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Saturday 29 November 2008
Deflation may return to Japan and spreading to other countries as we head toward zero interest rate scenario
His advice to investors: “Stay away from commodities currencies, look for record low interest rates around the world, and get set for flatter yield curves.”
Deflation may return to Japan and spreading to other countries as we head toward zero interest rate scenario
Bloomberg 27 November 2008
Deflation is destined to make an untimely return to Japan. The second-biggest economy faces the most acute threat of falling prices among industrialized nations, the Organization for Economic Cooperation and Development said on Nov. 25. Sound gloomy? The OECD may be overly optimistic to think deflation won’t re-emerge until the second half of 2009.
Things aren’t as dire as they seem. In fact, a return of deflation may offer benefits to Japan’s outlook. That also could go for other developed nations experiencing mild price drops.
Deflation was the unheralded catalyst behind the restructuring that fuelled Japan’s longest post-war recovery. Officials in Tokyo have been quick to blame the U.S. credit crisis for Japan’s recession. An explanation that deserves equal weight is that the positive side effects of deflation didn’t have enough time to assert themselves. It’s true that falling prices are rarely, if ever, good for the broader economy. They are a nightmare for debt holders and property owners. They can hurt corporate profits, cut wages and eat into government tax revenue.
Yet Japan benefited from deflation in two ways. First, it offered a kind of stealth tax cut for consumers, who gained more purchasing power between the late 1990s and mid 2000s. Second, it forced major change in the bloated, inefficient economy.
China’s rise was among the forces that prompted Japanese executives once and for all to restructure. Companies streamlined a labyrinthine distribution system that involved many middlemen and inflated prices. Banks also realized in the early 2000s that they couldn’t grow their way to health. They stepped up efforts to dispose of bad loans.
There’s a reason, though, why Japan’s political and corporate establishments were so frightened by deflation and obsessed about ending it. It was an uncertain and destabilizing force they couldn’t control or understand.
Policy makers wasted several years acting as if deflation was the cause, not a symptom, of Japan’s malaise. It was more about a malfunctioning credit system and increased global competitiveness. Whether officials know it or not, Japan’s growth in recent years owes much to deflation.
The return of inflation, albeit mild price increases, in recent years prompted the popping of champagne corks from Tokyo to Washington. It also took pressure off the government to continue efforts to modernize the economy.
As deflation threatens to make a comeback, officials in Japan and elsewhere need not panic. The key is to keep the trend modest. Aggressive drops in consumer prices won’t help business or investment confidence. And they certainly wouldn’t bode well for stock markets.
Like it or not, falling prices are something with which governments around the globe will need to grapple. Hungary, Iceland, Ireland, Spain and Turkey will experience “severe” economic declines, many because of housing slumps that “still have a long way to go,” the OECD said. It added that deflation has become a greater risk than inflation.
Deflation in China is certainly a threat if the global crisis gets worse. In Japan, Taro Aso certainly won’t appreciate being remembered as the prime minister who oversaw the return of deflation. And yet he’s taking very doctrinaire steps to stabilize growth, like fiscal pump priming.
Lacking in Tokyo these past couple of years has been long- term planning to prepare for an aging population and boost entrepreneurship. The Bank of Japan also is reluctant to take more drastic steps to fight deflation – such as returning interest rates to zero from today’s 0.3 percent.
The return of deflation will make it harder to remove structural impediments to growth with lax monetary and fiscal policies or a weak currency. Such measures offer short-term gains at the expense of long-term prosperity.
The good news is that Japan’s deflation didn’t turn into the global nightmare the U.S. feared. In October 2002, for example, Nikkei English News reported that the Central Intelligence Agency was investigating the effects of Japan’s deflation. Now, of course, economists are left wondering if the U.S. is headed toward deflation.
Japan is the more immediate risk. The BOJ didn’t formally end its deflation-fighting policy of pumping extra cash into the economy until March 2006. It’s worth noting that it took record increases in oil and food prices to produce a bit of inflation.
Now, “there is a high probability that Japan’s economy will slip into deflation in the third quarter of 2009” as core consumer prices turn negative, says Kyohei Morita, chief economist at Barclays Capital in Tokyo. It could happen sooner if the global outlook turns even gloomier in the months ahead. While not good news for Japan’s leaders, history shows that may not be the disaster it seems.
What about risk spreading to China?
The slump in commodity prices suggests China may find itself battling deflation, according to Stephen Koukoulas, the London-based head of global foreign exchange and fixed-income strategy at TD Securities.
“The commodity price cycle is a very good leading indicator for Chinese inflation,” Koukoulas wrote in a research note this week. “In less than six months, the inflation problem and ongoing over-heating of the Chinese economy has turned to a strong probability of a deflation problem.”
Chinese consumer prices have tracked changes in commodity prices in the past decade, suggesting the 44 percent slump in the RJ/CRB commodity index in the past six months may augur a slowdown in China’s inflation from its current 4 percent level.
“If China enters a period of flat or falling domestic prices and finds that it is stuck with unwelcome inventories, the world will likely see further commodity price falls, it could be flooded with cheap goods and an already worrying outlook for deflation could intensify,” Koukoulas wrote.
His advice to investors: “Stay away from commodities currencies, look for record low interest rates around the world, and get set for flatter yield curves.”
Deflation could be the next word to watch for closely amid the financial crisis.
The federal government committed an additional $800 billion to two new loan programs on Tuesday, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 trillion, according to Bloomberg News.
That sum represents almost 60 percent of the nation's estimated gross domestic product.
Given the unprecedented size and complexity of these programs and the fact that many have never been tried before, it's impossible to predict how much they will cost taxpayers. The final cost won't be known for many years.
The money has been committed to a wide array of programs, including loans and loan guarantees, asset purchases, equity investments in financial companies, tax breaks for banks, help for struggling homeowners and a currency stabilization fund.
Most of the money, about $5.5 trillion, comes from the Federal Reserve, which as an independent entity does not need congressional approval to lend money to banks or, in "unusual and exigent circumstances," to other financial institutions.
To stimulate lending, the Fed said on Tuesday it will purchase up to $600 billion in mortgage debt issued or backed by Fannie Mae, Freddie Mac and government housing agencies. It also will lend up to $200 billion to holders of securities backed by consumer and small-business loans. All but $20 billion of that $800 billion represents new commitments, a Fed spokeswoman said.
About $1.1 trillion of the $8.5 trillion is coming from the Treasury Department, including $700 billion approved by Congress in dramatic fashion under the Troubled Asset Relief Program.
The rest of the commitments are coming from the Federal Deposit Insurance Corp. and the Federal Housing Administration.
Only about $3.2 trillion of the $8.5 trillion has been tapped so far, according to Bloomberg. Some of it might never be.
Relatively little of the money represents direct outlays of cash with no strings attached, such as the $168 billion in stimulus checks mailed last spring.
Where it's going
Most of the money is going into loans or loan guarantees, asset purchases or stock investments on which the government could see some return.
"If the economy were to miraculously recover, the taxpayer could make money. That's not my best guess or even a likely scenario," but it's not inconceivable, says Anil Kashyap, a professor at the University of Chicago's Booth School of Business.
The risk/reward ratio for taxpayers varies greatly from program to program.
For example, the first deal the government made when it bailed out insurance giant AIG had little risk and a lot of potential upside for taxpayers, Kashyap said. "Then it turned out the situation (at AIG) was worse than realized, and the terms were so brutal (to AIG) that we had to renegotiate. Now we have given them a lot more credit on more generous terms."
Kashyap says the worst deal for taxpayers could be the Citigroup deal announced late Sunday. The government agreed to buy an additional $20 billion in preferred stock and absorb up to $249 billion in losses on troubled assets owned by Citi.
Given that Citigroup's entire market value on Friday was $20.5 billion, "instead of taking that $20 billion in preferred shares we could have bought the company," he says.
It's hard to say how much the overall rescue attempt will add to the annual deficit or the national debt because the government accounts for each program differently.
If the Treasury borrows money to finance a program, that money adds to the federal debt and must eventually be paid off, with interest, says Diane Lim Rogers, chief economist with the Concord Coalition, a nonpartisan group that aims to eliminate federal deficits.
The federal debt held by the public has risen to $6.4 trillion from $5.5 trillion at the end of August. (Total debt, including that owed to Social Security and other government agencies, stands at more than $10 trillion.)
However, a $1 billion increase in the federal debt does not necessarily increase the annual budget deficit by $1 billion because it is expected to be repaid over time, Rogers said.
Annual deficit
A deficit arises when the government's expenditures exceed its revenues in a particular year. Some estimate that the federal deficit will exceed $1 trillion this fiscal year as a result of the economic slowdown and efforts to revive it.
The Fed's activities to shore up the financial system do not show up directly on the federal budget, although they can have an impact. The Fed lends money from its own balance sheet or by essentially creating new money. It has been doing both this year.
The problem is, "if you print money all the time, the money becomes worth less," Rogers says. This usually leads to higher inflation and higher interest rates. The value of the dollar also falls because foreign investors become less willing to invest in the United States.
Today, interest rates are relatively low and the dollar has been mostly strengthening this year because U.S. Treasury securities "are still for the moment a very safe thing to be investing in because the financial market is so unstable," Rogers said. "Once we stabilize the stock market, people will not be so enamored of clutching onto Treasurys."
At that point, interest rates and inflation will rise. Increased borrowing by the Treasury will also put upward pressure on interest rates.
Deflation a big concern
Today, however, the Fed is more worried about deflation than inflation and is willing to flood the market with money if necessary to prevent an economic collapse.
Federal Reserve Chairman Ben Bernanke "has ordered the helicopters to get ready," said Axel Merk, president of Merk Investments. "The helicopters are hovering and the first cash is making it through the seams. Soon, a door may be opened."
Rogers says her biggest fear is not hyperinflation and the social unrest it could unleash. "I'm more worried about a lot of federal dollars being committed and not having much to show for it. My worst fear is we are leaving our children with a huge debt burden and not much left to pay it back."
Economic rescue
Key dates in the federal government's campaign to alleviate the economic crisis.
March 11: The Federal Reserve announces a rescue package to provide up to $200 billion in loans to banks and investment houses and let them put up risky mortgage-backed securities as collateral.
March 16: The Fed provides a $29 billion loan to JPMorgan Chase & Co. as part of its purchase of investment bank Bear Stearns.
July 30: President Bush signs a housing bill including $300 billion in new loan authority for the government to back cheaper mortgages for troubled homeowners.
Sept. 7: The Treasury takes over mortgage giants Fannie Mae and Freddie Mac, putting them into a conservatorship and pledging up to $200 billion to back their assets.
Sept. 16: The Fed injects $85 billion into the failing American International Group, one of the world's largest insurance companies.
Sept. 16: The Fed pumps $70 billion more into the nation's financial system to help ease credit stresses.
Sept. 19: The Treasury temporarily guarantees money market funds against losses up to $50 billion.
Oct. 3: President Bush signs the $700 billion economic bailout package. Treasury Secretary Henry Paulson says the money will be used to buy distressed mortgage-related securities from banks.
Oct. 6: The Fed increases a short-term loan program, saying it is boosting short-term lending to banks to $150 billion.
Oct. 7: The Fed says it will start buying unsecured short-term debt from companies, and says that up to $1.3 trillion of the debt may qualify for the program.
Oct. 8: The Fed agrees to lend AIG $37.8 billion more, bringing total to about $123 billion.
Oct. 14: The Treasury says it will use $250 billion of the $700 billion bailout to inject capital into the banks, with $125 billion provided to nine of the largest.
Oct. 14: The FDIC says it will temporarily guarantee up to a total of $1.4 trillion in loans between banks.
Oct. 21: The Fed says it will provide up to $540 billion in financing to provide liquidity for money market mutual funds.
Nov. 10: The Treasury and Fed replace the two loans provided to AIG with a $150 billion aid package that includes an infusion of $40 billion from the government's bailout fund.
Nov. 12: Paulson says the government will not buy distressed mortgage-related assets, but instead will concentrate on injecting capital into banks.
Nov. 17: Treasury says it has provided $33.6 billion in capital to another 21 banks. So far, the government has invested $158.6 billion in 30 banks.
Sunday: The Treasury says it will invest $20 billion in Citigroup Inc., on top of $25 billion provided Oct. 14. The Treasury, Fed and FDIC also pledge to backstop large losses Citigroup might absorb on $306 billion in real estate-related assets.
Tuesday: The Fed says it will purchase up to $600 billion more in mortgage-related assets and will lend up to $200 billion to the holders of securities backed by various types of consumer loans.
Citigroup says gold could rise above $2,000 next year as world unravels
Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup.
By Ambrose Evans-Pritchard 27 Nov 2008
The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.
This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.
"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.
"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.
"Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said.
"This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised."
"What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said.
Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said.
Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said.
Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.
Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.
The Fed boosted emergency loans to banks and firms
By MARTIN CRUTSINGER 28 November 2008
WASHINGTON (AP) - The Federal Reserve boosted its lending to commercial banks and investment firms over the past week, indicating that a severe credit crisis was still squeezing the financial system.
The Fed released a report Friday saying commercial banks averaged $93.6 billion in daily borrowing for the week ending Wednesday. That was up from an average of $91.6 billion for the week ending Nov. 19.
The report also said investment firms borrowed an average of $52.4 billion from the Fed's emergency loan program over the week ending Wednesday, up from an average of $50.2 billion the previous week.
The Fed said its net holdings of business loans known as commercial paper over the week ending Wednesday averaged $282.2 billion, an increase of $16.5 billion from the previous week.
Financial firms are borrowing from the Fed because they are having trouble raising money through normal channels as the financial system endures its worst crisis since the Great Depression.
Banks are hoarding cash rather than making loans out of fear that they won't be repaid. The Fed and the Treasury have been flooding the financial system with money in hopes that banks can return lending operations to more normal levels.
The central bank on Oct. 27 began buying commercial paper, the short-term debt that companies use to pay everyday expenses. It was one of a series of moves the Fed has made to try to unfreeze credit markets.
The Fed's goal is to raise demand in this area as a way to boost the availability of commercial paper, which has been seriously constrained since the financial crisis hit with force in September.
The report said insurance giant American International Group's loan from the Fed averaged $79.6 billion for the week ending Wednesday. That was down by $5.6 billion from the average the previous week.
The reduction reflected a modification of the government's support program for AIG earlier this month. Under that change, Treasury stepped in with a $40 billion purchase of stock in AIG, using money from the government's $700 billion financial system rescue package. The increased support from Treasury allowed the Fed to reduce slightly the size of its total loans to AIG.
The Fed unveiled two new programs Tuesday in a further effort to get consumer credit flowing again.
It said it would begin buying mortgage-backed securities from mortgage giants such as Fannie Mae and Freddie Mac. And it announced a program to lend to financial firms that buy securities backed by various types of consumer debt, from credit cards to auto and student loans.
Library-like silence in the stores as Thanksgiving sales fail to draw crowds
Suzy Jagger in New York November 29, 2008
The police officers who set up double metal barricades yesterday along the sidewalks of Fifth Avenue in Manhattan need not have bothered.
While the New York Police Department had erected the barriers to protect what they expected to be burgeoning crowds of shoppers yesterday from spilling onto the road, few of the bargain hunters turned up. Traditionally yesterday – known as Black Friday – is the busiest shopping day in the American calendar when stores kick off the postThanksgiving sales. Last year, about $20 billion was spent in American stores on that day alone. This time, only the discount stores appear to have flourished.
Yesterday, Wal-Mart stores, selling goods at rock-bottom prices, were so mobbed by bargain hunters that a 34-year-old security guard was trampled to death in Long Island as shoppers forced open the doors.
But across the East river in Manhattan, many of the luxury brand stores such as Gucci, Escada, and Versace on Fifth Avenue were empty. A few blocks over on the Upper East Side, Barney’s, the upmarket department store, was library-like in its silence with only four shoppers in its Yves St Laurent area, where one black velvet jacket had been reduced from $2,230 (£1,450) to $1,339. There were no takers either for a Barney’s own $350 mulberry-coloured woolly dog jacket.
While it was too early yesterday to ascertain how retailers had fared, Wall Street expects this year to be the worst shopping season since the recession of the early 1990s. The reason was within sight of any of the few shoppers on Fifth Avenue. From the stores near Central Park, one can just see the financial skycrapers on Wall Street at the other end of Manhattan, where the credit crisis erupted 18 months ago, and which has triggered a deep recession. With 240,000 Americans losing their jobs a month and banks slashing credit card and overdraft limits, many families have stopped spending on anything other than essentials.
Michael McNamara, the vice-president of SpendingPulse, which tracks spending across America and is owned by MasterCard, told The Times: “We have never seen the retail market this bad and decline this fast.” He added he believed that the only sector that will thrive during this recession would be food, with spending in some areas of clothing down 22 per cent in the first week of this month, compared with the same week the year before.
He said: “If you look at the electronics sector, you see that in August sales fell by about 5.5 per cent, that decline accelerated to 13.8 per cent in September, 19.9 per cent in October and 22.1 per cent in November so far.”
Mr McNamara’s statistics will come as no surprise to Circuit City, America’s second-biggest electronics chain, which applied this month for bankruptcy protection from the US courts and admitted to shareholders that its management had been “upended” by the speed of the economic decline.
In Circuit City’s Midtown Manhattan store yesterday, about 200 people eyed one-day discounts but comparatively few were buying, with just 11 people waiting to pay. Retailers are also being forced to compete with near-bankrupt stores that have slashed prices to generate some sales. AlixPartners, a US retail consultancy, estimates that there is $20 billion of liquidated stock stragnating on the American high street.
While early reports, including the tragic incident in Long Island, suggest that discount retailers across the country have been mobbed by bargain hunters, overall stores are expected to experience their worst performance since the recession of the early 1990s.
Worker dies at Long Island Wal-Mart after being trampled in Black Friday stampede
BY JOE GOULD, CLARE TRAPASSO and RICH SCHAPIRO November 28th 2008
A Wal-Mart worker died early Friday after an "out-of-control" mob of frenzied shoppers smashed through the Long Island store's front doors and trampled him, police said.
The Black Friday stampede plunged the Valley Stream outlet into chaos, knocking several employees to the ground and sending others scurrying atop vending machines to avoid the horde.
When the madness ended, 34-year-old Jdimytai Damour was dead and four shoppers, including a woman eight months pregnant, were injured.
"He was bum-rushed by 200 people," said Wal-Mart worker Jimmy Overby, 43.
"They took the doors off the hinges. He was trampled and killed in front of me.
"They took me down, too ... I didn't know if I was going to live through it. I literally had to fight people off my back," Overby said.
Damour, a temporary maintenance worker from Jamaica, Queens, was gasping for air as shoppers continued to surge into the store after its 5 a.m. opening, witnesses said.
Even officers who arrived to perform CPR on the trampled worker were stepped on by wild-eyed shoppers streaming inside, a cop at the scene said.
"They pushed him down and walked all over him," Damour's sobbing sister, Danielle, 41, said. "How could these people do that?
"He was such a young man with a good heart, full of life. He didn't deserve that."
Damour's sister said doctors told the family he died of a heart attack.
His cousin, Ernst Damour, called the circumstances "completely unacceptable."
"His body was a stepping bag with so much disregard for human life," Ernst Damour, 37, said. "There has to be some accountability."
Roughly 2,000 people gathered outside the Wal-Mart's doors in the predawn darkness.
Chanting "push the doors in," the crowd pressed against the glass as the clock ticked down to the 5 a.m. opening.
Sensing catastrophe, nervous employees formed a human chain inside the entrance to slow down the mass of shoppers.
It didn't work.
The mob barreled in and overwhelmed workers.
"They were jumping over the barricades and breaking down the door," said Pat Alexander, 53, of Crown Heights, Brooklyn. "Everyone was screaming. You just had to keep walking on your toes to keep from falling over."
After the throng toppled Damour, his fellow employees had to fight through the crowd to help him, police said.
Witness Kimberly Cribbs said shoppers acted like "savages."
"When they were saying they had to leave, that an employee got killed, people were yelling, 'I've been on line since Friday morning!'" Cribbs said. "They kept shopping."
When paramedics arrived, Damour's condition was grave.
"They were pumping his chest, trying to bring him back, and there was nothing," said Dennis Smokes, 36, a Wal-Mart worker.
Damour was taken to Franklin Hospital and pronounced dead at 6:03 a.m.
Hank Mullany, president of Wal-Mart's northeast division, said the company took extraordinary safety precautions.
"We expected a large crowd this morning and added additional internal security, additional third-party security, additional store associates and we worked closely with the Nassau County police," he said in a statement.
"We also erected barricades. Despite all of our precautions, this unfortunate event occurred."
The 28-year-old pregnant woman and three other shoppers were taken to area hospitals with minor injuries, police said.
In a news conference after the incident, Nassau County police spokesman Lt. Michael Fleming described the crowd as "out of control" and the scene as "utter chaos." He said Wal-Mart did not have enough security onhand.
Fleming said criminal charges were possible but that it would be difficult to identify individual shoppers in surveillance videos.
Items on sale at the Wal-Mart store included a $798 Samsung 50-inch Plasma HDTV, a Bissel Compact Upright Vacuum for $28 and Men's Wrangler Tough Jeans for $8.
The Long Island store reopened at 1 p.m. and was packed within minutes.
"I look at these people's faces and I keep thinking one of them could have stepped on him," said one employee. "How could you take a man's life to save $20 on a TV?"
It is hoped the two-year package, the majority of which will be pumped into local public works, will help create 300,000 jobs
Graham Keeley, Madrid November 27, 2008
Jose Luis Rodriguez Zapatero, Spanish Prime Minister, has unveiled an €11billion two-year package to boost the country’s flagging economy and cut unemployment.
The Spanish premier said the plan would boost public works programmes and offer some state help for the car industry which has been badly hit by the global financial crisis.
“We hope this will generate 300,000 jobs within a year,” he told parliament. “These are urgent measures to generate jobs.”
Mr Zapatero said the package would help innovation, productivity, infrastructure and education in 2009 and 2010.
The majority of the cash – €8 billion - was destined for local public works.
Councils should use the cash for construction projects, infrastructure works, repairing buildings and social programmes.
Mr Zapatero also handed €800 to Spain’s ailing car industry which accounts for 20 per cent of exports.
Car industry bosses, including Jean Pierre Laurent, chief executive of Renault Espana, had criticised Mr Zapatero for failing to do enough for car firms which are laying off thousands of workers s demand plummets.
“This is a sector with a future and we are backing it,” Mr Zapatero said.
The regional government of Aragon in eastern Spain announced a €200 million loan to General Motors Europe so the US car giant can start production of its new Opel Meriva at its factory in Zaragoza.
General Motors said it needed €595 million to keep its European factories running.
Spain has already put in place stimulus measures totalling about €40 billion as the economy contracted in the third quarter by 0.2 per cent, the first time this has happened in 15 years.
But the country’s scope for more fiscal stimulus is “reduced,” said Pedro Solbes, Spain’s Economy Minister.
“I’ve always said that the margin for fiscal measures is reduced and I’m still saying that,” Mr Solbes said.
He welcomed the European Commission’s proposed 200 billion euro stimulus plan for the EU economy unveiled on Tuesday.
“What’s new is the commission’s communiqué from yesterday calling on European countries to make a certain effort. We wanted to show solidarity with that effort,” he said.
The package, to which individual countries will contribute €170 billion, equals about 1.5 per cent of the 27-nation EU’s economic output.
Mr Solbes said the EU new stimulus plan will not reduce the Spanish budget deficit, which is likely to be above the EU limit of 3 per cent of GDP for the time since the adoption of the euro.
As the factory to the world, China may be the nation most vulnerable to collapsing global demand.
By George Wehrfritz Nov 22, 2008
Workers are losing factory jobs at the fastest rate in decades. Automakers—having failed to anticipate today's sales slump—are lobbying politicians for bailouts. The stock market is a crash heap, home prices are down by 35 percent or more in many cities and toxic assets have begun to weigh heavily on banks. America in 2008? Try China, where the global economic downturn now looks certain to end the country's 30-year growth boom, posing the greatest leadership challenge to Beijing since pro-democracy demonstrations threatened one-party communist rule back in 1989.
That's not the conventional take on China—yet. But with most industrialized countries now in recession and countries the world over hoping against hope that the planet's most buoyant major economy might somehow dampen the global downturn, it's a forecast that increasingly rings true. The reasoning goes something like this: China, despite its deep pool of savings and $2 trillion in foreign reserves, is unprotected from the fall in global demand that began in earnest in mid-2008. Notwithstanding all the hoopla about the rise of China's billion consumers, the body blow that's now landing in the industrial heartland will debunk the notion that China has already begun transitioning toward a new growth model based less on exports and investment and more on household consumption. "We would love to believe it too, but it just ain't so," wrote Standard Chartered bank's highly respected China economist, Stephen Green, last month. He says expecting Chinese spending to save the world from recession is "a pipe dream."
With China at the vanguard, Asia as a whole stands dangerously exposed to external shock. Since the late 1990s, household consumption as a share of China's GDP has fallen from roughly half to 35 percent. On the flip side, the share of Asia ex-Japan's output devoted to exports is now more than 45 percent, or roughly 10 points higher than it was on the eve of the 1997–98 Asian financial crisis. When juxtaposed with America's debt-driven gluttony, Asia's puny appetite for the goods it produces reflects a global economy that's staggeringly out of whack. "We are where we are because of massive imbalances that policymakers and politicians have allowed to build up over the last decade," argues Stephen Roach, chairman of Morgan Stanley Asia. "Those imbalances were never sustainable, but the longer they went on the more they seduced people. And now we're paying the ultimate price for that seduction."
The tab, in fact, has yet to be tallied, but don't be surprised if Beijing gets stuck with the biggest portion of the bill for the simple reason that China's rebalancing act is actually much tougher than America's. For U.S. households, today's crisis means saving more and consuming less (recent consumption data suggests that is happening quite rapidly). Yet in China, where total household consumption is just 5 percent of America's by value, the challenge is to sustain an economy that's largely investment- and export-driven, which means finding ways to perpetuate industrial overproduction. Michael Pettis, a professor of finance at Peking University, says America found itself in the same bind back in 1929. "The U.S. in the 1920s ran a huge trade surplus and had the largest reserves in history to that point," he says. "So was the U.S. immune to the global crisis? No. It was the country that suffered the most. In that sense it is exactly like China today."
Beijing realizes the growth trap it's in. Why else would it unveil on Nov. 10 a $590 billion stimulus plan—a package nearly as large as Washington's $700 billion financial bailout—just days after it announced that China's economy expanded by 9 percent in the July–September quarter? The consensus view is that China's economy has slowed markedly since then. Year-on-year growth estimates for 2009 are mostly in the 7s, with the latest forecasts adding the scary caveat, "or less." This month the Royal Bank of Scotland said 5 percent growth in China next year couldn't be ruled out. China's economy, which grew by 11.9 percent last year, hasn't dipped below 6 percent annually since 1990.
Beijing's stimulus plan has won plaudits internationally not least because it indicates that Chinese leaders won't stand idly by as the crisis deepens. But just as in Washington at the beginning of the Great Depression, policy miscues could cost China dearly—especially if they undermine the global trading regime that China's economy relies on more heavily than any other major economy in the world. In the early 1930s, America's self-defeating mistake was to cut off world trade, particularly in the Smoot-Hawley Tariff Act, at a time when it was the leading exporter in a world burdened by massive industrial overproduction. Today, China is the lead exporter, the world again faces massive overproduction, and the mistake Beijing must avoid is moving too hard to sell more manufactured exports at the risk of flooding an already weak market, and triggering a protectionist backlash. That will only push the global market toward deflation—the downward spiral of falling prices leading to falling demand, as stressed consumers wait for even better bargains.
The doubts about China's stimulus plan arise in part because it's all broad strokes with no fine print. Conceptually, however, it seems intended to split the difference between promoting consumption at home, and export sales. It includes commitments to fund rural infrastructure, boost social spending on health and education, and mount an "economic housing" scheme for migrant workers in major cities—all of which, if implemented, would raise household spending over time. But it also contains perks for heavy industry, value-added tax cuts for the export sector and lending provisions that will channel bank funding to state enterprises engaged in road and rail construction and away from private companies. "The two focuses are definitely exports and infrastructure. That's what we're getting from everything we're picking up," says Green. "And that the health and education spending, although it has been listed as one of the eight priorities, is not going to be [well] supported." Economists estimate that only a quarter of the $590 billion is new money as opposed to previously announced spending, future tax cuts and unfunded mandates passed down to local governments. There's reason to expect that much of the promised social spending—and the consumer empowerment it represents—may not materialize. One warning signal is that Beijing has entrusted much of the safety net stuff to the provinces, which historically have put a low priority on building schools, unless the order to do so comes with earmarked funding from Beijing. One new concern: local tax revenues are shrinking due to the economic downturn. Roach says investment in the social safety net would "reduce the precautionary saving that is inhibiting broad-based consumption growth across the nations [of Asia]," though he adds: "China has from time to time flirted with that, but they really have dragged their feet."
To understand the linkage between social services and household consumption, visit a Chinese hospital. At check-in, patients are required to deposit money up-front, and when that funding runs dry they're tossed out onto the street, healthy or not. According to the World Health Organization, China spends less than 1 percent of its GDP on health care, which ranks it 156th out of 196 nations the U.N. agency tracks. Likewise, poor kids can't attend school without paying fees, and most migrants are uninsured against job-site accidents at any price. Families cope by saving an estimated 25 percent of their disposable income, just in case.
That isn't a social contract conducive to the "harmonious society" President Hu Jintao has advocated since 2006, or so concludes a new report co-produced by the United Nations Development Program and the China Institute for Reform and Development. It calls on China to overhaul its social-welfare system to provide universal basic health care, education, unemployment and retirement benefits for the country's 1.3 billion people. It stresses the need to vest forgotten segments of society including farmers, migrant workers and the poor. And it claims that such expenditures—which it estimates would cost $55 billion a year—actually offer a bigger bang for the buck than would the construction of new roads, railways and bridges.
The risk today (and it's one that's already materializing in a mounting exodus from shuttered factories in Guangdong province) is that these workers could, like the boxcar-hopping hobos of America's Depression era, become the flotsam and jetsam of the economic bust. Almost since China's reforms began three decades ago, Beijing insisted that sustaining economic growth rates above 8 percent was paramount to employing the millions of workers pouring in from inland villages. The further growth drops below that level, the higher the percentage of an estimated 15 million workers entering the labor force each year lands in the ranks of the unemployed. Yet even as policymakers stoked fast growth with every means at their disposal, little was done to transform these workers into foot soldiers of a different sort: new consumers with sufficient social protections to save less and spend more.
The prescription for change has been obvious since the late 1990s. It includes balanced growth between booming east and lagging west; efforts to narrow the yawning income gap between China's superrich and everyone else; and policies that channel the massive earnings logged by the state-owned conglomerates that dominate China Inc. back into government coffers to fund social spending. Yet campaigns with names like Go West meant to spur investment in the hinterland never amounted to more than propaganda exercises, and a long-mulled plan for the government to charge state companies dividend on their huge profits remains a small-scale experiment. In October, Standard Chartered noted a "gulf between aspirations and actual policies" illustrated by Beijing's long-standing bias toward investment and exports, and support for "state-protected oligopolies." Pettis argues that Beijing's persistent mercantilism has prepared it for the wrong crisis—specifically, an external debt shock akin to the one that ravaged Asia in 1997-98, against which China's huge savings and foreign reserve pools would make it "superbly protected." Yet as with America in 1929, China is the nation most exposed in the world to a collapse in global demand today.
As such, Beijing finds itself in a fix as 2008 winds to an ignominious close. Export promotion offers a viable short-term means of keeping the factories of China running—yet grabbing more market share amid a global downturn is the surest way to incite protectionism. During the recent gathering of G20 leaders in Washington, much public emphasis was placed on shoring up the global financial architecture and defending free trade. Yet former New Zealand prime minister Mike Moore, who headed the World Trade Organization from 1999 to 2002, believes the backroom talks focused on the imperative that Asia not try to export its way out of today's crisis. It was "the elephant in the room; how China, and to a lesser extent India and the Southeast Asians, must become consuming countries," he says. "It's overwhelmingly in [their] interest to become a lot less reliant on exports, and it also does right by the people they represent. Not to do it could trigger something that's very, very unpleasant." Global trade slumped 70 percent in the 1930s, and any return to the virulent economic nationalism of that era "would turn crisis into catastrophe," warns Moore.
That presents Beijing with a leadership challenge very different from the one it confronted with tanks and soldiers in 1989. Today, it must work to maintain enough harmony in the global trade arena so as not to lose access to vital overseas markets, while telling the Chinese people that fast growth isn't their birthright. In essence, Beijing must offer a new social contract in which consumption bolstered with a social safety net replaces the export-driven growth engine that has powered China's economy for 30 years. FDR did that in America in the 1930s, but it took a decade. Might China's leaders fare any better? In the late 1990s, then Premier Zhu Rongji refrained from devaluing China's currency when many of its neighbors did so; the decision lost China some export momentum but gained its leadership a reputation for responsible global action. Today's leaders have maintained that reputation, but given the enormity of the economic challenges at hand, the only safe bet is that their helmsmanship will be tested to the extreme in 2009. Especially if the pessimists are correct and China's economy grinds to a halt.
OPEC defers new oil supply cut as divisions emerge
By Rania El Gamal and Alex Lawler Nov 29, 2008
CAIRO (Reuters) - OPEC on Saturday deferred a decision on a new oil supply cut amid signs that Saudi Arabia and its Gulf allies are demanding tighter adherence to restraints put in place over the past two months.
Gulf producers want to see strict compliance with recent output curbs of 2 million barrels a day before considering further reductions when the Organization of the Petroleum Exporting Countries meets in Algeria on December 17.
"Compliance I think is OK," said Kuwaiti Oil Minister Mohammad al-Olaim. "But the market conditions require us to be 100 percent compliant."
Delegates said that ministers discussed how much more they needed to cut in December. Most, including Gulf producers led by Saudi Arabia, saw a requirement to slice another 1 to 1.5 million bpd. But for that to happen, delegates said, Riyadh wants proof that all fellow members are meeting their part of existing curbs.
"We are very concerned about overproduction," said Qatari Oil Minister Abdullah al-Attiyah.
While OPEC's first priority is to put a floor under a $90-collapse in oil prices to $55, Saudi Arabia for the first time in years identified a "fair" price -- $75 a barrel.
That target will serve as a reference point for traders when world oil demand starts to emerge from the current recessionary slump.
But for now, the oil market is focused on whether OPEC can prevent prices falling further by avoiding the sort of divisions that have undermined its response to falling prices during previous economic downturns.
"$75 a barrel doesn't look doable in the short term," said Raja Kiwan of consultancy PFC Energy. "Given the fractious nature of OPEC on quota compliance, they may have some problems."
LEAKS?
Delegates identified Iran and Venezuela, perennial price hawks who have urged quicker cuts, as particular sources of concern on quota compliance. Venezuela denied the charge. Iran made no comment.
But consultants Petrologistics estimated last week that, based on shipping data, Iran's production would fall by 80,000 bpd this month, much less than the 199,000 bpd it is due to cut.
OPEC will want to keep any bickering under wraps.
Secretary General Abdullah El-Badri said compliance already was "100 percent" and OPEC President Chakib Khelil said in an official statement that members were "fulfilling their commitments."
Early industry estimates show Saudi Arabia and its Gulf neighbors making good their share of OPEC's 2 million bpd of cuts since September.
Petrologistics data estimated OPEC output falling by 1.22 million bpd in November, with nearly half of that reduction shouldered by Saudi -- Riyadh is only responsible for about a third of OPEC output.
OPEC may need to make larger cuts to balance the rapid decline in demand among Western economies that has caused inventories to swell. World oil demand is set to contract this year for the first time in 25 years.
"The bottom line is that they need to cut again and they need to cut substantially," said Gary Ross, CEO of consultancy PIRA Energy. "Demand is falling out from beneath them."
Naimi said he would like to see inventory cover among OECD industrialized nations down to 52 days from current levels of 55-56 days of forward demand, the top of the seasonal norm.
OPEC has a mixed record of dealing with downturns in the economy that curb energy demand.
In 2001 it successfully defended prices by removing 5 million bpd in four stages, 19 pct of its supply, laying the foundation for a 6-year boom in oil prices that culminated this summer in a record $147 a barrel.
But in 1997 in Jakarta, at the start of the Asian financial crisis, Saudi pushed through an OPEC increase after Venezuela openly flouted its cartel supply quota by a large margin.
Prices went into a tailspin and U.S. crude hit a low of $10.35 at the end of 1998.
The U.S. holiday shopping season got off to a slow start as consumers, squeezed by the economic crisis, bought carefully and said they would wait for better deals closer to Christmas.
Early results from the Black Friday weekend, which kicks off holiday sales one day after U.S. Thanksgiving, bolstered forecasts by some analysts that total holiday sales could contract for the first time since that data started being collected in the early 1990s.
ShopperTrak, which measures customer traffic, said on Saturday that Black Friday sales rose 3 percent to $10.6 billion (6.9 billion pounds). That was slower than an 8.3 percent rise in 2007.
"The initial response by many people may be positive," said Telsey Advisory Group analyst Joseph Feldman of the increase.
But, Feldman said, excluding inflation the sales figures are roughly flat year over year. His firm still expects overall holiday sales will be flat to slightly down.
Shoppers interviewed on Saturday said they were disappointed by the deals this weekend and bet stores would offer even steeper discounts in the weeks to come -- a worrisome sign for retailers struggling with weak profits.
"I'm not happy with the prices," said Rose Fernandez, shopping at a Macy's in Jersey City, New Jersey. "If it's worth the money, I would pick it up... If I can wait, I wait and watch. I can wait even till the day after Christmas."
ShopperTrak noted that stores would have a shorter holiday season, with 27 days between Thanksgiving and Christmas, compared with 32 days in 2007.
"(That) may catch some procrastinating consumers off guard, leading to lower sales levels," said Bill Martin, co-founder of ShopperTrak.
PENDING LAYOFFS PUT PURCHASES ON HOLD
Retailers are facing what could be the weakest sales season in nearly two decades as shoppers contend with falling home values, reduced access to credit and a weak job market.
The three-day Thanksgiving weekend can account for 10 percent of overall holiday sales and has taken on added importance this year as the country seeks a way out of its worst economic crisis since the Great Depression.
Heidi Hickman, a marketing manager, was browsing at a J.C. Penney in Jersey City on Saturday, but gifts were not on her mind.
"I got a notice there are going to be layoffs in my department," she said. "It's making me stop right now and not do anything until I find out."
If sales for November and December decline, it would mark the first contraction since the National Retail Federation began tracking holiday sales in 1992.
"I have very little confidence that the sales number will be up year-over-year," for the season, said Stacey Widlitz, retail analyst with Pali Capital.
In a highly competitive battle to attract shoppers, some retailers, including Kmart, opened on Thanksgiving day, while others began sales on Friday right after midnight.
In Chicago, Gap Inc's Old Navy chain opened at 7 a.m. (1 p.m. British time) on Saturday but an employee said there was little to do until 9 a.m. (3 p.m. British time), when shoppers finally began to arrive.
A nearby Sears had cut prices on holiday decorations by 60 percent, while clothing retailer Charlotte Russe tried to entice shoppers with a deal to buy one item and get another item for 50 percent off.
Penney said Black Friday shopping was strong as consumers sought deals on practical gifts, like sweaters. But it did not release sales figures for the weekend, saying the economic environment was too volatile.
Amazon.com Inc said Apple's iPod touch, which has a touch-sensitive screen, was its top-selling electronics item on Black Friday morning, while the Wii Fit, for Nintendo Co Ltd's Wii video game console, was its most popular video game.
SHOPPERS EXPECT PRICES WILL FALL
As shoppers sought low prices online, eBay's Web payments service PayPal saw 34 percent more transactions on Black Friday than in 2007 and showed a 26 percent increase in online payment volume.
In Los Angeles, Jenipher Park, 36, and Keri Yang, 34, bought boots at Nordstrom on Saturday, but both were expecting bigger discounts.
They said they will delay more purchases to get better deals closer to Christmas, and this year the two moms are planning to only get gifts for their children.
Many shoppers echoed those sentiments, saying they would find other ways to celebrate with adult relatives and friends. Some were already turned off to the very idea of shopping.
"I'm not into shopping this year like I was the year before," said Rolando Ramos, 29, on a visit to Chevy Chase, Maryland. "It's very depressing. Go to the malls, just looking around, it's deserted."
Widlitz said she expected discount behemoth Wal-Mart to win shoppers this holiday because of its low prices.
At a Wal-Mart store in Columbia, Maryland, on Friday, the parking lot was full at 7:30 a.m. and customers stood in line 10 shopping carts deep to make purchases.
Black Friday trade suggests longer stay in the red
By Andrew Edgecliffe-Johnson in New York and Jonathan Birchall November 29, 2008
Hassan, whose pretzel cart has sat outside the Disney store on New York's Fifth Avenue for almost 10 years, had never a Black Friday like it.
"Last year, I sold almost 1,000 breads. This year it's only 100 or 150," he said.
Up the road by FAO Schwarz, the queue stretched half way along the toy store. "Usually it's all the way around the block," said Ariel, manning a stand selling fluorescent paintings of nearby landmarks, who estimated his own sales were down 70 per cent.
Called Black Friday because historically it is the day when retailers begin to turn a profit for the year, the day after Thanksgiving is usually one of the busiest shopping days. It is watched obsessively by retailers as a signal of consumer demand for the critical Christmas season.
The thin crowds allowed tourists to take photographs of each other posing in front of Tiffany & Co's fir-lined windows and Bergdorf Goodman's display of boxing polar bears without the inconvenience of having to wait for other shoppers to pass. Tiffany's main floor was unusually calm.
Janet Hoffman, managing partner at Accenture's North American retail consultancy, said that initial reports from around the country suggested that shoppers were focusing on basic items rather than luxuries, and were hunting out discounts.
In Long Island, a Wal-Mart worker was trampled to death as the store opened. Two people were shot dead at a California Toys R Us, but details were unclear.
About 5,000 people waited for Macy's Manhattan flagship to open at 5am.
The Apple store in Trump Plaza had one-day discounts offering the iPod nano from $139 and MacBook laptops from $948. But Karen Brush, one of the few shoppers emerging with bags, said she had only gone in to replace a lost mobile phone.
"This year I'm cutting back," she said. "I'll probably end up bargain-hunting on the internet."
Shoppers' views on the prices on offer depended partly on the currency they were spending.
Nicola from Manchester, England, was congratulating herself on having bought her dollars in September.
Standing outside the always-hectic Abercrombie & Fitch store, she had accumulated six bags already. "I'm going to take them back to the hotel and come back out again. My arms are aching," she said.
Recent events have not been kind to the modern financial market structure. This column blames the prevailing consensus amongst finance academics for underestimating the irrationality and instability involved. Has the discipline failed to understand global financial markets?
By Richard Dale 27 November 2008
LONDON -- Recent events have demonstrated that the financial market structure that has evolved over the past twenty years is a powder keg – the detonating device was the bursting of the 2004 to 2007 credit bubble. In considering where we go from here, two separate issues need to be addressed: how to deal with financial bubbles and the design of a new financial market regulatory structure.
Counter-cyclical bank capital requirements may help to deal with the first problem but regulatory reform presents more formidable difficulties. The problem here has been exacerbated by the forced financial restructuring that has taken place during the crisis management of the past few months. We now have a much more concentrated financial services industry and one in which large investment firms have been merged with deposit-taking banks. The financial landscape is now dominated by huge financial conglomerates which markets will correctly perceive as being far too systemically sensitive to be allowed to fail. Hence the whole moral hazard issue is thrown into even sharper relief.
There are two possible regulatory responses to this situation. The first is to try to put banking back in its box; to reverse the trends of the past twenty years by dismantling the financial conglomerates and re-imposing strict activity constraints on deposit-taking institutions. This was the US response after the 1929/33 crash not only from the legislature in the form of the Glass Steagall Act but also from the leading banks themselves (National City Bank and Chase National Bank), who of their own volition announced that they were disposing of their securities affiliates because events had shown that commercial and investment banking should not be mixed. It is ironic that today’s response is in the opposite direction: non-bank investment firms have either been eliminated (Lehman), pushed into the arms of banks (Bear Stearns, Merrill Lynch) or induced to re-charter themselves as deposit-taking banks (Morgan Stanley, Goldman Sachs). Unscrambling these new universal banking conglomerates would, however, present enormous practical difficulties and is probably unrealistic.
The second approach is to neutralise moral hazard by subjecting financial institutions to a comprehensive regulatory framework which would also see regulators acting in a much more intrusive, investigative and, if necessary, adversarial manner. Crucially, this new regulatory approach would have to be truly global since national authorities are at present inhibited from taking action that might induce regulated activities to move to more accommodating financial centres.
Mixing banking and securities
Fifteen years ago, I argued that banks’ increasing involvement in securities activities worldwide could eventually lead to a repetition of the 1929/33 banking meltdown. My analysis rested on the observation that if banks were permitted to diversify away from non-core banking activities the moral hazard that is known to promote excessive risk-taking in traditional banking would be extended to these other activities, in particular securities markets. The question then was whether ‘the mixing of banking and securities business can be regulated in such a way as to avoid the danger of a catastrophic destabilisation of financial markets’. After considering all the regulatory options, I concluded that there was no solution: “Allowing banks to engage in risky non-bank activities could either destabilise the financial system by triggering a wave of contagious bank failures – or alternatively impose potentially enormous costs on tax payers by obliging governments or their agencies to undertake open-ended support operations.”
The prevailing view amongst finance academics at the time, as reflected in a critical review of my book in the Journal of Finance, was that financial structure was largely irrelevant to the question of systemic stability. According to the conventional wisdom we had learned from the 1929/33 crash, a monetary contraction such as occurred then could be neutralised by injecting reserves into the banking system and a flight to quality, because it merely redistributes bank reserves, “is unlikely to be a source of systemic risk”. This widely held view of the behaviour of financial markets turns out to have been entirely misguided. As we have witnessed in recent months, a major shock arising from publicised losses on banks’ securities holdings can have a domino effect on financial institutions, leading ultimately to a seizure in credit markets which central bankers, on their own, are powerless to unblock. Only drastic government intervention – guarantees for money market funds, guarantees for interbank lending, emergency deposit insurance cover, lending directly to the commercial paper market, and partly nationalising the banking industry – has prevented a full repetition of the 1929/33 financial meltdown.
In addition to underrating the importance of financial market structure, finance academics have also largely neglected the well-documented boom/bust characteristic of asset and credit markets. In my recent book on the South Sea Bubble, I analysed the behaviour of South Sea stock prices and concluded that, even when judged against the valuation techniques available at the time, there is overwhelming evidence that the South Sea boom represented an irrational bubble. My central thesis was that, taken together with other more recent boom/bust episodes, the events of 1720 lend force to the argument that national authorities must intervene to head off unsustainable financial market booms. I was also critical of revisionist histories of financial upheavals such as the South Sea Bubble that have tended to stress the rationality of investors and downplay the idea that financial markets are inherently unstable and prone to bouts of euphoria and panic.
What we have witnessed in recent months is not only the fracturing of the world’s financial system but the discrediting of an academic discipline. There are some 4000 university finance professors worldwide, thousands of finance research papers are published each year, and yet there have been few if any warnings from the academic community of the incendiary potential of global financial markets. Is it too harsh to conclude that despite the considerable academic resources that go into finance research our understanding of the behaviour of financial markets is no greater than it was in 1929/33 or indeed 1720?
Iceland’s meltdown was caused by the rapid emergence of an oversized banking sector and accompanying domestic credit creation, asset bubbles and excessive indebtedness that all this encouraged. This column draws lessons from this crisis and suggests Iceland should join the EU if it wants to stand a chance at keeping its well-educated young people from emigrating.
Gylfi Zoega 27 November 2008
Iceland’s borrowing in international credit markets during the period 2003-2007 propelled a macroeconomic expansion as well as the very rapid expansion of the banking sector. Borrowing was also undertaken to fund leveraged buy-outs of foreign companies as well as the buying of domestic assets. There developed the biggest stock market bubble in the OECD while house prices doubled.
The banking development was ominous. No visible measures were taken to limit the banks’ growth during the expansionary phase. The size of the banking sector at the end of this period was such that it dwarfed the capacity of the central bank to act as a lender of last resort as well as the state’s ability to replenish its capital. The banking system was also vulnerable because of its rapid expansion and the bursting of the domestic asset price bubble.
The end
The end came quickly. In the otherwise quiet city of Reykjavik, suspicious movements of government ministers and central bank governors were detected on Saturday morning, 27 September. On Monday it was explained that Glitnir, the smallest of the three larger banks, had approached the central bank for help because of an anticipated liquidity problem in the middle of October. Lacking confidence in the collateral offered, the central bank had decided to buy 75% of its shares at a very low price.
Like the banks themselves, the government had claimed for months that all three banks were liquid as well as solvent, yet when push came to shove it tackled a pending liquidity squeeze by wiping out the shareholders of Glitnir. Credit lines were now withdrawn from the two remaining banks. There followed an old-fashioned bank run on the Icesave branch of the Landsbanki in the UK The Landsbanki fell when it was unable to make payments to creditors.
The responses were chaotic. The governors of the central bank announced a 4 billion euros loan from Russia but then had to retract the story within hours. They also decided to fix the exchange rate but without the requisite foreign currency reserves this was an impossible task so the bank gave up within two days. One of the governors appeared on television and stated that the Icelandic state would not honour the foreign debt of the banks without distinguishing deposits from loans. Telephone conversations between government ministers in Iceland and the UK appear not to have clarified the situation. The British government then seized the British operations of both the Landsbanki and Kaupthing in London. The seizure of Kaupthing’s Singer and Friedlander automatically brought Kaupthing into default. All three banks were now in receivership.
The foreign exchange market collapsed on October 8th. Following a period of sporadic trading the central bank started to auction off foreign currency on October 15th. There are plans to let it float again.
The real economy is currently responding to the turmoil; unemployment is rising and there have been several bankruptcies and many more are imminent. There is the realisation that not just the banks but a significant fraction of non-financial firms are heavily leveraged; have used borrowing, mostly in foreign currency, to fund investment and acquisitions. The Icelandic business model appears to have involved transforming firms into investment funds, be they shipping companies such as Eimskip (established 1914), airlines such as Icelandair (established in 1943), or fish-exporting companies, to name just a few examples. Exporting firms, however, are benefiting from lower exchange rates. The future belongs to them.
Lessons
The proximate cause of the economic meltdown in Iceland is the rapid emergence of an oversized banking sector and the accompanying domestic credit creation, asset price bubbles and high levels of indebtedness. At this point it is important to consider the reasons why this was allowed to happen.
Monetary policy technically flawed
A sequence of interest rate rises, bringing the central bank interest rate up from 5.3% in 2003 to 15.25% in 2007 did not prevent the boom and the bubbles that preceded the current crash. On the contrary, they appear to have fuelled the bubble economy.
But surely it was apparent to anyone in the latter stages of the boom that it was driven by unsustainable borrowing and that a financial crisis was fast becoming inevitable. Iceland would have faced the music soon even in the absence of turmoil in international credit markets. However, in spite of many observers pointing this out (including the central bank itself!), the course of economic policy was not changed. There were clearly other, more profound, reasons for this inertia and passivity in the face of peril.
Belief in own abilities and good luck
History is full of examples of nations gripped by euphoria when experiencing rapidly rising asset prices. During the economic boom it was tempting to come up with stories to explain the apparent success, such as the notion of superior business acumen. However, this is a normally distributed variable and its mean does not differ much between nations. The ability to govern a modern economy is unfortunately also a normally distributed.
The normal distribution and the division of labour
When there are not too many people to choose from, it becomes doubly important to pick the best candidate for every job. While the private sector has, as if led by an invisible hand, a strong incentive to pick the most competent people for every position, the same can not be said of certain areas within the public sector. The appointment of former politicians to the position of central bank governor, to take just one example, reduces the bank’s effectiveness and credibility. The danger is that the individual in question has interests and policies that exceed those fitting a central bank governor in addition to lacking many job-specific skills. And this one example is just the tip of the iceberg!
In addition, Adam Smith’s dictum that the scale of the division of labour is determined by the size of the market also applies to the government. There are scale economies when it comes to running the state and small nations might benefit from the sharing of a government, as well as the central bank!
Social pressures
We now come to an equally profound problem, which is that the small size of the population makes it inevitable that personal relationships matter more than elsewhere.
One of the keys to success for an individual starting and sustaining his or her career in Icelandic society has been to pledge allegiance to one of the political parties – more recently business empires – and act in accordance with its interests. It follows that society rewards conformity and subservience instead of independent, critical thinking. Many players in the banking saga have interwoven personal histories going back many decades. The privatisation of the banks, not so many years ago, appears also to have been driven by personal affections and relationships rather than an attempt to find competent, responsible owners.
Mancur Olson’s The Logic of Collective Action, first published in 1965, describes the difficulties of inducing members of large groups to behave in the group’s interests. Clearly, political parties need to reward their members in order to motivate them and ensure their loyalty. The same applies to labour unions and business empires. But the smaller the country, the smaller the total surplus income that can be used in this way, while the amount needed to guarantee the loyalty of any given individual may not be any smaller. It follows from Olson’s analysis that the smaller the nation, the more likely it is that society will be uni-polar. As a matter of fact, powerful individuals or parties that often rule small nations. Such a society usually does not encourage dissent or critical thinking.
It follows that one individual’s criticism – be that of banks or the political or economic situation – may put him in a precarious position vis-à-vis the dominant group. The private marginal benefit of voicing your concerns and criticising is in this case negative and much smaller than the social marginal benefit.
The same logic explains why the media may not criticise the ruling powers. During the boom years, the media, different commentators and even some academics lavished praise on the Icelandic bankers and other capitalists who profited from the asset bubble. This then is the root of the problem; a cosy relationship between businesses, politics and the media and limited checks and balances. Everybody knows everything but no one does anything about anything!
Relations with Europe
Membership of the European Economic Areas, involving market integration and the free mobility of factors without the participation in a common currency and joint decision-making, made economic policy in Iceland difficult, even impossible, to implement. The local central bank was no match for the vast flows of funds that came into the country.
Membership of the EU might help remedy many of the problems described above. The sharing of certain areas of government may improve the quality of decision-making. Having greater contact with decision makers in Europe may provide stimulus, criticism and points of comparison that may improve the quality of decisions. The rule of law may be strengthened. The adoption of the euro will provide monetary stability and lower interest rates.
Iceland either has to move backwards to the time of capital controls or forwards into the EU. It needs to choose the latter option if it wants to stand a chance at keeping its well-educated young people from emigrating.
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Deflation may return to Japan and spreading to other countries as we head toward zero interest rate scenario
Bloomberg
27 November 2008
Deflation is destined to make an untimely return to Japan. The second-biggest economy faces the most acute threat of falling prices among industrialized nations, the Organization for Economic Cooperation and Development said on Nov. 25. Sound gloomy? The OECD may be overly optimistic to think deflation won’t re-emerge until the second half of 2009.
Things aren’t as dire as they seem. In fact, a return of deflation may offer benefits to Japan’s outlook. That also could go for other developed nations experiencing mild price drops.
Deflation was the unheralded catalyst behind the restructuring that fuelled Japan’s longest post-war recovery. Officials in Tokyo have been quick to blame the U.S. credit crisis for Japan’s recession. An explanation that deserves equal weight is that the positive side effects of deflation didn’t have enough time to assert themselves. It’s true that falling prices are rarely, if ever, good for the broader economy. They are a nightmare for debt holders and property owners. They can hurt corporate profits, cut wages and eat into government tax revenue.
Yet Japan benefited from deflation in two ways. First, it offered a kind of stealth tax cut for consumers, who gained more purchasing power between the late 1990s and mid 2000s. Second, it forced major change in the bloated, inefficient economy.
China’s rise was among the forces that prompted Japanese executives once and for all to restructure. Companies streamlined a labyrinthine distribution system that involved many middlemen and inflated prices. Banks also realized in the early 2000s that they couldn’t grow their way to health. They stepped up efforts to dispose of bad loans.
There’s a reason, though, why Japan’s political and corporate establishments were so frightened by deflation and obsessed about ending it. It was an uncertain and destabilizing force they couldn’t control or understand.
Policy makers wasted several years acting as if deflation was the cause, not a symptom, of Japan’s malaise. It was more about a malfunctioning credit system and increased global competitiveness. Whether officials know it or not, Japan’s growth in recent years owes much to deflation.
The return of inflation, albeit mild price increases, in recent years prompted the popping of champagne corks from Tokyo to Washington. It also took pressure off the government to continue efforts to modernize the economy.
As deflation threatens to make a comeback, officials in Japan and elsewhere need not panic. The key is to keep the trend modest. Aggressive drops in consumer prices won’t help business or investment confidence. And they certainly wouldn’t bode well for stock markets.
Like it or not, falling prices are something with which governments around the globe will need to grapple. Hungary, Iceland, Ireland, Spain and Turkey will experience “severe” economic declines, many because of housing slumps that “still have a long way to go,” the OECD said. It added that deflation has become a greater risk than inflation.
Deflation in China is certainly a threat if the global crisis gets worse. In Japan, Taro Aso certainly won’t appreciate being remembered as the prime minister who oversaw the return of deflation. And yet he’s taking very doctrinaire steps to stabilize growth, like fiscal pump priming.
Lacking in Tokyo these past couple of years has been long- term planning to prepare for an aging population and boost entrepreneurship. The Bank of Japan also is reluctant to take more drastic steps to fight deflation – such as returning interest rates to zero from today’s 0.3 percent.
The return of deflation will make it harder to remove structural impediments to growth with lax monetary and fiscal policies or a weak currency. Such measures offer short-term gains at the expense of long-term prosperity.
The good news is that Japan’s deflation didn’t turn into the global nightmare the U.S. feared. In October 2002, for example, Nikkei English News reported that the Central Intelligence Agency was investigating the effects of Japan’s deflation. Now, of course, economists are left wondering if the U.S. is headed toward deflation.
Japan is the more immediate risk. The BOJ didn’t formally end its deflation-fighting policy of pumping extra cash into the economy until March 2006. It’s worth noting that it took record increases in oil and food prices to produce a bit of inflation.
Now, “there is a high probability that Japan’s economy will slip into deflation in the third quarter of 2009” as core consumer prices turn negative, says Kyohei Morita, chief economist at Barclays Capital in Tokyo. It could happen sooner if the global outlook turns even gloomier in the months ahead. While not good news for Japan’s leaders, history shows that may not be the disaster it seems.
What about risk spreading to China?
The slump in commodity prices suggests China may find itself battling deflation, according to Stephen Koukoulas, the London-based head of global foreign exchange and fixed-income strategy at TD Securities.
“The commodity price cycle is a very good leading indicator for Chinese inflation,” Koukoulas wrote in a research note this week. “In less than six months, the inflation problem and ongoing over-heating of the Chinese economy has turned to a strong probability of a deflation problem.”
Chinese consumer prices have tracked changes in commodity prices in the past decade, suggesting the 44 percent slump in the RJ/CRB commodity index in the past six months may augur a slowdown in China’s inflation from its current 4 percent level.
“If China enters a period of flat or falling domestic prices and finds that it is stuck with unwelcome inventories, the world will likely see further commodity price falls, it could be flooded with cheap goods and an already worrying outlook for deflation could intensify,” Koukoulas wrote.
His advice to investors: “Stay away from commodities currencies, look for record low interest rates around the world, and get set for flatter yield curves.”
Deflation could be the next word to watch for closely amid the financial crisis.
Government Bailout Hits $8.5 Trillion
Kathleen Pender
November 26, 2008
The federal government committed an additional $800 billion to two new loan programs on Tuesday, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 trillion, according to Bloomberg News.
That sum represents almost 60 percent of the nation's estimated gross domestic product.
Given the unprecedented size and complexity of these programs and the fact that many have never been tried before, it's impossible to predict how much they will cost taxpayers. The final cost won't be known for many years.
The money has been committed to a wide array of programs, including loans and loan guarantees, asset purchases, equity investments in financial companies, tax breaks for banks, help for struggling homeowners and a currency stabilization fund.
Most of the money, about $5.5 trillion, comes from the Federal Reserve, which as an independent entity does not need congressional approval to lend money to banks or, in "unusual and exigent circumstances," to other financial institutions.
To stimulate lending, the Fed said on Tuesday it will purchase up to $600 billion in mortgage debt issued or backed by Fannie Mae, Freddie Mac and government housing agencies. It also will lend up to $200 billion to holders of securities backed by consumer and small-business loans. All but $20 billion of that $800 billion represents new commitments, a Fed spokeswoman said.
About $1.1 trillion of the $8.5 trillion is coming from the Treasury Department, including $700 billion approved by Congress in dramatic fashion under the Troubled Asset Relief Program.
The rest of the commitments are coming from the Federal Deposit Insurance Corp. and the Federal Housing Administration.
Only about $3.2 trillion of the $8.5 trillion has been tapped so far, according to Bloomberg. Some of it might never be.
Relatively little of the money represents direct outlays of cash with no strings attached, such as the $168 billion in stimulus checks mailed last spring.
Where it's going
Most of the money is going into loans or loan guarantees, asset purchases or stock investments on which the government could see some return.
"If the economy were to miraculously recover, the taxpayer could make money. That's not my best guess or even a likely scenario," but it's not inconceivable, says Anil Kashyap, a professor at the University of Chicago's Booth School of Business.
The risk/reward ratio for taxpayers varies greatly from program to program.
For example, the first deal the government made when it bailed out insurance giant AIG had little risk and a lot of potential upside for taxpayers, Kashyap said. "Then it turned out the situation (at AIG) was worse than realized, and the terms were so brutal (to AIG) that we had to renegotiate. Now we have given them a lot more credit on more generous terms."
Kashyap says the worst deal for taxpayers could be the Citigroup deal announced late Sunday. The government agreed to buy an additional $20 billion in preferred stock and absorb up to $249 billion in losses on troubled assets owned by Citi.
Given that Citigroup's entire market value on Friday was $20.5 billion, "instead of taking that $20 billion in preferred shares we could have bought the company," he says.
It's hard to say how much the overall rescue attempt will add to the annual deficit or the national debt because the government accounts for each program differently.
If the Treasury borrows money to finance a program, that money adds to the federal debt and must eventually be paid off, with interest, says Diane Lim Rogers, chief economist with the Concord Coalition, a nonpartisan group that aims to eliminate federal deficits.
The federal debt held by the public has risen to $6.4 trillion from $5.5 trillion at the end of August. (Total debt, including that owed to Social Security and other government agencies, stands at more than $10 trillion.)
However, a $1 billion increase in the federal debt does not necessarily increase the annual budget deficit by $1 billion because it is expected to be repaid over time, Rogers said.
Annual deficit
A deficit arises when the government's expenditures exceed its revenues in a particular year. Some estimate that the federal deficit will exceed $1 trillion this fiscal year as a result of the economic slowdown and efforts to revive it.
The Fed's activities to shore up the financial system do not show up directly on the federal budget, although they can have an impact. The Fed lends money from its own balance sheet or by essentially creating new money. It has been doing both this year.
The problem is, "if you print money all the time, the money becomes worth less," Rogers says. This usually leads to higher inflation and higher interest rates. The value of the dollar also falls because foreign investors become less willing to invest in the United States.
Today, interest rates are relatively low and the dollar has been mostly strengthening this year because U.S. Treasury securities "are still for the moment a very safe thing to be investing in because the financial market is so unstable," Rogers said. "Once we stabilize the stock market, people will not be so enamored of clutching onto Treasurys."
At that point, interest rates and inflation will rise. Increased borrowing by the Treasury will also put upward pressure on interest rates.
Deflation a big concern
Today, however, the Fed is more worried about deflation than inflation and is willing to flood the market with money if necessary to prevent an economic collapse.
Federal Reserve Chairman Ben Bernanke "has ordered the helicopters to get ready," said Axel Merk, president of Merk Investments. "The helicopters are hovering and the first cash is making it through the seams. Soon, a door may be opened."
Rogers says her biggest fear is not hyperinflation and the social unrest it could unleash. "I'm more worried about a lot of federal dollars being committed and not having much to show for it. My worst fear is we are leaving our children with a huge debt burden and not much left to pay it back."
Economic rescue
Key dates in the federal government's campaign to alleviate the economic crisis.
March 11: The Federal Reserve announces a rescue package to provide up to $200 billion in loans to banks and investment houses and let them put up risky mortgage-backed securities as collateral.
March 16: The Fed provides a $29 billion loan to JPMorgan Chase & Co. as part of its purchase of investment bank Bear Stearns.
July 30: President Bush signs a housing bill including $300 billion in new loan authority for the government to back cheaper mortgages for troubled homeowners.
Sept. 7: The Treasury takes over mortgage giants Fannie Mae and Freddie Mac, putting them into a conservatorship and pledging up to $200 billion to back their assets.
Sept. 16: The Fed injects $85 billion into the failing American International Group, one of the world's largest insurance companies.
Sept. 16: The Fed pumps $70 billion more into the nation's financial system to help ease credit stresses.
Sept. 19: The Treasury temporarily guarantees money market funds against losses up to $50 billion.
Oct. 3: President Bush signs the $700 billion economic bailout package. Treasury Secretary Henry Paulson says the money will be used to buy distressed mortgage-related securities from banks.
Oct. 6: The Fed increases a short-term loan program, saying it is boosting short-term lending to banks to $150 billion.
Oct. 7: The Fed says it will start buying unsecured short-term debt from companies, and says that up to $1.3 trillion of the debt may qualify for the program.
Oct. 8: The Fed agrees to lend AIG $37.8 billion more, bringing total to about $123 billion.
Oct. 14: The Treasury says it will use $250 billion of the $700 billion bailout to inject capital into the banks, with $125 billion provided to nine of the largest.
Oct. 14: The FDIC says it will temporarily guarantee up to a total of $1.4 trillion in loans between banks.
Oct. 21: The Fed says it will provide up to $540 billion in financing to provide liquidity for money market mutual funds.
Nov. 10: The Treasury and Fed replace the two loans provided to AIG with a $150 billion aid package that includes an infusion of $40 billion from the government's bailout fund.
Nov. 12: Paulson says the government will not buy distressed mortgage-related assets, but instead will concentrate on injecting capital into banks.
Nov. 17: Treasury says it has provided $33.6 billion in capital to another 21 banks. So far, the government has invested $158.6 billion in 30 banks.
Sunday: The Treasury says it will invest $20 billion in Citigroup Inc., on top of $25 billion provided Oct. 14. The Treasury, Fed and FDIC also pledge to backstop large losses Citigroup might absorb on $306 billion in real estate-related assets.
Tuesday: The Fed says it will purchase up to $600 billion more in mortgage-related assets and will lend up to $200 billion to the holders of securities backed by various types of consumer loans.
Source: Associated Press
Citigroup says gold could rise above $2,000 next year as world unravels
Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup.
By Ambrose Evans-Pritchard
27 Nov 2008
The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.
This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.
"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.
"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.
"Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said.
"This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised."
"What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said.
Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said.
Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said.
Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.
Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.
The Fed boosted emergency loans to banks and firms
By MARTIN CRUTSINGER
28 November 2008
WASHINGTON (AP) - The Federal Reserve boosted its lending to commercial banks and investment firms over the past week, indicating that a severe credit crisis was still squeezing the financial system.
The Fed released a report Friday saying commercial banks averaged $93.6 billion in daily borrowing for the week ending Wednesday. That was up from an average of $91.6 billion for the week ending Nov. 19.
The report also said investment firms borrowed an average of $52.4 billion from the Fed's emergency loan program over the week ending Wednesday, up from an average of $50.2 billion the previous week.
The Fed said its net holdings of business loans known as commercial paper over the week ending Wednesday averaged $282.2 billion, an increase of $16.5 billion from the previous week.
Financial firms are borrowing from the Fed because they are having trouble raising money through normal channels as the financial system endures its worst crisis since the Great Depression.
Banks are hoarding cash rather than making loans out of fear that they won't be repaid. The Fed and the Treasury have been flooding the financial system with money in hopes that banks can return lending operations to more normal levels.
The central bank on Oct. 27 began buying commercial paper, the short-term debt that companies use to pay everyday expenses. It was one of a series of moves the Fed has made to try to unfreeze credit markets.
The Fed's goal is to raise demand in this area as a way to boost the availability of commercial paper, which has been seriously constrained since the financial crisis hit with force in September.
The report said insurance giant American International Group's loan from the Fed averaged $79.6 billion for the week ending Wednesday. That was down by $5.6 billion from the average the previous week.
The reduction reflected a modification of the government's support program for AIG earlier this month. Under that change, Treasury stepped in with a $40 billion purchase of stock in AIG, using money from the government's $700 billion financial system rescue package. The increased support from Treasury allowed the Fed to reduce slightly the size of its total loans to AIG.
The Fed unveiled two new programs Tuesday in a further effort to get consumer credit flowing again.
It said it would begin buying mortgage-backed securities from mortgage giants such as Fannie Mae and Freddie Mac. And it announced a program to lend to financial firms that buy securities backed by various types of consumer debt, from credit cards to auto and student loans.
Library-like silence in the stores as Thanksgiving sales fail to draw crowds
Suzy Jagger in New York
November 29, 2008
The police officers who set up double metal barricades yesterday along the sidewalks of Fifth Avenue in Manhattan need not have bothered.
While the New York Police Department had erected the barriers to protect what they expected to be burgeoning crowds of shoppers yesterday from spilling onto the road, few of the bargain hunters turned up. Traditionally yesterday – known as Black Friday – is the busiest shopping day in the American calendar when stores kick off the postThanksgiving sales. Last year, about $20 billion was spent in American stores on that day alone. This time, only the discount stores appear to have flourished.
Yesterday, Wal-Mart stores, selling goods at rock-bottom prices, were so mobbed by bargain hunters that a 34-year-old security guard was trampled to death in Long Island as shoppers forced open the doors.
But across the East river in Manhattan, many of the luxury brand stores such as Gucci, Escada, and Versace on Fifth Avenue were empty. A few blocks over on the Upper East Side, Barney’s, the upmarket department store, was library-like in its silence with only four shoppers in its Yves St Laurent area, where one black velvet jacket had been reduced from $2,230 (£1,450) to $1,339. There were no takers either for a Barney’s own $350 mulberry-coloured woolly dog jacket.
While it was too early yesterday to ascertain how retailers had fared, Wall Street expects this year to be the worst shopping season since the recession of the early 1990s. The reason was within sight of any of the few shoppers on Fifth Avenue. From the stores near Central Park, one can just see the financial skycrapers on Wall Street at the other end of Manhattan, where the credit crisis erupted 18 months ago, and which has triggered a deep recession. With 240,000 Americans losing their jobs a month and banks slashing credit card and overdraft limits, many families have stopped spending on anything other than essentials.
Michael McNamara, the vice-president of SpendingPulse, which tracks spending across America and is owned by MasterCard, told The Times: “We have never seen the retail market this bad and decline this fast.” He added he believed that the only sector that will thrive during this recession would be food, with spending in some areas of clothing down 22 per cent in the first week of this month, compared with the same week the year before.
He said: “If you look at the electronics sector, you see that in August sales fell by about 5.5 per cent, that decline accelerated to 13.8 per cent in September, 19.9 per cent in October and 22.1 per cent in November so far.”
Mr McNamara’s statistics will come as no surprise to Circuit City, America’s second-biggest electronics chain, which applied this month for bankruptcy protection from the US courts and admitted to shareholders that its management had been “upended” by the speed of the economic decline.
In Circuit City’s Midtown Manhattan store yesterday, about 200 people eyed one-day discounts but comparatively few were buying, with just 11 people waiting to pay. Retailers are also being forced to compete with near-bankrupt stores that have slashed prices to generate some sales. AlixPartners, a US retail consultancy, estimates that there is $20 billion of liquidated stock stragnating on the American high street.
While early reports, including the tragic incident in Long Island, suggest that discount retailers across the country have been mobbed by bargain hunters, overall stores are expected to experience their worst performance since the recession of the early 1990s.
Worker dies at Long Island Wal-Mart after being trampled in Black Friday stampede
BY JOE GOULD, CLARE TRAPASSO and RICH SCHAPIRO
November 28th 2008
A Wal-Mart worker died early Friday after an "out-of-control" mob of frenzied shoppers smashed through the Long Island store's front doors and trampled him, police said.
The Black Friday stampede plunged the Valley Stream outlet into chaos, knocking several employees to the ground and sending others scurrying atop vending machines to avoid the horde.
When the madness ended, 34-year-old Jdimytai Damour was dead and four shoppers, including a woman eight months pregnant, were injured.
"He was bum-rushed by 200 people," said Wal-Mart worker Jimmy Overby, 43.
"They took the doors off the hinges. He was trampled and killed in front of me.
"They took me down, too ... I didn't know if I was going to live through it. I literally had to fight people off my back," Overby said.
Damour, a temporary maintenance worker from Jamaica, Queens, was gasping for air as shoppers continued to surge into the store after its 5 a.m. opening, witnesses said.
Even officers who arrived to perform CPR on the trampled worker were stepped on by wild-eyed shoppers streaming inside, a cop at the scene said.
"They pushed him down and walked all over him," Damour's sobbing sister, Danielle, 41, said. "How could these people do that?
"He was such a young man with a good heart, full of life. He didn't deserve that."
Damour's sister said doctors told the family he died of a heart attack.
His cousin, Ernst Damour, called the circumstances "completely unacceptable."
"His body was a stepping bag with so much disregard for human life," Ernst Damour, 37, said. "There has to be some accountability."
Roughly 2,000 people gathered outside the Wal-Mart's doors in the predawn darkness.
Chanting "push the doors in," the crowd pressed against the glass as the clock ticked down to the 5 a.m. opening.
Sensing catastrophe, nervous employees formed a human chain inside the entrance to slow down the mass of shoppers.
It didn't work.
The mob barreled in and overwhelmed workers.
"They were jumping over the barricades and breaking down the door," said Pat Alexander, 53, of Crown Heights, Brooklyn. "Everyone was screaming. You just had to keep walking on your toes to keep from falling over."
After the throng toppled Damour, his fellow employees had to fight through the crowd to help him, police said.
Witness Kimberly Cribbs said shoppers acted like "savages."
"When they were saying they had to leave, that an employee got killed, people were yelling, 'I've been on line since Friday morning!'" Cribbs said. "They kept shopping."
When paramedics arrived, Damour's condition was grave.
"They were pumping his chest, trying to bring him back, and there was nothing," said Dennis Smokes, 36, a Wal-Mart worker.
Damour was taken to Franklin Hospital and pronounced dead at 6:03 a.m.
Hank Mullany, president of Wal-Mart's northeast division, said the company took extraordinary safety precautions.
"We expected a large crowd this morning and added additional internal security, additional third-party security, additional store associates and we worked closely with the Nassau County police," he said in a statement.
"We also erected barricades. Despite all of our precautions, this unfortunate event occurred."
The 28-year-old pregnant woman and three other shoppers were taken to area hospitals with minor injuries, police said.
In a news conference after the incident, Nassau County police spokesman Lt. Michael Fleming described the crowd as "out of control" and the scene as "utter chaos." He said Wal-Mart did not have enough security onhand.
Fleming said criminal charges were possible but that it would be difficult to identify individual shoppers in surveillance videos.
Items on sale at the Wal-Mart store included a $798 Samsung 50-inch Plasma HDTV, a Bissel Compact Upright Vacuum for $28 and Men's Wrangler Tough Jeans for $8.
The Long Island store reopened at 1 p.m. and was packed within minutes.
"I look at these people's faces and I keep thinking one of them could have stepped on him," said one employee. "How could you take a man's life to save $20 on a TV?"
Spain injects €11bn into struggling economy
It is hoped the two-year package, the majority of which will be pumped into local public works, will help create 300,000 jobs
Graham Keeley, Madrid
November 27, 2008
Jose Luis Rodriguez Zapatero, Spanish Prime Minister, has unveiled an €11billion two-year package to boost the country’s flagging economy and cut unemployment.
The Spanish premier said the plan would boost public works programmes and offer some state help for the car industry which has been badly hit by the global financial crisis.
“We hope this will generate 300,000 jobs within a year,” he told parliament. “These are urgent measures to generate jobs.”
Mr Zapatero said the package would help innovation, productivity, infrastructure and education in 2009 and 2010.
The majority of the cash – €8 billion - was destined for local public works.
Councils should use the cash for construction projects, infrastructure works, repairing buildings and social programmes.
Mr Zapatero also handed €800 to Spain’s ailing car industry which accounts for 20 per cent of exports.
Car industry bosses, including Jean Pierre Laurent, chief executive of Renault Espana, had criticised Mr Zapatero for failing to do enough for car firms which are laying off thousands of workers s demand plummets.
“This is a sector with a future and we are backing it,” Mr Zapatero said.
The regional government of Aragon in eastern Spain announced a €200 million loan to General Motors Europe so the US car giant can start production of its new Opel Meriva at its factory in Zaragoza.
General Motors said it needed €595 million to keep its European factories running.
Spain has already put in place stimulus measures totalling about €40 billion as the economy contracted in the third quarter by 0.2 per cent, the first time this has happened in 15 years.
But the country’s scope for more fiscal stimulus is “reduced,” said Pedro Solbes, Spain’s Economy Minister.
“I’ve always said that the margin for fiscal measures is reduced and I’m still saying that,” Mr Solbes said.
He welcomed the European Commission’s proposed 200 billion euro stimulus plan for the EU economy unveiled on Tuesday.
“What’s new is the commission’s communiqué from yesterday calling on European countries to make a certain effort. We wanted to show solidarity with that effort,” he said.
The package, to which individual countries will contribute €170 billion, equals about 1.5 per cent of the 27-nation EU’s economic output.
Mr Solbes said the EU new stimulus plan will not reduce the Spanish budget deficit, which is likely to be above the EU limit of 3 per cent of GDP for the time since the adoption of the euro.
Why Beijing Is In A Risky Place
As the factory to the world, China may be the nation most vulnerable to collapsing global demand.
By George Wehrfritz
Nov 22, 2008
Workers are losing factory jobs at the fastest rate in decades. Automakers—having failed to anticipate today's sales slump—are lobbying politicians for bailouts. The stock market is a crash heap, home prices are down by 35 percent or more in many cities and toxic assets have begun to weigh heavily on banks. America in 2008? Try China, where the global economic downturn now looks certain to end the country's 30-year growth boom, posing the greatest leadership challenge to Beijing since pro-democracy demonstrations threatened one-party communist rule back in 1989.
That's not the conventional take on China—yet. But with most industrialized countries now in recession and countries the world over hoping against hope that the planet's most buoyant major economy might somehow dampen the global downturn, it's a forecast that increasingly rings true. The reasoning goes something like this: China, despite its deep pool of savings and $2 trillion in foreign reserves, is unprotected from the fall in global demand that began in earnest in mid-2008. Notwithstanding all the hoopla about the rise of China's billion consumers, the body blow that's now landing in the industrial heartland will debunk the notion that China has already begun transitioning toward a new growth model based less on exports and investment and more on household consumption. "We would love to believe it too, but it just ain't so," wrote Standard Chartered bank's highly respected China economist, Stephen Green, last month. He says expecting Chinese spending to save the world from recession is "a pipe dream."
With China at the vanguard, Asia as a whole stands dangerously exposed to external shock. Since the late 1990s, household consumption as a share of China's GDP has fallen from roughly half to 35 percent. On the flip side, the share of Asia ex-Japan's output devoted to exports is now more than 45 percent, or roughly 10 points higher than it was on the eve of the 1997–98 Asian financial crisis. When juxtaposed with America's debt-driven gluttony, Asia's puny appetite for the goods it produces reflects a global economy that's staggeringly out of whack. "We are where we are because of massive imbalances that policymakers and politicians have allowed to build up over the last decade," argues Stephen Roach, chairman of Morgan Stanley Asia. "Those imbalances were never sustainable, but the longer they went on the more they seduced people. And now we're paying the ultimate price for that seduction."
The tab, in fact, has yet to be tallied, but don't be surprised if Beijing gets stuck with the biggest portion of the bill for the simple reason that China's rebalancing act is actually much tougher than America's. For U.S. households, today's crisis means saving more and consuming less (recent consumption data suggests that is happening quite rapidly). Yet in China, where total household consumption is just 5 percent of America's by value, the challenge is to sustain an economy that's largely investment- and export-driven, which means finding ways to perpetuate industrial overproduction. Michael Pettis, a professor of finance at Peking University, says America found itself in the same bind back in 1929. "The U.S. in the 1920s ran a huge trade surplus and had the largest reserves in history to that point," he says. "So was the U.S. immune to the global crisis? No. It was the country that suffered the most. In that sense it is exactly like China today."
Beijing realizes the growth trap it's in. Why else would it unveil on Nov. 10 a $590 billion stimulus plan—a package nearly as large as Washington's $700 billion financial bailout—just days after it announced that China's economy expanded by 9 percent in the July–September quarter? The consensus view is that China's economy has slowed markedly since then. Year-on-year growth estimates for 2009 are mostly in the 7s, with the latest forecasts adding the scary caveat, "or less." This month the Royal Bank of Scotland said 5 percent growth in China next year couldn't be ruled out. China's economy, which grew by 11.9 percent last year, hasn't dipped below 6 percent annually since 1990.
Beijing's stimulus plan has won plaudits internationally not least because it indicates that Chinese leaders won't stand idly by as the crisis deepens. But just as in Washington at the beginning of the Great Depression, policy miscues could cost China dearly—especially if they undermine the global trading regime that China's economy relies on more heavily than any other major economy in the world. In the early 1930s, America's self-defeating mistake was to cut off world trade, particularly in the Smoot-Hawley Tariff Act, at a time when it was the leading exporter in a world burdened by massive industrial overproduction. Today, China is the lead exporter, the world again faces massive overproduction, and the mistake Beijing must avoid is moving too hard to sell more manufactured exports at the risk of flooding an already weak market, and triggering a protectionist backlash. That will only push the global market toward deflation—the downward spiral of falling prices leading to falling demand, as stressed consumers wait for even better bargains.
The doubts about China's stimulus plan arise in part because it's all broad strokes with no fine print. Conceptually, however, it seems intended to split the difference between promoting consumption at home, and export sales. It includes commitments to fund rural infrastructure, boost social spending on health and education, and mount an "economic housing" scheme for migrant workers in major cities—all of which, if implemented, would raise household spending over time. But it also contains perks for heavy industry, value-added tax cuts for the export sector and lending provisions that will channel bank funding to state enterprises engaged in road and rail construction and away from private companies. "The two focuses are definitely exports and infrastructure. That's what we're getting from everything we're picking up," says Green. "And that the health and education spending, although it has been listed as one of the eight priorities, is not going to be [well] supported." Economists estimate that only a quarter of the $590 billion is new money as opposed to previously announced spending, future tax cuts and unfunded mandates passed down to local governments. There's reason to expect that much of the promised social spending—and the consumer empowerment it represents—may not materialize. One warning signal is that Beijing has entrusted much of the safety net stuff to the provinces, which historically have put a low priority on building schools, unless the order to do so comes with earmarked funding from Beijing. One new concern: local tax revenues are shrinking due to the economic downturn. Roach says investment in the social safety net would "reduce the precautionary saving that is inhibiting broad-based consumption growth across the nations [of Asia]," though he adds: "China has from time to time flirted with that, but they really have dragged their feet."
To understand the linkage between social services and household consumption, visit a Chinese hospital. At check-in, patients are required to deposit money up-front, and when that funding runs dry they're tossed out onto the street, healthy or not. According to the World Health Organization, China spends less than 1 percent of its GDP on health care, which ranks it 156th out of 196 nations the U.N. agency tracks. Likewise, poor kids can't attend school without paying fees, and most migrants are uninsured against job-site accidents at any price. Families cope by saving an estimated 25 percent of their disposable income, just in case.
That isn't a social contract conducive to the "harmonious society" President Hu Jintao has advocated since 2006, or so concludes a new report co-produced by the United Nations Development Program and the China Institute for Reform and Development. It calls on China to overhaul its social-welfare system to provide universal basic health care, education, unemployment and retirement benefits for the country's 1.3 billion people. It stresses the need to vest forgotten segments of society including farmers, migrant workers and the poor. And it claims that such expenditures—which it estimates would cost $55 billion a year—actually offer a bigger bang for the buck than would the construction of new roads, railways and bridges.
The risk today (and it's one that's already materializing in a mounting exodus from shuttered factories in Guangdong province) is that these workers could, like the boxcar-hopping hobos of America's Depression era, become the flotsam and jetsam of the economic bust. Almost since China's reforms began three decades ago, Beijing insisted that sustaining economic growth rates above 8 percent was paramount to employing the millions of workers pouring in from inland villages. The further growth drops below that level, the higher the percentage of an estimated 15 million workers entering the labor force each year lands in the ranks of the unemployed. Yet even as policymakers stoked fast growth with every means at their disposal, little was done to transform these workers into foot soldiers of a different sort: new consumers with sufficient social protections to save less and spend more.
The prescription for change has been obvious since the late 1990s. It includes balanced growth between booming east and lagging west; efforts to narrow the yawning income gap between China's superrich and everyone else; and policies that channel the massive earnings logged by the state-owned conglomerates that dominate China Inc. back into government coffers to fund social spending. Yet campaigns with names like Go West meant to spur investment in the hinterland never amounted to more than propaganda exercises, and a long-mulled plan for the government to charge state companies dividend on their huge profits remains a small-scale experiment. In October, Standard Chartered noted a "gulf between aspirations and actual policies" illustrated by Beijing's long-standing bias toward investment and exports, and support for "state-protected oligopolies." Pettis argues that Beijing's persistent mercantilism has prepared it for the wrong crisis—specifically, an external debt shock akin to the one that ravaged Asia in 1997-98, against which China's huge savings and foreign reserve pools would make it "superbly protected." Yet as with America in 1929, China is the nation most exposed in the world to a collapse in global demand today.
As such, Beijing finds itself in a fix as 2008 winds to an ignominious close. Export promotion offers a viable short-term means of keeping the factories of China running—yet grabbing more market share amid a global downturn is the surest way to incite protectionism. During the recent gathering of G20 leaders in Washington, much public emphasis was placed on shoring up the global financial architecture and defending free trade. Yet former New Zealand prime minister Mike Moore, who headed the World Trade Organization from 1999 to 2002, believes the backroom talks focused on the imperative that Asia not try to export its way out of today's crisis. It was "the elephant in the room; how China, and to a lesser extent India and the Southeast Asians, must become consuming countries," he says. "It's overwhelmingly in [their] interest to become a lot less reliant on exports, and it also does right by the people they represent. Not to do it could trigger something that's very, very unpleasant." Global trade slumped 70 percent in the 1930s, and any return to the virulent economic nationalism of that era "would turn crisis into catastrophe," warns Moore.
That presents Beijing with a leadership challenge very different from the one it confronted with tanks and soldiers in 1989. Today, it must work to maintain enough harmony in the global trade arena so as not to lose access to vital overseas markets, while telling the Chinese people that fast growth isn't their birthright. In essence, Beijing must offer a new social contract in which consumption bolstered with a social safety net replaces the export-driven growth engine that has powered China's economy for 30 years. FDR did that in America in the 1930s, but it took a decade. Might China's leaders fare any better? In the late 1990s, then Premier Zhu Rongji refrained from devaluing China's currency when many of its neighbors did so; the decision lost China some export momentum but gained its leadership a reputation for responsible global action. Today's leaders have maintained that reputation, but given the enormity of the economic challenges at hand, the only safe bet is that their helmsmanship will be tested to the extreme in 2009. Especially if the pessimists are correct and China's economy grinds to a halt.
到了才知道
01. 到了中国，才知道只生一个孩子好。
02. 到了台湾，才知道骂祖宗还可以面带微笑。
03. 到了香港，才知道明星都戴著口罩。
04. 到了日本，才知道死不认帐的人有时候还会很有礼貌。
05. 到了韩国，才知道亚洲足球使上帝都差点疯掉。
06. 到了泰国，才知道看见漂亮妹妹先别慌著拥抱。
07. 到了新加坡，才知道为什麼四面都是水，还向别人要。
08. 到了印度，才知道多贵重的人都得给牛让道。
09. 到了印尼，才知道为什麼华人夜裏睡不著觉。
10. 到了阿拉伯，才知道做男人是多麼的骄傲。
11. 到了法国，才知道被人调戏还会很有情调。
12. 到了西班牙，才知道被牛拱到天上还可以哈哈大笑。
13. 到了南斯拉夫，才知道为什麼有人不愿回到祖国的怀抱。
14. 到了奥地利，才知道是个乞丐都能弹上一支小调。
15. 到了瑞士，才知道开个银行帐户没有十万会被人耻笑。
16. 到了丹麦，才知道写个童话其实可以不打草稿。
17. 到了义大利，才知道天天吃比萨脸上都可以不长脓包。
18. 到了希腊，才知道迷人的地方其实都是破庙。
19. 到了梵蒂冈，才知道在其境内任何地方开枪都可以打著罗马的鸟。
20. 到了美国，才知道不管是谁，乱嚷嚷都会中炮。
21. 到了加拿大，才知道面积比中国还大的地方，人比北京还少。
22. 到了巴拿马，才知道一条河也代表了主权的重要。
23. 到了巴西，才知道衣服穿得很少也用不著害臊。
24. 到了智利，才知道火车在境内拐个弯也很难办到。
25. 到了阿根廷，才知道不懂足球会让人晕倒。
26. 到了南非，才知道随时会被爱滋吻到。
27. 到了撒哈拉，才知道节约用水的重要。
28. 走遍非洲，才知道人吃人有时候也是一种需要。
29. 到了马来西亚，才知道牵手也会接传票。
一枝竹仔(粤)
歌手：Cream
词曲：周聪
一枝竹仔会易折弯
几枝竹一扎断节难
心坚似毅勇敢
团结方可有力量 嘿!
大众合作不分散
千斤一担亦当闲
齐共同力无猜忌
一切都好顺利 好!
花虽好要有叶满枝
月虽皎洁有未满时
孤掌莫似依
团结方可以干大事
OPEC defers new oil supply cut as divisions emerge
By Rania El Gamal and Alex Lawler
Nov 29, 2008
CAIRO (Reuters) - OPEC on Saturday deferred a decision on a new oil supply cut amid signs that Saudi Arabia and its Gulf allies are demanding tighter adherence to restraints put in place over the past two months.
Gulf producers want to see strict compliance with recent output curbs of 2 million barrels a day before considering further reductions when the Organization of the Petroleum Exporting Countries meets in Algeria on December 17.
"Compliance I think is OK," said Kuwaiti Oil Minister Mohammad al-Olaim. "But the market conditions require us to be 100 percent compliant."
Delegates said that ministers discussed how much more they needed to cut in December. Most, including Gulf producers led by Saudi Arabia, saw a requirement to slice another 1 to 1.5 million bpd. But for that to happen, delegates said, Riyadh wants proof that all fellow members are meeting their part of existing curbs.
"We are very concerned about overproduction," said Qatari Oil Minister Abdullah al-Attiyah.
While OPEC's first priority is to put a floor under a $90-collapse in oil prices to $55, Saudi Arabia for the first time in years identified a "fair" price -- $75 a barrel.
That target will serve as a reference point for traders when world oil demand starts to emerge from the current recessionary slump.
But for now, the oil market is focused on whether OPEC can prevent prices falling further by avoiding the sort of divisions that have undermined its response to falling prices during previous economic downturns.
"$75 a barrel doesn't look doable in the short term," said Raja Kiwan of consultancy PFC Energy. "Given the fractious nature of OPEC on quota compliance, they may have some problems."
LEAKS?
Delegates identified Iran and Venezuela, perennial price hawks who have urged quicker cuts, as particular sources of concern on quota compliance. Venezuela denied the charge. Iran made no comment.
But consultants Petrologistics estimated last week that, based on shipping data, Iran's production would fall by 80,000 bpd this month, much less than the 199,000 bpd it is due to cut.
OPEC will want to keep any bickering under wraps.
Secretary General Abdullah El-Badri said compliance already was "100 percent" and OPEC President Chakib Khelil said in an official statement that members were "fulfilling their commitments."
Early industry estimates show Saudi Arabia and its Gulf neighbors making good their share of OPEC's 2 million bpd of cuts since September.
Petrologistics data estimated OPEC output falling by 1.22 million bpd in November, with nearly half of that reduction shouldered by Saudi -- Riyadh is only responsible for about a third of OPEC output.
OPEC may need to make larger cuts to balance the rapid decline in demand among Western economies that has caused inventories to swell. World oil demand is set to contract this year for the first time in 25 years.
"The bottom line is that they need to cut again and they need to cut substantially," said Gary Ross, CEO of consultancy PIRA Energy. "Demand is falling out from beneath them."
Naimi said he would like to see inventory cover among OECD industrialized nations down to 52 days from current levels of 55-56 days of forward demand, the top of the seasonal norm.
OPEC has a mixed record of dealing with downturns in the economy that curb energy demand.
In 2001 it successfully defended prices by removing 5 million bpd in four stages, 19 pct of its supply, laying the foundation for a 6-year boom in oil prices that culminated this summer in a record $147 a barrel.
But in 1997 in Jakarta, at the start of the Asian financial crisis, Saudi pushed through an OPEC increase after Venezuela openly flouted its cartel supply quota by a large margin.
Prices went into a tailspin and U.S. crude hit a low of $10.35 at the end of 1998.
U.S. holiday sales get off to slow start
By Nicole Maestri
November 29, 2008
The U.S. holiday shopping season got off to a slow start as consumers, squeezed by the economic crisis, bought carefully and said they would wait for better deals closer to Christmas.
Early results from the Black Friday weekend, which kicks off holiday sales one day after U.S. Thanksgiving, bolstered forecasts by some analysts that total holiday sales could contract for the first time since that data started being collected in the early 1990s.
ShopperTrak, which measures customer traffic, said on Saturday that Black Friday sales rose 3 percent to $10.6 billion (6.9 billion pounds). That was slower than an 8.3 percent rise in 2007.
"The initial response by many people may be positive," said Telsey Advisory Group analyst Joseph Feldman of the increase.
But, Feldman said, excluding inflation the sales figures are roughly flat year over year. His firm still expects overall holiday sales will be flat to slightly down.
Shoppers interviewed on Saturday said they were disappointed by the deals this weekend and bet stores would offer even steeper discounts in the weeks to come -- a worrisome sign for retailers struggling with weak profits.
"I'm not happy with the prices," said Rose Fernandez, shopping at a Macy's in Jersey City, New Jersey. "If it's worth the money, I would pick it up... If I can wait, I wait and watch. I can wait even till the day after Christmas."
ShopperTrak noted that stores would have a shorter holiday season, with 27 days between Thanksgiving and Christmas, compared with 32 days in 2007.
"(That) may catch some procrastinating consumers off guard, leading to lower sales levels," said Bill Martin, co-founder of ShopperTrak.
PENDING LAYOFFS PUT PURCHASES ON HOLD
Retailers are facing what could be the weakest sales season in nearly two decades as shoppers contend with falling home values, reduced access to credit and a weak job market.
The three-day Thanksgiving weekend can account for 10 percent of overall holiday sales and has taken on added importance this year as the country seeks a way out of its worst economic crisis since the Great Depression.
Heidi Hickman, a marketing manager, was browsing at a J.C. Penney in Jersey City on Saturday, but gifts were not on her mind.
"I got a notice there are going to be layoffs in my department," she said. "It's making me stop right now and not do anything until I find out."
If sales for November and December decline, it would mark the first contraction since the National Retail Federation began tracking holiday sales in 1992.
"I have very little confidence that the sales number will be up year-over-year," for the season, said Stacey Widlitz, retail analyst with Pali Capital.
In a highly competitive battle to attract shoppers, some retailers, including Kmart, opened on Thanksgiving day, while others began sales on Friday right after midnight.
In Chicago, Gap Inc's Old Navy chain opened at 7 a.m. (1 p.m. British time) on Saturday but an employee said there was little to do until 9 a.m. (3 p.m. British time), when shoppers finally began to arrive.
A nearby Sears had cut prices on holiday decorations by 60 percent, while clothing retailer Charlotte Russe tried to entice shoppers with a deal to buy one item and get another item for 50 percent off.
Penney said Black Friday shopping was strong as consumers sought deals on practical gifts, like sweaters. But it did not release sales figures for the weekend, saying the economic environment was too volatile.
Amazon.com Inc said Apple's iPod touch, which has a touch-sensitive screen, was its top-selling electronics item on Black Friday morning, while the Wii Fit, for Nintendo Co Ltd's Wii video game console, was its most popular video game.
SHOPPERS EXPECT PRICES WILL FALL
As shoppers sought low prices online, eBay's Web payments service PayPal saw 34 percent more transactions on Black Friday than in 2007 and showed a 26 percent increase in online payment volume.
In Los Angeles, Jenipher Park, 36, and Keri Yang, 34, bought boots at Nordstrom on Saturday, but both were expecting bigger discounts.
They said they will delay more purchases to get better deals closer to Christmas, and this year the two moms are planning to only get gifts for their children.
Many shoppers echoed those sentiments, saying they would find other ways to celebrate with adult relatives and friends. Some were already turned off to the very idea of shopping.
"I'm not into shopping this year like I was the year before," said Rolando Ramos, 29, on a visit to Chevy Chase, Maryland. "It's very depressing. Go to the malls, just looking around, it's deserted."
Widlitz said she expected discount behemoth Wal-Mart to win shoppers this holiday because of its low prices.
At a Wal-Mart store in Columbia, Maryland, on Friday, the parking lot was full at 7:30 a.m. and customers stood in line 10 shopping carts deep to make purchases.
Black Friday trade suggests longer stay in the red
By Andrew Edgecliffe-Johnson in New York and Jonathan Birchall
November 29, 2008
Hassan, whose pretzel cart has sat outside the Disney store on New York's Fifth Avenue for almost 10 years, had never a Black Friday like it.
"Last year, I sold almost 1,000 breads. This year it's only 100 or 150," he said.
Up the road by FAO Schwarz, the queue stretched half way along the toy store. "Usually it's all the way around the block," said Ariel, manning a stand selling fluorescent paintings of nearby landmarks, who estimated his own sales were down 70 per cent.
Called Black Friday because historically it is the day when retailers begin to turn a profit for the year, the day after Thanksgiving is usually one of the busiest shopping days. It is watched obsessively by retailers as a signal of consumer demand for the critical Christmas season.
The thin crowds allowed tourists to take photographs of each other posing in front of Tiffany & Co's fir-lined windows and Bergdorf Goodman's display of boxing polar bears without the inconvenience of having to wait for other shoppers to pass. Tiffany's main floor was unusually calm.
Janet Hoffman, managing partner at Accenture's North American retail consultancy, said that initial reports from around the country suggested that shoppers were focusing on basic items rather than luxuries, and were hunting out discounts.
In Long Island, a Wal-Mart worker was trampled to death as the store opened. Two people were shot dead at a California Toys R Us, but details were unclear.
About 5,000 people waited for Macy's Manhattan flagship to open at 5am.
The Apple store in Trump Plaza had one-day discounts offering the iPod nano from $139 and MacBook laptops from $948. But Karen Brush, one of the few shoppers emerging with bags, said she had only gone in to replace a lost mobile phone.
"This year I'm cutting back," she said. "I'll probably end up bargain-hunting on the internet."
Shoppers' views on the prices on offer depended partly on the currency they were spending.
Nicola from Manchester, England, was congratulating herself on having bought her dollars in September.
Standing outside the always-hectic Abercrombie & Fitch store, she had accumulated six bags already. "I'm going to take them back to the hotel and come back out again. My arms are aching," she said.
The Financial Meltdown Is An Academic Crisis Too
Recent events have not been kind to the modern financial market structure. This column blames the prevailing consensus amongst finance academics for underestimating the irrationality and instability involved. Has the discipline failed to understand global financial markets?
By Richard Dale
27 November 2008
LONDON -- Recent events have demonstrated that the financial market structure that has evolved over the past twenty years is a powder keg – the detonating device was the bursting of the 2004 to 2007 credit bubble. In considering where we go from here, two separate issues need to be addressed: how to deal with financial bubbles and the design of a new financial market regulatory structure.
Counter-cyclical bank capital requirements may help to deal with the first problem but regulatory reform presents more formidable difficulties. The problem here has been exacerbated by the forced financial restructuring that has taken place during the crisis management of the past few months. We now have a much more concentrated financial services industry and one in which large investment firms have been merged with deposit-taking banks. The financial landscape is now dominated by huge financial conglomerates which markets will correctly perceive as being far too systemically sensitive to be allowed to fail. Hence the whole moral hazard issue is thrown into even sharper relief.
There are two possible regulatory responses to this situation. The first is to try to put banking back in its box; to reverse the trends of the past twenty years by dismantling the financial conglomerates and re-imposing strict activity constraints on deposit-taking institutions. This was the US response after the 1929/33 crash not only from the legislature in the form of the Glass Steagall Act but also from the leading banks themselves (National City Bank and Chase National Bank), who of their own volition announced that they were disposing of their securities affiliates because events had shown that commercial and investment banking should not be mixed. It is ironic that today’s response is in the opposite direction: non-bank investment firms have either been eliminated (Lehman), pushed into the arms of banks (Bear Stearns, Merrill Lynch) or induced to re-charter themselves as deposit-taking banks (Morgan Stanley, Goldman Sachs). Unscrambling these new universal banking conglomerates would, however, present enormous practical difficulties and is probably unrealistic.
The second approach is to neutralise moral hazard by subjecting financial institutions to a comprehensive regulatory framework which would also see regulators acting in a much more intrusive, investigative and, if necessary, adversarial manner. Crucially, this new regulatory approach would have to be truly global since national authorities are at present inhibited from taking action that might induce regulated activities to move to more accommodating financial centres.
Mixing banking and securities
Fifteen years ago, I argued that banks’ increasing involvement in securities activities worldwide could eventually lead to a repetition of the 1929/33 banking meltdown. My analysis rested on the observation that if banks were permitted to diversify away from non-core banking activities the moral hazard that is known to promote excessive risk-taking in traditional banking would be extended to these other activities, in particular securities markets. The question then was whether ‘the mixing of banking and securities business can be regulated in such a way as to avoid the danger of a catastrophic destabilisation of financial markets’. After considering all the regulatory options, I concluded that there was no solution: “Allowing banks to engage in risky non-bank activities could either destabilise the financial system by triggering a wave of contagious bank failures – or alternatively impose potentially enormous costs on tax payers by obliging governments or their agencies to undertake open-ended support operations.”
The prevailing view amongst finance academics at the time, as reflected in a critical review of my book in the Journal of Finance, was that financial structure was largely irrelevant to the question of systemic stability. According to the conventional wisdom we had learned from the 1929/33 crash, a monetary contraction such as occurred then could be neutralised by injecting reserves into the banking system and a flight to quality, because it merely redistributes bank reserves, “is unlikely to be a source of systemic risk”. This widely held view of the behaviour of financial markets turns out to have been entirely misguided. As we have witnessed in recent months, a major shock arising from publicised losses on banks’ securities holdings can have a domino effect on financial institutions, leading ultimately to a seizure in credit markets which central bankers, on their own, are powerless to unblock. Only drastic government intervention – guarantees for money market funds, guarantees for interbank lending, emergency deposit insurance cover, lending directly to the commercial paper market, and partly nationalising the banking industry – has prevented a full repetition of the 1929/33 financial meltdown.
In addition to underrating the importance of financial market structure, finance academics have also largely neglected the well-documented boom/bust characteristic of asset and credit markets. In my recent book on the South Sea Bubble, I analysed the behaviour of South Sea stock prices and concluded that, even when judged against the valuation techniques available at the time, there is overwhelming evidence that the South Sea boom represented an irrational bubble. My central thesis was that, taken together with other more recent boom/bust episodes, the events of 1720 lend force to the argument that national authorities must intervene to head off unsustainable financial market booms. I was also critical of revisionist histories of financial upheavals such as the South Sea Bubble that have tended to stress the rationality of investors and downplay the idea that financial markets are inherently unstable and prone to bouts of euphoria and panic.
What we have witnessed in recent months is not only the fracturing of the world’s financial system but the discrediting of an academic discipline. There are some 4000 university finance professors worldwide, thousands of finance research papers are published each year, and yet there have been few if any warnings from the academic community of the incendiary potential of global financial markets. Is it too harsh to conclude that despite the considerable academic resources that go into finance research our understanding of the behaviour of financial markets is no greater than it was in 1929/33 or indeed 1720?
Iceland faces the music
Iceland’s meltdown was caused by the rapid emergence of an oversized banking sector and accompanying domestic credit creation, asset bubbles and excessive indebtedness that all this encouraged. This column draws lessons from this crisis and suggests Iceland should join the EU if it wants to stand a chance at keeping its well-educated young people from emigrating.
Gylfi Zoega
27 November 2008
Iceland’s borrowing in international credit markets during the period 2003-2007 propelled a macroeconomic expansion as well as the very rapid expansion of the banking sector. Borrowing was also undertaken to fund leveraged buy-outs of foreign companies as well as the buying of domestic assets. There developed the biggest stock market bubble in the OECD while house prices doubled.
The banking development was ominous. No visible measures were taken to limit the banks’ growth during the expansionary phase. The size of the banking sector at the end of this period was such that it dwarfed the capacity of the central bank to act as a lender of last resort as well as the state’s ability to replenish its capital. The banking system was also vulnerable because of its rapid expansion and the bursting of the domestic asset price bubble.
The end
The end came quickly. In the otherwise quiet city of Reykjavik, suspicious movements of government ministers and central bank governors were detected on Saturday morning, 27 September. On Monday it was explained that Glitnir, the smallest of the three larger banks, had approached the central bank for help because of an anticipated liquidity problem in the middle of October. Lacking confidence in the collateral offered, the central bank had decided to buy 75% of its shares at a very low price.
Like the banks themselves, the government had claimed for months that all three banks were liquid as well as solvent, yet when push came to shove it tackled a pending liquidity squeeze by wiping out the shareholders of Glitnir. Credit lines were now withdrawn from the two remaining banks. There followed an old-fashioned bank run on the Icesave branch of the Landsbanki in the UK The Landsbanki fell when it was unable to make payments to creditors.
The responses were chaotic. The governors of the central bank announced a 4 billion euros loan from Russia but then had to retract the story within hours. They also decided to fix the exchange rate but without the requisite foreign currency reserves this was an impossible task so the bank gave up within two days. One of the governors appeared on television and stated that the Icelandic state would not honour the foreign debt of the banks without distinguishing deposits from loans. Telephone conversations between government ministers in Iceland and the UK appear not to have clarified the situation. The British government then seized the British operations of both the Landsbanki and Kaupthing in London. The seizure of Kaupthing’s Singer and Friedlander automatically brought Kaupthing into default. All three banks were now in receivership.
The foreign exchange market collapsed on October 8th. Following a period of sporadic trading the central bank started to auction off foreign currency on October 15th. There are plans to let it float again.
The real economy is currently responding to the turmoil; unemployment is rising and there have been several bankruptcies and many more are imminent. There is the realisation that not just the banks but a significant fraction of non-financial firms are heavily leveraged; have used borrowing, mostly in foreign currency, to fund investment and acquisitions. The Icelandic business model appears to have involved transforming firms into investment funds, be they shipping companies such as Eimskip (established 1914), airlines such as Icelandair (established in 1943), or fish-exporting companies, to name just a few examples. Exporting firms, however, are benefiting from lower exchange rates. The future belongs to them.
Lessons
The proximate cause of the economic meltdown in Iceland is the rapid emergence of an oversized banking sector and the accompanying domestic credit creation, asset price bubbles and high levels of indebtedness. At this point it is important to consider the reasons why this was allowed to happen.
Monetary policy technically flawed
A sequence of interest rate rises, bringing the central bank interest rate up from 5.3% in 2003 to 15.25% in 2007 did not prevent the boom and the bubbles that preceded the current crash. On the contrary, they appear to have fuelled the bubble economy.
But surely it was apparent to anyone in the latter stages of the boom that it was driven by unsustainable borrowing and that a financial crisis was fast becoming inevitable. Iceland would have faced the music soon even in the absence of turmoil in international credit markets. However, in spite of many observers pointing this out (including the central bank itself!), the course of economic policy was not changed. There were clearly other, more profound, reasons for this inertia and passivity in the face of peril.
Belief in own abilities and good luck
History is full of examples of nations gripped by euphoria when experiencing rapidly rising asset prices. During the economic boom it was tempting to come up with stories to explain the apparent success, such as the notion of superior business acumen. However, this is a normally distributed variable and its mean does not differ much between nations. The ability to govern a modern economy is unfortunately also a normally distributed.
The normal distribution and the division of labour
When there are not too many people to choose from, it becomes doubly important to pick the best candidate for every job. While the private sector has, as if led by an invisible hand, a strong incentive to pick the most competent people for every position, the same can not be said of certain areas within the public sector. The appointment of former politicians to the position of central bank governor, to take just one example, reduces the bank’s effectiveness and credibility. The danger is that the individual in question has interests and policies that exceed those fitting a central bank governor in addition to lacking many job-specific skills. And this one example is just the tip of the iceberg!
In addition, Adam Smith’s dictum that the scale of the division of labour is determined by the size of the market also applies to the government. There are scale economies when it comes to running the state and small nations might benefit from the sharing of a government, as well as the central bank!
Social pressures
We now come to an equally profound problem, which is that the small size of the population makes it inevitable that personal relationships matter more than elsewhere.
One of the keys to success for an individual starting and sustaining his or her career in Icelandic society has been to pledge allegiance to one of the political parties – more recently business empires – and act in accordance with its interests. It follows that society rewards conformity and subservience instead of independent, critical thinking. Many players in the banking saga have interwoven personal histories going back many decades. The privatisation of the banks, not so many years ago, appears also to have been driven by personal affections and relationships rather than an attempt to find competent, responsible owners.
Mancur Olson’s The Logic of Collective Action, first published in 1965, describes the difficulties of inducing members of large groups to behave in the group’s interests. Clearly, political parties need to reward their members in order to motivate them and ensure their loyalty. The same applies to labour unions and business empires. But the smaller the country, the smaller the total surplus income that can be used in this way, while the amount needed to guarantee the loyalty of any given individual may not be any smaller. It follows from Olson’s analysis that the smaller the nation, the more likely it is that society will be uni-polar. As a matter of fact, powerful individuals or parties that often rule small nations. Such a society usually does not encourage dissent or critical thinking.
It follows that one individual’s criticism – be that of banks or the political or economic situation – may put him in a precarious position vis-à-vis the dominant group. The private marginal benefit of voicing your concerns and criticising is in this case negative and much smaller than the social marginal benefit.
The same logic explains why the media may not criticise the ruling powers. During the boom years, the media, different commentators and even some academics lavished praise on the Icelandic bankers and other capitalists who profited from the asset bubble. This then is the root of the problem; a cosy relationship between businesses, politics and the media and limited checks and balances. Everybody knows everything but no one does anything about anything!
Relations with Europe
Membership of the European Economic Areas, involving market integration and the free mobility of factors without the participation in a common currency and joint decision-making, made economic policy in Iceland difficult, even impossible, to implement. The local central bank was no match for the vast flows of funds that came into the country.
Membership of the EU might help remedy many of the problems described above. The sharing of certain areas of government may improve the quality of decision-making. Having greater contact with decision makers in Europe may provide stimulus, criticism and points of comparison that may improve the quality of decisions. The rule of law may be strengthened. The adoption of the euro will provide monetary stability and lower interest rates.
Iceland either has to move backwards to the time of capital controls or forwards into the EU. It needs to choose the latter option if it wants to stand a chance at keeping its well-educated young people from emigrating.
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