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Daily Digest - Jan 11

Sunday, January 11, 2009, 9:37 AM
  • Yuan-settlement test to start
  • What Are the Chances of a Depression?
  • Asking for TARP Funds Takes Only 27 Minutes
  • Application Guidelines for TARP Capital Purchase Program
  • Warren's Warrants More Valuable Than U.S. Taxpayers'
  • Quantitative and qualitative easing again 
  • GMAC Announces Interim Changes to Its Board
  • Americans Grow To Like Old Cars 
  • Agency Raises Concerns About Car Makers' Pension
  • Obama / Harwood Interview
  • UBS closing U.S. clients' offshore accounts

 

Economy

 

Yuan-settlement test to start

CHINA'S central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.

The People's Bank of China will expand financial cooperation with overseas economies and "properly deal with the global financial crisis," the central bank said.

"We'll actively join international efforts to tackle the global financial crisis while safeguarding national interests," the central bank said.

It pledged to implement a pilot program that the State Council announced last month.

China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China's two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.

Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.

Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said 

What Are the Chances of a Depression?

According to a USA Today/Gallup poll conducted last month, 35 percent of Americans think that a "depression" -- which the poll defines as "an economic downturn that is much more severe than most recessions and would last several years" -- is very likely, and another 39 percent think it's at least somewhat likely.

This, however, is a relatively vague definition of a "depression". If, for example, real GDP declined by 4 percent in 2009, a further 2 percent in 2010, and then held steady in 2011 before finally beginning to recover in 2012, that would be by far the worst economic slump since World War II and would meet the USA Today poll's definition of a depression. And there are various other signs and symptoms that we might describe as "depressionary". For example, if unemployment were to hit double digits, or there was a run on one or more major commercial banks, or there was severe price deflation on the order of, say, 4% for a couple of quarters, some people might consider those things to be evidence of a depression, and we'd begin to see the term thrown about more casually.

But there is a somewhat more precise definition of a depression (although by no means is it one universally agreed upon by economists): that is a 10 percent decline in real GDP over the course of a year or more. This is the definition that the predictions market Intrade uses. And the latest trade at Intrade just put the chances of a depression occurring at some point in 2009 at 40 percent -- or about ten times more likely than the odds that Norm Coleman prevails in his election lawsuit in Minnesota.

Asking for TARP Funds Takes Only 27 Minutes

Journalists have written so much about the Troubled Assets Relief Program (TARP), better known as the federal bailout, that it's hard to find a new angle. Seems like everyone's clamoring for a piece of the collective capital. Maybe that's because it takes less than half an hour to ask for it.

It turns out that the application for TARP funds is surprisingly simple. Interested parties can find the complete guidelines for the TARP Capital Purchase Program here. The application is just two pages long. As a test, we decided to fill it out. Including the time it took us to explain this project to our chief financial officer, the TARP application took a mere 27 minutes to complete.

To put it in perspective, here are five things that take longer than filling out the TARP application.

Applying for Temporary Assistance for Needy Families (TANF): 4 hours.
Watching Wall Street: 2 hours, 5 minutes.
Making a tuna noodle casserole: 1 hour, 20 minutes.
Applying for New York State unemployment insurance benefits: 30 minutes.
Applying for food stamps in New Jersey: 30 minutes.
One of the only things that takes less time is filling out a credit card application: 2 minutes.

Application Guidelines for TARP Capital Purchase Program

The Last Pillar Of The Chinese Economy Falls

The way that the Chinese GDP was going to roll forward to become the No.1 economy in the world was relatively simple. An expanding global need for cheap goods would drive a massive export machine. An expanding middle class would become rabid consumers of items made both overseas and within China.

The system was fool-proof. Even remarkably intelligent economists and journalists talked and wrote about "the Chinese Miracle." In 2007, the nation's GDP was $3.2 trillion, but was growing at 11%. US GDP was well over $14 trillion that year, but its growth rate was 3%. It was only a matter of time before the lines crossed.

China has been able to draw upon a huge reserve of rural labor. People have been moved from rural China to a number of large industrial cities in the interior of the country, many of which now have populations in the millions. Factory complexes were built in these same areas. As long as demand for output moved up, the labor forces in these regions grew. China created its own middle class which served the dual purpose of making and consuming goods at record rates.

The central government has believed that as the demand for exports softened recently due to the global recession, the country's new middle class would continue to help GDP growth through consumption.

Warren's Warrants More Valuable Than U.S. Taxpayers' (Bloomberg Table)

Quantitative and qualitative easing again 

The UK Chancellor, Alistair Darling, has been busy repudiating the notion that the British government was planning to ‘print money' to prevent deflation and stimulate the economy. He was reported in the Financial Times (January 9th, 2009) as saying :"Nobody is talking about printing money. There's a debate to be had about what you do to support the economy as interest rates approach zero, as they are in the US. But for us that is an entirely hypothetical debate".

This statement of the Chancellor either represents a major manifestation of profound ignorance about what central banks do and how monetary policy is conducted, or a deliberate denial of an obvious fact, perhaps because the words "printing money" have unfortunate Weimar or Zimbabwe connotations. Yet ‘printing money' - that is, creating base money, either through the issuance of currency or by increasing the stock of commercial bank reserves held with the central bank - is what central banks do in a fiat money world. They do this not just in Zimbabwe, but also in the US, in the Eurozone and in the UK.

Even without the zero floor on the Bank of England's official policy rate (Bank Rate) having been reached yet (it currently stands at 1.5 percent), the Bank of England has in fact be printing quite a lot of money. By no means enough in the period since September 2008, I would argue, but certainly quite a bit. This is clear from Charts 1 and 2 below, which show the behaviour of central bank money, also called base money or the monetary base, and its two components, currency (notes and coin held outside the Bank of England) and commercial bank reserves held with the Bank of England. Chart 2 also shows the behaviour of the monetary base, or narrow money, relative to a broad measure of money, M4, which includes sterling bank deposits held by the private sector and some close substitutes. The ratio of broad money to narrow money (here M4 to M0) is sometimes called the (base) money multiplier. Note that in Chart 2, both M0 and M4, but not the ratio of M4 to M0, are drawn on the log scale.

 

GMAC Announces Interim Changes to Its Board

NEW YORK (Jan. 9, 2009) -- GMAC Financial Services confirmed today upcoming changes to its Board of Directors, in accordance with the U.S. Federal Reserve System Board of Governors' order granting the company's application to become a bank holding company and the company's participation in the U.S. Department of the Treasury's Troubled Asset Relief Program (TARP). Pursuant to the Fed's order, GMAC's Board will be reconstituted no later than March 24, 2009. GMAC's new seven-member board will consist of the GMAC chief executive officer, one representative from FIM Holdings LLC, two directors appointed by a trust to be formed by U.S. Department of the Treasury, and three independent directors elected by the aforementioned directors. In addition, each of General Motors and FIM Holdings LLC is entitled to have one non-voting observer on the board, as long as they hold common interests of GMAC.

Current GMAC Chairman J. Ezra Merkin is resigning from the board, effective Jan. 9, 2009. "I am pleased that GMAC has successfully completed its conversion to a bank holding company and look forward to GMAC's accomplishing its goals," Merkin said. The GMAC Board expressed its thanks to Merkin for his dedicated service to the company over the past two years.

During the short transition period to the new board, Merkin will be replaced as chairman by Lenard Tessler, managing director and co-head of Private Equity at Cerberus Capital Management, L.P., while the vacant seat will be filled by Jeffrey L. Lomasky, chief financial officer of Cerberus.

About GMAC Financial Services
GMAC Financial Services is a global finance company operating in and servicing North America, South America, Europe, and Asia-Pacific. GMAC specializes in automotive finance, real estate finance, insurance, commercial finance, and online banking. As of Dec. 31, 2007, the organization had $248 billion in assets and serviced 15 million customers. Visit the GMAC media site at http://media.gmacfs.com/ for more information.

 

Americans Grow To Like Old Cars

Imagine millions of Americans owning antique cars. A 1966 Ford Fairlane is worth almost $140,000. A 2001 Chrysler Prowler $40,000.

Consumers are keeping their vehicles much longer because they cannot afford to buy new ones. If they hold them much longer, they may become so ancient that they qualify to become collectibles. If people have lost the equity in their homes, perhaps they can get it back from the value of their vintage cars.

According to Bloomberg, "Used vehicles being traded in at dealerships averaged 6.3 years of age after the Wall Street meltdown in late 2008, about 6 months older than before the crisis, according to forecaster J.D. Power & Associates in Troy, Michigan."

Put another way, the car companies get into deeper trouble every day.

 

Agency Raises Concerns About Car Makers' Pension

DETROIT -- The government agency that protects pensions for Americans is raising fresh concerns about the repercussions if one or more of the U.S. auto makers were to collapse, saying 1.3 million workers and retirees could see their pensions slashed if that were to happen.

The head of the U.S. Pension Benefit Guaranty Corp. acknowledged in an interview that General Motors Corp., Ford Motor Co., and Chrysler LLC have well funded pensions according to the standard accounting rules applied by the Securities and Exchange Commission.

But by the PBGC's measures, the pension funds of Detroit's Big Three would be underfunded by as much as $41 billion if one or more of the auto makers went under and killed their pension plans, PBGC Director Charles E. F. Millard said.

"An awful lot of people seem to think these plans are well funded or overfunded," Mr. Millard said in an interview. "Each of these plans is significantly underfunded [and] in three years I don't want people coming back and saying, 'How come the PBGC never told us that?'"

This concern adds fodder to an ongoing debate over what the government's role should be in helping the struggling auto makers from collapsing as the trio face a difficult road in 2009. Some people argue a bailout for Detroit would be a good use of taxpayer money, and that holding back financial aid would result in a collapse, and force the government to spend billions shoring up the companies pension plans.

Mr. Millard estimates that the three auto makers only have enough money in their pension funds to cover only 76% of the pension obligations they have made, if they terminate the pension plans. GM's plan is estimated to be $20 billion, or about 20% underfunded, while Chrysler's plan is 34% underfunded, leading to a $9 billion-plus shortfall, the agency said. Ford's funded ratio is not publicly available, but the company's pension plans are likely running at a $12 billion deficit.

About $13 billion of the estimated $41 billion shortfall would be covered by the PBGC, Jeffrey Speicher, an agency spokesman, said. The remainder represents benefits that PBGC could not pay because of limits set by Congress, and those benefits would be lost by employees and retirees.

Obama / Harwood Interview

UBS closing U.S. clients' offshore accounts

ZURICH (Reuters) - Swiss wealth manager UBS AG (UBSN.VX) (UBS.N) is closing all the offshore accounts of its U.S. clients, the bank said on Friday, as it comes under pressure from U.S. tax authorities.

The Swiss bank decided in July last year to stop offering offshore accounts to U.S. citizens after it was targeted by a U.S. tax investigation which challenges Switzerland's famous banking secrecy laws.
U.S. prosecutors have alleged UBS helped clients hide $18 billion of untaxed American money in undeclared accounts. This amounts to around $300 million of annual unpaid taxes, the newspaper said.

UBS spokesman Serge Steiner said the decision to close offshore accounts for U.S. domiciled clients was taken in November 2007. The bank started last year to close cash accounts of U.S. clients holding less than 50,000 Swiss francs ($45,660), he added.

 

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2 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Jan 11

bailout-nation-cover.jpg

pir8don's picture
pir8don
Status: Gold Member (Offline)
Joined: Sep 30 2008
Posts: 456
Re: Daily Digest - Jan 11

Shouldn't the Bailout Nation be in the present tense.

How: A corupt wall street gets easy money

and: shakes the world economy.

Don

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If the only fix is a big fix then theres no fix

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