Dr. J.

My point is that I believe (which I welcome debate) is that each path leads to the same spot but what I suggest may make it more bearable. Regardless there will be no free ride for anyone.

The reality is that with deflation most people would have negative equity.


timekeepr said...

Ontario said
Better first through your mortgaged neighbour's pocket than some straight into some black hole of a bank.

The vast majority of people in Canada have been quite conservative and just wanted a decent roof over their families head. Hence they need a mortgage. I don't call that irresponsible.

No, a mortgage is not irresponsible but taking on a huge mortgage that one could not repay is irresponsible. Also, one can rent or buy a smaller home/townhouse /condo etc to get a roof over their heads.

And yes, giving money to the bankers is not a good idea either. But, if these home owners are bailed out, what would stop them from taking on more debt again?

YD said...

No, a mortgage is not irresponsible but taking on a huge mortgage that one could not repay is irresponsible. Also, one can rent or buy a smaller home/townhouse /condo etc to get a roof over their heads.

I think Ontario's point is being lost here. The situation you describe above is the exception. But it is the exception that is going to swamp the rule (meaning the conservative loan takers out there). I am a case in point. I have a very conservative mortgage, but if Ilargi is right by the time this is done I will be upside down by 300% I bought a small condo with 20% down and well within my ability to pay. But if my 165,000 dollar condo on which I am paying a 128,000 note is only valued at 40g's there is no way I would not walk away given an option, I would be stupid not to. Now follow the suggestion of forgiving the mortgage and that no longer is a destabilizing probability. All that is beside the point. I am self employed, my business is down 40% in the last three months. I am at the razors edge, I can fire everybody and hold on for awhile, but I fear the writing is on the wall. At least I have time to prepare emotionally.

Wyote said...

Bernanke: “Hank, in answer to your question: yes we are full bore over here. I’m beginning to understand the ‘shop till you drop’ idea. Was it Lenin who said that first? “

Paulson: “Something along those lines, yeah. Thing is, we have some big sales coming up that just need to happen. If they don’t, you’ll be tapped and I don’t think that’s a wise course yet.”

B: “Well the situations in Gaza, Ukraine, and Iran are due to help.”

P: “You bet they are, Ben. And the Sunnis get a two-fer, just when their air was running out. You gotta love the Game, don’t cha?”

B: “Sure, as long as we control the clock”

P: “And we do, Ben, we do. But we have to save some players for the Asia game that’s on the horizon.”

B: “You’ll keep in touch with me from Singapore, won’t ya?”

P: “You can count on it Ben.”

Anonymous said...

The only way a mortgage holiday would be fair is if those without a mortgage received equal compensation. I suspect the cost of doing the former would be enormous while the cost of doing the latter would be prohibitive. And both would involve shifting the cost to future generations where it would be multiplied. There is no simple solution.

el gallinazo said...


"The treasury in each country would print the equivalent of the total national mortgage debt and advance it to the appropriate banks."

Why print the money? Why not just confiscate half the savings or liquid assets of any person who is above water and give it to the banks? Avoids inflation. Better yet, confiscate all the assets and then shoot them - Stalin's solution.

el gallinazo said...


"There is no recession/depression here. His life and mind are completely insulated from any news of collapse. Sometime ignorance is bliss- brilliant ignorance."

We should consider ourselves fortunate to have such genius's advising us.

Universities, both public and private, will have a bonfire lit under their collective asses this year. Let us hope that we beat our economists into plowshares.

Honest John said...

Here is the answer
Don't buy stuff

Honest John said...

Peter Schiff's latest comments
Listen Here

Unknown said...

Am I correct in assuming that everyone here -- after months of reading high-level economic commentary, much of it with a macro/global context....

I'm correct in assuming that you, my fellow readers, think that the mortgages (and refis) offered to American families in a frenzied flood of wonderfully affordable, Greenspan-slashed interest rates (from 2003 through 2005) -- deliberately manufactured to create a wealth bubble that would hide the devastating costs of the Bush tax cuts and the Iraq war....

That you really believe that even after Greenspan declared the M3 (US money supply) a "secret" in February 2006 and immediately proceeded to raise interest rates, violently and cynically, 17 times in a row! -- effectively wiping out the entire the wealth of the middle class in a little over a year....

I am correct, right?, that everyone here thinks that these inevitable and tragic mortgages that could no longer be serviced due to the fastest and steepest price inflation/gouging in American history, are somehow connected to -- and even the cause of -- the depression sweeping the globe?

That you believe that these destroyed lives -- currently living with family or sleeping in their cars and still holding down two jobs -- that these newly impoverished American families managed to bankrupt the Central Banks of nearly all the nations of the world?

That you had NO idea -- after all you have read here -- that the current global economic disaster came about through a totally different mechanism and through a devious conspiracy among the world's most powerful investment houses? Right?

And this belief causes you to pontificate about the "moral hazard" of NOT blaming and condemning the newly impoverished middle class of America? When in fact their plight is only very tangentially related to the actual derivative-based crime that took place with the full knowledge and unbridled greed of the investment community?

And, you would rather have your own lives and the future of the nation destroyed than put a floor under a collapsing asset class? Rather strip your own future of opportunity than stop an economic tragedy because your afraid someone will get something for nothing?

After all the articles you've read?

This is really, really sad.

And quintesentially American.

(Sorry for the rant. I really needed that.)

xtropy27 said...

Hi Folks,

Some assistance please. What's the worst case, short term, scenario... and the best case, short term, scenario(s) ? Ditto for the long term scenarios ?

Wall Street, the banks, Governments, etc. ... I get a rock solid feeling that they're just not able to make the significant changes required to keep us from the worst. They're reactive... and reactive way after the fact. And this is not going to work. Can they fundamentally change enough to get out in front of all of this mess and make a difference ? NO.

So what's on the near & far Horizons ?

Call it please. Lay it out for us, if you will, in outline form. (Just the broad strokes ?) And what's the probable timeline ? What happens in what sequence ?

Thanks for developing and posting the 'Primers'. Nice work.

Anonymous said...


Lets see

1 get out of debt.of any and all kinds.

2 Begin to develop "stand alone"systems in your life that will keep you and yours eating,and safe.If you can garden...go for as much as you can grow.Stockpile seed,or meds you use.

3 Understand in your heart of hearts,its not going to get better.We are going thru the same sort of phase-change to a lower energy state the soviets went thru.

you are in "the good ol days"


Ilargi said...

"Frank said...
Illargi, Money from the sale of preferred stock is equity, not borrowed reserves. The fed graph is not lying, at least not about that.

Obviously, I just mean to point out that it's all just a matter of wrapping it up in a new piece of shiny paper and then saying it's something wholly different. In the end, they're still as broke as before.

And I betcha there are literally dozens of solvent small country banks left in the US.

And I fear for them. If everything around you falls, how long will you remain standing?

SanderO said...

The mortgage and real estate crisis means that there needs to be a "reset" of some sort. A bank who loaned money for a property which is now worth 50 of it's value at closing mean the bank is making ginormous profits if the entire mortgage is paid. That's not "fair". And the people who have paid for property have seen their asset lose half it's value. That's a bummer.

It should be noted that mortgages are very long term obligations and who knows how stable their income will be? Who has a contract that is renewable every year with COL increases for 30 on? A free lance person or a self employed one doesn't even know what the next month will bring let alone the next 30 yrs.. Taking a long term debt is a gamble the odds of which change as the economy changes.

I suspect that the people who are stuck with upside down mortgages will walk, the banks will be left with the properties and they 'oose, but they were the ones RESPONSIBLE for the bubble. The repsonible property owners will lose too because their asset has deflated. But depending on how long they have owned it it may be the air from the bubble which disappears. So of they bought a house 20 years ago for 250K and before the crash it had inflated to 500k it will now return to 250K. They lost "nothing" and the asset did not appreciate. No big deal there. Most things we buy DEPRECIATE from use and we acceopt that - cars, boats, TVs, clothes. Real estate needs to be a NON APPRECIATING asset
Or certainly at a rate which matches population growth.

Bummer for the real estate business and related blood sucker "industries".

el gallinazo said...


"(Sorry for the rant. I really needed that.)"

That was a great rant, Pluto, and I am feeling quite aroused and ready to roll. ( Were you a speech writer for Obama?) And yes, all long term and diligent readers of this blog are, in fact, certifiable geniuses.

So what should we do? Hanging Greenspan will do no good, as judging from photos, he's been dead for over a year.

Anonymous said...

El G:

Quite a leap of logic and if you are insinuating some sort of fascism in my point, you are way off. First it is our money, it isn't the states, it isn't the banks. We have been in a system of debt slavery since the fractional reserve system was put in place. It would be the statement of the people to say to the banks "You are paid in full parisites, you had a good run, now find real work."


Stoneleigh said...


Bailouts are NEVER for the little guy. His role in a Ponzi scheme is to be the empty-bag holder. This is the tragedy of our times, and there's nothing anyone can do to prevent it, whether or not they might want to. The losses have already occurred, but as yet still lie out of sight in illiquid 'asset' accounts supposedly worth hundreds of trillions of dollars, but actually worth close to nothing.

A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, encouraging them to buy everything on margin (ie with borrowed money). That's a recipe for paying far over the odds for everything, while the financiers collect the excess.

Unfortunately, it was easy to entice people into debt slavery, as the offer of access to material goods is always hard to resist, particularly when it seems like everyone else is enjoying new-found wealth. This is how credit bubbles form - a combination of predators and all-too-willing prey that doesn't understand the nature of the trap. Hansel and Gretel and the witch's gingerbread house comes to mind (but without the escape at the end).

A situation where ordinary people are able to buy anything on margin is historically very rare, as credit is normally only extended to those who don't need it. The last several decades have been an aberration, largely due to an increasingly reckless attitude towards risk (partly as a result of securitization, where risk could be passed on so many times that people assumed it had disappeared).

Even mortgages that seemed conservative in recent years were not. In the latter stages of a credit bubble, even a deposit of over 50% and a monthly payment that could be covered by one of two salaries is a recipe for deep trouble. We're looking at a collapse of property prices and a huge rise in unemployment, which will combine to cause an unprecedented amount of negative equity, default and foreclosure. The 'conservative' mortgagees are mostly just as trapped as those who over-extended themselves further.

Even those who own homes free and clear will find that in a frozen property market they can't move to where the jobs are or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay sky-rocketing property taxes. This is why we suggest that people rent rather than own. It amounts to paying someone else to take the property price risk for you, and rents will fall a long way in a deflation.

The middle class has been comprehensively fleeced by the debt trap, and the consequences for social stability will be extremely unpleasant once the chickens come home to roost. Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout.

scandia said...

YD..." I am at the razor's edge."
A sobering,thought provoking and exciting position.
IMO the task for us all is to develop resiliency. Have you listed the condo for sale?

*** said...


This is a great site. For just under two years ago, I dug into all things economic for three months, in trying to understand the nature of hedge funds, SIVs, derivatives, the whole game.

You will recall it was not so fashionable to mention it then.

Post fiscal apocalypse there's a steamhead of popular knowledge now built up to where a person so inclined can glean much information, and much faster, than existed for me two years ago (I know, I know, I'm like the one who told their kids they had to walk two miles to school, uphill both ways...).

And I can't feeling some kind of "historical envy," that people can ask questions of Ilargi and Stoneleigh here and get good answers. Oh that it had proceeded so quickly for me two years ago, instead of constantly being labeled a "troll" for suggesting the crookedness of Wall Street now apparent to every layman.

I am differently motivated about money. I watch it to stay on top of world events, for as I think most of us realize, wars are the mere punctuation points on international economic discourse.

Without disclosing too much (other than the fact that this household specializes in mixing concrete), our focus has been to stay out of all things abstract, which wealth becomes on Wall Street. We're solid on goats and horses, but then we live in Mexico.

Therefore not having any skin directly in the game (although in the fallout, in the long run, most on earth will find their feet somehow held to the fire), which is to say we don't have one penny in "hypothecated" asset classes or any species of debt, I have a question to posit.

And I mean this in deep respect, so please don't anyone take it otherwise. Having endured the unpleasant "abstract plumbing" of figuring out what these Wall Street beasts were up to a couple years ago, I appreciate what hard work it is to stay on top of this. As an artist I'd rather have cleaned toilets than spent hours a day reading about SIVs and derivatives, believe me.

The question, drumroll aside, is basically to question the loading of the dice.

On the one hand, at times TAE all but spits sulfur in observation of the gross, high-ranking criminality of it all, for which the English language has not so far coughed up adequate perjoratives to describe.

On the other hand, proceeds the analysis of trends, spreads, countertrends, appearing for the most part like a rather mechanical or physical analysis, of something without "a mind of its own." The stance of the market analyst is the POV of the scientist, no?

But if indeed the dice are loaded, why analyze the physics of rolling the dice?

How do we not know that enormous gummnt-related hedge funds are, at times, dispatched to frenzy the markets this way and that - just for one example - and that the entire purpose is for a malign, overarching entity to maintain some seeming veneer of normalcy in order to keep 'em lined up at the slaughterhouse per usual?

I admit to having long ago gone "tinfoil" as they say concerning various issues, such as the putative attack on New York. I'll refrain from analysis of same, except to mention that if my thoughts are correct, there will be more - and much more vast - such absurdity. In any case one must note that there never was an actual forensics investigation of the above-noted event. There really is no story. There is, in the end, only an *official* conspiracy theory, ascribing cause to certain conspirators rather than others. Pardon me for the repeat: there was no forensics investigation of materials.

With those kind of malign forces now governing all things fiscal - and hey, have the same parties who have refused investigation of an attack also not gobbled up the collective doings of Wall Street - well, how can we proceed with a "rational" or "scientific" analysis of markets?

I mean, we know the "playaz" are corrupt, right? If they could load the dice - and they can - would they not?

Just curious to hear any POV on this.

Thanks, with deep respect to the brilliant minds who people this site.

*** said...

"procede" not "proceed" - from learning Spanish, I'm suffering language dementia, is my excuse (Russ Winter claims that too...)

bluebird said...

Thanks for posting the primers section. Great work!

Anonymous said...


Great comment. Unfortunately too late for me, I have a mortgage on my small farm. I think the market here in Ontario will be in free fall in the spring. I dropped the kids off at school this morning and there are three houses for sale right beside the school that were not there Monday.

I think the horse is out and it is too late to close the barn door.

I am trying to prepare as much land for food crops, buying a bit of gold and silver and saving cash, food and everyday stuff and hoping for a miracle.


D. Benton Smith said...

We want everything to be okay again SO BADLY that we will accept any scam, no matter how insanely preposterous, just to make it so.

Reminds me of the dying Tinkerbell scene in 'Peter Pan', where the audience in unison vocalizes the words "I DO believe! I DO believe!"

Obama intends to dump a trillion or so into the economy, and then another trillion, and then another. His only promise about results is that it there won't be any ... at least not for a very very very long time. Years (not months) at best.

No word about where the magic beans are going to come from, but since the entire world is so much poorer now, whatever the it loaned us last year the amount can only loan us LESS next year.

The last of our REAL assets are about to be vacuumed up for pennies on the dollar by those with cash.

And just precisely who are these lucky beneficiaries going to be?

I must have fallen asleep during that part because I can't recall who he said was getting the dough.

Wait! I've got it!

He wants to it to be a surprise! Like a birthday party with presents!

Well, when we open those presents on January 21 we shall learn the real reason Team Obama has been so vague and uncommunicative about who the lucky winners of the counterfeit trillions actually are.

Here's a safe bet:

It won't be you.

*** said...

D Benton Smith

"Reminds me of the dying Tinkerbell scene in 'Peter Pan', where the audience in unison vocalizes the words "I DO believe! I DO believe!"

Having betrayed my tinfoil POV, which touches on the veracity of all things national of elections, we fairly ignored the candidates until quite late. Someone sent us a video link of an Obama campaign speech (it was on his official website), in which he addressed a fanatic, adulating throng, chanting something approximately like this:

"You've got to BELIEVE that we can win! And we WILL win, if you BELIEVE! We must BELIEVE that we can bring about change! I BELIEVE we can win! If we KEEP ON BELIEVING, we can win"

pan camera to swooning, tears of ecstasy, waving pennants...

And this was the man touted as eloquent?

Anonymous said...

Some snippits of wisdom.

Mugabe said ...
Half the world is nuts, and survival depends on guessing which half.
In a new 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.
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.

Anonymous said...

Obama has just told the truth ...

Can someone find the transcript?

Anonymous said...

Pluto writes:

" That you believe that these destroyed lives -- currently living with family or sleeping in their cars and still holding down two jobs -- that these newly impoverished American families managed to bankrupt the Central Banks of nearly all the nations of the world?

"And, you would rather have your own lives and the future of the nation destroyed than put a floor under a collapsing asset class? Rather strip your own future of opportunity than stop an economic tragedy because your afraid someone will get something for nothing? "

You seem to be advocating the asset protection of middle class status quo(before the collapse) on one hand, while discounting the the outlandish prices that prevents so many others from entering the realms of home affordabilty/ownership on the other--protect home assets here, and thus prevent affordabilty there.

And what a perverse irony that would be, stabilizing the asset value of those that already have, while those on the perphiery--people have cannot quite afford current home prices--are reduced to renting as more and more incomes are incongruous with upward mobilty.

A nice rant--and a wonderful recipe for further social/economic stratification

el gallinazo said...


I was not insinuating fascism or any other ism on your part. And I am obnoxious and dumb enough that I rarely insinuate anything. I often do have logic - it just tends toward the satyric in a jugular vein. You suggested just printing the money and paying back the banks for their mortgages. If I were a banker wanker, this would be a very attractive proposal. In a deflation, getting all the money back on my ill begotten lending practices would be quite a coup. Actually, this is what Benny and Hanky Panky have been working on, but in a more surreptitious mode. Their idea is to pay off the bankers but leave the mortgages intact. The best of both worlds - a double dip on their snow cone. Printing enough money to pay off all the bankers for all the mortgages would surely be a nuclear option, but the bomb would fall on everyone, and the poor most of all.


One of your typically awesome, brilliant comments. Do you do magic tricks also?

Gravity said...

Well, I've completed another full cycle of grief, ending in acceptance. This is the fourth so far.

I always skip denial, and go right into negotiation and anger,
then despair.
This cycle was about the culture shock of losing western consumerism, not for myself, but for the structure of society.
I can see this happening in other people now (my second cycle resolved that personal loss)

But still, I want to negotiate a more solid base of collapse- acceptance in my community, I see this is difficult, leading to yet another semi-cycle of grief, until it becomes self-evident for all.

Or perhaps you've returned to
your old ideas of the proletariat revolting?
Put it out of your mind, Winston, they're helpless animals.

The regular media makes people more helpless, blogs can make them less so, this one, for instance,
may help people into resolute negotiation, preparation and acceptance, while venting anger,
but the lack of denial makes it so much easier to handle the situation in a constructive manner.

More donations for TAE!

Anonymous said...

@ Pluto,

Thanks for your rant. I think that you expressed things that I have been thinking but couldn't figure out how to communicate. Your rant plus Stoneleigh's response has helped me reach a new level of understanding about our future. Sometimes it takes hearing the same thing stated 100 different ways before you really get it.

Stoneleigh, I have a follow up question to you about being a renter. What I am wondering is this, while being a renter means someone else has the property ownership risk - aren't you undertaking unknown risk by assuming your landlord is and can remain solvent? I'm from the Chicago area and rather recently the Cook County Sheriff made news by refusing to kick paying renters out of their dwelleings after being ordered to do so by lenders who were foreclosing on the landlord. As the trainwreck progresses, isn't the risk of landlord insolvency going to skyrocket? How can you even being to asses which landlord is solvent?

@Timekeeper - For what it's worth, one of the preconceptions I've had to get past is the idea that depressions are caused by panic. Because of the term panic, I thought it meant that all actors acted in irrational ways. Here, people are acting in highly rational ways - banks are cutting back lending, people are not buying as much and attempting to save. Your question about what would keep someone from going back into debt if a forgiveness program were attempted assumes that conditions will return to what they were in the recent past. What will keep people from getting into debt trouble in the future is that they will not have any access to credit. The world as we know it has changed and we are only now starting to learn what the future will look like, but it seems clear that past ideas about "fairness" will either have to be discarded or they too will be seeds of future unrest. No matter how "virtuous" you feel your past behavior has been, it is still impossible for you to escape from the negative consequences of societal conduct over the past decades. The best you can do is to try to prepare.

Linda S.

Weaseldog said...

West Texas, I agree with you that oil/energy drives our economics.

It drives everything. All of it. That's just basic science. Our economics education though, would have you believe that the stars shine bright because they have a high GDP.

Frank, Paulson has be seizing solvent banks under the authority of the FDIC and turning their assets over to larger troubled banks for a pittance, to prop up their books.

We're cannibalizing our infrastructure to paper over the rotten core of the system.

The Gov will do anything it can to make sure that the largest businesses stay afloat, even though that will mean a massive wipe out of smaller, otherwise solvent businesses. This is the only way that they keep their authority centralized. And that is the name of the game. Increasing centralization and infinite growth. Infinite growth for largest entities of course.

But what happens when the biggest fish in the pond has eaten everything?

Anonymous said...

Stoneleigh @ 8:28 AM -

Thank you for your clarity. Most amongst us have difficulty realizing and assimilating your statement:

"Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout."

Many middle class Americans are delusionally waiting for an Obama bailout. Obama appears to be another insider. He won't stop US militarism either. He CAN'T! Sadly, he appears to have allowed himself to be groomed to be one of the "boyz." Has Obama condemned Israel's recent genocide?

Time is short ...

Weaseldog said...

Dr. J, I don't believe that everyone who has been or will be foreclosed on, was irresponsible.

Most are losing their homes because of the economic damage that Greenspan, Bernanke and Paulson spearheaded.

I'm of the opinion that there should have been no bailout. For that matter, the Fed shouldn't have intentionally blown a bubble in 2001, and let speculators, including banks, take their lumps and write down their losses.

But my opinion doesn't matter. The name of the game is to blow an infinite bubble, to chase infinite growth. And to grow and infinite debt, on a finite planet.

el gallinazo said...


"But what happens when the biggest fish in the pond has eaten everything?"

It swallows itself tail first.

Anonymous said...

I think the transcript is at Obama's page in the blog
I going to read it.

el gallinazo said...

Adios a Babilonia,

"With those kind of malign forces now governing all things fiscal - and hey, have the same parties who have refused investigation of an attack also not gobbled up the collective doings of Wall Street - well, how can we proceed with a "rational" or "scientific" analysis of markets? "

Stoneleigh constantly states that the markets are neither rational or scientific. That's a Milton Friedman stupidity. However, things that are neither rational nor scientific, including the diabolically malicious, can be studied in a rational and scientific manner. Mob psychology for example.

In honor of our president, a few random quotations courtesy of the BBC;

"For a century and a half now, America and Japan have formed one of the great and enduring alliances of modern times."

"The ambassador and the general were briefing me on the - the vast majority of Iraqis want to live in a peaceful, free world. And we will find these people and we will bring them to justice."

"You know, one of the hardest parts of my job is to connect Iraq to the war on terror."

"Rarely is the question asked: Is our children learning?"

"Too many good docs are getting out of the business. Too many OB/GYN's aren't able to practice their love with women all across the country."

"I know the human being and fish can coexist peacefully."

"Families is where our nation finds hope, where wings take dream."

"I'll be long gone before some smart person ever figures out what happened inside this Oval Office."

Anonymous said...

Obama is on NPR at this moment give the public the Bad News in baby steps.

He is lacing the speech with sprinkles of gloom and doom on top on a Big Cream Puff.

Alternative Energy and Universal Health and cheap available college loans and mortgages.

Yikes, I hope he is just practicing for when he has to give some RBN (Really Bad News) in the near future.

el gallinazo said...

I think Obama's first priority is to insure that Bush be historically assigned the role of Hoover for the Greater Depression. He must dig the foundation for this future truism to root during the next two weeks.

Gravity said...

I have some micro-economic
questions regarding retail and deflation.

In one respect, Ilargi correctly predicted how I would percieve my town at christmas, something strange and unusual, deflation.

Also, the official Dutch inflation rate is still 1,65%, but there are very clear signs of deflation here,
since almost every shop is now desperately discounting everything to force sales, to no avail.

Many of the clothes shops, (apparel) are now offering more than fifty percent discounts on their winter collections,
in order to fund the purchase of the summer stock.
The banks aren't lending to them
to finance this,
obviously because they are short on cash and assets, and because these shops probably won't last another year. (abysmal christmas sales even at fifty percent discounts)

Any shops that do manage to fund the summer stocks will discover
these wont sell at all by that time.

I believe that the velocity of money is now at a critically low level, so that when shops offer 70% discount instead of 50%,
it does not make a difference in the level of money spent, the customers just get more for the same amount of money they would have spent anyway.
Is this even possible? How can the price mechanism fail in this way?

I asked several employees if it made a difference, going from 50% to 70% discount. Some said sales had increase slightly, but then
the marginal gains were lower,
Others said it made no difference,
thereby completely wasting a margin of profit.

My town is primarily a city of shops and small retail, all quite useless now, I fear half of them will have disappeared by next year.

The service-economy in my town is dissolving at an alarming rate,
I think new jobs can only be sustainable if they are related to primary industrial activity,
like food and energy production.
Does this make sense?

Is there a way out of this?
Or must we accept that the local over-saturation of these businesses are no longer viable?
And what can replace them, what can work now? What can we produce that people need?

Unknown said...

@Anonymous 12:11PM

You responded to my rant with:

You seem to be advocating the asset protection of middle class status quo (before the collapse) on one hand, while discounting the the outlandish prices that prevents so many others from entering the realms of home affordable/ownership on the other--protect home assets here, and thus prevent affordable there.

I advocated nothing of the kind in my Rant. That was a conclusion that you jumped to. And your conclusion tells you are my target audience.

I definitely HAVE a conclusion. A really LOUD conclusion. And it couldn't be more different than the one you fantasize. I'll get to it...

But first, you also wrote:

And what a perverse irony that would be, stabilizing the asset value of those that already have, while those on the periphery--people have cannot quite afford current home prices--are reduced to renting as more and more incomes are incongruous with upward mobility.

And, in this second paragraph you "Emily Latella" your mistaken assumption of my conclusion by making the EXACT POINT of my entire rant. Thank you.

You demonstrate the idea that if we improverish the entire middle class of a nation, by violently destroying the most fundamental asset class of a nation -- that somehow you (who have been standing on the sidelines) will be able to swoop in and take their place via "bargain" real estate and watch them writhe in the flames of punishment at the same time.

Maybe roast a few marshmallows, just for fun.

Ugh. This shows such a lack of knowledge of the economic consequences of a fallen nation and worthless currency that I can't find a starting point elementary enough to begin. It's like writing the first chapter of the Book of Genesis.

I have a dentist appointment. Let me leave you with a hint and I'll get back to you:

All of this -- EVERY SINGLE BIT of this -- could have been EASILY resolved, even though people's monthly payments doubled, tripled, or quadrupled within a single year.

Every cent of the home would have been paid for.

No home would have been foreclosed on. No families (or renters) would have been evicted into the street.

No banker would have lost a cent. In fact, they would have made even more than they expected.

No investor of outrageously bloated derivitives in the global market would have lost a dime.

All insurers of said derivatives would have made big money.

AND, homes would have gently fluttered down to a more affordable level over time without destroying a nation.


All it required was that loans be extended to 40 years from 30 years in duration. Ta dah!!

And don't think that bankers wouldn't have sold their souls to do that.

BUT -- two years earlier -- AFTER Greenspan started on his Alzheimer-induced rate-hiking rampage -- banking lobbyists paid congress (including liberals such as Joe Biden) to OUTLAW adjustments to the length of loans via the most depraved bill I have ever seen passed: The Bankruptcy Bill.

And you think you can step over the charred bodies of the former middle class and do business with this cabal?

This is why America deserves exactly what it is getting.

Weaseldog said...

Pluto, as Clint Eastwood said in 'The Unforgiven', "Deserve's got nothing to do with it."

The thieves who set this up are being richly rewarded. Those of us that were against every measure taken, are losing our country.

This isn't about deserving anything. It's about criminals getting away with the loot and never getting investigated, charged or sentence.

It's about how crime pays handsomely, so long as you do it on a big scale and bribe the politicians.

Nobody is getting what they deserve except a few sacrificial lambs like Msdoff. And he may just get a faked death, and go live on the Ken Lay Plantation in Paraguay for all I know.

Unknown said...

@ Gravity re Micro-economics

I don't know micro like I do macro, but you clearly do. Those are enlightening mechanisms that you point out. I especially liked this one:

I believe that the velocity of money is now at a critically low level, so that when shops offer 70% discount instead of 50%,
it does not make a difference in the level of money spent, the customers just get more for the same amount of money they would have spent anyway.
Is this even possible? How can the price mechanism fail in this way?

I don't know how I missed that! Obviously, gross sales would remain the same or less -- but that buyers would receiving ever increasing value for the money (assuming it doesn't hyper-inflate).

This fabulous state of grace (for buyers) happens on the macro scale in a different way. I don't think it will last too long, but what a great opportunity.

Is there a way out of this?

For you or for your nation? If you're talking about nations and you're in the Netherlands -- think of it as a business cycle. Your fundamentals are sound. Your area is scheduled to be better than you were by 2012. (The US won't regain any traction until 2018.)

If you're talking about yourself -- you answered your own question. Buy low and hold. Sell high in 2012. Pick a steeply discounted product that appreciates, like baseball cards or wine or whatever.

@ Weaseldog:

You're right. You're totally right:

Nobody is getting what they deserve except a few sacrificial lambs like Madoff. And he may just get a faked death, and go live on the Ken Lay Plantation in Paraguay for all I know.

The only good news is that Paraguay is suddenly thinking about signing the International Extradiction Treaty. They don't want to see anymore trash, like the Bush family, moving onto their land down there to escape the long arm of the law.

Anonymous said...

Clinton never produced a budget surplus. The notion that Clinton left Bush with a surplus is a myth. What Clinton did was to expand military spending and cut social spending. He used the Social Security trust fund to give the impression of a surplus.

What many people are unaware of is that as a TRUST FUND, Social Security BY LAW is not part of the government's budget. It was placed "on budget" by the Democrats in 1969 to paper over the military spending on the Vietnam War.

The government with the media's help has been LYING to the American people for years. Social Security is NOT PART OF THE GOVERNMENT's BUDGET and should NOT be included as part of government spending. Social Security is and operates as a trust fund and placing it on budget should be deemed illegal and is a massive fraud on the American people.

What is causing the massive deficits has been the rollback the progressive tax system and increased military spending. This is not rocket science unfortunately the media has kept the American people ignorant and misinformed.

Anonymous said...

Speaking of Barack Obama:


Barack Obama is a racial-minority individual and does not like racism:

There is bad news.

I know it may be hard to believe.

However, it is absolutely true that Ronald Wilson Reagan committed horrible, racist, hate crimes during his presidency.

A lot of people know about Reagan’s infamy.

And a lot of people will know about Reagan’s infamy—even until the very end of human existence: they’ll find out.

Numbers 32:23: “Be sure your sins will find you out.”

Respectfully Submitted by Andrew Yu-Jen Wang, J.D. Candidate
B.S., With the Highest Level of Academic Honors at Graduation, 1996
Messiah College, Grantham, PA
Lower Merion High School, Ardmore, PA, 1993

(I can type 90 words per minute, and there are thousands of copies on the Internet indicating the content of this post. And there are thousands of copies in very many countries around the world.)
‘If only there could be a ban against invention that bottled up memory like scent & it never faded & it never got stale.’ It came from my Lower Merion High School yearbook.