Tuesday 21 April 2009
Beware what the long-term holds
Those bullish on the recovery should ask themselves this question: Since the present bounce originated from Wall Street and since US stocks are rising because of the government’s bank rescue plan, how strong will the recovery be once there are signs that the scheme may fail?
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Beware what the long-term holds
By R SIVANITHY
20 April 2009
First, let’s get the easy stuff out of the way - the outlook for this week (which this column is supposed to discuss) is pretty much the same as the view given a fortnight ago. In a nutshell, there’s enough liquidity and interest sloshing around in the local market to provide ample support. So there should be no major plunges to worry about and traders can probably go about their business as usual playing the second-line stocks in rotation or buying the blue chips on the dips - unless of course Wall Street suddenly takes the view that the US government’s rescue package may not work.
This, of course, won’t happen anytime soon, because you have enough politicians and central bankers claiming that their efforts in propping up failed assets are working and, as we’ve stated many times before in this and other columns, the earnings and economic reports to be released over the near term will probably show the necessary upticks needed for the bulls and US officialdom to show as evidence that the economy has turned and the worst of the crisis is over.
And, with fund managers desperate to try and justify their existence, you can rest assured that the financial industry will try to wring the very last drop of mileage from such upticks. The possibility, however, is that while current market behaviour suggests a V-shaped recovery, a ‘W’ is just as likely, with the second dip, if it occurs, probably going deeper than the first.
There are several reasons why investors and traders should be sceptical about claims that everything is fine and it will be clear skies ahead. For one, analysts such as Paul Krugman and Joseph Stiglitz (both Nobel prize-winning economists) have written extensively about why the present US bank bailout plan is doomed to fail, so we won’t repeat those arguments here.
Suffice to say that Wall Street loves it, because it amounts to a one-way bet in which taxpayers are paying to benefit the financial sector. This point was also recently made by economics professor William Black, the former regulator in charge during the US Savings & Loan (S&L) crisis of the 1980s and former director of the Institute for Fraud Prevention in a TV interview earlier this month.
Prof Black alleged in the interview that the present US administration is covering up the extent of the bailout because the sums are much, much larger than reported and officials are scared stiff of the consequences if the truth is known.
He also pointed out that after the S&L crisis, a law called the Prompt Corrective Action Law that mandated automatic nationalisation when a banking crisis hits was passed, but this is now being ignored: ‘I think, first, the policies are substantially bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law,’ said Prof Black.
He also stated that hiding the extent of the mess in order to gain public confidence and propping up insolvent banks were what the Japanese did in the 1990s and so, quite logically, he predicted it could lead to the same outcome as Japan - a lost decade of growth.
Our take on all of this is similar, and one we’ve expressed many times before - the relentless pumping of money to inflate an economy built on poor fundamentals and such other tactics as changing the accounting rules to give banks greater leeway in how they value their toxic assets may fool people some of the time, but not all people all of the time, because the underlying economics have not changed.
Those bullish on the recovery should ask themselves this question: Since the present bounce originated from Wall Street and since US stocks are rising because of the government’s bank rescue plan, how strong will the recovery be once there are signs that the scheme may fail?
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Fed's Hoenig: Let insolvent financial firms fail
By Alister Bull
Apr 21, 2009
WASHINGTON (Reuters) - Insolvent financial firms must be allowed to fail regardless of size, a top Federal Reserve official said on Tuesday, as two prominent economists urged Congress to break up the biggest U.S. banks.
In blunt criticism of the government Federal Reserve Bank of Kansas City President Thomas Hoenig told Congress' Joint Economic Committee that the design of a $700 billion bank bailout last year sowed uncertainty and slowed recovery.
Citing the costs of the economic crisis, Nobel economic laureate Joseph Stiglitz and former IMF chief economist Simon Johnson also told the panel that it was in the interest of taxpayers to dissolve the largest U.S. financial institutions.
"The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just 'too big to fail.' I do not," Hoenig said.
"Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations," said Hoenig, who will be a voter on the Fed's policy-setting committee next year.
U.S. anti-trust rules should be used to break up the biggest banks to safeguard the economy, said Johnson, a professor at the Massachusetts Institute of Technology. He added the costs of the financial crisis already dwarf the damage done by industrial monopolies in the last century.
"The use of anti-trust (laws) to break up the largest banks will be essential," he said. "This is a very serious, imminent danger that needs to be addressed."
Stiglitz made a similar point, arguing that the American people had not received anything like sufficient benefits from allowing such large financial firms to grow, versus with the costs of the crisis.
"They should be broken up unless a compelling case can be made not to that," Stiglitz, a Columbia University professor, told the committee.
The biggest 19 U.S. banks are being subjected to a battery of so-called stress tests to restore confidence in their soundness, with guidelines on the process due on Friday and the results on May 4.
Stocks fell sharply on Monday amid fear that some of them still face massive losses, as the severe U.S. recession forces loan default rates to continue rising.
U.S. Treasury Secretary Timothy Geithner has signaled that no firms will 'fail' the stress tests, but Hoenig said this would be a mistake.
"Actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost," Hoenig said.
"Of particular concern to me is the fact that the financial support provided to firms considered "too big to fail" provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds," he said.
Nodding to anger among ordinary Americans over multi-billion dollar bailouts for rich bankers, Hoenig said some of these firms were simply too complicated, and too well-connected in Washington, for the good of the country.
"These "too big to fail" institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions. When the recession ends, old habits will reemerge," he said.
Hoenig also criticized the government's Troubled Asset Relief Program, or TARP, which was also separately chided on Tuesday by the Treasury's watchdog.
"In the rush to find stability, no clear process was used to allocate TARP funds among the largest firms. This created further uncertainty and is impeding recovery," Hoenig said.
U.S. Stocks Advance as Geithner Says Banks Have Enough Cash
By Rita Nazareth
April 21 (Bloomberg) -- U.S. stocks advanced the most in almost two weeks, led by financial shares, after Treasury Secretary Timothy Geithner said the “vast majority” of the nation’s banks have enough capital.
Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. rallied at least 9.2 percent, helping financial shares in the Standard & Poor’s 500 Index reverse a 4.1 percent drop and lead the market’s gain. Yahoo! Inc. added 5.3 percent on reports it’s in talks to form an advertising partnership with Microsoft Corp. DuPont Co., the third-largest U.S. chemical maker, added 4.9 percent after predicting a rebound in demand.
“Geithner’s comments that most banks are OK got money coming back into stocks,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “That pretty much allays yesterday’s fears about stress tests and banks having to raise more capital.”
The S&P 500 rose 2.1 percent to 850.08, its steepest gain since April 9, after dropping as much as 0.7 percent earlier. The Dow Jones Industrial Average increased 127.83 points, or 1.6 percent, to 7,969.56. The Russell 2000 Index of small companies jumped 3.9 percent. Six stocks climbed for each that fell on the New York Stock Exchange.
Benchmark indexes erased losses by about 11 a.m. as Geithner told Congress there are signs of thawing in credit markets and indications that confidence is returning. The earlier retreat came as companies from Bank of New York Mellon Corp. to Merck & Co. posted earnings or forecasts that trailed analyst estimates.
Banks Gain
Citigroup climbed 30 cents, or 10 percent, to $3.24 for the biggest advance in the Dow average. Bank of America jumped 74 cents, or 9.2 percent, to $8.76. JPMorgan Chase & Co. rose $2.84, or 9.6 percent, to $32.53. Wells Fargo & Co. added $1.81, or 11 percent, to $18.81.
The S&P 500 Financials Index of 80 banks, insurers and investment firms rose 8.2 percent after slumping 11 percent yesterday, its biggest slide since Jan. 20. The gauge is up almost 75 percent from a 17-year low reached March 6.
“Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” Geithner said in testimony to a congressional oversight panel on the government’s financial-rescue program. He added that there will be a “series of options” for lenders that need additional money following government stress tests.
The Federal Reserve is overseeing assessments of the health of the 19 biggest U.S. banks, with results to be released on May 4. The tests are designed to ensure the companies have enough capital to weather a deeper recession over the coming two years.
Remaining Funds
The Treasury chief said in a letter to the congressional oversight panel that the Troubled Asset Relief Program has enough money to aid banks even under “conservative” estimates. He reiterated the Treasury’s view that about $135 billion is still available in the fund approved by Congress in October. The letter said it’s possible the Treasury may have even more money remaining, depending on how many banks repay TARP funds and whether a housing-aid program uses its full allocation.
Lincoln National Corp. surged 20 percent to $10.56 after Bank of America analysts recommended buying shares of the insurer on the prospects of a government bailout. The firm applied for $3 billion in TARP funds last year.
Aflac Inc. jumped 17 percent to $29.23. Standard & Poor’s said a review of the biggest seller of supplemental insurance’s hybrid investments showed a downgrade is less likely.
Treasury bonds declined, sending 10-year yields up seven basis points to 2.91 percent, as concern eased over the extent of bank credit losses and after the Federal Reserve’s purchase of U.S. debt fell short of expectations.
Yahoo Rallies
Yahoo jumped 72 cents to $14.38. Microsoft has stepped up discussions with the owner of the second-ranked U.S. search engine about a partnership to challenge Google Inc. in the Internet-search market, people familiar with the matter said. Yahoo added another 1.5 percent to $14.59 in extended trading after reporting profit and sales that met analyst estimates.
Microsoft rose 1.9 percent to $18.97.
DuPont Co. rose $1.32 to $28.06 after the third-biggest U.S. chemical maker said demand will improve from first-quarter lows because most customers have used up inventories and are increasing purchases.
General Motors Corp. rose 2.4 percent to $1.70 after a government auditor said the Treasury will supply the automaker with $5 billion in additional aid.
Tenet Rallies
Tenet Healthcare Corp. rallied 44 percent to $2.05 for the biggest advance in the S&P 500. The owner of hospitals reported first-quarter profit excluding some items of 8 cents a share. Analysts polled by Bloomberg estimated, on average, that the company would break even.
Emulex Corp. surged 47 percent to $9.70. Broadcom Corp. offered to purchase the maker of components for data storage devices for $9.25 a share, or about $764 million, to add components that help computers store data.
Merck & Co. fell 6.7 percent to $23.54, leading a gauge of 54 health-care companies to the only decline in the S&P 500 among 10 industries. The drugmaker buying rival Schering-Plough Corp. said profit fell 57 percent on declining sales for its cervical cancer vaccine and drugs for cholesterol and bone loss.
New York Times Co. lost 16 percent to $4.94 for the biggest decline in the S&P 500. The newspaper publisher posted a wider first-quarter loss after advertising revenue dropped 27 percent and said the rate of decline in ad sales will be similar in the second quarter.
‘Mixed Bag’
“Mixed bag of earnings,” said David Heupel, who helps manage $60 billion at Thrivent Financial for Lutherans in Minneapolis. “There are still signs of a tough economic environment, but companies that have really cut down their expenses are starting to see a little glimmer of life.”
Analysts estimate that profits at S&P 500 companies decreased for the seventh straight quarter in the January to March period, the longest stretch of declines since at least the Great Depression. Earnings have tumbled 22 percent on average for the 80 companies in the index that have released results since April 7.
Renewed concern that credit losses may worsen sent the S&P 500 down the most in seven weeks yesterday. The index has added 24 percent from a 12-year low March 9 as government efforts to fix the banking system and revive the economy fueled speculation the first global recession since World War II will end.
Zions Bancorporation plunged 15 percent to $10.94 for the second-biggest slide in the S&P 500 today. The Salt Lake City- based lender operating in 10 Western states posted an $832.2 million loss tied to defaults and declining real estate values in Texas.
Disappearing Dividends
KeyCorp dropped 4.7 percent to $7.05. The bank reported its fourth straight quarterly loss as it wrote down assets and set aside more money to cover bad loans. The bank plans to cut its dividend to 1 cent a share from 6.25 cents.
Dividends for S&P 500 companies will probably plunge 22.6 percent this year, the steepest annual decline since 1938, S&P forecast. Companies in the 500-stock index are on pace to make $189 billion in payouts in 2009, compared with $248 billion last year, according to data compiled by Howard Silverblatt, an analyst at S&P in New York.
The firm said 61 companies cut payouts in 2008, five times the total in 2003 through 2007. Bank of New York Mellon and KeyCorp bring the tally so far this year to 50, Silverblatt said.
Geithner faces critical report on bail-out
By Tom Braithwaite in Washington
April 21 2009
Tim Geithner, US Treasury secretary, will face lawmakers in Congress on Tuesday, hours after publication of a report that criticises aspects of the bank bail-out and days before stress test results that could lead to the government taking larger stakes in the financial sector.
His appearance before the congressional oversight committee comes after increasingly confident public performances and tentative signs of improvement in parts of the economy.
But a report from the independent watchdog for the $700bn (€540bn, £470bn) troubled asset relief programme (Tarp) says Mr Geithner’s department is falling short in tracking public money used in the bail-out even as he prepares to steer the financial rescue in new and controversial directions.
“In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilise the financial system, it is not unreasonable that the public be told how those funds have been used by Tarp recipients,” says the quarterly report from Neil Barofsky, the Tarp special inspector-general, which is due to be published on Tuesday.
Treasury officials have questioned the value of demanding detailed explanations for use of funds, given that they are designed to improve the broad health of banks’ balance sheets and thus stimulate lending.
The watchdog’s criticism comes days before the completion of stress tests, which could pave the way for the strongest banks to pay back Tarp money and the weakest to be instructed to seek more capital.
A senior administration official told the Financial Times that the government’s preferred equity stakes in banks could be converted to common equity, which would help shore up balance sheets without the need to ask Congress for more resources.
Although both preferred and common equity are classified as Tier 1 capital, bank analysts have tended to focus on common equity in the current crisis, which is the foundation of the capital structure and has been seen as a better gauge of health.
Capital could also come from private equity raising – as initiated already by Goldman Sachs – and from recycling Tarp funds returned by healthier banks, the official said. The Obama administration is keen to avoid returning to Congress to ask for more Tarp money, which would be politically difficult.
Mr Barofsky warns in the report that not enough has been done to guard against fraud in a scheme designed to encourage investors to buy “legacy” assets from banks.
He says that the Treasury “should dispense with rating agency determinations” on mortgage-backed securities, which lay at the root of the financial crisis, and should instead screen each security to assess its value.
The report reveals “almost 20” criminal investigations into possible fraud in the programme are under way.
Neel Kashkari, the outgoing head of the Tarp, says in a letter to Mr Barofsky included in the watchdog’s report that the Treasury is considering modifications to programmes that will be used to buy legacy assets.
However, he emphasises that they are an essential part of the recovery strategy, saying the goal is “to restart markets for these assets to support the flow of credit that is absolutely vital to our economic recovery”.
Stock market bulls have got it wrong, warns Nouriel Roubini
'Dr Doom' predicts further shocks in the market
By Nick Clark
21 April 2009
Nouriel Roubini, the so-called "arch bear" economist who predicted the current financial crisis in 2006, added further gloom yesterday after he wrote off recent rises in global stock markets as no more than a dead cat bounce.
While an increasing number of analysts have in recent weeks urged investors to go back into equities, Mr Roubini, a professor at New York University's Stern School of Business who has emerged as one of the most respected economic voices in the wake of the credit crunch, warned yesterday that he didn't yet see a buying opportunity.
He holds little faith in the recent market rallies, which prompted some to suggest a recovery was underway. "I'm still cautious and bearish," he said. "I believe we are closer to a bottom in the stock market than a year ago, but this is a bear market rally."
Anthony Bolton, fund manager at Fidelity International, said last month that a bull phase had started, while analysts at Goldman Sachs have argued in recent weeks that "we are past the low point in the economic cycle".
However, Mr Roubini, dubbed "Dr Doom" for his warnings about financial meltdown, said there would be more bad news in the next few quarters.
In particular, the economist warned of further dangers ahead for the financial services industry in the US. "I see financial shocks in the months ahead. Some financial institutions are in so much trouble we may have to take them over," he said, before adding that losses in the industry could rise from $1 trillion to as high as $3.6 trillion.
Firms from across financial services will go out of business or be taken over, he said, particularly focusing on the bleak future for hedge funds.
Mr Roubini also disagrees with more optimistic forecasts for the US economy. In an interview published on Forbes.com yesterday, he said that the prediction of a 2 per cent growth rate next year was far too bullish. He called it at somewhere around 1 per cent. "So while we are going to be technically out of a recession, it is going to feel like a recession," he added.
He blamed weak recovery, deflation which would dog the US for the next two years, and financial shocks for the lower-than-expected growth.
Investors should stay on the sidelines, he cautioned, but added that there was light at the end of the tunnel. "I'm not a permabear. I believe that actually, if we do the right things, the US, Europe, Japan, but especially emerging markets can have a bright future of high economic growth."
Mr Roubini criticised market regulators, saying that while deregulation was positive "we took it to an extreme". He added: "Even financial markets need laws, institutions, rules; otherwise it is the law of the jungle."
Quoting from Oliver Stone's film Wall Street, he added: "Greed is good. There is nothing bad with greed. You know, that's what drives capitalism. But greed has to be contained by fear of losses and also realisation you are not going to be bailed out in bad times."
Japan to issue $110bn bonds for stimulus
By Lindsay Whipp in Tokyo, David Oakley in London and Michael Mackenzie in New York
April 21 2009
Japan is to issue an extra Y10,800bn ($110bn) of government bonds this fiscal year to help it tackle its worst recession since the second world war.
The bonds will fund the bulk of the government’s $154bn stimulus plan and will bring its expected total new issuance for the fiscal year starting this month to a record Y44,100bn, a 33 per cent rise on last year.
This comes as governments around the globe are taking on record debt levels to bail out loss-making banks and bolster economies as they attempt to spend their way out of the downturn.
The US is expected to issue about $2,000bn in the fiscal year starting last October, more than double last year. The eurozone governments are set to raise €800bn ($1,050bn) this calendar year, 23 per cent up on 2008.
The UK government in Wednesday’s annual Budget statement is expected to announce plans to issue £180bn ($270bn) in the 2009/10 financial year, a 25 per cent rise on last year’s record levels.
John Wraith, head of sterling rates product development at RBC Capital Markets, said: “A lot of governments are taking on record amounts of debt. This will have to be paid back at some point.”
“In the UK, the projected levels of debt will be affordable if interest costs can be contained. However, if debt levels rise further and a loss of credibility pushes yields up sharply, there could come a point where it is not affordable or sustainable.”
Meyrick Chapman, fixed income strategist for UBS, said: “The debt numbers just don’t go down. Every time there is a revision, its always up. That puts a lot of pressure on public finances.”
Japan is likely to suffer one of the most severe downturns this year amid collapsing demand for its exports. The International Monetary Fund last month forecast that Japan’s economy could contract by 5.8 per cent this year.
Japan is in a particularly difficult position because of its vast debt burden.
Stefan Liiceanu, a fixed income strategist for Barclays Capital in Tokyo, said: “The problem for Japan compared with the US, Europe and the UK is that it is having to tackle this recession from a much worse starting point . . . its broadly-defined debt-to-GDP ratio is already flirting with levels north of 180 per cent and it will only get worse in light of the country’s lower growth potential.”
Markets braced for historic £200bn deficit
The pound slid after it emerged that Alistair Darling will this week unveil Budget plans which will consign Britain to a deficit dwarfing anything faced in peacetime.
By Edmund Conway
21 Apr 2009
With economists raising the prospect of £200bn deficit and a gilt strike in the coming years, sterling fell by 2.66 cents against the dollar to $1.4539, wiping out much of the ground made against the US currency in recent weeks.
The plunge came as it emerged that tomorrow the Chancellor will be forced to slash his economic forecasts and raise his borrowing forecast well into the future.
Even if Mr Darling does not, as some expect, spend on new discretionary measures to wrest Britain out of recession, he will drive up Britain’s total national debt to over 100pc of gross domestic product for the first time since the early 1960s, analysts at Capital Economics predicted. He will also generate an annual deficit of over £200bn for the first time in history, they added.
The figures are likely to cause jitters in financial markets. The Government last month suffered the first failure of a conventional government bond (gilt) auction since 1995 and experts have warned of further failed auctions as the deficit climbs to new highs. Should the Government repeatedly fail to sell its bonds it may be forced to call on the International Monetary Fund or to raise taxes to punitive levels to make up the difference.
Michael Saunders UK economist at Citigroup, said the prospect of a gilt strike was no longer unlikely.
“There is no doubt we are closer to the edge now than we have been in ages,” he said. “How close are we? That is unknowable — it’s akin to being on a cliff edge in the pitch black. There may be a level of fiscal deficit at which people could lose faith in the Government’s commitment to economic flexibility. The fact that we don’t know how close we are to the edge is part of the difficulty. The IMF warned them, the OECD warned them, the European Commission warned them and the Government dismissed the warnings.”
With the cost of recession — in terms of higher unemployment benefit bills and lower tax revenues — set to eat into the public finances, the deficit is likely to rise this year to the highest level in peace time, while the economy shrinks at the fastest rate in over 60 years. The Treasury is expected to slash its 2009 economic output projection from a contraction of 1pc to a contraction of 3pc to 3.5pc.
At its peak, the Government deficit will rise to £230bn — some 16pc of GDP and higher than any other peacetime year on record, according to Capital Economics. As a consequence the size of the national debt, which was until recently comfortably below 40pc of GDP, will rise to above 100pc — a hugely embarrassing development for the Chancellor.
However, despite the precariousness of the public finances, the National Institute of Economic and Social Research said the Government has room to spend a further £30bn, or 2pc of GDP on an immediate income tax and national insurance rebate.
IMF: Nearly $3T in U.S. bank losses
By Joseph Weber
April 21, 2009
The International Monetary Fund said Tuesday that government efforts to end the global recession are restoring market confidence, but U.S. financial institutions still will have roughly $2.8 trillion in losses through next year.
The group's semiannual Global Financial Stability Report also stated worldwide losses for banks could reach $4 trillion. Banks are expected to bear about two-thirds of the write-downs, with pension funds and insurance companies assuming much of the remaining losses, the report stated.
The report stated banks should "cleanse" themselves of bad debts to restore profitability and that "in some cases partial or even total government ownership will be required to assure [banks have] adequate capitalization and an effective restructuring plan."
World leaders who met earlier this month in London for the G-20 summit agreed to invest more than $2 trillion in the global economy and make such policy changes as reforming financial markets, including the largely unregulated hedge funds.
The Obama administration has already put $787 billion into U.S. financial institutions through the Troubled Asset Relief Program.
The $2.8 trillion in losses is more than the roughly $2.2 trillion the IMF projected in its interim report in January. The amount was based on roughly $27 trillion in U.S.-originated assets.
"Write-downs continue to mount as the collapse of economic activity leaves companies and individuals increasingly unable to repay borrowings," the report stated. "Banks will have to rebuild capital as a result of credit losses."
The private, Washington, D.C.-based group monitors economic and financial developments, offers policy advice and provides temporary, short-term loans to countries.
The IMF also said more efforts must be made to lift economies out of the recession, which started in the United States in February 2007.
The report stated as much as $875 billion more might be needed by December 2010 to shore up U.S. and Europe banks -- $275 billion for the U.S. banks, $125 billion of United Kingdom banks and $475 billion for other European banks.
"Continued decisive and effective action is needed to preserve and strengthen these first signs of improvement, and to help provide a more stable and resilient platform for sustained global growth," said Jose Vinals, director of the IMF's Monetary and Capital Markets Department.
Return of the money snatchers?
Foreboding of a new round of inflation
By Richard W. Rahn
April 17, 2009
When will the next round of inflation hit, and how can we protect ourselves? Many economists and commentators, including yours truly, have warned about the potential of a new round of high inflation due to the great expansion of government spending. But does an increase in government spending necessarily translate into higher inflation? The answer is "no," but it most often does, and this is why.
An increase in government spending must be financed by increasing taxation, or increasing government borrowing, or creating more money by the central bank (the Federal Reserve), or all of the above. Increasing taxation or government borrowing does not directly increase inflation, but if the central bank creates new money faster than goods and services are increased, inflation will result.
President Obama and a majority of the Democrats have promised they will only increase taxes on the rich, which, by their current definition, includes about the top 5 percent of taxpayers who pay 60 percent of the federal income tax. The problem the Obama Democrats face is that it is precisely this group that already pays the highest tax rates (in many cases around 50 percent combined federal, state and local income taxes), and this group is both the most sensitive to tax rate changes and has the greatest ability to either legally or illegally avoid or evade paying more taxes (even by choosing not to work).
Collectively, this group does not have enough income to pay for all of the new government spending, even if the government could collect it - which it can't!
The United States has been fortunate in recent years because the Chinese, Japanese and many other non-American individuals and institutions have been buying U.S. government debt and investing in U.S. businesses. This inflow of capital has not only financed the government deficits, but has provided inexpensive capital for the U.S. private sector, allowing it to grow very rapidly.
This is now changing. Because of the global recession, every significant economy, with the exception of Norway, which has a small population and lots of oil revenue, is running a government deficit. Thus, collectively, governments around the world will issue many trillions of dollars of new government bonds in the next few years.
In order to sell all of this government debt, higher interest rates will be offered to induce people to save more rather than consume and to divert their investments from corporate stocks and bonds and venture capital to government bonds.
If people save more and consume less, the demand for goods and services will grow more slowly and fewer new jobs will be created. If people invest more in government securities and less in the private sector, there will be less research-and-development spending, lower productivity growth and less business expansion and job creation.
As interest rates rise, fewer people will be able to afford new homes, and businesses will find fewer profitable investments, all of which will keep unemployment rates high. The Federal Reserve will be under tremendous political pressure to create more money - largely by buying its own government debt - which in the short run can temporarily decrease interest rates, but over the long run will cause interest rates to rise steeply as inflation comes roaring back. The Fed will then have to stomp on the monetary brakes again, which will lead to another recession. This is precisely what happened during the late 1970s and early 1980s until there was the switch in economic policy under former President Ronald Reagan.
The Obama administration is forecasting higher rates of growth, and lower inflation and unemployment than the consensus forecast (Blue Chip Economic Indicators) of private sector economists, while at the same time proposing a series of laws and regulations that, if enacted, would make it impossible to achieve its own forecasts. Specifically, the Obama Democrats are proposing (among other things):
• Massive environmental regulations and taxes, which would depress incomes for most Americans and increase business costs, both of which would depress employment.
• Costly increases in labor regulations, including card check, which would make it much more costly for employers to hire workers and, therefore, fewer workers would be hired.
• A series of truly foolish laws and Treasury regulations whose purpose is to try to get a few billion dollars in additional tax revenue from businesses and individuals who operate outside the United States, but whose real effect would put at risk trillions of dollars of foreign investment into the U.S. at a time when it is most needed. This, in turn, would cost the U.S. hundreds of thousands, if not millions, of new jobs.
Unless the Obama Democrats suddenly get religion and start applying real cost-benefit analyses to their proposals before they leap, the United States is doomed for a repeat of the late 1970s - higher taxes, higher inflation, slower growth and more unemployment - when productivity growth was less than half the level of the last decade. Individuals can partially protect themselves by buying inflation-indexed U.S. government bonds (as long as they remain available), reducing their debt loads, particularly nonfixed-interest-rate debt, diversifying their assets across the globe, and - perhaps, praying for a new Mr. Reagan.
外强中乾 股价急挫
王冠一
22 四月 2009
美国银行公布首季业绩,虽然盈利达28.1亿或每股44美仙,较去年同期赚10.2亿或每股23美仙倍增,但股价却跌至四脚朝天,最终收报8.02美元,跌幅24%乃2月27日以来最大,市值单日蒸发了165亿。
经常挂在口边的话是「凡事不要看表面,魔鬼往往藏於细节之中」,在美银的业绩报告中亦可以得到印证。美银虽然转亏为盈,但不少盈利乃卖家当取得的包括卖中国建设银行股份套取19亿,来自美林的结构性票据利润则有22亿。
若扣除派予政府的优先股利息,利润增至42.5亿,但减去一次过性质的特殊性收益41亿,更大的问题乃不良资产(nonperforming asset)较前季暴增41%至257.4亿,较去年同期更增加3倍有多,银行信贷损失达133.8亿,是撇帐拨备数字69.4亿的接近两倍。
美银是美国主要发卡银行之一,但首季信用卡业务录得17.7亿亏损,坏帐率亦由去年底的7.16%上升至8.62%。纵使董事局主席兼行政总裁刘易斯表示毋须额外集资,但凯万认为美银年底前要多筹366亿。刘易斯承认,随着衰退深化及失业率上升,情况甚为严峻,相信信贷仍会进一步转坏。美银的「有形普通股权益资本比率」(TCE)由去年底的2.93%升至3.13%,仍远低於市场认同的5%安全水平。
美银於业绩公布后暴泻24%,其他金融股亦告急挫,当中花旗继上周五下跌9%后,周一再跌19%,主要是高盛发表报告,指花旗信贷损失会加快,潜在损失为每股38美仙。
其他利淡金融股的消息亦一浪接一浪,益令银行股兵败如山倒。网志Turner Radio Network透露,19家接受压力测试的银行,有16家已是资不抵债,陷技术性破产;《纽约时报》报道,政府拟把TARP贷款全数转为普通股,加强银行股本实力,变相把有问题的银行国有化;摩通证券亦发表报告,称银行仍要为信贷危机再减值4000亿,部份金融机构有增加股本需要。
正如纽约大学教授鲁宾尼在香港表示,若看穿表象,金融机构的业绩实际甚为潺弱。之前金融股劲升,美银在过去个多月升幅接近3倍,一度重返10美元之上,是投機炒作抑或投資者對銀行前景過度樂觀，大家不妨自行斟酌。
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