The Unravelling Continues As More People Suffer

By Donald Hunt and Simon Davies
SOTT.net

World stock indexes fell sharply again the week ending 23rd February, down 6-7% on average.

Gold bumped up against the $1000 barrier on Friday as it became clear that all countries are prepared to go deeply in debt to stimulate their economies and to bail out their banks.

In the background of the economic news there have been some significant moves on the world chessboard. The United States is moving closer to Russia and Iran while escalating the war in Pakistan and Afghanistan. Russia will now formally allow the United States to resupply their forces in Afghanistan through Russian controlled territory. US diplomatic overtures to Iran continue although the UK Financial Times and other mainstream sources continued to bang the Zionist inspired nuclear weapons drum.

China and the United States are as close as can be economically and neither side seem to need to deny it. China has the productive capacity and the money and the United States has the borrowers, the consumers, and the international police force. The United States, with Secretary of State Hillary Clinton's visit to China, has stopped the hypocritical ritual of "denouncing" Chinese human rights violations. It look like the world powers are joining forces to institute the next step of the plan. Meanwhile a new overtly fascist government has been formed in Israel by the right-wing schemer, Netanyahu; an event that does not bode well for humanity.

Africa

The South African economy shrank by 1.4% in the fourth quarter of 2008. It's currency, the rand, fell last week. South Africa has been hit hard by falling commodity prices. Platinum, for example, South Africa's biggest export, is worth less than half what it was a year ago. This has led to the announcement of job cuts and dividend suspensions at the largest platinum producer, Anglo American, Plc.

Asia

U.S. Secretary of State Hillary Clinton was in China this past weekend urging China to keep buying U.S. Treasury bonds.

Clinton Urges China to Keep Buying U.S. Treasury Securities

Secretary of State Hillary Clinton urged China to continue buying U.S. Treasury bonds to help finance President Barack Obama's stimulus plan, saying "we are truly going to rise or fall together."

"Our economies are so intertwined," Clinton said in an interview today in Beijing with Shanghai-based Dragon Television. "It would not be in China's interest" if the U.S. were unable to finance deficit spending to stimulate its stalled economy.

The U.S. is the single largest buyer of the exports that drive growth in China, the world's third-largest economy. China in turn invests surplus earnings from shipments of goods such as toys, clothing and steel primarily in Treasury securities, making it the world's largest holder of U.S. government debt at the end of last year with $696.2 billion.

China's leaders understand that "the United States has to take some very drastic measures with the stimulus package, which means we have to incur debt," Clinton said. The Chinese are "making a very smart decision by continuing to invest in Treasury bonds," which she called a "safe investment," because a speedy U.S. recovery will fuel China's growth as well.

China boosted purchases of U.S. debt by 46 percent last year to a record. The Chinese government said last week it plans to keep buying Treasuries, adding that future purchases will depend on the preservation of their value and the safety of the investment. China's currency reserves of $1.95 trillion are about 29 percent of the world total.

'No Viable Alternative'

JPMorgan Chase & Co. predicted in a Feb. 6 report that China will keep buying Treasuries "not only for the near-term stability of the global financial system, but also because there is no viable and liquid alternative market in which to invest China's massive and still growing reserves."

Chinese attempts to diversify from [US] Treasuries into more risk-oriented assets have not fared well. It has lost at least half of the $10.5 billion it invested in New York-based Blackstone, Morgan Stanley and TPG Inc. since mid-2007.

Asian nations also announced broader agreement on a currency pool to defend their currencies.

The fund is aimed at ensuring central banks have enough to shield their currencies from speculative attacks such as those that depleted the reserves of Indonesia, Thailand and South Korea during financial crisis a decade ago. Many Asian currencies have tumbled in the past year, threatening regional stability, as the global downturn spreads through their export- dependent economies...

Large reversals "of capital flows, which have affected the financial markets, could undermine growth prospects," they said. "This can be a significant downside risk to regional growth, which has already been dragged down by the global economic downturn."

A decade ago, Indonesia, Thailand and South Korea spent much of their foreign reserves attempting to prop up their exchange rates. The three nations were forced to turn to the International Monetary Fund for more than $100 billion of loans. In return, the governments had to cut spending, raise interest rates and sell state-owned companies.

In the years since, Japan, China and South Korea together with the Asean economies have amassed more than $3.6 trillion of foreign-exchange reserves, about half of the global total.

South Korea's finance minister stated they will act to prop up its banks and currency, if necessary.

No doubt the Asian countries learned their lessons from the 1997/98 crisis which was engineered and was designed to pry open their financial markets to Anglo-American firms. The western bankers' agent, the IMF, forced the east Asian countries to "reform" their economies and financial systems, changing what had been a nationalistic, state-led capitalism, to the so-called "Washington consensus" of privatized, free-market capitalism. The accumulation of foreign exchange reserves since then has resulted from their experiences during that crisis and has therefore prevented money from being re-injected into their economies and particularly into their social infrastructure. No doubt these hard earned funds will in due course be wasted in a meaningless defense of their currencies against forces which are far stronger than they seem to anticipate.

Eastern Europe

The Baltic nations of Latvia, Lithuania and Estonia are also banding together to defend their currencies' euro peg. This is causing a lot of economic pain but is needed if they wish to adopt the Euro. It is another sign of the fragility of the whole concept of the Euro in a time of worldwide economic collapse and also the price paid by ordinary people when monetary sovereignty is sacrificed for the benefit of corporate and banking interests. In order to 'balance budgets' and maintain their currency pegs to the Euro all three nations, with Latvia in the lead, will have to take the standard IMF 'medicine' which always pushes austerity onto the middle and working classes, slashes social spending and results in social unrest, the classic "IMF riot."

Baltic Currency-Peg Defense Cuts Reserves Amid Regional Slump

Latvia, Estonia and Lithuania, facing a prolonged recession, say they will protect their currency pegs whatever the cost. That strategy may be as crippling as the alternative, economists say.

The three-nation Baltic region is in its deepest crisis since breaking from the Soviet Union in 1991. Latvia, which spent $1.26 billion in 11 weeks defending the Lats last year, was forced to turn to an International Monetary Fund-led group for a $9.6 billion bailout. Its economy may contract 12 percent this year, while Estonian gross domestic product may shrink by as much as 9 percent and Lithuania's GDP by 4.9 percent.

Latvian Premier Ivars Godmanis resigned on Feb. 20 and Lithuania's two-month-old cabinet is struggling to win over a skeptical electorate after the two nations suffered the largest street riots since independence last month.

Keeping the peg "will likely mean a number of years of very low economic growth," said Lars Christensen, chief economist at Danske Bank AS in Copenhagen. "Wages and prices will have to fall to reestablish competitiveness."

Central bankers and government officials in the three countries, across the Baltic Sea from Sweden and Finland, say they will stick to their course toward adoption of the euro. The exchange rates of the Lithuanian Litas and the Estonian Kroon were pegged to the euro in 2004, just after the nations joined the European Union. The Latvian Lats was linked a year later...

Retaining Euro Peg

Latvia, the only of the three countries to have gotten a bailout, got a bad deal from the IMF, said New York University's Nouriel Roubini. The terms retained the euro peg as long as the government reduced wages, raised taxes and slashed spending.

"The IMF made a mistake with the Latvia program of allowing them to keep the peg," Roubini said in an interview on Feb. 4. "It doesn't make any sense because the currency is overvalued."

That view is shared by Paul Krugman, a Nobel prize-winning economist who in a Dec. 15 commentary in the New York Times warned that Latvia may become "the new Argentina." That country had a currency board and saw its peso plunge even after receiving an IMF loan.

The Latvian government fell on Feb. 20 after members of Godmanis's party said they lost confidence in his leadership, which was shaken after riots broke out on Jan. 13 in the capital Riga. Police arrested 106 people. Two days later in Lithuania, another 86 arrests were made after violence erupted in the capital, Vilnius.

Declining Polls

Two months after the government assumed power and introduced austerity measures, support for the Prime Minister Andrius Kubilius's Homeland Union fell to 11.6 percent in January from 21 percent the previous month, a survey by Vilmorus for Lietuvos Rytas showed. The margin of error was 1.9 percent.

"Although the implementation of these tough measures could lead to a significant erosion in popular support, we think that their political cost will still be much smaller than the cost of a currency devaluation," said Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul.

Devaluation also may push corporations and mortgages into default: About 80 percent of total loans in Latvia and 84 percent in Estonia are in euros.

Latvia's "banks and legal system are at this point not prepared for such a shock," said Christoph Rosenberg, head of the IMF's mission to the Baltic state, in a Jan. 6 opinion on the RGE Monitor, defending the agreement. "It's questionable whether devaluation would quickly boost exports, given the global environment and the structure of its exports."

Estonia is now considering wage cuts of 10 percent for state employees, excluding police and teachers. Latvia and Lithuania have already cut state public wages by 15 percent and 12 percent respectively.

"Essentially, it'll be a political decision that the pain of holding these regimes is just too heavy a cross to bear," said Timothy Ash, head of emerging-market economics at Royal Bank of Scotland Plc in London. "Their positions are just becoming more unsustainable because everyone around them is just letting their currencies adjust."

Western Europe

Problems in Central and Eastern Europe continued to threaten the financial stability of Western Europe last week. The euro fell to its lowest level in three months against the dollar last week on concerns about Central and Eastern Europe. It is estimated that Western European banks have loan exposures to Central and Eastern Europe of between €1.4 trillion and €1.6 trillion. The trouble is that this magnitude of loan exposure is the tip of the iceberg. A secret EU analysis that up to €16 trillion of EU bank assets may be 'impaired' (i.e., they may be less than their face value); chief among these are the 'family' of structured securities including Mortgage Backed Securities (MBS), Collateralised Debt Obligations (CDO) and Synthetic Collateralised Debt Obligations and the derivatives whose value is determined on their market price. How many of these are based on Eastern European risk is anybody's guess.

What we are seeing is akin to musical chairs; everybody knows that there are very few or possible no chairs but as long as the music can be kept going then nobody has to acknowledge this. Nouriel Roubini has suggested that a region-wide rescue will be required.

"The banking problem in Europe is becoming more severe," Roubini said in a Bloomberg Television interview. "You have a series of countries that are really in trouble," Roubini said, citing Latvia, Estonia, Lithuania, Hungary, Belarus and Ukraine.

German and French officials this week expressed concern about a slide in investor confidence in smaller European economies. The cost of insuring Irish, Greek and Spanish debt against default has climbed to records, and mounting losses in eastern Europe among Austrian banks sent that nation's bond-yield premiums to an unprecedented level.

European lenders are taking steps that could increase state control of banks as the recession deepens. German Chancellor Angela Merkel's cabinet approved draft legislation this week that allows for the takeover of Hypo Real Estate Holding AG, which would be the first German bank nationalization since the 1930s.

The continent's largest financial companies have reported $316 billion in writedowns and credit-related losses since the collapse of the U.S. subprime mortgage market in 2007 spread to other asset classes and continents. The market turmoil has forced European lenders to raise $370 billion in fresh capital and government-led bailouts from London to Zurich to Berlin, according to Bloomberg data.

EU Aid

Roubini said European nations may go further and assist member states that are unable to rescue their own banks. "Even the European Union now is thinking of helping those sovereigns and their banking systems," he said.

"There are significant problems in terms of debt and also banking problems in places like Ireland, for example," Roubini said. "But also a country like Greece has a huge amount of stock of public debt."

Moody's Investors Service Inc. on Feb. 17 said some of Europe's largest banks may be downgraded because of loans to eastern Europe, sending Italy's UniCredit SpA, which has aggressively expanded in the region, to its lowest in 12 years.

'Pressure' on Ratings

Moody's sees "continuous downward rating pressure" in the region as a result of worsening asset quality and western banks' reliance on short-term funding, the ratings company said in a report.

The International Monetary Fund has offered aid worth about $52 billion to Latvia, Hungary, Serbia and Ukraine.

Roubini, who predicted the global credit crisis, also discussed the need for plans to revive growth. The best approach in the euro zone is "fiscal stimulus in the short term but fiscal consolidation over the medium term," he said.

He noted that while the $787 billion U.S. fiscal stimulus package, signed into law this week by President Barack Obama, is necessary, it may not be sufficient and will put the country deeper into debt.

"We're going to add $4 trillion to $5 trillion to the public debt over the next few years," he said. "Down the line, maybe two or four years, there may be a downgrade of even the United States."

Still, he said, the U.S. is taking appropriate steps compared with other economies. He said the European Central Bank and Japan are "behind the curve."

Ireland, which some commentators are comparing with Iceland, saw large protests in Dublin against austerity measures. Like Iceland, much of Ireland's resurgent economy was built on the back of a banking and financial services boom. Now that bubble has turned to bust the Irish economy is looking decidedly vulnerable and hollow. The Irish government have responded in much the same way as the Eastern Europeans with the resulting discontent being peacefully, although understandably angrily, demonstrated on the streets of Dublin:-

Thousands March in Dublin Against Tax Increases, Spending Cuts

Tens of thousands of people marched in Dublin today in what labor unions say is the first of a series of demonstrations by workers to protest against government spending cuts and tax increases.

The Irish Congress of Trade Unions described the march as the "first step in a rolling campaign of action." The Impact labor union, which represents public workers, estimated the number of protesters at 100,000 in an e-mailed statement.

Ireland's government this month announced it will introduce a pension levy for public workers and cut spending to plug a deepening hole in public finances and stave off a downgrade of the nation's debt rating. Unions say lower-paid workers are taking the brunt of the cutbacks.

"The government recognizes that the measures which it is taking are difficult and, in some cases, painful," the office of Prime Minister Brian Cowen said in a statement today. "It is also convinced, however, that they are both necessary and fair."

Ireland's economy may shrink by 10 percent between 2008 and 2010, Cowen has said, while European Commission forecasts that the country's budget deficit will reach 11 percent of gross domestic product this year, almost three times the EU limit.

Markets

The markets this week (to Feb 23rd)

	Previous week's close	This week's close	Change	% change
Gold (USD)	942.70	994.90	52.20	5.54%
Gold (EUR)	732.59	775.57	42.98	5.87%
Oil (USD)	37.95	39.80	1.85	4.87%
Oil (EUR)	29.49	31.03	1.53	5.20%
Gold:Oil	24.84	25.00	0.16	0.63%
USD / EUR	0.7771 / 1.2868	0.7796 / 1.2828	0.0025 / 0.0040	0.32% / 0.31%
USD / GBP	0.7008 / 1.4270	0.6929 / 1.4432	0.0079 / 0.0162	1.13% / 1.14%
USD / JPY	90.750/ 0.0110	93.345/ 0.0107	2.595 / 0.0003	2.86% / 2.73%
DOW	7,850	7,366	485	6.17%
FTSE	4,190	3,889	301	7.17%
DAX	4,413	4,015	399	9.03%
NIKKEI	7,779	7,416	363	4.67%
BOVESPA	41,674	38,715	2,959	7.10%
HANG SENG	13,555	12,699	856	6.31%
US Fed Funds	0.25%	0.15%	0.10	n/a
$ 3month	0.29%	0.27%	0.02	n/a
$ 10 year	2.89%	2.79%	0.10	n/a

Middle East

After a massive building spree, Dubai is having trouble paying its debts as foreigners flee the country simply dumping luxury cars at the airport.

U.A.E. Central Bank Steps In to Support Dubai Debt, Spending

The United Arab Emirates' central bank stepped in to support Dubai after concern increased the emirate will struggle to repay its debt as global financial turmoil pushed up credit costs and burst a real-estate bubble.

The central bank bought half of an unsecured, $20 billion, 5-year notes issue at an annual interest rate of 4 percent, Dubai's Department of Finance said in an e-mailed statement yesterday.

Home to the world's tallest building, most expensive hotel suite and largest manmade islands, Dubai borrowed $80 billion to turn itself into a regional financial and tourism hub. Moody's Investors Service said in October that Dubai may need help from Abu Dhabi to pay for its debt. The emirate may have to refinance $15 billion this year in maturing loans and bonds, Moody's said...

Latin America

Brazil's unemployment rate rose to the highest levels in seven years. President Lula has accused companies of overreacting by laying off too many people before it is necessary.

United States and Canada

We had to chuckle this week as both sides of Congress danced around the concept of 'nationalization' of major US banks as if such an admission would open the gates of hell and the US would be consumed in the fire of communism as a result. It is pretty obvious that if Congress wishes to go about saving the US banking system in its current form, itself a highly dubious proposition, it will have to take sizeable and probably controlling stakes in the banks in the form of ordinary/common shares. It seems bound to happen yet to see the ideological squirming you'd be forgiven for thinking that it's not a forgone conclusion. In fact it makes us wonder if the ideological squirming is just for show so that Congress can uphold the 'free market' mantra while not allowing the free market to exact its inevitable price upon the system of greed to which they owe their very existence.

In a sign that Asian investors understand just how dire the predicament of the US is, the rescue of Freddie Mac and Fannie Mae, the US government linked mortgage lenders, looks unlikely to succeed without explicit US government guarantees of their mortgage backed securities as Asian investors simply won't buy them otherwise.

In case anyone doubted that 'self-regulation' really means NO-regulation or, even worse, criminal collusion, it emerged that:-

Two employees of Allen Stanford's financial business, which U.S. regulators have accused of massive fraud, held advisory roles at a watchdog group overseeing U.S. broker-dealers aimed at preventing abuses.

Lena Stinson, director of global compliance at Stanford Financial Group, served on the membership committee of the Financial Industry Regulatory Authority, or FINRA, which describes itself as the largest independent regulator of U.S. securities firms.

Frederick Fram, the chief operating officer of Stanford Group Holdings, served on the FINRA continuing education content committee, "where he participates in creating material for the Regulatory Element continuing education program," according to a biography on Stanford's website.

It seems that the self-regulatory body FINRA is heavily implicated as being a fraud as regards regulation as well as permitting fraud among the organizations that it purports to regulate. Harry Markopolos who repeatedly sounded the alarm on Bernard Madoff to the SEC has said that he doesn't think the SEC was corrupt but that FINRA definitely was. Whether he'd be able to say the same about the SEC (US Securities and Exchange Commission) in future seems doubtful as Mary Schapiro, the newly confirmed chairman of the SEC, used to be the chief executive of FINRA.

In the United States, as in Brazil, corporations are taking advantage of public fear of layoffs and economic collapse to use their increased power over workers. Many companies and public institutions that are not experiencing drops in business are cutting jobs, pay and benefits just to get ahead of the curve and improve the bottom line. It is a self-fulfilling prophecy, since it is now job losses that are driving downturn in general and in corporate profits.

Using the Crash to Hit Workers

Whatever the truth is about where this economy is heading, one thing is clear: employers are taking every opportunity to slash employment and, if they are unionized, to hammer unions for pay cuts, even when there is no justification for these actions.

Take Safeway Inc., a large national supermarket chain. The company, which had $44 billion in sales in 2007, and which, based upon third quarter figures for 2008 was well on the way to show record sales for 2008, appears to be using the economic downturn as a justification for laying off employees and making remaining employees work harder.

I can only give anecdotal information on this, but the Genuardi's Family Market store (a Safeway subsidiary) where I live, in Upper Dublin, PA, an upper middle-class suburb north of Philadelphia, according to its employees, has been laying off cashiers, and slashing its night work force - the people who restock the shelves and unload the delivery trucks when the store is closed. The management is doing this not because sales have slumped. They haven't. People may not be buying new cars, but they are still buying food, and in fact, if they are cutting back on eating out, as restaurant chains are reporting, they are probably actually buying more groceries, not less. Management is making these cuts simply because they can get away with it.

The layoffs, in the face of continued heavy business, means that cashiers are working harder. It means that the night staff, cut by half, is working twice as hard. But with jobs getting scarce, what is their option? If they don't like the speed-up, where are they going to go in the current environment? Meanwhile, if service gets worse, customers will accept the decline because they'll blame it on the economy, not noticing that there is really no justification for employee cutbacks at the supermarket.

Temple University, which is a major public higher education institution in Philadelphia, is reportedly telling all departments to make substantial cuts in their budgets . This will inevitably lead to layoffs of faculty and support staff critical to the education mission. And yet, what is the justification for such draconian measures? The governor initially announced plans to cut the state's contribution to the university's annual budget for next year by a few million dollars, but the new Economic Recovery Act stimulus package includes huge grants to the states, including Pennsylvania, more than compensating for those cuts. Furthermore, state-funded universities across the country, including Temple, are reporting increased applications and enrollments, as students whose parents cannot afford to send them to private colleges, send them instead to public institutions, and as workers who lose their jobs decide that the economic downturn is a good time to go to college and get an education. That means more tuition revenues coming in. Moreover, student aid, including Pell Grants for lower-income students, have been substantially increased in the stimulus package, meaning more money for public colleges. Money might be marginally tighter at places like Temple (while, as with most public institutions, the university's endowment is not a significant contributor to the operating budget, small as it is it is certainly significantly reduced because of the market collapse), but it's certainly not down by enough to put universities in crisis. It may not even be down at all.

It might be understandable that state and local governments would be considering layoffs, or reduced pay and hours for public employees, given the slump in tax revenues from property taxes, sales taxes and income taxes. It is certainly necessary for the auto industry, which has seen sales plummet, to lay off workers. Luxury stores like Circuit City are going bust. But not all employers are hurting alike. Health care industries are still booming. Public colleges are doing fine. Supermarkets are doing well. Energy companies are okay.

Criticism of the nationwide wave of layoffs by companies and employers that really don't need to beggar their workers or push them out onto the street came from an unusual quarter recently, when Steve Korman, chief executive of a privately held Philadelphia-area company called Korman Communities, blasted corporate executives for laying off workers when they don't really need to. Korman had gotten upset when he saw Pfizer Inc.'s CEO Jeff Kinder say, on a television business program, that he planned to lay off 8000 workers in anticipation of a merger with Wyeth, another drug company. The layoffs were not being made because Pfizer was losing money or in trouble financially, but rather to improve profits. Korman, who owns stock in Pfizer, got angry and spent $16,000 to run ads in the Philadelphia Inquirer and the New York Times, saying:

"I have listened to the executives of many companies say that they are eliminating thousands of jobs to 'improve the bottom line,' I own stock in many of these companies and would prefer that the company make a smaller profit and [that] the stock fall, in the short term, rather than affect the lives of our neighbors and their families as jobs are lost.

"Please join me in reminding all CEOs that we are not just dealing with numbers and profit, but with real people and real families who need to keep their jobs."

Korman sent individual letters saying much the same thing to 16 companies in which he is an investor, including Federal Express, Google, Cisco Systems, Caterpillar, General Electric, ExxonMobil, Kraft, Nokia, Intel, Johnson&Johnson, Apple, EMC, Chevron, DuPont, Coca-Cola, Oracle and Dow.

If this phenomenon is bad enough that it has upset a prominent capitalist like Korman, it is clearly a major problem.

The irony is that as all these companies slash their workforces, and force remaining workers to work harder, and as public institutions like Temple University and other colleges cut their faculties and increase class sizes for remaining teaching staff, they are undermining any stimulus that taxpayers are subsidizing in the massive stimulus bill, and thus making the recession worse, not to mention wasting the huge deficit-spending measure itself.

Nobody would argue with a company's laying off of workers when sales collapse and there is no money coming in, but in many cases this is not what has been happening.

One reason there is a tidal wave of layoffs even at viable businesses and institutions across the country is simply the lack of or weakness of labor unions. With workers at most employers unorganized (unions represent only some 8 percent of private employees), it is easy for managers to engender an attitude of fear and passivity among employees, which makes it easier to pick them off, and to make those on the job work ever harder. Furthermore, without labor contracts, there is little workers can do to resist speedups that can seriously threaten their health, safety and well-being.

Only a new militancy and sense of solidarity among American workers, and a revitalization of the nearly moribund labor movement, can rescue this situation, which will only get worse as the economy continues to sink.

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1. Iran is reported to have one tonne of low enriched uranium hexafluoride, the fuel needed for a nuclear reactor. However, in a typical twisting of facts this is being promoted as "enough material to build a bomb" when it is impossible to build a bomb from such material. If the one tonne of low enriched uranium hexafluoride were further enriched it would produce about 20 kilos of weapons grade uranium. Iran does not have the facilities to achieve such further enrichment but these details are of course careful glossed over in the unending lies that spew from the mainstream media.

Rescuing Capitalism or Grand Theft & Military Dictatorship?

By Simon Davies and Donald Hunt
SOTT.net

World stock indexes fell the week ending 16th February led by the Dow losing more than 5% while gold continued to inch its way towards the psychologically important $1,000/oz level, driven by the approach of what looks like another emerging market crisis in Eastern Europe which is driving the Euro and Sterling lower, sending - it would seem - mobile money towards gold. The big US news, however, was the passage of the almost $800 billion stimulus package in the United States and the decidedly lukewarm reception to US Treasury Secretary Timothy Geithner's much heralded $2 trillion bank rescue plan.

The G7 finance ministers met in Rome in an exercise in hot air generation, stating, as if we needed reminding, that the "downturn" will persist through 2009 and that the various "stimulus measures" won't have any noticeable effect for a while as they "build over time". The ministers did pledge to restore confidence to financial markets and growth to the world economy but didn't happen to mention how they plan to do it. Timothy Geithner demanded "exceptional measures" from his counterparts which we can only assume means "exceptionally large amounts of money" to prop up the international banking system so that it can continue to concentrate even greater wealth in even fewer hands.

The vagueness of Mr Geithner's plan for rescuing US banks is rather strange considering his technocrat status and that his boss promised "change" which one might have hoped meant something different. Yet all we have seen so far from both Mr Geithner and Barack Obama is more of the same. They haven't the simple courage nor the desire to tell us straight that they need to recapitalise the US banking system to the tune of some $6 trillion - that's $6,000,000,000,000 - that they plan to have the US taxpayer bear the burden of almost incalculable losses from worthless assets all the while urging austerity and sacrifice for all but the elite including the further decimation of the last threads of America's social fabric. Instead they brandish rescue plans, stimulus packages and a myriad of programme acronyms in the hope that we might not notice.

Across the Atlantic the same games are being played. The distraction of the week being a ritualized bashing of banker's bonuses. In the UK, the Chancellor of the Exchequer, Alastair Darling, was decidedly ill at ease in a Channel 4 TV interview when pressed on the bonuses to be paid to bankers at the Royal Bank of Scotland which is now 69% government owned and whose excess liabilities over the every diminishing value of its assets are now on the balance sheet of the UK Treasury. He really is caught between a rock and a hard place - in one ear he can hear the clamour of the street, the people whose money he has liberally dished out to the Royal Bank of Scotland while in the other he has the whispering bankers who tell him that all will be lost if he can't retain the best staff, the ones who can make the bank profitable again. No doubt Barack Obama finds himself in much the same position.

Both of those voices are right; it is ridiculous to have a business that has been rescued with public money pay out vast wads of it to the already well remunerated employees when in any other business they'd have been sent home as the shutters were pulled down for the last time. That is what happened to the coal miners, steel workers and printer workers under Margaret Thatcher, that is what happened in every other industry and business that "couldn't cut it" in the world of the free market, that is what is happening to millions around the globe now. That bankers even have jobs should be sufficient; that they need bonuses to retain them is beyond ridiculous. Yet, those that earn the bank the most money are indeed highly mobile and until the wheeler-dealing banking industry is brought crashing to its final demise there will be those who are more than happy to employ bankers who can generate millions in income, and pay them accordingly. This will not change until there is a fundamental change in the way banks are run and in the activities in which they engage.

The brand of free market capitalism whose inevitable conclusion is exactly the crisis we see today is a pathological system that sucks all economic activity into its gapping maw; it is a system where the lowest denominator rules. Whoever sinks the lowest wins. It is a world driven by quarterly financial results, by illusory "shareholder value", by pure monetary valuation of all things and by insatiable greed, until there is fundamental change there will be no change at all.

What is needed is somebody with the power to deliver, to stand up and announce a truly radical reform of the financial system, one in which banks go back to being boring money lenders, one in which the derivatives they deal in are for the benefit of their clients to manage risk and not for themselves and their gambling cohorts in the hedge fund and "wealth management" industries, one where capital is allocated not to where it can make the hottest buck to where it can generate the greatest social benefit and one in which no bank is too big to fail so that should it fail it can be allowed to fall without the need for government life support. When that happens we will be seeing the "exceptional measures" that the US Treasury Secretary demanded of the G7 this weekend.

However, as a hollow parody of what might be, Mr Geithner and his fellow finance ministers final summit statement was a collective affirmation of what they have all already done in handing out citizens dollars to the banks and other favoured sectors and the by now familiar statement championing free trade and decrying protectionism.

The shallowness of these statements being illustrated by the fact that the US stimulus package that had just been passed by Congress as Timothy Geithner headed for Rome had "buy American" provisions in, albeit significantly more limited than originally proposed. Protectionism is on the rise in Europe, with the catchy slogan in the UK of "British jobs for British workers". Not to mention the recent bailout by the Dutch government of ING Bank, the terms of which require the bank to expand lending domestically within the Netherlands; an understandable provision given the Dutch taxpayer had just handed ING another €25 billion to ING - but protectionist, in the literal sense of favouring the domestic market, nonetheless.

We were left with the impression from the G7 summit that there is much more going on behind the scenes than we are being told. There is a G20 summit in April and a G8 one in July as which we are vaguely told that new "common principles" on transparency and regulation are expected, no doubt these new regulations will be trumpeted as being designed to prevent "failures" in the future while in fact completely failing to address the root causes of this crisis while in actuality creating the walls of the new economic world order. We wonder if the details of this new order are so staggeringly awful that they will only be revealed once full dictatorship is in place; if so it's going to be an interesting spring and summer.

We are also highly skeptical at the wave of government and media attention being focused on banker's bonuses. It is not that we do not think the matter a valid one it is just the amount of energy and focus on it makes us wonder what it is that we are not seeing. We know that governments do not and will not address the real issues of the collapsing economic order nor seize the real culprits, so our radar tells us that something is afoot when so much media space and government energy is focused on this one topic. Perhaps it just a diversion from the details of the deals being done behind the scenes; details that would cause uproar if widely circulated.

One such deal is the aforementioned state support for ING Bank. The deal is extraordinarily sweet for ING and, by definition, the converse for the Dutch citizen. The deal has been structured so that the Dutch state will buy a €27.7 billion portfolio of US Alt-A mortgaged backed securities (one level better than sub-prime) for 90% of the face value at a time when the market value is about 60% to 65% of face value. The other details of the deal are such that the negative effects to ING will be covered by the state, one example being the payment of a management fee of €700 million to the bank. In return ING has promised to provide new lending of €25 billion inside the Netherlands during 2009. However, that will be using "at least €10 billion of the government's credit guarantee scheme." Even financial analysts had to admit that, "this deal sounds almost too good to be true".

We came across the details of this deal in one of the professional banking magazines for which we have a limited free trial. To be a subscriber costs over €5,000 per annum and that is for just one magazine. We worked out that to have access to a reasonable level of information regarding what is happening in the banking world would cost us €20,000 or more per annum and even then that would be a less than complete picture. With these sorts of barriers to market information it is no wonder that we are kept in the dark. We certainly cannot afford such expenses and the mainstream media that can has no interest in informing us of the details.

If this deal is even partly indicative of what is happening behind the scenes, and the complete lack of transparency in the US and the UK suggests it is, then it is little wonder that we are being directed to the topic of banker's bonuses rather than the shenanigans of state handouts to the banks themselves.

While on the topic of banker's bonuses here are the details of the pay out to Merrill Lynch banker's just prior to the bank announcing $15 billion quarterly loss and $27 billion full year loss, losses that have been absorbed by the US citizen through the US government's support of Bank of America:-

- the top four bonus recipients received $121 million in aggregate,
- the next four, $62 million in aggregate,
- the next six, $66 million in aggregate,
- ie. the top fourteen people received $10 million or more and combined more than $250 million,
- Twenty received more than $8 million but less then $10 million,
- Fifty three received between $5 million and $8 million,
- One hundred and forty nine received between $3 million and $5 million,
- The top one hundred and forty nine bonus recipients received a combined $858 million, and
- Six hundred and ninety six individuals received $1 million or more.

You will notice that we have referred to "citizen's" money being used rather than the more familiar "taxpayer's" money as it is all the citizens of a nation that are paying for these bailouts not just the ones that pay taxes for it is the unemployed, the underemployed and the children who also suffer due to the raping of their nations treasury.

So just where is all this headed?

United States and Canada

The three-quarters of a trillion dollar economic stimulus package was passed by the U.S. Congress with the usual partisan pork barrel politics from both "sides" of the corrupt elite. Seeing as it's the Democrats whose president is in power its the turn of the Republicans to play the role of the opposition and seek personal favours to allow the passing of the Bill. For a president whose mandate is to provide change for the American people, Obama has been singularly unimpressive in his handling of the stimulus package, not only is not nearly radical enough to truly make a difference to ordinary Americans but it relies on the idea that tax cuts will result in more spending rather than saving and therefore falls back on the hackneyed and desperately out of place notion that Americans must consume their way out of this crisis. It is frustrating to see so much money being thrown around in an attempt to keep an economy based on excessive consumption going when what is needed is a fundamental re-balancing and restructuring.

The lack of clear direction in the stimulus package is of course a reflection of the political elite's loyalty to their corporate and banking paymasters and to political dogma. Patrick Martin, in noting that the Republicans had fewer qualms voting for the same spending last year in a giveaway to banks to hide their insolvency, puts their recent reticence down to ideology:-

A large section of the congressional Republican caucus adheres to an ultra-right ideological opposition to any government spending except on the military and direct handouts to the wealthy...

The editorial page of the Wall Street Journal denounced the stimulus bill in revealing terms, declaring, "Combine this new spending, and the borrowing it will require, with the trillions of dollars still needed for the banking system, and we are about to test the outer limits of our national balance sheet." The newspaper howls about the evils of deficit spending to meet the needs of the unemployed, while passing over the "trillions of dollars" for the banks as though it was a given.

While the entire political establishment fails to admit that there are infinitely better alternatives to pumping more and more money in the organs and institutions of a corrupt and diseased system they do acknowledge the likely effects of their bailouts and stimulus failing to rejuvenate that system. It is infuriating to see them sleep walking us towards economic Armageddon while being seemingly aware that that is exactly where they are taking us.

Here it is from the horse's mouth, the New York Times:-

Rise in Jobless Poses Threat to Stability Worldwide

From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe.

Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs.

High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France.

Last month, the government of Iceland, whose economy is expected to contract 10 percent this year, collapsed and the prime minister moved up national elections after weeks of protests by Icelanders angered by soaring unemployment and rising prices.

Just last week, the new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.

"Nearly everybody has been caught by surprise at the speed in which unemployment is increasing, and are groping for a response," said Nicolas Véron, a fellow at Bruegel, a research center in Brussels that focuses on Europe's role in the global economy.

In emerging economies like those in Eastern Europe, there are fears that growing joblessness might encourage a move away from free-market, pro-Western policies, while in developed countries unemployment could bolster efforts to protect local industries at the expense of global trade.

So, if the U.S. DNI (Director of National Intelligence), the spy chief, says that unemployment is the biggest threat to national security and we are told that they are "groping for a response" we wonder whether they honestly believe that bailing out the banking system and economic stimulus will work or whether they are preparing for a war against their own citizenry, a war that will be fought with the Taser, the prison camp and all the powers garnered under the guise of the "war-on-terror'. It would certainly put the last eight years into perspective.

According to Ed Hightower, the biggest problem with the U.S. stimulus package is that it is not big enough, the infrastructure investments in the stimulus bill only providing 5% of infrastructure needed according to a January report by the American Society of Civil Engineers. When we combine this with the assessment that the US banking system, as we said earlier is estimated to need at least $6 trillion, a number well in excess of what has been admitted to date, we are inclined to agree with Bill Van Auken that military dictatorship may not be far off:-

US intelligence chief: World capitalist crisis poses greatest threat

In testimony before the Senate Committee on Intelligence Thursday, Washington's new director of national intelligence, Dennis Blair, warned that the deepening world capitalist crisis posed the paramount threat to US national security and warned that its continuation could trigger a return to the "violent extremism" of the 1920s and 1930s.

This frank assessment, contained in the unclassified version of the "annual threat assessment" presented by Blair on behalf of 16 separate US intelligence agencies, represented a striking departure from earlier years, in which a supposedly ubiquitous threat from Al Qaeda terrorism and the two wars launched under the Bush administration topped the list of concerns.

Clearly underlying his remarks are fears within the massive US intelligence apparatus as well as among more conscious layers of the American ruling elite that a protracted economic crisis accompanied by rising unemployment and reduced social spending will trigger a global eruption of the class struggle and the threat of social revolution.

The presentation was not only the first for Blair, a former Navy admiral who took over as director of national intelligence only two weeks ago, but also marked the first detailed elaboration of the perspective of the US intelligence apparatus since the inauguration of President Barack Obama.

"The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications," Blair declared in his opening remarks. He continued: "The crisis has been ongoing for over a year, and economists are divided over whether and when we could hit bottom. Some even fear that the recession could further deepen and reach the level of the Great Depression. Of course, all of us recall the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism."

Blair described the ongoing financial and economic meltdown as "the most serious one in decades, if not in centuries."

"Time is probably our greatest threat," he said. "The longer it takes for the recovery to begin, the greater the likelihood of serious damage to US strategic interests."

The intelligence chief noted that "roughly a quarter of the countries in the world have already experienced low-level instability such as government changes because of the current slowdown." He added that the "bulk of anti-state demonstrations" internationally have been seen in Europe and the former Soviet Union.

But Blair stressed that the threat that the crisis will produce revolutionary upheavals is global. The financial meltdown, he said, is "likely to produce a wave of economic crises in emerging market nations over the next year." He added that "much of Latin America, former Soviet Union states and sub-Saharan Africa lack sufficient cash reserves, access to international aid or credit, or other coping mechanism."

Noting that economic growth in these regions of the globe had fallen dramatically in recent months, Blair stated, "When those growth rates go down, my gut tells me that there are going to be problems coming out of that, and we're looking for that." He cited "statistical modeling" showing that "economic crises increase the risk of regime-threatening instability if they persist over a one to two year period."

In another parallel to the 1930s, the US intelligence director pointed to the implications of the crisis for world trade and relations between national capitalist economies. "The globally synchronized nature of this slowdown means that countries will not be able to export their way out of this recession," he said. "Indeed, policies designed to promote domestic export industries - so-called beggar-thy-neighbor policies such as competitive currency devaluations, import tariffs, and/or export subsidies - risk unleashing a wave of destructive protectionism."

It was precisely such policies pursued in the 1930s that set the stage for the eruption of the Second World War.

Blair also raised the damage that the crisis has done to the global credibility of American capitalism, declaring that the "widely held perception that excesses in US financial markets and inadequate regulation were responsible has increased criticism about free market policies, which may make it difficult to achieve long-time US objectives." The collapse of Wall Street, he added, "has increased questioning of US stewardship of the global economy and the international financial structure."

The threat assessment also included evaluations of potential terrorist threats, the "arc of instability" stretching from the Middle East to South Asia, conditions in Latin America and Africa and strategic challenges from both China and Russia, centering in Eurasia. It likewise dealt with the war in Afghanistan, which the Obama administration is preparing to escalate, providing a scathing assessment of the Karzai regime in Kabul and the familiar demand for an escalation of the intervention in Pakistan. Nonetheless, the report's undeniable focus was on the danger that economic turmoil will ignite revolutionary challenges on a world scale.

Blair's emphasis on the global capitalist crisis as the overriding national security concern for American imperialism seemed to leave some of the Senate intelligence panel's members taken aback. They have been accustomed over the last seven years to having all US national security issues subsumed in the "global war on terrorism," a propaganda catch-all used to justify US aggression abroad while papering over the immense contradictions underlying Washington's global position.

The committee's Republican vice chairman, Senator Christopher Bond of Missouri, expressed his concern that Blair was making the "conditions in the country" and the global economic crisis "the primary focus of the intelligence community."

Blair responded that he was "trying to act as your intelligence officer today, telling you what I thought the Senate ought to be caring about." It sounded like a rebuke and a warning to the senators that it is high time to ditch the ideological baggage of the past several years and confront the real and growing threat to capitalist rule posed by the crisis and the resulting radicalization of the masses in country after country.

It may have been lost on some of those sitting at the dais in the Senate hearing room, but when Blair referred to a return to the conditions of "violent extremism" of the 1920s and 1930s, he was warning that American and world capitalism once again faces the specter of a revolutionary challenge by the working class.

There is no doubt that behind the façade of Obama, the US national security apparatus is making its counter-revolutionary preparations accordingly.

Including Blair, Obama has named three recently retired four-star military officers to serve in his cabinet. The other two are former Marine Gen. James Jones, his national security adviser, and former Army chief of staff Gen. Erik Shinseki, his secretary of veterans affairs. This unprecedented representation of the senior officer corps within the new Democratic administration is indicative of a growth in the political power of the US military that poses a serious threat to basic democratic rights.

A report that appeared in a magazine published by the US Army War College last November, just weeks after the election, indicates that the Pentagon and the US intelligence establishment are preparing for what they see as a historic crisis of the existing order that could require the use of armed force to quell social struggles at home.

Entitled "Known Unknowns: Unconventional 'Strategic Shocks' in Defense Strategy Development," the monograph insists that one of the key contingencies for which the US military must prepare is a "violent, strategic dislocation inside the United States," which could be provoked by "unforeseen economic collapse" or "loss of functioning political and legal order."

The report states: "Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order... An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home."

In other words, a sharp intensification of the unfolding capitalist crisis accompanied by an eruption of class struggle and the threat of social revolution in the US itself could force the Pentagon to call back its expeditionary armies from Iraq and Afghanistan for use against American workers.

The document continues: "Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States. Further, DoD [the Department of Defense] would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance." The phrase - "an essential enabling hub for continuity of authority" - is a euphemism for military dictatorship...

Markets

The markets this week (to Feb 16th)

	Previous week's close	This week's close	Change	% change
Gold (USD)	914.30	942.70	28.40	3.11%
Gold (EUR)	706.51	732.59	26.08	3.69%
Oil (USD)	40.17	37.95	2.22	5.53%
Oil (EUR)	31.04	29.49	1.55	4.99%
Gold:Oil	22.76	24.84	2.08	9.14%
USD / EUR	0.7727 / 1.2941	0.7771 / 1.2868	0.0044 / 0.0073	0.57% / 0.56%
USD / GBP	0.6763 / 1.4786	0.7008 / 1.4270	0.0245 / 0.0516	3.62% / 3.49%
USD / JPY	91.893 / 0.0109	90.750/ 0.0110	1.143 / 0.0001	1.24% / 0.92%
DOW	8,281	7,850	430	5.20%
FTSE	4,292	4,190	102	2.38%
DAX	4,645	4,413	231	4.98%
NIKKEI	8,077	7,779	297	3.68%
BOVESPA	42,756	41,674	1,082	2.53%
HANG SENG	13,655	13,555	100	0.74%
US Fed Funds	0.25%	0.25%	0.00	n/a
$ 3month	0.27%	0.29%	0.02	n/a
$ 10 year	2.99%	2.89%	0.10	n/a

Africa

Nigeria is cutting spending due to sharp drops in oil revenues.

Asia

Asian stocks fell last week amid a deteriorating outlook for corporate profits and doubts over whether U.S. stimulus measures will succeed in alleviating the financial crisis.

"Investors are disappointed with the lack of clarity on the U.S. bank-rescue plan," said Daphne Roth, Singapore-based head of Asia equity research at ABN Amro Private Bank, which manages about $27 billion of Asian assets. "We will see more earnings downgrades going into the next few months and that's going to drag down Asian stocks at least till the end of the first half."

India's currency strengthened on news that it will continue offering stimulus programs.

Rupee Strengthens as India May Step Up Efforts to Boost Growth

India's rupee strengthened the most in more than two weeks on speculation the government and the central bank will announce more measures next week to revive economic growth.

[ ] The government unveiled two stimulus packages and the central bank cut its key rate four times since Oct. 20.

"The rupee is stronger as the market expects additional measures to boost growth to be announced next week," said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. "Such measures look inevitable after yesterday's industrial output report. The central bank may cut rates and help restructure loans of companies."

[ ]

Industrial production fell 2 percent in December, the most since 1993, after a revised 1.7 percent gain in November, the government said yesterday. India expects the $1.2 trillion economy will expand 7.1 percent in the fiscal year to March, the slowest pace in six years.

Record Low

The rupee will weaken almost 10 percent to a record low of 54 to the dollar by the end of the year as the worldwide credit crisis curbs foreign direct investment, HSBC Holdings Plc said.

The rupee may also extend last year's 19 percent slide as employers cut jobs overseas amid a global recession, reducing remittances from Indian workers abroad, Richard Yetsenga, HSBC's Hong Kong-based strategist, wrote in a research report today. The U.K. bank revised its rupee forecast from 45, HSBC's Singapore-based economist Robert Prior-Wandesforde, who co-wrote the report, confirmed in a phone call.

"We expect the slower moving remittance and FDI [Foreign Direct Investment] flows to now start to show the strain," wrote Yetsenga. "Our estimates suggest FDI into Asia could fall to roughly zero this year. While that may be overly pessimistic, the fall in FDI should certainly be spectacular for global reasons."

Overseas direct investment in India averaged $3.1 billion a month in 2008, compared with $1.3 billion in the previous year, government data show.

"The boom in FDI is long overdue, but cannot last, given the state of corporate finances globally," Yetsenga wrote.

Renault SA, France's second-largest carmaker, may abandon a factory project in the southern Indian city of Chennai, Chief Financial Officer Thierry Moulonguet said yesterday. The French company said it is reducing capital investment by 20 percent.

John Chan puts the vulnerabilities of export dependent Asian economies in perspective:-

Asia's export economies in free fall

Staggering falls in exports across Asia have shocked economic analysts and ended all claims that the global slump may be nearing its bottom. The IMF's growth forecast for Asia this year is just 2.7 percent - less than a third of the 9 percent growth rate of 2007. The prediction is a full percentage point less than during the 1997-98 Asian financial crisis.

IMA Asia analyst Richard Martin commented in the Australian: "It's a bit like watching a train wreck in slow motion. North Asia is suffering the biggest collapse in demand since World War II." Westpac bank's Richard Franulovich said that the "speed of the decline embedded in the latest Asia data is on par with the collapse in the US during the 1930s Depression."

Japan, the world's second largest economy, is already in recession and still declining. Japanese exports fell 35 percent in December from a year earlier, as the global demand for its cars, electronics and capital goods dried up. Industrial production plunged a record 9.6 percent, month on month, in December.

Bank of Japan chief economist Kazuo Momma warned this week that the economy was facing an "unimaginable" contraction, as analysts estimated that there was an annualised rate of contraction of 10 percent in the last quarter of 2008, even worse than the US. The government warned that 125,000 irregular workers, mainly in manufacturing, will lose their jobs in the six months to March, but an industry estimate put the figure far higher at 400,000.

China, the so-called "workshop of the world," is being hit particularly hard. Exports declined for the third consecutive month in January, falling 17.5 percent from a year earlier, after a 2.8 percent decline in December. Imports plunged even further - 43.1 percent, twice as much as December's 21.3 percent year-on-year drop, the General Administration of Customs said on Wednesday.

Because many of China's imports are inputs into the country's manufacturing exports, the sharp decline in imports indicates further falls in industrial activity. Imports of machinery and high-tech goods fell by roughly 40 percent, also spelling disaster for the countries that sell such components for Chinese factories to assemble. Shipments from Japan fell by 43.5 percent from a year earlier; those from South Korea were down 46.4 percent and from Taiwan, 58 percent.

Although many economists are predicting that China will still grow at 5-6 percent this year, these figures are no more reliable than the previous claims that China would continue to expand at a near-record pace. More than 20 million migrant workers have lost their jobs so far, with some analysts warning of 50 million more job losses if the economy deteriorates further.

India, the other economy previously touted as a possible bulwark against world depression, is suffering as well. Exports fell 24 percent in January. According to official data, one million Indian workers in the export sector have lost their jobs since September, when the global financial crisis erupted in the US. Textile, gem and jewelery workers have been worst affected. Another half a million workers are expected to lose their jobs by March.

Although better known for its IT outsourcing services, India has become a major Asian exporter in recent years. Its exports increased from 16.9 percent of India's GDP in 2002-03 to 24.8 percent in 2007-08. Export industries employ 150 million workers, the second largest sector after farming. India's economic growth for the fiscal year ending in March is officially projected to be 7.1 percent - down from 9.1 percent last year.

For the next fiscal year, economists believe the Indian growth rates will be near 6 percent at best. Citigroup estimated a growth rate of just 5.5 percent. Although India is less dependent on exports than most East Asian countries, its financial position is much weaker. New Delhi's public debt stands at 75 percent of its GDP, compared to just 18.5 percent in China, leaving less room for large stimulus packages.

South Korea's plight is equally stark. Exports, the main driving force of the economy, plunged 32.8 percent in January. Finance minister Yoon Jeung-hyun warned on Tuesday that the fourth largest economy in Asia would shrink by about 2 percent this year - a sharp revision from the previous official forecast of 3 percent growth. According to Yoon, this would mean the loss of 200,000 jobs in 2009. Even this figure is too optimistic compared to the IMF's forecast of 4 percent negative growth. Credit Suisse has projected as much as a 7 percent contraction.

Taiwan, the sixth largest Asian economy, saw its exports fall 44.1 percent in January from a year earlier - the biggest fall since records began in 1972. Imports plunged 56.5 percent in the same month. For an economy where exports account for 70 percent of GDP, the impact is devastating. Morgan Stanley has sharply revised down Taiwan's growth rate this year to minus 6 percent - down from the previous positive 0.5 percent. CLSA, a Hong Kong-based brokerage house, last week predicted an even greater contraction - 11 percent.

The export-dependent economies of South East Asia are also suffering. The IMF's projection for Philippines is just 2.25 percent this year, down from 4.6 percent last year and 7.1 percent in 2007. The official predication for Singapore, the region's trade and financial hub, in 2009 is a contraction of 5 percent - the deepest recession since the city-state was founded in 1965. Malaysia's exports in December plunged 14.9 percent from a year earlier, with exports to the US falling by 30 percent. Analysts expected the Malaysian economy to grow by just 1-1.5 percent in 2009, far lower than the government's target of 3.5 percent. Indonesia's central bank predicts the country's economy will slow to 4-5 percent in 2009 compared to 6.2 percent for 2008.

High saving rates and relatively secure financial institutions have not prevented the Asian economies from suffering massive losses. After the financial crisis of 1997-98, Asian countries strove to increase their exports in order to build large foreign currency reserves as a shield against further financial shocks. As a result, however, they have merely swapped dependence on global finance for reliance on global demand.

Credit Suisse analyst Cem Karacadag has estimated that net exports account for two-thirds of GDP in Hong Kong and Singapore, almost half in Malaysia and Thailand and one-third in Taiwan and South Korea. He calculated that, even without taking into account secondary impacts, every 10 percent fall in exports would cut 2 percentage points of growth in South Korea and Taiwan, and up to 7 percentage points in Hong Kong and Singapore.

Over the past decade, the export share of Chinese GDP doubled to 40 percent. With a vast supply of heavily-policed cheap labour, combined with infrastructure developed by the state, it became a final assembly point for transnational corporations. They supplied factories in China with components, raw materials and capital goods made elsewhere in Asia, transforming the region into a giant export machine. It appeared that China had replaced the US as the growth engine for many Asian countries.

In fact, as Jong Wha-Lee of the Asian Development Bank pointed out, the intra-regional trade disguised the fact that 60 percent of the final demand for Asian goods still came from advanced capitalist countries in North America, Europe and Japan. China's exports to the United States and European Union fell by 9.8 percent and 17.4 percent, respectively, in January. As the demand in the West has collapsed, the booming intra-trade, which involved mainly components, inputs and capital goods, has quickly evaporated.

The Korea Times complained last week: "China has been emerging as the biggest threat to the Korean economy" because the "high dependence on China has made the country particularly vulnerable to the emerging China risk". Korea's exports to China, much of them for re-export, fell 33 percent in December, and 46.4 percent in January, compared to a year earlier, due to the accelerating drop in global demand for "Chinese" goods.

Chinese officials have been loudly talking up the prospect of sparking a "rebound" by stimulating infrastructure spending and ordering state banks to increase lending. But analysts are skeptical that the state spending will boost private investment. The Morgan Stanley China economist Wang Qing told the Wall Street Journal: "Profits and profitability in 2009 will be very poor, and this is the key reason why I do not expect much private investment - especially in the manufacturing sector where China suffers from an overcapacity problem." He estimated that manufacturing investment would be zero this year, with a 12 percent drop in property investment.

The Financial Times on February 10 explained: "Most of all, China cannot escape the broader global economic environment. The government's fiscal stimulus was designed to keep the economy going until Western consumers recover. Yet the recent indications are that the global economy could be in for a more prolonged slump than first thought."

The same conclusion can be applied to all the stimulus packages across Asia. Most Asian countries are largely cheap labour platforms whose exports outweigh their relatively small domestic markets. Confronted by the global slump, each is trying to export more, which means taking market share at their neighbours' expense. This is causing rising trade tensions. India has started 17 investigations into Chinese imports since October, and imposed restrictions on Chinese steel, textiles and petrochemicals. In January, India banned Chinese toys imports for six months to protect its own toy industry.

Apart from pitting their "own" workers against other workers in neighbouring countries, the Asian elites have no understanding of, let along solution for, the economic crisis. Some have turned to the gods for answers. During the Chinese New Year a senior Hong Kong official selected a fortune stick on the city's behalf. It was the unluckiest, 27. "A fortune teller at Che Kung temple, shrouded in incense and consulting the heavens for inspiration, declared it meant Hong Kong could not isolate itself from global financial turmoil," the Financial Times reported.

The world's economies are like a group of people chained together and sliding down a mountain. No one economy can de-link and save itself, the inevitable result from decades of globalisation. The Chinese are stuck holding U.S. government bonds while they watch the deficit spending of the U.S. skyrocket. And there is nowhere else for them to put their money. As the director-general of China's Banking Regulatory Commissions said to the Americans last week, "We hate you guys."

China to stick with US bonds

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its "only option" in a perilous world, a senior Chinese banking regulator said on Wednesday.

China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world's largest holding of Treasuries.

However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt.

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances.

"Except for US Treasuries, what can you hold?" he asked. "Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option."

Mr Luo, whose English tends toward the colloquial, added: "We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: "There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books."

Mr Luo said China intends to maintain its separation of investment and commercial banking based on its observations of the US after repeal of the Glass-Steagall Act that enforced a similar division of banking activities.

"To some extent, Glass-Steagall has fuelled the crisis," Mr Luo said. "The separation of commercial and investment banking is likely to stay longer [in China] than before." Like senior financial officials in other developing nations - such as Mohammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency - Mr Luo also spoke out against what he called America's laissez-faire capitalism.

"Government ownership was viewed as something negative but the pendulum is swinging the other way. Perhaps banking is [no different from] public utilities where government participation is necessary," he said.

"Deregulation in the US has gone a little bit too far. The market can't be omnipotent."

Eastern Europe

In Russia, the ruble rose as the governments attempts to defend it bore fruit. Eastern European economies continued to show signs of serious trouble as Estonia and Hungary announced that their economies contracted in the 4th quarter of 2008, and growth slowed sharply in the Czech Republic and Slovakia.

"The data was all pretty grim," said Neil Shearing, an emerging Europe analyst at Capital Economics in London. "The big point is it will become worse before it gets better. The region's economy may contract 3 percent this year, while the consensus in the market still seems to be for a 1 percent growth."

In fact, it looks like Eastern Europe is shaping up to be a key determinant in the next phase of the global financial crisis:-

European governments, the European Union and international financial organizations need to act fast on risks stemming form banks' exposure in the eastern part of the continent to avert an escalation of the credit crisis, Nomura Holdings Inc. said.

East European countries are struggling to refinance foreign currency loans taken out by borrowers during years of prosperity through 2007, when economic growth averaged at more than 5 percent. The International Monetary Fund, which has bailed out Latvia, Hungary, Serbia, Ukraine and Belarus, warned on Jan. 28 that bank losses may widen as "shocks are transmitted between mature and emerging market banking systems."

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As companies and consumers [ ]sought cheap loans, denominated mainly in euros and Swiss francs, external liabilities reached about 100 percent of gross domestic product in Poland and the Czech Republic and almost twice the national output in Hungary, according to figures compiled by Nomura.

Banks' Exposure

Euro region banks' exposure totals $1.25 trillion in the region, and including U.K., Swedish and Swiss banks' liabilities it pushes the figure to $1.45 trillion, Nomura said, citing figures from the Basel, Switzerland-based Bank of International Settlements.

"We find the absolute levels and some of the risks worrying," wrote Montalto. There's "a serious risk that these exposures will have grave consequences for the central and east European economies themselves as well as for the European banks that hold the ultimate risk."

Non-performing loans in the region rose to 8 percent, from 5 percent through last year, and Standard & Poor's has forecast they may top 25 percent on average.
The risks stemming from the level of exposure are aggravated by the slump in currencies in the region and the increasing default risks on repayments as more workers lose their jobs and companies scale back production and pay, Montalto wrote. The region will have a recession this year as exports collapse, the IMF has said.

'Upside Risks'

The "upside risks" to bad loans are "very large" as wages are falling and unemployment rising, Montalto said.

A group of six banks, including Italy's UniCredit SpA and Austria's Raiffeisen International Bank Holding AG, have pressed the European Union to organize financial aid for countries on its eastern fringes like Romania and Ukraine.

Austrian banks alone have lent 230 billion euros ($294 billion) in the region, equal to about 80 percent of the country's GDP, according to data compiled by the Bank for International Settlements.

The banks, which also include Italy's Intesa SanPaolo SpA, Austria's Erste Group Bank AG, Societe Generale SA of France and KBC Groep NV in Belgium, requested a 12-point assistance program for the region ranging from foreign-exchange loans for banks to guarantees for customer deposits from organizations such as the European Bank for Reconstruction and Development, according to a Dec. 1 letter sent to the European Commission.

"There does not currently seem to be a consensus about a solution, with opinion split on whether any bailout should be at the EU or member-state level and where funding could come from," Montalto said. "With continued weakness in currencies in the region and a worsening economic picture, this issue is not going to go away on its own."

The EBRD, the World bank and euro-area governments should provide capital to banks, Montalto wrote. The EBRD is in talks about providing financial support to OTP Bank Nyrt., Hungary's largest bank.

The Ukrainian finance minister resigned as that country's credit rating and currency fell.

Hryvnia Drops After Ukraine Rating Downgraded, Minister Resigns

Ukraine's hryvnia weakened against the dollar after Fitch Ratings downgraded the country yesterday and the finance minister resigned, deepening concern the former Soviet republic won't be able to shore up the economy.

The currency, which has slumped 52 percent versus the dollar over the past six months, dropped 0.6 percent to 8.0550 per dollar by 1:46 p.m. in Kiev, paring a 0.9 percent advance this week. It lost 0.9 percent to 10.3549 per euro.

Fitch yesterday reduced Ukraine's credit rating to B, five levels below investment grade, the same day Finance Minister Viktor Pynzenyk submitted his resignation after saying the post had become "hostage" to politics. Pynzenyk objected to the parliament-endorsed budget for 2009, which plans for a budget deficit of 2.97 percent of gross domestic product in violation of the country's $16.4 billion loan agreement with the International Monetary Fund.

"It's negative news, it's unwelcome news as the situation in Ukraine is deteriorating," said Ali Al-Eyd, an emerging markets fixed-income analyst in London at Citigroup Inc. "Ukraine is going to be hit with a vicious slowdown."

The political instability in Ukraine during the worst global financial crisis since the Great Depression puts the country at risk of a banking and currency crisis, Fitch said yesterday. The outlook for the nation's ratings was kept at "negative," indicating that it may be reduced further.

Fitch predicts the economy will shrink 4.5 percent this year, and Citigroup may revise its current forecast of a 3 percent contraction "much lower," Al-Eyd said. Ukraine, dependent on exports of steel and other products as the global economic slowdown depresses demand, is struggling to fund a $12.3 billion current-account deficit amid the seizure in credit markets.

In what many might consider an upside to all this bad economic news out of Eastern Europe, the number of Russian billionaires fell by half.

Western Europe and UK

Meanwhile, at least publicly, European Central Bank officials continue to downplay the crisis.

ECB Policy Makers Signal no Rush to Start Unconventional Tools

European Central Bank policy makers signaled they are in no rush to step up their response to the credit crisis by purchasing securities and downplayed concerns about the fiscal health of some euro-region nations.

"We have already introduced a number of unconventional measures," ECB governing council member Axel Weber said in Rome today, echoing comments by President Jean-Claude Trichet, Italy's Mario Draghi and France's Christian Noyer. Trichet said "no decision has been taken yet on top of the non-standard action" announced so far.

The ECB is coming under pressure to follow the Federal Reserve and the Bank of England's policy to buy government or corporate debt as Europe faces its worst recession in decades. Investors are also increasing bets that the price of banking bailouts and stimulus packages will strain public finances and hobble governments' ability to meet bond payments.

Ireland yesterday led a surge in the perceived risk of holding European government bonds, with credit-default swaps on Irish debt rising 7.5 points to a record 355. Trichet indicated that investors' concerns may be overdone, saying that market expectations go "up and down."

"I would say that the euro area is not in question in any respect," Trichet said after meeting officials from the Group of Seven nations. "I have absolutely full confidence that the governments at stake will continue to take the appropriate decisions to have sustainable policy, particularly on the fiscal side."

ECB officials have so far resisted pledging to buy securities to increase the supply of money in the economy and grease credit markets. Unlike the U.S. and U.K., which have indemnified their central banks against any default risk, it is also unclear how the ECB could be covered.

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German Finance Minister Peer Steinbrueck said that unprecedented liquidity injections may stoke inflation pressures in the future. Earlier, ECB colleague Juergen Stark said in Tutzing, Germany that the central bank is prepared to act "but always with appropriate caution."

Less Aggressive

The ECB has also been less aggressive than the Fed and the Bank of England in reducing rates. The Fed has cut the benchmark rate to close to zero, while the Bank of England has lobbed off 400 basis points since October, bringing the key rate to 1 percent.

While the ECB lowered its benchmark down to 2 percent from 4.25 percent in the past five months, it's still the highest among the G-7 group of nations.

The ECB last year more than doubled the amount of funds offered in its longer-term refinancing operations and increased the provision of dollars and Swiss francs. In addition, it loosened its rules on the collateral it accepts when making loans.

The U.K. is projecting a 3.3% shrinkage in its economy this year, the worst since 1980.

Inevitably politicians, seeking to retain their power, are increasingly playing to their domestic audiences desire for their governments to focus their economic policies at home. Nations now find themselves in the carefully laid traps that make up the web known as the global economy. In Europe, without the ability to have any influence on their currency, politicians are reverting to old fashioned protectionism. Such measures threaten both other countries' exports and, possibly, the survival of the European Union itself.

Europe turns to protectionism as industry plummets

For some time, leading European politicians have attempted to put a positive gloss on declining figures for European production, but the results released Thursday ushered in a new tone. European Union Industry Commissioner Günter Verheugen told the Financial Times Deutschland, "The extent and speed of the crisis is completely new."

One day previously, an Ifo Institute for Economic Research survey revealed that business sentiment within the 16-country common-currency eurozone declined for the sixth consecutive quarter, plunging to its lowest point since the survey began 16 years ago. The European Central Bank (ECB) also issued a warning that the recession gripping Europe will not be short-lived. Rather, it will be a "long-lasting and clear downturn," the ECB said.

The response of the individual European nations to the growing crisis has been to embrace a raft of protectionist measures. Italian Premier Silvio Berlusconi recently warned appliance maker Indesit SpA not to transfer production and jobs to Poland, and in Britain, trade unions and politicians are demanding "British jobs for British workers."

On Wednesday, the acting EU Council president, Czech Prime Minister Mirek Topolanek, appeared before the press in Brussels and warned of a "protectionist race" in Europe, while acknowledging that national economies in the European Union were being hit hard by the international crisis and losing ground with unanticipated speed.

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After a meeting with EU Commission President José Manuel Barroso, Topolanek described the situation in Europe "as worse than it has ever been." The confidence of citizens in the economic and political system had been shaken, he said, and warned that the battening down of national markets endangered the European domestic market and the world economy.

The Süddeutsche Zeitung echoed the statements of the EU Council president, writing, "Any politician seeking to solve the economic crisis by protectionist measures only worsens the situation."

Barroso also warned against states going it alone. European heads of state and government should put an end to any "nationalist navel gazing," he said. Otherwise, there was a danger of "intensifying the powerful downward trend."

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Last Wednesday, the French automaker Peugeot announced it was shedding at least 11,000 jobs, and one day later, Renault announced its own plans to cut its workforce by 9,000. These job cuts have been agreed to by the French government and trade unions and are bound up with the announcement by French President Nicolas Sarkozy that he plans to subsidise domestic automakers with the sum of €6 billion.

Sarkozy declared that, in his opinion, it was irresponsible "to continue to manufacture French cars in the Czech Republic." He demanded a halt to the transfer of production to other countries. "If we give financial aid to the automotive industry," he said, "we do not want them to set up a factory in the Czech Republic again." He also urged the carmakers to support French industries involved in supplying parts and services to French auto companies.

Czech Prime Minister Topolanek reacted sharply to this openly protectionist policy and called for a special European summit to block it and similar policies.

German Chancellor Angela Merkel (Christian Democratic Union - CDU) also criticised the French action. The defence of free trade and the European domestic market is of crucial importance, Merkel said.

The German economy, which is heavily dependent on its export industries, would be especially vulnerable to any growth of protectionist measures in Europe.

Sarkozy defended his decision and drew attention to the fact that the German chancellor had rejected a joint European stimulus programme just a few weeks before. Now, every government was forced to take its own measures to deal with the crisis, he said. He added that the latest German stimulus programme includes many measures aimed at subsidising German enterprises.

The conflict between Berlin and Paris runs deep. In his role as EU Council president last year, Sarkozy repeatedly raised the demand for an "economic administration" for the eurozone. He made it quite clear that he regarded himself as best suited to head such an administration.

Supported by a majority of the 16 eurozone countries, Sarkozy is seeking to compel the German government to take more responsibility for financial policy. According to the Élysée Palace, Germany, as the continent's biggest national economy, must contribute much more to managing the crisis.

The German government wants precisely to prevent such a development. It regards itself better prepared for the crisis than other euro countries due to the labour market reforms introduced by the previous Social Democratic-Green government, which slashed welfare payments and opened the way for the creation of a huge low-wage sector in Germany.

Backed by the country's business federations, the Merkel government is seeking to exploit the crisis to strengthen Germany's dominant role in Europe. Berlin is vehemently opposed to taking any responsibility for Europe's "weak states" - i.e., those countries that have thus far failed to implement drastic social and welfare cuts.

Behind the German chancellor's appeals for adherence to "free trade" and rejection of protectionism lie the egoistic interests of the German business elite, which profits most from the European domestic market.

The varying economic performances of individual euro countries and the absence of a uniform financial and economic policy have led to increasing discrepancies ("spreads") between the government loans of the euro countries. In mid-January, Greece had to take out a new government loan at an interest rate well above the 3 percent levied on German government securities. Financial experts have said that the trend of rising spreads has "definitely not stopped" and warn that it could have explosive consequences for the fate of the euro as a common currency.

When the chairman of the euro group, Luxembourg Finance Minister and Prime Minister Jean-Claude Juncker, suggested introducing eurobonds to allow weaker member states access to credit on the basis of a pan-European solution, his proposal was immediately rejected by German Finance Minister Peer Steinbrück (Social Democratic Party - SPD). Instead, the German government is seeking to use its EU industry commissioner, Günter Verheugen, to force member states to implement budget cuts and strict austerity policies.

In view of increasing tensions, the EU presidency and the European Commission have announced plans for no fewer than three separate summits in the coming three months. On March 1, the heads of state and government will meet in Brussels to "coordinate national stimulus packages." The agenda is to include the struggle against protectionist tendencies, measures to revive the circulation of credit, the handling of "toxic" securities, and policies directed against the rise of unemployment. Three weeks later, the regular spring summit of the EU takes place in Brussels, which is also likely to concentrate on the economic and financial crisis. In May, the Czech council president has invited member countries to Prague for an employment summit.

Behind this summit frenzy are fears of a possible break-up of the European Union and an escalation of working class resistance to mass unemployment and growing poverty.

Latin America

Argentina Unlikely to Pay Back Paris Club During Global Slump

Argentina is unlikely to pay back $6.7 billion of defaulted debt owed to Paris Club creditors until the global recession shows signs of easing, a government official said.

It would be a mistake to drain the country's foreign reserves to pay back the debt amid the global credit crisis, said the official, who declined to be identified in accordance with government policy. He said the government is comfortable with its current foreign reserve level of $47.1 billion.

Argentina continues to negotiate with the Paris Club, an informal association of creditors that includes the U.S., Germany, Italy and Japan, the official said.

President Cristina Fernandez de Kirchner had said on Sept. 2 that the government would tap central bank reserves to pay off the Paris Club, a move that would help companies obtain financing as growth falters in South America's second-biggest economy.