In the 1930s, he said, the US banking system was about half the GDP. Today, it’s 150 percent of GDP. In Britain, it’s 400 percent of GDP.
What’s more, in the 1930s America was nation that loaned money to the rest of the world. Now it is a nation that borrows from the rest of the world. This is one of many reasons why it is wrong to look to the 1930s for lessons on what to do today even if you buy Keynesian economics.
Pirates have released a Ukrainian arms ship carrying dozens of Soviet-era tanks after reportedly being paid £2.2 million, the largest ever ransom for a vessel hijacked off the Somali coast.
The moral of this story is that it pays better to seize a ship full of arms then a ship full of Saudi oil.
Media reports suggest Senate Republicans have become a key focus of stimulus talks, an acknowledgement that they appear to hold the balance of power in that chamber despite having only 41 seats to the Democrats’ 58. The Washington Post reports on the front page that Senate Democratic leaders “conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.” Moderate Republicans are “trying to trim the bill by as much as $200 billion.”
This is not really a Republican vs Democratic thing. Rather it is an east and west coast against middle American thing. Still, I am surprised that Democrats could not hold together long enough to pass this law.
Edit: If this is true, Obama may just be using the Republicans as a stick to clean up some of the junk he does not like in the bill. (h/t The Common Room)
At the same time, US sovereign 5 year CDS surged 15 bps yesterday to 86 bps. To put that in perspective…..it’s where Citigroup CDS was trading exactly one year ago. Remarkably, Macro Man could only find two other countries with double-digit CDS ratings: Japan (58), Germany (59), and France (69). Was it really only a decade or so ago that Japan’s loss of a AAA rating amidst massive borrowing made waves? Now markets are essentially saying that the Japanese government (facing a massive demographic challenge) is the best creditor in the world.
CDS = Credit Default Protection.
To be honest, I don’t really understand this. As I understand it, the CDS contracts don’t cover inflation. Do people really believe that the US will default rather then inflate? I suppose it could happen.
The ruble slumped to its weakest level against the dollar in 11 years as investors speculated Russia will be forced to give up its currency defense after draining reserves.
One should note that Russia has not drained its reserves yet. The market is just beginning to anticipate that they will be drained. Then what?
Every week it gets worse and worse and worse. Today it was Japan….
THERE HAS NEVER BEEN DATA THIS BAD FOR ANY MAJOR ECONOMY – EVEN IN THE GREAT DEPRESSION. December industrial production came in down 9.6%, worse than the METI forecast. It is now down almost 21% year over year. METI forecasts a further 4.7% decline in February. The inventory to production ratio soared again. Maybe METI will be correct.
If it is, Japan industrial production will have fallen 28% (non annualized) in four months. It will have fallen by a third in about a year. Nothing in the history of major nations compares. A 28% decline in four months would be more than half of the entire decline in U.S. industrial production over the 3 years and nine months of the U.S. Great Depression.
As far as the chaos goes, this will have to do….
Relativity minor so far, but this kind of thing is going to grow as economic problems get worse. It is going to test the EU’s ability to hold together.
As far as these particular strikes are concerned, they are going to get a lot worse in the week ahead. A story to watch.
A 40 Year Wish List from the Wall Street Journal is this week’s rant of the week.
Buried deep inside the massive spending orgy that Democrats jammed through the House this week lie five words that could drastically undo two decades of welfare reforms.
The very heart of the widely applauded Welfare Reform Act of 1996 is a cap on the amount of federal cash that can be sent to states each year for welfare payments.
But, thanks to the simple phrase slipped into the legislation, the new “stimulus” bill abolishes the limits on the amount of federal money for the so-called Emergency Fund, which ships welfare cash to states.
Wildcat strikes spread to power stations across Britain today with more than 2,000 workers at 17 different sites walking out in protest against the use of foreign contractors.
Around 700 staff walked out of the Grangemouth oil refinery in Scotland and 400 more staged an unofficial strike at a refinery in Teesside as workers lent their support to a three-day strike at Total’s Lindsey oil refinery near Grimsby.
The wave of renegade strikes has also hit power stations including Longannet in Scotland, where 500 mechanical contractors have downed tools. At least 17 sites have seen strike action thus far and talks about further walkouts are ongoing at other installations, including the Sellafield nuclear plant.
Resource-poor Japan just discovered a new source of mineral wealth — sewage.
A sewage treatment facility in central Japan has recorded a higher gold yield from sludge than can be found at some of the world’s best mines. An official in Nagano prefecture, northwest of Tokyo, said the high percentage of gold found at the Suwa facility was probably due to the large number of precision equipment manufacturers in the vicinity that use the yellow metal. The facility recently recorded finding 1,890 grammes of gold per tonne of ash from incinerated sludge.
The steepest decline in Mexico’s peso in 13 years blindsided everyone from UBS AG economists to Gustavo Huitron, the local marketing manager for Mercedes-Benz.
After weakening 20 percent last year, the currency fell to a record low of 14.4484 per dollar today. RBS Greenwich Capital Markets in Greenwich, Connecticut, now predicts another 3.8 percent drop by June 30. The peso’s worst performance since 1995’s so-called Tequila Crisis is being driven by the U.S. recession and falling oil prices, which are cutting Mexican exports and government revenue.
Pakistan Electric Power Company (Pepco) is under enormous miseries, facing a shortage of 10,000 tones a day supply of fuel oil to its power producing units as the consignments of Pakistan State Oil (PSO) remained stuck up at the port.
The situation is accordingly resulting into a power shortage of about 600 MW in the system and no turn around in the situation is possible before Monday, February 2, 2009 when the PSO would get its consignments cleared at the port in Karachi.
The depth of the downturn in Japan, the world’s second-largest economy, emerged yesterday with industrial production showing a record 9.6 per cent decline last month and unemployment up by 0.5 per cent to a three-year high of 4.4 per cent.
Output fell at its fastest pace since records began in 1953 and it was considerably worse than the 9 per cent consensus forecasts expected by the market and up from a previous record of 8.5 per cent a month earlier. It is particularly worrying for a country that relies heavily on global exports of cars, electronics and machinery.
Needless to say, this is a lot worse then what America is experiencing even if you account for the build up in inventories. An almost 10% drop in one quarter is a 40% annualized drop. I don’t really think it will keep dropping at the current rate, but even if all it did was level out that would still be a heck of drop.
While the US economy declined at the fastest rate for 26 years, the fall was less severe than many on Wall Street had expected, with some economists forecasting a 5.9 per cent drop.
In a short-term sweet but probably long-term bitter turn, inventories rose at the end of 2008. The inventory increase was troubling because it was likely unintended — the result of companies getting stuck with unwanted merchandise because demand has tailed off in the recession. Excess inventory will have to be worked off down the road and that signals production cuts, which in turn could mean layoffs that hamstring the economy even more.
“With inventory investment jumping in (the fourth quarter), there will be inventory liquidation in (the first quarter),” Insight Economics analyst Steven Wood said. “This suggests that (first-quarter) GDP will also contract, probably more sharply than it did in (the fourth quarter).”
Inventories increased by $6.2 billion in the fourth quarter, after going down $29.6 billion in the third quarter and $50.6 billion in the second quarter. The climb added 1.32 percentage points to GDP. Real final sales of domestic product, which is GDP less the change in private inventories, decreased 5.1% in the fourth quarter, after falling by 1.3% in the third quarter.
“Obviously, with final demand declining at a 5.1% annualized rate, an increase in inventories is hardly good news for future economic conditions,” MFR Inc. analyst Joshua Shapiro said. “It signals that businesses were unable to reduce inventories to desired levels as demand evaporated. This means that orders and production will sink even more as inventory control and final demand both weigh on activity.”
In other words, GDP only dropped by 3.8% but demand dropped by 5.1%. The difference is made up by the fact that inventories increased. No wonder factories are cutting production so sharply.
Edit: LA Times puts some numbers on on the inventory build up….
Swonk and other economists who analyzed the underlying data noted that about 1.3% of the economy’s output went into inventory — showing that companies produced more than their customers were purchasing.