"Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars
or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are
repeat offenders. The combination can be fatal for investors holding bonds issued by financially shaky countries like Argentina
or Greece, which sell a lot of their debt outside their own borders (as does the U.S.--45% of all publicly held debt). As
a nation's finances deteriorate, foreign investors sell their bonds, putting upward pressure on interest rates. That usually
sets off a spiral including a deteriorating currency, which, if the bonds are denominated in foreign currencies, makes it
impossible for the country to pay its debt."
Hammered by Republicans for billions of dollars in spending that added
to the deficit, Obama outlined steps he said would rein in spending. They include rules requiring that spending or tax cuts
be offset by cuts to other programs or tax increases, a freeze on most discretionary spending and a presidentially appointed
commission to recommend ways to reduce the deficit.
Economists are encouraged that business investments appear to be coming
back even though the job market continues to drag. New U.S. Commerce Department data shows orders for durable goods, not including
transportation equipment, rose 0.9% in December, surpassing forecasts. The Labor Department reported that weekly unemployment
applications fell to 470,000 in the week ending Jan. 23, exceeding the median estimate of 450,000 predicted by 42 economists
polled by Bloomberg.
“A strong, healthy financial market makes it possible
for businesses to access credit and create new jobs. It channels the savings of families into investments that raise
incomes. And that can only happen if we guard against the same recklessness that nearly brought down our entire economy.” Essential
reforms include measures to protect consumers and investors from financial abuse; close loopholes, raise standards, and create
accountability for supervision of major financial firms; restrict the size and scope of financial institutions to reign in
excesses and protect taxpayers and address the ‘too big to fail’ problem; and establish comprehensive supervision
of financial markets.
So, what did we get for all that dough? Unfortunately, more questions than answers.Indeed, many of the factors that helped cause the previous crisis -- a sustained period of low
interest rates, high levels of consumer debt in the West and excessive risk-taking by financial institutions -- remain in
place. Atthe same time, supersized government
bailouts could have created the conditions for future financial crises that will be larger and even more expensive than the
one the world has just suffered. Despite the protestations
by politicians that such a large-scale rescue should never be allowed to happen again, their actions over the past two years
suggest the opposite...For central bankers, politicians and policymakers...the challenges are immense.
They must withdraw the financial support that has been provided to the financial sector without triggering a collapse, but
before new risk-taking creates the conditions for another collapse. They must overhaul regulation to make banks safer while
reversing the moral hazard that has characterized the current round of bailouts. They must manage a controlled
reduction of government debt. And they must attempt to rebalance the world economy without withdrawing into conflict and protectionism.
There is little doubt that the authorities' swift response to
the crisis prevented an even more severe economic collapse. But the global financial system is far from being fixed.
The global economic recovery could lose pace later this year, dashing
hopes for a rapid escape from the deepest downturn of the postwar era, economists and investors said at the World Economic
Forum's annual meeting
Markets are ultimately about people, which is what George Akerlof and
Robert Shiller talk about in Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism
(Princeton University Press, £16.95). It deals with that relatively new field, “behavioural economics”, or
how the economy really works. As they put it in the Introduction, “it accounts for how it works when people really are
human, that is, possessed of all-too-human animal spirits”, or human frailties.
According to the authors, there are five ways in which “animal spirits”
manifest themselves in economic behaviour:
The state of the economy depends upon the “feel-good” factor
or the level of confidence about how the future will pan out. This is not a rational prediction but based on instinct, which
is the most crucial feature of “animal spirits”.
A sense of fairness can overrule rational economic motivations. For example,
the demand for shovels can rise after a snowstorm, but raising prices at such a juncture would be considered unjust by the
majority and, therefore, desisted.
The action of monopoly capitalism — multinationals or predatory
corporations can impact the entire economy. For instance, the actions of energy giant Enron led many to lose faith in financial
markets as a whole.
Many people make their economic decisions without taking into account
inflation: instead of maximising their real (inflation-adjusted) income, they succumb to “money illusion”.
Finally, human behaviour is heavily influenced by stories and narratives
with logic that drive people to action. We’re all gullible idiots at the time and only later wake up to realise we’ve
been conned.
If you put all the five factors together, the conclusion is obvious: “animal
spirit” forces other than reason guide our actions. If you look back, none of them are based on rational grounds and
this “irrationality” must be taken into account to understand how economies actually work. If economists have
failed to explain repeated crises, it is because they have interpreted economic activity through an unreal model. Economists
have based their studies on mathematical models of human behaviour whereas they should have been based on human psychology
and practical politics of the times.
The global recovery is off to a stronger start than anticipated earlier but is proceeding at different
speeds in the various regions. Following the deepest global downturn in recent history, economic growth solidified and
broadened to advanced economies in the second half of 2009. In 2010, world output is expected to rise by 4 percent. This represents
an upward revision of ¾ percentage point from the October 2009 World Economic Outlook. In most advanced economies, the recovery
is expected to remain sluggish by past standards, whereas in many emerging and developing economies, activity is expected
to be relatively vigorous, largely driven by buoyant internal demand. Policies need to foster a rebalancing of global demand,
remaining supportive where recoveries are not yet well sustained.
Leading experts brought together by the
World Economic Forum developed proposals to help tackle corruption. Their reportRaising Our Game: Next Steps for Business, Government and
Civil Society to Fight Corruptionrecommends
the following: • For Businesses– empower
ethics officers to prevent bribery through anti-corruption programmes, such as the Partnering Against Corruption Initiative
(PACI) • For Governments– create a level
playing field by ratifying and fully implementing the United Nations Convention Against Corruption into national law • For
Civil Society– strengthen its “watchdog” role to
promote ethical practices with business and government
The rapid expansion of
the European Union in the past decade parallels that of the United States just before the Civil War. In both cases, the unions
seemed strong until the economic environment soured. Could the EU be headed for a civil war?
Perhaps not war, but “divorce”
(civil or otherwise) may be imminent for Europe, claims the Socionomic Institute.
“Both unions appeared
to be strong when markets were rising. But once stocks reversed, the stress of a bear market severed those bonds quickly,”
explains study author Brian Whitmer, editor of Elliott Wave International’s EUROPEAN FINANCIAL FORECAST. “War
eventually broke out among the U.S. states, and I believe that an equally perilous period is coming for the countries of the
EU.”
Thinking of counting to a trillion
one second per number? Better get started. It will take 31,688 years.
And tack on a few more years if
you want to go for 1.35 trillion, the dollar estimate for the federal deficit in the current budget year.
The whole sum could be taken care
of if every American, all 300 million of them, forked over $4,500.
Back in 1981, President Ronald
Reagan, characterizing the national debt as it approached $1 trillion, commented that "a trillion dollars would be a stack
of $1,000 bills 67 miles high." The debt, the accumulation of annual deficits, now stands at more than $12 trillion.
Put another way, the $1.35 trillion
could pay for 40,000 players like Alex Rodriguez, whose $33 million salary in 2009 made him baseball's richest man.
Or think the $6.25 billion paid
out by Goldman Sachs in salaries and bonuses in 2009 was a lot of money? The federal deficit could support the payroll of
216 such financial firms.
A trip around the world at the
equator is about 25,000 miles. So 1.35 trillion miles would be a dizzying 54 million circuits around the globe.
A trillion is one followed by 12
zeros.
The Washington Monument, overlooking
the deficit debate in the Capitol, stands about 555 feet high. Stacked end to end, it would take more than 2.4 billion monuments
to reach 1.35 trillion feet. That's well more than double the distance from the Earth to the sun.
Being sat on by a 10,000-pound
bull elephant would be a crushing experience. What about if 135 million pachyderms were piled up?
The Earth has been around for about
4.5 billion years. A long time until you consider that 1.35 trillion years equals 300 Earth lives. Looking at more modern
history, 1.35 trillion seconds would take us back more than 40,000 years, when Neanderthals were using stones to make tools.
By Jim Abrams ASSOCIATED
PRESS in The Washington Times
.
What Is Wrong With the Job MarketAnd
How to Fix It
CONCLUSION: The Great Recession is over, but the recovery will be a difficult
slog through much of this year. The risks are also uncomfortably high that the economy will backtrack into recession. This
would be an especially dark scenario, almost certainly involving a deflationary spiral of falling wages and prices. The Federal
Reserve and fiscal policymakers would also have fewer options and resources with which to respond.
A range of problems suggest that such a scenario cannot be easily dismissed.
Most obvious are high and rising unemployment and weak wage growth, the mounting foreclosure crisis, rising commercial mortgage
loan defaults and resulting small bank failures, budget problems at state and local governments, and dysfunctional structured-finance
markets that restrict credit to consumers and businesses.
Policymakers should provide more help to the economy to ensure the recovery
becomes self-sustaining. The Federal Reserve must not raise interest rates too soon or end its credit easing efforts too quickly.
Congress must provide more resources to unemployed workers whose benefits are running out, to state governments unable to
balance their budgets, and to small businesses looking for credit and all businesses that expand payrolls.
All this help comes at significant cost. While the fiscal stimulus has
been vital, it has helped produce a $1.4 trillion budget deficit this past fiscal year and will lead to another similarly
sized deficit in the current one. Yet the cost to taxpayers would have been measurably greater if policymakers had not acted
aggressively. The recession would still be in full swing, undermining tax revenues and driving up government spending on Medicaid,
welfare, and other income support for distressed families.
It is a tragedy that the nation has been forced to spend so much to tame
the financial crisis and end the Great Recession. Yet it has been money well spent.
The Budget and Economic Outlook: Fiscal Years 2010 to 2020
January 2010
The Congressional Budget Office projects that
if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year
2010. That amount would be slightly smaller than the 2009 deficit but, as a share of the economy as a whole (measured by gross
domestic product, or GDP), it would still be the second largest since World War II. The budget picture remains daunting beyond
this year, with deficits averaging about $600 billion annually from 2011 through 2020.
Those estimates are not intended to be a prediction
of actual budget outcomes; rather, they indicate what CBO estimates would occur if current laws and policies remained in place.
Toward that end, CBO’s projections presume no changes in current tax laws or spending programs. Any new legislation
that reduced revenues (such as indexing the alternative minimum tax for inflation) or boosted spending (such as providing
supplemental funding for military operations in Afghanistan) would increase projected deficits. For example, if all tax provisions
that are scheduled to expire in the coming decade were extended and the AMT were indexed for inflation, deficits over the
2011–2020 period would be more than $7 trillion higher. (See the above chart for details on the budgetary impact of
some alternative policy actions and see the sidebar for more information on CBO’s baseline.)
Accumulating deficits are pushing federal
debt to significantly higher levels. CBO projects that total debt will reach $8.8 trillion by the end of 2010. At 60 percent
of GDP, that would be the highest level since 1952. Under current laws and policies, CBO’s projections show that level
climbing to 67 percent by 2020. As a result, interest payments on the debt are poised to skyrocket; the government’s
spending on net interest will triple between 2010 and 2020, increasing from $207 billion to $723 billion.
Economic growth will probably remain muted
for the next few years. The deep recession that began in 2007 appears to have ended in the middle of 2009. The economy grew
during the third quarter, and early signs suggest that the labor market strengthened slightly late in 2009. CBO expects that
the economy will continue to grow, although at a slower pace than in past recoveries. Hiring rates remain very low, and CBO
projects that the unemployment rate will average more than 10 percent during the first half of 2010, before beginning a gradual
decline. That pattern is typical of recent recessions, where hiring continues to fall for 6 to 12 months after the economy
begins to grow.
Beyond the 10-year projection period, growth
of spending for Medicare, Medicaid, and Social Security will speed up from its already rapid rate. To keep federal deficits
and debt from reaching levels that would substantially harm the economy, lawmakers would have to significantly increase revenues,
decrease projected spending, or enact some combination of the two.
DAVOS
DATOS
Bubblechology
Robert J. Shiller, a well-known Yale economist, suggested that bubbles
could be diagnosed using the same methodology psychologists use to diagnose mental illness.
After all, a bubble is a form of psychological malfunction. And like mental
illness there’s a tricky gray area between being really sick and just having a few problems, Shiller said during a panel
discussion at the World Economic Forum in Davos, Switzerland.
The solution: a checklist like psychologists use to determine if someone
is suffering from, say, depression. So here is Shiller’s checklist.
Sharp increases in the price of an asset such as real estate or dot-com
shares
Great public excitement about said increases
An accompanying media frenzy
Stories of people earning a lot of money, causing envy among people who
aren’t
Growing interest in the asset class among the general public
“New era” theories to justify unprecedented price increases
A decline in lending standards
DAVID M. WALKER
EX-COMPTROLLER
GENERAL OF THE US
Political timidity invites financial disaster
In his State of the Union address, President Obama noted that "campaign fever has come
even earlier than usual" this year. Indeed it has. Typically, politicians in campaign mode make big, expensive promises to
voters - new programs, new benefits, new and bigger tax cuts. We will surely see some of that this year; but what is notable
about the conversation in Washington right now - and on the campaign trail - is its focus on deficits and debt. The White
House and members of both parties appear to see political advantage in talking about fiscal discipline. That's a good thing,
but only if they take action - serious action - soon.
America, simply put, is not on a sustainable path. Within two decades, if we haven't dramatically changed the way
we do business in Washington, we'll either see critical social programs going bankrupt, or our tax rates doubling to cover
the shortfall. The dysfunction is not only fiscal but cultural; it is rooted deeply in our political system.
In fact, there are at least four disturbing parallels between the factors related to the recent subprime mortgage
crisis that caused the recession, and the actions of the federal government, which may cause the next financial crisis.
First, consider the chasm between those who bear the burdens of financial risk-taking and those who reap the benefits.
During the subprime mortgage crisis, the people who sold unsound mortgages weren't the same people who held them. Now the
bankers are back in the black, and homeowners are still paying the price. So are the taxpayers.
But is that practice really so different than that of elected leaders who increase spending and cut taxes while
refusing to consider the long-term costs of either? Today's politicians reap short-term, electoral gains; tomorrow's taxpayers
get a long-term, crushing obligation.
Second, remember how impenetrably complicated the subprime securities were? They were almost impossible to explain
to anyone outside the big banks - even to many inside players, as well. That lack of transparency fueled the illusion that
the economy was sound instead of on the brink.
This is uncomfortably similar to the way the government handles its finances. We all know that the federal budget
deficit has spiraled out of control. But fewer people are aware that those annual deficits are understated. If you think the
$12.3 trillion national debt is too high, the federal government has tens of trillions of obligations, commitments and contingencies
that aren't on the federal balance sheet.
Third, most of the corporations crippled by the subprime crisis paid little or no attention to the danger signs,
which included mounting debt, dwindling cash flow and unrealistic credit ratings.
It reminds me of our federal government's cavalier attitude toward debt. By the end of fiscal year 2010, we will
have a total debt approaching 95 percent of our economy - and half of the public debt is held by foreign lenders. To put this
in historical perspective, our Founding Fathers took on debt at a level of 40 percent of the economy to win our independence
and gain agreement on the U.S. Constitution. And at the end of World War II, though we had debt equal to 122 percent of our
economy, we had virtually no foreign debt. There is simply no precedent for today's type of indebtedness.
Fourth, and most important of all, recall how major corporations failed to address the growing risks of the housing
bubble before it burst into a full-blown crisis. Risk managers failed to adequately anticipate the disaster scenario for housing
prices. Corporate overseers, including boards of directors, did an inadequate job of monitoring related risks.
Is that so different than the government's own lax vigilance? Federal regulators allowed too many players on the
field with too few referees. Deregulation led to a general weakening of standards for transparency, accountability and oversight.
When the crisis hit, the government was caught completely off step - and hardly seems to have regained its footing.
As we enter a new decade, and our economy begins to recover, let us hope that our national leaders will take a
step back, recognize the depths of our long-term fiscal challenges and start making the hard choices to avoid the next crisis.
So far, the signs are mixed. A group of senators succumbed to pressure from the extreme right and left and effectively
killed the creation of a commission that would have recommended changes in fiscal policy. Conservatives feared its authority
to raise taxes; progressives feared its authority to cut spending. That's not a promising start. Still, it is encouraging
that a majority of senators favor the idea, and so does the president. As he just announced in his State of the Union address,
he is prepared to establish such a commission by executive order.
Politicians of both parties frequently say that those who caused the nation's economic crisis - by this they mean
Wall Street bankers - need to change the way they do business. In equal measure, that should apply to Washington, too.
David M. Walker is president and CEO of the Peter G. Peterson Foundation, former
comptroller general of the United States (1998-2008) and author of "Comeback America" (January 2010)
CBO DIRECTOR TO CONGRESS: "...accumulating deficits will push federal debt held by the public to significantly
higher levels. At the end of 2009, debt held by the public was $7.5 trillion, or 53 percent of GDP; by the end of 2020, debt
is projected to climb to $15 trillion, or 67 percent of GDP. With such a large increase in debt, plus an expected increase
in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket. CBO projects
that the government’s annual spending on net interest will more than triple between 2010 and 2020 in nominal terms,
from $207 billion to $723 billion, and will more than double as a share of GDP, from 1.4 percent to 3.2 percent..."
UNEMPLOYMENT RATE
CBO projects, that if current
laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. At 9.2
percent of gross domestic product (GDP), that deficit would be slightly smaller than the shortfall of 9.9 percent of GDP ($1.4
trillion) posted in 2009. Last year's deficit was the largest as a share of GDP since the end of World War II, and the deficit
expected for 2010 would be the second largest. Moreover, if legislation is enacted in the next several months that either
boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year's shortfall.
The
world economic recovery will speed up, the dollar will strengthen and equities and profits improve, according to a panel of
leading experts on Wednesday.
Despite further
consolidation in economic and financial systems and continued volatility in global markets, 2009 was "a year that showed the
first sign of regained optimism and confidence in financial markets," said John Prestbo, editor and executive director of
Dow Jones Indexes, which organized the 2010 Global Economic Outlook panel discussion.
A shift in market sentiment has led to more optimistic forecasts for economic growth.
"Two years after the start of a severe worldwide
recession, a rebound in global economic activity is clearly underway with industrial production and international trade flows
rising briskly," said Kevin Logan, an independent global economist. "By the middle of this year, estimates for global GDP
growth in 2010 are likely to be double what they were in the middle of 2009."
President Obama's plan to restrict banks from making speculative investments is seen as one of his
boldest financial reforms. This Backgrounder reviews the government's regulatory proposals and the debate over their long-term
impact.
The Federal Reserve plans to stop buying securities issued by government housing loan agencies Fannie
Mae and Freddie Mac by the end of the first quarter. This is not only likely to push up mortgage rates; Treasury rates should
rise as well. Throughout 2009, the private sector sold a portion of their agency holdings to the Fed and used those funds
to buy Treasurys. Once the Fed’s agency purchases stop, this private sector portfolio shift will end, removing a major
source of demand in the Treasury market. As the chart shows, since the start of 2009 the Fed has bought or financed the entire
increase in Treasury issuance. As Fed purchases slow and Treasury issuance continues at a high level, interest rates will
have to move up to attract new buyers.
CHINA LENDING TO U.S.
January
22, 2010
Debt
Burden Now Rests More on U.S. Shoulders
THE
United States government borrowed more money than ever before in 2009, but its largest lender — China — sharply
reduced the amount it was willing to lend.
The United States Treasury estimated
this week that during the first 11 months of last year China raised its holdings ofTreasury securitiesby
just $62 billion. That was less than 5 percent of the money theTreasuryhad to raise.
That raised its holdings to $790 billion,
leaving it the largest foreign holder of Treasury securities — Japan is second at $757 billion and Britain a distant
third at $278 billion. But China’s holdings at the end of November were lower than they were at the end of July.
Not since 2001, when China was still a relatively
minor investor in Treasury securities, had the country shown a decline in holdings over a six-month period.
President Obama: "Never
Again Will the American Taxpayer be Held Hostage by a Bank that is 'Too Big to Fail'"
From the White House
The President proposed what he called "the Volcker Rule," named after
one of the fiercest advocates for financial reform over the past year, and who has been particularly focused on addressing
the issue of banks being "too big to fail." He also proposed addressing one of the clearest issues leading to the financial
crisis of the past years, namely banks that stray wildly from their core mission: serving their customer. Having met
with Paul Volcker this morning, and having last week proposed new fees on Wall Street to ensure the taxpayersget their money back, thePresident came with a direct message for banksthat might object to these changes:
I welcome constructive input from folks in the financial
sector. But what we've seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on
Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people.
So if these folks want a fight, it's a fight I'm ready
to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting
reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to
small business, they can't keep credit card rates low, they can't pay a fee to refund taxpayers for the bailout without passing
on the cost to shareholders or customers -- that's the claims they're making. It's exactly this kind of irresponsibility
that makes clear reform is necessary.
President Barack Obama meets with Economic Recovery Advisory Board Chair Paul Volcker in
the Oval Office January 21, 2010. (Official White House Photo by Pete Souza)
The President went on to explain the reforms he was proposing in more
detail:
First, we should no longer allow banks to stray too
far from their central mission of serving their customers. In recent years, too many financial firms have put taxpayer
money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward.
And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.
Our government provides deposit insurance and other
safeguards and guarantees to firms that operate banks. We do so because a stable and reliable banking system promotes
sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression.
But these privileges were not created to bestow banks
operating hedge funds or private equity funds with an unfair advantage. When banks benefit from the safety net that
taxpayers provide –- which includes lower-cost capital –- it is not appropriate for them to turn around and use
that cheap money to trade for profit. And that is especially true when this kind of trading often puts banks in direct
conflict with their customers' interests.
The fact is, these kinds of trading operations can create
enormous and costly risks, endangering the entire bank if things go wrong. We simply cannot accept a system in which
hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could
pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the
bank wins but taxpayers foot the bill if the bank loses.
The proposal would:
1. Limit the Scope - The President
and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own,
invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers
for its own profit.
2. Limit the Size - The President
also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will
place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement
existing caps on the market share of deposits.
In the coming weeks, the President will continue
to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common
sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too
Big to Fail.” Chairman Barney Frank’s financial reform legislation, which passed the House in December,
laid the groundwork for this policy by authorizing regulators to restrict or prohibit large firms from engaging in excessively
risky activities.
As part of the previously announced reform program,
the proposals announced today will help put an end to the risky practices that contributed significantly to the financial
crisis.
The rise in joblessness was a sharp change from November, when 36
states said their unemployment rates fell...The rise
in joblessness was a sharp change from November, when 36 states said their unemployment rates fell...Nationally, more than 600,000
people left the labor force in December, according to government data. The large exodus from the labor force indicates that
"unemployment is a lot worsethan the numbers suggest"...
Developing countries facing higher borrowing costs,
lower credit levels, and reduced international capital flows
The global economic recovery that is now underway will slow later this year
as the impact of fiscal stimulus wanes. Financial markets remain troubled and private sector demand lags amid high unemployment,
according to a new report from the World Bank.
Global Economic Prospects 2010, released today, warns
that while the worst of the financial crisis may be over, the global recovery is fragile. It predicts that the fallout from
the crisis will change the landscape for finance and growth over the next 10 years.
Global GDP, which declined by 2.2 percent in 2009, is expected to grow 2.7 percent
this year and 3.2 percent in 2011[1].Prospects
for developing countries are for a relatively robust recovery, growing 5.2 percent this year and 5.8 percent in 2011 -- up
from 1.2 percent in 2009.GDP in rich countries, which declined
by 3.3 percent in 2009, is expected to increase much less quickly—by 1.8 and 2.3 percent in 2010 and 2011. World trade
volumes, which fell by a staggering 14.4 percent in 2009, are projected to expand by 4.3 and 6.2 percent this year and in
2011...
Stronger
fundamentals helped theLatin America and the Caribbeanregion
weather this crisis much better than in the past. Following an estimated 2.6 percent drop in GDP last year, regional output
is projected to increase by 3.1 percent in 2010 and 3.6 percent in 2011, but weaker investment will keep growth from attaining
boom year levels. Remittances and to some extent tourism (both important sources of external finance for Caribbean countries)
are expected to recover only modestly in the 2010–11 period, undermined by weak labor market conditions in the United
States and other high-income countries. Key challenges include the winding down of stimulus measures; providing for the unemployed
in a fiscally sustainable manner; and maintaining openness towards international trade and investment.
$1.900,000,000,000 increase in US debt limit proposed
Senate Democrats...proposed allowing the federal government
to borrow an additional $1.9 trillion to pay its bills, a record increase that would permit the national
debt to reach $14.3 trillion. The unpopular legislation is needed to allow the federal government to issue
bonds to fund programs and prevent a first-time default on obligations.
The record increase in the so-called debt
limit is required because thebudget deficithas spiraled out of
control in the wake of a recession that cuttax
revenues, theWall
Street bailout, and increased spending by the Democratic-controlled Congress. Last year's deficit hit a phenomenal
$1.4 trillion, and the current year's deficit promises to be as high or higher...Less than a decade ago, $1.9 trillion
wouldhave been enough to finance theoperations
and programs of the federal government for an entire year.
The UK government expects borrowing to come in at £178
billion this year, topping 12% of gross domestic product, but has pledged to halve its deficit over the next four years.
Recorded history covers much less than one trillion seconds
Russia diversifies into Canadian dollars
Russia’s
central bank announced on Wednesday that it had started buying Canadian dollars and securities in a bid to diversify its foreign
exchange reserves.
Analysts
said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and
into investments denominated in other commodity-linked currencies.
The global economy will suffer the fallout from the financial
crisis for years to come, the World Bank said... in a report warning that growth may wilt later this year as stimulus spending
fades.
The Washington-based bank forecasts the world economy will
grow 2.7 percent this year, and 3.2 percent in 2011. It contracted 2.2 percent in 2009.
"A great deal of uncertainty clouds the outlook for the second
half of 2010 and beyond," the report said.
Though the "acute phase" of the crisis has passed, chronic
weaknesses remain. Much depends on the timing of withdrawal from massive stimulus programs and adjustments to monetary policy,
the bank said.
Mishandling could result in a "double-dip," with a return to
recession in 2011, it warned.
China appears to be on the brink of overtaking beleaguered Japan as the
world's second-biggest economy after another blistering performance in 2009...
Asia's two biggest economies look to have ended 2009 in a tight race but
China, which grew 8.7 percent last year, is soon expected to unseat its neighbour from the position it has held for more than
40 years...
China...reported nominal -- unadjusted for inflation -- gross domestic
product (GDP) for 2009 of 33.5 trillion yuan, or 4.9 trillion US dollars at today's exchange rates...
Japan posted nominal GDP of about 505.1 trillion yen, or 5.5 trillion
US dollars, in 2008 and its economy is expected to have shrunk by roughly six percent last year, reducing the figure to about
5.2 trillion US dollars...
Risk that deteriorating
government finances could push economies into full-fledged debt crises tops a list of threats facing the world in 2010.
Report by the World
Economic Forum says
high debt has become a growing concern for financial
markets. The risk is particularly high for developed nations, as many emerging economies, not least in Latin America, have
already been forced by previous shocks to put their fiscal houses in order (see below on this page for more details on the
WEF report).
Chinawill slow its massive lending spree and
step up monitoring of banks as it tries to prevent speculative bubbles in real estate and other assets while keeping the country's
economic recovery on track
Investment
expert and author Stephen Leeb believes we're entering the beginning of the end when it comes to thecommoditiesthat hold our modern
world together. Resources such as oil, copper and iron are being rapidly depleted -- and with the needs of developing countries,
demands are only increasing.
Five Potential Potholes on the Road to U.S. Recovery
1. Employment continues
to decline...2.Commercial real estate (CRE) foreclosures continue rising, more banks go belly up...3. Residential real estate's advance halts...4. China's real estate bubble
pops...5. U.S. Sales and income taxes keep declining
The U6 unemployment rate counts not only people
without work seeking full-time employment (the more familiar U-3 rate), but also counts "marginally attached workers and those
working part-time for economic reasons."Note that some of these part-time workers
counted as employed by U-3 could be working as little as an hour a week. And
the "marginally attached workers" include those who have gotten discouraged and stopped looking, but still want to work.The age considered for this calculation is 16 years and over
____________________________________________
Moody’s Investors Service
“Latin America and the Caribbean have come out of the crisis with
relatively little new debt, especially when compared to more developed parts of the world, leaving the region in a good position
at the start of 2010...For the first time in years, if not decades, a major crisis has passed without substantial increases
in the regional debt burden or a fall in international reserves.”
THIS WEEK'S REPORTS
Election Finance Reform Report
In addition to extensive new information about the role of
small and large doors in federal and state elections, the fifty-five page report contains this report offers a new vision
of how campaign finance and communications policy can help further democracy through broader participation.
"My resolve to reform the system is only strengthened when
I see a return to old practices at some of the very firms fighting reform and when I see record profits at some of the very
firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers
for the bailout"
___________________________________
Stephen Dinan, Washington Times
"In a decision with profound implications for the role of money in American
campaigns, the Supreme Court on Thursday gave interest groups, unions and corporations the right to pour money into issue
advertising in political races - reigniting the passionate battle over the influence of cash on the electoral process."
“The announcement of an agreement to create a presidentially
appointed fiscal commission that will report to the Congress and be assured a vote on its recommendations is a major step
toward putting our nation’s financial house in order while protecting our social safety net programs.”
_________________________________________
Columbia University
professor and Nobel Laureate, Joseph Stiglitz:
U.S. does not have capitalism..."In old-style 19th Century capitalism, I owned my company, I made
a mistake, Ibore the consequences. Today, (at) most of the big companies you have managers who, when things go well,
walkoff with a lot of money. When things go badtheshareholders bear the costs."...the American systemnow socializes the losses and “privatizesthe gains.”
Premio
Nobel y profesor de la Universidad de Columbia Joseph Stiglitz:
"En EEUU ya no hay
capitalismo...
Una horrible cantidad de gente no está gestionando su propio dinero.
En el viejo capitalismo del Siglo XIX, yo poseía mi empresa y, si cometía un error, sufría las consecuencias. Hoy, en la mayoría
de las grandes empresas, tienes gestores que, cuando las cosas van bien, se llevan muchísimo dinero, y cuando van mal, los
accionistas corren con los costes...Es un sistema en elque se socializan las pérdidas y se privatizan
las ganancias."
_________________________________________
Director general del FMI, Dominique
Strauss-Kahn
"Necesitamos
reformas y una voluntad política...Mi preocupación es que en seis o doce meses todo el mundo retome su actividad como antes
y se olviden las lecciones de la crisis financiera".
___________________________________
Justin Lin, World Bank chief economist
"Unfortunately,
we cannot expect an overnight recovery from this deep and painful crisis, because it will take many years for economies and
jobs to be rebuilt. The toll on the poor will be very real"
THIS WEEK'S POLLS
.
.
.
DR.DOOM SAYS...
"...monetization of...fiscal deficits is becoming a pattern in many advanced economies,
as central banks have started to swell the monetary base via massive purchases of short-and long-term government paper. Eventually,
large monetized fiscal deficits will lead to a fiscal train wreck and/or a rise in inflation expectations that could sharply
increase long-term government bond yields and crowd out a tentative recovery...Fiscal
stimulus is a tricky business...If they remove the stimulus
too soon by raising taxes, cutting spending and mopping up the excess liquidity, the economy may fall back into recession
and deflation. But if monetized fiscal deficits are allowed to run, the increase in long-term yields will put a chokehold
on growth....Americans are deluding themselves that
they can enjoy European-style social spending while maintaining low tax rates....
Monetizing the fiscal deficits...(is)...the
path of least resistance: Running the printing presses is much easier than politically painful deficit reduction.
But if the U.S. does use the
inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the U.S. dollar would
rise significantly....A disorderly rush to
the exit could lead to a dollar collapse, a spike in long-term interest rates and a severe double-dip recession.
Will America be the next great
power to fall because of unsound finance?
The question is particularly
pressing in the midst of what is widely seen as the worst financial crisis since the
Great Depression...the
United States may be succumbing to financial overstretch. Deeply in debt to the rest of the world, it has become part of a
“dual country” --- “Chimerica.” “In effect, the People’s
Republic of China has become banker to the United States of America.”... Until the current global financial crisis,
this seemed to be a fairly reliable relationship. American consumers over-bought goods and over-borrowed from China, and the
Chinese in turn accumulated huge dollar surpluses that they plowed back into Wall Street investments, thereby supplying profligate
Americans with the financing we needed to consume and sustain ourselves as the lone superpower. “For a time it seemed
like a marriage made in heaven,”... “The East Chimericans did the saving. The
West Chimericans did the spending..”
Suddenly, however, it’s looking more
like a marriage made in hell...much of the current crisis stems from this increasingly uneasy symbiosis. It turns out “there
was a catch. The more China was willing to lend to the United States, the more Americans were willing to borrow.” This
cascade of easy money...“was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts
that Planet Finance witnessed after 2000. . . . And Chimerica — or the Asian ‘savings
glut,’ as Ben Bernankecalled it — was the underlying reason why the U.S. mortgage
market was so awash with cash in 2006 that you could get a 100 percent mortgage with no income, no job or assets.” Going
forward, the system seems likely to be increasingly unstable, as Treasury Secretary Henry Paulson suggested recently when
he warned that unless fundamental changes are made, “the pressure from global imbalances will simply build up again
until it finds another outlet.”
Previous periods of global stability and peace had relied
on
Extract from book review by Michael Hirsch of...
THE ASCENT OF MONEY
A Financial History of the World
By Niall Ferguson
Illustrated. 442 pp. The Penguin Press. $29.95 Published
November 13, 2008
judicious mechanisms like the Congress of Vienna or the Bretton Woods agreements. Now the international system —
and America’s position within it — has come to depend on what looks more like a global Rube Goldberg machine running
on hot money...the Chinese may now have the upper hand in this chimerical Chimerica. While
so far it’s worked in Beijing’s interest to under write America’s rampant consumerism — because we
buy so many of their goods — the Chinese also have the option of recycling some of their surplus billions into their
own huge population. We, on the other hand, don’t have the option not to borrow from them. Indeed, it’s no secret
on Wall Street and in Washington that the real targets of President Bush’s $700 billion bailout plan were the foreign
funds, including “
sovereign wealth funds,” that keep America’s financial system afloat.
Unless these foreign financiers — principally China and Japan — get reassurance that the global financial system
can function properly again, America’s long period of growth and power may be coming to a close. Perhaps, then, the conclusion should be that Americans
need to flex our muscles less as an empire and fight a little harder for fiscal sobriety and balance in our foreign policy.
Without doubt, the United States is exhibiting some of the classic precursors to out-of-control
inflation. But a deeper look suggests that the story is not so simple...
One basic lesson of economics is that prices rise when the government creates an excessive
amount of money. In other words, inflation occurs when too much money is chasing too few goods.
A second lesson is that governments resort to rapid monetary growth because they face
fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which
essentially print money to cover the budget shortfall.
Those two lessons go a long way toward explaining history’s hyperinflations, like
those experienced by Germany in the 1920s or by Zimbabwe recently. Is the United States about to go down this route?
Recession:As
federal spending and debt soar to new highs, many economists have alarmingly concluded that the dollar will soon collapse
and take the economy with it. But that scenario is far from inevitable.
You don't have to look far to see the red flags flapping. Most recently,
the respected 24-member Committee On the Fiscal Future of the United States warned the U.S. must cut its debt or face a dollar
crisis.
"It has got to be done," said Rudolph Penner, formerly head of the
nonpartisan Congressional Budget Office and the group's co-chair. "It will be done some day. It may be done with enormous
pain. Or it may be done more rationally."
In the same vein, commentator Patrick Buchanan wondered in his latest
column, "Is America's Financial Collapse Coming?" And these concerns are far from isolated. A Google search of "dollar" and
"crisis" yielded 57.5 million hits.
We too have said the government's massive spending and debt pose real
dangers. Average federal spending from World War II through 2008 was about 20% of gross domestic product. Today, it's 26%
— and climbing. Worse, just one year ago total U.S. public debt was $5.8 trillion. Today it's $12 trillion, and rising
literally by the minute.
Even so, we believe a full-blown dollar crisis — involving a
collapse in our currency and an inability to pay our debts — is unlikely.
• Over two-thirds
of people believe the current economic crisis is also a crisis of ethics and values • Report based on opinion
poll of over 130,000 respondents from 10 G20 economies on Facebook • Global religious leaders identify the key
values for a more just and sustainable post-crisis economy
Over two-thirds of people believe the current
economic crisis is also a crisis of ethics and values. But only 50% think universal values exist. These are among the findings
of the World Economic Forum’s Faith and the Global Agenda: Values for the Post-Crisis Economy, an annual report on issues
related to the role of faith in global affairs.
Almost two-thirds of respondents believe that people do not
apply the same values in their professional lives as they do in their private lives
When
asked to identify the values most important for the global political and economic system, almost 40% chose honesty, integrity
and transparency
“The
economic and financial crisis is an opportunity to re-articulate the values that should underpin our global institutions going
forward,” said John J. DeGioia, President of Georgetown University, USA. “The world's religious communities are
critical repositories of those values.
The social sins that Mahatma Gandhi used to instruct his young disciples in his ashram are:
"...there are
those which feature highly on the Global Risks Landscape and which predated the recession
but have been exacerbated by its impact through greater
resources constraints or short-term thinking.
These include:
Fiscal crises and the social and political implications of high unemployment
Underinvestment in infrastructure,
both new and existing, and its consequences for growth, resource scarcity and climate change adaptation
Chronic diseases and their impact on both advanced economies and developing countries
The report also notes how concerns over further asset
bubbles remain strong...
The other risks discussed in this report are equally
systemic in nature and also require better global governance but they currently feature less prominently on the Global Risks
Landscape. The report raises these risks to understand if there is an “awareness gap” around these areas and suggests
that they should not be forgotten in the focus on an integrated and longer term view of risks. These risks include:
transnational crime and corruption;
biodiversity loss; and
cyber-vulnerability."
Economic Risks
Food price volatility - Rising and volatile prices affect poor
consumers globally (those whose consumption basket is more than 50% food)
Oil price spikes - Sharp and/or sustained
oil price increases place further economic pressures on highly oildependent industries and consumers, as well as raising geopolitical
tensions
Major fall in the US dollar - An abrupt, major fall
in the value of the US dollar with impact throughout the global economic and financial systeM
Slowing Chinese economy - Sudden reduction in China’s growth to 6% or less
Fiscal crises - Overstretch of fiscal positions generates unsustainable levels of debt, rising interest rates, inflationary pressures
and sovereign debt crises
Asset price collapse - A collapse of real and
financial assets in advanced and emerging market economies leads to the destruction of wealth, deleveraging, reduced household
spending and demand
Retrenchment from globalization (developed) - Multiple developed economies
adopt policies that create barriers to flows of goods, capital and labour and fail to engage with multilateral governance
structures to address global challenges
Retrenchment from globalization (emerging) - Multiple emerging economies
adopt policies that create barriers to flows of goods, capital and labour and fail to engage with multilateral governance
structures to address global challenges
Burden of regulation - If not balanced, regulation can have
unintended consequences for Industry structures and market competition, distorting the allocation of capital and constraining
investment and the power to innovate
Underinvestment in infrastructure - Failure to invest in
physical or intangible infrastructure hinders growth and development and results in major loss of resilience
Geopolitical Risks - International terrorism, Nuclear
proliferation, Iran, North Korea, Afghanistan
instability, Transnational crime and corruption, Israel-Palestine,
Iraq, Global
governance gaps
Environmental Risks - Extreme weather, Droughts and desertification, Water scarcity, National Catastrofe - Cyclone, Earthquake, Inland
flooding, Coastal flooding, Air pollution, Biodiversity loss
Societal Risks - Pandemics, Infectious diseases, Chronic diseases, spread of US-style liability regimes to other jurisdictions, Migration
Technological Risks - Cyberspace attacks
or system failures, Nanoparticle toxicity, Data fraud/loss
"Leaders now recognize that the world is inadequately equipped to deal with global risks. The context in which
decisionmaking processes happen has shifted radically from one where the immediate prevailed to one where a long-term perspective
is vital. To fight systemic crises effectively we need systemic risk management. This report is a reminder of the urgency
for action at individual, corporate, national and supra-national levels. “Going back to business as usual” is
no longer an option. Behaviour needs to change at all levels: individual, corporate, political, if new, more forwardlooking
models and mechanisms for global governance are to be truly effective in managing the risks the world faces.
(Webmaster comment: I believe this is worth reading and considering. - JW)
Post-Crisis Reforms: Some
Points to Ponder
by MUHAMMAD TAQI USMANI
,
Vice President, Darul-Uloom Karachi
The following is an extract from a paper by Justice Muhammad
Taqi Usmani is an eminent Hanafi Islamic scholar from Pakistan included in the World Economic Forum report "Values for the
Post-Crisis Economy" cited above:
A glance over the present
crisis
Let us now have a glimpse of how the present crisis emerged to find out its root causes in the
light of the principles highlighted above. Until early 2007, there was a boom in US household credit. Financial institutions
raced towards offering house loans at competitive rates of interest. In order to refinance these loans, they were sold to
factoring agencies that securitized them for the general public. Risky loans were packaged in “collateralized debt obligations”
(CDOs) with a claim that pooling these debt obligations according to a mathematical magic erodes their risk to a great extent.
Agencies, therefore, rated them as AAA.These CDOs were then sliced up and exported throughout the
world. This prompted Wall Street to create new CDOs of low-rated corporate bonds. Once CDOs exhausted the available debts,
derivatives in the form of credit default swaps (CDS) came into the picture. By 2008, the credit default swaps market had
grown to US$60 trillion, while the entire world’s GDP was US$60 trillion. During the same time, the size of the derivatives
markets overall had increased to an incredible US$600 trillion—most of this money was unregulated.
When house prices dropped, the obligors of house loans defaulted. Foreclosures were insufficient
to recover the dues. It transpired that these debt-based assets were not safe.This created a panic, and the whole pyramid
of debt-based instruments fell down. Once panic set in, lending was stopped, companies suffered losses, and share prices faced
steep falls.The whole economic setup was in the grip of the crisis that is estimated to have wiped out nearly 45% of the wealth
of the world.
Causes and remedies
This review shows that there were four basic factors responsible for the crisis:
1. Diverting “money” from its basic function as a medium of exchange, and making itself an object
of trade that turned the whole economy into a balloon of debts over debts.
Even in the Depression of 1930s, the Economic Crisis Committee formed by the Southampton Chamber of Commerce,
after discussing the basic causes of the problem, observed that:
In order to ensure that money performs its true
function of operating as a means of exchange and distribution, it is desirable that it should cease to be traded as a commodity.
In order to save the world from such evil consequences, this recommendation must be adhered to.
An exchange of different currencies is, of course, inevitable for the purpose of international trade. So far
as these exchange transactions are carried out for the genuine purpose of cross-border trade, they cannot pose a problem.
The problem is caused by speculative transactions in money itself. At present, the majority of
currency transactions in the market are purely speculative.The volume of global international trade in 2008 was
approximately US$32 trillion, making an average of US$88 billion on a daily
basis; the daily turnover in global foreign exchange markets is estimated at US$3.98 trillion, 9 that is, 45 times more than the volume
of international trade. It means that only 2% of trade in currencies is based on the genuine cross-border trade, while 98%
of currencies transactions account for nothing but speculation in money prices.This artificial use of currencies is the main
cause of the perpetual fluctuations in their prices that has almost stopped the function of money as a store of value.
Moreover, one of the essential requirements for restricting money to its basic function is that
interest should be abolished from financing activities. Serious thought must be given to reshaping our financial system on
the basis of equitable participation in productive activities to minimize debt transactions, which must be backed by real
assets and created only by real trade transactions of sale or lease and so on.
2. Derivatives were one of the basic causes of the financial problems. Frank Partony, a former
derivatives trader, observes:
The mania, panic and crash had many causes. But if you are looking for a single word to use in
laying blame for the recent financial catastrophe, there is only one choice: Derivatives.
The worth of total derivatives was nearly US$741.1 trillion (741,100,000,000,000) in 2008,
11 while the total
GDP of the entire world was only 60.6 trillion—that is, the worth of derivatives was 12 times more than the gross products
of all the countries of the globe.
In order to curb this evil, derivatives must be banned.
3. Sale of debts was one of the most prominent causes of this crisis. Packaging a large amount
of debt in a bundle of CDOs, which was the initial cause of the present crisis, would not be possible if sale of debts was
disallowed.
Since a genuine sale is meant to transfer the sold item to the buyer, it is logical that the seller
should have full control of the sold item to be able to deliver it to the buyer.The same principle is applicable to debts.
Since it is not absolutely certain that the obligors will fulfill their obligations, the creditor should not be allowed to
sell these debts to anyone, thereby transferring the risk of default to the buyer.This is one of the reasons why the sale
of debts is prohibited in Islamic jurisprudence.
4. Short sales in stocks, commodities and currencies is the basic factor that makes speculation
an obstacle in the smooth operation of real commercial activities. Realizing the bad effects of short selling, many regulatory
authorities resorted to a temporary ban on shorting.
In order
to avoid the lethal consequences of speculation, short sales should not be allowed any more.
To sum up: we are in the burning need of a visible change in our economic set-up on the basis of the principles
mentioned above.
To quote
the remarks of the chairman of the World Economic Forum in its last annual meeting:
Today we have reached a tipping point, which leaves us only one choice—change or face continued
decline and misery.
(From a footnote to the above paper: G. William
Domhoff has summarized this concentration in the United States in the following words: “In the United States wealth
is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all
privately held wealth, and the next 19% (the managerial, professional and small business stratum) had 50.5%, which means that
just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers).
In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households had an even greater
share: 42.7%.”)
January 25-31, 2010
.
"...
EXTRACTS from