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China losing appetite for U.S. debt
Alan Rappeport, Financial Times
Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.
China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8bn. China overtook Japan as the largest holder in September 2008.
The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest…
(16 February 2010)
Metal prices rising strongly again
Will Smale, BBCNews
Global metal prices have had a rollercoaster ride in recent years – and they are rising strongly again.
The cost of base metals such as copper and aluminium have traditionally been completely overshadowed by the price of crude oil.
It was oil that got the headlines, while copper and the other main metal commodities stayed very much in the background.
All this changed in the year or two before the global economic bubble burst in the summer of 2008.
Yes, the rapidly increasing price of oil still dominated the financial headlines, but suddenly there was also a lot of reporting on the fact copper and other metal prices were also hitting all-time highs…
(16 February 2010)
Collapse of the euro is ‘inevitable’: Bailing out the Greek economy futile, says FRENCH banking chief
Sam Fleming and Tim Shipman, The Mail
The European single currency is facing an ‘inevitable break-up’ a leading French bank claimed yesterday.
Strategists at Paris-based Société Générale said that any bailout of the stricken Greek economy would only provide ‘sticking plasters’ to cover the deep- seated flaws in the eurozone bloc.
The stark warning came as the euro slipped further on the currency markets and dire growth figures raised the prospect of a ‘double-dip’ recession in the embattled zone.
The bailout of Greece will only act as a ‘sticking plaster’ for the Euro crisis, the bank warned yesterday.
Claims that the euro could be headed for total collapse are particularly striking when they come from one of the oldest and largest banks in France – a core founder-member.
In a note to investors, SocGen strategist Albert Edwards said: ‘My own view is that there is little “help” that can be offered by the other eurozone nations other than temporary, confidence-giving “sticking plasters” before the ultimate denouement: the break-up of the eurozone.’…
(16 February 2010)
Goldman Goes Rogue – Special European Audit To Follow
Simon Johnson, The Baseline Scenario blog
At 9:30pm on Sunday, September 21, 2008, Goldman Sachs was saved from imminent collapse by the announcement that the Federal Reserve would allow it to become a bank holding company – implying unfettered access to borrowing from the Fed and other forms of implicit government support, all of which subsequently proved most beneficial. Officials allowed Goldman to make such an unprecedented conversion in the name of global financial stability. (The blow-by-blow account is in Andrew Ross Sorkin’s Too Big To Fail; this is confirmed in all substantial detail by Hank Paulson’s memoir.)
We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November. These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets. When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.
But the affair is now out of Ben Bernanke’s hands, and quite far from people who are easily swayed by the White House. It goes immediately to the European Commission, which has jurisdiction over eurozone budget issues. Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients.
This audit should focus on ten sets of questions.
Which eurozone governments have worked with Goldman, and on what basis, over the past decade? All actions prior to and after the introduction of the euro need to be thoroughly reexamined.
What transactions has Goldman facilitated and how has that affected the reporting of European government debt? (Under the Maastricht Treaty, eurozone government debt is not supposed to exceed 60 percent of GDP.)
In the case of Greece, the accusation is that Goldman deliberately and in a premeditated manner conspired to hide the true degree of government debt. Is this true, and to what extent has Goldman helped other countries engage in similar transactions, e.g., countries now seeking entry to the eurozone?
What is the full extent of Greek and other government liabilities, if these are accounted for properly? Without this reckoning, it is impossible to design a proper level of European Union (or any other) support for weaker eurozone countries.
Are there non-eurozone countries that have also been aided and abetted by Goldman in this fashion? For example, are the UK and Switzerland implicated – and thus endangered?
Has Goldman extolled the virtues of government debt in Greece, or other countries, while at the same time helping to deceive investors on the true risks inherent in those debts? What were Goldman’s own holdings of these securities?
Is there evidence that Goldman has structured similar transactions for the private sector – enabling companies to conceal the level of their true indebtedness? Have securities issued by such firms also been endorsed by Goldman to the buying public?
Were Goldman’s US-based supervisors aware of Goldman’s activities in Greece and other eurozone countries? Did they condone activities that undermine the integrity of the European Union?
Where was the European Central Bank while all of this was happening? Has the ECB become dangerously enraptured with the new Wall Street and its “techniques”?
Did any responsible official really think that what Goldman was constructing was really some sort of productivity-enhancing financial innovation – as opposed to a sophisticated form of scam?…
(16 February 2010)
The Making of a Euromess
Paul Krugman, New York Times
Lately, financial news has been dominated by reports from Greece and other nations on the European periphery. And rightly so.
But I’ve been troubled by reporting that focuses almost exclusively on European debts and deficits, conveying the impression that it’s all about government profligacy — and feeding into the narrative of our own deficit hawks, who want to slash spending even in the face of mass unemployment, and hold Greece up as an object lesson of what will happen if we don’t.
For the truth is that lack of fiscal discipline isn’t the whole, or even the main, source of Europe’s troubles — not even in Greece, whose government was indeed irresponsible (and hid its irresponsibility with creative accounting).
No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.
Consider the case of Spain, which on the eve of the crisis appeared to be a model fiscal citizen. Its debts were low — 43 percent of G.D.P. in 2007, compared with 66 percent in Germany. It was running budget surpluses. And it had exemplary bank regulation.
But with its warm weather and beaches, Spain was also the Florida of Europe — and like Florida, it experienced a huge housing boom. The financing for this boom came largely from outside the country: there were giant inflows of capital from the rest of Europe, Germany in particular…
(14 February 2010)
Did peak oil cause the present financial crisis?
ilargi, the automatic earth
There is a long-standing misunderstanding about the perceived influence of perceived limits to energy availability in our societies that leaves people from the energy field, or even those who have trouble understanding finance, convinced that what is known as peak oil is the driving force in our present financial collapse.
As crucial as energy is to our lives and lifestyles, such claims are simply wrong. People -except in exceptional cases- don’t lose their homes because gas at the pump became more expensive, and banks wouldn’t have gone bankrupt -barring trillions in public bailouts- because their energy costs went up. I don’t want to regurgitate the entire topic, but then there’s no need for that either; a brief glance at the numbers should say enough.
An example.
As you may remember, sometime in 2008, the price of gas temporarily went up by about $1 per gallon. This is when the first accounts began to appear of people linking the present financial crisis to the energy crisis, claiming that the latter caused the former. To me, this never made much sense. I do, however, have fond memories of very interesting discussions on the topic at the time with very smart oil man Jeffrey Brown.
Still, the numbers were what they were, even back then, and in the end, derivatives didn’t cause peak oil anymore than peak oil caused derivatives. Some phenomena simply need no help destroying themselves.
Say, to drive 25,000 miles (40.000 km) per year, the average American needs about 1000 gallons of gas. The price rise in 2008 then cost her an extra $1000 for the year. In that same year, her home lost about 20% of its value, or $40,000. Her pension went down an often reported 30%, which can, depending on her age, range anywhere from say, $100,000 to $1 million. In other words, the average American easily lost about 50 times as much in pure financial market terms as she did at the pump in 2008.
In 2009, gas prices came down considerably, but home prices kept on falling. Hence: while her financial losses on energy costs diminished, the home price losses continued.
…That is not to say that energy issues could never be, or even never have been, the cause of financial problems. Just that they are not this time around. Nor were they, obviously, in the 1930’s depression, not an insignificant point for those who are still confused. Neither does any of this take away from the importance of peak oil. That importance, however, will play out in the future, it does not do so now. For one thing, energy demand and usage have plunged in the past two years. For another, oil producing countries are pumping out fuel literally like there’s no tomorrow, because the finance crisis hits their budgets like so many sledgehammers. Something, incidentally, that I’ve long predicted, not a hard call to make, since an organization such as OPEC, and the quota it boasts, have credence only in times of economic plenty. The financial losses on investments incurred by Middle East nations are surely staggering, though we have no concrete numbers other than Dubai’s demise, and they were definitely not caused by oil running out, but by Saudi and Abu Dhabi investments in US securities.
Feb 18, 2010
