"'Buy an apartment, and you are patriotic,' says a local Chinese official in her bizarre call to beggar the poor to bail out housing speculators.Well well well, all I can say is that reminds me of a certain someone's exhortation to go "shopping" in the face of another crisis, not so long ago. (h/t Carlos Tejeda, China Journal) But the screw hasn't finished turning, not by a long shot. Menzie Chinn reports at Econbrowser that the Bush Administration's take on the cause of the current financial crisis is that there has been a "Global Savings Glut," the actual subtitle of the section entitled "Origins of the Crisis" of the Economic Report of the President. An excerpt from the paper's executive summary itself:
Wang Aihua shocked the nation with her bold statement last Monday, delivered live on a local TV station in Hefei, capital of Anhui Province. Wang is the director of the city's urban planning bureau."
"# The roots of the current global financial crisis began in the late 1990s. A rapid increase in saving by developing countries (sometimes called the "global saving glut") resulted in a large influx of capital to the United States and other industrialized countries, driving down the return on safe assets. The relatively low yield on safe assets likely encouraged investors to look for higher yields from riskier assets, whose yields also went down. What turned out to be an underpricing of risk across a number of markets (housing, commercial real estate, and leveraged buyouts, among others) in the United States and abroad, and an uncertainty about how this risk was distributed throughout the global financial system, set the stage for subsequent financial distress.My personal, non-economist, take is that the central banks of the developing world did finance US debt beyond what was credible, and that that did have the effect of lengthening an unsustainable boom in credit, and so there is some merit in the Administration's view. But, as I noted above, perhaps this had something to do with following the Administration's own prescription for a different crisis, altogether. Minzie, who is an economist, goes straight for the jugular:
# The influx of inexpensive capital helped finance a housing boom. House prices appreciated rapidly earlier in this decade, and building increased to well-above historic levels. Eventually, house prices began to decline with this glut in housing supply."
"So, while I won't say that the idea of saving flows coming from East Asia had some role in the financial crisis we're now undergoing, I'd say one has to think about how those flows came about, as much as how big they are. We don't usually think of the rest-of-the-world driving macroeconomic events in the US ... and I still don't think it's time to start."Well worth reading in full. Meanwhile, Yves Smith at Naked Capitalism pours cold water on the official Chinese GDP data for the fourth quarter, which show growth of 6.8%. Smith points out that power consumption in China was down 9.6% in November, after falling 4% in October, which is not consistent, usually, with pretty strong economic growth figures. She is waiting for the December power consumption numbers, before officially giving the statistics bureau a raspberry. (Chinn's piece came to my attention via Yves Smith as well, h/t.) Meanwhile, JR Wu at Real Time Economics has a piece on what recession looks like in China, examining the principle of "bao ba" or "protect the 8," the 8% GDP growth which conventional wisdom holds is the number below which you begin to see significant social unrest. The notion of "bao ba" apparently dates back to the Asian Financial Crisis. In 1989, the year of Tiananmen Square, GDP grew by 4.1%. Richard Herd, head China economist at the OECD, thinks that every percentage point decline in GDP equates to about 2 million job losses.
"According to Citigroup, China’s real GDP contracted 0.3% on an annualized basis in the fourth quarter from the third quarter — the first fall in at least 16 years. Morgan Stanley estimates China’s GDP fell 0.5% for the same period on a seasonally adjusted, annualized basis.Meanwhile, Paul Cavey, head of China economics at Macquarie Research has an opinion piece in Wall Street Journal Asia where he argues that the banking sector in China may, by instituting counter-cyclical policies, be setting the stage for a gigantic credit bubble.
Goldman Sachs estimates that China’s economy grew 2.6% in the October-December period from the July-September quarter. The OECD puts the quarter-on-quarter growth for the same period at 0.3%."
"Whatever the dangers of a market-based system during a boom, it does have benefits on the way down. The caution of typical banks in downturns arises not just because they suffer capital shortages, but because economic risks increase. Having been tied in a knot of prudential and monetary restrictions, China's banks have had little opportunity to develop the skills needed to navigate this trickier environment.This is particularly interesting to me because for a long time in foreign affairs circles the financial sector in China was regarded as especially vulnerable, only to watch Bank of America et. al. take huge stakes in partially privatized state-owned banks. Clearly a paradigm-shift has taken place if their public nature is to be envied. But it does give the gimlet eye to the notion of consumerism as the way forward and savings as hopelessly reactionary, does it not? Meanwhile, Rebecca Christie and Mark Drajem at Bloomberg report that Timothy Geithner, whose appointment as Treasury Secretary was cleared for a full vote by the Senate Finance Committee today, said that the new Administration believes that Beijing is "manipulating" the yuan.
In particular, there are worrying signs that, having avoided a credit bubble and bust during the boom, Beijing is now setting itself up for that cycle during the downturn. With a monetary expansion target of 17% in 2009 and the economy likely to expand 8% or less, the government is paving the way for exactly the sort of credit excesses that have already proved so damaging elsewhere. It is too early to be worried about this yet, but the result could be a future increase in nonperforming loans, and perhaps the need for a banking bailout with Chinese characteristics down the road.
So the rest of the world may be looking enviously at China right now. But as governments everywhere contemplate restructuring their own banking sectors, it is far too soon to conclude China offers the best model to follow."
"'President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,' Geithner said in the remarks posted on the committee’s Web site today. 'The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.'"Senator Linsey Graham (R-SC) called the remarks "music to [his] ears". Graham sponsored legislation in 2007 which would punish imports from countries which have been found to "misalign" their currencies.
2. Chris Oliver at MarketWatch yesterday reported that Japanese exports were down 35% in December, following a 26.7% decline in November. "Exports to the US fell a record 36.9% in December on year, after declining 33.8% in November, the previous record. Exports to Asia were down 36.4%." Barclays Capital predicted that Japanese GDP would contract by 10.3% on an annual basis on the back of this and the news that industrial power consumption fell by 13% in December. In a follow-up story, Oliver reports that the Bank of Japan voted to keep benchmark interest rates unchanged at 0.1% today, and forecast that consumer price inflation would decline by 1.1% in fiscal 2010 and 0.4% in fiscal 2011.
"The board noted that conditions had "shifted significantly downward" from its outlook report published in October. Instead of expanding, the economy is likely to contract in the two years to fiscal 2010 before an expansion takes hold. Gross domestic product is expected to contract 1.8% in fiscal 2009 and 2% the following year."3. Ian King and Patrick Hosking at the London Times report that the UK may be blocked from bailing out Barclays, because as a provision of the Abu Dhabi royal family's earlier infusion of capital, later dilution would be compensated for with additional shares.
"But the small print in the deal, in which Barclays raised £7.3 billion from Abu Dhabi and Qatar, means that if the bank raises fresh capital before the end of June, the Middle Eastern investors would receive a greater number of shares for their original investment without paying more. If Barclays were to raise fresh capital at last night’s closing price, for example, it would automatically hand almost 50 per cent of the bank to the Middle Eastern investors. The only way to get around the anti-dilution clause, should Barclays need more money before the end of June, would be if new capital was raised at more than the 153p-a-share at which paper issued to Abu Dhabi and Qatar is due to convert into Barclays stock.The clause was insisted upon by a certain Amanda Staveley, chief executive of PCP Capital a private equity firm which advised the Emirate on the deal. Worth reading in full.
This would mean that if the Government wanted to take a meaningful stake in the bank, it would have to do so by paying more than 153p for Barclays shares — which were trading at just 66.1p yesterday. The Treasury would face accusations of wasting taxpayers’ money were it to do this."
4. Gabriel Gatehouse at BBC points out that the details of the gas contract between Russia and Ukraine have still not been made public.
5. Galrahn at Information Dissemination has an interesting translation of Russian military thinking on how it should change its approach in order to profit from soft power initiatives in the United States. As perhaps our analysis appears to Moscow, it does seem to demonstrate a large level of misunderstanding of how things work over here, but here is some of Galrahn's translation:
"The situation in American society favors the implementation of these plans. In many ways the United States today is reminiscent of the Soviet Union period of stagnation under Brezhnev. Militarism, foreign adventures, attacks on freedom of speech and human rights, censorship, the presence of the official ideology are evident. Multinational and multiracial American society does not have a common history and defines itself in terms of ideology, which is a more fragile foundation of national unity, rather than a common culture and history that binds cultures. If you choose to continue the comparison, the US, as in the Soviet Union, should be a peaceful ideological and cultural revolution. The challenge for Russia is to give impetus and direction to the process."Some in Moscow apparently anticipate a color revolution in the US ... or its complete dissolution. Worth a look.
6. Dexter Filkins reports that NATO forces have effectively ceded much of southern Afghanistan to the Taliban. This is the NYT's map of unsecured areas, apparently:
7. Juan Cole at Informed Comment has a useful round up on the aftermath of the Israeli operation in Gaza. The Israeli Defense Force has issued a travel advisory to officers regarding travel to Europe, where several courts assert universal jurisdiction and where war crimes cases have been, or are in the process of being, filed.
This is not an idle concern, General Pinochet was prevented from leaving England due to an injunction filed by a Spanish judge on crimes against humanity charges. (Indeed, depending on how "activist" the various judiciaries in Europe are, this issue may trouble senior US government officials as well. It is important to remember in cases this charged with emotion the general view of what is just has the propensity to prevail over the written law and bilateral and multilateral treaties. As Chief Justice Oliver Wendell Holmes, Jr. once said, "The law is the will of he who the sheriff will obey." And, just now, Israel has a serious public relations problem on its hands.)
Cole points to Arab media sources reporting that Hamas is carrying out reprisals against "collaborators" in Gaza following the IDF's withdrawal. Evidently, Hamas is using the crisis to consolidate their power in the strip. Meanwhile, UN Secretary-General Ban ki-Moon visited Gaza and "demanded that nothing like the Gaza campaign ever be undertaken again ... and he said he would do what he could to establish accountability." Cole is not sympathetic to Israeli concerns, nonetheless, the post is worth reading in its entirety.
And, the dictator of Libya, Muammar Gaddafi has an op ed in the New York Times reiterating his call for a one state solution to the Israeli-Palestinian stand off. Key excerpts:
"The basis for the modern State of Israel is the persecution of the Jewish people, which is undeniable. The Jews have been held captive, massacred, disadvantaged in every possible fashion by the Egyptians, the Romans, the English, the Russians, the Babylonians, the Canaanites and, most recently, the Germans under Hitler. The Jewish people want and deserve their homeland.
But the Palestinians too have a history of persecution, and they view the coastal towns of Haifa, Acre, Jaffa and others as the land of their forefathers, passed from generation to generation, until only a short time ago.
Thus the Palestinians believe that what is now called Israel forms part of their nation, even were they to secure the West Bank and Gaza. And the Jews believe that the West Bank is Samaria and Judea, part of their homeland, even if a Palestinian state were established there. Now, as Gaza still smolders, calls for a two-state solution or partition persist. But neither will work."
"A key prerequisite for peace is the right of return for Palestinian refugees to the homes their families left behind in 1948. It is an injustice that Jews who were not originally inhabitants of Palestine, nor were their ancestors, can move in from abroad while Palestinians who were displaced only a relatively short time ago should not be so permitted.Worth reading in full. However, a key sticking point is that the raison d'etre of Israel is to provide a state which is majority Jewish, because the Jewish people have a history of being persecuted when they live in states which are not. Return is at direct odds with that purpose, as that would quickly lead to the Jewish population being a minority one in Israel--or, as Qaddafi would have it, Isratine. Meanwhile, Sue Pleming at Reuters reports that Gaddafi told students at Georgetown University via satellite link that:
It is a fact that Palestinians inhabited the land and owned farms and homes there until recently, fleeing in fear of violence at the hands of Jews after 1948 — violence that did not occur, but rumors of which led to a mass exodus. It is important to note that the Jews did not forcibly expel Palestinians. They were never “un-welcomed.” Yet only the full territories of Isratine can accommodate all the refugees and bring about the justice that is key to peace."
"Oil exporting countries may move toward nationalization because of the rapidly declining prices. This is put on the table and is being discussed seriously,. Oil maybe should be owned by national companies or the public sector at this point, in order to control the oil prices, the oil production or maybe to stop it."If Libya were to re-nationalize concessions recently parceled out, I imagine that might darken the legacy of what was considered one of the Bush Administration's more important foreign policy successes. That said, it wouldn't make much of a difference in terms of the global supply situation.
8. In a strange story, Maher Chmaytelli at Bloomberg reports that the oil minister of Algeria, Chakib Khelil, has said that Saudi Arabia will cut its production by 300 kb/d below its current OPEC quota.
9. Dulue Mbachu at Bloomberg reports that a draft bill sent to the parliament at Abuja would end all discretionary awarding of oil and gas contracts, mandating that all concessions be awarded via open bidding.
"A new national oil company [would] also be created to prospect for oil worldwide and raise funds from global financial markets. The country will set up a Nigerian Petroleum Directorate to develop policies and strategies for fossil energy and a National Petroleum Inspectorate to enforce policies and regulate technical and commercial aspects."Open bidding could do much to restrain the wildly corrupt nature of doing business with the Nigerian government.
10. Eric Watkins at the Oil & Gas Journal reports that Petrobras will publish its new five year plan come January 26th--next Monday. Petrobras has moved back the date for the plan's publication several times in the last few months as it considered the changing oil price environment, likely critical to determining EROI on its new deepwater finds. (See Daily Sources 12/31 #13.)
11. The Calgary Herald reports that Daniel Yergin, head of Cambridge Energy Research Associates, said,
"Just on supply-demand, putting aside geopolitics, this surplus is going to last for a couple of years and that will have a dampening impact on oil prices. Right now, predicting oil prices is really predicting [GDP]."
12. In a bit of good news, the Baltic Dry Index, an indicator of global shipping levels and thus international trade, appears to be recovering somewhat, though it is still more than 80% below its height in 2008.
13. Samantha Young at the Associated Press reports that California Governor Arnold Schwarzennegar has sent a letter to President Obama, directly asking him to waive federal restrictions on new Californian vehicle emissions regulations. The EPA had refused to provide a waiver which would allow California to implement the new regulations despite the fact that they are stricter than the emissions requirements stipulated in federal law. (see Daily Sources 1/15 #18.)
14. Jack Healy at the New York Times reports that new home construction in the US fell 15.5% in December from November. The nation-wide unemployment rate has risen to 7.2%.
15. Damian Paletta and David Enrich at the Wall Street Journal write on alleged political interference in the distribution of TARP funds.
"Nonetheless, in December OneUnited got a $12 million injection from the Treasury's Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.The Journal includes a map showing which states got the bulk of funds disbursed so far, which seems to correlate more or less to where the financial industry is located.
Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging that OneUnited be considered for a cash injection."
Still, it does seem to me that if our legislators really believe that we are in a crisis of such magnitude that over a trillion dollars in taxpayers funds are required for the safety of the entire economy that, perhaps, just perhaps, they should put aside pork and special interests in the interest of the nation as a whole. Is that really too much to ask? Is this view really naivete?
16. The EIA reports that US crude stocks jumped by a whopping 6.1 million barrels to 332.7 million barrels, well above the historical five year average for this time of year. That said, they are still below the highest stock levels seen in the last five years. According to a Bloomberg survey, analysts were expecting a 1.4 million barrel build. Gasoline stocks also rocketed up by 6.5 million barrels and now are a the top of the historical range. Analysts had expected a 1.8 million barrel build. Distillates stocks, by which the EIA mainly means stocks of diesel and heating oil, grew by 800,000 barrels, a bit more than Wall Street expectations of 500,000 barrels, and are well above the historical range. Taken in isolation, this should put considerable downward pressure on crude prices, but at the time of this writing, prices have recovered after falling a few dollars per barrel on the news.