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Daily Digest - Jan 8

Wednesday, January 7, 2009, 9:13 PM
  • CBO projects $1.2 trillion deficit for 2009 
  • Congressional Budget Office The Budget and Economic Outlook
  • Obama: Financial Markets Face 'Substantial Overhaul'
  • Paulson Says GSEs Should Become Public Utility-Like Firms 
  • Fed faces tough task ending emergency support
  • The Fate of Paper Money 
  • U.S. debt is losing its appeal in China  
  • Government Panic Could Herald Dollar Panic 
  • Detroit School Lacks Toilet Paper, Light Bulbs 
  • FACTBOX-U.S. economic report shows poor hit hard 
  • Budget gloom will toughen resistance to stimulus 
  • CNN to Air Timely Documentary and Discussion About U.S. Economic Challenges 
  • Real-Estate Executive Found Dead in Apparent Suicide 
  • U.S. companies face $409 billion pension deficit: study 
  • Italian Pensions Sapped by Private Funds Bush Backed
  • Gold Demand (Chart) 

Economy

CBO projects $1.2 trillion deficit for 2009 

WASHINGTON (AP) -- The federal budget deficit will nearly triple to an unprecedented $1.2 trillion for the 2009 budget year, according to grim new Congressional Budget Office figures.
The eye-popping estimates reflect plummeting tax revenues because of the recession and about $400 billion spent to bail out the financial industry and take over Fannie Mae and Freddie Mac. Last year's deficit was $455 billion.

The CBO estimate released Wednesday also sees the economy shrinking by 2.2 percent this year and recovering only slightly to grow by 1.5 percent in 2010. It foresees the unemployment rate eclipsing 9 percent early next year unless the Obama administration steps in.

"The recession -- which began about a year ago -- will last well into 2009," the CBO report says. The agency said that "ongoing turmoil in the housing and financial markets has taken a major toll on the federal budget."

The dismal figures come a day after President-elect Barack Obama warned of "trillion-dollar deficits for years to come."

CBO's figures don't account for the huge economic stimulus bill Obama is expected to propose soon to try to jolt the economy. 

Congressional Budget Office The Budget and Economic Outlook

Obama: Financial Markets Face 'Substantial Overhaul'  

President-elect Barack Obama told CNBC he plans "a substantial overhaul" of financial markets in the coming months, including a major restructuring of regulatory agencies. 

"Wall Street has not worked," Obama told CNBC's John Harwood in an exclusive interview. "So it's going to be a substantial overhaul. We're going to have better enforcement, better oversight, better disclosure, increased transparency. 

Paulson Says GSEs Should Become Public Utility-Like Firms 

The best option for Fannie Mae and Freddie Mac may be to convert them into public, utility-like organizations that would not hold any investment portfolio, U.S. Treasury Secretary Henry Paulson said on Wednesday. 

Speaking at the Economic Club of Washington, Paulson said returning Fannie Mae and Freddie Mac to their pre-conservatorship states remains inadvisable even though a permanent nationalization would also be detrimental as it crowds out the private sector.

"A public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain," he said.

He also said the U.S. government's credit support of nearly all new mortgages is unsustainable in the long run and that policy-makers will have to decide on an appropriate level of government housing subsidies. He noted that Fed purchases of Government Sponsored Enterprise debt and mortgage-backed securities, along with reducing rates, may help attract new homebuyers.

Paulson also said support for GSEs must be explicit or non-existent and that a middle ground is a recipe for crisis. 

Fed faces tough task ending emergency support  

NEW YORK (Reuters) - When U.S. central bankers eventually move to wean markets off the emergency support put in place to rescue the economy, they will face the difficult and delicate task of timing it right. 

If they wait too long, they risk sky-high inflation or another asset bubble. If they move too fast, they risk undermining any incipient economic recovery.

Even against the current backdrop of a miserable economic outlook and the specter of deflation, a growing number of voices are warning that the Federal Reserve needs a clear and credible exit strategy for its unprecedented policies.

The Fed's balance sheet has more than doubled in size to over $1.2 trillion in recent months as policy-makers sought to shield the economy from the worst financial crisis since the Great Depression by pumping liquidity into key credit markets.

"All roads lead to inflation and the economy will be very precariously perched when the Fed starts reversing its policy," said Michael Pento, senior strategist at Delta Global Advisors. "It's sophomoric and naive to think there is any way out of this without a lot of pain." 

The Fate of Paper Money 

Paper Money in Asia 

The first well-documented widespread use of paper money was in China during the Tang (618-907 A.D.) dynasty around 800 A.D.[1] Paper money spread to the city of Tabriz, Persia in 1294 and to parts of India and Japan between 1319 to 1331. However, its use was very short-lived in these regions. In Persia, the merchants refused to recognize the new money, thus bringing trade to a standstill. 

U.S. debt is losing its appeal in China  

China has bought more than $1 trillion in American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home - a shift that could pose some challenges to the U.S. government in the near future but eventually may even produce salutary effects on the world economy. 

At first glance, the declining Chinese appetite for U.S. debt - apparent in a series of hints from Chinese policy makers over the past two weeks, with official statistics due for release in the next few days - comes at an inopportune time. On Tuesday, the U.S. president-elect, Barack Obama, said Americans should get used to the prospect of "trillion-dollar deficits for years to come" as he seeks to finance an $800 billion economic stimulus package.

Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt - largely U.S. Treasury bonds and American mortgage-backed securities.

But now, Beijing is seeking to pay for its own $600 billion economic stimulus - just as tax revenue falls sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and midsize enterprises, many of which are struggling with slower exports, and Chinese bankers say they are being instructed to lend more to local governments to allow them to build new roads and other projects as part of the stimulus program. 

Government Panic Could Herald Dollar Panic 

One of the few things more troubling for an economy than government intervention is government intervention driven by panic. Time and again, history has shown that when governments rush to engineer solutions to pressing problems, unintended difficulties arise. 

In the current crisis, there is growing evidence that Washington is in a state of increasing panic. Despite its massive cash injections, market manipulations and 'rescue' plans, the recession is clearly deepening and spreading. With little to show thus far, politicians don't know if they should redouble past efforts, break ground on new initiatives, or both. However all agree, unfortunately, that the consequences of doing too little far outweigh the consequences of doing too much.

Although there are many parallels between the current crisis and the Crash of 1929, one key difference is the global profile of the U.S. dollar. In 1929, the dollar was on the rise, and would soon eclipse the British Pound Sterling as the world's 'reserve' currency. Furthermore, the American economy was fundamentally so strong that in 1934 America was the only major nation able to maintain a currency tied to gold.

Ever since, the U.S. dollar's privileged 'reserve' status has been a principal factor in America's continued prosperity. The dollar's unassailable position has enabled successive American governments to disguise the vast depletion of America's wealth and to successfully increase U.S. Treasury debt to where the published debt now accounts for some 100 percent of GDP. The total of U.S. Government debt, including IOU's and unfunded programs, now stands at a staggering $50 trillion, or five times GDP! If the dollar were just another currency, this never would have been possible. 

Detroit School Lacks Toilet Paper, Light Bulbs 

DETROIT -- A Detroit elementary school is asking for donations of toilet paper and light bulbs to keep their school functioning. 

The principal of the Academy of Americas sent a letter to staff, parents and partners asking for donations of items "that are of the utmost importance for proper school functioning and most importantly for student health and safety."

In the letter, Principal Naomi Khalil cited budget constraints within the district as the reason why the school could no longer stock the items.

The district is grappling with a more than $400 million budget deficit and is on the verge of being assigned an emergency financial manager by the state.

The letter asks for toilet paper, paper towel rolls, trash bags and 60, 100 or 150-watt light bulbs.
"We realize that the economic situation is stressful for our entire community, but we are asking for your collaboration," wrote Khalil. "We thank you for your cooperation and we hope that as a school community we can pull together to guarantee the best possible educational environment for our children."
Parents said a letter went out asking for supplies at the start of the school year.

"They sent out a letter for pencils, pens, they put Kleenex on there," said parent Danny Huddleston.
A spokeswoman for the district said the school is not running out of supplies but instead is asking for them to ensure they have sufficient supplies to what they already have. 

FACTBOX-U.S. economic report shows poor hit hard 

Jan 7 (Reuters) - The U.S. recession is shaping up to give Americans their hardest economic times since World War Two. 

A new assessment of the economy was presented on Wednesday by the Congressional Budget Office, the non-partisan budget analyst for Congress.

Here are some of CBO's observations on the impact of the bad economy on the poor, elderly and others, one year into the recession:

* More people need food stamps. Government spending on food stamps, designed to help the poor buy basic commodities, will grow by 27 percent this year. CBO said spending will hit $50 billion, from $39 billion last year, mostly because of growing caseloads and benefits as food prices have risen. A record 31.5 million people were signed up for food stamps last September, according to government records.

* Unemployment rolls are growing. Washington's spending on jobless benefits will nearly double, to $79 billion this year from $43 billion last year. CBO thinks the jobless rate will rise to 9.2 percent next year, from around 6.7 percent now. 

Budget gloom will toughen resistance to stimulus 

The bond markets did not appear too shocked by Wednesday's dramatically higher US budget deficit numbers - with the Congressional Budget Office forecasting a record-shattering deficit this year of almost $1,200bn. 

But the political impact is likely to cause instant problems for Barack Obama.

The president-elect, who said on Wednesday his fiscal stimulus package was likely to creep towards the "high end" of estimates - meaning it could near $800bn (€585bn, £527bn), itself a record-breaking number - will now find it harder to achieve broad bipartisan support for the package.

In addition to rising Republican concerns about the size of the stimulus, which has not been factored into the CBO's 2009 fiscal deficit projection, fiscally conservative "blue dog Democrats" are now more likely to drag their feet on the measure.

"The CBO's deficit projections are jaw-dropping," says Kent Conrad, a North Dakota Democrat, who is chairman of the Senate budget committee. "This is one of the worst budget forecasts I have seen in my lifetime. President-elect Obama is being handed an absolute fiscal disaster."

Economists also warn that the CBO's longer-term projections, which show the deficit dropping below $200bn by 2019, are based on unrealistically rosy assumptions. These include assuming that all George W. Bush's tax cuts will expire next year, which is unlikely to happen, and that Congress will allow the alternative minimum tax to kick in. Until now it has deferred the tax with an annual "patch". 

CNN to Air Timely Documentary and Discussion About U.S. Economic Challenges 

January 7, 2009 - In response to public demand for information about the scope of the country's financial challenges, CNN/U.S. will air the television premiere of the acclaimed documentary I.O.U.S.A., together with an unscripted panel discussion with policy leaders about various economic solutions currently under consideration. 

The two-hour program will feature an exclusive televised version of the nonpartisan film I.O.U.S.A., which examines the U.S. government's fiscal landscape and the consequences for the national economy. Since its premiere at the 2008 Sundance Film Festival, the film has garnered rave reviews from critics; has been nominated for a Critics Choice Award; and is on the short list for an Oscar nomination for Best Documentary Feature.

This exclusive televised event will air on CNN/U.S. on Saturday, January 10 at 2:00 p.m. EST and on Sunday, January 11 at 3:00 p.m. EST, and will be hosted by Ali Velshi and Christine Romans, co-anchors of CNN's Your $$$$$, the network's weekend business roundtable program. 

Real-Estate Executive Found Dead in Apparent Suicide 

CHICAGO -- Real-estate executive Steven L. Good was found dead of an apparently self-inflicted gunshot wound Monday in his Jaguar in a forest preserve outside Chicago, said the Kane County Sheriff's Department. 

Mr. Good, 52 years old, was chief executive of Sheldon Good & Co., one of the nation's largest real-estate auction firms. His father founded the company in 1965.

In a prepared statement Monday, Sheldon Good President Alan Kravets called it "a testimony to Steve's leadership that Sheldon Good & Co. remains well positioned for the future [and] poised for significant growth."

As chairman of the Realtors Commercial Alliance Committee, Mr. Good said last month in an industry outlook news release that market conditions were "very challenging."

According to the company's Web site, Sheldon Good "has sold more than 45,000 U.S. and international properties in more than 100 different classes and produced more than $10 billion in sales."

Mr. Good wrote a book called "Churches, Jails and Gold Mines...Mega-Deals from a Real Estate Maverick." In it, Mr. Good tells how he purportedly turned his auction firm into the real-estate equivalent of Sotheby's or Christie's. 

U.S. companies face $409 billion pension deficit: study 

NEW YORK (Reuters) - Volatile markets have saddled U.S. companies with a $409 billion deficit on pension plans, reversing a $60 billion surplus a year earlier, and will cut into earnings in 2009, consulting firm Mercer said.

As of December 31, pension plans among members of the Standard & Poor's 1500 had $1.21 trillion of assets and $1.62 trillion of liabilities, Mercer said in a report released on Wednesday. At the end of 2007, pension plan assets totaled $1.66 trillion and liabilities totaled about $1.6 trillion, Mercer said.

The S&P 1500 is a broad portfolio representing large-cap, mid-cap and small-cap segments of the U.S. equity markets.

The shortfall suggests that more companies will have to pump cash into their pension plans to ensure they can meet their commitments to retirees.

Mercer estimated pension expenses will increase to about $70 billion this year from $10 billion in 2008, reducing overall profitability by about 8 percent.

"The decline in funded status will be capitalized and reflected in corporate balance sheets for many companies," Adrian Hartshorn, a member of Mercer's financial strategy group, said in a statement.

He said this will reduce balance sheet strength and could affect companies' ability to make capital expenses, meet loan covenants and preserve their credit ratings. 

Italian Pensions Sapped by Private Funds Bush Backed 

Jan. 5 (Bloomberg) -- Italy did for retirement financing what President George W. Bush couldn't do in the U.S.: It privatized part of its social security system. The timing couldn't have been worse. 

The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit. 

Gold Demand (Chart)

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11 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Jan 8

bailout-prescrption.png

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Jan 8

5bd72708-dd27-11dd-a2a9-000077b07658.gif

gregroberts's picture
gregroberts
Status: Diamond Member (Offline)
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Re: Daily Digest - Jan 8

Davos, take a look at this...  

States of emergency declared across Europe over gas

http://www.timesonline.co.uk/tol/news/world/europe/article5469834.ece

Greg

jrf29's picture
jrf29
Status: Gold Member (Offline)
Joined: Apr 18 2008
Posts: 453
Re: Daily Digest - Jan 8

Davos, this was an absolutely phenominal daily digest!

I always like the links to raw data.

It's nice to hear that CNN will air I.O.U.S.A....

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Jan 8

Hello Greg:

Super, thank you!

Hello Jrf29:

Thank you, there was a lot out there last night, I'm still reading the Fed PDF/Full report, hope it is informative, take care and yeah it is super to see IOUSA hitting mainstream cable and if I recall I think they dedicated some time to it.

lfriedland's picture
lfriedland
Status: Member (Offline)
Joined: Jul 29 2008
Posts: 3
Aftermath of Financial Crises

In case you haven't seen it yet, "The Aftermath of Financial Crises" is an excellent read.

It is a data intensive, historic look at major banking collapses and their impact on housing and equity prices, as well GDP and employment. It shows the percent of decline and the duration in each case.

Reinhart & Rogoff have done their homework, and it ain't pretty.

DanS's picture
DanS
Status: Member (Offline)
Joined: Apr 6 2008
Posts: 21
Where's Dr. House when you need the straight truth...

Morons elect morons to assure them that their 16 years of public education is really worth something, when in fact it's all a monstrous pretense.  Public education is philosophically and morally bankrupt.  America is stewing in systemic illiteracy.

 

Tesseractal's picture
Tesseractal
Status: Bronze Member (Offline)
Joined: Apr 18 2008
Posts: 25
Re: Daily Digest - Jan 8

Regarding the RE Executive dead in apparent suicide - why is this included?

The article suggeests that the execs have said "the company is remains well positioned for the future [and] poised for significant growth" there isn't anything linking his suicide with the current meltdown.

The bit about the chairman of the Realtors Commercial Alliance Committee, Mr. Good said last month in an industry outlook news release that market conditions were "very challenging." - is already a month old.

Am I missing something????

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: Daily Digest - Jan 8

Over-regulation has been discussed here before...here is yet another example of the consequences:

http://www.digitaljournal.com/article/264507

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - Jan 8
Tesseractal wrote:

Regarding the RE Executive dead in apparent suicide - why is this included?
The article suggeests that the execs have said "the company is remains well positioned for the future [and] poised for significant growth" there isn't anything linking his suicide with the current meltdown.
The bit about the chairman of the Realtors Commercial Alliance Committee, Mr. Good said last month in an industry outlook news release that market conditions were "very challenging." - is already a month old.
Am I missing something????

Probably....  ever heard of lying through one's teeth?

Mike 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Jan 8

Hello Tesseractal:

Good catch, thanks! On the Good comment, I recall this month slid 8% and the past 11 months 10%, so in one month we fell what we fell in the year. This is from memory so I may have the numbers off. Take care.

 

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