Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Since the EURUSD blasted through 1.22 to 1.21 it now feels like we might see the EURUSD gravitate towards the 1.10 level or even "stampede" right through it during the coming months.
America's budget is in crisis. Thanks to Bush's tax cuts and military spending, which have contributed to budget deficits of US$500 billion per year, the US will have to raise taxes and limit budget spending, whether or not Bush is re-elected. The annual military budget, which has increased by US$150 billion since Bush took office, will need to be cut in coming years to get the budget under control.
The US is borrowing massively from abroad. Asia's central banks have bought hundreds of billions of dollars in US securities. Japan alone has foreign exchange reserves of around US$750 billion, much of that in US treasury bills. China, Hong Kong, India, Korea, Singapore and Taiwan together have another US$1.1 trillion or so in reported foreign exchange reserves. In short, the US is in deep and growing debt to Asia. Only massive buying of treasury bills by Asian central banks has prevented the dollar from falling even more precipitously than it has.
The rest of the world is catching up. America's big technological lead will narrow relative to Brazil, China, India and other major economic regions of the developing world. China will have an economy larger than the US economy within 25 years -- potentially 50 percent larger by 2050. India, considerably poorer on average than China, will also close the wealth gap. By 2050, India will conceivably have an economy the size of America's, with four times the population and roughly one-fourth of the average income level per person.
Reuters Denies Leaking Payrolls Report
--------------------------------------------------------------------------------
WASHINGTON (Reuters) - Reuters said it did not release U.S. payrolls data before the official embargo on Friday but that a technical glitch caused the wrong time stamp to appear on data received by some clients.
"We did not break the embargo," said Stephen Naru, Reuters global head of media relations in New York.
"We released the data when we were authorized by the Labor Department to do so. We are investigating the matter with Yahoo and any other organization that has issues with the time stamp," Naru said.
The Reuters story reporting a surprising gain in U.S. employment did not appear on its own screens, which are seen by clients in trading rooms around the world, until 8:30 a.m. (1330 GMT) -- in compliance with the official embargo.
An official at the Labor Department said investigations into the possible leak of the data show a Reuters article appeared to have been posted on the Internet two minutes early, but they did not believe the story was transmitted early.
"(Reuters' position) is our position too. There was nothing out of the ordinary in the lockup," spokesman Bob Zachariasiewicz told Reuters.
"We don't believe there was a leak."
A Reuters official in London familiar the technology issues behind Friday's events elaborated on the time-stamp problem.
"The story issued with an incorrect time stamp to U.S. Online Reports customers was processed by a U.K.-based server whose clock was off by about two minutes," said Jim Craddock, Technology Owner, Media.
"The server is not automatically synchronized with an official clock source -- hence the incorrect timestamp. It is not clear how often this server is manually corrected.
"There is a new system in place at the Reuters technical center in Docklands which is synchronized, but editorial text feeds have not been migrated to this system yet."
Dollar Rises on Strong U.S. Jobs Report
--------------------------------------------------------------------------------
By Kazunori Takada
TOKYO (Reuters) - The dollar traded higher against its major rivals on Monday, after a bullish U.S. jobs report raised expectations that the Federal Reserve would move sooner to lift rates from a 46-year low.
Although the U.S. currency initially struggled against the yen on selling by Japanese exporters and as steep gains in Tokyo share prices fueled demand for the yen from foreign investors, it was fetching 104.64/72 yen as of 0552 GMT.
That compares with 104.46/54 in late U.S. trade on Friday.
"Now that (dollar) selling has receded, it's coming back up on short-covering as the market was short (on dollars) going into the jobs data on Friday," said a spot trader at a U.S. bank.
Data on Friday showed that U.S. non-farm payrolls climbed 308,000 in March, the biggest gain in four years and more than twice what the market was expecting.
An improvement in jobs data is seen key to the Fed raising its funds rate from a 1958 low of one percent, which would increase the allure of dollar-denominated assets for foreign investors.
The euro rowed back to $1.2097/02 from $1.2132/38, edging closer to a four-month low of 1.2045 hit late last month.
Sterling slipped to $1.8272/76 compared with 1.8302/07.
"The euro is reacting to (strong U.S.) fundamentals. I think there is a chance that we could see the euro fall under 1.2," said Mitsuo Imaizumi, deputy general manager of the international bond and forex department at Daiwa Securities SMBC.
UPBEAT JAPAN
Against the yen, the single currency was trading a tad lower at 126.53/64 yen compared with 126.60/74 in late U.S. trade.
"What we may see is that the yen will continue to outperform the euro, because there has been a fairly large euro rally to date and we haven't seen that in the yen due to intervention," said Naomi Fink, senior currency strategist at BNP Paribas.
"And secondly because we see some pretty strong economic figures and improvements in sentiment in Japan, whereas we don't really in the euro area."
Hans-Werner Sinn, head of Germany's Ifo Institute, said on Sunday that the euro zone's biggest economy was mired in an economic crisis, with high wages, foreign competition and a political logjam making him doubtful of near-term improvements.
Meanwhile, Japan's closely watched Tankan survey of business sentiment, released last week, showed that Japanese companies felt business was better in March than at any time in almost seven years.
Analysts say that given improving economic fundamentals, large foreign buying of Japanese stocks, and the Japanese authorities apparent scaling back of currency intervention, the yen is likely to make further gains.
A Japanese government source, who has regular contact with the Finance Ministry, which runs Tokyo's intervention policy, told Reuters his impression was that many in the government recognized that a stronger yen helped companies deal with high oil and raw material prices.
He said that as a result, the government would likely halt its campaign of massive intervention to weaken the yen.
The dollar was still not far from the four-year low of 103.40 yen hit on Wednesday.
The Nikkei average ended the day up 1.20 percent at 11,958.32, after briefly leaping above the key 12,000 mark to a high of 12,003.92.
But some traders said the yen's upside versus the dollar may be limited.
"Yen-buying was limited despite the Nikkei's move today and the dollar was also little moved on the Reuters report on intervention. All this may be a sign that the yen may be capped around here for the time being," said the U.S. bank dealer.
Monetary Policy Modeling: Where Are We and Where Should We Be Going?
Our honorees, Dale Henderson, Richard Porter, and Peter Tinsley, have already received much well-deserved praise. I will add only one brief observation. Although I am a relative newcomer to the Federal Reserve, I have already had numerous occasions to be impressed by the research staff here. The Board staff has what a management expert might call a terrific corporate culture. They understand that they make crucial contributions to the policymaking process, not only in the realm of monetary policy but in banking, payments, consumer affairs, and other areas, and they bring great pride and professionalism to their work. Moreover, they understand the value of sophisticated and subtle economic analysis, which they apply both to day-to-day questions of policy and to more fundamental research questions. A culture like that doesn't just happen; it requires senior people who lead by example. In their times at the Board, Dale Henderson, Dick Porter, and Peter Tinsley, each in his own way, have promoted a culture that combines the best in policy-oriented research with the intellectual rigor and curiosity needed to address questions that go beyond the immediate economic situation. That is an outstanding contribution, one that should be recognized in addition to the many intellectual contributions that each of these scholars has made to the economic literature.
The theme of the panel is "Monetary Policy Modeling: Where Are We and Where Should Be Going?" Forecasting the direction of successful research is inherently very difficult. There is a kind of efficient markets principle at work; if a promising direction for research were obvious, someone would have already pursued it. So I think the best I can do is highlight three general areas in which much good work has already been done, including research by Messrs. Henderson, Porter, and Tinsley, but in which further progress would be enormously helpful to monetary policymaking in practice.
The first area is the characterization of good monetary policy in increasingly realistic and complex model environments. Henderson, Porter, and Tinsley have all made significant contributions to macroeconomic modeling at the Board. For specificity, I will focus on a piece of recent research that I like very much and which has already received much attention at this conference: Dale Henderson's paper with Christopher Erceg and Andrew Levin (2003).
We have learned a great deal in recent years about the effects of monetary policy in dynamic, stochastic, sticky-price models, with Michael Woodford's recent book (Woodford, 2003) perhaps best representing the state of the art. This line of research is potentially of great importance to applied macro modelers, because it addresses areas in which some may feel that our current policy models need to be strengthened, notably the treatment of expectations, the specification of model dynamics, and the relationship of the economic structure to the form of the policy rule. However, naturally enough, the earliest models in this genre have tended to be highly simplified representations of the economy, only loosely matched to the data. Like the models themselves, the optimal policy rules derived in the models are often unrealistically simple. For example, in some of these models, strict inflation targeting--a policy of keeping inflation at zero at all times--is the optimal policy.
To make these models relevant for applied policy analysis, the natural next step is to add new frictions and more complex dynamics to the benchmark models. The Erceg-Henderson-Levin (EHL) paper explores the implications for monetary policy of a plausible complication, the inclusion in the model of nominal wage stickiness as well as price stickiness. As was discussed yesterday, this relatively simple addition makes an important qualitative difference in the policy results. Specifically, in the EHL model, monetary policy can no longer achieve a fully optimal outcome but instead faces tradeoffs among its objectives. Because the optimal rule in their model is relatively complex and depends on model parameters and shocks, EHL use model simulations to examine the performance of some simple policy rules. Interestingly, they find that relatively simple policy strategies can achieve results close to the optimum.
The contribution of the EHL paper goes beyond the specific findings; equally important is the direction that this work sets for the collective research program. Erceg, Henderson, and Levin have shown by example that incorporating additional, realistic frictions into the basic new-Keynesian model changes both the behavior of the model and the nature of the optimal policy rule in nontrivial ways. The papers at this conference by Canzoneri, Cumby, and Diba (2004) and by Benigno and Woodford (2004) both take up the EHL challenge. For example, Canzoneri, Cumby, and Diba consider further complications of the sticky-price, sticky-wage model, including capital investment and habit formation in consumption, while Benigno and Woodford explore the case in which the steady state of the model is not Pareto optimal, as assumed by EHL. This progressive analysis of the implications of alternative assumptions is part of what Thomas Kuhn called "normal science." The insights from these types of modeling efforts are already informing policy analysis at the Board, and their influence will only grow as they become more detailed and realistic.
A second important area, one that will always be central to monetary policy, is macro forecasting. Because monetary policy works with a lag, the ability of policymakers to stabilize the economy depends critically on our ability to peer into our cloudy crystal balls and see something resembling the future. One of the key variables to be forecast is inflation. A variety of approaches to forecasting inflation are used at the Board, of course. One of Dick Porter's many contributions was to develop a monetary approach to forecasting inflation at medium-term horizons.
Dick's so-called P-star approach, originally developed with Jeffrey Hallman and David Small (1991) and updated in a 2000 paper with Athanasios Orphanides, combines simplicity with insight. Porter's analysis begins with an equation so basic that, at one time at least, it appeared on the California license plate of Milton Friedman's personal automobile. That equation is of course the quantity equation, MV = PY, or money times velocity equals the price level times output. This equation can be used to define a link between money growth and inflation that depends on the evolution of the velocity of money. Hallman, Porter, and Small (1991) analyzed the predictive power of that relationship under the assumption that M2 velocity is a constant--an assumption that seemed reasonable at the time they wrote, but, as these things are wont to do, broke down soon after they did their initial work. Orphanides and Porter (2000) have developed a more sophisticated version of the P-star model, which employs information about the opportunity cost of holding M2 to track the evolution of equilibrium M2 velocity. This approach seems to work reasonably well at predicting inflation at medium-term horizons, and the forecasts of this model are reported routinely to the Board of Governors. Of course, something very similar to Porter's approach was used by the Bundesbank prior to the formation of the euro area and is used by the European Central Bank today.
My own view is that a reliable macroeconomic forecast requires looking at many different types of economic data and considering a variety of forecasting models; any single model or approach is likely to go off the rails at one time or another. For this reason, I am personally attracted to factor models, which summarize large amounts of data (as in Bernanke and Boivin, 2003), and to model averaging, along with more structured analyses. Interesting alternative models, like Porter's P-star model, are useful because they give yet another perspective on the likely evolution of a critical macroeconomic variable and thus provide a check on other forecasts that one might have in hand. Because good forecasts are so crucial to good monetary policy, I hope and expect to see a great deal more work exploring the robustness of alternative forecasting methods.
The third and final research area that I would like to highlight is the analysis of how the public forms its expectations, and of the effects of various expectations formation mechanisms on macroeconomic dynamics. For example, a rich recent literature on learning and macroeconomics has emphasized that actual inflation and inflation expectations may to some degree evolve independently, and that effective monetary policy stabilizes inflation expectations as well as inflation itself (Orphanides and Williams, 2003). Peter Tinsley, in a series of papers with Sharon Kozicki, has explored this theme in great detail. For example, Kozicki and Tinsley (2001) show that it is far easier to make sense of the term structure of Treasury yields if one assumes that expectations about long-run inflation adjust in a reasonable adaptive manner. In a paper presented at a recent conference at the Federal Reserve Bank of San Francisco, Kozicki and Tinsley (2003) develop an empirical model of the economy under the assumptions that the Fed's implicit inflation target is subject to permanent shocks and that the public learns about the Fed's target over time. Although simple, their model allows for a much richer and realistic description of the evolution of monetary policy and the economy. For example, their approach gives empirical content to the idea of imperfect monetary policy credibility; in their model, monetary policy is credible when private expectations of long-run inflation tend to align closely with the central bank's true underlying inflation target. Their model also illustrates clearly the benefits of central bank credibility for macroeconomic stability. I think that further theoretical and empirical work on expectations formation mechanisms and their links to economic dynamics will prove highly fruitful.
I will conclude by thanking the organizers for their hard work in putting together this conference. A research conference of the quality of this one is exactly the right way to honor the scholarly contributions of Dale, Dick, and Peter.
--------------------------------------------------------------------------------
References
Benigno, Pierpaolo, and Michael Woodford (2004). "Optimal Stabilization Policy When Wages and Prices Are Sticky," (PDF) presented at a conference on Models and Monetary Policy, Board of Governors of the Federal Reserve System, March 26.
Bernanke, Ben, and Jean Boivin (2003). "Monetary Policy in a Data-Rich Environment," Journal of Monetary Economics, 50 (April), pp. 525-46.
Canzoneri, Matthew, Robert Cumby, and Behzad Diba (2004). "Price and Wage Inflation Targeting: Variations on a Theme by Erceg, Henderson, and Levin," (PDF) presented at a conference on Models and Monetary Policy, Board of Governors of the Federal Reserve System, March 26.
Erceg, Christopher, Dale Henderson, and Andrew Levin (2000). "Optimal Monetary Policy with Staggered Wage and Price Contracts," Journal of Monetary Economics, 46 (March), pp. 281-313.
Hallman, Jeffrey, Richard Porter, and David Small (1991). "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?" American Economic Review, 81 (September), pp. 841-58.
Kozicki, Sharon, and Peter Tinsley (2001). "Shifting Endpoints in the Term Structure of Interest Rates," Journal of Monetary Economics, 47 (June), pp. 613-652.
Kozicki, Sharon, and Peter Tinsley (2003). "Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information," Federal Reserve Bank of Kansas City, RWP 03-09 (November).
Orphanides, Athanasios, and Richard Porter (2000). "P* Revisited: Money-Based Inflation Forecasts with a Changing Equilibrium Velocity," Journal of Economics and Business, 52 (January/April), pp. 87-100.
Orphanides, Athanasios, and John Williams (2003). "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," National Bureau of Economic Research working paper no. 9884.
Woodford, Michael (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, N.J.: Princeton University Press.
http://www.federalreserve.gov/boarddocs/speeches/2004/20040327/default.htm
Daily Update
The weekly release is posted on Monday. Daily updates of the weekly release are posted Tuesday through Friday on this site.
H.10 DAILY UPDATE: WEB RELEASE ONLY For immediate release
FOREIGN EXCHANGE RATES April 2, 2004
The Board of Governors of the Federal Reserve System is advised that the Federal Reserve
Bank of New York has certified for customs purposes the following noon buying rates in
New York City for cable transfers payable in foreign currencies:
(Rates in currency units per U.S. dollar except as noted)
MONETARY
COUNTRY UNIT Mar. 29 Mar. 30 Mar. 31 Apr. 1 Apr. 2
*AUSTRALIA DOLLAR 0.7484 0.7531 0.7620 0.7671 0.7584
BRAZIL REAL 2.9390 2.9190 2.9070 2.8925 2.8985
CANADA DOLLAR 1.3097 1.3080 1.3100 1.3101 1.3140
CHINA, P.R. YUAN 8.2771 8.2771 8.2770 8.2769 8.2769
DENMARK KRONE 6.1295 6.1000 6.0575 6.0255 6.1500
*EMU MEMBERS EURO 1.2141 1.2202 1.2292 1.2358 1.2109
HONG KONG DOLLAR 7.7975 7.7963 7.7930 7.7883 7.7870
INDIA RUPEE 44.00 44.07 43.40 43.40 43.75
JAPAN YEN 105.52 105.61 104.18 103.70 104.55
MALAYSIA RINGGIT 3.8000 3.8000 3.8000 3.8000 3.8000
MEXICO PESO 11.160 11.229 11.183 11.182 11.172
*NEW ZEALAND DOLLAR 0.6529 0.6568 0.6650 0.6678 0.6583
NORWAY KRONE 6.9440 6.9010 6.8600 6.8200 6.9310
SINGAPORE DOLLAR 1.6890 1.6836 1.6750 1.6720 1.6750
SOUTH AFRICA RAND 6.4000 6.3350 6.3235 6.3450 6.4120
SOUTH KOREA WON 1157.80 1154.00 1146.70 1141.40 1141.80
SRI LANKA RUPEE 97.750 97.490 97.850 98.000 97.850
SWEDEN KRONA 7.6305 7.5920 7.5500 7.4650 7.6160
SWITZERLAND FRANC 1.2872 1.2790 1.2677 1.2627 1.2932
TAIWAN DOLLAR 33.150 33.090 33.000 32.890 33.000
THAILAND BAHT 39.620 39.600 39.280 39.160 39.190
*UNITED KINGDOM POUND 1.8163 1.8283 1.8400 1.8564 1.8293
VENEZUELA BOLIVAR 1920.00 1920.00 1920.00 1920.00 1920.00
MEMO:
UNITED STATES DOLLAR
1)BROAD JAN97=100 114.04 113.89 113.35 113.04 113.81
2)MAJOR CURRENCY MAR73=100 86.00 85.75 85.24 84.89 85.92
3)OITP JAN97=100 143.51 143.60 143.15 142.99 143.03
For more information on exchange rate indexes for the U.S. dollar, see "New Summary Measures
of the Foreign Exchange Value of the Dollar," Federal Reserve Bulletin, vol. 84 (October 1998),
pp. 811-18 (http://www.federalreserve.gov/pubs/bulletin/). Weights for the broad index can be
found at http://www.federalreserve.gov/releases/H10/Weights; weights for the major currencies
index and the other important trading partners (OITP) index are derived from the broad index
weights. The most recent annual revision of the currency weights and dollar indexes took effect
with the December 16, 2003, release of this report.
The source for exchange rates not listed in the table above but used in the calculation of the
broad and OITP indexes is Reuters Limited.
* U.S. dollars per currency unit.
1) A weighted average of the foreign exchange value of the U.S. dollar against the currencies
of a broad group of major U.S. trading partners.
2) A weighted average of the foreign exchange value of the U.S. dollar against a subset of
the broad index currencies that circulate widely outside the country of issue.
3) A weighted average of the foreign exchange value of the U.S. dollar against a subset of
the broad index currencies that do not circulate widely outside the country of issue.
The euro is reported in place of the individual euro-area currencies. These currency rates can
be derived from the dollar/euro rate by using the fixed conversion rates (in currencies per euro)
given below:
1 EURO = 13.7603 AUSTRIAN SCHILLINGS
= 40.3399 BELGIAN FRANCS
= 5.94573 FINNISH MARKKAS
= 6.55957 FRENCH FRANCS
= 1.95583 GERMAN MARKS
= .787564 IRISH POUNDS
= 1936.27 ITALIAN LIRE
= 40.3399 LUXEMBOURG FRANCS
= 2.20371 NETHERLANDS GUILDERS
= 200.482 PORTUGUESE ESCUDOS
= 166.386 SPANISH PESETAS
= 340.750 GREEK DRACHMAS
http://www.federalreserve.gov/releases/e15/default.htm
http://www.federalreserve.gov/Releases/G5/Current/default.htm
http://www.occ.treas.gov/scripts/newsrelease.aspx?Doc=NFBQ8WDP.xml
US Corp Bonds-Spreads narrow after jobs report
Friday April 2, 6:12 pm ET
By Dan Wilchins
NEW YORK, April 2 (Reuters) - U.S. corporate bond spreads tightened on Friday, after a blowout jobs report gave investors hope that the economy was in full recovery mode, and that corporate profits should continue to grow at a strong pace.
The Labor Department said on Friday that payrolls outside of the agricultural sector surged by 308,000 jobs in March, the biggest increase in nearly four years and well above the 103,000 expected on Wall Street.
The report slammed bond prices in general, leading the 10-year Treasury yield (US10YT=RR) to stage its biggest one-day rise since the Long-Term Capital Management crisis in 1998.
But corporate bonds spreads tightened, and stocks rose, as investors focused on the extent to which rising employment should help spur spending and boost profits.
Spreads opened dramatically tighter, but gave back a good part of their initial gains during the session as investors fretted more about how soon the Federal Reserve would hike rates.
"This report is still good news for corporates," said Edward Marrinan, a high-grade corporate bond strategist at J.P. Morgan in New York.
If the Fed raises rates in November, as J.P. Morgan economists are forecasting, corporate spreads could still have a few quarters of solid performance, as investors focus on the likelihood of improving profits, Marrinan said.
In the new issue market on Friday, NTL (NasdaqNM:NTLI - News), Britain's largest cable operator, sold an 800 million sterling equivalent deal with dollar, euro, and sterling tranches.
The $425 million 10-year note, which cannot be bought back for five years, was priced at par to yield 8.75 percent. The notes are being issued through a subsidiary, ntl Cable Plc.
In the secondary market, spreads on Sun Microsystems Inc.'s (NasdaqNM:SUNW - News) notes maturing in 2009 with a 7.65 percent coupon jumped as high as 2.2 percentage points, before coming back in to 2 percent, about unchanged on the day.
The company announced on Friday that its quarterly loss would be wider than current Wall Street estimates, but also announced that it had resolved its bitter anti-trust battles with Microsoft Corp. (NasdaqNM:MSFT - News), and planned to cooperate more closely with the Redmond, Washington-based behemoth.
The Microsoft settlement will result in payments of $2 billion to Sun Micro, which exceeds the size of Sun's outstanding debt.
Tyco International Ltd. (NYSE:TYC - News) debt, meanwhile, was little moved by news that the corruption trial of two former executives ended in a mistrial.
Spreads on most of the company's bonds narrowed about 0.05 percentage points, in line with the market, traders said.
"People care about the company, not the trial," a trader said.
Dollar Surges on Strong U.S. Jobs Data
Friday April 2, 9:03 am ET
By Manuela Badawy
NEW YORK (Reuters) - The dollar surged against major currencies on Friday as a much stronger than-expected March U.S. employment report signaled that the U.S. economy is on a firmer path to recovery.
ADVERTISEMENT
The robust number indicated the U.S. labor market was firmer than previously thought, which, if sustained, could enable the Federal Reserve to start raising interest rates from their current 1958 low of 1 percent.
Rate increases would be widely viewed by analysts as a bullish prospect for the dollar because it would burnish the allure of dollar-denominated assets for foreign investors.
The euro dived more than 1 percent against the dollar to session lows around $1.2120 (EUR=). The dollar rose to 104.71 yen(JPY=) from a session low of 103.67 yen.
Against the Swiss franc, the dollar rose 1.3 percent to session highs around 1.2848 francs(CHF=). Sterling fell more than 1 percent against the dollar to $1.8272.
Non-farm payrolls climbed 308,000 in March, the Labor Department said, the biggest gain since April 2000 and well above the 103,000 rise expected on Wall Street.
The unemployment rate ticked up to 5.7 percent from the two-year low of 5.6 percent seen in January and February.
"Very strong and a big surprise. Just confirmed rumors of a strong number. The dollar jumped even before the data so somebody must have known about the strong figures," said Shaun Osborne, chief currency strategist, Scotia Capital in Toronto.
"Gains in jobs were in the services sector. This is supportive for the dollar going forward. But the Fed needs consistently strong jobs reports before it can raise rates," he said.
(Additional reporting by Gertrude Chavez)
Oil Slips as U.S. Mulls Waiving Gas Rules
Friday April 2, 9:16 am ET
LONDON (Reuters) - Oil prices slipped slightly on Friday and traders said the market remained subdued following news Washington is considering requests to temporarily waive gasoline specification rules that have contributed to fears for a supply crunch.
ADVERTISEMENT
A big U.S. crude build reported earlier in the week had set prices off on a gasoline-driven losing streak that has taken more than two dollars off the price of oil since a high on Wednesday.
New York light crude futures fell 14 cents to $34.13 a barrel. London Brent futures slipped 93 cents to $30.62 a barrel, catching up with a big fall late on Thursday on the New York exchange, which closed an hour later than the London market.
Fears for gasoline tightness have kept up the market for much of the last month, analysts said.
U.S. government figures showing commercial crude stocks rising to their highest level in 19 months, and gasoline inventories building to above year-ago levels, unwound some of those concerns, and helped U.S. gasoline futures ease about eight percent from a record high set on Wednesday, triggering bearish sentiment in the crude market.
Traders said skepticism about compliance had limited the impact of OPEC's (News - Websites) agreement on Wednesday to forge ahead with its April 1, million-barrel-per-day supply cut.
A Reuters survey last week of physical crude market participants showed OPEC members' cuts were likely only to meet about a third of the stated reduction in April.
Skeptics have also drawn attention to efforts by the United States to persuade cartel members to supply more oil to the market.
President Bush expressed disappointment at OPEC's decision to cut, and, signaling its support, Kuwait said it did not want to see prices rise any further.
OPEC members Kuwait and the United Arab Emirates had recommended to the cartel's Wednesday meeting that the group consider delaying tighter restrictions to allow oil prices to cool.
Much of the recent gasoline market tightness has been blamed on U.S. federal rules requiring refiners to blend dozens of different kinds of gasoline for various states.
Energy Secretary Spencer Abraham said on Thursday the U.S. Environmental Protection Agency was seriously considering requests from three states for temporary exemptions to requirements.
But some analysts said that the clean-burning fuel requirements were secondary to capacity problems and low stock levels in explaining gasoline prices.
"Our view is that even if some of these measures are introduced they will not help much in easing gasoline supply. This is because they do not address the central issues currently contributing to U.S. gasoline market tightness, namely low stock levels, accelerating demand and the inability of the U.S. refining system to respond to surges in demand for its products," Barclays Capital said.
"The big problems of low gasoline inventory and the inability of the US refining system to cope with surging demand still remain."
Dollar Firmer as Jobs Hopes Fly High
Friday April 2, 4:50 am ET
By Natsuko Waki
LONDON (Reuters) - The dollar recovered its footing on Friday, pulling up from recent four-year lows against the yen and 10-day lows against the euro ahead of a keenly-awaited U.S. employment report.
ADVERTISEMENT
Monthly U.S. jobs figures have disappointed in recent months, each time sending the dollar reeling, but a strong employment index in Thursday's ISM manufacturing report has raised optimism Friday's payrolls could show an improvement.
Economists polled by Reuters predicted 103,000 jobs were created in March compared with a paltry 21,000 in February. However, some banks expect a payrolls gain of as much as 200,000 and others as low as 75,000.
"Expectations for the payrolls are flying quite high at the moment. But room for disappointment is also considerable," said Carsten Fritsch, currency strategist at Commerzbank in Frankfurt.
"The dollar will come under pressure if the number comes in weaker than expected as it will postpone expectations for a Federal Reserve tightening and also put the sustainability of U.S. expansion at risk."
By 0930 GMT, the dollar was up two thirds of a percent at 104.18 yen, after hitting a four-year low of 105.38 on Wednesday. The euro also succumbed to the dollar's firmer tone, shedding a third of a percent to $1.2316.
"I think the real consensus now will have shifted somewhere between 120 and 150 (thousand) or even above... The bottom line here is there seems to be an asymmetric risk to the dollar today," said Mitul Kotecha, head of global FX research at Credit Agricole Indosuez.
Job creation has been the weak spot in the U.S. economic recovery and investors believe the Fed is unlikely to raise interest rates until the employment market has perked up. Low rates of return on dollar deposits have played a key role in the dollar's recent downtrend as investors have sought higher- yielding assets elsewhere.
YEN LOSES STEAM
The yen paused on Friday after sharp gains earlier in the week, prompting speculation Japanese investors were buying foreign assets at the start of the fiscal year. But many analysts said it was just a matter of time before Japan's currency made further gains.
"The yen is just pausing for breath," said David Mann, currency strategist at Standard Chartered. "We still see it going higher in the coming months."
Given improving economic fundamentals, large foreign buying of Japanese stocks, and the Japanese authorities apparent scaling back of currency intervention, some analysts say the yen could soon challenge the 100 per dollar mark.
Japan's top financial diplomat, Zembei Mizoguchi, said on Friday that Tokyo's stance on foreign exchange was unchanged, and that it would continue to act as needed in the market.
The Nikkei average gained more than one percent, as foreign investors continued to pour capital into Japanese assets.
The latest data from the Finance Ministry on weekly capital flows shows net purchases of Japanese stocks by foreigners from March 1 to March 26 totaled 2.58 trillion yen ($24.88 billion), which would likely make the month of March a record.
In the euro zone, industry producer prices rose 0.1 percent on the month and were unchanged on the year in February.
The single currency received a boost on Thursday after European Central Bank President Jean-Claude Trichet indicated the bank was in no hurry to cut rates, wrong-footing many traders who had expected him to signal a rate cut in coming months.
Yen Slips from Near 4-Year Peak Vs Dollar
Thursday April 1, 10:40 pm ET
By Hideyuki Sano
TOKYO (Reuters) - The yen slipped from near a four-year peak against the dollar on Friday as Japanese investors bought fresh foreign assets at the start of the new financial year in a market otherwise becalmed ahead of key U.S. jobs data.
"Japanese investors' fresh investment is blossoming," said a trader at a major Japanese bank.
"But this will take place only in Asian markets," he said, adding that participants remained focused on the non-farm payrolls data due at 8:30 a.m. EST.
Japanese investors, frustrated by near-zero interest rates at home and seeking higher returns abroad, are allocating fresh money for the fiscal year that kicked off on Thursday.
Dollar bulls are hoping the jobs data will show the U.S. recovery has finally started to create enough jobs to allow the Federal Reserve to think about hiking interest rates.
Economists on average expect 103,000 more jobs were created in March than in February, while some traders forecast a larger figure.
Still, most traders were cautious as the data has had a habit recently of causing disappointment. The February payrolls data posted a rise of just 21,000 and sent the dollar reeling as it dented hopes for a Fed rate hike in the near future.
The Fed fund rate is at one percent, the lowest level since 1958. Low U.S. rates are thought to have worked against the dollar as they discourage foreign investors from buying U.S. bonds.
"I'd say the dollar will be sold if the (jobs) data is in line with expectations, and even a strong reading would just give it a mild boost," said Junya Tanase, forex strategist at JP Morgan Chase in Tokyo.
"The dollar's longer term downtrend is unchanged."
Tanase said the Fed was unlikely to consider lifting rates until payroll figures show jobs growth of around 150,000 or more for several consecutive months.
As of 10:12 p.m. EST Thursday, the dollar was around 104.20 yen up about 0.5 percent from late U.S. trade.
Still, it was not far from the four-year low of 103.40 hit on Wednesday while the yen rides high on growing optimism the Japanese economy may be staging its strongest recovery since the bursting of the asset bubble more than a decade ago.
100-YEN LEVEL
Many analysts say that given improving economic fundamentals, large foreign buying of Japanese stocks, and the Japanese authorities apparent scaling back of currency intervention, the yen would soon challenge the 100 per dollar mark.
Japan's top financial diplomat, Zembei Mizoguchi, said on Friday that Tokyo's stance on foreign exchange was unchanged, and that it would continue to act as needed in the market.
Toshiaki Kimura, group manager of forex trading at Mitsubishi Trust and Banking, said that the dollar may drop below 103 yen in April, and could test 100 yen by June.
The Nikkei average gained 0.86 percent in morning trade, as foreign investors continued to pour capital into Japanese assets.
The latest data from the Finance Ministry on weekly capital flows shows that net purchases of Japanese stocks by foreigners from March 1 to March 26 totaled 2.58 trillion yen ($24.88 billion), which would likely make the month of March a record.
The euro was largely unchanged around $1.2360 compared with around $1.2365 in late U.S. trade and Thursday's 10-day high around $1.2390, hit after European Central Bank President Jean-Claude Trichet said the bank was in no hurry to cut rates.
While the bank kept policy unchanged as expected, Trichet wrong-footed many traders, who had been expecting him to signal a rate cut in coming months to help shore up sluggish euro zone economies.
The euro rose to 128.70 yen from around 128.12 in late U.S. trade.
Good time to set "tight stops" on positions and endure the inevitable correction. However, there are still many stocks that are trading with P/Es below 15. It will just be a matter of industry rotation.
I'll be watching Life Insurance providers as terrorist attacks (that do not seem to be able to be put to a halt) continue. A more aggressive war policy will also increase the demand for life insurance. Every geopolitical climate has a market cycle that follows it.
Peace,
igen, veled meg mi lesz, Csókolom!
magyarul tudok pletyka'lni?
Be braced for a bust as bubbles look set to burst
By Marc Faber
Published: March 29 2004 5:00 / Last Updated: March 29 2004 5:00
Credit has to be given to Alan Greenspan, the Federal Reserve chairman.
He is the first head of a monetary authority who has not only managed to create a series of bubbles in the domestic economy but has also managed to create bubbles elsewhere - in the New Zealand and Australian dollars, emerging market debts, government bonds, commodities, emerging market equities and capital spending in China.
In fact, over the last 18 months, US monetary policies have boosted all asset classes. This is most unusual since it ought to be obvious that in the long run commodities and real estate inflation is incompatible with a bond bull market.
Mr Greenspan's monetary tribulations mark an achievement no one else in the history of capitalism has accomplished. It is also one investors will never forget once this credit-driven, universal bubble bursts and it will fill entire chapters of financial history books with economic and financial horror stories.
We simply don't know how the end game of the current speculative wave will be played out and when the bust will occur but a painful resolution of the current asset inflation and global imbalances is as certain as night follows day.
I used to believe that sometime in 2004 we would see the beginning of diverging trends in the performance of different asset classes, since bonds, commodities and real estate cannot continuously rally in concert.
[Uh, we just had the biggest crash in bonds ever in the history of bonds didn't we?]
After all, one characteristic of a strong secular bull market in one asset class is the simultaneous occurrence of a bear market in another. The commodities bull market of the 1970s was accompanied by a vicious bond bear market. The equities and bond bull markets of the early 1980s were accompanied by a persistent bear market in commodities and, in the 1990s, stocks of developed Western markets soared while Japan and emerging stock markets collapsed.
So, I was leaning towards the view that some assets would continue to increase in value in 2004 while others, such as bonds, would begin to fall by the wayside and enter longer-term bear markets. After further consideration, I am now increasingly concerned that sometime soon "everything" could begin to unravel. When interest rates rise, it is conceivable that bonds, stocks, commodities and real estate will all decline in value at the same time.
[I doubt highly that commodities will crash in concert with the other nor do I think they'll all crash at once, I think this guy may have a problem with crack or maybe ice or perhaps justs wants you to buy his book...crashes will occur but it will be years between them...for example stocks crash then a couple years later real estate etc...sooner or later the fiat goes down too..]
In the past I have had the tendency to dismiss the deflationist views of some reputed economists and strategists as unlikely. I now feel the current universal asset inflation and overheated Chinese economy will be followed by a serious bust and asset deflation, which will kill consumption in the US. The only question is when.
[Or as I posted before the chinese could sell their dollars for commodities they need...I assure you they don't care if the dollar crashes but they do need metals food etc...and they won't be wiped out if our fiat goes tubesville. As much as we'd like to think so.]
I'm at a loss as to when this bust will occur. But given the overbought condition of the US stock market, the extremely high bullish consensus (indicative of market tops in the past), the rising commodity markets and the tendency of markets to defeat central bankers who entertain the same erroneous beliefs that central planners under the socialist ideology had when they thought they could plan the best possible economic outcomes, the bust could come sooner rather than later.
[I think sooner rather than later too, especially if something blows up, like the Sears Tower or what have you.]
Moreover, we know from the experience of Japan in the late 1980s and Hong Kong in the mid-1990s that consumption booms, driven by asset inflation, end with a colossal bust. That can result from rising interest rates, or because stagnating household incomes no longer support the asset bubble as affordability diminishes, or additional supplies coming to the market and exceeding demand.
So, given that consumption driven by asset inflation is unsustainable in the long run and always ends badly, what should the contrarian investor do?
The least desirable asset in the world is US dollar cash. The investment community can take everything in stride - even a 70 per cent decline in Nasdaq stocks. But interest rates, as low as they are now, compel people to speculate on everything from commodities, homes and bonds to equities.
[The least desirable asset in the world is US dollar cash. Am now hearing this everywhere...see it on websites, see it from Sorros, Buffet, Templeton...]
Therefore, investors in the current speculative environment should be extremely defensive and not be tempted by short-term gains, which could be swiftly erased. Daily moves of 5 per cent in investment markets will become common. Nickel recently fell 8 per cent in a day, copper by 5 per cent, and the euro by 5 per cent within a week. Gold and, especially, silver may offer some protection but, once the current asset inflation bubble ends, they could also be in for a rough time.
[Or not.]
Obviously, as I experienced in Asia in the 1990s, it wasn't important to be "asset-rich" before the crisis of 1997 but to be "cash-rich" after the crisis when financial asset values had tumbled by 90 per cent and when incredible bargains across all asset classes were available. The author is editor and publisher of 'The Gloom, Boom & Doom Report' and author of Tomorrow's Gold
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=107....
Bottom line bubbles burst; not if but when...be prepared if it happens "suddenly"...
Reappointing Alan Greenspan as chairman of the Federal Reserve Board is like inviting the Titanic's captain back to the helm for another cruise.
The financial markets and the punditocracy continue to believe that Greenspan is the closest thing to God on Earth -- witness the market rally on April 22, when the White House announced the reappointment. But this faith in Mr. Greenspan says more about their continued lack of contact with reality than his merits as Fed chairman. After all, these are some of the same people who thought a 5,000 NASDAQ index made sense (it's now below 1,500).
Do they forget that Greenspan ignored the largest financial bubble in history, which led to a loss of more than $8 trillion in stock wealth? It should have been clear by 1997 that the stock market had entered a bubble, as at least a few economists were saying at the time. As a result of its bursting, the economy remains mired in stagnation.
It would not have been difficult for Greenspan to deflate this bubble, as he inadvertently demonstrated in late 1996, when he made his famous comment about the market's "irrational exuberance." The comment sent the market plummeting. If Greenspan hadn't reversed his position two days later, his comment might have, by itself, prevented further expansion of the bubble. If he had consistently berated the markets with "irrational exuberance" comments and supported his case with charts and graphs, it is unlikely the market would have reached the dizzying heights of 1999 and 2000. If talk proved insufficient, he could have raised the margin requirement (which restricts borrowing to buy stock), and if necessary, he could have raised interest rates.
But he didn't do any of that -- and arguably, he even may have promoted expansion of the bubble with his "new economy" rhetoric. The economy will suffer for years to come as a result.
The bad news is not all behind us. Greenspan continues to ignore a housing bubble, the collapse of which is likely to have even larger repercussions for the economy and the retirement security of millions of Americans. People are currently buying homes in the bubble-infected markets (mostly on the east and west coasts), which could lose 30 to 40 percent of their value in a drop. For most families, their home is their biggest investment. Tens of millions of baby boomers are counting on equity in their home to support them in retirement now that their 401(k) plans have suffered so drastically from the stock market retreat. Instead of warning of a housing bubble, Greenspan testified before Congress last summer that there is no such thing.
He also supports an over-valued dollar that is causing the nation to borrow more than $1.5 billion every day from abroad. This process cannot continue for long. At some point the country literally will run out of things to sell -- in about 20 years at the current rate, if foreigners don't lose interest in the United States long before that. Whenever it happens, the dollar will drop, sending import prices and inflation soaring, and U.S. living standards will plummet. Again, Greenspan could act now, but he seems happy to let this debt continue to grow, happy to pass this problem on to future generations.
Those generations will suffer, too, from his endorsement of Bush's first round of draconian tax cuts. It's not clear why Greenspan did it -- after all, the head of the Fed shouldn't be influenced by the political climate -- because it was crystal clear from the start that those cuts were reckless.
Yet, unlike the custodian or the factory worker who get fired for poor performance, Greenspan just keeps drawing praise and getting reappointed. Nice work, if you can get it.
Greenspan May Not Go On
WHITE HOUSE MAY SEE GREENSPAN AS LIABILITY FOR ELECTION
By JOHN CRUDELE
March 30, 2004 -- WHO'S going to be the next one to hear the immortal words, "You're fired"? It just might be Alan Greenspan.
Granted, I'm a bit early on this conjecture. The Federal Reserve chairman's term doesn't expire until June, and the last word from the Bush Administration is that he can stay on.
But a few weeks ago, I started hearing a story from a very well-connected Washington insider that the White House is peeved at Greenspan for some stuff that appeared in "The Price of Loyalty," the best-selling book by former Bush Treasury Secretary Paul O'Neill.
As I said in a column in late January, at one point O'Neill has Greenspan lamenting that "capitalism is not working" because of corporate corruption. And there are stories in the book about secret alliances between O'Neill and Greenspan.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=107....
http://www.investorshub.com/boards/read_msg.asp?message_id=2707661
etc etc etc
But what is really tweaking the administration's cheek is the fact that some of the other information in the book could only have come from Greenspan. And Greenspan and the now-despised O'Neill were, and are, tight.
"O'Neill is very friendly with Greenspan," says this source, who has worked in previous Republican administrations. "And the White House is [not happy with]" the Fed chairman.
Disloyalty is a sin in this White House. And being a friend to the administration's enemy makes you the enemy.
If that was all, the administration might get over it and allow the 78-year-old to serve another four-year term - although I personally don't know why anyone would want to stay in a high-pressure job until the age of 82.
But there is also a very tricky economy that is likely to cause Greenspan to butt heads with the administration over the next few months.
The White House, of course, wants what every incumbent administration wants - a Federal Reserve that will roll over and play dead.
If interest rates could go any lower, that's what the Bush Administration would want. But since they can't, the next best thing would be for Greenspan not to do anything.
But therein lies the problem.
Even though the economy isn't exactly booming, prices - thanks only in part to a big jump in energy costs - are rising enough so that the Fed will soon have to start paying lip service to inflation.
The Fed won't raise interest rates in a presidential election year unless some global crisis forces its hand. But the words about inflation that Greenspan will have to utter won't sit well with the White House.
I wrote in this column a few weeks ago that private inflation data would soon cause Greenspan to worry. And just last week, Fed Governor William Poole said in a speech that the risk of inflation has increased - a shocking deviation from the Fed's script.
This is typical of how the Fed works.
Next you will hear other Fed representatives bringing up the issue of inflation and then, finally, Greenspan himself. And if he weighs in, he'll probably be out.
*
Don't get too excited about the big rally in stock prices yesterday and last Thursday.
It's the end of the quarter and professionals - when they can - jack up stock prices so they can report to customers like you how well they are investing your money.
Some pros have to allow three days for the paperwork to clear for trades to be counted in the current quarter. That's why these rallies start before the last day of the month.
The real test will be when April 1 arrives. Then we'll see if there is enough conviction to keep the rally going - especially since this Friday's employment figures could prove a major problem.
The December rally that this column expected gave way to weakness in the early part of 2004, which I also expected.
And with all the problems in the U.S. economy and world politics, there's no reason to think that an already overpriced stock market can continue a heroic rise.
* Please send e-mail to:
jcrudele@nypost.com
http://www.nypost.com/business/22084.htm
It's The Depression, Moron...
Borrowing and slightly twisting a quote from a past and somewhat colorful character from American history, “It’s the depression, moron…” True – Arkansas Billy said “It’s the economy, stupid”, but, in the end, his point is still exactly the same. In fact, Bill Clinton’s logic and powerful insight into all-things-political was so on the mark, so profound and so accurate that he stole a presidency on the sheer weight of its prevailing simplicity.
Regardless of what you may personally think about Clinton, he was, in fact, right. He was right for the moment and the deep wisdom in his little quip stands unchallenged today. The upcoming election will be determined by many confluent political forces, but none so powerful as the economy. The wit and wisdom of this single testimonial by our former Chief Executive will turn out to be his long sought after place in history just because of the sheer power of its truth.
By 2004, based solely upon the utter brilliance of this profound precision of thought, we all should have been thoroughly tutored by those four little words that comprise the bulk of the Clintonian legacy. So much so that if any American has not figured it out yet, then they have simply not been listening. Or they have been so distracted by the DNA on the blue dress that have not had the presence of mind to stop their moralistic yammering, listen and finally admit that Bill got it right at least once. It has become such an indelible fact of our culture that if anyone had not learned it by now, then they are truly, well, ...a moron.
Bill Clinton and I will agree that he was correct then about his single economic truth and he remains so today. However, at this juncture, our understanding of the meaning of the economy, moron, radically diverges. You see, Bill was talking about the economy of right now. But the real economy of the nation is not right now, it has never been, not even in the so-called new paradigm. The true economy is based on tomorrow. It is future based, future oriented and future mortgaged in every single respect. Hence, to truly understand the economy that is right at or doorstep and what it is doing, we need to see where it is actually headed.
The truth is, fellow morons, the Emperor of the economy is, at this very moment, butt naked. He sold his clothing, all of it. He had to. And there he stands out on Wall Street, grinning and flashing his wares to everyone who wants to actually open their eyes and see. But the Emperor has managed to print up enough money and pass it around to an army of people who can speak the contemporary financial vernacular. Working together, this vast sea of conflicted financial professionals have managed to convince an entire population of reasonably intelligent, public school educated, neo-Darwinian evolved humans that this economy that our former President referenced is robust and ready to roll onto new decades of boom and bubble.
http://www.usatoday.com/money/economy/2004-03-29-survey_x.htm
The fact is, winter is coming and the Emperor is about to freeze his exposed rear off. The unmistakable signs are all around us, including ice crystals forming on both red cheeks. We are being systematically lied to by the army of economic prevaricators bought and paid for by the ones who will lose their political and economic shirts and perhaps hung in public ceremonies if (when) the populace ever finds out they have been purposefully duped.
This jolly troop of lying jesters have watched so much football that they have learned to ply their trade like a football coach on ESPN. With a carefully constructed language that stems from a short dictionary of less than 100 actual words, they have learned by proper chained-link-lingo-speak to convince the population that today’s game is somehow unconnected to the end game or even rest of the season. Or, that today’s economy is somehow unlinked to tomorrow’s sheer fiscal realities.
They are all lying and they all know it. They are successfully convincing the population that the Emperor’s clothing is exquisite because if they fail, they all will be trading in their six-digit paychecks for a victory garden planted in 5-gallon buckets on their Manhattan terraces.
What does the economy have in store, right around the corner?
The truth is, a planetary wide economic depression is right at our doorstep.
A hush settles over the normally jubilant crowd of economic revelers - the news is received as undisguised sacrilege by all...
It will be a depression so profound and so deep that there has never been one in history that has ever rivaled it before. And it is only a matter of time. Indeed, the financial disaster itself has already happened, its effects are simply delayed, waiting for the creditors bills to hit the mailboxes. The party is over. We have spent the money. The plastic won’t swipe anymore and the clerk is giving us funny looks. Now we have to pay the bills. Unfortunately, we don't have that kind of money and we don't make that much money. Our creditors will not be amused when they find this out.
There is much denial here, obviously. The worst disaster that can ever befall a culture based on capitalism is economic depression. It is such an unmitigated disaster that we have done an historically masterful job at totally denying its reality. We have passed laws against it (National Industrial Recovery Act of 1933 and the The Social Security Act of 1935). We have renamed it (severe economic downturn). We have successfully delayed it (lowering interest rates and printing up money simultaneously). We have convinced ourselves it is acceptable to borrow against it – even though that makes its ultimate effects even worse (relaxing credit and actively encouraging a refinance mania in the face of a mounting immoral deficit). And we have finally managed to jargon ourselves around it. The whole happy parade is led by Wall Street talking heads who are, in fact, nearly all paid lackeys of firms that make their money on a robust market (manufactured or not) and plenty of gullible investors that suck up their every confident word and literally bet the farm on charged and/or refinanced laptops.
Depression is inevitable because of the historic and mind-boggling debt, because of the total lack of fiscal integrity, restraint and control of the government and because everyone has lied to so many people for so long, no one knows the truth anymore and certainly no one believes anyone else, particularly about the new paradigm economy of instant gratification. Our culture is propped up on toothpicks and our in-basket is loaded down with tons and tons of debt, all of it about to be called in. In case you have not heard, there are funny popping sounds emanating from just beneath where we are all comfortably seated enjoying our lattes and cappuccinos at our favorite hi-tech computer bars.
I am fairly certain that Alan Greenspan probably knows what is ultimately coming down. Regardless of what his detractors may say about him, Greenspan is truly an economic genius and has masterfully delayed disaster and using tricks of monetary manipulation that should win him some historic prize one day, many generations from now. Unfortunately, his genius will probably end up turning against him while he lives. He has not saved us from depression, he has only staved it off and ultimately, made it worse. When the coming depression happens, it will almost certainly be pinned on him and, almost without question named after him! Why? Because the rest of the jolly liars will need a scapegoat, and it will either happen on his watch or shortly thereafter. One day sooner than later, Greenspan (if he is as smart as I believe him to be) will simply disappear, leaving them and the freezing Emperor of the economy standing out on the street all alone and fully exposed with the snow blowing up into uncomfortable places. When they finally figure it out, they are all going to be livid. And when they announce, as they will, that Alan Greenspan has left the building, get ready to hunker down.
What is next? Get ready for a triple punch soon and make your plans accordingly.
Punch one: watch for the markets to slide to new lows this summer and particularly this fall. This will cascade into four linked effects: the dollar will tumble as the Euro will mount a real challenge as the world currency of choice, convincingly displacing the dollar. Gold will soar, approaching $800 to $1000 mark within a year or two. (You heard it here first.) International confidence will begin to fail resulting in loss of significant foreign investments and our international debts could be called in at ever increasing levels. Forget the bond markets (snore). Wait till you witness the inevitable, predictable and powerful political effect of the declining economy in the November elections. The administration’s only hope for survival or even circumventing a massacre at the polls will be leveraging the Greenspan genius and delaying the inevitable market convulsion this fall.
Punch two: the government will have to begin printing money in unprecedented volume by the coming, long hot summer of 2005. A new administration, emboldened by its mandate to “fix the economy” will naively respond to the evolving crisis by reversing the Bush tax cuts and raising them even beyond previous levels. This will only exacerbate the economic dilemma, of course. Eventually, interest rates will spike considerably higher than even on Carter’s watch. Inevitably, jobs will be lost and productivity will spiral down the government’s fiscal toilet as the economy cannot possibly sustain the stress. Perot’s ‘great sucking sound’ will emanate not from our southern border, but from Wall Street itself.
Punch three: As the tax base implodes, as the debt is called in and as the deficit spikes through the stratosphere, somebody somewhere will finally declare the Emperor the pervert that he is. He will then sit on Wall Street in sackcloths and ashes, but it will be way too late. It already is.
One of my Internet heroes, Jim Puplava, has been publicly calling the Emperor a pervert for over a decade. He has mounted an interesting theory that while all this economic insanity is hanging over our heads that it is conceivable that the nation could be hit with an unpredictable event that he calls a Rouge Wave or a “ten sigma event” that would either trigger an uncontrolled economic meltdown or make an ongoing economic disaster even worse. Such an occasion could be a terrorist attack on par with or worse than 911, or an international incident of such magnitude that it would inevitably adversely affect every civilized nation’s economy. Such rogue waves, Jim writes, are totally unpredictable and play on the weaknesses already inherit in the world’s invariably linked financial systems, weakened by historic excesses and apalling debt.
So what do we do now?
Don’t worry, be happy.
Hey – everybody else is! What is going to happen has already been set into motion anyway. We are all seated comfortably and in style on the great fiscal ship Titanic. Night is falling. The air is festive. We are feeling our great and lofty positions as the band plays on and the great ship sails off into history. Why, not even God Himself could sink this greatest economic juggernaut in the history of mankind! Oh by the way, we have just been handed our latest assignment: re-arrange the deck chairs and get ready for tomorrow’s next big boom.
Until then… It’s the depression, moron. Deal with it now or deal with it later. And, oh by the way, if you thought the half-time at the Superbowl was lewd, don’t tune into Moneyline, whatever you do. The Emperor is a mainstay and they don’t just do headshots.
Dennis Chamberland
dennis@chamberland.us
http://www.chamberland.us/latest0315.html
How Healthy Are the Banks?
By Frank Shostak
[Posted March 29, 2004]
In his speech before the Independent Community of Bankers of America on March 17, 2004, the Chairman of the Federal Reserve Board, Alan Greenspan, concluded that the US banking system is in healthy shape. According to the Fed Chairman, the weakness in credit quality that accompanied the recent recession has clearly been mild for the banking system as a whole, and the system remains strong and well positioned to meet customer needs for credit and other financial services.
The latest data, however, indicate that there is some deterioration in the quality of bank credit. In the fourth quarter, the charge-off rate of real estate loans rose to 0.26% from 0.13%, while the consumer loans charge-off rate jumped to 3.04% in the fourth quarter from 2.76% in the previous quarter.
Furthermore, not once during his entire speech did Greenspan mention the Fed's policy that has driven down interest rates to their current lows, much less how this policy is a major factor behind the appearance of a supposedly strong banking system.
The Fed's policy can generate the illusion of success, to be sure. But when it is reversed—as it inevitably must be—the illusion is shattered to reveal the painful facts of reality. Contrary to Greenspan, the expansion of the banking system and its apparent strength is built on shaky foundations.
Good credit versus false credit
There are two kinds of credit: that which would be offered in a market economy with sound money and banking (good credit) and that which is made possible only through a system of central banking, artificially low interest rates, fractional reserves, deposit insurance, and bailout guarantees (false credit).
Banks cannot expand good credit as such. All that they can do in reality is to facilitate the transfer of a given pool of savings from savers (lenders) to borrowers. To understand why, we must first understand how good credit comes to be and the function it serves.
Consider the case of a baker who bakes ten loaves of bread. Out of his stock of real wealth (ten loaves of bread), the baker consumes two loaves and saves eight. He lends his eight remaining loaves to the shoemaker in return for a pair of shoes in one-week's time. Note that credit here is the transfer of "real stuff," i.e., eight saved loaves of bread from the baker to the shoemaker in exchange for a future pair of shoes.
Also, observe that the amount of real savings determines the amount of available credit. If the baker would have saved only four loaves of bread, the amount of credit would have been only four loaves instead of eight.
Furthermore, note that the saved loaves of bread provide support to the shoemaker, i.e., they sustain him while he is busy making shoes. This in turn means that credit, by sustaining the shoemaker, gives rise to the production of shoes and therefore to the formation of more real wealth. This is a path to real economic growth.
The introduction of money does not alter the essence of what credit is. Instead of lending his eight loaves of bread to the shoemaker, the baker can now exchange his saved eight loaves of bread for money (i.e., sell his stock for money) and then lend the money to the shoemaker. The shoemaker in turn can exchange the money for goods and services he requires.
Observe that money fulfils the role of a claim against real goods and services. This simply means that the holder of money expects to be able to exchange them for goods and services whenever he requires. Thus, when the baker exchanges his eight loaves for eight dollars he retains his real savings, so to speak, by means of the eight dollars. The money in his possession will enable him, when he deems it necessary, to reclaim his eight loaves of bread or to secure any other goods and services.
The existence of banks does not alter the essence of credit. Instead of the baker lending his money directly to the shoemaker, the baker will now lend his money to the bank, which in turn will lend it to the shoemaker. By lending his money, the baker temporarily transfers his claims over real resources to the bank. The bank in turn lends these claims to the borrower, who is the shoemaker.
In the process the baker earns interest for his loan, while the bank earns a commission for facilitating the transfer of money between the baker and the shoemaker. The benefit that the shoemaker receives is that he can now secure real resources in order to be able to engage in his making of shoes.
Despite the apparent complexity that the banking system introduces, the act of extending credit remains the transfer of saved real stuff from lender to borrower. Without the increase in the pool of real savings, banks cannot create more real credit. At the heart of the expansion of good credit by the banking system is an expansion of real savings.
Now, when the baker lends his saved eight dollars we must remember that he has exchanged for these dollars eight loaves of bread. In other words, he has exchanged something for eight dollars. So when a bank lends those eight dollars to the shoemaker, the bank lends fully 'backed-up' dollars, i.e. fully backed-up claims on real resources.
Trouble emerges however, if instead of lending fully backed-up claims a bank engages in issuing empty claims (fractional reserve banking) that are backed-up by nothing. Rather than fulfilling the role of intermediary, i.e., facilitating the transfer of savings from lenders to borrowers, the bank now gives rise to a diversion of real savings from wealth generating activities to activities that are lower on the consumer's list of priorities.
When unbacked claims are created, they masquerade as genuine money that is supposedly supported by a real stuff. In reality however, nothing has been saved. So when such claims are issued, they cannot help the shoemaker since the pieces of empty paper claims cannot support him in producing shoes. What he needs instead is bread.
Since the printed money masquerades as proper money it can however be used to "steal" bread from some other activities and thereby weaken those activities. This is what the diversion of real wealth by means of money out of "thin air" is all about. If the extra eight loaves of bread weren't produced and saved, it is not possible to have more shoes without hurting some other activities, which are much higher on the consumer's lists of priorities as far as life and well being are concerned. This in turn also means that unbacked credit cannot be an agent of economic growth.
Rather than facilitating the transfer of savings across the economy to wealth generating activities, when banks issue unbacked claims they are in fact setting in motion the weakening of the process of wealth formation. It has to be realized that banks cannot pursue ongoing unbacked lending without the existence of the central bank, which by means of monetary pumping makes sure that the expansion of unbacked claims doesn't cause banks to bankrupt each other.
We can thus conclude that as long as the increase in lending is fully backed up by real savings it must be regarded as good news since it promotes the formation of real wealth. Only false credit, which is generated out of "thin air", is bad news. Low interest rate policies by the Fed both encourage the expansion of false credit and discourage saving, in a process that brings about continually weakening financial conditions.
Curiously some commentators are of the view that any type of credit helps grow the economy. This way of thinking is based on a crude empiricism, which supposedly shows that the expansion in bank lending and the expansion in economic growth are closely correlated. However, only credit which is backed up by real savings is an agent of economic growth. Credit which is unbacked by real savings is an agent of economic stagnation.
Furthermore, regardless of how sophisticated and advanced the banking system is, if it is engaged in the expansion of unbacked claims it will promote misery and not economic prosperity. Hence, while it is important to have a sophisticated banking system for facilitating the transfer of real savings it is real savings and not banks that give rise to economic growth.
The banking sector is very vulnerable
To be sure, the existence of fractional reserve banking and all the other institutions that assist in the creation of false credit have been in place for a very long time, generating ongoing bouts of boom and busts and distorting the economic system. What makes the prospect more serious this time is the low savings rate, the rock-bottom interest rates, the sad condition of household balance sheets, and the vulnerability of banks themselves.
The rapidly diminishing ability of the US to generate internal real funding is seen in collapsing consumer savings and ever expanding government. For instance, the consumer savings rate stood in January at 1.8% against 10.4% in April 1980. The personal income-to-personal outlays ratio is currently in free fall. The pace of individuals' spending is much faster than the pace of income generation.
Furthermore, the level of consumer credit in relation to disposable income is at a record high. Also, home mortgages as a percentage of disposable income rose to a new record high of 82% in the fourth quarter from 77.4% in the first quarter. Furthermore, in the first quarter of 1981 the nonfinancial debt-to-GDP ratio stood at 1.33 against a record high of 2.9 in the fourth quarter of 2003.
In sum, the pace of credit expansion by far outstrips the pace of income generation. This is another indication that the pool of real savings is in trouble. If it would have been otherwise then income would have grown much faster and would have easily absorbed any increase in debt.
Furthermore, we shouldn’t overlook the magnitude of monetary increases since 1980. The following chart depicts the magnitude of a destructive monetary explosion – the product of loose monetary policy of the Fed and fractional reserve banking. In February money AMS stood above its trend by $1,260 billion against $960 billion in January 2001. Also, note the massive monetary explosion since the early 1980’s.
Another important drain on real resource remains the ever-growing size of the government. Contrary to most analysts, it is not the budget deficit as such but rather government spending that weakens the pool of real savings. It is growing government spending that does the damage by diverting real resources from wealth producers.
Between December 2000 and December 2003 government expenditure increased by 33%. Moreover government spending stood above its long-term trend by $122 billion in December 2003. In December 2000 spending was $37 billion below the trend. Furthermore, the Federal debt stood above $7 trillion in December last year.
Consequently, on account of prolonged monetary pumping and an ever growing government, what we likely have at present is a stagnant or declining pool of savings which is accompanied by accelerating levels of debt. This in turn leads us to conclude that it is highly likely that savings do not support a large portion of credit, i.e., the high level of unbacked debt makes the banking sector very vulnerable.
While banks are the greatest beneficiaries of the false boom, they cannot escape the negatives of the bust. So long as the pool of savings is still growing and a loose monetary policy is maintained, banks can continue to show good performance.
Once the Fed tightens its stance for whatever reason—perhaps to shore up the dollar or rein in prices—or banks decide to curb their unbacked credit expansion, economic activities that sprang up on the back of false credit are likely to be exposed as unsustainable. Since these false activities are part of bank balance sheets this means that the quality of the banking sectors' assets must be deteriorating.
Against the background of deteriorating savings conditions and rising debt, how is the US economy managing to show a reasonable performance? The answer to this can be found in the balance of payments. For 2003, the US current account deficit closed at $541.8 billion—up from $480.9 billion in 2002. In early 2004 the trade gap has continued to widen further. It stood at $43.7 billion in January against $42.7 billion in the previous month.
The continued widening in the trade gap is the manifestation of a positive net stream of real resources coming from the rest of the world to the US. The fact that the US can print dollars that are eagerly accepted by foreigners enables it to divert resources from the rest of the world. To put it briefly, by means of printing presses the US keeps its economy going at the expense of the rest of the world.
For the time being, not only are foreigners happily channelling their real resources into the US but they are also doing this in return for the liabilities of a non-wealth generating entity called the US government. Foreigners are exchanging real stuff for unbacked promises. For instance, at present, foreign central bank holdings of T-Bonds exceed $1.1 trillion, or 10% of US GDP. So at the moment, the US remains at the mercy, so to speak, of the rest of the World.
We can thus conclude that the banking system is far from being in healthy shape as suggested by Greenspan, but on the contrary it is very vulnerable to a sudden weakening in economic activity.
Also, contrary to Greenspan's view, the banking system is not well positioned to expand credit since there is very little savings left. Any further bank credit expansion means an expansion of credit out of thin air. Obviously, this type of credit expansion will only further undermine the health of the economy and ultimately the bank's own health.
In fact, since a large chunk of credit was created out of "thin air" there is high likelihood that it will evaporate back into "thin air." It seems to us that against the background of rapidly deteriorating real fundamentals the Fed will be forced in the not too distant future to reverse its stance, thus setting in motion the inevitable liquidation of various artificial forms of life that currently comprise bank balance sheets.
_____________________________
Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He maintains weekly data on the AMS for subscribers through Man Financial, Australia. Send him MAIL and see his outstanding Mises.org Daily Articles Archive. Shostak wishes to express thanks to Michael Ryan for his useful comments. Comment on this article on the Mises Economics Blog.
http://www.mises.org/fullarticle.asp?control=1480
Continuing to hold those dollars...
U.S. Notes Decline on Concern BOJ to End Yen Sales, Reduce Debt Purchases
March 29 (Bloomberg) -- U.S. 10-year notes fell in Europe, pushing yields to their highest in more than three weeks, after the London-based Times said the Bank of Japan may end its yen sales, fueling speculation it will buy less U.S. government debt.
Quickening economic growth means Japan no longer needs a weaker currency to boost exports, the Times said, citing unidentified officials at Japan's central bank, which buys and sells the yen on behalf of the Ministry of Finance. A ministry official said Japan's currency policy hasn't changed.
``We have seen the Bank of Japan has changed strategy,'' regarding selling yen, said Cyril Beuzit, head of interest-rate strategy in London at BNP Paribas SA, France's biggest bank by assets. ``It has to be seen as a negative for Treasuries.''
The 4 percent note maturing February 2014 fell 5/8, or 6.25 per $1,000 face amount, to 101 6/32 as of 8:48 a.m. in London, according to Merrill Lynch & Co. Its yield rose 2 basis points to 3.85 percent. A basis point is 0.01 percentage point. The yen rose to 105.59 per dollar, according to EBS prices, from 106.02 late Friday in New York.
Foreign central-bank holdings of Treasury and agency securities in accounts at the Federal Reserve rose by a daily average of $7.9 billion in the week ended Wednesday to $1.2 trillion. Japan is the biggest overseas holder of Treasuries, with $577 billion as of the end of January.
`Officially Validated'
``It's officially validated there will be less purchases of Treasuries,'' said Jai Tiwari, a bond strategist at research firm IDEAglobal Ltd. in Singapore. ``We are likely to see a move higher'' in yields. Bond yields move inversely to prices.
The BOJ sold 10.5 trillion yen ($99.4 billion) in the two months to Feb. 25, about half of 2003's record sales. The yen has strengthened 6.4 percent since reaching a five-month low of 112.33 on March 8 on speculation an improving economy will allow Japan to tolerate a stronger currency. The Finance Ministry will release yen-sales figures for March on Wednesday.
Some traders, such as Kikuko Takeda at Bank of Tokyo- Mitsubishi Ltd. in Tokyo, said other factors, such as accelerating inflation, may affect the $3.66 trillion Treasury market.
``Although the Bank of Japan has played a big role, the Treasury markets are huge and the impact from less yen sales should be limited,'' Takeda said in Tokyo.
Treasuries on Friday had the biggest drop in two months after measures of inflation and consumer confidence rose. A Commerce Department report Thursday showed the personal consumption expenditure price index, excluding food and energy prices, rose 1.1 percent from a year before in February, matching October and the fastest since it gained 1.3 percent in July.
Job Creation
Treasuries may also fall for a second week on prospects the government will say the economy this month added the most jobs since December 2000. The Labor Department may say Friday the economy added 120,000 jobs in March, from 21,000 in February, according to the median forecast of 61 economists surveyed by Bloomberg News.
The yield on the 10-year note fell 17 basis points on March 5, when the Labor Department released the February jobless figures.
Ried, Thunberg & Co.'s investor sentiment index was 44 on Friday, compared with 42 the previous week. The reading has been below 50 -- a sign investors expect the note's price to drop -- for 16 weeks, the longest stretch since mid-2002. The 63 international investors surveyed by the Westport, Connecticut- based research firm manage $1.5 trillion. Ried, Thunberg is a unit of London-based ICAP Plc, the world's largest interbank brokerage.
To contact the reporter on this story:
Beth Thomas in Tokyo bthomas1@bloomberg.net
To contact the editors of this story:
Justin Carrigan at jcarrigan@bloomberg.net;
Walter Krumholz at wkrumholz@bloomberg.net
Last Updated: March 29, 2004 03:32 EST
European Central Bank May Move Toward Interest-Rate Cut as Confidence Ebbs
March 29 (Bloomberg) -- European Central Bank President Jean- Claude Trichet may this week signal a willingness to reduce interest rates amid government and industry reports that may show stagnating consumer and business confidence, according to economists including Conrad Mattern.
``Sooner or later, they will have to cut if the indicators continue like this,'' said Mattern, chief economist at Activest Investment in Munich, which manages about $50 billion. ``They will discuss a rate cut and we expect a reduction, but not this week.'' He forecasts a reduction in May or June.
Rate-cut speculation has increased, pushing the euro to its lowest against the dollar this year, since Trichet said last week the ECB may have to lower its forecast of 1.6 percent economic growth in 2004 unless consumer spending picks up. German business confidence fell for a second month in March, hurt by a drop in retailing, an industry report Friday showed.
A reduction in the ECB's benchmark rate, currently 2 percent, is unlikely at this Thursday's meeting, according to economists surveyed by Bloomberg News. Of 36 economists polled Thursday and Friday, all but two forecast no change. Eight said they expect a cut by June.
Revised Forecasts
Since the survey, Deutsche Bank AG, Bank of America Corp. in London and Barclays Capital changed their forecasts for ECB rates. Deutsche Bank now expects a quarter-point reduction by June. Europe's second-largest bank by assets, based in Frankfurt, had previously predicted a 2 percent rate through 2004. London- based Barclays forecast a quarter-point cut as soon as this week.
The euro fell to $1.2045 today, the lowest in almost four months and taking the currency's decline from a Feb. 18 record of $1.2930 to almost 7 percent. Europe's single currency bought $1.2095 at 9:37 a.m. in Frankfurt.
ECB board member Gertrude Tumpel-Gugerell said on Friday that Europe's recovery may be delayed and the bank is ready to pare interest rates if needed.
``We expect a clear signal at the press conference that the ECB is ready to cut rates in May should the German data reflect conditions for the euro region,'' said Karsten Junius, an economist at Dekabank in Frankfurt and co-author of a book on the central bank. ``We will get a warning before they cut rates.''
Slower Pace
The European Union's statistics office will probably say on Wednesday that business and consumer confidence stagnated in March, according to a survey of 30 economists polled by Bloomberg News. An industry report on Thursday may show European manufacturing expanded at a slower pace this month than in February, according to a separate survey of 28 economists.
German consumer confidence was unchanged this month as expectations for future income and economic growth deteriorated, the GfK AG market researcher as saying. GfK also said shoppers were more pessimistic than previously estimated last month.
``When you open the newspaper there's not much positive news for the consumer at the moment,'' said Rolf Buerkl, an economist at GfK. ``People don't have any certainty that allows them to plan for the future -- they don't know how their incomes will develop.''
The ECB will announce its rate decision on Thursday. The bank hasn't cut rates since June last year, when it lowered its main lending rate by half a point. In the U.K., which hasn't adopted the euro, the Bank of England has begun raising rates.
The U.K. central bank's benchmark rate stands at 4 percent after increases in November 2003 and February this year. The U.S. Federal Reserve's overnight rate stands at 1 percent.
Futures Trading
Investors increasingly expect the ECB to cut rates by the end of June, futures trading suggests. The yield on the three- month contract for June settlement was at 1.85 percent today, down from 2 percent at the start of March. The money market rate was 1.97 percent, below the ECB's benchmark refinancing rate.
``We stick to our forecast of no change on Thursday, but the risk that they will cut is at 40 percent,'' said Dekabank's Junius, one of five economists who correctly predicted the ECB's unexpectedly small quarter-point rate cut on March 6, 2003. ``There could well be a vote, and the outcome wouldn't be unanimous.''
ECB council member Yves Mersch said on Friday that rates are ``appropriate'' even though economic reports have been ``mixed'' and Bundesbank Chief Economist Hermann Remsperger said he sees no need to change his growth forecast for Germany after business confidence dropped. Ernst Welteke, the bank's President and one of 18 rate-setters on the ECB's council, said earlier last week the current level of rates doesn't hinder growth.
`Not Clear-Cut'
Some economic reports suggest Europe is still on a recovery path. French consumer spending held steady in February after rising 3.3 percent in January, the government said Tuesday. German retail sales probably rose for a second month in February, the median of 19 forecasts in a Bloomberg News survey of economists showed.
``The case for lower rates is not clear-cut,'' said Lorenzo Codogno, co-chief economist for Europe at Bank of America in London, in a note to investors. ``Euro-zone business and consumer confidence due on March 31, just one day ahead of the ECB council meeting, could take on additional importance.''
Codogno on Friday revised his ECB forecast, saying he now expects a half-point rate reduction in the next two months, after the drop in German business confidence. Previously, the bank saw only a 40 percent chance of a cut. Disappointing data ``will probably tilt the balance at the ECB toward a cut,'' he said.
Inflation below the bank's 2 percent limit and slowing money supply are giving the ECB room to pare rates. European inflation probably stayed at a rate of 1.6 percent in March, economists expect a report on Wednesday to show. Money supply, the ECB's gauge of future inflation, grew at the slowest pace in more than two years in February.
``The ECB will prepare a rate cut on Thursday,'' said Julian von Landesberger, an economist at HVB Group in Munich. ``They see that their picture of a gradual recovery is no longer intact, and they will get more reasons for a cut in April.''
To contact the reporter on this story:
Christian Baumgaertel in Frankfurt at cbaumgaertel@bloomberg.net.
To contact the editor of this story:
Heather Harris at hharris@bloomberg.net.
Chris Kirkham, or ckirkham@bloomberg.net.
Last Updated: March 29, 2004 02:49 EST
The euro dropped against the dollar and the yen in London on speculation the European Central Bank will this week suggest it's prepared to cut interest rates to prevent an economic recovery from stalling.
German consumer confidence was unchanged this month, a survey from Gfk AG market research showed. ECB President Jean- Claude Trichet said last week that the bank may pare its growth estimates unless consumer spending picks up.
``We anticipate the euro will stay under pressure and wouldn't be surprised to see $1.20 break this week,'' said Steve Barrow, senior currency strategist in London at Bear Stearns Cos. ``An ECB rate cut is coming, it's just a question of timing.''
Against the dollar, the euro fell as low as $1.2045, its weakest since Dec. 4, and was trading at $1.200 as of 9:22 a.m. in London from $1.2118 late Friday in New York, according to EBS prices. Versus the yen, the euro slid as low as 127.27, the lowest since November, from 128.52 and was at 127.67.
A reduction in the ECB's benchmark rate from 2 percent, is unlikely at Thursday's meeting, according to economists surveyed by Bloomberg News. Of 36 polled Thursday and Friday, all but two forecast no change. Eight said they expect a cut by June.
The 12 percent gain in the euro against the dollar in the past year has, in part, been spurred because interest rates in the 12-country region are double those in the U.S. The Federal Reserve this month kept its benchmark rate at 1 percent.
Signals From Trichet
ECB board member Gertrude Tumpel-Gugerell said on Friday that Europe's recovery may be delayed and the bank is ready to pare interest rates if needed.
``Trichet will probably pave the way for a future rate cut at the ECB's press conference,'' said Niels Christensen, a currency strategist in Paris at Societe Generale SA. ``The risks for the euro are to the downside.''
The yen rose to its highest in more than six weeks against the dollar in Europe after the London-based Times newspaper reported Japan will end sales of its currency because the nation's economic recovery is accelerating.
Japan's currency was trading at 105.60 as of 9:23 a.m. in London from 106.02 late on Friday in New York.
The world's second-biggest economy no longer needs a weaker yen to bolster exports, the Times said, citing unidentified Bank of Japan officials. Finance Minister Sadakazu Tanigaki denied the article, calling it ``bold speculation,'' Kyodo News said. The ministry directs the central bank to buy or sell.
Business Confidence
Employment and business confidence reports this week may add to signs of growth after the economy expanded at its fastest annual pace in 13 years last quarter. Signs the economy is recovering has helped push the yen up 14 percent against the dollar in the past 12 months.
Eighty-nine percent of the 70 investors, traders and strategists polled from Tokyo to New York on Friday advised buying or holding the yen against the dollar. Among those who provided a recommendation on the yen versus the euro, a majority said they would buy or hold Japan's currency.
The quarterly Tankan index of business sentiment among large manufacturers, compiled by the BOJ, on Thursday will probably rise to 10, from 7 last quarter, according to a separate survey of economists by Bloomberg News.
``The downward pressure on dollar-yen will persist because the fundamentals remain good, but the move down toward 100 won't be a rapid one,'' said Michael Klawitter, a currency strategist in London at WestLB AG.
Currency Sales
The BOJ sold 10.5 trillion yen in the two months ended Feb. 25, about half of 2003's record annual total. The central bank buys or sells yen at the behest of the Ministry of Finance. A MOF official, speaking on condition of anonymity, declined to comment on the Times report. The ministry determines currency policy, not the Bank of Japan, the official said.
Futures traders halved their bets that the yen will fall against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a drop in the yen compared with those on a gain -- so-called yen net shorts -- fell to about 14,600, from about 31,400 a week earlier.
The ministry will sell yen to prevent it from gaining beyond 105 per dollar after April 1, when most Japanese companies start a new business year, Citigroup Inc. said, citing its own survey.
Of the 57 corporate and investor clients surveyed by the world's biggest financial services company, 79 percent said Japan will try to keep the yen at a certain level after the fiscal year begins. When asked the level, 45.6 percent said 105 is the line the ministry will seek to ``defend,'' Citigroup said.
To contact the reporter on this story:
Richard Blackden in London at rblackden@bloomberg.net
To contact the editor of this story:
Daniel Moss at dmoss@bloomberg.net.
Fannie Mae's Thoughts On 'Housing Bubble' Stories
August 23, 2002
Often when the housing sector is strong and growing at a steady, healthy pace, as it has and will continue to do, stories appear warning of a "housing bubble." But as Federal Reserve Chairman Greenspan said in Congressional testimony, it is very difficult for a housing bubble to occur on a national basis because unlike stocks and bonds, investors cannot move in and out of housing as they can financial instruments. In the past quarter century, home values nationwide have never fallen on an annual basis. In fact, home values nationwide have risen every year, even during severe recessions like 1981-82 when the unemployment rate jumped to nearly 11 percent, and during the "mild" recession of 1990-91.
Certainly, housing may cool from its record pace, but recent stories of weakness usually refer to the high-end market. It is not the case that more moderately priced homes which we fund are showing price weakness. For much of the 1990's income outpaced home price appreciation. It has only been recently that home prices have caught up.
Following are facts that give us confidence in the health of the housing market:
On a national average basis, annual home prices have not declined since the Great Depression. Even during severe recessions (such as 1981-82, when the economy had double digit unemployment rates and mortgage rates over 18 percent), home prices increased. To be sure, there have been regional declines (such as in the "oil patch" in the mid-1980s, and California and New England in the early 1990s), but even these did not bring national prices down.
The causes of the regional home price downturns do not appear to be in place today. The oil patch home price decline came as a result of a regional recession that was even worse than the national recession of 1981-82 -- it was, in effect, a regional depression. It would take a U.S. downturn approaching that magnitude to bring national home prices down -- something that seems extremely unlikely.
The regional downturns in California and New England in the early 1990s stemmed largely from excess housing supply in the face of steeply rising prices -- resulting in a sharp increase in unsold home inventories. This exhibited many of the characteristics of a speculative bubble. The supply-demand situation is very different today -- with strong demand being met with constrained supply (as an increasing number of communities have made development more difficult as a result of concerns about sprawl and the environment). As a result, unsold inventories of new homes today are near record lows, while existing home inventories are below average -- putting upward pressure on home prices.
Some have argued that home price gains have outstripped income growth, making housing less affordable. These arguments are incorrect for two reasons. First, over the 1990s, median household income growth and home values both increased at a 3.5 percent pace (while disposable personal income growth increased by 5.2 percent) -- so home price gains were no more than income growth over this long-run period. Second, these arguments fail to account for interest rates -- the most important factor in home affordability. Low inflation over the past decade, and a weak economy more recently, are responsible for bringing mortgage rates down and boosting affordability. Today, yields on 30-year fixed-rate mortgages are at or near the lowest levels since the mid-1960s. As a result, affordability is at high levels despite strong home price gains. It is true that home price gains have outpaced income growth over the past couple of years, suggesting that the recent rapid gains in home prices won't continue (unless mortgage rates fall still more). The unsold home inventory situation indicates that home price increases will moderate to be more in line with income growth, however, rather than falling. Over the past two years disposable personal income growth has averaged 4.9 percent.
Some have argued that home price gains have outstripped the general rate of inflation, and therefore they will have to fall to come back into line with the general price level. This argument is also incorrect. There is no necessity for changes in the price of a particular good or service to equal the overall inflation rate -- either in the short run or the long run. For example, personal computer prices have been falling for decades, yet no one expects PC prices to suddenly jump in order to bring PC inflation back into line with overall inflation. Because housing is something that people historically have wanted to spend more on as their wealth and income rise, demand has shifted toward owner-occupied housing and away from other goods and services as the real economy has grown over time. This shift in relative demand has pushed up home prices faster than the average rate of inflation. There is no specific long run relationship between home price inflation and general inflation other than home price gains should continue to outpace general inflation.
Over the long run, strong productivity growth should allow nominal GDP growth (and thus disposable personal income) to grow by 5.5-6.0 percent this decade. This would, in turn, support home price gains in the range of 5.0-5.5 percent with no additional declines in mortgage rates.
While home price gains have been strong in recent years, increases in the strongest markets are less than they were in the late-1980s (the last time home price inflation was very strong). For example, home values in California (those funded by conforming loans) have risen by 11.5 percent over the past two years (compound annual rate) -- compared with an 18.0 percent increase in 1988-90. In Massachusetts, home values are up by 12.0 percent -- versus 23.0 percent in 1985-87.
In regional home price declines, the proximate cause has always been a downturn in the (regional) economy. The recession of 2001 is over (even if economic growth is only modest today) and most analysts expect stronger economic growth in the year ahead than in the previous year -- both nationally and regionally. There are only a handful of states still in recession, and the economic environment should improve for them -- rather than worsen -- over the next year. Moreover, housing demand is expected to continue to grow at a healthy pace over the next decade. This is due to strong demographic and economic drivers led by household growth, baby boomers moving into their peak homeownership years, immigration, low inflation, and strong productivity gains.
While there is little prospect of a national home price decline, there are a handful of markets around the country that are at risk of a drop in home prices. These are areas where home prices have increased sharply in recent years while new supply has grown strongly -- resulting in a rise in unsold inventories of new homes. Weakness in certain employment sectors (e.g., high-tech manufacturing, telecommunications, airlines and aircraft, and hotels/tourism) could pop prices in those markets. Fortunately, the number of at-risk markets appears to be small.
Federal Reserve Board Chairman Alan Greenspan recently said, "The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock price bubble is imperfect ... Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole." When he testified before Congress on July 17, 2002, Greenspan added, "The type of underlying conditions that create bubbles are very difficult to initiate in the housing market. It is not an issue on the table at the moment." Greenspan also added that the diversity of housing markets in the United States and the high transaction costs involved in selling a home made a bubble "most unlikely."
We expect the housing market to slow modestly over the coming year from the record pace of the past year. Moreover, the recent pace of home price gains is unsustainable if mortgage rates don't continue to decline (which we do not expect). These points do not lead to the conclusion that home prices will drop. Instead, home price gains are likely to slow over the next few years -- but continued strong income growth, strong underlying housing demand, and continued supply restraints on new housing will keep prices moving upward (probably in the range of 4.0-5.5 percent).
Consider the Source
http://www.fanniemae.com/ir/issues/creditrisk/082302.jhtml?s=Current+Issues&t=Credit+Risk+Manage...
Australian Reserve Bank warns of economic instability due to overseas credit creation
http://www.abc.net.au/worldtoday/content/2004/s1073698.htm
The World Today - Thursday, 25 March , 2004 12:26:00
Reporter: Stephen Long
HAMISH ROBERTSON: Here at home the Reserve Bank has issued a new report today acknowledging potential risks to the Australian economy, from the homefront and abroad.
In its first publication on financial stability, the central bank says there is a mid-term risk that debt-laden households will cut back on spending, amplifying a future economic downturn.
It also says that easy money and cheap credit are encouraging overseas investors to pursue high yield, risky investments.
Well, just before we came on air I was joined in the studio by our Finance Correspondent Stephen Long and I put it to him that the report was a pretty sober assessment.
STEPHEN LONG: Well, yes, Hamish, but the warnings aren't up in headlights and overall the Reserve Bank is stressing that financial stability in Australia is looking pretty good and the economy is in good shape, as are the major banks.
That said, it is clearly concerned at the huge run up in household credit and debt outstanding, which has been growing at an annual rate of 15 per cent and an even faster 22 per cent over the year to January this year.
And with people borrowing so much to fund predominantly housing loans – that's 85 per cent of the debt – and more recently investment housing, which was been growing at 23 per cent a year, and then redrawing on their mortgages to fund their lifestyles, there is a risk that if people cut back on that spending, it could lead to an economic down turn.
Just look at these figures for instance: housing equity withdrawal as it's known – people drawing money out of their mortgages to fund consumption – that now accounts for 4-and-a-half per cent of disposable income.
So if there was, say, the housing market coming off the boil, people feeling less secure or if the economy started to turn down and people were less secure and losing jobs and they cut back on spending, in the jargon of the Reserve Bank, 'consolidated their balance sheets', the risk that the Reserve Bank acknowledges is that could amplify any economic downturn that was around.
HAMISH ROBERTSON: This assessment by the Reserve Bank does seem to have ominous parallels with the warnings contained in this week's edition of The Economist magazine that Australia is heading for a crash.
STEPHEN LONG: Indeed, indeed, the parallels are remarkable. However, whereas The Economist sees this as a strong risk, at this stage the Reserve Bank is saying it is only a small risk to the Australian economy.
HAMISH ROBERTSON: So the Reserve Bank is trying to put this with a sense of perspective?
STEPHEN LONG: Yes. Where they it's a small risk though, they do acknowledge that in a sense it is difficult to assess how strong the risk is because in the past we haven't had this situation, and generally when you've had an economic down turn being amplified, it's been amplified by corporates cutting back on spending or banks cutting back on lending.
So this peculiar situation of having such heavily indebted households and the risk that household spending is going to be cut back seriously and precipitate a very, very serious downturn, is a situation that is really almost unprecedented.
Whereas the Reserve Bank is saying the risks are small, it's on the other hand acknowledging that it's actually difficult to get a gauge on how serious those risks are.
HAMISH ROBERTSON: Australia's economy of course, is also very vulnerable to changes to the economies in other countries. What are the Reserve Bank's concerns about the overseas position?
STEPHEN LONG: Well, it's big concern is that cheap credit, with very, very low interest rates overseas, the lowest we've seen in 46 years in the US at just 1 per cent, and a flood of easy money that's been used to prop up economies after the tech wreck is actually encouraging investors into high yield risky investments, and also we've seen it fuelling a similar housing bubble in the United States.
HAMISH ROBERTSON: It's not alone in that thinking, is it Stephen, because many in the United States also share those fears?
STEPHEN LONG: Certainly, there are economists on the left and the right who are saying that. It's another key concern of The Economist magazine. Many liberal economists, many market economists in the United States fear that Alan Greenspan has actually precipitated a second bubble after presiding over the irrational exuberance of the tech boom, which brought the US economy undone, precipitating the largest crash in financial history.
The cheap credit in the US in particular, there are fears this had led to a second bubble, this time largely in the household sector, but also in these high yield, high investment areas that could really cause a serious problem overseas, precipitating a new global down turn, but I must say the Reserve Bank, as I said, isn't putting that risk in headlights and is acknowledging it as a potential risk – serious, significant, but at this stage small.
HAMISH ROBERTSON: I was speaking to our Finance Correspondent Stephen Long.
Forecast of Rising Oil Demand Challenges Tired Saudi Fields
By JEFF GERTH
Published: February 24, 2004
When visitors tour the headquarters of Saudi Arabia's oil empire, a sleek glass building rising from the desert in Dhahran near the Persian Gulf, they are reminded of its mission in a film projected on a giant screen. "We supply what the world demands every day," it declares.
For decades, that has largely been true. Ever since its rich reserves were discovered more than a half-century ago, Saudi Arabia has pumped the oil needed to keep pace with rising needs, becoming the mainstay of the global energy markets.
But the country's oil fields now are in decline, prompting industry and government officials to raise serious questions about whether the kingdom will be able to satisfy the world's thirst for oil in coming years.
Energy forecasts call for Saudi Arabia to almost double its output in the next decade and after. Oil executives and government officials in the United States and Saudi Arabia, however, say capacity will probably stall near current levels, potentially creating a significant gap in the global energy supply.
Outsiders have not had access to detailed production data from Saudi Aramco, the state-owned oil company, for more than 20 years. But interviews in recent months with experts on Saudi oil fields provided a rare look inside the business and suggested looming problems.
An internal Saudi Aramco plan, the experts said, estimates total production capacity in 2011 at 10.15 million barrels a day, about the current capacity. But to meet expected world demand, the United States Department of Energy's research arm says Saudi Arabia will need to produce 13.6 million barrels a day by 2010 and 19.5 million barrels a day by 2020.
"In the past, the world has counted on Saudi Arabia," one senior Saudi oil executive said. "Now I don't see how long it can be maintained."
Saudi Arabia, the leading exporter for three decades, is not running out of oil. Industry officials are finding, however, that it is becoming more difficult or expensive to extract it. Today, the country produces about eight million barrels a day, roughly one-tenth of the world's needs. It is the top foreign supplier to the United States, the world's leading energy consumer.
Fears of a future energy gap could, of course, turn out to be unfounded. Predictions of oil market behavior have often proved wrong.
But if Saudi production falls short, industry experts say the consequences could be significant. Other large producers, like Russia and Iraq, do not have Saudi Aramco's huge reserves or excess oil capacity to export, and promising new fields elsewhere are not expected to deliver enough oil to make up the difference.
As a result, supplies could tighten and oil prices could increase. The global economy could feel the ripples; previous spikes in oil prices have helped cause recessions, though high oil prices in the last year or so have not slowed strong growth.
Saudi Aramco says its dominance in world oil markets will grow because, "if required," it can expand its capacity to 12 million barrels a day or more by "making necessary investments," according to written responses to questions submitted by The New York Times.
But some experts are skeptical. Edward O. Price Jr., a former top Saudi Aramco and Chevron executive and a leading United States government adviser, says he believes that Saudi Arabia can pump up to 12 million barrels a day "for a few years." But "the world should not expect more from the Saudis," he said. He expects global oil markets to be in short supply by 2015.
Fatih Birol, the chief economist for the International Energy Agency, said the Saudis would not be able to increase production enough for future needs without large-scale foreign investment.
The I.E.A., an independent agency founded by energy-consuming nations, and Washington see investment in energy exploration and field maintenance as vital, but such proposals face strong opposition inside Saudi Arabia. Tensions with the West, particularly the United States, make such investment politically difficult for Saudi society. For example, an effort by Crown Prince Abdullah, the kingdom's de facto ruler, to encourage Western companies to invest $25 billion in his country's natural gas industry essentially collapsed last year.
"Access to Persian Gulf oil reserves, especially Saudi Arabia's, is the key question for the whole world," Dr. Birol said.
President Bush has said he wants to make the United States less reliant on oil-producing countries that "don't like America" by diversifying suppliers and financing research into hydrogen fuel cells, but achieving that remains far off.
His administration backs foreign investment initiatives in the gulf region, including Saudi Arabia, and his energy policies rely on Energy Department projections showing the world even more dependent on Arabian oil in 20 years. That may be enough time for governments to find alternatives, but oil field development requires years of planning and work.
Publicly, Saudi oil executives express optimism about the future of their industry. Some economists are equally optimistic that if oil prices rise high enough, advanced recovery techniques will be applied, averting supply problems.
But privately, some Saudi oil officials are less sanguine.
"We don't see us as the ones making sure the oil is there for the rest of the world," one senior executive said in an interview. A Saudi Aramco official cautioned that even the attempt to get up to 12 million barrels a day would "wreak havoc within a decade," by causing damage to the oil fields.
In an unusual public statement, Sadad al-Husseini, Saudi Aramco's second-ranking executive and its leading geologist, warned at an oil conference in Jakarta in 2002 that global "natural declines in existing capacity are real and must be replaced."
Dr. al-Husseini, one Western oil expert said, has been "the brains of Saudi Aramco's exploration and production." But he has told associates that he plans to resign soon, and his departure, government oil experts in the United States and Saudi Arabia say, could hinder Saudi efforts to bolster production or entice foreign investment.
Saudi Arabia's reported proven reserves, more than 250 billion barrels, are one-fourth of the world's total. The most significant is Ghawar. Discovered in 1948, the 300-mile-long sliver near the Persian Gulf is the world's largest oil field and accounts for more than half of the kingdom's production.
The company told The New York Times that its field production practices, including those at Ghawar, were "at optimum levels" and the risk of steep declines was negligible. But Mr. Price, the former vice president for exploration and production at Saudi Aramco, says that North Ghawar, the most valuable section of the field, was pushed too hard in the past.
"Instead of spreading the production to other fields or areas," Mr. Price said, the Saudis concentrated on North Ghawar. That "accelerated the depletion rate and the time to uncontrolled decline," or the point where the field's production drops dramatically, he said.
In Saudi Arabia, seawater is injected into the giant fields to help move the oil toward the top of the reservoir. But over time, the volume of water that is lifted along with the oil increases, and the volume of oil declines proportionally. Eventually, it becomes uneconomical to extract the oil. There is also a risk that the field can become unstable and collapse.
Ghawar is still far too productive to abandon. But because of increasing problems with managing the water, one Saudi oil executive said, "Ghawar is becoming very costly to maintain."
The average decline rate in Saudi Aramco's mature fields — Ghawar and a few others — "is in the range of 8 percent per year," without additional remediation, according to the company's statement. This means several hundred thousand barrels of daily oil production would have to be added every year just to make up for the diminished output.
Every oil field is unique, and experts cannot predict how long each might last. For its part, Saudi Aramco is counting on Ghawar for years to come.
The company projects that Ghawar will continue to produce more than half its oil. One internal company estimate from 2002 puts Ghawar's production at 5.25 million barrels a day in 2011, more than half the total expected crude oil capacity of 10.15 million, according to United States government officials and oil executives.
"The big risk in Saudi Arabia is that Ghawar's rate of decline increases to an alarming point," said Ali Morteza Samsam Bakhtiari, a senior official with the National Iranian Oil Company. "That will set bells ringing all over the oil world because Ghawar underpins Saudi output and Saudi undergirds worldwide production."
The I.E.A. warned in November that huge investments would be needed to offset the decline rates in mature Middle Eastern oil fields — it put the average at 5 percent — and the increasing costs of oil and gas production. The agency, based in Paris, forecasts that Saudi production will need to reach 20 million barrels a day by 2020. (I.E.A. and other research estimates say that more than 90 percent of that would be crude oil; the rest would be liquid products like natural gas liquids that result from the processing of crude oil.)
In his speech in Jakarta, Dr. al-Husseini noted the need for exploration, pointing out that colleagues at Exxon Mobil predict that more than 50 percent of oil and gas consumption in 2010 must come from new fields and reservoirs.
Harry A. Longwell, the executive vice president of Exxon Mobil, says finding new sources of oil is crucial. Mr. Longwell, in an interview, said that increasing demand and declining production were not new problems, but they were "much larger now because of the world's demand for energy and the magnitude of the numbers now are much larger."
To offset its declines, Saudi Aramco is bringing back into production one idle field, Qatif, and is enhancing production at a nearby offshore field, Abu Safah. The company says that with expert management, these fields will produce about 800,000 barrels a day.
But current and former Saudi Aramco executives question those expectations, contending that the goal of 500,000 barrels a day for Qatif is unrealistic and that development costs are higher than anticipated.
Qatif poses real difficulties. It is near housing for Saudi Arabia's minority Shiite population and contains high concentrations of hydrogen sulfide, a highly toxic gas. Its development is "particularly challenging," according to a technical paper by Saudi Aramco engineers presented last year in Bahrain, which said that 45 percent of potential drilling sites "were rejected due to safety concerns."
At Abu Safah, Saudi Aramco has experienced increasing water problems as it has turned to submersible pumps to extract oil. Experts, including American and Saudi government officials, say the technique is ill advised. Saudi Aramco, in its written response to questions, defended the use of the pumps at Abu Safah and its ability to manage the water after 37 years of production.
One United Sates government energy expert noted that "submersible pumps is what the Soviets went to on an indiscriminate basis in West Siberia and it went south." Samotlor, a huge field in Siberia, once produced more than three million barrels a day, but it declined sharply in the 1980's after the Soviets pushed it too hard. Today it produces only a few hundred thousand barrels a day.
A link to exchange rate news:
http://www.quickex.ca/Links.html
Unpleasant surprises waiting to happen
By ROMEO BERNARDO
There is, quite rightly, increasing concern over government's mounting debt. In all the talk about the risks, consequences and possible solutions to government's debt problem however, one critical dimension to the problem seems to have been overlooked--government's contingent liabilities.
This is surprising as past fiscal crises in the country were triggered by the realization of some of these extra-budgetary activities. Reported budget deficits have in fact been found to contribute much less to increases in the country's debt-to-output ratio than extra-budgetary items (the decomposition of the debt-to-output ratio by Homi Kharas and Deepak Mishra revealed that from 1980-97, reported deficits contributed only 34% while extra-budgetary items contributed 133% to the change in the debt-output ratio).
A study on government performance jointly published by the Philippine government, the World Bank, and the Asian Development Bank reports estimates of government's contingent liabilities running to about PhP3.1 trillion, which is nearly of the same magnitude as government's direct debt outstanding (PhP3.4 billion as of November 2003). What is worrisome about these contingent liabilities is that nobody knows when the additional fund demands will arise and how much government will need to put up at any point. Obviously, such unwelcome surprises can be very destabilizing.
Going through the list of government's contingent liabilities which includes the unfunded liabilities of pension institutions--Social Security System (SSS), Government Service Insurance System (GSIS), Retirement and Separation Benefits System (RSBS)--direct guarantees on obligations of state enterprises--e.g., National Power Corp. (NPC), National Food Authority (NFA)--guarantees on various types of risks (including market, currency, regulatory, political) under built-operate-transfer or BOT contracts, deposit insurance, implicit guarantee on the banking sector, umbrella guarantees for various types of loans in the agriculture, microenterprise and housing sectors, among others, government guarantees to NPC appear to require the most urgent attention.
The national government's exposure to NPC has become virtually real with government having had to incur debts directly to finance NPC's deficits, which have been rising at an alarming rate. From around PhP8 billion in 2000, NPC's losses, arising largely from inadequate power rate adjustments and the costs of take-or-pay contracts, rose steeply to an estimated PhP73 billion in 2003 and are reportedly, expected to reach PhP113 billion this year. Thus, unless rate increases are implemented and kinks in the privatization of the power sector are ironed out, the risk to government of absorbing an increasing portion of NPC's losses is very real.
Another threat to government's fiscal sustainability is the SSS' unfunded pension liabilities (estimated at around PhP1.3 trillion in 1999). Despite much ado over SSS' investment decisions, the accumulation of the pension fund's unfunded obligations is largely due to increases in pension benefits over the years (usually, as part of government's Labor Day concessions) without matching increases in contribution rates. Already, annual benefits being paid out exceed members' contributions and SSS' reserves are estimated to run out by 2011. Last year's 1% increase in the contribution rate is mere band-aid for a gaping wound. A larger adjustment is needed right away, without which the bleeding will increase by the day.
Then there is the banking sector, which because of public expectations, benefits from an implicit government guarantee. This implicit guarantee carries even more weight today as banks, lacking alternative investment outlets, have been parking a large share of investment funds in government securities. Any problem on the fiscal side will thus translate directly into banking sector stress. This underscores the need for government to come to grips with the sector's bad asset problem and recapitalization requirements to allow banks, in time, to carry out their intermediation function.
There are many, many other contingent obligations that government is potentially exposed to, some significantly smaller (e.g., directed credit programs), others with less likelihood of being triggered (e.g., force majeure events under build-operate-transfer contracts). In many cases, particularly with public enterprises, the need for government to take over the corporations' loan servicing results from operating inefficiencies and subsidized price structures due to the highly politicized environment for rate adjustment. Thus, in cases where the private sector is willing to take over, government should privatize and concentrate instead on strengthening its regulatory function.
As to the rest of government's contingent liabilities, the crucial first step is to set up a monitoring system to enable government to keep track of all the financial risks it is exposed to in any given period. In time, government needs to develop practical tools to better manage these off-budget risks.
http://www.bworld.com.ph/current/B&F/executive.html
PDIC to cover 95% of deposits
The Philippine Deposit Insurance Corp. (PDIC) would soon be able to cover at least 95% of the total deposit accounts in the banking system and almost fully cover small deposits generally placed in thrift and rural banks.
PDIC president Ricardo M. Tan said the proposed increase of the maximum deposit insurance coverage to PhP250,000 would make this possible as he stressed the importance of having the bill ratified as soon as Congress resumes session in June.
"With the proposed increase of the maximum insurance coverage to PhP250,000, around 26 million deposit accounts, representing 95% of total deposit accounts in the banking system will be protected," Mr. Tan said.
He added that this level of insurance limit would allow PDIC to almost fully cover deposits of small depositors generally placed in thrift and rural banks with 99% of deposit accounts in rural banks and 96% in thrift banks.
Mr. Tan underscored the passage of the bill, saying that it was important to protect small depositors.
"Small depositors generally have limited access to pertinent information involving their savings in banks. Coupled with this limited access is their inability to process available information," Mr. Tan said.
The bill seeking to increase the maximum insured deposit coverage to PhP250,000 from PhP100,000 remains pending at both Houses of Congress although both chambers already reconciled their differing versions after being stalled since the 12th Congress opened in 2001. The Lower House earlier wanted to hike the insurance coverage to PhP400,000, while the Senate wants to double the current limit to PhP200,000.
The approved bill, which seeks to amend Republic Act 3591, awaits ratification from both Houses before the President can sign it into law.
Aside from increasing the amount of the insured deposit coverage, the approved version of the bill also provides for a permanent and continuing insurance coverage on all insured deposits to protect depositors from sudden bank closures. The approved version of the bill also restores the power of the PDIC to examine banks and to extend financial assistance under certain conditions. -- I.C. Gonzales
New Islamic bank to be proposed
By ERIC S. BORAS, Reporter
A group of investors is planning to set up a medium-sized bank that would cater to the Muslim market in the country.
An industry source said the new Islamic bank, which would be put up through the rehabilitation of an existing thrift bank, would take advantage of the Muslim funds that were fleeing from the United States and Europe.
It also plans to become a major vehicle in channeling foreign aid from Middle East countries to the Philippines particularly to war-torn Mindanao where majority of Muslim Filipinos reside.
"Muslim businessmen were now looking for a place to put their money because the tightened financial examinations in Europe and America after all these bombings had made them uncomfortable with their investments," the source said.
The group of investors had already tapped the services of veteran muslim banker Ebrahim Mama-o, who is offering consultancy services for the Saudi Arabian Embassy in the country with specialization in the Filipino Financial Affairs program.
Mr. Mama-o, together with prospective owners of the new Islamic bank, will present its proposal to the Bangko Sentral ng Pilipinas next week, the source said.
"This new Islamic bank will hit the ground running and ably serve the needs of the country's muslim community as soon as the [central bank] approves its operation," said the source.
The idea for a new Islamic bank emerged after the country's existing muslim bank--Al-Amanah Islamic Bank of the Philippines--failed to reach out to the vast majority of Muslim Filipinos.
Burdened with high nonperforming assets, which limits income and curtails operation, Amanah Bank could not address many of the financial needs of Muslim businessmen, the industry source said.
Under the plan, the new Islamic bank would use muslim concepts such as "No Riba" and "Mudaraba" where the bank would not pay a fixed interest on deposits but rather give out a return based on profits, the source said.
The owners of a leading chain of fine-dining restaurants is said to be interested in investing in the proposed Islamic bank.
RP debt, banks' bad loans worry ADB
By IRIS CECILIA C. GONZALES, Reporter
The Asian Development Bank (ADB) has raised concerns on the country's swelling debt and the banking industry's growing bad loans, saying that this has been slowing down economic growth.
Richard Ondrik, ADB senior officer, said while the Manila-based bank was comfortable with monetary policies and the benign inflation environment, it still would like to see a more manageable debt level for the country.
ADB, a multilateral development finance institution, extends grants and loans to countries in Asia and the Pacific. Established in 1966, it is dedicated to reducing poverty in the region.
Mr. Ondrik said while country is not in a debt crisis like Argentina, the Philippines' situation is still alarming.
"What we are not comfortable is the size of debt. Prudential management of debt is one side of the coin. But how much it is, is scary. It is nothing like Argentina but there are concerns on the size of the debt," Mr. Ondrik said in an interview.
Data from the central bank showed that the country's external debt could hit $59.4 billion by yearend due to the government's external funding requirement.
TAXES
As such, Mr. Ondrik stressed the need to improve the revenue stream by implementing additional tax measures.
"It is good that government recognizes its debt level, but there are also tools to address this. And that means pushing for revenue growth," said Mr. Ondrik, who is also the bank's senior programs coordination specialist.
He cited, for instance, the need for Congress to push through with the indexation of sin taxes.
The measure pushed by the Department of Finance, and which remains pending at the legislative branch, seeks to realign the taxes on cigarettes and alcohol with the current inflation environment.
Mr. Ondrik said without additional tax measures, the government may miss its target to wipe out the budget deficit by 2009, a view shared by Bangko Sentral Governor Rafael B. Buenaventura.
"The government has a target of zero-deficit by 2009 but it really depends a lot on revenue growth," Mr. Ondrik said.
Similarly, Mr. Buenaventura has repeatedly stressed the need for additional revenue measures in the face of the heavy deficit burden weighing on the country's shoulders.
The Department of Budget and Management has pegged the end-2004 budget deficit at PhP197 billion.
The Department of Finance has recognized the need to raise taxes and has even reconsidered an earlier plan to impose tax on text messages.
Mr. Ondrik said now is a good time to implement additional tax measures because the present environment can tolerate it.
"If you look at it, when things are poorly performing, it is much easier to make major leaps," he said.
BAD LOANS
Another concern of the ADB is the growing amount of bad loans in the financial system.
Mr. Ondrik said that despite the passage of the Special Purpose Vehicle Act, or the SPV law, which grants incentives to buyers of bad loans, the banking system remains soured with bad loans.
The ADB official said banks seem to have unreasonable expectations from buyers.
"No bank has been able to take advantage of the SPV. It appears that deals are failing not because of the law but because of unreasonable expectations by the bank," Mr. Ondrik said. He urged banks not to expect too much from the sale of bad loans.
The SPV law stipulates that properties that banks want to include in the portfolio for sale to asset management firms must be submitted to the central bank which will certify if these are qualified to avail of incentives such as tax perks.
http://www.bworld.com.ph/current/B&F/b&fstory1.html
Philippine Peso hits new lows on political, fiscal worries
Heavy dollar purchases by corporates and banks -- linked by some traders to election and fiscal concerns -- yesterday pushed the peso down to new lows versus the dollar.
All-time trading, closing and average lows were posted by the peso, which hit PhP56.45 to the dollar early in the day at the Philippine Dealing System, the country's electronic currencies exchange.
It closed at PhP56.42 following brisk trading, down four centavos from Friday's session. The peso averaged PhP56.429 to the dollar, weaker by 10.9 centavos from last week's PhP56.32.
Volume turnover at the spot market jumped to $160 million changing hands from the $117.50 million previously.
Currency traders said follow-through dollar buying was prompted by the peso's breaching the psychological resistance of PhP56.35 on Friday.
"Clients panicked when it hit beyond PhP56.35, although the market was calm that the central bank will provide dollar liquidity. These corporates are buying for their month-end requirements. The PhP56.35 was a very critical level," a market source said.
The peso-dollar rate had been hovering within a familiar range of PhP56.15 to PhP56.35 until it hit an intraday low of PhP56.38 last Friday, which traders also attributed to corporate demand.
"Banks were still covering their short dollar positions since Friday. They have to buy back the dollars they sold to the market. Last week, there was huge corporate order," a trader said.
Lack of substantial inflows exacerbated the peso's fall as inflows of dollar remittances coming from overseas Filipino workers (OFWs) continue to be sluggish.
"When the dollar is up, OFWs tend to anticipate further weakness for the peso. They will sell when the price is attractive to them. They only unload dollars which are enough for daily expenses," a trader from a foreign bank said.
FUTILE DEFENSE
Market players also said the Bangko Sentral ng Pilipinas (Central Bank of the Philippines, or BSP) was not in the market on Friday. "They may have thought it was futile to defend the peso at that time. They thought it would be more costly for them," a source said.
But in yesterday's trading, market players believed the central bank was in the spot market at PhP56.45 to the dollar, allowing the peso to trim its losses towards end trade to close at PhP56.42.
Currency traders said the peso will likely stay at current levels today.
Traders also attributed the peso fall to recent BSP pronouncements that the country's dollar reserves could hit the lower range of target by yearend. Bangko Sentral Governor Rafael B. Buenaventura had said gross international reserves (GIR) could hit $14 billion, the lower end of the target range of $14 billion to $15 billion, due to the government's borrowing mix and budgetary shortfalls.
"Worries on the country's dollar reserves weighed on sentiment," a trader said.
Other traders said political concerns ahead of the May 10 elections also contributed to the decline. Many companies, they said, continued to hedge on future dollar requirements.
Traders also said the BSP's hands-off stance in the market contributed to the decline. Mr. Buenaventura said it was partly due to "corporate demand" for dollars.
Others blamed uncertainties brought about by anticipation of today's scheduled announcement by the government of its budget deficit figures for February.
The Malacañan presidential palace, meanwhile, said it is optimistic that the peso will soon recover as soon as corporate demand for dollars eases and political concerns here and abroad ebb.
Presidential deputy spokesman Ricardo L. Saludo said the BSP will take prudent measures to protect the peso. "Monetary authorities are monitoring the currency market with ample instruments on hand to fight speculators and maintain orderly trading," Mr. Saludo told BusinessWorld. -- Ruby Anne M. Rubio, Iris Cecilia C. Gonzales and Karen L. Lema
http://www.bworld.com.ph/current/TopStories/headline.html
William Greider, in an article titled “Who Governs Globalism” in The American Prospect, 1997, wrote, “Cumulatively, since 1980, Americans have bought $1.5 trillion more than they sold in their merchandise trade with foreign nations.” The debt is more like $3 trillion by now. Americans are writing checks but nobody's cashing them at the bank. Why? Because they think dollars are wealth. When the world cashes in their chips, the USS Dollar will sink like a rock. People will dream of the “good ole days” of true glorious southern slavery. (http://www.guardian.co.uk/comment/story/0,3604,940757,00.html)
Stephen King and the Crash
As written in June 2000
On June 29, 1999 at about 3 am on BBC World Service Radio a reporter interviewed the chief economist at HFBC Bank in London, Stephen King (yes -- this is all true), who had an unpopular assessment of the present state of the US economy: some time around 2001 - 2002, the US economy would inevitably collapse. Daytime news broadcasts remain tranquil. The imminent collapse of the world economy, it seems, has not been a topic that an enterprising reporter might wish to persue. A cynic might say that BBC management requires a more up-beat feel, but we here at the Currency Center are not cynical.
What the world needs now is yet another prediction of calamity. Yet, a year on, King's prediction is right on the mark. He predicted a bubble "associated with strong growth and low inflation" combined with a dash of massive lack of investment in "products in savings" and interest rate hikes that are like a pea-shooter against the Godzilla of exponential growth. He even cited Greenspan's perceptive observation that "the party can't go on forever."
"I don't think there is any evidence," said Mr. King "to suggest that with one [interest] rate increase you have a problemÉ but after three or four rate increases, which is what we think will happen in the next 12 months, then you have a much bigger problem." For those of you who are living in mud huts, that's what has been going on lately -- and the same thing is happening in the UK.
I personally have not heard this prediction repeated, and King himself admitted that his viewpoint is not shared my many of his colleagues and he attributes this to their lax view of low inflation-- something that is seen as a good sign-- and their ignoring "asset price inflation" which he noted was present, in Cinemascope, in Japan just before their collapse. As it happens, Alastair Cooke, in an April 2000 broadcast of his "Letter From America," devoted considerable time to his friend's rent hike of 700% in New York City. How can we have low inflation if some prices are skyrocketing?, Cooke wondered and he talked to an economist who explained to him that certain things were out of the loop as regards inflation. . . like rent, and ahhh, real estate prices . . . which sheds some light on Kings' "asset price inflation." Real estate prices, it seems, do not figure in the calculations of inflation according to the Federal Reserve Board.
Add to this gonzo mix, a liberal dose of hucksters in the media selling "the largest uninterrupted ecconomic expansion in human history," while bearing in mind that Sinclair Lewis has already warned us that "Advertising is a valuable economic factor because it is the cheapest way of selling goods, particularly if the goods are worthless."
Today's question is: What will President (the media ALWAYS gets their way) George Dubya Bush's reaction be to this state of affairs as the rate increases continue and the inevitable becomes more obvious?
My guess is that he will do one of the following. . .
1) Declare war on some Non-WTO member nation
2) Start a school for ballroom dance and lasagna preparation in Aspen
3) Launch a national Pick Six Lottery backed by the FDIC
4) Push for a tax break for the over-the-$2mil/year crowd
5) Re-deregulate the Savings & Loan industry
If you forsee other possibilities, contact
World Center for Equivocal Currencies
Immediately
We Need To Know
Contact J. Walter Plinge at
b.ob@accesinternet.com
© copyright June 2000, J. Walter Plinge, France
Distribute freely if it's kept intact, including credits,
and not for profit or print media.
http://ebean390.tripod.com/waltking.html
Money is Not a Commodity: The Proof
This is the proof that Money is not a commodity. If you can solve the riddle and disprove the proof, I’ll give you a prize, like say, maybe, Algeria.
It’s not too complex actually. It’s based on the proof of an already accepted law of mathmatics that you cannot divide by zero. That’s done by looking for the inconsistencies that dividing by zero creates elsewhere in the system.
Robert Kaplan, author of The Nothing That Is— A Natural History of Zero proves it this way:
Pick two numbers, like 13 and 25... ok...
we know: 13 X 0 = 0
and we know: 25 X 0 = 0
therefore: 13 X 0 = 25 X 0
now divide
both sides
by zero and... 13 = 25
The inconsistency is… well, obvious. The inconsistency is that by dividing by zero, you can arrange to prove just about anything.
--------------------------------------------------------------------------------
So, are there inconsistencies in foriegn commodity trade transactions? The assumption by the economic community is that money is a commodity and by allowing the free purchase and sale of one currency for another, currency values will be determined by the market forces the same as any other commodity. Here is what happens in real life when you buy and sell currencies.
“The power of these speculators was dramatically illustrated in 1992 when financier George Soros, following a bet with then UK prime Minister John Major, sold $10 billion worth of British pounds on international Money Markets for a $1 billion profit and in doing so, single-handedly managed to force a devaluation of the pound and scuttle a new proposal for an exchange rate system in the European Union at the same time.”
Tony Clarke of the Polaris Institute, Canada, cited in
The Ecologist, May/June 1999,
”Twilight of the Corporation,” page 161)
So . . .
Are there inconsistencies here? At first, it appears that the British currency acted like any other commodity. When supply increased, demand decreased and the value of the pound dropped. Pure supply & demand.
But there are inconsistencies in the Soros case (and many others):
Britain's economy was adversely affected by Soro's trade, even though Britain had actually gained financial power (Soros made a £.6 million profit and the same was added to the British economy) The other types of foriegn commodity transactions may cause small fluctuations, but they do not destabilize a country's entire economy. Other types of foriegn commodity trade, besideds buying and selling a currency with a currency, are:
· buying a commodity with a currency
· selling a commodity for a currency
· trading a commodity for a commodity (other than money)
The specific point here is that the values of all other foreign traded commodities whether imports or exports were altered by Soros. That is, a sale of a particularly large quantity of wheat, may alter the price of wheat and might possibly, in a wildly extreme situation, even affect related products like corn, but it will not alter the whole market uniformly. The value of all other commodities, imports and exports, was altered by the Soros deal. It did what no other commodity can do, so we can only conclude that there is something odd about exchanging currencies as though they were commodities. For this reason currencies cannot be considered true commodities.
To disprove this, one must show that other types of foreign commodity exchanges listed above can and do — to the same extent and with similar frequency — alter the whole market as currency trades do. Or maybe you can find another way.
Disprove the Proof and win yourself a prize.
Time Limit: 100 years
Good Luck
© copyright (c) 2000, J Walter Plinge, France
b.ob@accesinternet.com
Distribute freely if not for profit or print media, and it's kept intact, including credits
http://ebean390.tripod.com/waltproof.htm
Nate Dubhaigh hands out fake money during a protest outside of Bechtel Corp., in downtown San Francisco on Tuesday, Feb. 24, 2004. Bechtel is among the top recipients of reconstruction contracts to build Iraq after the war.
Protesters gathered outside the company Tuesday to speak out against what they consider is war profiteering by companies like Bechtel, Halliburton and others. (AP Photo/Marcio Jose Sanchez)
Indeed, in the United States, more than $2 trillion of securitized assets currently exists with no government guarantee, either explicit or implicit.
http://www.federalreserve.gov/boarddocs/testimony/2004/20040224/default.htm
Soros made $1 billion and we were all better off
By George Trefgarne (Filed: 16/09/2002)
September 16 1992. Black Wednesday and the pound was ejected from the European Exchange Rate Mechanism. George Trefgarne ponders what Britain would be like had we stayed in
Britain in 2002 is a pretty prosperous place. Yet it nearly wasn't so. Ten years ago, we almost blew it, and if we had succeeded, we would all be considerably worse off. You might easily have lost your job, and your home, and you would certainly be paid less than you are now.
In October 1990, Margaret Thatcher was persuaded by her chancellor, John Major, and Douglas Hurd, then foreign secretary, to join the Exchange Rate Mechanism. She was against the idea. But it would, they said, kill off inflation. The ERM fixed the pound against the German mark - the strongest currency in Europe - within a six per cent band either side of 2.95 marks.
Prices in Britain were rising at nine per cent at the time and the housing market was overheating. The weakness of the pound was making inflation worse. The ERM would supposedly put a stop to all that and show how wonderfully pro-European we were.
The plan backfired spectacularly. To keep the pound up to the mark, interest rates had to be held up, too. Even when they came down to 10 per cent, in a shrinking economy they were still far too high.
But supposing we had stayed in? Supposing ruinous interest rates and the Bank of England spending £4 billion of the foreign exchange reserves had been enough to beat off the speculators? What would modern Britain be like?
Poorer, is the answer. Joining the ERM coincided with a major downturn in the world economy and the mechanism pushed us into a deep recession. A million people lost their jobs, and a quarter of a million had their homes repossessed.
Bankruptcies more than doubled, from 40,000 in 1989 to 100,000 in 1992. Consumer spending was down and companies were cutting back on investment. If we had stayed in, these nasty trends might easily have continued for another couple of years.
That would have been perilous for the housing market. By September 1992, it was poised for collapse. About two thirds of Britons own their homes, among the highest proportion in the world. But houses are bought with secured loans and those who cannot keep up with their monthly payments risk repossession by the banks.
There were 32,000 repossessions in 1992, about seven times more than in a normal year. But, by 1993, an amazing 511,000 households were at least three months in arrears on their mortgages. A few more months of interest rates at 12-15 per cent - as they reached to keep us inside the ERM - and the disaster would have been turned to catastrophe. This would have been a terrible blow to the banks and the weaker ones might not have survived so many loans going bad.
Aside from the human misery of homes being repossessed and a further fall in property prices, staying in the ERM would have undoubtedly prolonged the recession. In 1992, the economy shrank by 1.4 per cent. If it had kept on contracting at a similar rate for a couple more years before the recession ended, national output would now be around 13 per less than it is now. This is a huge sum.
As a nation, we would currently be producing £1,600 less for every man, woman and child. Unemployment, which peaked at more than three million, could well have reached four million, widening the Government's deficit still further.
It is not surprising that the ERM crisis lost the Conservatives their reputation for economic competence, which they have never recovered. If their policy had succeeded, and we had stayed in, they would be even more unpopular.
One conspicuous beneficiary of the debacle was a little-known shadow chancellor, one Gordon Brown. Pretty soon, he and the then Labour leader, John Smith, were taunting John Major for being "the devalued leader of a devalued government".
After Mr Smith's death, Tony Blair picked up where he left off. But Mr Brown shouldn't crow. He originally supported the ERM. If we had stayed in and the economy had weakened, his current public spending spree would be almost impossible to finance. He would be facing something like a £40 billion shortfall in his revenues.
Philip Stephens, the author of Politics and the Pound, thinks things would not have been that bad - an orderly devaluation within the system would have been allowed and interest rates could have been cut. But, he reckons, even this would not have been enough to allow the Tories to win the 1997 election. We might well, though, after a successful ERM apprenticeship, now be using the euro.
Fixed exchange rates are no panacea. There are examples from around the world that show how bad things might have been here. In Hong Kong, where the currency is fixed to the mighty dollar, property prices have fallen 40 per cent from their peak.
Germany is on the verge of recession and unemployment is more than four million, but the natural prescription of devaluation and cutting interest rates is unavailable, since its rates are set by the European Central Bank to contain inflation in the whole euro zone.
In Argentina, the peso was pegged to the dollar and could not keep pace with the American currency's rise in the late 1990s as America boomed. The peg collapsed, the banks followed and the Argentine economy is now in serious recession. There have been five presidents in the past year.
Since escaping from the ERM, Britain has overtaken France to become the fourth largest economy in the world, and growth, though slowing, is the fastest among G7 advanced nations. Unemployment is at its lowest since the mid-1970s. The pound is strong against the euro, as returning holidaymakers can testify.
The experience of the ERM proves that you cannot buck a foreign exchange market, nor should you try. Rather than a fixed exchange rate, the best way to control inflation is via your own, independent central bank, as Mr Brown has so heroically demonstrated.
We have much to thank speculators such as the infamous George Soros for. Their legacy is our current prosperity and the $1 billion that Mr Soros pocketed out of the Bank of England's foreign exchange reserves, 10 years ago today, was cheap at the price.
Lenin declared that the best way to destroy the capitalist system is to debauch the currency. For once, he was right and we should count our blessings we narrowly avoided such a disaster here. But it was more by luck than judgment.
Ex-BANK OF AMERICA Banker Paid Millions Over Parmalat
By Emilio Parodi
MILAN (Reuters) - A former Bank of America Corp. executive under investigation in the Parmalat fraud case has admitted he received millions of dollars from work linked to the food firm but said the payments were commissions, judicial sources said on Friday.
The sources said Milan prosecutors had discovered two Swiss bank accounts linked to Luca Sala, the former head of Bank of America's (NYSE:BAC - News) corporate finance division in Italy, which had received more than $30 million in deposits since 1997.
Sala, under investigation for suspected market rigging and money laundering, told magistrates he had received the money as bonuses for work connected to Parmalat before Italy's biggest listed food group went insolvent last December, they said.
"He said they were commissions for his work as an agent hedging the bank against political risks" stemming from Parmalat financing, a judicial source said without elaborating.
Sala, who quit Bank of America last year to work as a consultant at Parmalat has offered to forfeit some of the money, said the sources, who asked not to be identified.
The Wall Street Journal reported on Friday that Sala had told investigators he misappropriated $27 million in a kickback scheme involving Parmalat.
The former banker is one of more than two dozen people under investigation in one of the world's biggest fraud scandals, which has raised questions about banks' dealings with the insolvent firm. Nineteen people are under arrest. None have been charged.
RESCUE PLAN SOON
Parmalat's emergency administrator Enrico Bondi is expected to present a draft of a recovery plan to Industry Minister Antonio Marzano early next week, a source close to the situation said on Friday.
Markets are eager to know what Parmalat assets Bondi might try to sell off and how much money the company expects eventually to be able to repay banks and bondholders.
The Parmalat crisis exploded on Dec. 19 after a 4-billion-euro Cayman Islands account documented on Bank of America letterhead was declared false.
Parmalat's debts have since been revealed to be 14.5 billion euros, and founder Calisto Tanzi, one of those in jail, has admitted to misappropriating hundreds of millions of euros.
Seven Italian and foreign financial institutions, including Bank of America, are being investigated to see how much they knew about Parmalat's finances when they bought and sold its bonds or did other business with its former management, news reports have said.
Milan prosecutors questioned Sala for a third time on Friday, focusing on $1.2 billion in private debt sales that they estimate Bank of America arranged for Parmalat.
Prosecutors are investigating whether some of the money was returned to Bank of America, possibly via a trust, a judicial source said.
"Some of that money can be traced to Parmalat's accounts and some can't," the source said.
Sala had said earlier this year that he was a victim of fraud and that he and Bank of America had been duped.
Neither Bank of America nor Parmalat would comment. The bank has previously said it was not aware of alleged improprieties.
Former Parmalat finance director Alberto Ferraris told investigators on Jan. 8 that Shahzad Shahbaz, Bank of America's London-based head of regional corporate and investment banking, helped Sala place the debt, according to a transcript of the questioning obtained by Reuters.
Japan Gets Wish With Dollar Short Squeeze: David DeRosa
Feb. 22 (Bloomberg) -- Japanese officials must be pinching themselves to make sure Friday's better-than-two-yen rise in the dollar was for real. Hopefully, they will note that the movement of the dollar against the yen happened without the Bank of Japan being a market participant.
Probably not -- Japan is adamant that it won't allow appreciation in the yen. And it has shown that it's prepared to use the full weight of its central bank against the currency market.
The move in the yen actually started on Thursday. The yen was trading at 105.50 when the dollar seemed to catch a lift. By the end of the day it was trading at the 107 handle. The real fireworks happened on Friday when the dollar vaulted over the 109 level.
Part of this drama was caused by Japan's finance ministry saying it may keep selling the currency and by an announcement that Japan's Prime Minister Junichiro Koizumi had raised the terrorism alert to its highest level since March. This is a knee- jerk reaction: If Japan is a target, sell yen.
Accumulating Dollars
Part of the yen's rise on Friday had to do with it being Friday, which is the day that's notorious in the foreign exchange market for short squeezes. That's when panicked short sellers, in this case traders with short positions in the dollar, are forced to cover for fear of immediate capital losses. And once the squeeze begins, it's hard to find anyone who isn't a buyer of dollars, meaning the price action is a one-way street.
A measure of Japan's determination to cap the yen's rise is its record accumulation of dollars, hence selling yen, over the past year. Those dollars were used to buy U.S. Treasury bonds. Japan's purchases totaled $167 billion in 2003.
All of this is rooted in a deeply held belief that Japan is an export economy. If its currency rises in value, it fears its goods could be priced out of international markets, and, in particular, the U.S. market.
Whether that's true, Japan nevertheless thinks it must act against the strengthening yen. Yet in recent times, Japan has achieved little relief from the strengthening yen for all its Herculean efforts.
Not So Fast!
That's why it's ironic that the yen could drop so quickly without the direct help of the Japanese government, although it did play a small role.
The market has been impressed by recent economic numbers coming out of Japan that indicate a turnaround at long last. The number that grabbed the most attention was last quarter's gross domestic product: Japan's economy grew at a 7 percent annual rate in the three months ended Dec. 31, the government said on Wednesday. That's the fastest pace in 13 years, and faster than the U.S. or Europe.
Time to buy yen, one might presume. If Japan turns around, then there should be a flood of money into the Japanese stock market, and that would take a lot of yen purchases.
Not so fast, according to Japan's vice finance minister for international affairs, Zembei Mizoguchi.
He basically said, ``Buying of yen on good news won't be tolerated!'' And to make his point, he did say that it ``won't be the case'' for Japan to allow the yen to appreciate, even if the economy is expanding.
Why Fix It?
This is as curious as it is Draconian. If Japan is growing at 7 percent, then why mess with the foreign exchange market? If the economy is working, Mr. Mizoguchi, why try to fix it?
Consider the consequences of holding down the yen against the dollar in the midst of a recovery -- assuming that's what is happening in Japan. A lower yen makes the cost of entering Japanese markets artificially cheap for foreign investors.
And sooner or later the yen will rise because we know the Bank of Japan can't really control the currency. All of this could mean that Japan's official yen policy ends up creating a stock market bonanza for foreign investors.
This may sound silly considering the last 13 years of economic torpor in Japan, but could it now be risking a repeat of the 1980s?
If the economy really is on the mend, and the BOJ keeps the yen lower than it should be, then the policymakers are risking creating a tidal wave of international funds rushing into their country.
To contact the writer of this column:
David DeRosa in New Canaan, Connecticut, or derosa@bloomberg.net
To contact the editor of this column:
Bill Ahearn, or bahearn@bloomberg
Charts Brought to you by: Zeal
http://www.zealllc.com/index.html
Commodities - Metals fall back as dollar soars
Reuters, 02.20.04, 5:32 PM ET
CHICAGO (Reuters) - Gold tumbled to a three-month low and closed under $400 an ounce Friday, eclipsed as a safe-haven investment by a surge in the dollar after Japan went on a high security alert.
The rising dollar also prompted profit-taking in other metals including silver and copper. But lumber climbed as a strike at CN Rail looked set to disrupt shipments from Canada. Soybeans rose on fears of damage to Brazil's crop.
At the COMEX in New York, gold for April delivery closed $12.30 lower at $398.00 an ounce, trading from $412.00 to $394.50, its lowest since November 26.
Gold bullion fell to $397.25/8.00 from Thursday's close at $409.30/0.00. London's afternoon fix was $405.25.
The dollar jumped almost two percent against the yen after Japan Friday said it tightened security at 650 facilities around the country, including nuclear power plants and government offices, to guard against a possible terror attack.
A falling yen helped yank the euro further from Wednesday's lifetime high on the dollar and also diverted money back to the greenback from conventional safe havens like physical gold.
"I wonder if that maybe helped support the market a little bit initially," said Bernard Hunter, a director at bullion dealer ScotiaMocatta in Toronto.
"We broke $400, which was sort of a psychological level, and just sort of accelerated on the downside from there," Hunter said. "It's the danger of having only one fundamental indicator," he added, referring to the dollar.
Gold is seen as an alternative currency as investors move in and out of the dollar. Gold typically tracks the euro closely so it was unusual for the yen to take the leadership role for precious metals. Last month, dollar disinvestment lifted April gold to a 15-year high at $432.30.
March silver fell 12.5 cents to $6.533 an ounce. It had set a six-year high at $6.88 on Wednesday, so speculators were ready to cash some winnings ahead of the weekend.
Copper, more of an industrial metal, also saw profit-taking after setting 8-year highs this week on the outlook for tight supplies and economic growth in the United States and China.
COMEX March copper fell 2.10 cents at $1.3085 per pound.
At the Chicago Mercantile Exchange, lumber was able to fend off any profit-taking and rose to new 4-1/2 year highs after Canadian National Railway Co., Canada's largest railroad, warned customers to expect shipping delays because 5,000 employees went on strike early on Friday over wages.
Canada ships $6 billion worth of spruce, pine, fir and other wood for housing into the United States.
CME framing lumber for March delivery closed up the $10 trading limit at $390.50 per thousand board feet.
At the Chicago Board of Trade, soybeans for March delivery flirted with $9 a bushel but closed at $8.93, up 13 cents. Those were still the highest prices seen since May, 1997.
The gains followed Thursday's cut by Brazil in its soybean crop forecast to 57.66 million metric tons. The new Brazilian forecast is still a record, but it is far below the U.S. Department of Agriculture forecast of 61 million tons.
The reduction, tied to recent heavy rains at harvest and to earlier dryness in other Brazilian soy areas, comes as U.S. soybean supplies are forecast to fall to a 27-year low.
CBOT March soyoil rose 0.46 cent at 32.93 cents, setting a new 15-1/2 year high on shrinking stocks and Chinese demand.
CBOT March corn closed unchanged at $2.84-3/4 a bushel and CBOT March wheat closed 1-1/4 cents lower at $3.71-1/2.
At the New York Mercantile Exchange, crude oil and products closed down sharply on profit-taking. Heating oil was under particular pressure with demand for distillates -- heating oil and diesel -- down with winter bowing out.
"Distillate stocks are above year-ago levels, and so people are writing off the winter season as we are getting to the end of February," said Marshall Steeves, a Refco energy analyst.
NYMEX March crude closed 40 cents lower at $35.60 a barrel. In London, April Brent crude fell 13 cents at $30.69.
NYMEX March heating oil fell 3.78 cents at 88.66 cents a gallon and March gasoline fell 2.63 cents at $1.0306 a gallon.
Copyright 2004, Reuters News Service
http://www.forbes.com/reuters/newswire/2004/02/20/rtr1270039.html
OWNERSHIP OF FEDERAL RESERVE
[Source: Federal Reserve Directors: A Study of Corporate and Banking Influence. Staff Report,Committee on Banking,Currency and Housing, House of Representatives, 94th Congress, 2nd Session, August 1976.]
Chart 1
** Federal Reserve Directors: A Study of Corporate and Banking Influence **
-- -- Published 1976
-- -----------------------------------------------------------------------
Chart 1 reveals the linear connection between the Rothschilds and the Bank of England, and the London banking houses which ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Act was drafted, who directed the subsequent successful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914. These firms had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council in 1914. In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as in New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control.
-- -----------------------------------------------------------------------
N.M. Rothschild , London -- Bank of England
______________________________________
/ /
/ J. Henry Schroder
/ Banking / Corp.
/ /
Brown, Shipley -- Morgan Grenfell -- Lazard -- /
& Company & Company Brothers /
/ / / /
--------------------/ -------/ / /
/ / / / / /
Alex Brown -- Brown Bros. -- Lord Mantagu -- Morgan et Cie -- Lazard ---/
& Son / Harriman Norman / Paris Bros /
/ / / / N.Y. /
/ / / / / /
/ Governor, Bank / J.P. Morgan Co -- Lazard ---/
/ of England / N.Y. Morgan Freres /
/ 1924-1938 / Guaranty Co. Paris /
/ / Morgan Stanley Co. / /
/ / / \Schroder Bank
/ / / Hamburg/Berlin
/ / Drexel & Company /
/ / Philadelphia /
/ / /
/ / Lord Airlie
/ / /
/ / M. M. Warburg Chmn J. Henry Schroder
/ / Hamburg --------- marr. Virginia F. Ryan
/ / / grand-daughter of Otto
/ / / Kahn of Kuhn Loeb Co.
/ / /
/ / /
Lehman Brothers N.Y -------------- Kuhn Loeb Co. N. Y.
/ / --------------------------
/ / / /
/ / / /
Lehman Brothers -- Mont. Alabama Solomon Loeb Abraham Kuhn
/ / __/______________________/_________
Lehman-Stern, New Orleans Jacob Schiff/Theresa Loeb Nina Loeb/Paul Warburg
-- ------------------------- / / /
/ / Mortimer Schiff James Paul Warburg
_____________/_______________/ /
/ / / / /
Mayer Lehman / Emmanuel Lehman
/ / /
Herbert Lehman Irving Lehman
/ / /
Arthur Lehman \ Phillip Lehman John Schiff/Edith Brevoort Baker
/ / Present Chairman Lehman Bros
/ Robert Owen Lehman Kuhn Loeb -- Granddaughter of
/ / George F. Baker
/ / /
/ / /
/ / Lehman Bros Kuhn Loeb (1980)
/ / /
/ / Thomas Fortune Ryan
/ / /
/ / /
Federal Reserve Bank Of New York /
//////// /
______National City Bank N. Y. /
/ / /
/ National Bank of Commerce N.Y ---/
/ /
/ Hanover National Bank N.Y.
/ /
/ Chase National Bank N.Y.
/ /
/ /
Shareholders -- National City Bank -- N.Y. /
-- ----------------------------------------- /
/ /
James Stillman /
Elsie m. William Rockefeller /
Isabel m. Percy Rockefeller /
William Rockefeller Shareholders -- National Bank of Commerce N. Y.
J. P. Morgan -----------------------------------------------
M.T. Pyne Equitable Life -- J.P. Morgan
Percy Pyne Mutual Life -- J.P. Morgan
J.W. Sterling H.P. Davison -- J. P. Morgan
NY Trust/NY Edison Mary W. Harriman
Shearman & Sterling A.D. Jiullard -- North British Merc. Insurance
/ Jacob Schiff
/ Thomas F. Ryan
/ Paul Warburg
/ Levi P. Morton -- Guaranty Trust -- J. P. Morgan
/
/
Shareholders -- First National Bank of N.Y.
-- -------------------------------------------
J.P. Morgan
George F. Baker
George F. Baker Jr.
Edith Brevoort Baker
US Congress -- 1946-64
/
/
/
/
/
Shareholders -- Hanover National Bank N.Y.
-- ------------------------------------------
James Stillman
William Rockefeller
/
/
/
/
/
Shareholders -- Chase National Bank N.Y.
-- ---------------------------------------
George F. Baker
-- -----------------------------------------------------------------------
-- -----------------------------------------------------------------------
Chart 2
** Federal Reserve Directors: A Study of Corporate and Banking Influence **
-- -- Published 1983
-- -----------------------------------------------------------------------
The J. Henry Schroder Banking Company chart encompasses the entire history of the twentieth century, embracing as it does the program (Belgium Relief Commission) which provisioned Germany from 1915-1918 and dissuaded Germany from seeking peace in 1916; financing Hitler in 1933 so as to make a Second World War possible; backing the Presidential campaign of Herbert Hoover ; and even at the present time, having two of its major executives of its subsidiary firm, Bechtel Corporation serving as Secretary of Defense and Secretary of State in the Reagan Administration.
The head of the Bank of England since 1973, Sir Gordon Richardson, Governor of the Bank of England (controlled by the House of Rothschild) was chairman of J. Henry Schroder Wagg and Company of London from 1963-72, and director of J. Henry Schroder,New York and Schroder Banking Corporation,New York,as well as Lloyd's Bank of London, and Rolls Royce. He maintains a residence on Sutton Place in New York City, and as head of "The London Connection," can be said to be the single most influential banker in the world.
-- -----------------------------------------------------------------------
J. Henry Schroder
-----------------
/
/
/
Baron Rudolph Von Schroder
Hamburg -- 1858 -- 1934
/
/
/
Baron Bruno Von Schroder
Hamburg -- 1867 -- 1940
F. C. Tiarks /
1874-1952 /
/ /
marr. Emma Franziska /
(Hamburg) Helmut B. Schroder
J. Henry Schroder 1902 /
Dir. Bank of England /
Dir. Anglo-Iranian /
Oil Company J. Henry Schroder Banking Company N.Y.
/
/
J. Henry Schroder Trust Company N.Y.
/
/
/
___________________/____________________
/ /
Allen Dulles John Foster Dulles
Sullivan & Cromwell Sullivan & Cromwell
Director -- CIA U. S. Secretary of State
Rockefeller Foundation
Prentiss Gray
------------
Belgian Relief Comm. Lord Airlie
Chief Marine Transportation -----------
US Food Administration WW I Chairman; Virgina Fortune
Manati Sugar Co. American & Ryan daughter of Otto Kahn
British Continental Corp. of Kuhn,Loeb Co.
/ /
/ /
M. E. Rionda /
------------ /
Pres. Cuba Cane Sugar Co. /
Manati Sugar Co. many other /
sugar companies. _______/
/ /
/ /
G. A. Zabriskie /
--------------- / Emile Francoui
Chmn U.S. Sugar Equalization --------------
Board 1917-18; Pres Empire Belgian Relief Comm. Kai
Biscuit Co., Columbia Baking Ping Coal Mines, Tientsin
Co. , Southern Baking Co. Railroad,Congo Copper, La
/ Banque Nationale de Belgique
Suite 2000 42 Broadway / N. Y /
__________________________/___________________________/
/ / /
/ / /
Edgar Richard Julius H. Barnes Herbert Hoover
------------- ---------------- --------------
Belgium Relief Comm Belgium Relief Comm Chmn Belgium Relief Com
Amer Relief Comm Pres Grain Corp. U.S. Food Admin
U.S. Food Admin U.S. Food Admin Sec of Commerce 1924-28
1918-24, Hazeltine Corp. 1917-18, C.B Pitney Kaiping Coal Mines
/ Bowes Corp, Manati Congo Copper, President
/ Sugar Corp. U.S. 1928-32
/
/
/
John Lowery Simpson
-- -------------------
Sacramento, Calif Belgium Relief /
Comm. US Food Administration Baron Kurt Von Schroder
Prentiss Gray Co. J. Henry Schroder -----------------------
Trust, Schroder-Rockefeller, Chmn Schroder Banking Corp. J.H. Stein
Fin Comm, Bechtel International Bankhaus (Hitler's personal bank
Co. Bechtel Co. (Casper Weinberger account) served on board of all
Sec of Defense, George P. Schultz German subsidiaries of ITT . Bank
Sec of State (Reagan Admin). for International Settlements,
/ SS Senior Group Leader,Himmler's
/ Circle of Friends (Nazi Fund),
/ Deutsche Reichsbank,president
/
/
Schroder-Rockefeller & Co. , N.Y.
-- ---------------------------------
Avery Rockefeller, J. Henry Schroder
Banking Corp., Bechtel Co., Bechtel
International Co. , Canadian Bechtel
Company. /
/
/
/
Gordon Richardson
-----------------
Governor, Bank of England
1973-PRESENT C.B. of J. Henry Schroder N.Y.
Schroder Banking Co., New York, Lloyds Bank
Rolls Royce
-- -----------------------------------------------------------------------
-- -----------------------------------------------------------------------
Chart 3
** Federal Reserve Directors: A Study of Corporate and Banking Influence **
-- -- Published 1976
-- -----------------------------------------------------------------------
The David Rockefeller chart shows the link between the Federal Reserve Bank of New York,Standard Oil of Indiana,General Motors and Allied Chemical Corportion (Eugene Meyer family) and Equitable Life (J. P. Morgan).
DAVID ROCKEFELLER
-- ----------------------------
Chairman of the Board
Chase Manhattan Corp
/
/
______/_______________________
Chase Manhattan Corp. /
Officer & Director Interlocks/---------------------
-- -----/----------------------- /
/ /
Private Investment Co. for America Allied Chemicals Corp.
/ /
Firestone Tire & Rubber Company General Motors
/ /
Orion Multinational Services Ltd. Rockefeller Family & Associates
/ /
ASARCO. Inc Chrysler Corp.
/ /
Southern Peru Copper Corp. Intl' Basic Economy Corp.
/ /
Industrial Minerva Mexico S.A. R.H. Macy & Co.
/ /
Continental Corp. Selected Risk Investments S.A.
/ /
Honeywell Inc. Omega Fund, Inc.
/ /
Northwest Airlines, Inc. Squibb Corporation
/ /
Northwestern Bell Telephone Co. Olin Foundation
/ /
Minnesota Mining & Mfg Co (3M) Mutual Benefit Life Ins. Co. of NJ
/ /
American Express Co. AT & T
<p class=MsoNormal
The Magic Pen
Sir Josiah Stamp, former President, Bank of England, didn't pull his punches. "Bankers own the earth," he said. "Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back."
In recent years, bankers have bought the Orient. BankAmerica's share was 16 billion. J.P. Morgan kicked in 23 billion, Chase Manhattan 32 billion, and Citicorp 60 billion. The notes, or IOUs of the debtor countries, became assets of these banks, and as such could serve as the basis for additional lending, via the "fractional reserve" procedure which allows a banker to create ten dollars (for instance) in new deposits, (i.e., loans), for every dollar he has in reserve. Of course, if the assets become worthless, as via bankruptcy, the loans which they supported have to be called in: a bad business indeed. Now those assets are in danger of becoming worthless. Are the bankers worried?
Ostensibly they are. The old saw says that if you owe the bank a million, you worry. If you owe it a billion, the bank worries. But the worry is unwarranted, and I suspect the bankers are wringing their hands more for the benefit of naive economics reporters than out of genuine concern. Why? Because if the borrowing Asians were to go belly-up, the loss of bank assets would be so severe as to seriously derange the American economy, not to mention those of Europe and the rest of the world. So it just won't be allowed to happen.
The IMF to the rescue! It has propped up the Philippine economy with a billion, that of Thailand with twenty-two billion, of Indonesia with forty billion, and South Korea with sixty billion. But gosh! the IMF is now taking its turn at hand-wringing: it's running out of money! A person would think that modern money were some scarce and precious commodity, considering how many financial institutions seem to be running out of it, while, in fact, they create it from nothing. Not to worry: the American taxpayer to the rescue---again. Never mind that bailouts don't work. Mexico has had four such bailouts in the last two decades, and could now be said, with justification, to be owned and operated by the IMF. But the central point is that the borrower not default. As long as he can pay interest on his loan, the loan remains an asset to the lending bank, and that means that there will be bailouts ad infinitum, or until an incredibly obtuse public wakes up.
If the taxpayer is funding the IMF, where does he get the funds? Well, he could do without food, clothing, shelter, and transportation, and just turn his paycheck over to that organization. It is more likely, however, that he attempt to maintain his standard of living, despite ruinous taxation and rising prices, by borrowing. From whom? Why, for starters, Chase Manhattan, Citicorp, J.P. Morgan, and BankAmerica, among others. If these institutions were to simply create enough money to reimburse themselves for their Asian losses, people might begin to ask questions that bankers would prefer not to answer, such as "Why do we have to work for money, when these guys get it with the stroke of a pen?" Rather, the banks accomplish the same thing indirectly: they lend to the general public funds which enable the public to pay, among other things, taxes, which are in turn used to reimburse the banks, via the IMF, for their "bad" investments. (We assume, being generous of heart, that this scenario of "failure" was not contemplated from the onset.)
One obvious lesson to be learned is that it is dangerous to link banking and government. That linkage becomes established when a government strips its people of money, and substitutes a scrip, or credit, created by a privileged class: the bankers. The bankers can do this only with the consent of the government, and at its pleasure, for otherwise modern banking would be clearly illegal. In return for this favor, the bankers finance government, coming, in time, to own it, as President Franklin Roosevelt pointed out. It's an unholy alliance, but very satisfying to banker and politician. The only loser is the rest of us, who, by our productive labor, keep the country going.
The Founding Fathers established a system of checks and balances, dividing the power of government into three distinct departments. But the most important check and balance of all was that provided by specie money. "No state shall make anything other than gold and silver coin a legal tender--." And "no state shall coin money." By ensuring that money was a substance owned by the people, and warehoused, (not created), by the banker, the people, who produced the money, just as they continue to produce everything else that they need, would call the tune. They, after all, paid the piper. Strip the people of their own wealth for use as a medium of exchange, and force (or trick) them into using imaginary, government-approved, banker-created "money," and you reduce a nation of free men into a nation of slaves, albeit reasonably contented ones. This process is easy for us to see as regards Asia; the view becomes cloudier the closer to home we look. Perhaps, from the Asian perspective, it is clearer: we are enslaved to the government which finances the IMF, as clearly as they are the slaves of that corporation.
http://www.investorshub.com/boards/read_msg.asp?message_id=2408075
The euro hit a fresh record against the dollar Wednesday, pushing above $1.29 for the first time in its five-year history.
http://story.news.yahoo.com/news?tmpl=story&u=/dowjones/20040218/bs_dowjones/200402181406000877
MARKET FORECASTS USING STATISTICS PUBLISHED BY THE FEDERAL RESERVE BOARD - A DIFFERENT TAKE ON THE REAL ECONOMY
While the Change in Real GDP is up
The Personal Consumption Index is at four year lows, meaning that the population in general is spending less.
Disposable personal income is back at 1997 levels, meaning more money has gone into paying property taxes, energy costs and servicing credit card debts.
Real Income and Consumption
Americans are having a difficult time saving any money other than through their artificial equity buildup in their homes due to the high costs of servicing enormous personal and consumer led spending debts over the past three years.
Personal Savings Rates
The Wealth to Income Ratio shows a sharp drop and mild recovery which will be impacted in coming months due to continued deficit spending and a sharp rise in inflation which will tank real estate prices and create another banking bailout scenario
Consumer sentiment is skewed by the fact that 40 million low to no income and unemployed citizens are not surveyed, and although not at all time lows, if employment does not pick up by the end of the second quarter, consumer sentiments will probably drop below their all time lows since the beginning of the survey in the late 80's.
Housing starts continue to be fueled by the low interest rate environment, yet the deficits in the coming years may force the Fed to raise rates to stem foreign currency dealers from continuing to dump and short the US dollar.
The US Treasury Department currently does not have sufficient net foreign currency reserves to offset a major selloff of US Dollars by foreign central banks and lending institutions. A cessation of foreign interest buying in the Treasury Markets and a simultaneous shorting of the dollar could result in some foreign investors making multi trillion dollar gains against the dollar in a relatively short period of time:
http://www.ustreas.gov/press/releases/2003122412265726198.htm
This is a major weakness not only for the Treasury Department, the Federal Reserve, but the entire US Banking system.
The U.S. Monetary System is caught in a trap, it must continue to lower rates in order to keep the consumer, housing, and industrial engines moving forward, otherwise the controlled expansion will collapse under the weight of increased interest rates causing a tumult in the bond markets. Mortgage rates must eventually reach the point of zero with yields being adjusted based on discounts charged for originations as opposed to actual real nominal rates being charged. Any sudden rise in rates would potentially cause the collapse in the stock prices of both Fannie Mae and Freddie Mac and create huge losses for the Federal Home Loan Bank, thus rates must continue to fall to keep the economy moving ahead.
Lower rates will hold delinquency rates down.
But the dollar, which is only ten cents shy of breaking an all time low against the Euro will continue to fall against foreign currencies as a result:
http://finance.yahoo.com/m5?s=USD&t=EUR&a=1&c=3
Domestic Business spending on high tech equipment and technologies will remain level until the outflow of jobs to foreign countries subsides as the industry continues to consolidate and cut costs after the dot bomb era. Most executives pay packages continue to rise as cost cutting measures are increased while spending remains highly conservative.
Inventories remain at historical lows due to just in time technology advances which do not require the holding of large inventories for longer periods of time.
Corporate profits are yet to fully recover, despite the massive layoffs over the past four years and net losses of over 2.6 million jobs.
Most of corporate America's profits during the past five years have been generated by lower interest rates, not increased production, sales and profits from real economic expansion.
Although the default rate on corporate bonds has been stemmed by lower rates, expect new highs if the Fed Raises rates any time soon.
Despite the lower rate regimes, corporate bonds remain the most risky investments of any financial instruments as the downgrades by rating agencies in general increase due to the fragility of the global economy. The dollar must fall at least another 40% from its current levels for foreign buyers to be able to afford the high prices for cars, technology, energy, and power that the US is trying to export. These exports are only being accomplished now by huge government deficit spending which does not bode well for the US Dollar.
Despite lower rates, net interest expense continues to remain at higher levels historically due to the higher costs of doing business domestically.
These statistics do not bode well for the job market, despite current administration rhetoric to the contrary. Most major American Corporations are still faced with hard pressed decisions to cut costs through cutting jobs, usually the highest fixed cost of any business. Continued consolidation in both the technology and banking sectors will bear this out.
Currently, the United States government is insolvent technically due to plummeting receipts and skyrocketing expenditures.
This adds further fuel to the fire sale values of the US Dollar.
More foreign investors are flocking toward inflation indexed debt offerings as opposed to more traditional public debt offerings. This is a double edged sword balancing on a tight rope for if inflation does rear its ugly head, the government costs of borrowing will skyrocket, creating ever larger mounting deficits.
It would appear the only way to keep the economy flowing and expanding is to continue to print more money out of thin air.But this further depresses the dollar and all foreign currencies pegged to it.
OPEC nations adjust for the US Deficit spending and inflationary monetary policy by raising oil prices by cutting production, keeping their own values ahead of the curve.
The size of the capital flight out of the United States has been underestimated by most market analysts who get paid to promote the illusion of a strong dollar. The United States is facing a financial meltdown larger than those experienced by Asia and Russia combined.
The refinance boom is officially over.
And the dollar will continue its major slide until a changing of the guard at the Fed, the Treasury and the current administration.
That is the perception of most investors who are not lost in the woods but stand outside the forest to be able to look at the falling trees.
China started to buy major amounts of European currencies for its currency reserves around 2001 (and I think Japan did too).
That the denomination of oil in EURO will come sooner or later is imho unavoidable. The question is only will it be denominated in Euro alone, or will there, which I think is likelier, a double denomination in EURO and USDollar.
Two points that mainly will determine the EURUSD exchange rate in the near future.
1. How much USD were already shifted into EURO by countries with major foreign currency reserves (No doubt, they started already years ahead) and how much demand from USD for EURO is therefor left.
2. How much EURO will the ECB "print" to provide supply for the increased demand.
Oil, Currency and the War on Iraq
By Cóilín Nunan
This document is also available in Word and PDF formats.
It will not come as news to anyone that the US dominates the world economically and militarily. But the exact mechanisms by which American hegemony has been established and maintained are perhaps less well understood than they might be. One tool used to great effect has been the dollar, but its efficacy has recently been under threat since Europe introduced the euro.
The dollar is the de facto world reserve currency: the US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world exports are denominated in dollars. In addition, all IMF loans are denominated in dollars.
But the more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost the US next to nothing to produce, so the fact that the world uses the currency in this way means that the US is importing vast quantities of goods and services virtually for free.
Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after year without apparently any major economic consequences. The most recently published figures, for example, show that in November of last year US imports were worth 48% more than US exports1. No other country can run such a large trade deficit with impunity. The financial media tell us the US is acting as the ‘consumer of last resort’ and the implication is that we should be thankful, but a more enlightening description of this state of affairs would be to say that it is getting a massive interest-free loan from the rest of the world.
While the US’ position may seem inviolable, one should remember that the more you have, the more you have to lose. And recently there have been signs of how, for the first time in a long time, the US may be beginning to lose.
One of the stated economic objectives, and perhaps the primary objective, when setting up the euro was to turn it into a reserve currency to challenge the dollar so that Europe too could get something for nothing.
This however would be a disaster for the US. Not only would they lose a large part of their annual subsidy of effectively free goods and services, but countries switching to euro reserves from dollar reserves would bring down the value of the US currency. Imports would start to cost Americans a lot more and as increasing numbers of those holding dollars began to spend them, the US would have to start paying its debts by supplying in goods and services to foreign countries, thus reducing American living standards. As countries and businesses converted their dollar assets into euro assets, the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble, as it is currently openly considering doing, because, without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.
There is though one major obstacle to this happening: oil. Oil is not just by far the most important commodity traded internationally, it is the lifeblood of all modern industrialised economies. If you don’t have oil, you have to buy it. And if you want to buy oil on the international markets, you usually have to have dollars. Until recently all OPEC countries agreed to sell their oil for dollars only. So long as this remained the case, the euro was unlikely to become the major reserve currency: there is not a lot of point in stockpiling euros if every time you need to buy oil you have to change them into dollars. This arrangement also meant that the US effectively part-controlled the entire world oil market: you could only buy oil if you had dollars, and only one country had the right to print dollars - the US.
If on the other hand OPEC were to decide to accept euros only for its oil (assuming for a moment it were allowed to make this decision), then American economic dominance would be over. Not only would Europe not need as many dollars anymore, but Japan which imports over 80% of its oil from the Middle East would think it wise to convert a large portion of its dollar assets to euro assets (Japan is the major subsidiser of the US because it holds so many dollar investments). The US on the other hand, being the world's largest oil importer would have, to run a trade surplus to acquire euros. The conversion from trade deficit to trade surplus would have to be achieved at a time when its property and stock market prices were collapsing and its domestic supplies of oil and gas were contracting. It would be a very painful conversion.
The purely economic arguments for OPEC converting to the euro, at least for a while, seem very strong. The Euro-zone does not run a huge trade deficit nor is it heavily endebted to the rest of the world like the US and interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East’s main trading partner. And nearly everything you can buy for dollars you can also buy for euros - apart, of course, from oil. Furthermore, if OPEC were to convert their dollar assets to euro assets and then require payment for oil in Euros, their assets would immediately increase in value, since oil importing countries would be forced to also convert part of their assets, driving the prices up. For OPEC, backing the euro would be a self-fulfilling prophesy. They could then at some later date move to some other currency, perhaps back to the dollar, and again make huge profits.
But of course it is not a purely economic decision.
So far only one OPEC country has dared switch to the euro: Iraq, in November 20002,3. There is little doubt that this was a deliberate attempt by Saddam to strike back at the US, but in economic terms it has also turned out to have been a huge success: at the time of Iraq's conversion the euro was worth around 83 US cents but it is now worth over $1.05. There may however be other consequences to this decision.
One other OPEC country has been talking publicly about possible conversion to the euro since 1999: Iran2,4, a country which has since been included in the George W. Bush’s ‘axis of evil’.
A third OPEC country which has recently fallen out with the US government is Venezuela and it too has been showing disloyalty to the dollar. Under Hugo Chavez’s rule, Venezuela has established barter deals for trading its oil with 12 Latin American countries as well as Cuba. This means that the US is missing out on its usual subsidy and might help explain the American wish to see the back of Chavez. At the OPEC summit in September 2000, Chavez delivered to the OPEC heads of state the report of the 'Interrnational Seminar on the Future of Energy’, a conference called by Chavez earlier that year to examine the future supplies of both fossil and renewable energies. One of the two key recommendations of the report was that ‘OPEC take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers’5, i.e. OPEC should avoid using both the dollar and the euro for many transactions.
And last April, a senior OPEC representative gave a public speech in Spain during Spain’s presidency of the EU during which he made clear that though OPEC had as yet no plans to make oil available for euros, it was an option that was being considered and which could well be of economic benefit to many OPEC countries, particularly those of the Middle East6.
As oil production is now in decline in most oil producing countries, the importance of the remaining large oil producers, particularly those of the Middle East, is going to grow and grow in years to come7.
Iraq, whose oil production has been severely curtailed by sanctions, is one of a very small number of countries which can help ease this looming oil shortage. Europe, like most of the rest of the world, wishes to see a peaceful resolution of the current US-Iraqi tensions and a gradual lifting of the sanctions - this would certainly serve its interests best. But as Iraqi oil is denominated in euros, allowing it to become more widely available at present could loosen the dollar stranglehold and possibly do more damage than good to US economic health.
All of this is bad news for the US economy and the dollar. The fear for Washington will be that not only will the future price of oil not be right, but the currency might not be right either. Which perhaps helps explain why the US is increasingly turning to its second major tool for dominating world affairs: military force.
REFERENCES
Anon., ‘Trade Deficit Surges to a Record High’, Reuters, (January 17, 2003), http://www.centredaily.com/mld/centredaily/news/4970891.htm.
Recknagel, Charles, ‘Iraq: Baghdad Moves to Euro’, Radio Free Europe (November 1, 2000), http://www.rferl.org/nca/features/2000/11/01112000160846.asp.
Anon., ‘A Look At The World's Economy’, CBS Worldwide Inc., (December 22, 2000), http://www.cbsnews.com/stories/2000/12/22/2000/main259203.shtml.
Anon., ‘Iran may switch to euro for crude sale payments’, Alexander Oil and Gas, (September 5, 2002), http://www.gasandoil.com/goc/news/ntm23638.htm.
Hazel Henderson, ‘Globocop v. Venezuela’s Chavez: Oil, Globalization and Competing Visions of Development’, InterPress Service, (April 2002), http://www.hazelhenderson.com/Globocop%20v.%20Chavez.htm.
Javad Yarjani, ‘The Choice of Currency for the Denomination of the Oil Bill’, (April 14, 2002), http://www.opec.org/NewsInfo/Speeches/sp2002/spAraqueSpainApr14.htm.
The Association for the Study of Peak Oil, Newsletter 26, (February 2003), http://www.asponews.org.
FURTHER READING
William Clark, ‘The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth’, (January 2003), http://www.ratical.org/ratville/CAH/RRiraqWar.html.
http://www.pressurepoint.org/pp_iraq_oil_currency_war.html
Volume | |
Day Range: | |
Bid Price | |
Ask Price | |
Last Trade Time: |