Daily Sources 12/11

1. Stefan Theil at Newsweek conducted an interview with Peer Steinbrück which was posted to internet on December 6. Major points the German Finance Minister made include:

"When I look at the chaotic and volatile debate right now, both in Germany and around the world, my impression and concern is that the daily barrage of proposals and political statements is making markets and consumers even more nervous. Still, Brussels is pressing for a joint European approach. For a while the position in Brussels and a few other places has been 'We're now very much for setting up large-scale spending programs, but we're not really going to ask what the exact effects of those might be. And since the amounts are so high, well, let's get the Germans to pay because they can.'"

"I tend to be skeptical [of the need for unprecedented stimulus programs] because it is human nature to see the crisis as even worse than it is. I don't want to downplay anything; 2009 looks like it will be a very difficult year. But we are not about to collapse. We are just about to ratify our €31 billion stimulus in Parliament. As long as we haven't even given that a chance to work, I am not going to participate in this bidding war over who can do the most."

"Europe will have to search for and find its future role. The financial summit in Washington was a symbol. Do you really think that you're going to get these debates from a G20 format back down to the G7? I'm rather skeptical."

"[Europe has] a leadership problem because we are still 27 different members who have still not decided on how to work with each other based on what we used to call a European constitution."

Well worth reading in its entirety. Paul Krugman, in his blog today, calls this interview "extraordinarily depressing."He goes on to say,

"[The] nature of the crisis, combined with the high degree of European economic integration, gives Germany a special strategic role right now — and Mr. Steinbrueck is therefore doing a remarkable amount of damage.

Here’s the issue: we’re rapidly heading toward a world in which monetary policy has little or no traction: T-bill rates in the US are already zero, and near-zero rate will prevail in the euro zone quite soon. Fiscal policy is all that’s left. But in Europe it’s very hard to do a fiscal expansion unless it’s coordinated."

Krugman says that if Germany prevents an effective European response, then the downturn's severity will be greatly magnified. I take no issue with Krugman's analysis, except to point out that he is insisting that Germany make the bulk of the financial commitment in a political system where Germany does not have proportionate representation. Until it seems to the Germans that their policy "intransigence" is likely to hurt their economic and political fortunes more than a coordinated stimulus program would hurt their balance, they will be unlikely to coordinate. Some have suggested that by then it will be too late.

In this vein, Yves Smith at naked capitalism appears to endorse an argument made by David Piling in the Financial Times that China and Japan are unlikely to goose domestic consumption enough to reboot the global economy. Smith notes that only a third to a sixth of China's stimulus plan (or $193.4 - $97.6 billion) is estimated to be new spending, most of it had already been budgeted. (And there appears to be similar creativity in Berlin ... and even Rome.) But the economy of China is way too small to make up for the demand slack created by the fall in American and European consumption in any case, Piling points out. (For example, $97.6-$193.4 billion would account for between 2 and 5.5% of 2008 GDP assuming 8% growth over 2007 nominal GDP.) Beyond that, it will take more than enlarging the money supply to change thousand year old cultural attitudes toward household consumption and savings. The trouble would be the same as with the banking system as a whole, the money supply should be growing, but the velocity wouldn't necessarily increase proportionately. Well-worth reading in full.

That said, the governments of China and Japan were hardly models of prudence as they continued to finance the shopping spree in the US long after it became clear that the ability to repay was becoming more and more tenuous. Intergovernmental debt is even more risky than normal debt in one critical way--there is no sheriff which can seize the assets of the US government should it choose to default. The governments of China and Japan decided to finance this spree themselves, and as such it is difficult for me to swallow the notion of our decadence versus their prudence. You owe the bank $1,000,000, you better watch out; you owe the bank $1 trillion, the bank better watch out.

2. Bettina Wassener at the New York Times reports that the Bank of Korea cut its benchmark lending rate 100 basis points (1%) to 3% today. Taiwan's central bank also today cut its benchmark lending rate by 75 basis points (0.75%) to 2%.

3. Eurointelligence reports that the RWI--a semi-official economic forecasting institution in Germany--forecast that the German economy would contract by 2% in 2009. The organization, however, predicts that domestic consumption will not fall as deflation will ease pressure on household budgets.

4. Eurointelligence reports that Tito Boeri has an analysis of the current Italian stimulus package, showing that new taxes are expected to bring in more money than the new stimulus expenditures. The post includes the accounting breakdown. Worth a look.

5. Eurointelligence writes that El Pais reports that the IMF expects the Spanish economy to contract by 1% in 2009 and that the nature of the contraction will produce a steep increase in unemployment.

6. Bob Davis at Real Time Economics reports that the IMF program whereby it would offer up to $100 billion in loans to countries without requiring of them strict policy changes is hobbled by the fact that it will only make such loans to countries which do not, in the IMF's estimation, require many policy changes. Moreover, the loans would be structured to mature in three months, with two possible renewals for three months, for a total of nine months. Evidently, there is little need for such short term loans and the new loan structure was the handiwork of European countries which were not all that enthusiastic about the notion of providing condition-free financing. (That sounds awful similar to reluctance on other fronts emanating from Berlin.)

7. Nasreen Seria and Vernon Wessels at Bloomberg report that the central bank of South Africa--the Reserve Bank--has cut its benchmark interest rate by 50 basis points (0.5%) to 11.5%.

"'With domestic demand remaining under pressure and exports coming down, we are in for a double whammy next year,' said Elize Kruger, an economist at Thebe Financial Services Ltd. in Johannesburg. 'They have ample justification to continue to cut rates into next year, and to cut more aggressively.'"

Reserve Bank Governor Tito Mboweni said that inflation was likely to fall to an annual rate of between 3 and 6 percent by the third quarter of 2009. The story gives a good summary of the economic situation in the country.

8. Adriana Brasileiro and Andrea Jaramillo at Bloomberg report that Brazil left its benchmark interest rate unchanged yesterday at 13.75%. The high rate is attracting what might be carry trade, but the central bank signaled it might be ready to cut rates at its next meeting. There was some rumor that the de Silva government was considering dispensing with the central bank's autonomy, given the resistance to rate cuts.

9. Platts reports that the IEA estimated in its monthly publication that production from the OPEC was down 760 kb/d in November to 31.33 mb/d. For OPEC-11 the reduction was estimated at 825 kb/d to 28.16 mb/d. The bulk of the reduction was thought to have come from Saudi Arabia, which the IEA estimated reduced its production by 350 kb/d to 9.05 mb/d. OPEC-11 had pledged to cut production by 1.5 mb/d in its October meeting. However, Katarzyna Klimasinska and Grant Smith at Bloomberg report that Saudi Oil Minister Ali al-Naimi said in an interview in Poznan, Poland, today that the country had produced 8.493 mb/d in November, or 512 kb/d less than the IEA estimates. The number is only slightly more than their quota established in the October meeting of 8.477 mb/d. Margaret McQuaile at Platts reports that OPEC President and Algerian Oil Minister Chakib Khelil today told journalists that "based on recent conversations with his OPEC colleagues, including Saudi Oil Minister Ali Naimi, 'there is consensus' within the group for a production cut in Oran."

11. The Associated Press reported that the Mexican Energy Department yesterday released a forecast showing that oil exports will fall by 5% each year through 2017 as domestic consumption rises.

12. Mary Jordan at the Washington Post writes that the media in the UK is reporting London will withdraw its 4,100 troops remaining in Iraq by March. US troops will take over their positions in Basra.

13. Jonathan S. Landay at McClatchy reports that a UN Security Council committee yesterday placed three Pakistani leaders of Lashkar-e-Taiba [LeT] and a Saudi operative on a terrorist watch list. The UN document said that LeT had sent troops to fight the occupation forces in Iraq and that the organization may have received money from al-Qaeda.

"[Zaki-ur-Rehman] Lakhvi, the group's alleged military coordinator, 'has directed LeT operations, including in Chechnya, Bosnia, Iraq and Southeast Asia. In 2006, Lakhvi instructed LeT associates to train operatives for suicide bombings,' the document said. 'In 2004, Lakhvi sent operatives and funds to attack U.S. forces in Iraq, having directed an LeT operative to travel to Iraq in 2003 to assess the situation there.'"

(The article is well-worth a close read. h/t informed comment) The document also asserts that the charity Jamaat-ud-Dawa is a front for the LeT. Candace Rondeaux and Rama Lakshmi at the Washington Post report that Islamabad responded by shutting down 11 offices of Jamaat-ud-Dawa and placed its leader under house arrest in Lahore.

"The US and India have long pushed for the UN to bring sanctions against Jamaat-ud-Dawa, directly linking its activities to Lashkar terrorist acts. But China, a top Pakistan ally and one of five permanent members on the Security Council, blocked two previous attempts -- once in May 2007 and once in April 2006."

This is interesting in part because China has what it calls its own Islamist extremist problem in Xinjiang. Somini Sengupta and Robert F. Worth at the New York Times report that the Indian Foreign Minister, Pranab Mukherjee, speaking in front of Parliament in its first session since the Mumbai attacks, "reiterated India’s demand for Pakistan to hand over about 40 fugitives and suspects" and "pressed the Zardari administration to close down the 'infrastructure' that enables terror strikes against India." However, Mukherjee "appeared" to avoid directly critizing President Zardari.

14. Roger Cohen at the New York Times argues that the Organization for the Prohibition of Chemical Weapons might provide the blueprint for workable negotiations between the international community and Iran regarding their nuclear program. Worth reading in full. Barbara Slavin in the Washington Times reports that the just-retired No. 2 intelligence official in the US told journalists Tuesday that he stood by the conclusions of the year-old National Intelligence Report which concluded that Iran had abandoned its nuclear weapons program in 2003. Gareth Porter at IPS reports after a visit to Iran that the leadership there was split into two camps regarding the possibility of talks with the incoming Obama Administration. One camp views it as a fundamental shift in the American approach to the international community and an opportunity, therefore, to find a way out of the decades long impasse between the two countries. The other sees Obama as indebted to the Israeli lobby in Washington DC and therefore unlikely to pursue any fundamentally different policy toward Iran. Well worth reading in full.

15. Calculated Risk reports that the Department of Labor announced that the advance figures for seasonally-adjusted unemployment claims for the week ended December 6 is 573,000. The numbers represent four week moving averages. "Continued claims are now at 4.429 million. ... It was just in May that continued claims hit 3 million; that was a big story!" Helpful graphs at post ... worth a look.