Sunday, March 29, 2009

Inflating Their Way Out of Trouble After All

By Simon Davies and Donald Hunt
SOTT.net

A busy two weeks in the global economy as the taps were opened by governments busy creating new money. Sadly they decided to use it to buy government bonds and worthless "toxic assets" rather than employ and train citizens and build much needed national infrastructure.

Inevitably, with new money flowing into the system inflation will grow further eroding the value of savings and wages, while mobile money will seek a home in commodities thereby adding a double boost to the cost of living for us all. Governments seem to be clinging to the hope that excess supply will dampen the inflationary pressure; a forlorn hope. China and Russia called for a new global reserve currency clearly losing patience with the US pretense at global economic leadership.

The US Congress became "a rat's nest of grandstanding" on the issue of AIG bonuses while remaining silent on the secrecy of the Federal Reserve as to who's been receiving the trillions in bailout money and on Goldman Sachs receipt of over $12 billion in AIG bailout money.

Markets

World stock indexes all rose over the past two weeks, led by financial institutions, on news that the bailouts are having their intended effect of pushing the losses onto the taxpayers and leaving profitable business to the financial institutions.

Over the past two weeks the U.S. dollar fell. The drop in the dollar is not surprising given the $1.5 trillion in extra money to be brought into existence and then thrown into the black hole that is the US financial system. Oil jumped 14% over the past two weeks while gold rose 6% against the dollar but now seems range bound between $930 and $950/oz.


Crude Oil Rises as Dollar's Decline Increases Commodity Demand

Crude oil rose to the highest in almost four months in New York as the dollar extended its losses against the euro, increasing the investment appeal of commodities.

Oil advanced for a third day as the dollar's decline improved the appeal of hard assets as an inflation hedge and made commodities cheaper for non-U.S. buyers. Crude for May delivery jumped 11 percent last week as the U.S. Federal Reserve announced new initiatives to lower interest rates and speculators turned bullish on oil for the first time in three weeks.

"Sentiment has definitely improved on the back of the Fed announcement," said Toby Hassall, a research analyst at Commodity Warrants Australia Pty in Sydney. "We're going to need further weakness in the dollar to really establish a base at $50."
The Euro was the main beneficiary of US dollar weakness again, having strengthened 7.7 against the dollar during March.
With the US, UK, Japan and Switzerland now fully committed to "quantitative easing", the creation of new money by the government, there are few safe havens other than the Euro, as John Normand at J.P. Morgan put it:-


"The dollar is a sell near term versus those currencies where quantitative easing is off the table. The top on euro-dollar will come when the ECB looks likely to join the quantitative easing crowd. For now, it's content to stay on the sidelines."




The markets the last two weeks (from March 8th to March 22nd)
Previous close This week's close Change% change
Gold (USD) 939.50952.9013.401.43%
Gold (EUR)742.57701.8040.775.49%
Oil (USD) 45.6752.106.4314.08%
Oil (EUR)36.1038.372.276.30%
Gold:Oil20.5718.292.2811.09%
USD / EUR0.7904 / 1.26520.7365 / 1.35780.0539 / 0.09266.82% / 7.32%
USD / GBP0.7096 / 1.40920..6918 / 1.44550.0178 / 0.0363 2.51% / 2.58%
USD / JPY98.270/ 0.010295.857/ 0.01042.413 / 0.00022.46% / 1.96%
DOW6,6277,2786519.83%
FTSE3,5313,8433128.84%
DAX3,6664,06940210.97%
NIKKEI7,1737,94677310.77%
BOVESPA37,10540,0762,9718.01%
HANG SENG 11,92212,8349127.65%
US Fed Funds 0.25%0.19%0.06n/a
$ 3month 0.20%0.20%0.00n/a
$ 10 year 2.87%2.64%0.23n/a


Fiscal Stimulus

Fiscal Stimulus should perhaps better be termed "loads of money" as despite their being hundred of thousands of economists in the world, the best that governments can come up with as they grapple with a crisis that they seem resolute to exacerbate, is to create new money and throw it at financial investors, a process know as "quantitative easing". This would be a good thing if the money were being used to create but instead, as is wholly predictable, it is being pumped into the financial system rather than the real economy. In the UK, ₤75 billion is being created to buy UK government bonds (known as gilts). An incredible sum considering it is 20% of all gilts outstanding.

In the US an equivalent sum would be $900 billion according the UK Financial Times. No such luck for holders of US Treasuries who would be delighted to sell as the amount earmarked by the US Treasury is "just" $300 billion. However, there was great news for US banks that will get to unload over $1.2 trillion of "toxic" mortgage backed securities onto the US government.

So if you had you eye on a new highway, school, hospital, community centre, transport system, affordable housing or pretty much anything else that would pay millions of ordinary people to build things that will last at least another generation or perhaps some newly trained teachers, doctors or nurses you will have to wait for there is a far more pressing need to save the banking system.

The other economic tools available to government are of course interest rates, which they are all busily cutting as fast as possible in a race to zero, and stimulus packages which, if properly directed could make huge differences. The question of course is whether they are being properly directed. If you have received any meaningful indication in your bank account, through your employer or in the price you pay for goods and services that these massive stimulus packages are reaching ordinary citizens please let us know. Before recipients of tax refunds bombard us with the details, those don't count. They don't count because (i) they are not meaningful in terms of total household finance, (ii) you had to pay tax to get a refund, (iii) it was your money already, they just gave a bit back, (iv) the tax system is totally rigged in favour of the rich so getting screwed a bit less is not a good deal and (v) compare tax refunds per capita with bailout dollars per bank shareholder and you'll know why they don't count.

So here's this weeks litany of stimulus:-

South Korea announced a stimulus package worth $3.9 billion to be followed this month by one totaling $33 billion.

Colombia lowered interest rates as did Mexico. Australia signaled its intent to lower interest rates further as did Eastern European countries, abandoning any effort to prop up the value of their currencies. Eastern European currencies did find some relief with the announcement of an increase in the amount of aid forthcoming from the EU. India also signaled lower rates.

It is an interesting freak of economics that when a government decides to create new money there is an immediate inflationary boost which predictably results in the value of the currency falling on world markets, yet when there are massive booms fueled by bank created "credit money" such as that engineered up until 2007, despite the fact that there is often a greater inflationary effect, we are told everything is just fine and the "markets" behave accordingly. In reality, the real rate of credit created inflation and particularly asset price inflation rips the guts out of the average person's economic security while tethering them to a debt burden that will remain with them for the entire lives.

There are infinitely better ways to use newly created money than "buying" worthless paper from insolvent banks. For example governments could follow the example from the 19th century of Guernsey by paying people with newly created money to build nationally important infrastructure or they could train people for jobs which we know there is ready demand for such a teachers, doctors, nurses and a myriad of other professions and trades where skills shortages are extreme.

Sweden and Canada are expected to join the quantitative easing programme soon. This will leave the world in a new and bizarre situation as the major economies outside Asia Pacific will be busily printing money in a series of what are looking increasingly like competitive devaluations of their respective currencies. Essentially a devaluation of all western currencies will occur as Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London said:-



"Quantitative easing across the board will diminish the fiat currencies as a store of value. Investors may then seek refuge in harder currencies such as commodities."
We would remove the "may" and say that speculative money and any mobile money seeking to protect itself from this across the board devaluation will seek refuge in commodities. The commodity of choice would normally be gold followed by silver yet gold, as we mentioned above, remains range bound between about $930/oz and $950/oz. The gold market is one of the most controversial in the world. There is an immense body of evidence, produced by serious and professional participants and observers, which shows that it is highly manipulated. The data that proves the manipulation is of course ignored and the messengers attacked and ridiculed. This last week is a good example of the manipulation and how it works.

While oil jumped 14% against the dollar gold nudged up just 6%. As a haven of value gold is unique so it would seem a little odd that at the time the world's de facto reserve currency is devaluing itself by over $1.5 trillion gold is out performed by oil for which there is currently a very finite demand, peak oil propaganda notwithstanding. The clue to why gold performed the way it did is that two days after the announcement of quantitative easing in the US an additional 1.2 million ounces of gold was sold short on Comex. The effect of short selling is that it gives the impression that supply is exceeding demand such that it creates a downward pressure on the gold price.

Therefore somebody was in the gold futures market driving the gold price down. If the details and history of how gold is manipulated are of interest take a look at the Gold Anti-Trust Action Committee (GATA). There used to be a Wikipedia article on GATA but it was deleted in February 2009. Considering that GATA is ten years old, has some highly respected Board members including Catherine Austin-Fitts and has funded two landmark anti-trust law suits it seems odd that it be removed with the reason given as, "This non-notable organization has no third-party sources for it's notability."

There was an interesting although depressing comment from Neil Mackinnon, a former economist for the U.K. Treasury and now chief economist and partner at ECU Group, a London based hedge fund with about $1 billion in assets:-



"All major central banks will have to follow the Fed and adopt quantitative easing. If the European policy makers are hoping they will get a free ride on the U.S. stimulus, hoping they will look more prudent, they are deluding themselves."

Which means that every major economic nation will be forced to create bundles of new money which will cause currency devaluation, known as inflation, across all western nations thereby wiping out the value of savings and wages; the knock-on effect into emerging markets will be devastating. To exacerbate matters mobile money will seek to find a home in readily tradable commodities, especially in the event that the gold market continues to be manipulated, thereby driving the price of basic essentials even higher. Those of us caught in the middle are already being whipsawed and it's going to get a lot worse the more quantitative easing goes on.

While we sit looking at the stark reality of such a future it is clear that we are not the only ones who'd like to see a different currency system for both Russia and China have called for a new international reserve currency modeled on the IMF's Special Drawing Rights. It seems that Russia and China now see the pitfalls of allowing the world's dominant economic nation and dominant military power to have free rein for so long. Both countries are at the mercy of the US. The devaluation of the US dollar is making Chinese manufactured goods more expensive for US consumers while China's strategic monetary reserves are shrinking in value as the dollar and other currencies devalue. As Zhou Xiaochuan, governor of China's central bank, said the desirable goal of the international monetary system is to:-



"create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."
In an indication of the bizarre nature of investor "sentiment" Hungarian and Polish Hungary banks shares rose following the fall in the Swiss Franc (due to quantitative easing) as many of the loans made to Hungarian and Polish nationals are denominated in Swiss Francs and Euro so the local currency write downs these banks will have to make is momentarily reduced. Never mind that these banks, like their brethren in Western Europe are essentially bankrupt. It is this short term nature of the financial markets that exemplifies the disconnect between those seeking self interested profit and those seeking the long term benefit of all people on this planet. How can the latter win over the former when the mindset of self interest is the central core of the entire political, economic and social system?

Bailouts

Other G20 nations have joined the United States in signaling a willingness to use tax money to relieve financial institutions of so-called "toxic assets." In other words, paying the gambling addicts gambling debts off so they can keep on gambling.

Troubles in auto manufacturing are not limited to the United States. In Japan both Mazda and Nissan are in trouble with Toyota eating through it's cash reserves at an estimated rate of $10 billion a quarter. Nissan has tapped the US government's trillion dollar aid programme, issuing $1.5 billion in bonds backed by auto loan receivables.



Mazda, Shut Out of Bond Market, May Need Aid as Cash Dwindles

Mazda Motor Corp., burdened with the second-worst credit rating among Japan's carmakers and a 62 percent surge in short-term borrowing this fiscal year, plans to apply for government aid as it consumes cash.

"We can't sell bonds right now," said Nobuyoshi Tochio, general manager of Mazda's financial services division. "The market isn't functioning. Conditions are really bad."

Mazda, Japan's second-largest car exporter, used 174 billion yen ($1.8 billion) in cash last quarter as sales of Mazda6 sedans have plunged in the U.S. and Europe. The Hiroshima-based company may turn to the government for low- interest loans as its junk rating prevents it from following Toyota Motor Corp. in tapping capital markets.

"Mazda needs loans from the government badly, as it's vulnerable," ....."The company is important to the local economy, so it should be able to get them."
[ ]

Surging unemployment and tight credit has driven overall car demand to an almost 30-year low in the U.S. In the first two months of 2009, the company's sales plunged 29 percent in the U.S., 16 percent in Europe and 38 percent in Japan.
Exacerbating the drop in sales is the yen's 17 percent gain against the euro and 7.5 percent rise against the dollar in the past six months.......Every 1 yen drop against the dollar and euro cuts Mazda's annual operating profit by 2.6 billion yen and 1.4 billion yen, respectively.

In response, the carmaker slashed production by at least 221,000 vehicles in the second half of the fiscal year, slowing down the rate it was burning cash.
A little aside here: Mazda say the bond market isn't functioning which is not entirely true. The bond market has been remarkably busy, the problem is that while there is a lot of money looking for a safe haven there is also an almost inexhaustible supply of government guaranteed and other highly rated issues which is crowding out higher risk issuers such as Mazda. Such is the self-fulfilling nature of financial crises.

The saga of the overextended and insolvent German mortgage lender, Hypo Real Estate continued with a war of words regarding its nationalization between its major US based investor, J.C. Flowers & Co., and German regulators.

J.C. Flowers, the head of the firm, which holds 24% of Hypo Real Estate wants to keep his shares while the German government and therefore the German people bailout the bank to the tune of billions and possibly as much as €1 trillion. His argument is essentially that as that is what is being done in the US so the same must be done in Germany - an argument that is reflective of the mindset of the adherents to pure free market capitalism; a singularly self interested and rapacious mindset.


"Of course Hypo Real could not survive without the assistance of the German state and Germany; the government and the people have done the bank a good service," Flowers told the Bundestag, or lower house of parliament, finance committee hearing. "Steps taken were very necessary and appropriate though not unique, being taken by other states around the world."
[ ]

"Hypo's shares have positive value and with restructuring of the bank we believe the shares with state support have the prospect for long-term recovery," said Flowers.
[ ]

"It doesn't surprise me" that Flowers is insisting on keeping his stake in Hypo Real Estate, Merkel told reporters in Berlin. What's decisive is the German parliament's vote on the planned expropriation law, she said.

She reiterated that Hypo cannot be allowed to fail because of the bank's "systemic" importance. "That's why we need that 'last resort,'" she said.
The US announced plans to buy $1.2 trillion of "toxic" bank assets, namely mortgaged backed securities. The details were released late as Timothy Geithner, US Treasury Secretary, was busy trying to save his backside being bitten off by a bunch of hypocritical members of Congress that have recently contracted a severe form of rabies which causes them to foam wildly at the mouth when the topic of banking bonuses is in the air, more on which a little later.

It's a sweet deal for the banks but you'd never know it from the reactions with many complaining of having to sell too cheaply.

Meanwhile, yet another time bomb of toxic assets is about to hit the banks, shipping loans. Just like real estate mortgages which become worthless pieces of paper when the home owner cannot pay the monthly payments and the home is worth a fraction of what was originally paid for it, so too the ship mortgage market. Even with nearly 500 container ships laid up (taken out of circulation) there just isn't the global demand to keep shipping rates up. As a result the value of vessels, just like that of real estate is dropping like a stone; the NYK Procyon, a 4,750 teu (Twenty foot Equivalent Unit or one of the short containers) container ship sold for about $10 million last week whereas it would have been nearer $50 million a year ago.

Confidence

Confidence is viewed as a key economic indicator for the simple reason that it is in effect a measure of how much we all believe the big lie that is the global economic system. The economic system relies on all of us believing in it. We have to believe that the bank note in our pocket is actually worth something when in reality it is just a piece of paper for which a bank promises to give you another piece of paper of the same value. As you can see that is a circular proof of value and therefore valueless, unless of course you keep believing otherwise. This is why the G20 continually pledge to "restore confidence"; and of course along with confidence "growth" but more on "growth" another time.

We are told that the Federal Reserve will not tell us where the bulk of the money it is lavishing on the US banking system is going because otherwise "it would cast a stigma on recipients". Which is to say that people would stop having confidence in those banks and other institutions that can only survive on government money.

So when confidence drops it is a measure that those in power watch closely.



South African Manufacturing Confidence Tumbles

South African manufacturing confidence tumbled in the first quarter as the global economic crisis slashed export demand, the Bureau for Economic Research said.

The manufacturing business confidence index fell to 16 from 31 in the previous three months, the bureau, based at the University of Stellenbosch near Cape Town, said in an e-mailed statement today.

"The impact of the global economic crisis, which exacerbated the domestic economic slowdown already in motion, seems to be bringing the sector to its knees," the bureau said. "Retrenchments of factory workers continued to increase as production plummeted."

Official data shows that manufacturing, which accounts for 16 percent of the economy, plunged a record 11.1 percent in January from a year ago, threatening to push the economy into recession. A collapse in car sales in the U.S. and Europe have forced manufacturers such as ArcelorMittal South Africa Ltd., Africa's biggest steelmaker, and Volkswagen AG, the country's second-largest automaker, to scale back production and fire workers.

South Africa's economy, the biggest on the continent, contracted for the first time in a decade in the fourth quarter, with output dropping an annualized 1.8 percent.
Same situation in Japan:-



Japan Manufacturer Sentiment Tumbles Most on Record

Confidence among Japanese manufacturers slid the most in at least five years as a deepening global recession spurred record declines in exports and factory output, a government survey showed.

Sentiment among manufacturers was minus 66 points this quarter compared with minus 44.5 three months earlier, a joint survey by the Cabinet Office and Finance Ministry showed today. The drop was the biggest since the report began in 2004. A negative number means pessimists outnumber optimists.

Businesses said they will cut spending next fiscal year as the global collapse in demand erodes earnings. Prime Minister Taro Aso is preparing a stimulus package that may be twice as big as the 10 trillion yen ($104 billion) already pledged to revive an economy facing its worst recession since 1945.

"We're far from an environment where companies can be optimistic," said Yoshiki Shinke, a senior economist at Dai- Ichi Life Research Institute in Tokyo. "Companies may cut business investment more next fiscal year and we're going to see job and wage cuts intensify."
There isn't any confidence in Shipping these days either. This is just some of the news from Lloyds List:-



- Norwegian ship owner Siem Offshore has cancelled NKr1.2bn ($190m) of newbuilding anchor handling tug supply vessels at Norwegian shipyard Kleven Maritime albeit leaving it with 8 vessels still on order.

- Another Norwegian ship owner Petroleum Geo-Services has cancelled one of four seismic survey ships it ordered from Spanish yard Factorias Vulcano. PGS subsidiary Arrow Seismic Invest notified the yard and demanded a €39m ($53m) refund after a charter party was cancelled.

- Swedish shipowner Srab has cut its losses and walked away from a three vessel newbuilding order in Turkey.

- Navibulgar, the privatised Bulgarian operator sold last year to German interests, is to scrap around one-third of its elderly fleet, axing over 700 seafaring jobs in the process

- Israeli carrier Zim Integrated Shipping Services has laid up ten 4,000 teu container ships in the Philppines.

- An estimated 400-500 container vessels are now laid up worldwide, of which many belong to leading operators. Market leader Maersk, to cite just one example, is expected to mothball about 25 units totaling 150,000 teu, equivalent to 8% of its fleet.
In the United States, it would be incorrect to speak of lost confidence. Confidence is long gone, we should rather speak of increased fear and anxiety.


Financial fears grow - More consumers are just a paycheck or two away from ruin

Americans are in a collective state of financial depression as many admit they could only cover their bills for two months at most if they found themselves suddenly jobless, a nightmare more and more worry may come true.

The results of a bevy of surveys found a growing number of consumers are only a couple paychecks away from a household collapse even as many scramble to shore up savings. Rainy-day funds appear to be a distant memory as households burn cash to cover food and energy bills as well as mortgage and car payments.

A large number of households say that even one missed paycheck would spell financial ruin. And even in households that remain well off, the surveys show a festering fear that financial problems are lurking.....

A MetLife study released last week found that 50% of Americans said they have only a one-month cushion -- roughly two paychecks -- or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

And it's not just low-income earners who would find themselves financially challenged. Twenty-nine percent of those making $100,000 or more a year said they would have trouble paying the bills after more than a month of unemployment.

A Discover U.S. Spending Monitor monthly study found that consumers were becoming more despondent as each month passed...
This is a condition that is known as slavery and relates very closely to the condition known as "living in illusion". Now the illusion is being increasingly exposed for what it is we wonder what the reaction of the masses will be; will they resort to violence as the powers that be clearly wish them to or will they seek an alternative path, one that will mean thinking of themselves as part of a community of man rather than as deserving individuals for whom "looking after No. 1" is all they know?

The Mighty Fallen

Babcock and Brown the infamous Australian private equity firm fell into receivership the week before last:-



Babcock & Brown is dying as it lived: beyond its means. Few institutions embodied the "buy now, pay later" ethos quite like the Australian fund manager. For years it bought ports, property and power stations on credit, spun them off into heavily leveraged satellite funds, then booked big advisory and development fees, hoping that the assets would keep rising.

Babcock & Brown collapsed into bankruptcy on Friday, ending the public life of the Australian group that for years cut a swathe on the world stage with its particular brand of infrastructure investing.

The death knell came as New Zealand owners of subordinated debt voted down a restructuring plan that would have seen noteholders receive just A$18,000 for a debt instrument with a face value of A$180m.

However, senior creditors owed close to A$3.9bn are expected to pick over B&B's carcass for years as they attempt to sell off the group's remaining infrastructure, real estate and aircraft leasing operations.
GE, which is suffering from the uncertainty and assumed poisonous nature of its massive financial arm GE Capital, has at last lost its "Blue Chip" status, being downgraded one notch (credit rating levels are called 'notches') by Standard & Poors (S&P) rating agency from AAA to AA+, a move that seems to have brought much relief as it was mooted that a four notch downgrade might be on the cards. This caused the UK Financial Times to comment:-


The downgrade is further confirmation of financial markets' dysfunctional relationship with ratings agencies. After years of accepting repackaged junk as top-shelf goods just because S&P or Moody's said so, the crisis has pushed investors to the opposite extreme of treating any financial firm as guilty until proved innocent. That is how GE's debt has been quite irrationally treated, so Thursday's sigh of relief may be a sign the agencies are regaining their credibility.
The dysfunctional relationship between financial markets and credit rating agencies is simply a reflection of the nefarious and peccant relationship between financial institutions and ratings agencies. Despite their much vaunted claims of independence, rating agencies became extremely compliant when dealing with the largest investment and commercial banks on whose business they depended for a substantial portion of their income.

Similarly, Berkshire Hathaway, the investment vehicle of famed finance guru Warren Buffett was downgraded by the Fitch rating agency from it exalted AAA to AA+. Much of Fitch's concern stems from the fact that Warren Buffet is so central to Berkshire's success and at 78 isn't a spring chicken.

Job Losses - Economic Depression - Austerity

Morgan Stanley projected a 4% contraction in the economy of Latin America this year while the European Central Bank is predicting a contraction of 3.3% for the Eurozone.

The situation in Ireland, once the showpiece of the new global economy, is dire.



Ireland: Government to impose draconian austerity measures with opposition support

Ireland's prime minister (Taoiseach), Brian Cowen, has warned of more savage cuts than expected in the emergency budget scheduled for April 7.

Speaking to the Dail, or parliament, Cowen of Fianna Fail said that there had been a "serious deterioration in the public finances," with the Department of Finance estimating a deficit €4.5 billion. This is a rise in the deficit from a predicted 2 percent to as much as 6 or 6.5 percent.

A bleaker picture still was painted by Central Bank Governor John Hurley, who said that Ireland is experiencing "an unprecedented contraction" in output, which is set to continue for the next two years. The 6 percent decline in Ireland's GDP would lead to unemployment topping 11 percent.

The decline had begun in the property and construction sectors, but had now "broadened out into a marked weakening of domestic demand, which is being significantly amplified by the contraction in export demand as a result of the movement into recession of all our main trading partners," Hurley said.

"No one should be in any doubt about the seriousness of the global situation, which is not easing, and the seriousness of our own difficulties," he added. At the end of the two years, Hurley said that the economy would have declined by 10 percent.

The government's emergency budget will impose devastating cuts in public spending, while raising large additional amounts through taxes on working people. These cuts will be in addition to the €2 billion pay cut already levied on public service workers via the "pension levy," and the €2 billion cuts in spending already announced for the 2009 budget.

Cowan said the cuts were necessary because Ireland had to deal with the crisis "in a way which would be seen to be credible by international markets."

Announcing the proposal, Finance Minister Brian Lenihan made clear that the new taxes will be levied on the lowest-paying workers. Currently, 40 percent of the workforce earns wages below the tax threshold. But in future, according to Lenihan, "Everybody will have to pay something..."
Sales at department stores and discount stores fell in South Korea in February as unemployment rose:-



Consumers are reducing spending as the deepening global recession prompts Asian companies to lower production, close factories and cut jobs. The number of employed people in South Korea dropped by 103,000 last month, the most in five years, as retailers and manufacturers fired workers.
In Eastern Europe, the War on People is taking the form of the old IMF austerity assault. Hungary's premier resigned last week due to the economic crisis and the elite called for his replacement to be an economist trained in "crisis management" (we all know what that means). Hungary's premier, Ferenc Gyurcsany, said he had to quit so that a government could be formed that would have "wider support" for cutting spending. The "wealthy" countries, not subject to IMF dictate, play by slightly different rules. They are urged to increase spending to rescue banks and "key industries" which will in due course bankrupt them so that then austerity for the people becomes necessary.

The End of Neo-liberalism?

There has been a lot of talk lately about the end of the neoliberal era, the end of Anglo-Saxon free market ideology. Many have said that the ideology of free markets has failed. Of course it did fail at the stated goals of making everyone free and prosperous, but were those the real goals? Or was the real goal of the free-market ideology the funneling and concentration of wealth and power in the hands of a few? If so, it was a resounding success:



Is This Really the End of Neoliberalism? - The Crisis and the Consolidation of Class Power

Does this crisis signal the end of neo-liberalism? My answer is that it depends what you mean by neo-liberalism. My interpretation is that it's a class project, masked by a lot of neo-liberal rhetoric about individual freedom, liberty, personal responsibility, privatisation and the free market. These were means, however, towards the restoration and consolidation of class power, and that neo-liberal project has been fairly successful.

One of the basic principles that was set up in the 1970s was that state power should protect financial institutions at all costs. This is the principle that was worked out in New York City crisis in the mid-1970s, and was first defined internationally when Mexico threatened to go bankrupt in 1982. This would have destroyed the New York investment banks, so the US Treasury and the IMF combined to bail Mexico out. But in so doing they mandated austerity for the Mexican population. In other words they protected the banks and destroyed the people, and this has been the standard practice in the IMF ever since. The current bailout is the same old story, one more time, except bigger.

What happened in the US was that 8 men gave us a 3 page document which pointed a gun at everybody and said 'give us $700 billion or else'. This to me was like a financial coup, against the government and the population of the US. Which means you're not going to come out of this crisis with a crisis of the capitalist class; you're going to come out of this with a far greater consolidation of the capitalist class than there has been in the past. We're going to end up with four or five major banking institutions in the United States and nothing else...

Moves on the Grand Chessboard

China, the country with money and industrial capacity, is slowly advancing as an imperial power at the expense of the U.S. and Western Europe:

China to Add $2 Billion to African Investment Fund, FT Reports

China will add $2 billion to an African investment fund to take advantage of opportunities in agriculture, power generation and mining left behind by western investors caught in the global credit freeze, the Financial Times reported, citing Chi Jianxin, chief executive of the fund.

The China-African Development Fund has invested $400 million since starting in 2006 and will probably have spent most of its initial capital of $1 billion this year, as much as two years ahead of schedule, the report said.
Meanwhile, as we discussed above, China has been increasingly vocal about its desire to consider alternatives to the U.S. dollar as the world's reserve currency. Last week, Premier Wen Jiabao went so far as to say China "was concerned about the security of our assets," an unusually blunt statement for the diplomatic Chinese.

"We're concerned about the security of our assets" - China premier warns of potential dollar collapse

In a public statement raising questions about the solvency of the US government, Chinese Premier Wen Jiabao said Friday that China, the largest holder of US treasury debt, was "concerned about the security of our assets."

Wen's remarks came at a news conference following the annual session of China's parliament, where he commented on the economic policies of the new US administration. "President Obama and his new government have adopted a series of measures to deal with the financial crisis," Wen said. "We have expectations as to the effects of these measures. We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried."

He called on the United States to "maintain its good credit, to honor its promises and to guarantee the safety of China's assets."

Chinese officials fear that the huge borrowing in world credit markets required to finance the US government's budget deficits - a projected $5 trillion over the next four years according to an estimate released by the Obama administration last month - will lead to a decline in the value of the dollar.

Since Beijing now holds about $1 trillion in dollar-denominated assets, including nearly $700 billion in US Treasury debt, a decline in the value of the US currency would hit China hard.

Wen added that while concerned about the safety of its dollar holdings, Beijing would "at the same time also take international financial stability into consideration, because the two are inter-related." This underscores the conservative role of the Chinese regime, which places the defense of world capitalism at the center of its policy.

US officials reacted with repeated reassurances about the value of the dollar and the safety of the dollar-denominated assets held by Chinese and other overseas investors.

White House economic adviser Lawrence Summers defended the record of US Treasury borrowing, saying Friday that dollar holders would suffer much more if full-scale deflation sets in and US gross domestic product collapses.

A Treasury spokeswoman declared, "The US Treasury market remains the deepest and most liquid market in the world." White House Press Secretary Robert Gibbs added, "There's no safer investment in the world than in the United States."

President Obama followed up Saturday, during a joint media appearance with visiting Brazilian President Luiz Inacio Lula da Silva at the White House, declaring that, "Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States."

Obama depicted the influx of dollars into the United States as an endorsement of the future prospects of American capitalism. "There is a reason why even in the midst of this economic crisis you have seen actual increases in investment flows here in the US," he said. "I think it is a recognition that the stability not only of our economic system but also our political system is extraordinary."

The driving force of this influx of capital is fear rather than confidence, however. Investors are pulling out of weaker regions like eastern Europe and southeast Asia, as well as Africa and Latin America. They are also shifting from the purchase of stocks and bonds issued by American banks and corporations, now regarded with great distrust, in favor of government-issued debt instruments.

The US fiscal deficit has mushroomed. During the first five months of fiscal 2009 (October 2008 through February 2009), the federal budget deficit tripled compared to the same period the previous fiscal year, growing from $265 billion to $764.5 billion, the largest ever. The five-month deficit is already nearly 70 percent larger than the full-year deficit of $459 billion for fiscal 2008.

Writing in the Financial Times on March 12, Paul Kennedy, Yale University professor and author of The Rise and Fall of the Great Powers, argued that the Obama stimulus program would have a destabilizing effect on world financial markets: "no one is asking who will purchase the $1,750bn of US Treasuries to be offered to the market this year - will it be the east Asian quartet, China, Japan, Taiwan and South Korea (all with their own catastrophic collapses in production), the uneasy Arab states (yes, but to perhaps one-tenth of what is needed), or the near bankrupt European and South American states? Good luck! If that colossal amount of paper is bought this year, who will have ready funds to purchase the Treasury flotations of 2010, then 2011, as the US plunges into levels of indebtedness that could make Philip II of Spain's record seem austere by comparison?"

According to an estimate by Merrill Lynch, US Treasury notes have produced Chinese investors a 2.7 percent loss this year in terms of the Chinese currency, the yuan. Beijing is in a bind, however, since any effort to unload a significant part of its massive dollar holdings could flood the market and trigger a financial panic, with devastating effects on the value of all dollar-denominated securities, including its own investments.

Objective processes are undermining the longstanding symbiotic relationship between Beijing and Washington, however. The US slump has produced a massive drop in purchases of Chinese goods. Chinese exports plunged 25.7 percent in February, slashing the country's trade surplus from $39.1 billion to $4.8 billion. Continuation of this trend means China will earn correspondingly fewer dollars to invest in US government bonds.

The mounting conflicts between the two major powers find expression not only on the financial plane, but in diplomatic and security issues. Wen's statement of concern over the dollar was issued only days after the highly publicized clash between US and Chinese naval vessels off the coast of Hainan Island. Chinese vessels sought to force the USNS Impeccable out of an area, about 75 miles offshore, where it was conducting surveillance of traffic in and out of China's biggest submarine base.

President Obama dispatched a guided-missile destroyer to the South China Sea on Thursday, armed with torpedoes and missiles, to escort the Impeccable as it continues its surveillance mission. Obama later met with Chinese Foreign Minister Yang Jiechi at the White House.

The next day came Wen's declaration about the dollar, and then a day later a Chinese consortium signed a $3.2 billion natural gas deal with Iran. Beijing effectively thumbed its nose at the US policy - escalated by Bush and continued by Obama - of seeking to undermine the Iranian regime economically. The three-year deal involves extensive Chinese engineering assistance to the development of the South Pars gas field under the Persian Gulf seabed, in return for gas deliveries to Chinese customers.
China offered support to Russia's call for an alternative to the dollar as the world's reserve currency. Meanwhile, offshore banking entities dumped U.S. Treasury debt last month.

The EU is reluctantly considering increasing its aid to struggling Eastern European countries. This is their "backyard" in imperial parlance, Western Europe's source of cheap skilled labor, so one would think that offering "aid" (which always comes with strings attached) might be natural. The reluctance comes from Germany which is clearly still resisting the global wave of "spend now, pay later" bailout capitalism. Whether this stems from a general fiscal conservatism for which Germany is rightly renowned, a simple protectionist stance or a deeper understanding of the trap that world leaders have fallen into, we can only speculate. In the US of course there are those that believe that any nation that doesn't follow the US and UK lead to the letter and mortgage the future of its children on saving the economic system as we know it is "seeking a free ride" or "waiting to pick up the pieces when it's all over". These voices are clearly those of Puppets working for an agenda set by hidden masters:-

Merkel Keeps Cashbox Closed as She Spurns Obama Plea

Forget Nicolas Sarkozy. Ignore Gordon Brown. Angela Merkel, taking advantage of Germany's economic heft, is now the European Union's dominant figure. And leaders from Warsaw to Washington had best not forget it.

Just as the German chancellor vetoed a bailout for eastern Europe on March 1, she is now leading European opposition to U.S. President Barack Obama's call for a global pump-priming package. She'll determine the fate of a 5 billion-euro ($6.4 billion) infrastructure proposal at an EU summit in Brussels later this week.

"It's Merkel who holds the key to the cashbox, and she doesn't want to give it up," says Jean-Dominique Giuliani, chairman of the Robert Schuman Foundation, a research center in Paris.

Merkel's rejection of more stimulus touched off the first trans-Atlantic clash of the Obama administration and led critics to say she risks deepening the global recession. Even as finance ministers from the Group of 20 nations were meeting in southern England March 14, seeking to paper over differences with a pledge to deliver a "sustained effort" to boost growth, Merkel was 42 miles (67 kilometers) away in London, defending her opposition to further spending.

"Germany really has contributed its share," said Merkel, 54, as she stood alongside Brown, the U.K. prime minister.

Third Rebuff

The remarks were her third rebuff in three days to Obama's March 11 call for "concerted action around the globe to jump- start the economy," comments echoed by Lawrence Summers, his top economic adviser, and Treasury Secretary Timothy Geithner.

It is a reversion to type for Germany, which built its postwar society on the principle of monetary stability after the economic havoc of two world wars. Germany authored the limits on budget deficits for countries using the euro currency -- only to flout them during the reign of Merkel's Social Democratic predecessor, Gerhard Schroeder.

With the world economy set to shrink for the first time since World War II, Merkel has forged a European position not to go beyond tax cuts and emergency spending that the EU says amounts to 3.3 percent of gross domestic product.

Nobel laureate economist Paul Krugman says Merkel is underestimating the scope of the crisis. Germany is a "giant stumbling block" to global efforts to fight the recession, he told Der Stern magazine last week.

Obama on March 14 said there isn't a fundamental "conflict or contradiction between the positions of the G-20 countries" on how to deal with the crisis, only "a difference in details." Merkel spokesman Thomas Steg today also denied any "conflict," calling it an "artificial debate..."

While the EU forecasts that the German economy will shrink 2.3 percent in 2009 -- the second-worst in the 16-nation euro region, after Ireland -- economists say its relative strength will likely re-emerge whenever the recession ebbs. Europe's largest economy has used the 10-year-old euro to rebuild its competitiveness, and the EU's eastward expansion in 2004 moved Germany from the edge of the European market to the center.

Manufacturing Anger

Last week the United States was in an uproar over a $165 million dollars of bonuses and incentive pay paid to executives of the AIG insurance group subsidiary AIG Financial Products while the parent group has received $180 billion in bailout money. The US Congress took advantage of a golden opportunity to grandstand; the House of Representatives passed a bill to tax the bonuses by 90%; a move fraught with serious constitutional issues relating to retrospective law and a precedent that many of us will come to rue.

Interestingly, the Obama administration has attempted to tamp down public anger about this and to allow the bonus payments while also expressing "outrage". It is a tricky situation for the Obama administration as bonuses lie at the heart of the "wheeler-dealer" culture that fueled the credit boom and also contributed handsomely to the funds of many members of Congress and to the President himself.

The focus on bonuses is also a wonderful distraction. The entire US media, and therefore the bulk of the US populace, are focused on $165 million already paid and the prospect of further bonuses to "retain key AIG staff" that may total $600 million all in while the real issue is where the now $180 billion of government money pumped into AIG has gone. As usual Bill Van Auken had some pithy words on the subject:-

The AIG bonuses furor: the class issues

The bankrupt insurance giant American International Group (AIG), which has received the most massive public bailout of any US financial institution, is paying out hundreds of millions of dollars in bonuses to the very executives who oversaw the transactions that bankrupted the firm and threatened to drag down much of the US and world economy with it.

This revelation has sparked genuine popular anger, while providing a graphic exposure of the real class character of the economic policies being pursued by the Obama administration in the face of the deepest economic crisis since the Great Depression of the 1930s.

According to the Wall Street Journal, AIG International is paying out $450 million in bonuses to executives at its London-based subsidiary AIG Financial Products, which was primarily responsible for the company's staggering $99.3 billion loss in 2008.

The bonuses are on top of $121.5 million in "incentive pay" for 2008 going to 6,400 of AIG's employees and another $600 million in "retention pay" going to another 4,000 of them, for a grand total of over $1 billion.

The New York Times reported that seven AIG executives would receive bonuses worth $3 million or more each, while the Washington Post related that $165 million was being divvied up between 400 employees - an average of $412,500 each, or roughly ten times the annual gross pay of an average worker.

Given the de facto bankruptcy of AIG, these bonuses are being paid directly out of taxpayers' funds, a total of $180 billion of which have already been showered on the company. This amount is roughly equal to all of the discretionary spending contained in the Obama administration's anemic economic stimulus package.

In addition to the deep-felt popular outrage of millions who are faced with the daily threat of losing their jobs and their homes while seeing their income slashed as a result of the crisis, the bonus plan also triggered toothless expressions of disapproval from the Obama administration.

Treasury Secretary Timothy Geithner is reported to have called the government-installed chairman of AIG, Edward Liddy, telling him that the bonuses were "unacceptable" and demanding that they at least be pared down. Given that in its first $85 billion bailout of the company last September the government took over an 80 percent share of the firm, one might have thought that Geithner's request would have carried some weight.

Think again.

Liddy, a former board member of Goldman Sachs - the investment house believed to have received a large portion of the bailout money after it was "laundered" through AIG's insurance contracts - fired back an extraordinary letter telling the government to get lost.

"Quite frankly, AIG's hands are tied," he wrote, claiming that the bonuses were "binding obligations" - part of the executives' employment contracts - and interfering with them could provoke lawsuits. Moreover, he argued that they were fully warranted, despite the massive losses for which those receiving them were responsible. Without doling out a billion in additional compensation, he claimed, AIG would be at risk of losing "the best and the brightest to lead and staff the AIG businesses." Employees would leave if "their compensation is subject to continued and arbitrary adjustment by the US Treasury," he said.

"The best and the brightest?" The executives in AIG's financial division ran an unregulated credit-default swap operation that was just as much a scam as Bernie Madoff's fund, and far more destructive.

The obvious question is: where precisely are these "best and brightest" going to go if they fail to get their hundreds of millions in bonuses? The market for this type of financial parasitism has collapsed, dragging down with it the livelihoods of millions upon millions of working people. Rather than getting bonuses, those in charge of the financial manipulations carried out by AIG and its partners should be on the receiving end of criminal investigations.

In the end, the Obama administration came around to Liddy's position that the bonuses must be paid. This was made clear Sunday by Lawrence Summers, the chairman of the White House National Economic Council, in a televised interview on ABC's "This Week."

"There are a lot of terrible things that have happened in the last 18 months," declared Summers, "but what's happened at AIG is the most outrageous."

Despite his supposed outrage, Summers insisted that the government, its 80 percent ownership of AIG notwithstanding, could do nothing about the bonuses. "We are a country of law," he proclaimed. "These are contracts. The government cannot just abrogate contracts."

The government cannot abrogate contracts? Try telling that to American autoworkers who have seen not only bonus payments, but pay, holidays, pensions, health benefits and working conditions - all part of their contracts - slashed as a condition imposed by the White House for government financing to stave off bankruptcy.

There were no pious statements from Washington about a "nation of law" and the sanctity of the contract as the government backed a vicious assault aimed at driving autoworkers back to the conditions of the 1930s. Rather, these workers were vilified amid the universal demand - seconded by the United Auto Workers union - that they agree to rip up their contracts and be quick about it.

This is the real content of the Obama administration's economic policy. What is sacred is not law or contracts, but rather the principle that the wealth, power and privileges of the top one percent of American society cannot be touched, no matter how deep the economic crisis.

The real concern of Summers and others in the administration is that the AIG bonuses are so provocative that they will interfere with the attempts to carry through policies aimed at placing the full burden of the crisis onto the backs of working people in the name of "shared sacrifice."

This was expressed most clearly by Obama's economic advisor, Austan Goolsbee, who warned that AIG's action would "ignite the ire of millions of people." He added, "You worry about backlash."

It is precisely this development, which the administration and the ruling elite so fear, that points the only way to resolving the deepening economic catastrophe in the interests in the majority of the population. The "ire" and "backlash" of millions upon millions of working people must be mobilized to settle accounts with the financial oligarchy that is responsible for the present crisis and to break its economic and political stranglehold over society.
This shouldn't be surprising. The major financial institutions in the United States donated more than $100 million dollars to the presidential campaigns last year. And when Citigroup, J.P. Morgan and Bank of America say, "Jump" whoever gets elected asks, "How high?"

According to Paul Craig Roberts, the bailouts, while clearly scams, have at least taught the US public that "the elites run the government in their own private interests":-

Eliot Spitzer, the former New York Governor who was set-up in a sex scandal to prevent him investigating Wall Street's financial gangsterism, pointed out on March 17 that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG's financial deals. These payments, Spitzer writes, are "a way to hide an enormous second round of cash to the same group that had received TARP money already."

Goldman Sachs, for example, had already received a taxpayer cash infusion of $25 billion and was sitting on more than $100 billion in cash when the Wall Street firm received another $13 billion via the AIG bailout.

Moreover, in my opinion, most of the billions of dollars in AIG counter-party payments were unnecessary. They represent gravy paid to firms that had made risk-free bets, the non-payment of which constituted no threat to financial solvency.

Spitzer identifies a conflict of interest that could possibly be criminal self-dealing. According to reports, the AIG bailout decision involved Bush Treasury Secretary Henry Paulson, formerly of Goldman Sachs, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury. No doubt the incestuous relationships are the reason the original bailout deal had no oversight or transparency.

The Bush/Obama bailouts require serious investigation. Were these bailouts necessary, or were they a scam, like "weapons of mass destruction," used to advance a private agenda behind a wall of fear? Recently I heard Harvard Law professor Elizabeth Warren, a member of a congressional bailout oversight panel, say on NPR that the US has far too many banks. Out of the financial crisis, she said, should come consolidation with the financial sector consisting of a few mega-banks. Was the whole point of the bailout to supply taxpayer money for a program of financial concentration?

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