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IMF: Global Losses Could Surpass $4 Trillion By End Of 2010

From Reuters UK this afternoon:

The economic crisis may be at its worst now and a recovery could follow unless downside risks materialise, euro zone countries are likely to tell a Group of Seven meeting on Friday, a G7 source said.

Yep. Things are looking up for the global financial system. Or, at least, that’s what we’re told. From Bloomberg’s Timothy Homan today:

Worldwide losses tied to distressed loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions, the International Monetary Fund said.

Banks will shoulder about 61 percent of the writedowns, with insurers, pension funds and other nonbanks assuming the rest, the Washington-based lender said in a report released today on the state of the global financial system. The fund forecast $2.7 trillion in losses from U.S.-originated loans and assets, compared to its estimates of $2.2 trillion in January and $1.4 trillion in October…

The $4.1 trillion estimate is the first by the IMF to include loans and securities originating in Europe and Japan.

Bloomberg Television reported elsewhere today that global financial institutions have suffered writedowns and credit losses exceeding $1.3 trillion since a credit crunch began in mid-2007.

The IMF report follows one issued by JPMorgan Chase analysts last Friday that warned banks are looking at $400 billion more in losses. From Bloomberg’s Jody Shenn yesterday:

Banks are likely to realize about $400 billion more in losses on soured assets, requiring further injections of government capital, JPMorgan Chase & Co. said. Banks will need to set aside about $215 billion more in reserves against their holdings of $2.1 trillion of U.S. home loans that haven’t been packaged into securities, mortgage-bond analysts led by Matthew Jozoff in New York wrote in a report dated April 17.

A surge in defaults on subprime mortgages that began in 2006 escalated a U.S. housing slump, leading to a global economic downturn. Banks worldwide have taken writedowns and losses of $920 billion so far, compared with $900 billion of capital raised, the analysts wrote.

Sources:

“UPADTE 1-Euro zone to tell G7 econ may be at bottom –source”
Jan Strupczewski
Reuters UK, April 21, 2009

“IMF Says Losses From Crisis May Hit $4.1 Trillion (Update1)”
Timothy R. Homan
Bloomberg, April 21, 2009

“Banks Face $400 Billion More in Losses, JPMorgan Says (Update1)”
Jody Shenn
Bloomberg, April 20, 2009

Iranian Nukes: A Real National Security Test

These days I find myself wondering if the “cruise missile diplomacy” of the Clinton years is back again. From the Associated Press’ Jennifer Loven yesterday:

The U.S. economy is showing only glimmers of life and two costly wars remain in the balance, but President Barack Obama’s “no drama” handling of the Indian Ocean hostage crisis proved a big win for his administration in one of its first critical national security tests.

Obama’s two quiet backstage decisions to authorize the Defense Department to take necessary action if Capt. Richard Phillips’ life was in imminent danger gave a Navy commander the go ahead to order snipers to fire on the pirates holding the cargo ship captain at gunpoint.

For Obama, the benefits were instantly clear: an American life saved and a major victory notched against an increasingly worrisome scourge of the seas off the Horn of Africa.

Folks, this…

The brave Captain Jack Sparrow

…is not a “critical national security test.” Scourge of the seas off the Horn of Africa, perhaps, but no “critical” threat to our nation’s security.

On the other hand, this…

Enriched uranium

…could turn a good chunk of American real estate into a radioactive parking lot.

From Ewen MacAskill of the Guardian (UK) today:

The US and Europe are preparing to make a major concession to Iran to end the nuclear stalemate, according to American and European sources today.

In what amounts to a major policy shift, the Obama administration is set to drop a precondition for the start of negotiations on the nuclear issue – that Iran first suspend its uranium enrichment process.

The precondition has been the biggest stumbling block in efforts over the last few years to open talks. The Bush administration insisted upon it but Tehran adamantly refused.

An announcement is imminent of a location and date for the first direct talks between the US – alongside Europe – with Iran on the nuclear issue…

US and European sources said today that dropping the precondition was one of a number of ideas being discussed in private. But they hinted that it was likely to happen…

The concession means Iran would be able to continue with uranium enrichment, an essential part of achieving a weapons capability but which also has a civilian purpose, while talks got underway.

Here’s something our government officials might want to keep in mind. The top nuclear terrorism experts in the world today believe there’s a 30 percent chance of a nuclear detonation in an American city within the next decade. Graham T. Allison, the Director of the Belfer Center for Science and International Affairs at Harvard University and author of Nuclear Terrorism: The Ultimate Preventable Catastrophe, says the probability of a nuclear strike against a U.S. city is closer to 50 percent.

Seeing that Iran is not exactly one of our pals in the Middle East, if it ever becomes capable of producing nuclear weapons, don’t think for a second that the local Uncle Sam-haters won’t be knocking on their door asking if they could spare a nuke. After all, how does that old Arabian proverb go?

The enemy of my enemy is my friend.

Talk about a real national security test.

Sources:

“Analysis: Obama beats first national security test”
Jennifer Loven
Associated Press, April 13, 2009

“Obama to drop uranium precondition for Iran nuclear talks”
Ewen MacAskill
Guardian (UK), April 14, 2009

From Robin Hoods To Burnin’ Hoods

Back in the late nineties, a few of my buddies from college moved into an up-and-coming neighborhood of Chicago that was still kind of sketchy in terms of crime. I remember how one friend drove an old beat-up Ford Escort and used to park it overnight on the street. One day I told him, “Hey, you guys live in a pretty cool neighborhood, but I’d be afraid to leave my car on the street overnight.” He replied, “Yeah, my car’s already been broken into a couple of times.” I asked, “Wow, did they take anything?” He responded, “No, but they’ve rummaged through there. I don’t keep anything of value in there anyway. Besides, someone actually felt sorry for me and left some money on the driver’s seat. Pretty sad when even criminals are telling me I should get a new set of wheels, right?”

While here we have some twisted Robin Hood-esque story, in Germany it’s burning hoods that’s making the headlines. I happened to come across a Bloomberg piece by Brett Neely last week about a growing destructive trend taking place in that country. Neely wrote:

When Berlin resident Simone Klostermann returned from vacation and couldn’t find her Mercedes SLK, she thought it had been towed. Police told her the 35,000- euro ($45,000) car had been torched.

“They’d squirted something flammable into the car’s engine block in the gap between the windshield and the hood,” said Klostermann. “The engine was completely destroyed.”

The 34-year-old’s experience isn’t unique in the German capital. At least 29 vehicles were destroyed in arson attacks this year, most of them luxury cars, according to police. The number is already about 30 percent of the total for 2008. The latest to go up in flames was a Porsche, on Feb. 14, two days after a Mercedes was set alight in a public car park.

While youths in Athens protest by throwing Molotov cocktails, in Paris by toppling barricades, and in Budapest by hurling eggs at politicians, protesters in Berlin rage at their economic plight by targeting the most expensive cars — symbols of German wealth and power.

A group calling itself BMW — the initials stand for Movement for Militant Resistance in German – has claimed responsibility for several attacks in left-wing magazines and Web sites, police spokesman Bernhard Schodrowski said…

The worst recession since World War II is fueling anger among youths across Europe who “perceive their future as rather precarious,” said Margit Mayer, a politics professor at Berlin’s Free University.

“Whether you look at the Berlin events or these anarchist groups in other European cities and countries, they are all making reference to the deepening economic crisis and how the various governments are dealing with them,” said Mayer, a specialist in urban social and protest movements.

Some groups are “very quick to attack whoever they can make out as responsible for having robbed them of decent life prospects,” according to Mayer.

In this case, those they perceive as being wealthy, it seems. Neely added:

Likewise, arson attacks on cars are not new: a Web site, “Burning Cars,” was set up to track the incidents in May 2007, one month before a summit in the northern German resort of Heiligendamm of the Group of Eight industrialized nations. There have been 290 attacks on cars since then, among them 55 Mercedes and 29 BMWs damaged or destroyed by fire, the site records.

“I wouldn’t advise someone to park their Porsche on the street” in Kreuzberg, Berlin police commissioner Dieter Glietsch told the Taz newspaper in June last year.

By the way, we have a word for these guys here in the Windy City. They’re called “playa-haters.”

Source:

“Arsonists Torch Berlin Porsches, BMWs on Economic Woe (Update1)”
Brett Neely
Bloomberg, February 27, 2009

‘Bring On The Summer Of Rage’

Although the following comes from our neighbors across the pond, you might be able to identify with some of what’s being said. From Guardian (UK) columnist Charlie Brooker on March 2:

Any abusive relationship tends to end with a long, slow phase of mounting disappointment followed by a sudden, irreversible snapping point. The descent to rock bottom may take years but when you get there, the force of impact still shocks, and it’s precisely this shock that gives you the strength to walk away. Take smoking, for instance. You can light up for years, hating yourself and the habit a little bit more with each accumulated puff, yet remain hopelessly locked in nicotine’s pointless embrace, until one day you find yourself scrabbling through the kitchen bin, picking potato peelings off a dog end because it’s 11pm and the shops are closed and GOD YOU NEED A FAG . . . when you catch sight of your sorry junkie-arsed reflection in the shiny bin lid and undergo an epiphany of self-disgust, vowing to quit there and then.

I bring this up because I suspect that across the country, people are undergoing similar epiphanies every day. Not about cigarettes, but politicians. My personal snapping point was reached last week, at the precise moment Jack Straw announced the government was vetoing the Information Tribunal’s order for the release of cabinet minutes relating to that whole invasion-of-Iraq thing. Come on, you remember Iraq: that little foreign policy blip millions of us protested against to absolutely zero avail, because Straw and his pals figured they knew best, even though it turned out they didn’t and – oops! – hundreds of thousands of lives were lost as a result. Remember the footage of that screaming little boy with his limbs blown off? Maybe not. Maybe you felt a shiver of guilt when you saw that; guilt that you hadn’t personally done enough to prevent it; should’ve shouted louder, marched further. Or maybe it stunned you into numbness. Because what was the point in protesting any more? These people do what they want.

They do what they want, these people, and you and I are cut out of the conversation. I’m sure they’re dimly aware we still exist. They must spot us occasionally, through the window, jumping up and down in the cold with our funny placards . . . although come to think of it, they can’t even see us through the window, since they banned peaceful
protest within a mile of Parliament.

Instead they pick us up on a monitor, courtesy of one of the 15bn CCTV cameras that scrutinise our every move in the name of security. On the screen you’re nothing but a tiny monochrome blob; two-dimensional and faceless. And that’s just how they like it.

Straw and co blocked the release of the minutes, claiming that to actually let us know what was going on would set a dangerous precedent that would harm good government. Ministers wouldn’t speak frankly at cabinet meetings if they felt their discussions would be subjected to the sort of scrutiny that, say, our every waking move is. In other words, they’d be more worried about the press coverage they’d get than the strength of their arguments.

Well, boo hoo. Surely craven pussies like that shouldn’t be governing anyway?

Having pissed in the public’s face, Straw went on to shake the final drips down its nose, writing a defence of the government’s civil liberties record in this paper in which he claimed “talk of Britain sliding into a police state is daft scaremongering, but even were it true there is a mechanism to prevent it – democratic elections . . .

People have the power to vote out administrations which they believe are heavy- handed.” Thanks, Jacksy – can I call you Jacksy? – but who the hell are we supposed to vote in? Despite a bit of grumbling, the Tories supported the veto. Because they wouldn’t want cabinet minutes published either.

It’s all over. The politicians have finally shut us out of their game for good and we have nowhere left to turn. We’re not part of their world any more. We don’t even speak the same language. We’re the ants in their garden. The bacteria in their stools. They have nothing but contempt for us. They snivel and lie and duck questions on torture – on torture, for Christ’s sake – while demanding we respect their authority. They monitor our every belch and fart, and insist it’s all for our own good.

Straw wrote, “If people were angels there would be no need for government . . . But sadly people are not all angels.” That rather makes it sound as though he believes politicians aren’t mere people. Maybe they’re the gods of Olympus. Maybe that’s why they’re in charge.

Thing is, they could get away with this bullshit while times were good, while people were comfortable enough to ignore what was happening; when people were focusing on plasma TVs and iPods and celebrity gossip instead of what the politicians were doing – not because they’re stupid, but because they know a closed shop when they see one. But now it looks as if those times are at an end, and more and more of us are pulling the dreampipes from the back of our skulls, undergoing a negative epiphany; blinking into the cold light of day.

Consequently the police are preparing for a “summer of rage”. To the powers that be, that probably just means more tiny monochrome blobs jumping up and down on the long-distance monitor for their amusement. Should it turn out to be more visceral than that, they’ll have no one to blame but themselves.

Think MI5 (the British counter-intelligence and security agency) doesn’t have this guy on their radar?

Think he even cares?

Remember remember the 5th of November

Source:

“To politicians, we’re little more than meaningless blobs on a monitor. Bring on the summer of rage”
Charlie Brooker
The Guardian (UK), March 2, 2009

Nouriel Roubini: Banking System Could Face Insolvency

More scary predictions about potential U.S. financial losses today from “Doctor Doom” Nouriel Roubini, a former Treasury Department director under the Clinton administration and head of Roubini Global Economics in New York. Bloomberg’s Ayesha Daya and Henry Meyer wrote today:

U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Referring to the recent reports of fourth-quarter losses at Bank of America Corp. ($1.79 billion) and Citigroup Inc. ($8.29 billion), Roubini added:

The problems of Citi, Bank of America and others suggest the system is bankrupt… In Europe, it’s the same thing.

According to Bloomberg, losses and write-downs at financial companies worldwide have surpassed $1 trillion since the collapse of the U.S. sub-prime mortgage market in 2007.

Source:

“Roubini Predicts U.S. Losses May Reach $3.6 Trillion (Update1)”
Ayesha Daya, Henry Meyer
Bloomberg, January 20, 2009

Strong Dollar From Economic Misery?

David Gaffen from the Wall Street Journal offered his two cents today as to the reason behind renewed U.S. dollar strength. From his post in the MarketBeat blog:

It seems ironic that the lousy U.S. economy could be underlying strength in the U.S. dollar, but that’s what seems to be happening. The euro fell to $1.3192 from $1.3378, and the dollar also managed a bit of strength against the yen, though the gains were more modest owing to the yen’s strength around the world. Win Thin, currency strategy at Brown Brothers Harriman, says the dollar may be benefiting from a bit of “first in, first out” analysis, as investors presume that the aggressive display of monetary policy easings in the U.S. will help the world’s largest economy climb out of its malaise faster than others. “In December emerging markets rallied strongly, but I think the poor data last week out of the U.S. reminded everyone that the global economy is in pretty bad shape,” says Mr. Thin. Further appreciation of the dollar could be in store by Thursday, when the European Central Bank holds its meeting on monetary policy. Anything less than a rate reduction of a half-point would likely boost the dollar, Mr. Thin says, as it would be viewed as a disappointment.

According to this logic, I guess I’ll start praying for economic hardship to befall the United States before anyone else. Better to get it over with, right?

FREE VIDEO: How to make money in the Forex markets

Source:

“Four at Four: Bank of Whatever”
David Gaffen
Wall Street Journal (MarketBeat blog), January 13, 2009

Jim Cramer Says U.S. Will Not Have Another Great Depression

Ever notice CNBC television personality Jim Cramer is big on making bold statements? From CNBC’s web editor Tom Brennan yesterday:

“Enough with the hysteria,” Cramer said during Tuesday’s Mad Money, we’re not going to suffer another Great Depression.

Sure, there are plenty of things to worry about: We need the European Central Bank and the Bank of England to make big interest-rate cuts. Friday’s unemployment number should be dreary. And jobless homeowners equal more foreclosures. Commercial real estate, too, is a problem. There’s also a weak China, which has all but disappeared since the Olympics. But we’re nowhere near the devastation seen 75 or more years ago.

There’s no 33% unemployment nor are we in danger of massive bank failures. Housing prices have fallen far enough to, in addition to the decline in building permits, signal a bottom by June 30 of next year, which is what Cramer’s been saying all along. Washington has taken the necessary steps to save our financial system, most recently with Citigroup, hopefully the model going forward. And with Fannie and Freddie , AIG , Lehman Brothers, Wachovia and Washington Mutual all taken care of in one way or another, so there probably are no more surprises to be had.

Another thing to keep in mind: We still have the safeguards put in place as part of the New Deal the prevent another Great Depression, like the FDIC, Social Security, unemployment insurance and the Federal Housing Authority.

So forget all the talk you’ve been hearing lately. If these talking heads wanted to worry about a Great Depression, they should have followed Cramer’s lead a few thousand Dow points ago. There are things to be concerned with – the ECB, China, etc. – but we’re not in the dire straights we were before.

What lead is that? Telling “Mad Money” viewers on July 29 that the stock market bottomed July 15, with the Dow Jones Industrial Average at 10,962.54 and the S&P 500 at 1,214.91? After all, it WAS a few thousand Dow points ago.

Source:

“Cramer’s Problem With Doom and Gloom”
Tom Brennan
CNBC, December 2, 2008

Financial Professionals Look Overseas For Jobs

Coming as no surprise to anyone following the latest financial developments, the search for financial jobs is shifting away from Wall Street as the domestic job market for financial professionals continues to sour. From the Wall Street Journal’s Dana Mattioli earlier in the week:

The Wall Street meltdown has already left tens of thousands of American financial professionals unemployed, and thousands more may face the same fate. The crisis, a weak economy and increased competition for available jobs are sending some professionals running for the border.

Executive recruiters say more professionals, especially those in finance, have been inquiring about opportunities outside the U.S. in the past few months. Some undergraduate finance and M.B.A. students are refocusing their job searches from Wall Street to overseas. And it’s not just the typical globetrotter — the young and unattached — looking for work outside the U.S. In a number of cases, people with families say they are willing to uproot the entire clan for the sake of job stability.

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Mattioli noted that financial job opportunities abroad seem to be holding up. She wrote:

Although non-U.S. markets are suffering as a result of the spreading credit crisis, the financial job market elsewhere hasn’t been damaged as severely as it has been in New York and other U.S. financial hubs. American employers cut 159,000 jobs in September alone, and that figure doesn’t take into account the newest wave of job losses on Wall Street.

Recruiters say that although many major markets are facing similar fates to the U.S., job opportunities for finance professionals in Asia, the Middle East and Central and Eastern Europe still abound.

If I were one of these job seekers, I’d be on my hands and knees praying right now that the theory of decoupling holds water.

Madness, “Night Boat To Cairo” (1979)
YouTube Video Link

Source:

“More Americans Vault Overseas to Search for Jobs”
Dana Mattioli
Wall Street Journal, October 14, 2008

The Week Of Financial Crisis

Now that it’s Monday morning, when I look back at the financial chaos that took place last week, one term in particular comes to mind…

“Hell in a handbasket”

And Dr. Prieur du Plessis, the chairman and principal holder of South African-based Plexus Asset Management, best summed up the week of financial crisis in Market Oracle (UK) yesterday when he wrote:

Whew – what a wild week! Global stock markets and commodities tumbled, whereas government bonds and the US dollar surged amid mounting fears that the ongoing turmoil in financial markets was foreshadowing a hard landing for the US and Europe.

The first-ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came on Monday in the wake of the US House of Representatives failing to gather enough votes to pass the $700 billion bank rescue package. Globally, more than $1.7 trillion got wiped off the MSCI World Index.

Considering the entire history of the Dow Jones Industrial Average since 1896, Monday’s decline of 777 points ranked as the largest points decline in history (see post “Fear Grips Global Markets”). However, and let’s be thankful for small mercies, the percentage decrease of 6.98% was still significantly less than 1987’s 22.61% decline.

Although the Senate’s passing of the bailout plan on Wednesday brought temporary relief, the reversal on Friday of the House’s earlier decision brought more volatility. In classic “buy on the rumor, sell on the news” fashion, the Dow Jones Industrial Index rallied by 3.0% leading up to the vote, but then sold off by a massive 486 points (4.5%) to end 1.5% down on the day and 7.3% lower on the week.

Already, this week is off to a bang-up start. As I type this, the Dow is off over 400 points this morning, while in Europe, the pan-European Dow Jones Stoxx 600 index posted its biggest one-day percentage loss ever on Monday (according to preliminary data). The index fell 7.6% to 241.57, surpassing the 6.21% fall recorded back on September 11, 2001.

Source:

“Fear Grips Stock Markets as Economies Tip Into Recession”
Prieur du Plessis
Market Oracle (UK), October 5, 2008

U.S. Economy Headed Towards Doom And Gloom?

This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:

An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.

Burton talked about Gundlach’s credentials for making such statements. He wrote:

As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.

The MarketWatch reporter noted:

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”

Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

In other words, $1 to $2 trillion. Rogoff continued:

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…

The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

A new banana republic?

Sources:

“The worst is yet to come”
Jonathan Burton
MarketWatch, September 18, 2008

“America will need a $1,000bn bail-out”
Kenneth Rogoff
Financial Times (UK), September 17, 2008

U.S., Europe Headed Towards Another Depression?

For some, warnings of a U.S. economic slowdown go beyond a recession. From the CNBC website this morning:

The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Hong Kong-based Tyche, told CNBC on Thursday.

“We expect a depression in the United States. We expect a depression, very possibly, also in Europe,” Hennecke said on “Worldwide Exchange.”

Hennecke, who previously worked as an investment adviser at Hong Kong’s Bridgewater Ltd. and is a frequent guest on CNBC and Bloomberg Television, explained:

The estimated $300 billion cost of the Fannie/Freddie bailout will probably be considered as a loss that the government will have to take, therefore passing it on to taxpayers, he explained.

“We already have $3 trillion of debt, as far as the U.S. government is concerned. These debt figures across the U.S. economy are rising very sharply.”

When the government can no longer pass the United States’ “immense debt” on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

“Definitely, it (the dollar) is not a safe place to be invested in, as real inflation is closer to 10 or 11 percent than the actual inflation numbers given by the U.S. government,” Hennecke said on “Worldwide Exchange”.

“Better than Charmin?”

Source:

“Bailouts Will Push US into Depression: Manager”
CNBC, September 11, 2008

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World’s Richest Nation? Not The United States

U-S-A! We’re number one! Not really, according to PARADE magazine’s IntelligenceReport. From the August 17 issue:

Despite what the Presidential candidates are saying, America is not the world’s richest nation. If you run the numbers, Switzerland has a higher median household income ($62,000, compared with our $48,000). And, at $44,000, our per capita GDP (the amount of national income generated per citizen) has fallen to third: The tiny nation of Luxembourg leads the way, with $78,000; Norway is second, with $52,000. Last year, the number of millionaires in China, Russia, and India grew faster than in the U.S.

Income inequality also is greater in the U.S. than in other developed nations, and some economists believe that makes us more vulnerable to hitting the skids than the rest of the world. “Low-wealth children are unlikely to become high-wealth adults, while high-wealth children are very likely to become high-wealth adults,” says Dalton Conley of the Center for American Progress, a Washington think tank. “That should sound alarms for policymakers.”

Source: HeavyWhimsy.com

Source:

“The World’s Richest Nation?”
PARADE (IntelligenceReport), August 17, 2008

Goldman Sachs: Half The World’s Economy Threatened By Recession

Talk about an attention-grabber. Yesterday, Bloomberg’s Simon Kennedy wrote:

Goldman Sachs Group Inc. said countries that account for half of the world’s economy face a recession a year after the credit crisis began.

The U.S., Japan, the 15-nation euro area and the U.K. are “either in recession or face significant recession risks in the months ahead,” Goldman’s London-based international economist Binit Patel said in a report to clients today…

“Continued robust, albeit slowing, growth in China and the rest of the emerging markets” will deliver world growth of 3.6 percent next year after 3.9 percent in 2008, said Patel, who estimates emerging markets account for the other 50 percent of the world economy.

Bloomberg’s Kennedy added:

A year since the U.S. housing slump sparked about $500 billion in credit market losses for banks globally, the world’s largest economies are all stumbling as rising borrowing costs combine with record commodity prices to sap growth. The U.S. is close to a recession and France, Germany and Japan all contracted in the second quarter.

“And The Winners Are…”

Source:

“Goldman Sachs Says Half of the World Economy Faces Recession”
Simon Kennedy
Bloomberg, August 21, 2008

Former Top IMF Economist Predicts Large U.S. Bank Failures

When it comes to the credit and banking crisis here in the United States— you ain’t seen nothing yet. That’s according to a former chief economist of the International Monetary Fund. Bloomberg’s Shamim Adam wrote yesterday:

Credit market turmoil has driven the U.S. into a recession and may topple some of the nation’s biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

“The worst is yet to come in the U.S.,” Rogoff, a Harvard University professor of economics, said in an interview in Singapore today. “The financial sector needs to shrink; I don’t think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.”…

“Like any shrinking industries, we are going to see the exit of some major players,” Rogoff told Bloomberg, declining to name the banks he expects to fail. “We’re really going to see a consolidation even among the major investment banks.”

The Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University pointed out that bank failures might not be all that bad of a thing. Adam wrote:

“The only way to put discipline into the system is to allow some companies to go bust,” Rogoff said. “You can’t just have an industry where they make giant profits or they get bailed out.”

Rogoff noted that the credit crunch and banking crisis is taking place during an economic recession and a major housing slump. From the Bloomberg piece:

The world’s largest economy is already in a recession, and the housing market will continue to deteriorate, Rogoff said. The U.S. slowdown will last into the second half of next year, he said, predicting a faster recovery in Europe and Asia.

Source:

“Large U.S. Banks May Fail Amid Recession, Rogoff Says (Update5)”
Shamim Adam
Bloomberg, August 19, 2008