Infinite Unknown

Fed sharply lowers economic forecasts for this year, 2009; signals another rate cut coming

WASHINGTON (AP) — The Federal Reserve on Wednesday sharply lowered its projections for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the country in more than a half-century.

With the economy forecast to lose traction, or even jolt into reverse, unemployment will move higher, the Fed predicted.

Facing the likelihood of “significant weakness” in the economy, some Fed officials suggested “additional policy easing could well be appropriate at future meetings,” according to documents from the Fed’s most recent closed-door deliberations on interest rate policy at the end of October.

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Tags: Economy, Fed, Federal Reserve, financial crisis, GDP, Inflation, Politics, Rate Cut, Unemployment

An undated company handout photograph shows Toyota Motor Corp. vehicles bound for export at the company’s Tahara plant in Tahara, Aichi Prefecture, central Japan, released to the media on Oct. 28, 2008. Source: Toyota Motor Corp. via Bloomberg News

Nov. 17 (Bloomberg) — Japan’s economy, the world’s second largest, entered its first recession since 2001 last quarter and the government and economists say conditions may get even worse.

Gross domestic product shrank an annualized 0.4 percent in the three months ended Sept. 30, the Cabinet Office said today in Tokyo. Economists predicted the economy would grow 0.1 percent after contracting a revised 3.7 percent in the previous period.

The slowdown may deepen as the global financial crisis hurts exports, prompting companies from Toyota Motor Corp. to Canon Inc. to slash profit forecasts and cut investments. Japan has the lowest interest rates among the 20 biggest economies and public debt that exceeds 180 percent of GDP, limiting the government’s ability to stimulate growth.

“It’s only going to get worse,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Japan may be entering its deepest recession in a decade as the global financial crisis cools demand overseas.”

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Tags: Bank of Japan, Economy, financial crisis, GDP, Japan, Recession

Dow rises 11% on big rally, but October is still shaping up to be one of the worst months in Wall Street history.

NEW YORK (CNNMoney.com) — The Dow rallied as much as 906 points during Tuesday’s session, as investors dove back into stocks near the end of one of the worst months in Wall Street history.

The Dow Jones industrial average (INDU) added 889 points after having risen as much as 906 points earlier in the session. It was the Dow’s second-biggest one-day point gain ever, following a 936-point rally two weeks ago. The advance of 10.9% was the sixth-biggest ever.

The Standard & Poor’s 500 (SPX) index gained 91.6 points or 10.8%, its second-biggest one-day point gain ever and its fifth-best one-day percentage gain.

The Nasdaq composite (COMP) rose 143.6 points or 9.5%. On a percentage basis, it was the fourth-best one-day gain ever for the tech-fueled Nasdaq. But on a point basis, it didn’t crack the top 10.

The broad advance occurred as the two-day Federal Reserve meeting got underway, with a decision on interest rates expected Wednesday afternoon. Policymakers are widely expected to cut a key short-term interest rate.

Stocks ended Monday’s session at the worst levels in more than five years, with the major gauges down more than 25% for October. Global markets had fallen too, as investors worldwide bailed out of stocks amid the credit crisis and weak economy.

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Tags: Banks, Credit Crisis, credit crunch, Dow Jones, Economy, Fed, Federal Reserve, financial crisis, GDP, Government, Nasdaq, Politics, Recession, Standard & Poor's, Stock Market, Treasury, U.S., Wall Street

The International Monetary Fund may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money.

IMF’s work in countries such as Turkey is only just beginning

The Fund is already close to committing a quarter of its $200bn (£130bn) reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia.

Neil Schering, emerging market strategist at Capital Economics, said the IMF’s work in the great arc of countries from the Baltic states to Turkey is only just beginning.

“When you tot up the countries across the region with external funding needs, you get to $500bn or $600bn very quickly, and that blows the IMF out of the water. The Fund may soon have to start calling on the West for additional funds,” he said.

Brad Setser, an expert on capital flows at the Council for Foreign Relations, said Russia, Mexico, Brazil and India have together spent $75bn of their reserves defending their currencies this month, and South Korea is grappling with a serious banking crisis.

“Right now the IMF is too small to meet the foreign currency liquidity needs of the larger emerging economies. We’re in a dangerous situation and there is the risk of extreme moves in the markets, as we have seen with the Brazilian real. I hope policy-makers understand how serious this is,” he said.

The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing `AAA’ bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world’s central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis.

“The IMF can in theory create liquidity like a central bank,” said an informed source. “There are a lot of ideas kicking around.”

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Tags: Bank for International Settlements, bankruptcy, Belarus, bonds, central bank, debt, Dominique Strauss-Kahn, Economy, financial crisis, GDP, Government, Hungary, Iceland, IMF, Liquidity, Pakistan, Politics, Romania, Russia, Serbia, taxpayers, Turkey, Ukraine

The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria - the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down - and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom - a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

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Tags: Argentina, Austria, Banks, Brazil, Credit Crisis, credit crunch, Dollar, Economy, euro, GDP, hedge funds, Hungary, IMF, Meltdown, Poland, Romania, Russia, Spain, Sweden, Switzerland, U.K., U.S.

Congress: Think.

Ben and Hank have both told you that the critical issue for the economy is for “lending to resume”, stating that it has dramatically contracted.

If this was the truth, then Ben and Hank would have come to you for $700 billion in the TARP, but instead of TARPing the money, they would have asked for permission to use it to capitalize 10 new banks which would be immediately IPO’d off to the public with the stake being in the form of some kind of super-senior debt that held a coupon high enough to encourage immediate (or nearly-so) replacement with private capital.

This would have resulted in an aggregate of seven trillion worth of new lending capacity in the economy, an amount that, incidentally, would allow the full replacement of Fannie and Freddie as holders of housing debt with about $2 trillion left over for credit cards, auto and business loans.

That would have immediately solved the “credit freeze” problem.

So why wasn’t this proposed?

This is the reason:

In short, it wouldn’t have done anything because the economy only grows at a rate of about 20 cents for every dollar of debt taken on. That is, it takes five dollars of debt to generate one new dollar of GDP.

The bad news is that once you reach the “$1 for $1″ level you are no longer able to finance growth with debt, and it becomes inevitable that you will begin to finance debt with debt.

That, of course generates no GDP at all but precipitously tightens the spiral.

We crossed that Rubicon roughly around 1968, and you have had this fact concealed from you.

Congress, please listen:

The Truth is that we now require about $5 of debt to generate $1 of GDP.

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Tags: Ben Bernanke, Congress, Credit Crisis, credit crunch, debt, Depression, Dollar, Economy, financial crisis, GDP, Government, Henry Paulson, hyperinflation, Inflation, mortgage crisis, Mortgages, Politics, Recession, U.S.

Oct. 14 (Bloomberg) — The U.S. government posted a record budget deficit for 2008 as financial market strains slowed economic growth and spending rose the most since 1990.

The shortfall widened to $455 billion in the fiscal year ended Sept. 30, compared with a $162 billion deficit a year earlier and the previous high of $413 billion in 2004, the Treasury said today in Washington. The gap was 3.2 percent of gross domestic product, up from 1.2 percent last year, the Treasury said. The 2008 deficit was the largest as a share of the economy since 2004, when it was 3.6 percent of GDP.

The excess of expenditures over receipts this year could get even worse. As the Treasury uses $700 billion to rescue the financial system from the credit crisis, Morgan Stanley chief economist David Greenlaw predicts the shortfall may almost quadruple to about $2 trillion.

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Tags: Banks, Bush administration, Credit Crisis, credit crunch, debt, Economy, financial crisis, GDP, George Bush, Government, Henry Paulson, Politics, Treasury, U.S.

Here is an update on the size of the derivatives market with the latest official figures (.pdf) from the Bank for International Settlements (BIS). Hold your breath, as we are not anymore talking paltry billions but TRILLIONS of whichever fiat currency.

Current emergency meetings on banks and markets are still only in the stage where politicians and central bankers are bickering over how to create a few more hundred billions Euros and FRNs. But toxic MBS pale in comparison to the mushrooming growth of the derivatives market. According to figures released in the quarterly review of the BIS (pp A103) in September the total notional amount of outstanding derivatives in all categories rose 15% to a mindboggling $596 TRILLION as of December 2007.

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Tags: Angela Merkel, BIS, Credit Crisis, credit crunch, Derivatives, Derivatives market, Economy, financial crisis, GDP, Nicolas Sarkozy, Silvio Berlusconi, Stock Market, U.S.

Oct. 13 (Bloomberg) — France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders, racing to prevent the collapse of the financial system.

The announcements came as Britain took majority stakes today in Royal Bank of Scotland Group Plc and HBOS Plc. The coordinated steps followed a pledge yesterday by European leaders to bolster market confidence as the global economy slides toward recession.

“What it should do is stabilize the banking system,” said Peter Hahn, a fellow at London’s Cass Business School and former managing director at Citigroup Inc. “Will it stop us from having a recession? No, nothing is going to stop us from having a recession.”

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Tags: Angela Merkel, Austria, bailout, Banks, BNP Paribas, Citigroup, Credit Crisis, credit crunch, debt, Economy, EU, France, GDP, Germany, Gordon Brown, HBoS, Holland, mortgage crisis, Mortgages, Nicolas Sarkozy, Politics, RBS, Recession, Spain, Stock Market, Wall Street

The eurozone has fallen into recession, with industry particularly badly hit by the fall-out from global economic turmoil, results of a closely watched survey indicated on Tuesday.

Private sector output in the 15-country region contracted in September for the fourth consecutive month, according to eurozone purchasing managers’ indices. The pace of decline was the fastest since the aftermath of the September 2001 terrorist attacks in the US, with manufacturing faring worse than services.

The latest data indicated that, even if the crisis on Wall Street has yet to have a direct impact on eurozone economies, global economic storms have pushed the region into a technical recession - two quarters of contracting gross domestic product.

The eurozone composite purchasing managers’ index - covering services as well as manufacturing - fell from 48.2 in August to 47 this month. A figure below 50 is meant to indicate a contraction in activity.

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Tags: ECB, Economy, GDP, Inflation, Recession