Daily Digest

Daily Digest - May 22

Friday, May 22, 2009, 12:23 PM
  • U.S. Dollar No Longer Russia Primary Reserve Currency...
  • Ron Paul - "Prepare for Revolutionary Changes..." (Video)
  • Flawed Paradigms and More (Video)
  • David Rosenberg: The Short-Covering Rally Is Finished, Here Comes The Leg Down
  • Houing Starts (Chart)
  • Home Depot on Housing Market
  • Year to Date Country Returns (Table on page)
  • Talks Dan Ariely asks, Are we in control of our own decisions? (Video)
  • Sachs: Rethinking the Global Money Supply
  • Japanese Economy Crashes... Hard (Chart)
  • United Kingdon Retail Price Index (Chart, lowest lows since 1948 when data collection began)
  • Zipf’s Law
  • CORRECTED - UPDATE 1-GM bankruptcy plan eyes quick sale to gov't
  • David Rosenberg: The Short-Covering Rally Is Finished, Here Comes The Leg Down
  • Flu Pandemics May Lurk in Frozen Lakes
  • Britain's debt outlook lowered to negative 

Economy 

U.S. Dollar No Longer Russia Primary Reserve Currency...

 

This is a big deal. Today’s action with falling equities, falling bond prices, and a falling dollar (with sharply rising gold prices in dollar terms) pretty much boxes Bernanke and little Timmy Geithner in.

The American way of life is about to change whether we like it or not.

Notice that no shots were fired, no one sent up a balloon saying “Russia no longer uses the dollar as a reserve currency!” No, it happened slowly and subtly. (ht Comrade)
Russia Dumps the U.S. Dollar for Euro as Reserve Currency

The US dollar is not Russia’s basic reserve currency anymore. The euro-based share of reserve assets of Russia’s Central Bank increased to the level of 47.5 percent as of January 1, 2009 and exceeded the investments in dollar assets, which made up 41.5 percent, The Vedomosti newspaper wrote.

The dollar has thus lost the status of the basic reserve currency for the Russian Central Bank, the annual report, which the bank provided to the State Duma, said.

In accordance with the report, about 47.5 percent of the currency assets of the Russian Central Bank were based on the euro, whereas the dollar-based assets made up 41.5 percent as of the beginning of the current year. The situation was totally different at the beginning of the previous year: 47 percent of investments were made in US dollars, while the euro investments were evaluated at 42 percent.

The dollar share had increased to 49 percent and remained so as of October 1. The euro share made up 40 percent. The rest of investments were based on the British pound, the Japanese yen and the Swiss frank.

The report also said that the reserve currency assets of the Russian Central Bank were cut by $56.6 billion. The losses mostly occurred at the end of the year, when the Central Bank was forced to conduct massive interventions to curb the run of traders who rushed to buy up foreign currencies. The currency assets of the Central Bank had grown to $537.6 billion by October 2008. Therefore, the index dropped by almost $133 billion within the recent three months.

The majority of Russian companies, banks and most of the Russian population started to purchase enormous amounts of foreign currencies at the end of 2008. The dollar gained 16 percent and the euro 13.5 percent over the fourth quarter. The demand on the US dollar was extremely high, and the Central Bank was forced to spend a big part of its dollar assets, experts say.

The change of the structure of the currency portfolio of the Bank of Russia has not affected the official peg of the dual currency basket, which includes $0.55 and 0.45 EUR.
The investments of the Bank of Russia in state securities of foreign issuers have been considerably increased, the report said. About a third of Russia’s international reserves are based on US Treasury bonds.

Russia became one of the largest creditors of the US administration last year, the US Department of the Treasury said. Russia increased its investments in the debt securities of the US Treasury from $32.7 billion as of December 2007 to $116.4 billion as of December 2008.

If that little development doesn’t bother you, then how about the possibility of the U.S. losing her AAA credit rating?:
Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

 

Ron Paul - "Prepare for Revolutionary Changes..." (Video)

 

Ron Paul reading what appears to be clips from mail he has received. More and more people are catching on...

Ron Paul "Prepare For Revolutionary Changes" (05/19):

Flawed Paradigms and More (Video)

David Rosenberg: The Short-Covering Rally Is Finished, Here Comes The Leg Down

 

Recently departed Merrill Lynch bear David Rosenberg is out with his first report from his new outfit, Gluskin Sheff.

Not surprisingly, he picks up where he left off from his last report out of Merrill. He explains further why he believes that this big, two-and-half month runup is a sucker's rally based on short covering in the trashiest, low-quality stocks.

The Pragmatic Capitalist offers up a big chunk of the letter:

WHAT TO DO IF THE BEAR MARKET RALLY HAS ENDED?

The bulls enjoyed and the bears endured a massive 37% rally in the S&P 500 from the March 9th lows to the May 8th highs. Both in terms of duration and magnitude, this proved to be the most intense rally during this 20-month long bear market. And, the bounce has been so impressive that it has taken what was widely considered to be a massively undervalued stock market in early March to one that is now at least moderately expensive. (The FTSE All-World market P/E ratio on forward earnings estimates is now around 15x, well above pre-Lehman collapse levels and nearly double the lows for the cycle.)

Since the rebound from the March 9th lows was again led by the four sectors that led the decline during the bear phase – financials, consumer discretionary, materials and industrials – it stands to reason that this was just another counter-trend rally. What we know about history is that the sectors that led the downturn are never the ones to emerge as leaders in the next sustainable bull market.

The fact that the best performing stocks were the ones with the lowest quality ratings and with the largest short interest says a lot about the nature of this rally as well — the 50 heaviest shorted stocks tripled the advance among the 50 least shorted stocks — that its sustainability is in doubt. In other words, this was a rally built largely on short covering, pension fund rebalancing and the emergence of hope wrapped up in ‘green shoot’ data points. Technical factors ostensibly played a role too because the bounce in March came off the most oversold levels in the equity market since 1932 and the rally ended just as the S&P 500 kissed the 200-day moving average – as it has been known to do in these bear market rallies. In the aftermath of the weak April U.S. retail sales results (see more below) even in the face of the latest round of tax relief, some second-guessing over the extent of any second half economic recovery has occurred. This may have shown up in the markets towards the end of the latest rally as volume weakened as the major averages advanced. Considering that cyclical bear markets typically end 4-5 months before recessions run their course, it is imperative that the downturn ends by August to justify the March lows in the S&P 500 and the other major averages. As doubts emerge over whether in fact the green shoots amount to anything more than dandelions, it now looks as though the major averages are about to embark on the fabled retesting phase towards the March lows. (We should add that the just-released consensus forecasts published by the Philly Fed show that professional economists just trimmed their Q3 real GDP projections to a 0.4% annual rate from the 1.0% estimate previously.)

We will be watching to see whether the lows hold as they did in March 2003, which symbolized the onset of the cyclical bull phase at the time; or whether this turns out to be a violation of the lows as was the case in the summer of 2002, which represented the final severe leg of the tech-induced bear market of that prior cycle.

For the near-term, it matters little because the testing process does seem to be in place right now and this carries with it well-established investment patterns. Over the past year, we have seen four other testing phases (they all failed as the market did break to new lows). Under the proviso that the S&P 500 hit an interim peak back on May 8th at 930 (it is down 3% since, even with yesterday’s bounce), here is what the recent historical record tells us to expect (at a minimum, take profits).

Houing Starts (Chart)

Home Depot on Housing Market

 

From the Financial Times: Home Depot chief warns on US housing

Growing optimism over the US housing market may be premature, a leading retailer warned on Tuesday.
...
"We are concerned about the accelerating rates of foreclosures, particularly in the western part of the country,” [Frank Blake, chief executive of Home Depot] said, noting that one out of every 54 homes in California was in foreclosure.

Mr Blake said that a slowing foreclosure rate in California during the fourth quarter had led to an improvement in regional store sales but the trend had then reversed as foreclosure rates rose again in the first quarter.

The shift “provides a cautionary note on signalling a recovery prematurely”, he said. “Before we see real improvement we believe we need to see sustainable deceleration in foreclosures.”
Now that the foreclosure moratorium is over, the pace of foreclosures is picking up again. And, according to Mr. Blake, this will probably impact the home improvement companies.

Year to Date Country Returns (Table on page)

Talks Dan Ariely asks, Are we in control of our own decisions? (Video)

Sachs: Rethinking the Global Money Supply

 

Jeff Sachs says the dominance of the dollar should end, and probably will end:

Rethink the Global Money Supply, by Jeffery Sachs, Scientific American: The People’s Bank of China jolted the financial world in March with a proposal for a new global monetary arrangement. The proposal ... has much to commend it. ...

President Richard Nixon delinked the dollar from gold in 1971 (to offset the U.S.’s expansionary monetary policies in the Vietnam era), and major currencies began to float against one another... But most global trade and financial transactions remained dollar-denominated, as did most foreign exchange reserves held by the world’s central banks. The exchange rates of many currencies also remained tightly tied to the dollar.

This special role of the dollar in the international monetary system has contributed to the global scale of the current crisis, which is rooted in a combination of overly expansionary monetary policies by the Federal Reserve and lax financial regulations. Easy money fed an unprecedented surge in bank credits, first in the U.S. and then elsewhere, as international banks funded themselves in the U.S. money markets. As bank loans flowed into other economies, many foreign central banks intervened to maintain currency stability with the dollar. The surge in the U.S. money supply was thus matched by a surge in the money supplies of countries linked to the U.S. dollar. The result was a temporary worldwide credit bubble...

China has now proposed that ... nations peg their currencies to a representative basket of others rather than to the dollar alone. ... U.S. monetary policy would accordingly lose its excessive global influence...

The U.S. response to the Chinese proposal was revealing. Treasury Secretary Timothy Geithner initially described himself as open to exploring the idea; his candor quickly caused the dollar to weaken in value—which it needs to do for the good of the U.S. economy. That weakening, however, led Geithner to reverse himself...

Geithner’s first reaction was right. The Chinese proposal requires study but seems consistent with the long-term shift to a more balanced world economy in which the U.S. plays a monetary role more coequal with Europe and Asia. No change of global monetary system will happen abruptly... We will probably move over time to a world of greater monetary cooperation within Asia, a rising role for the Chinese yuan, and greater symmetry in overall world monetary and financial relations.

Japanese Economy Crashes... Hard (Chart)

United Kingdon Retail Price Index (Chart, lowest lows since 1948 when data collection began)

Zipf’s Law

 

Sizing up cities:

Math and the City, by Steven Strogatz: ...The mathematics of cities was launched in 1949 when George Zipf, a linguist working at Harvard,... noticed that if you tabulate the biggest cities in a given country and rank them according to their populations, the largest city is always about twice as big as the second largest, and three times as big as the third largest, and so on. In other words, the population of a city is, to a good approximation, inversely proportional to its rank. Why this should be true, no one knows. ...

Given the different social conditions from country to country, the different patterns of migration a century ago and many other variables that you’d think would make a difference, the generality of Zipf’s law is astonishing.

Keep in mind that this pattern emerged on its own. ... Many inventive theorists working in disciplines ranging from economics to physics have taken a whack at explaining Zipf’s law, but no one has completely solved it. Paul Krugman ... wryly noted that “the usual complaint about economic theory is that our models are oversimplified — that they offer excessively neat views of complex, messy reality. [In the case of Zipf’s law] the reverse is true: we have complex, messy models, yet reality is startlingly neat and simple.” ...

Around 2006, scientists started discovering new mathematical laws about cities that are nearly as stunning as Zipf’s. ... For instance,... populous ... cities have more gas stations than smaller ones (of course), but not nearly in direct proportion to their size. The number of gas stations grows only in proportion to the 0.77 power of population. The crucial thing is that 0.77 is less than 1. This implies that ... bigger cities enjoy economies of scale. In this sense, bigger is greener.

The same pattern holds for other measures of infrastructure. Whether you measure miles of roadway or length of electrical cables, you find that all ... show an exponent between 0.7 and 0.9. Now comes the spooky part. The same law is true for living things. That is, if you mentally replace cities by organisms and city size by body weight, the mathematical pattern remains the same.

For example, suppose you measure how many calories a mouse burns per day, compared to an elephant. ... The relevant law of metabolism, called Kleiber’s law, states that the metabolic needs of a mammal grow in proportion to its body weight raised to the 0.74 power.

This 0.74 power is uncannily close to the 0.77 observed for the law governing gas stations in cities. Coincidence? Maybe, but probably not. There are theoretical grounds to expect a power close to 3/4. Geoffrey West of the Santa Fe Institute and his colleagues Jim Brown and Brian Enquist have argued that a 3/4-power law is exactly what you’d expect if natural selection has evolved a transport system for conveying energy and nutrients as efficiently and rapidly as possible to all points of a three-dimensional body, using a fractal network built from a series of branching tubes — precisely the architecture seen in the circulatory system and the airways of the lung, and not too different from the roads and cables and pipes that keep a city alive.

These numerical coincidences seem to be telling us something profound. It appears that Aristotle’s metaphor of a city as a living thing is more than merely poetic. There may be deep laws of collective organization at work here, the same laws for aggregates of people and cells. ...

[For more on city size, see: Why Has Globalization Led to Bigger Cities?, by Edward Glaeser.]

 

 CORRECTED - UPDATE 1-GM bankruptcy plan eyes quick sale to gov't

 

(Removes third paragraph with reference to not making any other payment)

By Chelsea Emery and Tom Hals

NEW YORK, May 19 (Reuters) - General Motors Corp's (GM.N) plan for a bankruptcy filing involves a quick sale of the company's healthy assets to a new company initially owned by the U.S. government, a source familiar with the situation said on Tuesday.

The source, who would not be named because he was not cleared to speak with the media, did not specify a purchase price. The new company is expected to honor the claims of secured lenders, possibly in full, according to the source.

The remaining assets of GM would stay in bankruptcy protection to satisfy other outstanding claims.

GM has about $6 billion in secured debt, including a secured revolving credit and bank debt.

The government's plans include giving stakes in the new company to GM's union and bondholders, although the ownership structure of the company is still being negotiated, said the source who is familiar with the company's plans.

In addition, the government would extend a credit line to the new company and forgive the bulk of the $15.4 billion in emergency loans that the U.S. has already provided to GM, the source said.

The government has given GM until June 1 to restructure its operations to lower its debt burden and employee costs.

If those talks failed, the company has said it would follow rival Chrysler LLC into bankruptcy.

Setting up a new company to buy the healthy assets is aimed at reassuring consumers who might not be willing to make a major purchase from a bankrupt company, fearing it would not honor warranties or provide service.

The board of the new company would be established with the tacit approval of the government. Fritz Henderson, who took the helm of GM earlier this year after the government pushed out Rick Wagoner, would likely head the new company, the source said.

GM could not be immediately reached for comment.

GM shares were up about 9 percent at $1.29. (Editing by Gerald E. McCormick)

David Rosenberg: The Short-Covering Rally Is Finished, Here Comes The Leg Down

 

Recently departed Merrill Lynch bear David Rosenberg is out with his first report from his new outfit, Gluskin Sheff.

Not surprisingly, he picks up where he left off from his last report out of Merrill. He explains further why he believes that this big, two-and-half month runup is a sucker's rally based on short covering in the trashiest, low-quality stocks.

The Pragmatic Capitalist offers up a big chunk of the letter:

WHAT TO DO IF THE BEAR MARKET RALLY HAS ENDED?

The bulls enjoyed and the bears endured a massive 37% rally in the S&P 500 from the March 9th lows to the May 8th highs. Both in terms of duration and magnitude, this proved to be the most intense rally during this 20-month long bear market. And, the bounce has been so impressive that it has taken what was widely considered to be a massively undervalued stock market in early March to one that is now at least moderately expensive. (The FTSE All-World market P/E ratio on forward earnings estimates is now around 15x, well above pre-Lehman collapse levels and nearly double the lows for the cycle.)

Since the rebound from the March 9th lows was again led by the four sectors that led the decline during the bear phase – financials, consumer discretionary, materials and industrials – it stands to reason that this was just another counter-trend rally. What we know about history is that the sectors that led the downturn are never the ones to emerge as leaders in the next sustainable bull market.

The fact that the best performing stocks were the ones with the lowest quality ratings and with the largest short interest says a lot about the nature of this rally as well — the 50 heaviest shorted stocks tripled the advance among the 50 least shorted stocks — that its sustainability is in doubt. In other words, this was a rally built largely on short covering, pension fund rebalancing and the emergence of hope wrapped up in ‘green shoot’ data points. Technical factors ostensibly played a role too because the bounce in March came off the most oversold levels in the equity market since 1932 and the rally ended just as the S&P 500 kissed the 200-day moving average – as it has been known to do in these bear market rallies. In the aftermath of the weak April U.S. retail sales results (see more below) even in the face of the latest round of tax relief, some second-guessing over the extent of any second half economic recovery has occurred. This may have shown up in the markets towards the end of the latest rally as volume weakened as the major averages advanced. Considering that cyclical bear markets typically end 4-5 months before recessions run their course, it is imperative that the downturn ends by August to justify the March lows in the S&P 500 and the other major averages. As doubts emerge over whether in fact the green shoots amount to anything more than dandelions, it now looks as though the major averages are about to embark on the fabled retesting phase towards the March lows. (We should add that the just-released consensus forecasts published by the Philly Fed show that professional economists just trimmed their Q3 real GDP projections to a 0.4% annual rate from the 1.0% estimate previously.)

We will be watching to see whether the lows hold as they did in March 2003, which symbolized the onset of the cyclical bull phase at the time; or whether this turns out to be a violation of the lows as was the case in the summer of 2002, which represented the final severe leg of the tech-induced bear market of that prior cycle.

For the near-term, it matters little because the testing process does seem to be in place right now and this carries with it well-established investment patterns. Over the past year, we have seen four other testing phases (they all failed as the market did break to new lows). Under the proviso that the S&P 500 hit an interim peak back on May 8th at 930 (it is down 3% since, even with yesterday’s bounce), here is what the recent historical record tells us to expect (at a minimum, take profits).

• The average length of the testing phase is 53 calendar days and 38 business days (versus 45 calendar days and 33 business days for the interim bear market rallies).

• On average, the S&P 500 undergoes a correction of more than 20%.

• The sectors that led during the rally, corrected most during the selloff. This means that financials, consumer discretionary, materials and industrials should underperform in the next few months, while health care, consumer staples, utilities and telecom services should emerge as the leaders.

• Market volatility more than doubles, on average.

• Bonds rally, with the 10-year Treasury note yield down nearly 15 basis points, on average.

• The flight-to-safety during these periods means that the Canadian dollar declines (on average by 10%), while the trade-weighed U.S. dollar rallies more than 6%.

• Commodity prices decline an average of 15%, again as cyclical trades unwind.

• Corporate spreads (Baa) widen an average of more than 60 basis points; it is very important to be focused on high-quality paper during these market testing periods as high-yield spreads widen, on average, by more than 300 basis points (and keep in mind the vast outperformance, which is typical, during the bear market rallies).

• What we discovered during this process was that gold performed quite well during both the bear market rallies and the subsequent sell offs (and despite the flows back in the U.S. dollar). This may be an indication that gold is in a secular bull market.

Flu Pandemics May Lurk in Frozen Lakes

 

The next flu pandemic may be hibernating in an Arctic glacier or frozen Siberian lake, waiting for rising temperatures to set it free. Then birds can deliver it back to civilization.

New research suggests an influenza virus could go into hiding in the ice when earlier generations of humans, birds or other hosts developed immunity strong enough to drive the virus to extinction. It’s a sort of evolutionary loophole.

“It can bring a set of viral genes back to life that have been frozen for centuries or thousands of years,” said environmental biologist Scott Rogers of Bowling Green State University in Ohio. “If hosts haven’t seen the virus in a while, then there may be no active immunity.”

Rogers and Zeynep Koçer, of Bowling Green State University in Ohio, found that influenza viruses can easily survive freezing in pond water, and emerge from the melting ice strong enough to infect bird eggs. They presented their latest evidence today at the American Society for Microbiology meeting in Philadelphia.

Rogers calls this evolutionary strategy “genome recycling.” He thinks migrating waterfowl regularly deliver influenza viruses to Arctic glaciers and lakes, where it becomes frozen in ice. When the ice melts, birds pick the virus up and transport it back south where it can infect humans.

The research comes amid a global alert over a new swine flu strain, H1N1, that has so far killed at least 80 people and could be headed toward full-blown pandemic. Influenza pandemics have struck periodically in historic times. The worst in recent memory were the Spanish flu in 1918, the Asian flu in 1957 and the Hong Kong flu in 1968.

These pandemics are hard to predict or trace back to their origins. Some researchers have proposed Siberia as a hub for the evolution of flu pandemics that eventually emerge in other locations — carried there by birds.

Scientists have in fact detected influenza viruses frozen in the ice and mud of lakes in Alaska, Siberia and elsewhere. These Arctic lakes are the summer grounds for ducks that migrate to China, Southern Asia, Europe and North America.

Dany Shoham, who studies biological warfare at the Begin-Sadat Center for Strategic Studies in Bar-Ilan University in Israel, first sidled up to the idea that influenza viruses may hide in ice during the 1990s. As influenza viruses pass from one person, or bird, to another, they normally pick up random changes in their genes because of errors in viral replication. This “genetic drift” happens at a constant rate.

But Shoham noticed something strange: Influenza viruses isolated decades apart sometimes showed little sign of genetic drift. One strain that came from Russia in 1977, was nearly identical to a strain of the virus last seen in 1950.

“In some cases,” he said, “they are absolutely identical.”

To Shoham, it seemed as though these viruses spent the intervening decades not infecting birds or people, but rather frozen in suspended animation — something like Buck Rogers spending 500 years drifting in space.

Shoham and Rogers believe that ice provides a perfect explanation. When they tested their theory with Siberian lake ice in 2006, they found an influenza virus almost identical to one that had infected people in the 1930s, and again in the 1960s.

“This phenomenon may take place regularly,” Shoham said, “far beyond what we witness.”

They are now trying to prove the viruses found in lake ice can actually survive well enough to re-infect birds when the ice melts. So far it has been shown only in lab experiments, but there’s already some indication that influenza has evolved a special capacity for surviving cold.

When cells and viruses are cooled, their membranes often change suddenly — similar to the way water molecules reorganize during freezing — and this can rupture the membrane and kill the cell. So, biophysicist Joshua Zimmerberg of the National Institutes of Health cooled an influenza virus below freezing while monitoring the properties of its membrane coating using a new technique called “magic angle spinning nuclear magnetic resonance.”

But the membrane coating of influenza was “like none we had ever looked at before,” said Zimmerberg, who published his results last year in Nature Chemical Biology. Influenza’s membrane capsule gradually hardened from an oily fluid into a hardened gel, without sudden changes. “It’s remarkably stable with freezing and thawing,” he said. “That’s the unique thing about influenza.”

The idea that influenza may hide out in ice has struck a chord among some experts. “One of the challenges is where does this virus persist between pandemics?” said virologist Richard Slemons of Ohio State University, who has studied bird flu for 35 years. “The idea needs to be considered and explored.”

Rogers believes global surveillance for influenza outbreaks should keep an eye on Arctic ice. Many other viruses may have evolved to lay dormant in ice when their host populations develop resistance, says Shoham. He suspects waterborne viruses such as polio, hepatitis A, and rotavirus (which causes diarrhea) could all potentially survive in ice. Even smallpox — a virus against which Americans are no longer routinely vaccinated — might survive in the bodies of victims buried in Arctic permafrost.

Meanwhile, Rogers and John Castello of State University of New York in Syracuse have isolated a plant virus called tomato mosaic virus from Greenland glacial ice up to 140,000 years old. “It’s our opinion that they are probably still viable,” says Rogers, “but we weren’t able to show that.”

And Koçer is screening ice from Antarctic lakes that have remained frozen for at least hundreds of years, using a technique which can detect any type of virus — whether they infect, plants, animals, or bacteria.

“I want to see everything,” she says. One preliminary run turned up genetic sequences for what could be over 100 viruses.

Britain's debt outlook lowered to negative

 

LONDON (AP) -- Britain faces the unsettling possibility of seeing its debt rating downgraded, after credit ratings firm Standard & Poor's said Thursday it has revised the country's outlook to negative from stable.

Though the ratings agency reaffirmed the country's long-term triple-A credit rating -- reserved for the least risky bond issuers -- it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

The outlook revision does not trigger a formal re-evaluation of Britain's rating -- unlike being put on credit watch -- but does mean that policy makers have to be aware that a downgrade may happen if public finances do not improve.

The pound slumped by over 2 U.S. cents to just below $1.56 after the news, but recovered most of its ground to trade around $1.57.

Meanwhile the FTSE share index fell nearly 140 points, or around 2.8 percent, though like other markets around the world it was facing selling pressure after the U.S. Federal Reserve warned that the U.S. economy would shrink by more than anticipated this year.

A lower credit rating would make the government pay higher interest rates to borrow money on bond markets. An S&P study found that 37 percent of its negative outlooks were followed by a downgrade.

"Pressure on the rating will raise concerns regarding the ability to issue the record amount of gilts (British government bonds) required over the coming year to fund the deteriorating fiscal position in the U.K.," said Hans Redeker, an analyst at BNP Paribas.

This is the first time Britain has been put on the negative list since since S&P started giving its view of the outlook of the country's public finances in the early 1980s.

S&P said the downward revision reflects a more cautious view of how quickly the country's finances can be repaired and that its projections incorporate new estimates of the cost of the government's bailout of the banking sector. It now esimtates that the government's net debt burden will rise to nearly 100 percent of economic output by 2013, way more than the government is currently projecting.

"These projections reflect our more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow," said S&P's credit analyst David Beers.

"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term," Beers said.

Prime Minister Gordon Brown is under pressure to call a general election from the Conservative Party leader David Cameron to deal with a mounting controversy over expense-account abuses in Parliament. Brown still has a year before an election must be held, but all opinion polls show that the country's swelling debt burden is one of the voters' major concerns.

Figures earlier highlighted the scale to which Britain's public finances have deteriorated.

The Office for National Statistics said public sector net borrowing -- the government's preferred measure -- jumped to 8.5 billion pounds in April from 1.8 billion in the same month the year before as the country pays for higher social welfare benefits and sorts out the banks.

In his budget last month, Britain's finance chief Alistair Darling predicted that the country's debt position, which aggregates borrowing through the years, is expected to rise to 59 percent of gross domestic product in 2009-10, rising to a peak of 79 percent in 2013-14. When the government came into office in 1997, it said one of its main economic policies was to keep debt around 40 percent.

 

10 Comments

gregroberts's picture
gregroberts
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Re: Daily Digest - May 22

Scary stuff

tpl's picture
tpl
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Re: Daily Digest - May 22

Amazing work Davos.

Thank you for bringing so much to the table and making it so easy to be informed.

The Ariely video was an amazing addition.

I'm spreading the word about the Daily Digest.

tpl

Montana Native's picture
Montana Native
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Posts: 162
Re: Daily Digest - May 22

It's nice to see some critical analysis from Maddow, I quit watching CNBC about 6 months ago because they were playing softball with the new administration. I wish her and Keith would sic Turbo Timmy and Helicopter Ben instead of harping about Cheney and Bush so much. Thanks for the vid!

1984, minority report, V is for Vendetta, all looking more realistic for the future huh.

Davos's picture
Davos
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Re: Daily Digest - May 22

 inSolvent The mother of all debt clocks

Tapani's picture
Tapani
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Re: Daily Digest - May 22

Tough decisions in California

that1guy's picture
that1guy
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Posts: 333
Re: Daily Digest - May 22

The more I see, the more I am considering dual citizenship.....strongly strongly considering. That added video on prolonged detention is like the cherry on top. The worst part, it is already happening, a women had her 16 year old child taken out of her house and 'detained' as a threat.....

DavidC's picture
DavidC
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Re: Daily Digest - May 22

Hi Davis,

That debt clock is unbelievable (well, believable but you know what I mean)!

DavidC

fujisan's picture
fujisan
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Re: Daily Digest - May 22

 Calculated Risk: FDIC Bank Failures: By the Numbers

Quote:

Three banks were closed by the FDIC this week, for a total of 36 banks so far in 2009. The largest was BankUnited in Florida with $12.8 billion in assets.

To put those failures into perspective, here are three graphs: the first shows the number of bank failures by year since the FDIC was founded, and the second graph includes bank failures during the Depression. The third graph shows the size of the assets and deposits (in current dollars).

...

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - May 22

 Banks hit with one time $5.6 billion fee - MarketWatch

Quote:

WASHINGTON (MarketWatch) -- To prepare for further bank collapses, a key regulator on Friday introduced a one-time fee on banks that should bring in $5.6 billion in funds to help refill a depleted insurance fund used to protect depositors. The Federal Deposit Insurance Corp. signed off on a new fee to replenish its deposit insurance fund, which pays depositors of failed institutions. The FDIC imposed a 5 basis point charge on each bank's assets minus its grade A, Tier 1 capital that regulators require. That means banks must pay 5 cents into the fund for each $100 of assets they have minus their Tier 1 capital. The amount is significantly less than the $15 billion the FDIC expected to bring in from the one-time fee when the agency considered it in February. At that time the FDIC tentatively asked to have banks pay a 20 basis point charge on U.S. deposits, which meant banks would have had to pay 20 cents for every $100 of U.S. deposits.

VeganDB12's picture
VeganDB12
Status: Platinum Member (Offline)
Joined: Jul 18 2008
Posts: 731
Re: Daily Digest - May 22

Tapani, thank you for the link. I am astounded by the discussion of total elimination of welfare in California but I am often astounded these days.

Just to add my 0.02, it seems to me, living in New York, that California is like New York, with lots of funded entitlements for the poor (very inadequate but present nonetheless) like medi-Cal, Welfare etc.....now just drop these people cold?    This gives me a sense for how it  could go with social security when the Boomers (myself included) are too old to fight and too expensive to feed.....

Even the pittance that is Welfare these days is a necessity for the people who depend on it.  Now what choice do they have? no jobs, no support, already living in poverty.....what do you do next in that situation?  Sounds like a good recipe for civil disorder if ever I heard. Stealing would be completely justified if needed for survival, wouldn't it?  What the heck are they thinking, on top of an illegal immigrant unemployment problem to add starving welfare recipients to the mix.  It sets a worrisome precedent. 

We'll see if they can get it through the legislature.

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