Start the printing press $200 B please!

By JON HILSENRATH

The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.

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As of Feb. 10, the Fed had pumped more than $1 trillion into the financial system. That sum had the potential to grow in coming weeks as the Fed completed plans to buy $1.25 trillion of mortgage-backed securities. As of mid-February, the Fed's holdings of mortgage-backed securities stood at $1.025 trillion.

Let's print some money! I'm glad my fixed debt doesn't mature!!

From NYT:

"What does FDIC insured mean any more? 21 billion in the red, I spoke to some bankers in the summer of 2008 about their FDIC insured CDs and said FDIC still faced some risks and only covered <$100k per bank at the time, why not treasuries. Oh I also told Clemens Sialm back in early 2008, do you think the US treasury should be used as the risk-free rate? He laughed, "If the US isn't the risk free rate than what is?" Laugh and sob quietly.

With banks failing in growing numbers, the F.D.I.C. said its insurance fund fell deeper into the red, ending 2009 with a deficit of $20.9 billion. That position was nearly $38.1 billion weaker than a year earlier. The bulk of that decline reflects funds that the F.D.I.C. is setting aside to cope with future losses.

Collectively, banks posted a $914 million profit in the fourth quarter, compared with a $2.8 billion profit in the third quarter.

For all of 2009, the banking industry posted a $12.5 billion profit, far below the $100 billion in annual profits that the industry raked in two years earlier at the height of the boom. Although the financial industry benefited from ultra-low interest rates, most banks also faced record loan losses. Many midsize and community lenders, which do not have big trading businesses, suffered big losses last year. Officials worry that they will be reluctant to lend to small businesses and other customers until they replenish their coffers. “Large banks need to step up to the plate here,” Ms. Bair added."

Indiana's Bayh to Retire From Senate - WSJ.com

It certainly does say something. If a public company has a BoD retire because of ineffective leadership and infighting it is about a good a sign to get rid of that stock ASAP! This seems to be a condemnation of partisanship in general, which is odd b/c it seems that a congress that is more evenly split in power is more likely to work together whereas a lopsided congress turns into gridlock?

Indiana's Bayh to Retire From Senate - WSJ.com: "'It says something that an incumbent senator with $13 million in the bank decides to retire this late in the process,' said Jennifer Duffy, senior editor at the nonpartisan Cook Political Report. Ms. Duffy said as many as seven Democratic seats might switch hands this year, and suggested even more could be put in play if Republicans find strong candidates. An outright Republican takeover of the Senate remains unlikely. Democrats currently control the chamber 59-41, which means the GOP would need to win 10 seats to take over. In a news conference, Mr. Bayh condemned what he called the political bickering and gridlock that prevails on Capitol Hill, saying that his desire to serve 'in Congress has waned.' 'There is too much partisanship and…too much narrow ideology' in Washington. 'Even at a time of enormous national challenge, the people's business is not getting done.'"

But the senator soon appeared increasingly frustrated and voted against some big spending bills pushed by the Democratic majority. In January, he fought for legislation that would have created a government commission to recommend ways to reduce the nation's debt. That proposal won 53 votes, drawing support from both parties, but fell short of the 60 needed to pass.

Mr. Bayh cited the failure of the proposal, as well as the collapse last week of a bipartisan $85 billion jobs bill, as examples of congressional dysfunction.

"All of this and much more has led me to believe that there are better ways to serve my fellow citizens," he said. "I love helping our citizens make the most of their lives, but I do not love Congress."

The New Population Bomb | Foreign Affairs

The New Population Bomb | Foreign Affairs: "One somewhat daring approach to immigration would be to encourage a reverse flow of older immigrants from developed to developing countries. If older residents of developed countries took their retirements along the southern coast of the Mediterranean or in Latin America or Africa, it would greatly reduce the strain on their home countries' public entitlement systems. The developing countries involved, meanwhile, would benefit because caring for the elderly and providing retirement and leisure services is highly labor intensive. Relocating a portion of these activities to developing countries would provide employment and valuable training to the young, growing populations of the Second and Third Worlds."

IMF GDP projections, deficits, productivity, labor cots, lost jobs by sector etc...

Well, that would be interesting to see jobs come back in the hardest hit sectors: manufacturing and construction...it would also help keep young unemployed men from getting too much angrier over their plight. Something's got to give here--this is a huge number of unemployed men.

I hope the IMF is right, these projections look downright outstanding and bright--let's hope this is the end of this depression...do we prefer stagflation?

Incredible how productive we can be when we're forced to work harder...we're going to come out of this leaner and meaner, for sure.

Finally, we see some correction in the deficits, this is great news and I hope it continues to narrow and trade increases overall.

"The central bank [of China] pushed up the reserve ratio by half a percentage point, to 16.5 percent, for large banks, and 14.5 percent for small banks, effective Feb. 25. Small financial institutions that mainly lend to farmers, like rural credit cooperatives, are temporarily exempted from the increase to make sure they can provide loans for spring planting." --Feb. 12, 2010 NYT

This is real life acting like a cartoon.

IMF thinks we should have higher inflation targets! interesting

In a new paper with two other IMF economists, Giovanni Dell'Ariccia and Paolo Mauro, Mr. Blanchard says policy makers need to consider radically different approaches to deal with major banking crises, pandemics or terrorist attacks. In particular, the IMF paper suggests shooting for a higher-level inflation in "normal time in order to increase the room for monetary policy to react to such shocks." Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.

At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further.

Mr. Blanchard argues that there isn't much difference in maintaining inflation at 2% or 4%. Tax brackets could be adjusted so that higher inflation, by itself, doesn't push taxpayers into higher tax rates. Inflation-adjusted bonds could protect investors.

The new paper, titled "Rethinking Macroeconomic Policy," also recommends that central banks use regulatory weaponry try to prick asset bubbles before they grow dangerously large. Relying exclusively on raising interest rates to do such work risks damage to the broader economy, an argument that Federal Reserve Chairman Ben Bernanke has made.

"If leverage appears excessive, regulatory capital ratios can be increased," the paper says. "To dampen housing prices, loan-to-value ratios can be decreased; to limit stock price increases, margin requirements can be increased."

wouldn't a surge in manufacturing base be a nice surprise for the US?!

February Economic Report

by Simon Hunt This will be a shortened version of our usual monthly economic reports, since we have posted several short notes on the economic and financial markets. This year is likely to be a year of surprises. Global economic growth will disappoint. The intrusion of governments into all matters financial, economic and even personal is a cause for uncertainty associated with policy risks; and markets hate uncertainty. It is these policy risks which could have the biggest impact on the potential global recovery in the economy and financial markets. 2010 should also be the year when many countries from the USA to the UK to China will experience the first moves towards policy tightening and the gradual withdrawal of financial and monetary stimulus. Moves by China to begin tightening monetary policy, even though they are only tinkering with the problem of excess liquidity, are a leading indicator to world markets of this changing environment. The consequences of this tightening are not yet visible, but could well become far reaching. One outcome of China's fiscal and monetary largesse has been growing consumer inflation, whether fully seen in official data or not. What has been experienced on the ground by exporting companies, as we have been warning for several months, has been an increase in wages because of a shortage of skilled workers. Many never returned to their factories after last year's CNY. One factory reports (to a friend) that they are short of 17% of their normal labour force and this sort of rate is probably indicative across many coastal exporting companies. The impact has been twofold: production has been hit and wages have had to be increased. Yesterday, Jiangsu province raised its monthly minimum wage by 13% to RMB960 (US$140). Wages for skilled labour are rising far more. This move by the province is an official recognition of what companies have been experiencing for many months. The plight of exporting companies has consequences, too, for the RMB. China is under pressure to revalue its currency. Exporters are suffering from severe margin pressures. They are experiencing rising wages, rising raw material prices and increases in electricity and water rates etc. At the same time, credit for many of these companies remains exceptionally tight, so much so, that exporters are asking their foreign customers to open LCS, not at point of shipment, but at point of order placement. There are a number of consequences resulting from the inflation of costs being experience by exporters. First, there will be the political result. Beijing will resist foreign pressure to revalue its currency - the earliest would be the second half of this year. Second, exporters will be raising their prices after the CNY, on average by around 10%, but for some goods substantially more. Third, buyers of Chinese goods knew well in advance that prices would be rising; they knew too that freight rates were being raised; so they have probably bunched orders up before prices rose. This dynamic together with the modest inventory replenishment being seen in the USA (though not yet evident in west coast US ports) and elsewhere has been the reason for higher level of Chinese and other Asian export business. There is also another dynamic at work here. Across many manufacturing sectors in Asia business has been boosted by the need to replenish inventory within the supplier chain. This had been rundown to almost zero levels for balance sheet reasons in 2008's 4th quarter and last year's first quarter. This round of inventory replenishment has about now run its course. What lies behind this development will determine the course of the global economy in the first half of this year. From what we hear, the news will not be encouraging. China's industrialisation has been nothing short of miraculous - stunning - yet there remain many pitfalls ahead. It has successfully, at least in the short-term, grown its economy whilst most of the rest of the world has suffered the pains of recession. However, by throwing so much fiscal and monetary stimulus at the economy, it risks seeing rising inflation to levels above those of official forecasts (3-4%). Inflation in the Austrian sense is already rampant. Average land prices rose by 106% last year, though even more in many large cities; the stock market exploded; investment in commodities soared, not just by merchants, but by institutions and individuals; and manufacturing, caught in this speculative frenzy, started to produce for inventory. Certainly, our observation from visits last year was that China's economy had far too much speculative froth; that too much of the fiscal stimulus and bank lending were directed into speculation and not into the real economy; and that the seeds were being sown for a nasty reaction post 2010. We also noted, confirmed by discussions which our associate had with senior people in Beijing that economic success was breeding arrogance in the country, a theme which we have found also. In its dealings with foreign countries, China has become far more assertive, stretching from US arms sales to Taiwan, to the disputed borders between India and China, to its "obstreperous stance it took in the Copenhagen climate change conference last December", to its truculence over the alleged hacking of Google and other foreign companies and to trade issues. The real question is whether these are tactics of divergence from the government's real problem of how to take the speculation out of the economy in order to create the foundation for sustainable growth, in other words to cause some domestic pain. We don't buy that argument. We suspect that China has grown sufficiently powerful through its trade, through the rest of the world's perception that the world depends on China's economy and because of its huge foreign exchange reserves for it to finally ditch Deng Xiaoping's words, "Keep a low profile and hide your claws" whilst building up your strength. The West's response to China's undisputed rise in power and influence will be all-important. The history of empires suggests that America will not allow its global superpower status to be handed over willingly. There are bound to be geopolitical clashes over the coming decade, whether over the Middle East, Taiwan, Japan etc. These will be an intrinsic part of the global transition from a unilateral world to a world dominated by two powers. In the meantime, trade will be the central issue, a theme which we have focused on for a long time, so will not express again our thinking beyond concluding that the trend is now towards manufacturing being based close to points of final consumption, rather than in some distant country or region like China and Asia. This is both a political and economic conclusion. Pete Peterson, for instance, calls for business leaders to re-enact the non-partisan Committee for Economic Development that was formed in the midst of WW11 by folks like Paul Hoffman, Bill Benton and Marion Folsom, or something along those lines, in order to try and solve the nation's structural problems, ranging from rising budget deficits, the $60 trillion in unfunded government liabilities and promises, to the growing intrusion of government into business and finance. Part of this coming revolution will surely be to bring back within American borders much of the manufacturing capacity needed for its own economy, rather than having that capacity located offshore. Government has begun this process by wielding a stick, threatening to curtail many of the financial benefits and tax breaks that US companies currently enjoy from their offshore operations. The next stage will be to offer the carrot - by granting tax and other incentives for US multinationals to make that move. This relocation of capacity will not happen on its own: it will be an integral part of the US using its scientific and engineering prowess to produce state-of-the art products, whether by the development of intelligent cars, telemedicine, smart robots, artificial intelligence and other devices. In short, it will be a combination of America's power of technology and the political and economic forces pulling manufacturing back home which will revolutionaries the global economy with similar developments to be seen in Europe and Japan. It will not be just competition by price, but competition by quality and design which will allow America to reemerge as a dynamic economic power sometime by the end of the 2010s. First, though, there must be the Schumpeterian destruction of outdated plant and the financial system which then allows a return to traditional ratios of capital structures with a focus on long-term investment. It is this destruction which always occurs in the Winter of the K-Wave, probably starting around 2012/13 in a succession of down-waves which don't terminate until circa 2018. This does not mean that the entire period is one long depression, but that recoveries are relatively short within an overall downturn. In summary, global economic recovery will disappoint as set out below:- Growth will slow in the first half of this year It should recover late this year with a modest recovery likely in 2011. The seeds of the next credit crisis have been sown by soaring government debt and monetary largesse. It may well be the need for a huge issuance of government loans that will cause the next credit crisis, starting around 2012 and reaching its apex in 2013. A new global recession, part of the ongoing depression, will begin that year and last at least two years. The world is unlikely to begin a new period of sustainable growth until 2018 at the earliest. Until then markets will remain volatile and should be traded rather than now making long-term investments.