Daily Sources 4/6

1. Barry Eichengreen and Kevin H. O’Rourke have a post on VOX EU which shows that most of the historical comparisons done between this financial crisis and the Great Depression only look at the US data. However, if you plot current global data versus the global data of the Great Depression, you will see that "world industrial production, trade and stock markets are diving faster now than during 1929-30." One graph from the post shows the volume of world trade:



Although Eichengreen and O'Rourke conclude that the global economy is sinking faster than it did in 1929-30, they also demonstrate that the policy response is quite substantially different. "The good news, of course, is that the policy response is very different. The question now is whether that policy response will work." A must read.

2. Jurjen van de Pol at Bloomberg reports that European factory gate prices--or producer prices--fell by an annual rate of 1.8% in February. "Retail sales dropped 4% from a year earlier, a separate report showed." Meantime, Ambrose Evans-Pritchard at the UK Telegraph reports that Swiss the consumer price index fell by 0.4% in March from a year earlier.

"'This is something that we must prevent at all costs. The current situation is extraordinarily serious,' said Philipp Hildebrand, a governor of the Swiss National Bank."

Evans-Pritchard continues his piece by pointing out that Japan has been hit by a double whammy: a rising yen and declining imports.

"Japan's industrial output fell 38% in February (year-on-year), mostly concentrated into the last four months. No major economy imploded at this speed in the 1930s. The country has been hit by a double shock. As an export power it has taken the brunt of Anglo-Saxon belt-tightening: as the world's top creditor it is cursed by a 'safe-haven' currency that soars in moments of danger--largely because the Japanese bring home their wealth till the storm passes. Normally, Japan can cope. This time, the yen's rise has pushed the economy over a cliff.

The yen must come back down to earth, and soon, or Japanese society will start to disintegrate. If necessary, the Bank of Japan will force it down by intervention, as occurred in 2003-2004.

Will China stand idly by as Japanese unleashes a shock to the global system through competitive devaluation? That depends whether you think China's spring recovery is the real thing, or an inventory build-up before the next downward slide. The Communist Party says 20m jobs have been lost since the bubble burst. This cannot be tolerated for long.

It is remarkable that China's fall into deflation has attracted so little notice. China's CPI was minus 1.6% in February."

Evans-Pritchard is congenitally alarmist, but his worry I think is genuine and it is hard to fault his logic. Very much worth reading. (h/t Yves Smith at Naked Capitalism.)

3. Jon Hilsenrath at Real Time Economics reports that the Fed, Bank of Japan, Bank of England, European Central Bank, and Swiss National Bank announced today that the "Fed will be able to lend pounds, euros, yen and Swiss francs to US institutions with pressing short-term needs for loans in those currencies."

4. On Sunday, Stefan Wagstyl at the Financial Times reported that the IMF had made the suggestion in a confidential report obtained by the paper that eastern European nations adopt the euro, with or without becoming an official member of the monetary union.

"For countries in the EU, euro-ization offers the largest benefits in terms of resolving the foreign currency debt overhang [accumulation], removing uncertainty and restoring confidence.

Without euro-ization, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance."

(h/t P O Neill at A Fistful of Euros.)

5. The Associated Press reports that the Taro Aso administration plans to submit a ¥10 trillion (~$99.3 billion) additional stimulus program this Friday to parliament. The figure amounts to a bit more than 2% of GDP and is on top of the previous ¥12 trillion program.

6. Sky Canaves at China Journal reports that the official Chinese response to North Korea's missile launch was rather muted.

"Foreign ministry spokeswoman Jiang Yu said China had 'taken notice' of the launch and 'noticed responses from relevant parties,' according to a statement on the ministry’s Web site.

Jiang also urged restraint amid the rush to condemn North Korea’s actions.

'We hope relevant parties to keep calm and restraint, properly handle this issue, and work together to safeguard peace and stability of the region,' she said. 'The Chinese side is willing to continue to play a constructive role.'"

7. Dmitry Solovyov at Reuters reports that a new documentary--"Base"--being aired on Rossiya television claims that the US airbase at Manas is really a Trojan Horse for a sophisticated surveillance operation.

"At Manas, the US built a station which controls entire Central Asia, parts of China and Siberia. For Americans, the existence of the intelligence complex at the base is more important than the runway. It was done in a treacherous way, without being endorsed by the Kyrgyz authorities."

An anonymous US defense official denied the claim and noted that the documentary was released just as the US and Bishkek resumed a dialogue on the future of the airbase.

8. Joseph Chaney and Narayanan Somasundaram at Reuters report that the large industrial firms of India are not reacting to the low international price environment by pursuing more avidly overseas resource deals like Chinese firms, but instead are hoarding cash.

"India's outbound resources acquisitions have fallen nearly 86 percent in the first quarter to just $170.7 million, Thomson Reuters data shows. In China, first quarter outbound resources acquisition volume is up nearly a third to $21.2 billion."

Unlike China, the Indian government is unlikely to extend credit to state-owned companies at the current juncture. Worth reading in full.

9. Platts reports that Nigeria's central bank announced that the country produced about 1.9 mb/d in January, down from 2.2 mb/d in December. The bank said that exports amounted to about 1.45 mb/d in January. Nigeria has about 3.2 mb/d of installed production capacity.

"Nigeria's Finance Minister Mansur Muhtar said two weeks ago that the country's oil output had averaged 1.6 million b/d so far this year, while the government's benchmark production was 2.292 million b/d."

10. Marc A. Thiessen, a former staffer for Senator Jesse Helms and one of the authors of the Helms-Burton Act, makes the strange argument, in the Washington Post, that although the embargo has failed, it would be folly to put an end to it now, because it will provide us with the most clout in negotiations following the death of Fidel Castro. He gives us a snapshot of a historic meeting he had with Ricardo Alarcón in 1998 to show how relatively weak Raul Castro is on the island nation.

"In 1998, I had a revealing meeting with Alarcón in Havana. I was working for Sen. Jesse Helms--then chairman of the Senate Foreign Relations Committee and a household name in Cuba thanks to regime propaganda--and had gone to the island with my colleague Roger Noriega for the visit of Pope John Paul II. As the price of admission to Cuba, we had to endure a meeting with a low-level functionary in the Cuban National Assembly.

About 30 minutes into that meeting, Alarcón came into the room unexpectedly and announced: 'I will now answer your questions.' Alarcón had been quoted in US media indicating his desire to succeed Fidel Castro, so we said point blank: 'We hear you want to be president of Cuba.' He waved his cigar dismissively, saying that all he had told the reporter was that if the revolution needed him, of course he would answer the call. We pressed: 'But didn't Fidel just announce at the Communist Party conference that Raúl will succeed him?' Alarcón shot up in his seat: "No!" he declared. 'All Fidel said was what is in the Cuban constitution--that in the absence of the president, the first vice president assumes the duties of the president.' But, he added with a smile, 'the president serves at the pleasure of the National Assembly of People's Power'--which Alarcón heads. He then held forth on the future of the revolution, referring to Raúl as a 'brother of lesser historical significance,' and named several individuals who would be better choices to serve as Fidel's successor, including rising stars such as Carlos Lage and Felipe Pérez Roque. (Raúl, if you need confirmation, check Cuban state security's recording of the exchange.)"

This op ed is slightly suspicious simply because Raúl Castro shook up the government in the beginning of March, replacing a number of figures, and Fidel the next day blogged about them being seduced by the "honey of power." Whether or not the opinion piece is merely an attempt to knock Raúl off-balance psychologically-speaking, clearly having a business relationship with a political actor is more likely to give you influence over them than a refusal to deal with them whatsoever.

11. Alaric Nightingale at Bloomberg reports that oil firms are moving to take advantage of the contango in oil again on the strength of extremely low oil tanker charter rates.

"Vitol, a closely held oil trader, hired three tankers at $45,000 a day each, capable of carrying a combined 6 million barrels of oil, Athens-based Optima Shipbrokers said today. Gunvor, shipper of a third of Russia’s oil, booked a tanker at the same rate, while Shell, Europe’s largest oil company, hired an ultra large crude carrier at $64,000 a day, Optima said.

Four other shipbrokers, all of whom declined to be identified because the information is private, reported the same transactions. ...

The price of hiring a supertanker for a month is about 23.7 cents a barrel, based on the Baltic Exchange’s daily rental rate divided by a carrying capacity of 2 million barrels. It was as high as 97.5 cents in January."

12. Rebecca Wilder at News N Economics makes the useful observation that there was a sharp slowdown in US migration last year through July 2008, leading her to the conclusion that homeowners are holding on to homes which are falling in value, resisting pressure to move to where there might be new job opportunities.

"The sharp drop in migration increases further the odds of a jobless recovery. Since households are not moving to find work--especially away from those areas hit hardest in the housing market ... . The sectoral shifts and associated labor adjustments will take longer."

An article on the Home Owners' Loan Corporation of the New Deal suggests that the share of households that owned homes in the 1920s was about 40%. I have not been able to discover any data on the percentage of homeowners as a share of households for the Great Depression, though I imagine it took a hit. Here is the quarterly data from 1965 through Q4 2008:



From the graph below it does seem as if nearly all the increases in home ownership from 1986-7--when homeowners represented about 64% of the population--start in 1997, when taxes on residential capital gains were eliminated for gains of up to $500,000, ie the beginning of the bubble. If 1997 represents where we must return to for the bubble to bottom, we are looking at another 3.5% of US households losing their homes. In 2007, there were 111,162,259 households according to the US Census Bureau, so that translates to 334,868 households losing homes. Clearly the ability of the nation to quickly reallocate labor due to low home ownership rates in the Great Depression did little to buttress the nation against the economic shocks, though perhaps the situation is slightly different for a net exporting versus a net importing nation.