Daily Sources 3/24

1. President Barack Obama has an op ed in the Los Angeles Times today which urges the leaders of the G20 to strong measures and to continue to coordinate their response to the financial crisis with the US in the upcoming London summit. Key excerpts:

"My message is clear: The United States is ready to lead, and we call on our partners to join us with a sense of urgency and common purpose. Much good work has been done, but much more remains. Our leadership is grounded in a simple premise: We will act boldly to lift the American economy out of crisis and reform our regulatory structure, and these actions will be strengthened by complementary action abroad. Through our example, the United States can promote a global recovery and build confidence around the world; and if the London summit helps galvanize collective action, we can forge a secure recovery, and future crises can be averted."

The President stresses that the US has pursued two basic means of addressing the crisis, fiscal stimulus and the restoration of credit, and that these efforts will be enhanced by global coordination:

"This must continue to be amplified by the actions of our G-20 partners. Together, we can embrace a common framework that insists on transparency, accountability and a focus on restoring the flow of credit that is the lifeblood of a growing global economy. And the G-20, together with multilateral institutions, can provide trade finance to help lift up exports and create jobs."

The essay also specifically calls for greater contributions to the IMF:

"Third, we have an economic, security and moral obligation to extend a hand to countries and people who face the greatest risk. If we turn our backs on them, the suffering caused by this crisis will be enlarged and our own recovery will be delayed because markets for our goods will shrink further and more U.S. jobs will be lost. The G-20 should quickly deploy resources to stabilize emerging markets, substantially boost the emergency capacity of the International Monetary Fund and help regional development banks accelerate lending. Meanwhile, America will support new and meaningful investments in food security that can help the poorest weather the difficult days that will come."

The Administration chose the Los Angeles Times as the delivery vehicle for this message, which suggests that it is primarily directed at the members of the G20 that reside in Asia and will make more sense after the next item. Worth reading in full.

2. Andrew Batson at the Wall Street Journal reports that China's central bank governor Zhou Xiaochuan on Monday published a proposal to create a new currency to replace the dollar as the global reserve currency.

"In his paper, published in Chinese and English on the central bank's Web site, Mr. Zhou argued for reducing the dominance of a few individual currencies, such as the dollar, euro and yen, in international trade and finance. Most nations concentrate their assets in those reserve currencies, which exaggerates the size of flows and makes financial systems overall more volatile, Mr. Zhou said.

Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, he argued, because it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates. It could also be the basis for a more equitable way of financing the IMF, Mr. Zhou added. China is among several nations under pressure to pony up extra cash to help the IMF."

The US has a 15% vote at the IMF which requires a 85% consensus in order to approve a change, meaning that every nation but the US has to agree in order for a proposal to be accepted.

"Mr. Zhou's idea is to expand the use of "special drawing rights," or SDRs--a kind of synthetic currency created by the IMF in the 1960s. Its value is determined by a basket of major currencies. Originally, the SDR was intended to serve as a shared currency for international reserves, though that aspect never really got off the ground.

These days, the SDR is mainly used in the IMF's accounting for its transactions with member nations. Mr. Zhou suggested countries could increase their contributions to the IMF in exchange for greater access to a pool of reserves in SDRs.

Holding more international reserves in SDRs would increase the role and powers of the IMF. That indicates China and other developing nations aren't hostile to international financial institutions -- they just want to have more say in running them. China has resisted the US push to make an immediate loan to the IMF because that wouldn't give China a bigger vote. "

The official translation of Zhou's speech can be found on the People's Bank of China's website here. Justin Fox at the Curious Capitalist argues, interestingly, that it would be in US interests to accept the proposal:

"Zhou's proposal was treated in the WSJ and the NYT as another Chinese attack on the dollar, and I guess it is. But it also points the way toward a global monetary regime that, in theory at least, would better serve the long-term interests of the US than the current dollar-denominated one.

The advantage of having your country's currency as the world's reserve currency is that you don't really have to play by the rules: You can run big deficits financed by the rest of the world, you can spend more than you earn, and to a certain extent you can escape the consequences of your profligacy by devaluing your currency when you run into trouble. The obvious disadvantages are that running big deficits and spending more than you earn aren't really great long-term economic strategies."

Worth reading in full. Meanwhile, Rebecca Wilder has the very useful post demonstrating that the quantitative easing by the Fed and the Bank of England have resulted in less growth in money supply than one might imagine, because the multiplier is collapsing as the banks and consumers hoard cash. She concludes that the European Central Bank and Bank of Japan are lagging in terms of growth in money supply, and that the ECB has actually allowed the money supply growth to go negative. Her graph illustrating this:



Worth a look.

3. Alex Morales and Mathew Carr at Bloomberg report that China, as well as dozens of developed nations, will be asked by the UN to accept "binding" targets on their carbon emissions in six days at negotiations to be held in Bonn.

"The UN whittled down hundreds of proposals circulating to get poor and rich countries to focus on closing a gap that threatens to derail a deal. Nations are closer to agreeing on a year for a long-term emissions target, 2050, and on how to fund greenhouse-gas reductions in poor countries, the UN said today.

'In a number of areas there is a very clear convergence and countries are quite close to each other,' Yvo de Boer, the UN’s top climate official, said in a telephone interview from Germany. Still, 'there are a number of areas where a lot of blanks need to be filled in."

China and India are among developing countries that have rejected adopting any targets until industrialized nations first make reductions. They argue that countries in North America and Europe were responsible for most of the buildup of heat-trapping emissions in the atmosphere blamed for warming the planet, dating to the beginning of the industrial age."

4. The Associated Press reports that Ukrainian Prime Minister Yulia Tymoshenko yesterday signed an agreement with European Commission President José Manuel Barroso which pledged to provide financing for the upgrade of Ukraine's 40 year old natural gas pipeline system in return for "embracing market economy practices."

"[The agreement] aims to improve both the safety and capacity of Ukraine's pipeline network and revamp its management so Western investors can put up money without fear of losing any of it to endless red tape or corruption."

Meanwhile, Edward Hugh at Fistful of Euros reports that "Ihor Burakovsky, the director and board chairman of the Institute for Economic Research and Policy Consulting says that 'experts' have forecast a 12% drop in Ukraine’s GDP in 2009 and an 18% inflation rate."

"In fact [industrial] output was up slightly month on month (by 5.4%) in February, in part as a result of the demand for steel exports produced by the sharp Hyrvnia devaluation, and February output was “only” down by 31.6%, following January’s 34.1% annual fall, so you could say that things were getting better, but frankly, and at this stage of the game, such finesse is a little but lost on me."

Ukraine is still yet to receive the second installment of the $16.4 billion IMF loan, as the IMF refuses to disburse the monies until certain measures are passed by the government.

"Lawmakers need to pass two more bills to qualify for the $1.9 billion installment of the IMF loan, which originally was expected on Feb. 15, according to Oleksandr Shlapak, the first deputy head of the president’s staff, with the central bone of contention being the 5% budget deficit projected for 2009, and on a lot lower contraction forecast than the current 'most realistic case' scenario."

Meanwhile, Upstreamonline.com reports that Russia responded to the EU-Ukrainian agreement by suspending talks with Kiev. Apparently, Moscow was upset it was not included in the talks between the EU and Ukraine in the first place.

"Prime Minister Vladimir Putin threatened to review ties with the European Union and officials warned that the risk of gas supply disruptions would rise if Russian interests were ignored."

RIA Novosti quoted the Prime Minster as saying,

"If Russia's interests are ignored, we will also have to start reviewing the fundamentals of our relations. We would very much like for things not to reach this point."

Putin indicated that Moscow had proposed to the European Commission that the two jointly allocate funds to Kiev, but at the time the EC indicated that they had no funds available for the Ukraine. Meanwhile, Vladimir Soldatkin at Reuters reports that Russian energy minister Sergei Shmatko told the media that Russia could maintain and raise oil output if prices remain above $50/b.

5. Uwe Klussmann at Der Spiegel reports that the television appearance of General Kurashvili, who was in charge of the Georgian peacekeeping forces in South Ossetia on August 7, 2008, is playing a key role in the EU's investigation into the causes of the Russo-Georgian conflict at that time.

"This is because Kurashvili may have been quoting directly from Order No. 2 from Aug. 7, a Georgian document that could shed light on the question of who started the war. When the commission questioned the Russian deputy head of the general staff, Anatoly Nogovitsyn, in Moscow, he quoted from the very same Georgian order. According to Nogovitsyn, the document also contained the phrase "reestablishment of constitutional order." If the order, which Russian intelligence intercepted, is authentic, it would prove that Saakashvili lied [and that Tblisi had chosen to mass troops by South Ossetia and then use a Russian response as an excuse for an attack]."

Tblisi refuses to allow EU investigators access to Order No. 2 of August 7, which seems awful close to an admission of guilt. Greg Scoblete at Real Clear World notes the Hill story by Kevin Bogardus on the 19th that Georgia had spent $300k on a six month contract and $470k on an eleven-month contract with lobbyists with contacts with the Democrats. Apparently Randy Scheunemann, Tblisi's old main PR man in the US (and foreign adviser to GOP presidential candidate Sen. John McCain--see Daily Sources 12/2 #1.) has been thrown over.

6. Eurointelligence notes that the FT Deutschland reports that the German Foreign Ministry has established a task force to explore potential threats to security posed by the financial crisis. "The scenarios include state defaults in politically unstable regions such as the Caucasus."

7. Scott Peterson at Japan Economy Watch notes that Japanese household financial assets fell by an annual rate of 5.7% in December--the sharpest drop on record. Peterson adds

"this is not good news for a country where a large proportion of the population is expecting to live off of savings fairly shortly. Further, Japanese consumers are unlikely to provide a boost to GDP as they are not going to increase discretionary spending in the face of investment losses."

8. Seyoon Kim at Bloomberg reports that Seoul plans to append 17.7 trillion won (~$13 billion), or 1.9% of GDP, on cash "handouts," cheap loans, infrastructure and job training to its 51 billion won already allocated. "The stimulus will boost economic growth by 1.5 percentage points and help create 552,000 new jobs, the finance ministry said in Gwacheon today." The government hopes to get the measure passed by parliament in April.

9. Platts reports that Nigerian oil and gas labor unions have rescinded their threat to strike tomorrow.

"'We have decided to suspend plans to call a strike following our meeting with the national security adviser Monday, which we believe was favorable,'deputy general secretary of the Petroleum and Natural Gas Senior Staff Association of Nigeria, or Pengassan, Lumamba Okugba, told Platts."

10. Nasreen Seria and Vernon Wessels at Bloomberg report that South Africa's central bank--the Reserve Bank--decided today to cut benchmark interest rates by 1% to 9.5%.

"The Reserve Bank is not 'necessarily at the end of the cycle' of rate cuts, [Monetary Policy Committee] member Brian Kahn said in a televised interview with the South African Broadcasting Corp. today. The risks to inflation are now 'more on the downside because of the softening economy.'"

Governor Tito Mboweni also indicated that the decision to accelerate the schedule of monetary policy committee meetings should not be misconstrued to mean that there will be changes in the repurchase rate at every meeting.

11. Valerie Rota at Bloomberg reports that Moody's Investor Service has said that Mexico's credit rating is safe.

"'Despite heightened anxiety about the escalation of violence and organized crime activity, Mexico does not fit the general profile of countries identified as failed states,' Moody’s said in a report released today. 'The general foundations of its investment-grade rating remain solid.'"

While I would usually be happy to hear of calm-headed assessments of situations distant, I imagine the first thought in a lot of heads today was much the same as mine: "Last time Moody's rated something ... sell, sell, shit, SELL SELL SELL!!!!" But then, today also Enrique Krauze has an op ed in the New York Times which points out that the failed state meme is best described as a caricature of the situation in the country. Key excerpts:

"Mexico is a tolerant and secular state, without the religious tensions of Pakistan or Iraq. It is an inclusive society, without the racial hatreds of the Balkans. It has no serious prospects of regional secession or disputed territories, unlike the Middle East. Guerrilla movements have never been a real threat to the state, in stark contrast to Colombia.

Most important, Mexico is a young democracy that eliminated an essentially one-party political system, controlled by the Institutional Revolutionary Party, that lasted more than 70 years. And with all its defects, the domination of the party, known as the P.R.I., never even approached the same level of virtually absolute dictatorship as that of Robert Mugabe in Zimbabwe, or even of Venezuela’s Hugo Chávez.
...
Our national institutions function. The army is (and long has been) subject to the civilian control of the president; the church continues to be a cohesive force; a powerful business class shows no desire to move to Miami. We have strong labor unions, good universities, important public enterprises and social programs that provide reasonable results."

That said, Krauze does call on readers to consider how much instability America's drug war is exporting. Worth reading.

12. R. Colin Johnson at the EE Times reports that US Navy researchers claimed to have found experimental evidence of cold fusion at the American Chemical Society's annual meeting.

"Cold fusion was first reported in 1989 by researchers Martin Fleischmann and Stanley Pons, then with the University of Utah, prompting a global effort to develop the technology. Normal fusion reactions, where hydrogen is fused into helium, occur at millions of degrees inside the Sun. If room temperature fusion reactions could be realized commercially, as Fleishchmann and Pons claimed to have achieved inside an electrolytic cell, it promised to produce abundant nuclear energy from deuterium--heavy hydrogen--extracted from seawater.

Other scientists were unable to duplicate the 1989 results, thereby discrediting the work."

Italian and Japanese researchers also reportedly presented evidence of cold fusion.