Daily Sources 3/16

1. Real Time Economics carries the full text of the G20 communique released on Saturday. Key excerpts:

"2. Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.
...
5. We are committed to helping emerging and developing economies to cope with the reversal in international capital flows. We recognise the urgent need to pursue all options for mobilising International Financial Institution (IFI) resources and liquidity to finance countercyclical spending, bank recapitalisation, infrastructure, trade finance, rollover risk and social support. We agreed on the urgent need to increase IMF resources very substantially. This could include further bilateral support, a significantly expanded and increased New Arrangements to Borrow (NAB), and an accelerated quota review. We should also ensure that all Multilateral Development Banks have the capital they need, beginning with a substantial capital increase for the Asian Development Bank, and put it to best use to help the world’s poorest.
...
7. We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organisation of Securities Commissions (IOSCO) code; full transparency of exposures to offbalance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardisation and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures."

2. Michael Wines, Keith Bradsher, and Mark Landler at the New York Times reported on Friday that Chinese Prime Minister Wen Jiabao aired some of Beijing's worries with regard to their holdings of US debt ahead of the G20 meeting in London.

"'President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. ... We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.'

He called on the United States to 'maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.'"

3. Xinhua reports that the Chinese Ministry of Finance announced on Friday that the 5 billion yuan (~$732 million) stimulus plan directed at subsidizing the purchase of automobiles and motorcycles in rural areas will translate into a 10-13% discount, respectively.

"Farmers who buy light trucks and minivans from March 1 to Dec. 31, would get a 10 percent discount, with the ceiling subsidies of 5,000 yuan (~$732.29).

Subsidies of 2,000 and 3,000 yuan (~$292.92 and ~$439.37) can be use to replace old three-wheeled and four-wheeled vehicles respectively.

From this Feb. 1 to Jan. 31 in 2013, farmers who buy motorcycles would get 13 percent of the purchase price back, with ceiling subsidies of 650 yuan (~$95.20)."

4. Borzou Daragahi at the Los Angeles Times reports that Iranian state television on Saturday carried an announcement by government officials that a $3.2 billion deal to develop the South Pars natural gas fields had been stuck with China.

5. Marcus Hand at Lloyd's List reports that Singapore port container cargo traffic fell by an annual rate of 20% in February. The number of containers that went through the port fell by 6% from January to 1.85m teu. Singapore's port is the world's largest container port.

6. Pamela Constable at the Washington Post reports that Pakistani President Zadari announced early today that he would reinstate a number the judges deposed by Pervez Musharraf in 2007, including former Chief Justice Iftikhar Mohammed Chaudhry.

"Zardari's turnabout came after thousands of demonstrators poured into the streets of this leafy capital of Punjab province [Lahore] Sunday, throwing rocks at police and cheering wildly. A wide cross section of Pakistan's political, social and religious sectors joined the day-long protests.

As the demonstrations escalated, police first responded with volleys of tear gas. But by mid-afternoon they suddenly withdrew from the streets, while numerous city and provincial officials were reported to have resigned. The swift collapse of authority signaled the end of Zardari's bid to seize control of Punjab, the most politically influential region of the country, and raised serious questions about his ability to remain president."

Worth reading in full. Includes links to fascinating pictures of hordes of lawyers protesting in Pakistan.

7. Haig Simonian at the Financial Times reports that on Friday Switzerland's finance minister, Hans Rudolf Merz, "said Bern would abolish the strict distinction between tax fraud, a crime in Swiss law, and tax evasion, a civil offence." Merz stressed that customer accounts would remain secret in all but exceptional cases, meaning that a specific request from an investigative body would be required in order to obtain the data, or so I infer. As I've said before, changes of 500 plus year traditions are better indicators, to me, of what kind of stresses the financial system is under than most. (h/t Yves Smith at naked capitalism.)

8. Eurointelligence notes a media report that Finnish manufacturing orders are down 38% year over year in January.

9. OPEC decided in its meeting Sunday to maintain the current quota allocations, and called on its members to fully comply with them. Current compliance is 79% according to the cartel--the producers which are probably the largest over-suppliers are Iran and Venezuela, ironically usually the biggest hawks in the group. The OPEC press release following the meeting can be found here. Key excerpt:

"The Conference, however, welcomed, some initial signs reported of a reversal in crude oil-stock trends, and a narrowing of the contango in the front price structure, indicating that the adjustment process instigated through OPEC measures vis-à-vis excess supply in the market is gradually helping to redress balance, and was also pleased to observe that following the decision taken by the 151st (Extraordinary) Meeting of the Conference in December 2008 to cut 4.2 mb/d from the actual September 2008 OPEC-11 production level with effect from 1st January 2009, compliance for the month of February, according to secondary sources, was 79%, which has contributed to balancing the price of the OPEC Reference Basket at around US$40/b since the beginning of the year, despite the critical economic outlook.

The Conference therefore emphasized its commitment to comply fully with its decision of December 2008, in order to further contribute to market stability. The Secretariat will monitor very closely developments in the market. Furthermore, the Conference will convene in Vienna, on Thursday 28th May 2009, to consider any further actions deemed necessary."

On a side note, the cartel decided to lengthen Abdullah Salem el-Badri's (of Libya) stay as Secretary General of the organization for another three year term. At Environmental Capital, Spencer Swartz reports that Russia decided not to join the organization or coordinate any serious production cuts.

"[Russian deputy prime minister Igor Sechin] proposed a slew of things for Russia and OPEC ministers to work on together, such as coordinating (i.e., raising) taxes on foreign oil firms’ crude production and refining operations."

Moscow had indicated that it would consider to what extent OPEC was complying with headline cuts before it joined in cooperation. Even so, this has to be considered good news in the West, given recent noise from Moscow and hints from Tehran.

10. Rania El Gamal at Reuters reports that Sheikh Nasser al-Mohammad al-Sabah told al-Watan newspaper that the country would officially cancel the al-Zour 615 kb/d export refinery construction project today in remarks published Sunday. In May, KNPC awarded $8.4 billion in construction tenders to four South Korean and one Japanese firm to build the refinery.

11. Rainbow Nelson at Lloyd's List reports that the Chavez administration expects the Venezuelan Congress to pass a law tomorrow which would transfer the administration of ports from the regional to the state level.

"'We are going to recover the ports and airports in the whole republic, oppose it whoever wants to, this is the law of the republic,' Mr Chavez said on his weekly television program ‘Alo Presidente’.

He warned Henrique Salas, who governs the department of Carabobo and oversees Venezuela’s most important port, Puerto Cabello, and Manuel Rosales, the governor of Zulia, which oversees the port of Maracaibo, that the navy and army would be used to quell any opposition to the move."

Opponents have pledged to resist the law.

12. The Associated Press reports that Mexico has slapped import duties on 90 US products in retaliation for the cancellation of a program that had allowed Mexican trucks to trasnport goods within the US.

13. Mary Williams Walsh at the New York Times reports that AIG issued a press release Sunday which provided the names of the institutions and governments which received payments via the bailout monies provided to the insurance company.

"Financial companies that received multibillion-dollar payments owed by AIG include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).

AIG also named the 20 largest states, starting with California, that stood to lose billions last fall because AIG was holding money they had raised with bond sales."

14. Justin Fox at the Curious Capitalist dug up the Bureau of Economic Research data on unemployment in the Great Depression to compare them to the financial crisis of 2008.



As Fox notes, nonfarm employment accounts for a much larger share of total employment in the US today than it did in 1929. Still, nonfarm employment accounted for about 78% of all private sector hours worked at that time, according to Robert Higgs at the Independent Institute.

Daily Sources 12/2

1. President of the Republic of Georgia Mikheil Saakashvili has an op-ed in the Wall Street Journal today in which he asserts that his decision to send military force into South Ossetia it was in response to Russian troops and tanks pouring into the region. Saakashvili writes that his op-ed was made necessary by

"a fierce, multimillion-dollar Russian PR campaign that hinges on leaked, very partial, and misleading reports from a military observer from the Organization for Security and Cooperation in Europe (OSCE)."

However, there is also the matter of the story in the New York Times on November 26 of the former Georgian Ambassador to Moscow telling the Parliament in Tblisis that government officials had told him that Saakashvili planned for war with the breakaway regions as early as April. (Daily Sources 11/26 #3)

I do not want to seem unsympathetic to the Georgian cause, but the straw man argument is hard to stomach. After all, Presidents of foreign nations seldom seek to place opinion pieces in national papers without the assistance of a US public relations firm or two or three. And, in the case of the Republic of Georgia, we have a good idea of who Saakashvili's PR agent would be--Randy Scheunemann, who also happened to be a foreign policy adviser (for reasons unknown) to Senator John McCain. (It is generally bad form to be a foreign policy adviser to a Presidential candidate who might most benefit from a conflict involving a client of yours.) He also happens to work for the Caspian Alliance, a lobbying firm that pushes the interests of US oil companies involved in the formerly Soviet Caspian littoral. My guess is that Scheunemann advised that this op-ed was placed and that, for the most part, he wrote it.

It is very hard, from my far remove, to judge the veracity of the claims and counterclaims of Russia and Georgia in the South Ossetian and Abkhazian conflicts. Both are, without doubt, spinning. But it's hard not to scoff at the notion that Georgia has been victim to a PR onslaught by agents of Moscow. Clearly, the US press was firmly in Tblisi's camp from the get-go and it was only after some European reporting, in particular that of the BBC, began to trickle into the American consciousness that reporters in the US broadcast and print medias began to question the narrative of Georgia as bullied victim.

Clearly it is not in the interests of the United States to encourage, by indifference, the adventurism of Moscow. On the other hand, to deliberately encourage Georgian adventurism is plainly contrary to the national interest. One primary reason it is so is because there is little political will in the US, under any circumstances, to deploy blood and treasure on behalf of Tblisi. In part because there would be so little to gain from such deployment and in part because there would be so much to lose.

Worth reading in full in any case.

2. Platts reports that OPEC President Chakib Khelil told reporters today that the organization would like Russia to join:

"What we would like is that they become full members. If they have a problem with that, they should just cut production. We don't need an agreement to create solidarity with those that have the same objective as us."

3. Eric Watkins at the Oil & Gas Journal reports that the Cairo Court for Urgent Cases plans to hold a hearing December 15 to consider an appeal of a decision on November 18 by the Cairo Administrative Court (CAC) to halt natural gas exports to Israel. The appeals plead that the CAC did not have jurisdiction, because the export agreement is between private, not national, corporations. The CAC holds that resources like natural gas are the national patrimony and that thus it has jurisdiction.

"The agreement to supply Egyptian gas to Israel was signed in June 2005 by Egyptian oil minister Sameh Fahmi and Israeli infrastructure minister Binyamin Ben Eliezer."

The commercial agreement is rumored to be a 15 year term contract for natural gas at $1.50/MMBTu without any provision for prices to change to reflect market conditions. Although it is a somewhat misleading benchmark, on NYMEX natural gas is selling at $6.53/MMBTu--in terms of BTUs per barrel of crude oil that roughly translates to $37.87/b.

"The gas being supplied to Israel goes to Israel Electric Corp., which has estimated that 20% of the electricity produced in Israel over the next decade will be from Egyptian gas."

Organizations upset with Israel's approach to Palestine orginally brought the case to the CAC.

4. Robert Kagan has an op ed in the Washington Post which argues that we must do more than counsel India to restrain their response to the Mumbai terror attacks. He suggests that we ought to

"Have the international community declare that parts of Pakistan have become ungovernable and a menace to international security. Establish an international force to work with the Pakistanis to root out terrorist camps in Kashmir as well as in the tribal areas."

Kagan suggests that whether or not Islamabad is happy with the idea, we need to show the people of India that we take attacks on them as we do on ourselves. Although it is clearly for emotional effect, one might point out that no one expects anyone to take attacks on other nations as seriously as they do on their own. After all, the main promise of states is security, and slightly beyond that rules-based security. If states fail to provide it, their legitimacy comes into question. That aside, Kagan closes with:

"Either way, it would be useful for the United States, Europe and other nations to begin establishing the principle that Pakistan and other states that harbor terrorists should not take their sovereignty for granted. In the 21st century, sovereign rights need to be earned."

Why would it be useful for the US and Europe to establish the principle that harboring terrorists is legal grounds for military intervention? Does Kagan not realize that there are plenty of organizations in the United States that some, even in Europe, regard as terrorist organizations? One does not even have to go as far afield as, say, Alpha 66 in Miami--there have been rumblings that a European court might order the detention of President George W. Bush on allegations of war crimes should he leave the US. No one takes that seriously just now, but just what is it that compels Kagan to believe that the rest of the world will accept American definitions of terror indefinitely?

The primary--and extremely troubling--irony here is that nationalist extremists in New Delhi are already plying, ingenuously even, the neocon arguments put forth by Kaplan and others for war on Iraq in their peculiar pursuit of power--and probably, ultimately, revenge. (And that revenge is brutal as BJP pogroms in the past indicate.) Is Kaplan suggesting a "coalition of the willing" or that India seriously pursue UN sanction? It seems clear from his op ed that he does not think it likely New Delhi would get the go ahead from the Security Council. Is Kaplan seriously counseling New Delhi to pursue a red herring?

In the meantime, Robert F. Worth and Graham Bowley at the New York Times report that the Indian police today said all of the Mumbai terror attackers came by ship from the Pakistani port of Karachi. Candace Rondeaux at the Washington Post writes that Pakistani Foreign Minister Shah Mahmood Qureshi in a television broadcast offered to set up a joint inquiry into the attacks. New Delhi has demanded that Islamabad hand over 20 individuals suspected to be linked to terrorist acts in India since 1993. The two countries do not have an extradition treaty.

5. David Osler at Lloyd's List reports that ship owners are mulling over switching from flags of convenience to flags of nations with meaningful naval power assets in the wake of the ongoing Somali piracy situation. Sadly, I do not have a link to an open source for this article. However, the summary is all you really need to know. The cost of private security might well prove more expensive than that of taxes, in the final analysis. Quelle surprise!

6. Liz McCarthy at Lloyd's List reports that the indices for Capesize and Panamax rates have reached the lowest level ever recorded. The Baltic Dry Index, widely considered a general barometer of shipping activity, has fallen to 684 points.

"'It’s difficult to see how much lower it can go. This is desperate stuff,' said a Baltic Exchange freight market representative. ... If the rates continue to plummet the index may approach its lowest recorded level of 554, in early August 1986."

7. Thomas Fuller and Seth Mydans at the New York Times reported yesterday that the Thai Constitutional Court banned the Prime Minister and several top government officials from politics for five years and ordered the largest political party in Parliament dissolved. The party--the People Power Party--has announced they will form a new party, to be known as Pua Thai, and will call for the election of a new Prime Minister on December 8.

8. Blaine Harden at the Washington Post reports that North Korea has made good on its threat to sharply limit South Korea's access to the joint industrial complex in the border city of Kaesong. On November 24 Pyongyang shut down the rail line between the two countries and said it would begin expelling South Koreans from the industrial complex beginning December 1. (Daily Sources 11/24 #10) Harden writes that for the most part North Korea is upset about two developments. A) The government of President Lee Myung-bak, who was inaugurated in February, has reversed the "sunshine policy" of the last 10 years which tended to give considerable aid without many strings attached. B) Apparently, Kim Jong Il was offended by the clinical descriptions of his alleged illness in recent months. Koh Yu-hwan, a professor of political science at Dongguk University in Seoul, told Harden, "Discussions of the health and private life of Kim bring into doubt the survival of his regime -- and of the survival of everyone in his inner circle."

Harden has another article today on another source of the dispute--anti-Kim Jong Il propoganda leaflets being sent into North Korea via balloons by private South Korean activists. The activists clashed with proponents of detente today, nearly sparking a riot. Both are very interesting reads, although some language is duplicated.

9. Shai Oster at the Wall Street Journal reports that Beijing is becoming increasingly worried about the 130 million migrant workers in China, many of whom have been laid off by factories and are returning to the farms they had leased to farming companies. 130 million people is 10% of China's population of 1.32 billion. The leases on farm land pay about 1/7th of what skilled factory and construction labor paid and many of the laborers have no farming experience. If a substantial portion of laborers chose to farm as opposed to lease, there might be problems with food supply. If they simply lease, they will likely need some other means to make ends meet--and many will likely find themselves idle. Well worth reading in full.

10. Aresu Eqbali at Platts reports that Iran and Malaysia signed a number of oil and gas cooperation deals today. Malaysia's Petrofield will be responsible for 100% of the cost of construction of a 10 million mt/year LNG plant to

"process gas from Iran's offshore Golshan field in the Persian Gulf off southern Bushehr province. ... A shipping company, under 50:50 ownership, will be set up in order to transport the LNG."

After 25 years of operation, NIOC will assume control of the plant. The new deal will replace one signed last year to develop natural gas from the neighboring Ferdows field. In the meantime, the gas from Ferdows proved unsuitable for LNG production. "Golshan has estimated gas reserves of about 30 Tcf." Iranian Oil Minister Gholamhossein Nozari was quoted as saying the deal also covers "exports of 250,000 b/d of Iran's ultra heavy and heavy crude oil to Malaysia's Kedah refinery and the sale of 120,000 b/d of condensates."

11. Alexander Ragir at Bloomberg reports that, in a client note, Banco Santander analysts said that Petrobras Osmond Coelho, the manager of the pre-salt region, told them that oil prices would not affect the timing of the development of the offshore fields. The analysts believe, after a meeting with Coelho, that the company will be able to profitably produce oil from the salt fields at $50/b.

12. Greg Quinn and Theophilos Argitis at Bloomberg report that the leaders of Canadian opposition parties the Liberal Party, New Democratic Party and Bloc Quebecois signed an accord yesterday to form a coalition government, which would effectively take power from the Conservative Party.

"The Liberals won 26 percent of the popular vote in October’s election, their worst showing. They have 77 seats in the 308-member legislature, while the New Democrats hold 37. The separatist Bloc Quebecois party has 49 seats. The three parties combined would hold a majority in the House of Commons."

The Liberal Party will, as part of the accord, get the right to appoint 18 of the 24 Cabinet posts. Bloc Quebecois, separatist in the past, might have held out for posts key to further autonomy, though the article does not give any details. This would be the first coalition government to lead Canada since World War I and it appears to have been a decision by left-leaning politicians that it was key to the economic security of Canada to control the fiscal response to the global financial crisis.

"Liberal Leader Stephane Dion, 52, would become interim prime minister and offer 'stimulus' programs including increased spending on infrastructure and aid to automakers and forestry companies."

Proposals so far are for tens of billions in government spending. Worth reading in full.

13. Natasha Brereton at Real Time Economics reports that consumer price inflation expectations for 12 months ahead in the UK to 3.3%, down from 4.7%, per a survey by Barclays Capital.

14. Tina Seeley at Bloomberg reports that the US Energy Department will resume filling the Strategic Petroleum Reserve (SPR) in January. Congress in May--in great part due to the advice of Philip Verleger--passed legislation suspending additions to the SPR in an attempt to put a lid on prices. Although the fall in prices is the subject of much debate, and I doubt the kibosh on SPR additions are the real culprit, who, given the incredibly opaque state of the oil markets, can gainsay him? The reserve is to add 2 million barrels in January (or about 64.5kb/d.)

15. Maurice R. Greenberg has an op ed in the Wall Street Journal where he asks the US to reconsider the terms of the AIG bail out. Greenberg was formerly the legendary Chairman and CEO of AIG--forced out by the board in 2005 under the shadow of allegations of fraudulent business practices, among other things, by New York Attorney General Eliot Spitzer. Spitzer, you will remember, resigned as Governor of New York this Summer after an investigation was leaked that found that he partook of high-priced prostitutes. Greenberg suggests that the terms proffered to Citigroup make more sense and that the terms AIG faces are punitive. I'm not sure how persuasive the piece is, but you gotta like the title given the current zeitgeist--"AIG Needs a New Deal." Worth reading in full.

16. Joe Carroll at Bloomberg reports that Chevron's Vice President of Strategy and Development, John Watson, told an industry conference today that the company planned to sell some refineries. He would not elaborate as to which or how many refineries Chevron intended to sell. I suspect it would be difficult to get a good price at just this moment, however. "Chevron operates or owns stakes in 18 plants that can process 2.94 million barrels of crude a day."

17. Richard Rubin at Platts reports that Kinder Morgan today started moving commercial ethanol on the Central Florida Pipeline between Tampa and Orlando--the first US shipment of ethanol via a gasoline pipeline from one market to another. The company also today announced it had successfully shipped blended B-5 biodiesel via the Plantation Pipeline between Collins, Mississippi and Spartanburg, South Carolina.

Daily Sources 10/8

1. Nancy Trejos at the Washington Post reports that $2 trillion has been wiped out of retirement accounts in the US.

According to a survey released yesterday by AARP, 20 percent of baby boomers stopped contributing to their retirement plans in the past year because they have had trouble making ends meet.

This news makes me think I can predict with nearly complete confidence that Barack Obama will be the next President of the United States. In a previous blog I provided an analysis of how his election would affect America's geopolitical situation, but could not have expected that he would have been elected to the position on top of such a tremendous mess. Figuring out just how this crisis will play out geopolitically generally and in terms of specific nations is no small puzzle. But I do think that Obama would return some confidence to the markets worldwide, and as such, may do something to alleviate the situation we have found ourselves in. There was some good news today, AP reported that pending home sales rose 7.4% from July to August as per the National Association of Realtors. The index of pending sales reading is at the highest seen since July 2007.

2. Naked Capitalism has a post on Arvind Subramanian's proposal for a bail out of the American financial system by China published in the Financial Times yesterday. He suggests that the People's Bank of China could lend the US $500 billion (of its $1.8 billion cash reserves) on the condition that the money only be used to recapitalize the banks (as opposed to providing liquidity by purchasing toxic assets, as our current emergency financial stabilization fund is structured to do.) Yves Smith thinks the tongue in cheek plan makes a lot of sense. In today's Washington Post, Subramanian and C. Fred Bergsten have an op ed arguing that a globalized crisis "requires a globalized response." Well, just in time for ...

3. Carter Dougherty and Edmund L. Andrews at the New York Times report that the Fed, the European Central Bank, the Bank of England, and the central banks of Canada and Sweden all coordinated a cut in interest rates of a half percent. Switzerland also cut its benchmark rate and Japan publicly supported the move, though it left its benchmark rate of 0.5% (if I remember correctly.) (The yen is rapidly approaching the landmark 100 per dollar rate (interbank).) China also reduced its benchmark lending rate by 0.27%.

4. Nigel Morris, David Prosser and Sean Farrel at the Independent report that Downing Street has arranged a £50 billion rescue fund for the British banking system.

5. Denis Maternovsky at Bloomberg has the story that Russia, Indonesia and Ukraine shut down their stock markets today in the face of massive sell offs. Russia's RTS bourse will be shut indefinitely. MICEX will be closed until Friday. Jakarta's exchange will shut indefinitely, or so I have been led to believe.

Hungary headed for its worst daily decline since 1999 as the Budapest Stock Exchange fell 6.3 percent. Latvia's OMX Riga Index lost 6.5 percent to its lowest level since January 2004. India's Sensex index slid 2.6 percent and China's CSI 300 Index fell 3.8 percent, its third day of declines. South Korea's Kospi Index lost 5.8 percent.

6. From a panel discussion at the Council on Foreign Relations featuring Nouriel Roubini, Brad Setser, Benn Steil and Mort Zuckerman on September 25:

ROUBINI: So what you have to ask yourself is whether the sharp falling U.S. private consumption demand -- is there enough domestic private demand in the rest of the world in emerging markets that can grow to suspend global economic growth, and my answer is no because, you know, in U.S. the total consumption's about $9.5 trillion. Take the entire consumption of 1 billion Chinese, it's about $1 trillion. Take all of the consumption of almost 1 billion Indians, it's $600 billion. So the sum of the consumption of 2 billion Chindians is about one sixth of the U.S. consumption, right?

So if there's a shortfall U.S. consumption, can their consumption go up by 500 percent in order to compensate for the falling U.S.? The answer is no. The question in this country is whether we're relying especially China some parts of Asia some parts of Latin America on expert to the United States is the main engine of goods, and the rest of the demand is essentially production of investment goods that produce more exportables is the question of whether their policy stimulus in terms of monetary and fiscal policy can be aggressive enough to avoid a hard landing.

And for China -- by the way, a hard landing means a growth that's gone from 11 (percent) to 6 percent because China needs a growth rates of 10 percent in order to move about 15 million--(inaudible)--investment sector every year to maintain social and political stability. And my concern is that while now they're going to have a fiscal stimulus, they cannot so aggressively flow all of the infrastructural spending they want to do over the next five, 10 years over a year or two. And if that's the case actually, their policy response may not be aggressive enough to control the fall out coming from the collapse of demand in the United States and the recession and the rest of the advanced economy. And if China goes into essentially a hard landing, then the two main engines of global growth, that were U.S. and China, one on the consumption, the other one on the production are going to have a recession or a near recession, then you have real trouble for the global economy.

SETSER: If I could just make one small amendment to what Nouriel said which is that over the last two years, Europe has been a bigger engine of demand growth for most of them, the emerging world than the United States because our net exports have been contributing to growth and so for much of the emerging world, the economic trajectory of Europe over the next 12 months will matter as much if not more than that of the United States, which is a significant change from the world of, say, five years ago.

STEIL: And in terms of the so-called--very briefly, in terms of the so-called BRIC countries--Brazil, Russia, India, and China--I'm particularly concerned about Brazil and Russia. The reason is that we really haven't seen fundamental reforms in those economies, their boom has been very much based on the rise in commodities prices. If global demand really does take a deep hit, I think Brazil and Russia go down with it.

I'm pretty convinced by these remarks that we are likely to see a significant slowdown in China and India. Continuing in that vein, Steve Mufson at PostGlobal reports that Chinese gasoline demand fell 5.6% (470 kb/d) in August from July and 2.7% (or 200 kb/d) in July from June. Chinese gasoline prices averaged about $3.62/gallon in September, as compared to the US average of $3.72/gallon. Diesel prices are still 21% lower in China than the US (and China "dieselized"), but clearly these prices can be expected to put a damper on Chinese demand. Paul Cavey has an op ed in today's Wall Street Journal Asia which states that China's domestic real estate market has contracted by 50% over the last few months. Cavey, head of China economics at Macquarie Capital Securities, argues that domestic real estate and exports are the two central drivers of Chinese economic growth.

7. Isambard Wilkinson at the Telegraph reports that Pakistan has enough reserves to purchase about 30 days worth of food and fuel, after which the country faces bankruptcy.

Pakistani President Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community.

Evidently talks with Riyadh to defer payments on the daily delivery of 100,000 barrels of oil have not born any fruit at this stage. Islamabad has been unable to secure loans at favorable terms from friendly countries. The rupee has lost 21% of its value so far this year and Standard & Poor's rates Pakistani debt at CCC+. (Well, whatever else you think of governments, at least they are transparent enough that you can rate their debt with some accuracy!) The problem here is that Zadari is known in Pakistan as "Mr. 10%." The government of Musharraf fell, from what I can tell, in great part as a result of the "lawyers revolt" there, caused by the removal by Musharraf of Supreme Court Justice Chaudhry. Even though the lawyers' movement brought down the general, Zadari has refused so far to reinstate the Justice--who presided over the corruption trials brought against the President. It might be difficult to go around the world, hat in hand, asking for $100 billion--no matter how genuine Pakistan's need is--if the general response is going to be how much of that money is actually going to be "... um ... and so what's your cut?" I know I'd be pretty reluctant. But then we have to consider that Pakistan is a nuclear power where food and fuel shortages could create serious unrest and even potentially a total state failure. Is the US about to be subjected to nuclear blackmail by their key ally in the war against terror?

8. Kelly Zang at Xinhua reports that Russia did not include the Altai gas pipeline project in its recently published blueprint for gas sector development to 2030. The Altai pipeline would have shipped 30 billion cubic meters of natural gas from Western Siberia to China. China was hoping for first shipments in 2011. There are plenty of customers vying for Russian gas. In the east, Tokyo offered a $14 billion subsidy for a pipeline to the Pacific. (Japan is looking at cuts in supply from traditional suppliers Indonesia and Malaysia.) Europe also is likely to want more gas going forward. It would be significant if Moscow decided not to integrate their energy complex too tightly to Beijing, choosing a line to Japan or more to Europe.

9. Henry Kissinger and George Schultz have an important and thoughtful op-ed in the Washington Post today which argues, much as I have in my own little way, that:

We believe that the fundamental interests of the United States, Europe and Russia are more aligned today -- or can be made so -- even in the wake of the Georgian crisis, than at any point in recent history. We must not waste that opportunity.

Though perhaps it was necessary to do given military exercises with Venezuela--and though I believe Secretary Gates is a pragmatic realist--Peter Finn in the Washington Post reports that he re-emphasized American support for Kosovan independence in a visit to the province today.

10. Peter Finn at the Washington Post reports that Secretary Gates in Macedonia asked Europe for 10 - 12,000 more troops for action in Afghanistan.

11. Platts reports that the Iraqi oil minister Hussain Al-Shahristani told reporters in Turkey that OPEC was ready to convene an emergency meeting should oil fall much below $90/b. Their next meeting is currently scheduled for December 17 in Oran, Algeria.

12. Nick Tattersall and Thomas Grove at Reuters report that the Nigerian Oil Minister Odein Ajumogobia has expressed concern about the drop in oil, suggesting that OPEC should consider production cuts.

13. Sabrina Tavernise at the Washington Post reported that the Turkish Parliament voted by 497 to 18 to reauthorize projection of force by the Turkish military against Kurdish separatists in Iraq.

14. Dan Scotto told Energytechstocks.com that,

"At best, the Wall Street meltdown has probably set back the timetable for constructing a new generation of nuclear power plants in the U.S. by three years."

Nuclear is difficult to provide security for, but it does burn clean.

15. Dorothy Kosich at Mineweb reports that the US emergency financial stability fund bill (HR 1424) included a fair amount of concessions to the coal lobby.

H.R. 1424 and the short-term budget bill Congress also contained the following provisions supported by National Mining Association (NMA):
- Extension of the mine safety equipment and training tax credit;
- Additional tax credits for advanced coal electricity projects and coal gasification, including gasification in Coal-to-Liquid (CTL) production;
- New tax credits for carbon capture and storage or reuse in enhanced oil recovery
- An extension of the alternative fuels credit applicable to CTL;
- Funding to support the Department of Defense's ongoing CTL testing.

Coal is probably part of the solution to America's energy security, but why such provisions needed to be added as pork to an emergency financial stabilization bill is beyond me. It should be added that of all the fossil fuels, coal is by far the dirtiest to extract and to burn. Coal-to-liquid processes have potential, but just now the climate costs of CTL production are prohibitive. We have Sens. Max Baucus (D-Montana), Mitch McConnell (R-Kentucky), and Jay Rockefeller (D-West Virginia) and Reps. Roy Blunt (R-Missouri--the Minority Whip) and Artur David (D-Alabama) to thank for this particular piece of pork, as per the NMA.

16. Frank Ahrens at the Washington Post reports that the NY Fed will borrow $37.8 billion in investment grade securities from AIG in return for cash. This comes on top of reports that following the government's $85 billion bailout of the insurance company top execs went on a week-long stay at a California spa resort. The new CEO defended this action, saying it was de riguer in the insurance industry. Yeah, maybe, but it ain't de riguer in the government industry, which is what AIG is nowadays.

17. Norval Scott in yesterday's Globe and Mail has a story on how the credit crisis is killing plans for new oil sands upgrading plants in Canada. The story says that an upgrader--essentially a refinery that upgrades the tar in the sands into synthetic crude which can then be refined by another refinery into oil products--now requires $90/b oil to be profitable. Just three years ago I heard prices ranging from $40-$60/b. Given the reader comments, apparently much of the price increase is coming from a scarcity of skilled labor as much as the cost of money.

18. Claire Leow and Yoga Rusmana at Bloomberg reported that government estimates in Jakarta are that palm oil exports will likely drop by as much as 1.5 million tonnes next year due to the biodiesel mandate which came into force late September. The regulations stipulate that all transportation diesel sold in the country must be 1% biodiesel. The country is expected to produce more than 19 million tonnes of palm oil next year and as much as 20 million tonnes in 2010.

Indonesia's biofuel industry can produce between 1.3 million [tonnes] to 1.5 million [tonnes] annually. Capacity may double to 3 million [tonnes] by 2010.

19. The EIA's Week in Petroleum reported that crude stocks built by 8.1 million barrels last week against analyst expectations (as per the Platts survey) of a 1 million barrel draw. (Crude stocks are now a bit above the historical average.) Gasoline stocks increased by 7.2 million barrels versus the 2 million barrel build expected on Wall Street. Stocks are still well below the historical average, but that is a big build against the lowest levels seen since 1967. Distillates saw a 0.5 million barrel draw down against the 1 million barrel increase expected by most Wall Street analysts. Some of this is continuing fall out from the refinery closures caused by Hurricanes Ike and Gustav. I think, even given the shortages, that it is a signal of more demand destruction, and thus, taken in isolation, lower crude prices.

Daily Sources 9/17

1. Andrew E. Kramer at the New York Times reports that trading was halted on the Russian stock market for the second time this week. The market has dropped by more than 25% this week and is off 57% since its peak in May. The Russian Central Bank and regulators also announced a 4% reduction in bank reserve requirements today, which the central bank’s chairman, Sergei Ignatyev, said would free up $11.76 billion. The Russian finance minister, Aleksei L. Kudrin, also announced he would free up about $44 billion by increasing the repayment time of state loans to state banks from one week to three months. Kudrin also said that the discussed measure of having Russia's Sovereign Wealth Fund invest in the market has, for now, been deemed unnecessary.

2. The Moscow Times reports that UBS analysts have said that the price of crude has dropped so much that a barrel is now worth less than the cost of transport and Russian taxes. If you are a pure crude exporter--and don't have a refinery from which you then sell products--you are losing money. (Evidently the mandated prices of transportation fuels in Russia now would not be counted as subsidies.)

3. Margarita Antidze and Matt Robinson at Reuters report that Russia has signed treaties with Abkhazia and South Ossetia which formally commits Moscow to coming to their defense should they be attacked. In 19th century gunboat diplomatic terms, you would call it a "guarantee of independence."

4. AP reports the US Embassy in Yemen was assaulted with a car suicide bomb, rocket-propelled grenades, and automatic weapons today. At least 16 are dead, although apparently no Americans were hurt. President Bush used the incident to say that the attack is a "reminder" that we are "at war with extremists." Officials believe it is likely an al-Qaeda attack. Non-essential personnel were just allowed back into the facility last month.

5. MEND's oil war continues to heat up in Nigeria, as per Ibanga Isine and Victor Sam at the Punch. The "oil war" is also referred to by MEND as "Operation Hurricane Barbarossa"--which is probably meant to evoke the Turkish privateer "Redbeard" who put an end to the damage the Knights of Saint John were doing to Ottoman shipping and eventually became the Fleet Admiral of the Ottoman Navy(a) and not Hitler's "Operation Barbarossa" (or the code name for the invasion plan of the Soviet Union.) The Hurricane part I understand ... and so far many of the attacks seem to have come via speed boats.

It is in this environment that the Nigerian Senate is considering an anti-terrorism bill reports John Alechenu at the Punch. Yet another foreign political utilization of the Bush Administration's "War on Terror" (by the way, just yesterday Putin referred to the Georgian terrorist situation)--and it is worth remembering that America remains very popular in Nigeria.(b) "If passed, the attorney-general will be empowered to detain persons for up to 60 days where he has reasonable grounds to 'believe or suspect' that 'the entity knowingly committed; attempted to commit, participate in committing; or facilitated the commission of terrorist acts.'" I think that such broad language tends to erode the rule of law, and this would be in a country where the rule of law is not particularly strong to begin with.

6. Juan Forero at the Washington Post has an important report on a witness in ongoing trials in Colombia linking Gen. Mario Montoya to death squads in Medellin. Montoya is apparently well-known in Washington and was one of the generals involved in orchestrating the spectacular rescue of hostage Ingrid Betancourt from FARC. The State Department stood behind Montoya today in interviews. Should these allegations prove true, they will likely be very damaging to the Uribe Administration as well as further undermine the American image in South America.

7. Thom Shanker at the New York Times reports that Defense Secretary Gates has apologized for the deaths of non-combatants in recent strikes in Afghanistan. I think that--though it might stick in the craw a little--this was a very wise move.

8. Xinhua reports that China will allow local governments to raise the cost of heating in response to the increased costs of coal.

9. Tom Doggett at Reuters reports that Sam Bodman, Secretary of Energy, told reporters that the Administration is considering asking the IEA for some of its gasoline reserves.

10. Edmund L. Andrews, Michael J. de la Merced and Mary Williams Walsh at the New York Times report that The Federal Reserve Bank has agreed to lend AIG $85 billion for a majority equity stake in the company.

11. David Cho at the Washington Post reports that the Federal Reserve has asked the Treasury for a $40 billion deposit.

12. Brain Setser at Follow the Money yesterday had a blog entry which partially answered my question regarding where foreign banks were going to put their money, following the Treasury's release of the Treasury International Capital data for July (TIC.) Answer: fleeing the US, and insofar as they are investing in the US, investing in the safest possible instrument, Treasuries. To paraphrase:

Before the crisis, foreigners bought roughly:

- $205b of long-term Treasury bonds
- reduced their holdings of bills by $10b
- $285b of long-term Agencies
- $540b of long-term corporate bonds
- $210b of US equity.
or about $1,230 billion per month.

After the crisis:
- $350b of long-term US treasury bonds
- $125b of short-term bills
- $150b in Agency bonds
- $210b of corporate bonds
- $55b of US equity
or about $890 billion per month.

Today the yield on the 3 month Treasury bill went to zero. That suggests to me that the market believes that the dollar will be worth more tomorrow, versus a basket of goods, than it is today. By basket of goods, I mean basket of currencies and securities because commodities appear to have rebounded recently. (Gold for December went up, if I understand correctly, $70 today! h/t Jesse's Cafe Americain) So, does this mean that foreign central banks will now be forced to sell dollars in order to defend their currencies or that they will be forced to buy dollars in order to defend their exports? I dunno.

(a) Wikipedia: Hayreddin Barbarossa
(b) Pew's 47-Nation Global Attitudes Study of 2007 has 70% of Nigerians having favorable views of the United States. Table: "Favorable Views of the U.S.", page 17. You also might want to check out my blog entry from March: The Geopolitical Consequences of the Candidates.

Daily Sources 9/15

The news today is overwhelmingly about what is beginning to look like a full-fledged financial meltdown in the US. Obviously, the consequences of a meltdown would be profound, but take a little while to think through. Here are the major stories on what's happening in NYC, and a few interesting items that could have been lost in the mix:

1. Heather Landy and Neil Irwin at the Washington Post write that Lehman Brothers filed for bankruptcy Monday morning. (I wonder whether the new draconian private bankruptcy laws passed at the behest of the banking industry apply to them.)

2. David Hilzenrath at the Washington Post reports that New York will allow AIG to lend money to itself.

3. Michael J. de la Merced and Mary Williams Walsh at the New York Times report that the Fed has asked Goldman Sachs and JP Morgan Chase to put together a $70 billion bail out package for AIG.

4. Binyamin Appelbaum and Zachary A. Goldfarb at the Washington Post report that the Bank of America made a deal to purchase Merrill Lynch for $50 billion over the weekend.

5. The Associated Press reports that the Federal Reserve reported today that industrial output dropped 1.1% last month, far exceeding analyst expectations of 0.3%. The decline was led by an 11.9% decline in motor vehicle and motor vehicle parts production. Output in mining--which includes oil and gas--fell 0.4% in August.

6. Andrew Batson at the Wall Street Journal reports that China abruptly decided to lower benchmark interest rates today on the fear of an economic slow down, and in response to financial news out of NY. The People's Bank of China will reduce the one year benchmark lending rate 0.27 percentage points to 7.2%. Inflation in China fell below 5% in August. Deposit rates (for individual savers) at banks remain at 4.4%, which presumably encourages spending.

7. Randy Fabi at Reuters reports that MEND declared an oil war on Sunday, warning all oil workers to leave the Niger Delta. Evidently the fighting is the worst the region has seen in some time with the Nigerian army, navy, and air force all involved in moves against the militants. Militants set fire to one of Shell's flow stations in the region today. This follows a call for a ceasefire by the MEND on Thursday.

8. Chris Obore of the Kampala Monitor writes that Erik Solheim, the Norwegian Minister of Environment and International Development, has warned Ugandan officials that Norwegian aid was at risk if the country did not more carefully address environmental and transparency concerns.

9. Alison Smale at the New York Times reports that the former European Union envoy to Kabul--Francesc Vendrell--has said that Afghanistan is in the worst shape it has been in since 2001.

10. Interesting op-ed in Wall Street Journal Asia by Richard Bush and Kenneth Lieberthal pointing out the main differences in American foreign policy messages to Taiwan and Georgia. Countries the authors believe face similar dilemmas.

Daily Sources 9/3

1. Juan Cole's Informed Comment links two more pieces on the ongoing conflict between Kurds and al-Maliki in Diyala. Asharq Alawsat's Ma'ad Fayad interviewed Massoud Barzani Monday. (Asharq Alawsat is a pan-Arabic paper based in London.) As Dr. Cole noted, Barzani refers to the al-Maliki government as "totalitarian." Barzani also says of the situation in Diyala that "it is true that it almost reached the point of confrontation." Barzani also refers to an improved relationship with Turkey. The Guardian's Jonathan Steele reports today that Kurdish peshmerga and Iraqi forces are "bracing" for a confrontation in the city of Khanaqin in Diyala province.

2. Salman Masood at the New York Times writes that a would be assassin missed the Pakistani Prime Minister--Yousaf Raza Gilani--today.

3. Eric Watkins at the Oil & Gas Journal writes that Iran has invited Brazil to join OPEC, but that Brazil has refused. Evidently, de Silva gave as his reason--outside of the $1 million membership fee--that Brazil has been investing in refining and biofuels in order to become an exporter of products, not crude.

4. Upstream online reports that Saudi Arabia's Khursaniyah oil field is now operational and producing 500 kb/d of oil. The oil field was initially due to start up in December and produces Arab Medium, a medium sour crude with an APIº of 28.5 and 2.85%wtS. 500 kb/d roughly equals 0.5% of world consumption. (That's a lot.)

5. Alonso Soto at Reuters writes that the Ecuadorian oil minister said that Venezuela was going to propose output cuts at the Saturday OPEC meeting, but that Ecuador was going to call for sustaining the current production quotas. Given the close ties and similar interests of Ecuador and Venezuela, I wonder what the difference in the calculus is.

6. Yesterday Venezuela's Chavez and South Africa's Mbeki signed a memorandum of understanding on energy cooperation, according to SAPA. Chavez called upon PetroSA to enter the oil production sector in Venezuela and hailed the agreement as a example of a new South-to-South cooperation and as a way to help reduce fuel and food costs in the southern hemisphere. Apparently a number of different economic and cultural cooperation agreements are being considered by the pair.

7. Gazprom signed an oil and gas exploration deal with Nigeria today, as per the AFP.

8. Reuters' Tom Pfeiffer writes that European governments are becoming alarmed at new Russian appetite for African energy deals. The concern appears to be centered on deals with African members of OPEC, i.e. Libya, Algeria, Angola, Nigeria, and Russia's reported interest in a gas exporting countries coalition organized along the same basic guidelines as OPEC. This is very interesting given China's Africa Policy of 2006.

9. Russia Economy Watch notes in two posts that growth in both the services and manufacturing sectors in Russia slowed in July.

10. Karen De Young in the Washington Post writes that the US today unveiled a $1 billion aid package for Georgia. Vice President Cheney arrives in Tblisi tomorrow.

11. Francis Fukuyama writes one of the better pieces on Russia and the American situation for the Financial Times. (History ain't over. Never thought it was. Glad Francis is on board for that one ... now.)

12. In a strange article by Rebekah Kebede in Reuters, James L. Gallogly, EVP at ConocoPhillips is quoted as saying that refinery utilization rates in the US will be at the recent (85% as opposed to more traditional 90%) utilization rates for the next few years. This doesn't make a lot of sense given that reduced demand is likely to reduce price in the short term, which in the medium term should increase demand and thus price and thus refinery runs. In any case, if it proves true, given that the share of world consumption is about 25%, this will be very significant going forward. Perhaps Gallogly is signalling that Conoco expects a worldwide slump.

13. Brad Setser, whose blog Follow the Money is hosted by the Council on Foreign Relations' Maurice R. Greenberg Center for Geoeconomic Studies, writes that demand for GSE debt from foreign central banks and sovereign wealth funds is drying up. (Evidently, they have shifted their purchasing to treasuries ... still US.) Given that there is no private appetite for the GSE debt, and that GSEs are the mortgage market in the US, that certainly doesn't bode well. (Maurice Greenberg, of course, is the former CEO & Chairman of AIG and I'm guessing this particular institution at the CFR has been funded, for the most part, by the Starr Foundation--AIG's foundation that gives grants by invitation only. Just thought worth noting given AIG's current troubles and the light this particular piece might shine on them.)