Daily Sources 9/16

1. The Federal Reserve announces it will keep the Federal Funds Rate at 2%. Given the financial environment, probably the most significant news today. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth." "The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

My sense is that this provides little support to the dollar, the consequences / desirability of which I am still thinking on. Paul Krugman mentions the strong v weak dollar debate in a recent blog post, and refers to how a weak dollar strengthens the American balance sheet vis-a-vis foreign governments and provides impetus to US exports, but ignores the savings of the elderly (and most unsophisticated--read not wealthy--investors who quite rationally tend to choose "safer" "fixed income" investments like Treasuries). My question is whether or not a weak dollar policy forces export-based economies in Asia to pursue a strong dollar policy by purchasing more US debt? If the Asian tigers (and the EU) begin to avoid US debt, who will they sell to? I dunno; I'm not an economist. I do know something about the oil markets, though, and I can tell you that the notion of 25% of your customer base all of a sudden going broke is likely not viewed as good news in the Middle East, even if their Sovereign Wealth Funds can go bottom fishing.

From a geopolitical perspective, the consequences of a worldwide financial system breakdown are ... um ... not good. The most famous antecedent of course is the Great Depression, on which many blame WWII. The comparison, on the face of it, is alarming to say the least. Joseph Stiglitz, Economics Professor at Columbia, appears, given his piece in the Guardian, to think the comparison to the Great Depression relatively apt. (I am not sure of the helpfulness of Stiglitz's arguments here, but liked the way he pointed out once upon a time that the neo-liberals were, in large part, responsible for the mess Russia got into as a result of its transition from communism.)

That this is big is indisputable, Bred Setser points out that in terms of sheer size, Lehman's bankruptcy is larger than Argentina's default of 2001. He also mentions that a large percentage of those being burned just now are financiers in Asia. Michael Lewis also thinks American financial credibility, and likability, in Asia is approaching zero.

Ralph Atkins and Chris Giles at the Financial Times report that on Tuesday the Bank of Japan injected $24 billion into the international money markets, the New York Federal Reserve Bank $50 billion, the European Central Bank €70 billion (~ $100 billion), the Bank of England £20 billion (~ $36 billion). In the meantime, the Associated Press writes that the Labor Department reported Tuesday that consumer prices were down 0.1% in August.

2. Reuters reports that OPEC cut its forecast for oil demand growth in 2008 to 880 kb/d in its Monthly Oil Market Report for September. That is 120 kb/d less than its previous forecast. In the meantime, according to Ayesha Daya and Maher Chmaytelli at Bloomberg, the OPEC governors from Libya and Iran both said today that an emergency OPEC meeting was not warranted by the current situation. But the chief economist at the British Saudi Bank said in an interview with Juan Pablo Spinetto and Grant Smith at Bloomberg that Saudi Arabia would likely cut production in advance of the December OPEC meeting. (Saudi Arabia is currently producing more than its quota. Just how much more is a subject of much debate.)

Meanwhile, Austin Ekeinde at Reuters reports that the Nigerian "oil war" by MEND continues to heat up, with several facilities coming under attack. Over the last four days, the militants have shut in as much as 110 kb/d. Also, Alexander Kwiatkowski at Bloomberg reports that Angola will cut its crude oil exports by 10% in November. Moreover, AP reports that Brazil has turned down the offer of OPEC membership.

Deisy Buitrago at Reuters also reports that Hugo Chavez said today that oil will settle at $90-100/b. This comes on top of news that Chavez is planning to visit China next month and renewed alarms about China becoming the destination for Venezuelan oil. And as part of the poisonous rhetorical mix, it is worth having a look at Maria O'Grady's opinion piece in the Wall Street Journal yesterday which argues that Chavez's dalliance with Russia is a good sign of his difficulties.

3. Dan Bilefsky and Stephen Castle at the New York Times report that the US Ambassador to NATO is arguing that Georgia's conflict with Russia regarding Abkhazia and South Ossetia should not prevent Georgia from becoming a NATO member. Also, Free Exchange at the economist has a little piece on how the Georgia conflict has punished Russia's economy. Given the fall in the price of oil, this is a double whammy.

All that aside, William Schomberg at Reuters reports that the EU has approved the purchase of an Italian electric energy producer by a unit of Gazprom. And the AP reports that the governing (pro-Western) coalition in Ukraine collapsed today. President Viktor Yushchenko accused Russia of attempting to destabilize the Ukraine by encouraging ethnic Russian separatists in the Crimean peninsula.

4. Esteban Israel at Reuters reports that Cuba has conditionally accepted the resumption of a formal political dialogue with the EU this month. This comes on top of the interesting news reported by Karen DeYoung at the Washington Post that the Bush Administration has asked Cuba to reconsider its rejection of aid the US has proposed in response to Hurricanes Ike and Gustav's devastation of that country. Cuba has rejected aid via an airlift by commercial aircraft, but asked the United States to temporarily drop certain provisions of the embargo which prevent it from purchasing reconstruction materials on credit. (Credit? If Lehman can't get any, ... .) The US has rejected this counter-proposal.

5. Stephen Graham at the Associated Press reports that Pakistan has authorized its troops to fire on coalition forces should they cross over into Pakistan from Afghanistan.

6. Jeff Wilson at Bloomberg reports that corn and soybeans fell precipitously on the CBOT today. This comes on top of a study that argues high grain prices are here to stay from the University of Illinois at Urbana-Champaign.

7. If you wanted to quantify--outside of the difference between eating well and starvation--what pollination is worth, the Helmholtz Association of German Research Centres released a study today which posits that the worldwide economic value of pollination is €153 billion (~$220 billion). I would think this is a ginormous underestimation.