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    Daily Digest – Jan 27

    by Davos

    Tuesday, January 27, 2009, 3:23 AM

  • Population growth is the biggest economic and environmental problem
  • How the Government Dealt With Past Recessions (2001 Audio)
  • 82,000
    Job Losses 
  • Job Losses (Chart)
  • Existing Home Sales (Chart Seasonally Adjusted Annual Rate)
  • Home Inventory (Chart)
  • Fannie to Tap U.S. for as Much as $16 Billion in Aid 
  • Fed looks like one more shaky bank (Hat tip CM) 
  • Just ‘plane’ despicable; rescued Citi buying $50M jet 
  • Downturn Accelerates As It Circles The Globe (Hat Tip CM)
  • U.K. Economy Shrinks Most Since 1980, in Recession (Hat Tip CM)
  • 2009 Country stock market performance – things already aren’t pretty(Table in article) 
  • Panel Discusses the Stimulus Package


Population growth is the biggest economic and environmental problem 

ARROYO GRANDE, Calif. (MarketWatch) — Six years ago, Peter Orszag, President Obama’s new budget director, co-authored a Brookings Institution study that concluded: "Balancing the budget would require a 41% cut in spending on Social Security and Medicare, a 47% cut in discretionary spending, or a 17% cut in all non-interest spending." It’s getting worse: Today entitlements eat up 40% of the federal budget and are growing. 

No doubt Orszag’s earlier thinking had a lot to do with why Obama picked him. But it’s also a signal of what we can expect when a Social Security reform bill is sent to Congress during Obama’s "first 100 days." And that will trigger a brutal battle. Why? Because AARP’s 35 million members will fight all benefits reductions while young voters who put Obama in office will fight any new Social Security taxes.

Bruising battle? It won’t matter. In the long term, reforming entitlements will be like rearranging deck chairs on the Titanic. Remember, Obama’s adding a $1 trillion stimulus package on top of what Nobel economist Joseph Stiglitz calls a "$10 trillion hangover" of debt left by former President Bush and the economic meltdown. And all that’s on top of the massive $60 trillion to $75 trillion of unfunded Social Security and Medicare liabilities.

To get perspective, let’s shift our thinking into a parallel universe: Into Chris Buckley’s satirical novel "Boomsday," which goes way beyond acceptable government policies. He offers a bizarre solution to reforming Social Security, a solution that forces all of us to focus, and not just on the out-of-control economics of retirement entitlements. He forces us to focus on the one core problem overshadowing all other global economic issues: Population growth. 

How the Government Dealt With Past Recessions (2001 Audio -1:20 Recession Missunderstood, Feds Rate too low too long)

82,000 Job Losses (Caterpillar 20,000, Home Depot 7,000, Sprint 8,000, Pfizer 19,000, Philips 6,000, ING 7,000, Corus 3,500, Wolseley 7,500, Texas Instruments 1,800, GM 2,000) (Bloomberg & Other Sources)

Job Losses (Chart)

Existing Home Sales (Chart Seasonally Adjusted Annual Rate)

Home Inventory (Chart REO’s not included)

Fannie to Tap U.S. for as Much as $16 Billion in Aid  

Jan. 26 (Bloomberg) — Fannie Mae, the largest source of home-loan money in the U.S., said it will need to tap as much as $16 billion in emergency funds from the U.S. Treasury Department to stay afloat as deterioration in the housing market persists. 

Fannie’s planned request, announced today, follows Freddie Mac, which said Jan. 23 that it will need as much as $35 billion more in federal aid. Unprecedented mortgage losses drove the net worth of both companies below zero last quarter, they said in separate securities filings.

This will be Washington-based Fannie’s first draw on a $200 billion emergency fund set up by Treasury in September to keep the government-sponsored enterprises solvent. Fannie said losses on mortgage loans and a decline in the market value of its assets accounted for the shortfall in the fourth quarter.

Fannie’s Treasury request was "much worse" than expected, said Rajiv Setia, a fixed-income strategist at Barclays Capital in New York. Setia estimates taxpayers will have to shell out at least $50 billion for Fannie and $70 billion for Freddie this year. One or both, especially Freddie, may exceed the Treasury’s backstop this year, he said.

The requests for funds comes as the Treasury faces increasing demands from U.S. financial companies such as Bank of America and Citigroup Inc., which are coping with the fallout from a slumping housing market and a deep recession that’s driving foreclosures to record levels.

Freddie and Fannie are the largest sources of mortgage money in the U.S., owning or guaranteeing a combined $5.2 trillion of the $12 trillion home-loan market.

Treasury Lifeline

McLean, Virginia-based Freddie, which received $13.8 billion in aid in November, will be using about half of its $100 billion lifeline from Treasury once it receives its second capital injection.

"Hopefully policymakers are proactive in upping the $100 billion backstop," Setia said. "You don’t want them to get to those levels and have to revisit the issue."

The companies have posted five consecutive quarters of losses totaling $68.4 billion combined. The Federal Housing Finance Administration seized their operations in September amid concern from regulators that the two may fail in the worst housing slump since the Great Depression.

Fannie has previously said that $100 billion may not be enough to keep it afloat. Treasury agreed to pump money into the companies if the value of their assets drops below what they owe on their obligations. Fannie’s $3.1 trillion total book of business was worth $9.4 billion at the end of the third quarter. Fannie’s preliminary request was $11 billion to $16 billion.

Stefanie Mullin, an FHFA spokeswoman, declined to comment.

Fed looks like one more shaky bank (Hat tip CM) 

Citigroup (C, news, msgs) is too big to fail. American International Group (AIG, news, msgs) is too big to fail. So is Bank of America (BAC, news, msgs). 

If $25 billion is not enough, shovel in $20 billion more in taxpayer money. Still not enough? Guarantee that taxpayers will pick up the tab for losses on $100 billion, $200 billion, $300 billion in shaky assets. There’s no choice, right? Keep shoveling the cash into the black hole, because if we stop, the whole U.S. economy — wait, make that the whole global economy — will fall into disaster.

But how about the Federal Reserve, the key conduit for so many of these taxpayer billions? Is it too big to fail?

Bet you’ve never even thought about that question. Or what it means to anyone who lives in the United States. But you should.

A fistful of IOUs

The Federal Reserve’s balance sheet increasingly looks like that of Citigroup or Bank of America. The Fed has extended loans backed by $200 billion in consumer and small-business loans and by $73 billion in assets from Bear Stearns and American International Group. It has extended loan guarantees of almost $300 billion to Citigroup and Bank of America.

As a result, its vaults aren’t stuffed with the customary gold notes and U.S. Treasury bills, notes and bonds. Instead, they’re piled high with paper assets without ready market prices that everyone suspects aren’t worth what they were when the Fed accepted them as collateral.

For more investing news and advice, play the videos to the right.

The central bank is using theoretical valuation methods, often with considerable wiggle room, to price what it owns, just as Citibank and Lehman Bros. (LEHMQ, news, msgs) and Washington Mutual (WAMUQ, news, msgs) did. It has relied on credit ratings from the same rating companies that performed so dismally in the run-up to the current crisis to justify the value it claims for that paper. It has created specialized investment vehicles, just as Citibank and State Street (STT, news, msgs) did, in an effort to leverage a relatively modest amount of cash from the Treasury by 10-to-1.
What’s the Fed to do?

Looking at all this, anyone who has seen this crisis take down what were once assumed to be rock-solid financial institutions, capable of surviving any crisis, has to ask whether the Federal Reserve really is too big to fail.

And the answer isn’t nearly straightforward enough for investors and taxpayers who like to sleep soundly at night. 


Beleaguered Citigroup is upgrading its mile-high club with a brand-new $50 million corporate jet – only this time, it’s the taxpayers who are getting screwed. 

Even though the bank’s stock is as cheap as a gallon of gas and it’s burning through a $45 billion taxpayer-funded rescue, the airhead execs pushed through the purchase of a new Dassault Falcon 7X, according to a source familiar with the deal.

The French-made luxury jet seats up to 12 in a plush interior with leather seats, sofas and a customizable entertainment center, according to Dassault’s sales literature. It can cruise 5,950 miles before refueling and has a top speed of 559 mph. 

Downturn Accelerates As It Circles The Globe (Hat Tip CM) 

Economies Worse Off Than Predicted Just Weeks Ago

The global rout has altered high streets in Britain, where shops including retail icon Woolworths have gone bust. The number of jobless has climbed to nearly 2 million, a level not seen since 1997 when the Labor
washingtonpost.com readers have posted 149 comments about this item.
The world economy is deteriorating more quickly than leading economists predicted only weeks ago, with Britain yesterday becoming the latest nation to surprise analysts with the depth of its economic pain.

Britain posted its worst quarterly contraction since 1980 on the heels of sharper than expected slowdowns reported from Germany to China to South Korea. The grim data, analysts said, underscores how the burst of the biggest credit bubble in history is seeping into the real economies around the world, silencing construction cranes, bankrupting businesses and throwing millions of people out of work.

"In just the past few days, we’ve had a big downward revision, we’re seeing that an even bigger deceleration is on the way than we thought," said Simon Johnson, former chief economist at the International Monetary Fund and a senior fellow at the Peterson Institute for International Economics.

The depth of the troubles, analysts say, indicates that nations may need to spend more than the billions of dollars already planned on stimulus packages to jump-start their economies, and that a global recovery could take longer, perhaps pushing into 2010.

Analysts are particularly concerned about the slowdown in China and the recession in Europe. There is mounting concern about the stability of the euro and the British pound, which dropped to a 24-year low against the dollar yesterday. Analysts are fretting about the possibility of a debt default in a euro-zone country that could send fresh shock waves through global financial markets.

The problems in Europe now appear to be as bad if not worse than those in the United States. In the last quarter of 2008, the British economy shrank at an annualized rate of 6 percent. That is worse than economists expected, but also showed the British recession may be even harsher than the one in the United States, where analysts predict data expected next week will show the U.S. economy to have contracted between 5 and 5.5 percent in the last quarter of 2008. 

U.K. Economy Shrinks Most Since 1980, in Recession (Hat Tip CM) 

Jan. 23 (Bloomberg) — The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession. 

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said in London today. Economists had predicted a 1.2 percent drop, according to a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession.

The pound dropped against the dollar and U.K. stocks fell after the report. Prime Minister Gordon Brown said that the government is using "every weapon at our disposal" to fight the crisis. Bank of England Governor Mervyn King says officials may start buying up securities soon as interest rates lose their potency to aid the economy.

"This is undeniably grim," said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. "Two or three quarters more like this and you’re talking about depression, not recession. This should hasten activity to address the credit and money market issues."

Service industries shrank by 1 percent on the quarter, manufacturing dropped 4.6 percent and construction fell 1.1 percent, the statistics office said. Business services and finance, accounting for 30 percent of the economy, contracted 0.5 percent and also slipped into a recession. 


Of the 84 country equity indices that we track, 19 are up so far this year, which is at least better than we could say for 2008. As shown, China is currently the second best performing country so far this year, with a gain of 9.33%. Another BRIC country that is currently in the black for 2009 is Brazil, with a gain of 2.49%. But 19 countries in the black means that 65 countries are already in the red, and some are bleeding pretty badly. Seventeen countries are down more than 10%, including G-7 countries Germany and Japan. Canada is the best performing G-7 country so far in 2009 with a decline of 3.50%. Puerto Rico has seen the biggest loss — falling by 34%.

When all else fails, blame China

Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: "President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency". In the US, the words "currency manipulation" are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.

The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.

Under the Omnibus Trade and Competitiveness Act of 1988, "The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade."

"If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage."
Should the US Treasury officially determine China to be a currency manipulator, the US Administration can unleash a range of remedies, including antidumping measures, countervailing duties, and safeguards. Although the World Trade Organization permits certain retaliatory responses from importing nations which can prove that they suffered material injury due to unfair trade practices, much of what the US Congress and some members of the Obama administration have in mind is likely to be in clear violation of the United States’ WTO obligations. It would certainly provoke a response from China. The bilateral trade war that is likely to result could easily spread to the EU, Japan and emerging markets outside China.

Overall and bilateral current account imbalances and nominal and real, bilateral and effective exchange rates

The overall current account deficit of the US is the excess of US domestic investment over US national saving. The overall current account surplus of China is the excess of China’s national saving over China’s domestic investment. Bilateral trade balances are of no economic interest, unless there are only two countries in the world. Note that the first quote from the Omnibus Trade and Competitiveness Act of 1988 slides seamlessly from overall current account imbalances to bilateral trade imbalances, ignoring the transfer payments and foreign investment income items that are included in the current account but not in the trade balance. Trade balances and current account balances (bilateral or aggregate) can and do move in opposite directions.

There is no reason in economic theory or empirical fact why there should be any reliable correlation, between nominal exchange rates (bilateral or trade-weighted (effective) ) and the bilateral or aggregage trade balance, let alone a clear causal connection from any nominal exchange rate to the trade balance. Certain kinds of shocks and policy actions may produce an empirical association (not a causal relation) between a depreciation of the effective (trade-weighted) real exchange rate and an increase in the aggregate trade surplus. This is the case, for instance, for most aggregate demand shocks, e.g those produced by contractionary Keynesian fiscal policies. But supply shocks may produce the opposite correlation, that is, a depreciation of the effective real exchange rate and a reduction in the aggregate trade balance surplus.

In any case, as Chart 1 below shows, there has been a steady appreciation of the real effective exchange rate of the Yuan since the beginning of 2005. JP Morgan’s broad real effective exchange rate index for the Yuan shows a 27 percent real appreciation since December 2004. The from a macroeconomic perspective uninteresting nominal bilateral US$-Yuan exchange rate appreciated 21 percent over the same period. 

Panel Discusses the Stimulus Package

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