Daily Sources 12/4

1. Li Yanping and Dune Lawrence at Bloomberg report that Secretary Paulson is in Beijing today pressing for a stronger Reminbi.

"The fifth round of the Strategic Economic Dialogue between China and the U.S. is a swansong for Paulson, who initiated the talks and will exit with the Bush administration. The currency appreciation that he’s applauded -- a 20 percent gain since the end of a peg to the dollar -- may be wound back as President Hu Jintao seeks to protect exporters from the global recession."

The discussions will also focus on agreements on electricity generation, transportation, and environmental cooperation. Philip Lagerkranser at Bloomberg reports that China may resist US calls in the dialogue to relax restrictions on foreign ownership of their banks. Unsurprising, I suppose. It was Brad Setser who first pointed out that by taking stakes in major international financial institutions, the US was ironically taking stakes in international concerns, funded in part by the international appetite for US debt. Brad Setser also has another interesting post today worth reading in full regarding China's stance regarding the devaluation of the yuan and the US as a "debtor country." It sounds reasonable to me, but I am beginning to suspect that the major exporting nations--China, India, and Germany--are considering whether it is in their interests to pursue policies which encourage US dollar deflation. Let me stress my lack of monetary economics background here, while at the same time suggesting that, should that be the case, it may be reasonable to expect a default, followed by an inflation shock here in the US.

2. Gregory Viscusi at Bloomberg has a useful synopsis of the history behind the rise of piracy in Somalia. In 2005, the Islamic Courts Union (ICU), "an alliance of sharia tribunals," won control of Somalia. They imposed Islamic Law and, as a result, piracy was completely suppressed. The US tried to persuade the Islamists to create a coalition government with opposition parties, but when the ICU refused it is alleged Washington gave the covert green light for an invasion to oust the government by Ethiopia which began in December 2006. In mid-December 2006 the US alleged that the ICU was linked to al-Qaeda.

"'The U.S. denies it publicly, but it’s a commonly held view that the American government provided tacit if not overt support to the Ethiopians,' says Roger Middleton, an Africa researcher at Chatham House, a London consultant."

Worth reading in full.

Robert Farley and Yoav Gortzak write in Foreign Policy that the European Union will, following the passage of UN Security Council Resolution 1846, launch Operation Atalanta on December 8 to protect shipping against piracy in the Gulf of Aden. They report that Euroskeptics in England, though the fleet will be controlled by a Vice Admiral from the Royal Navy, are upset by the decision to deploy warships under the EU aegis. (Some in England are upset that the French have been allowed to build a larger navy than theirs as well, it seems. However, the new law of the sea did not make it into the Queen's speech yesterday, which suggests that the Brown Administration, at least, thought 1846 was sufficient for the UK's interests for now.) However, Farley and Gortzak favor the move because it would begin to put the EU in the habit of deploying forces outside of the NATO structure. The EU presents to much of the world a less controversial aspect than the US-led NATO. Whose interests that would serve might be a matter of debate, however. Galrahn at Information Dissemination--who linked the Foreign Policy piece--notes that a Russian Admiral went on TV today to praise Resolution 1846 because it gave his ships the freedom of action required to engage the pirates. Jerry Frank at Lloyd's List reports that Major-General Jin Yinan, the head of China’s National Defence University, told Reuters that he believed Beijing should send warships to assist the various navies off Somalia. Apparently there is a coterie of influential advisers to the government who are pushing for China's involvement, in part because of China's Africa Policy of 2006 which envisions deepening involvement with African nations in order to secure a share of the natural resources there.

"China’s ambassador to the UN, Zhang Yeui, also backed the early deployment of an UN peacekeeping force to tackle the threat to the international economy and Somalians."

Also today in a blog post, Frank suggests:

"An Islamic extremist victory in Somalia — the very end result the US and western powers did not want — may be the best hope for international shipping running the gauntlet through the Gulf of Aden."

3. Alissa J. Rubin at the New York Times reports that Iraqi Prime Minister Nuri Kamal al-Maliki rejected Kurdish arguments that he was not authorized by the Constitution to establish tribal councils, or "Support Councils."

"[Al-Maliki's] government says the councils are unarmed volunteer groups, though that is a gray area, as every adult male is permitted one gun.

But Kurdish officials fear that the councils will instead be full-fledged militias that could be used against them in the north."

President Jalal Talabani, a Kurd, said on Monday that he would be sending the question of the legality of the Support Councils to the Federal Supreme Court. Al-Maliki's response is that not every institution in the government requires the authorization of the Supreme Court.

4. Emily Wax and Rama Lakshmi at the Washington Post report that yesterday Secretary Condoleeza Rice in New Delhi urged Pakistan to quickly act to help find and arrest those responsible for the terrorist attack on Mumbai last week. As she was speaking, tens of thousands of protesters in Mumbai were chanting "Death to Pakistan."

"Rice made demands on both countries. She said that Pakistan had a 'special responsibility' to cooperate with India and help prevent attacks. She also warned India against any impulsive moves that could have 'unintended consequences.'"

Rice also for the first time suggested there might be a link between the attackers and al-Qaeda.

5. Henry Meyer and Torrey Clark at Bloomberg report that Putin pledged further state aid to help cushion the economy in a three hour call-in television show today. The government has already pledged $200 billion in that effort. Concerns about the economy are deepening, however, VTB Capital forecast that unemployment in Russia will rise to 10-11% next year from about 6% now. At the bottom an interesting tidbit:

"Putin may try to persuade Medvedev to step down to allow him to assume full control and avoid taking blame for the crisis as prime minister, say analysts including Olga Kryshtanovskaya, a political analyst at the Russian Academy of Sciences, and Leonid Sedov, an analyst from the Levada Center research group in Moscow."

For the record, I doubt it, but it would be extremely enlightening should it be prescient.

6. Carter Dougherty at the New York Times reports that several European central banks cut their benchmark lending rates today.

"The European Central Bank, meeting in Brussels, cut its benchmark rate to 2.5 percent, from 3.25 percent. The Bank of England reduced its rate to 2 percent, from 3 percent, on top of an unexpectedly large reduction just a month ago."

In Sweden, the Riksbank cut its rate by 175 basis points (1.75%) to 2%. Real Time Economics has the text of the head of the European Central Bank's, Jean-Claude Trichet, statement announcing the cut.

7. Kevin Sullivan at the Washington Post reports that UK Prime Minister Gordon Brown said yesterday that homeowners who have lost their jobs or are facing deep cuts in income will be allowed to defer interest payments on mortgages for up to two years.

"Brown did not provide many details of the plan, but analysts said it basically amounts to a government insurance program for mortgage lenders. The BBC reported that the plan will cover people with mortgages of up to 400,000 pounds, or nearly $600,000."

8. Ian Austen at the New York Times reports that the Canadian Prime Minister has shut down the Parliament until January 26 in order to forestall a non-confidence vote he was sure to lose due to the new opposition coalition. Read it to believe it.

9. Grant Smith at Bloomberg writes that Francisco Blanch, a Commodity Strategist with Merrill Lynch, released a report today saying that if the recession spread to China, and absent large cuts by OPEC, oil might fall to as low as $25/b. "In the short-run, global oil demand growth will likely take a further beating as banks continue to cut credit to consumers and corporations." The lower band most have suggested up to now has been around $40/b. Iranian President Ahmadinejad suggested $35/b just yesterday (Daily Sources 12/3 #1) and in a report in early Fall Philip Verleger gave $10/b as a low case scenario, but these have been outliers for the most part. Predictive qualities aside, the mood is clearly darkening. "Producers in Canada may shutter almost 800,000 barrels a day if prices decline below $35 a barrel, Blanch added."

10. Paul Okolo and Garth Theunissen at Bloomberg report that the Nigerian Naira fell 5% against the dollar this week after the central bank restricted the sale of dollars to $100 million versus the $800 million typically seen earlier.

"The shortage of dollars has prevented trading in naira between Nigeria’s commercial banks, which demanded more than $1 billion of U.S. currency at auctions in the past month, Citigroup Inc. said."

The bank apparently thinks the demand for dollars is being driven by "speculation on the naira," rather than the unwinding of dollar-denominated debt. The United States imports more than half, if I remember correctly, of Nigerian crude production. To go out on a limb into monetary economics where I have no expertise: Has the price of oil gone down so much that the Nigerian central bank would be helped by access to cash swaps with the Federal Reserve? "Nigeria’s cash reserves dropped 4.3 percent to $55.9 billion in November, the central bank said yesterday."

11. Aloysius Unditu and Arijit Ghosh at Bloomberg report that the central bank of Indonesia cut their benchmark lending rate by 25 basis points to 9.25%. The rupiah has fallen 25% in the last three months, suggesting that the high interest rate was not defending the currency. Consumer price inflation grew 11.7% in November, year over year. The government's decision to cut the subsidized price of gasoline by 8.3% on December 1st may be followed by a similar cut in diesel prices, which may cut inflation some.

12. David Cho, Zachary A. Goldfarb and Dina ElBoghdady at the Washington Post report that the Treasury is considering a plan to directly intervene in the mortgage market by purchasing securities which finance new home loans. However, to receive the government funding, banks would have to sell mortgages at low rates, for example at 4.5% for 30 year fixed-rate loans. It is not clear how the Treasury would finance their purchases, one option is to sell bonds at 3%, thus making a profit on the 4.5% mortgages.

13. Shobhana Chandra and Bob Willis at Bloomberg report that the Labor Department announced that a larger number of jobless than expected--4.09 million--received unemployment checks the week ended November 22.

14. Stanley Reed at BusinessWeek reports that Bernstein analysts Ben Dell and Neil McMahon made a presentation today which suggested that US stripper wells--onshore oil wells that produce as little as 15 b/d--amount to 18% of US onshore production. Stripper wells require high oil prices to be profitable, but the article does not provide a break-even point. Either way, the analysts expect that the low price environment may take as much as 1.3 mb/d of US production offline, about 20% of US production, or about 1.5% of global demand and around 6.5% of US demand.