Does anyone remember when the Fed use to focus on “Core Inflation?” The argument back then was that you should exclude volatile things like Energy and Food to get a true picture of the underlying inflationary pressures. Now get this from the Fed Report….

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

Why don’t they strip out Energy and Food prices to get a true picture of the underlying inflationary pressures? As Megan McArdle notes…

The fall in the CPI was driven almost entirely by energy prices, without which the price index was flat.

When the CPI was high, people argued that interest rates should not be raised because underlying cause for the high CPI numbers was a rise in volatile energy prices. Now those same people argue that we need to cut rates because volatile energy prices are falling. I just don’t get it.

Even relative optimists like Felix Salmon are starting to get a little worried. At the closing of his post dealing with today’s cuts he says…

Did we really need a zero interest rate policy, or Zirp, on top of this? It would be great if we could get some reassurance from FOMC members that they understood the downside of today’s move and know what they’re doing. Because it really worries me.

Editors Note: The “This” in the above quote is referring to the Fed’s promise to print money and intervene directly in the markets.

From Spiegel….

Evidently the Romans and Germans fought a bloody battle in the third century AD, said archaeologist Petra Lönne. Some 1,000 Roman legionnaires may have been involved in the fight.

Intriguingly, the find includes more than 300 iron projectiles that were fired by powerful Roman torsion weapons known as scorpions (scorpio), which could catapult heavy darts with a high velocity and deadly accuracy. It had a range of 300 and was portrayed in the opening battle scene of the Hollywood movie “Gladiator.”

“The bolts were found densely clustered,” said archaeologist Henning Hassmann.

Historians say the discovery of the battlefield is so significant because it appears to refute the assumption that the Romans withdrew from Germania after their defeat by an alliance of Germanic tribs at the battle of the Teutoburg forest in 9 AD.

This longer article from Spiegel has more details. As best as they can tell, some German’s took a stand on the hill. There, they got pounded by the scorpions and Roman auxiliaries. After pounding the Germans for a while, it seems that the Romans attacked the hill from two different sides of the hill. They seem to think that the Romans won.

From Brad Setser….

In October, China was about the only central bank adding to its reserves (I suspect, it hasn’t formally released its reserves data). Most central banks were selling. That shows up in the US TIC data. South Korea, Brazil, Mexico, Russia and Ukraine were all net sellers of long-term US Treasury bonds …

The big central bank flow was a reallocation away from Agencies toward Treasuries. And specifically toward short-term Treasury bills.

China increased its holdings of short-term Treasury bills by a stunning $56 billion while also buying $10 billion of long-term Treasuries. That flow alone would have been enough to cover the trade deficit in the absence of any offsetting outflows.

You have got to admire China’s determination to make this all work. But how much longer can the prop us up.

(I know, I know, people can stay stupid for longer then I think. But I have to believe they are pushing their limit)

From Jeff Matthews….

You might think a supposed $50 billion fund with audited statements from an unknown accounting firm with no web site might, oh, raise some eyebrows.

And it did.

As the Wall Street Journal has reported, one individual more or less laid out the issue for the regulators in language that does not get much clearer, nor much further from the actual truth:

“Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff’s stock-options strategy and was convinced the results likely weren’t real.

“Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999″.

Here is a guy who correctly identified a Ponzi Scheme almost ten years ago. Yet he had to wait that entire time for people to acknowledge that he was right.

Always remember that no matter how stupid you thinks something is, and no matter how certain you think collapse is, it can always continue on for far longer then you think. And that is assuming that you are right.

From Naked Capitalism…..

So let’s play out my variant of how a bankruptcy goes. The three ring circus described in The Deal moves forward. The story anticipates the bankruptcy process lasts till late 2010. I tell you what happens in the meantime: there are just about zero car sales. No normal prospective car buyer is going to have any confidence with a process this protracted and uncertain and will take his business elsewhere. GM runs through its DIP money faster because neither it nor any of its dependents are getting any dough, The assumptions going in, made with unduly optimistic assumptions about sales (no allowance for customer revulsion) are way way off base.

But now that GM is in Chapter 11, there is no turning back. Its cash hemorrhaging has grown far beyond what was ever envisaged even in supposed worst case forecasts. The only options now are nationalization (to what end? The brand has been destroyed) or liquidation. And liquidation takes down the parts suppliers, which in turn makes most of the foreign transplants unworkable.

So for the hatred of UAW and the stubbornness of some GM creditors we destroy the entire US auto sector.

This is silly. The health of the auto industry is ultimately dependent on the financial health of the consumer, not the Big Three. As long as there are people buying cars in America there will be an auto industry in America. As long as people need to drive cars they will need to fix cars. This means that parts suppliers will still be selling parts.

This issues of not wanting to buy from a bankrupt company is a red herring. Of course nobody wants to buy a vehicle from the Big Three if they are going bankrupt at current prices. But the whole point of bankruptcy is that it cuts your operating costs. This means that the Big Three should be able to dramatically lower their prices after a bankruptcy. Companies like Hyundai broke into the American market despite their previously bad reputation by dramatically improving their cars and selling their cars for dirt cheap. If the Koreans can do it, the Big Three can do it.

And if they can’t, why bail them out?

From Naked Capitalism….

Over a weekend, word leaked out that AIG is paying yet more retention bonuses. This move is making a complete and utter sham of the supposed punitive elements of the rescue. But clearly, there was not enough of an adverse reaction to the earlier announcements of retention bonuses to deter the giant insurer. A few Congressmen saying bad things hasn’t deterred exhorbitant CEO pay, so why should it be more effective here?

Some readers have written in to say they have friends or family at AIG who had worked very hard for many years and continued to work hard, and deserved better.

I hate to say it, but the party line on capitalism is that the participants are supposed to bear both risk and reward. Top people at AIG were very well paid just on a cash basis. Yes, it is sad if savings in the form of stock holdings are wiped out, but the government is not supposed to be in the business of saving private enterprise from its bad decisions. There were hardworkng people at Enron and Bear who were not at all culpable in the demise of those firms, but they had their savings wiped out.

I lot of people have made some good arguments in the comment section that some people at AIG needs to be paid bonuses or the business will just collapse. This may or may not be true. I don’t know enough to say for sure.

I have to say that even though many of the people arguing in favor of some of the bonus seem like intelligent and knowledgeable people, I have hard time buying their argument. I can’t help but notice that white collared people are quick to get outraged at the high wages that the blue collar auto workers make. But when it comes to bankers they think that it is critical that they keep their high pay come hell or high water.

My gut feeling is that if a operation can’t be run by paying people the same kinds of wages and benefits that they would get for government work, the the government should not be running an operation. Put it another way, if you have to pay people at AIG more money then you pay the head of the Federal Reserves, then it must be that AIG is to complex for the Federal Reserves to bail out.

But what do I know? I never wanted AIG to be bailed out to begin with.

From the Economist….

Instead of glass prisms, Icelanders are looking forward to a different Chinese cargo in the dying weeks of the year: fireworks. They set off more per person each new year than any other country in the world. Such is the demand that the Chinese manufacturers are making a special loan to Icelanders to buy them, according to a local newspaper.

Almost no other private creditor is lending them anything; Iceland has turned instead to the IMF.

This little throw away line buried in a story about Iceland’s problems demonstrates how insane the Chinese business model is. As the broader article makes clear, the other shoe has not dropped yet as far as Iceland is concerned. Iceland owes the world a lot of money that is never going to be repaid.

So what are the Chinese manufactures dong loaning money to Iceland for fireworks? I can only think that they are determined to keep their exports from dropping off. But really, how short sighted can you get? There is a reason why nobody else is loaning Iceland money.

From Alpha Sources….

On several occasions have we heard rants about the profligacy of the deficit nations and how, in more polemic circles, the surplus countries were holding the deficit countries by the, erm, b’lls. Of course, once you stop to think about it is not certain who is holding whose private parts here.

The point Claus Vistesen makes is basically the same one as I made here.