Here is a somewhat more easily understandable round -up of the global
aspects. Together with two items worth noting.
You'll note that the big news of the attempt to isolate the tocic
assets of the banks barely gets a mention in A.E-P's essay, because
it is globally only one small corner of a filthy hovel.
xxxxxxxxx cs
===============================
SUNDAY TELEGRAPH 1.3.09
We need shock and awe policies to halt depression
Ambrose Evans-Pritchard
As ordinary citizens with no power over the levers of policy, we
watch from the sidelines, and weep. The whole global economy has
tipped into a downward spiral. Trade and output are contracting at
rates that outstrip the leisurely depression of the 1930s. Debt
deflation has simply washed over the drastic measures taken by
governments everywhere.
Judging by the latest Merrill Lynch survey of fund managers,
investors have a touching faith that China is going to rescue us all
and re-ignite the commodity boom. How can this be? Taiwan's exports
to China fell 55pc in January, Japan's fell 45pc. These exports are
links in the supply chain for China's industry. Manufacturing output
in the Shanghai region fell 12pc in January.
My favourite China guru, Michael Pettis from Beijing University, is
in despair - as you can see on his blog (http://mpettis.com). The
property bubble is bursting. Developers have built more offices in
Beijing since 2006 than the entire stock in Manhattan. There is a 14-
year supply glut. We have seen this movie before.
Factory output is collapsing at the fastest pace everywhere. The
figures for the most recent month available are, year-on-year: Taiwan
(-43pc), Ukraine (-34pc), Japan (-30pc), Singapore (-29pc), Hungary
(-23pc), Sweden (-20pc), Korea (-19pc), Turkey (-18pc), Russia
(-16pc), Spain (-15pc), Poland (-15pc), Brazil (-15pc), Italy
(-14pc), Germany (-12pc), France (-11pc), US (-10pc) and Britain
(-9pc). Norway sails blissfully on (+4pc). What do they drink up
there? [GAS in a cold winter! -cs]
This terrifying fall has been concentrated in the last five months.
The job slaughter has barely begun. Social mayhem comes with a 12-
month lag. By comparison, industrial output in core-Europe fell 2.8pc
in 1930, 5.1pc in 1931 and 3.9pc in 1932, according to RBS.
Stephen Lewis, from Monument Securities, says we have been lulled
into a false sense of security by the lack of "soup kitchens". The
visual cues from Steinbeck's America are missing. "The temptation for
investors is to see this as just another recession, over by the end
of the year. But this is not a normal cycle. It is a cataclysmic
structural breakdown," he said.
Fiscal stimulus is reaching its global limits. The lowest interest
rates in history are failing to gain traction. The Fed seems
paralyzed. It first talked of buying US Treasuries three months ago,
but cannot seem to bring itself to hit the nuclear button.
As the Fed dithers, a flood of bond issues from the US Treasury is
swamping the debt market. The yield on 10-year Treasuries has climbed
from 2pc to 3.04pc in eight weeks. The real cost of money is rising
as deflation gathers pace.
US house prices have fallen 27pc (Case-Shiller index). The pace of
descent is accelerating. The 2.2pc fall in December was the worst
month ever. January looks just as bad. Delinquenc-ies on prime
mortgages were 1.72pc in September, 1.89pc in October, 2.13pc on
November and 2.42pc in December. This is the trajectory eating away
at the banking system.
Graham Turner, from GFC Economics, fears the Dow could crash to 4,000
by summer unless there is a "quantum reduction" in mortgage rates.
The Fed should swoop in to the market - armed with Ben Bernanke's
"printing press" - and mop up enough Treasuries to force 10-year
yields down to 1pc and mortgage rates to 2.5pc. Monetary shock and awe.
This remedy is fraught with risk, but all options are ghastly at this
point. That is the legacy we have been left by the Greenspan
doctrine. We are at the moment of extreme danger in Irving Fisher's
"Debt Deflation Theory" (1933) where the ship fails to right itself
by natural buoyancy, and capsizes instead.
From all accounts, the Fed was ready to launch its bond blitz in
January. Something happened. Perhaps the hawks awoke in cold sweats
at night, fretting about Weimar.
Perhaps they feared that China and the world will pull the plug on
the US bond market. If so, it is time for Washington to get a grip.
America remains the hegemonic global power. The Obama team should let
it be known - and perhaps Hillary Clinton did just that on her trip
to Asia - that any country playing games with the US bond market in
this crisis will be treated as an enemy and pay a crushing price.
Pacific allies already know that they cannot take the US security
blanket for granted. As for China - and others pursuing a
mercantilist strategy of export-led growth - they must know that the
US can shut off its market and wreak havoc to their economy.
To Europe, they might make it clearer that unless the European
Central Bank is brought to heel by the Continent's leaders (whatever
Maastricht says) and forced to play its full part in emergency
efforts to save the global economy, the NATO military alliance will
wither and the region will be left to fend for itself against a
revanchist Russia.
Should the main threat come from an exodus of private wealth,
Washington may have to impose temporary capital controls. Never
forget, America is the one country with enough strategic depth to go
it alone, if necessary. The US is not going to let foreigners keep it
trapped in a depression.
I doubt matters will ever come to this. Japan is already in dire
straits. Exports crashed 46pc in January, year-on-year. The Bank of
Japan may soon start buying US Treasuries for its own reasons - just
as it did from 2003 to 2004 - in order to reverse the 30pc rise of
the yen over the last 18 months. If it helps preserve the Sino-US
defence alliance in the face of Chinese naval expansion, so much the
better.
In any case, the storm has shifted across the Atlantic to Europe.
Germany faces 5pc contraction this year (Deutsche Bank). The bill has
come from the burst bubble in the ex-Soviet bloc. Europe's banks are
on the hook for $1.6 trillion (£1.1 trillion). For the first time
since the launch of monetary union, Europe's leaders are speaking
openly about the risk of EMU break-up.
A run on the US dollar looks a remote threat as the euro drama
unfolds. The Fed may soon have all the room for manoeuvre it needs.
Small comfort.
==============
2. Right, not bonkers
Liam Halligan
Last week I asked you whether I was bonkers - having been so labelled
on BBC Radio 4's Today programme.
For months I've argued that the fear of deflation is simply an Aunt
Sally - an excuse to nail interest rates to the floor - and that the
threat of inflation is a far greater danger.
I've warned that reckless state borrowing could cause a "gilts
strike" - in which no one wants UK Treasury bills -that would drive
us into the arms of the International Monetary Fund.
And I've banged on that banks must be forced to fully disclose all
potential sub-prime liabilities - or the inter-bank market will
remain stuck.
My stark warnings have attracted criticism. But I now know that I'm
not bonkers - because of hundreds of readers' emails urging me to
"keep telling it as it is".
Moreover, now the taboo has been broken, and the scenarios I've
outlined are being discussed, the insanity of our current policy
consensus is being laid bare.
Last week ratings agencies argued that deflationary pressures are
"retreating". Columnists in international newspapers now admit it's
"high time" the banks "fessed up". And the Government's own Audit
Commission has just bravely pointed to the "distinct possibility .
there will be insufficient lenders to match planned levels of
borrowing".
Tories take note. The truth will out. So why not get ahead of the curve?
==============AND -------->
3.Taking the lead on pensions
Mark Kleinman
Following Lord Turner's withering criticism last week of banking
regulation over much of the last decade, will the former Chancellor,
who oversaw the establishment of this regulatory architecture, be
making a "gesture" and offering to relinquish part of his pension
entitlement when he retires?
Following Lord Turner's withering criticism last week of banking
regulation over much of the last decade, will the former Chancellor,
who oversaw the establishment of this regulatory architecture, be
making a "gesture" and offering to relinquish part of his pension
entitlement when he retires?
[He's been the shrillest critic -cs]
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