Tuesday, 18 November 2008

Impact on Emerging Markets

One of the biggest stories to emerge from the G-20 Summit was the seating arrangement: Lula da Silva of Brazil was on George Bush's right and Hu Jintao of China was on his left. This has repeatedly been said to signal the new international economic order. Immanuel Wallerstein, for example, argues that American political and economic power peaked between 1945 and 1970 and has been declining since. He contends that George Bush's eight years in office hastened that decline, and Brazil's insistence over the weekend on being partners with the US, not mere junior parters, evidences a new multipolar world system.

Yet, assertions of the new multipolarity does not mean emerging economies will be resistant to financial or economic contagion. How will countries be affected? First, stock market spillovers are quite clear. We've seen the MSCI emerging market index (which includes stock markets in Brazil, South Africa, India and China) drop precipitously by 23%. Just as important now it seems is the growing global economic downturn. RGE monitor reports that growth in nine of the largest emerging Asian economies was revised downward. According to the Asian Development Bank, India's growth will fall sharply.

Developing countries are impacted in a number of different ways. Trade, especially in natural resources will slow following drops in demand. Remittances, the second largest financial inflow to many developing countries (exceeding foreign aid) will decline as both economic migration to developed countries declines with job losses and the quantity per remittance drops. Foreign aid, which is pro-cyclical, will suffer along with bad economic news, though development aid has been in secular decline already for two decades. While falling capital flows into developing countries may adversely affect some, for others it may ease pressure on climbing exchange rates and allow for greater internal capital mobilization.

Countries strongly affected will be those with substantial exports to the US and EU, especially those countries selling commodities that are highly income elastic--that is commodities particularly sensitive to changes in income--including, for example, Caribbean and African countries with big tourism sectors. Countries with substantial current account deficits (a macroeconomic account which includes a country's balance of trade, or their exports minus imports, plus their net on interest, dividends and foreign aid) may be in trouble. RGE monitor notes that South Africa's current account deficit (at 7.3% of GDP) has been widening and the country will be less able to finance it with foreign investment, making possible sudden and large capital outflows.

However, despite these turbulent times for the developing world, this crisis is unusual in that it is a crisis in the core. Merrill Lynch's Emerging Markets Macro Weekly from November 10th did an old school country by country risk analysis, which seems to strongly support this view. They crunched about 5000 economic indicators and built a risk ranking for the world (based on current account financing gaps, foreign exchange reserves, exports to GDP ratios, private credit to GDP ratios, private credit growth, loans to deposits ratios, and bank capital to assets ratios). Their results are pretty interesting, and if anything may support Wallerstein's faith in the new multipolarity. They conclude:
The world’s ten most vulnerable economies are: Australia, Switzerland, Korea, Romania, Hungary, Sweden, Bulgaria, Euro area, UK and US. The world’s ten least vulnerable economies are Nigeria, Mexico, Philipinnes, Colombia, Egypt, Oman, Indonesia, Peru, China and Russia.

Wednesday, 12 November 2008

Waking up to the crisis

The price of oil

Oil prices continue to fall amid persistent fears of a sustained global recession. Until last August the price of oil and the price of oil futures (claims on future oil production that can be originated, bought and sold) consistently fluctuated in a counter-cyclical fashion in relation to the values of major stock indices. The fact that oil tended to go up in price when stocks went down while oil tended to down if stocks went up indicated a shuffling of funds between the two markets. The causality was case by case but there was certainly a strong negative correlation between the two classes of investment. Since late September, equity and oil have been continued to exhibit strong correlation. This correlation, however, is now positive. Both stocks and oil have been plummeting in step with one another.
How should this change in the relationship between oil and equity be interpreted? This is one point where virtually all schools of economic thought can probably agree. The downward movement is a reflection of the economic crisis deepening and becoming universal. In order for investors to move money from sinking stocks into the oil market they would have to believe that global demand for petrol was buoyant. This would imply that the global slowdown was such that the worlds appetite for fossil fuels would continue through what would have to be a relatively mild period of global gloom. Investors are coming to understand the gravity of the situation. This is far from news. The shift in the relationship between equity and petrol began in August--before the collapse of Lehman Bros. What is note worthy is that the price of oil seems to have no floor. It has continued to sink in step with equity far below where many thought it possibly could.


Global trade is expected to contract, in global terms, for the first time in 26 years. This news is coming at a time in the history of the global economy when trade constitutes a more important role in growth than at any other time. Throughout the global expansion of the last decade and a half, increases in trade have out paced global growth by a large and consistent margin. The world bank has announced that it will be releasing $100 bn in funds to deal with the slowdown in trade and some of the devastating effects it is expected to have on poor and middle income countries.

Fiscal policy

One of the only issues that the nations participating in the G20 meeting in Washington this weekend can agree on is the need for major fiscal stimuli. This comes after the realization that even the most aggressive monetary policy (rate cuts to stimulate lending and increase the money supply) would have little effect on the willingness of financial institutions to begin lending again. Money markets (the markets in which firms raise money for short and medium term debt usually related to raw materials and pay-role; the overhead costs that bring firms through one production cycle to the next) are still hemorrhaging funds as investors pull back from market exposure.
A major fiscal response by China has just been announced ($586 bn) while preliminary responses by the worlds richest countries have been made public (USA $170 bn, Japan $168 bn, Germany $15.7 bn). The spending packages announced will most likely be spent on everything from consumer stimulus (tax rebates to increase demand), transport investment, and possibly investment in utilities such as water and electricity. The nature of the distribution of the fiscal package will depend largely on the ideological leanings of the government implementing it. In the free-market spirit of minimized state intervention the US is more likely to concentrate on stimulating consumption. Other nations, such as China, can be expected to concentrate on long term investment like infrastructure--this creates jobs in the short term while creating long term capacity increases. European and North American nations will do the same albeit in a smaller scale.
Can this sort of massive public expenditure benefit normal people? If so how? And, if the answer is yes, how can we ensure that aside from bettering our lot economically it also deepens democracy? Can there be democratic accountability of public revenue of the sort that could empower normal people? These are questions to think about.

Other economic news...

Bush has rejected continued calls for a rescue for Detroit's big 3 auto makers. Economists predict that allowing the companies to collapse would cause more than 2.5 million job losses. The effect of that would be devastating for the American economy and would certainly pull the rest of the world down with it.

Between now and the end of 2011, approximately $2,100 bn of European corporate debt will be due to be payed back, $800 bn of which will be due next year. These massive paybacks come at a time when it will be harder to refinance (take out new loans to pay back old ones) debt than at any other time since the great depression. With the world economy in free fall, the default of more major companies would surely only accelerate the decline.

The IMF, in its World Economic Outlook Update, predicted that the advanced economies, taken as a whole, would experience a contraction of output for the first time in the post-war period.

If you cannot feel the effects of the economic crisis yet, expect to soon.

Sunday, 9 November 2008

On interest and the Nov. 6 rate cuts

Among the non-Obama related news is a massive Bank of England cut in the cost of borrowing by 1.5 per cent and the European Central Bank's cut of .5 per cent. The cuts came alongside a gloomy International Monetary Fund report forecasting 2009 to be the first contraction of industrialized countries since WWII. Meanwhile, the Financial Times has continued to report that inflation is set to fall along with declining commodity prices.

The aim of the interest rate cut is both to loosen credit to allow for the continued daily functions of capital and hopefully to increase investment, which would then combat falling prices. But how should we understand the determinants of the rate of interest? Academic economists theorize the longer term tendencies of the interest rate more than day to day shifts. Neoclassical economists assume that the average rate of interest and the average (or general) rate of profit equate in equilibrium. Here, the sheer mobility of money capitalists and productive capitalists will tend to generate an equalization of returns. Marx however, disagreed.

Marx's thoughts on the rate of interest are somewhat scattered and fragmented. He did not however seem to believe that the rate of interest was determined by the same laws of motion which determined the general rate of profit, ie, the technical conditions of production. He says in volume III of Capital: "The prevailing average rate of interest in a country, as distinct from the constantly fluctuating market rate, cannot be determined by any law. There is no natural rate of interest, therefore in the sense that economists speak of a natural rate of profit and a natural rate of wages."

While there is no general theory of the average rate of interest, he does say a few things about it's determinants. He indicates that the average rate of interest will fall below the general rate of profit and above zero. For if the average rate of interest and the general rate of profit were equal, where would be the incentive on the part of any individual capitalist to go through the difficult and uncertain process of production; much easier would be to simply lend and collect. Thus there must be rewards to "profit of enterprise." Marx also notes that the average rate of interest depends to some extent on the supply and demand of money capital.

Additionally, it must be noted that the interest of money capitalists does not reflect any contribution to the production of value. Instead it is a deduction on "profit of enterprise" or industrial capital. That is, surplus value is divided between what productive capital keeps and what must be paid out to money capital in interest. This might be why he refers to them as "parasites" and "bandits". Again, Marx notes: "It is indeed only the separation of capitalists into money-capitalists and industrial capitalists that transforms a portion of the profit into interest, that generally creates the category of interest; and it is only the competition between these two kinds of capitalists which creates the rate of interest."

Regarding day to day fluctuations of interest and central bank policy, Marx seems to deny that monetary authorities take the role of prime mover: "An ignorant and mistaken legislation ... may intensify a money crisis. But no manner of bank legislation can abolish a crisis." This, in a post gold-standard era, is because of the central bank's perpetual struggle to both avoid the devaluation of commodities and maintain money as the reflection of social labor (on this point see David Harvey, Limits to Capital, 2006, p. 294). In a crisis, the contradiction of a central bank may be between devaluing money on the one hand via inflation that is caused by lowering interest rates (low interest rates prompt investment and an increase in the money supply hopefully generating more production and higher prices, which is why unions have backed the move), and allowing commodities to devalue in a recession or depression. Put more generally, the problem for Marx is the simultaneous management of "capital in its money form and capital in its commodity form." Currently we are seeing the inflation/devaluation strategy. In a period of falling inflation, especially in Europe, central banks are hoping the drastic rate cuts will both to loosen credit and prop up prices of goods so to better reflect their value. Savers on the other hand are rightly worried about the value of their currency.

Monday, 3 November 2008

Global Outlook...

With tomorrow's election looming and continuing signs of an immanent global recession, the world's leaders are moving forward on their plans to rearrange the worlds financial infrastructure. The meeting of 20 industrialized and developing nations outside of Washington DC on Nov. 15 will be the beginning of a process, known as Bretton Woods II, that will determine the future international finance law and regulation. While participating nations agree on the need to forge a united response to the crisis, tensions exist regarding the nature of said response. Some participating countries, led by France, would like to see an effective convergence of regulatory law to prevent competition between financial centers. This proposal is likely to be contested. The reason this proposal is likely to meet resistance is that it would limit the ability of states and municipalities to enact policies that minimize regulation thus attracting oversight-averse financial institutions. The theory behind demanding a unified regulatory system that would eliminate the ability for financial centers to develop exceptional policy structures is that the lack of universal legal norms would lead to financial centers being forced to out-do each other in the race to deregulate and attract financial businesses. In other words, if left the option, national and regional governments will, following their self interest, undermine any progress made in the way of new regulatory norms. (Here we can see yet another example of how entities, guided by self interest can undermine the collective good.)

In IMF (International Monetary Fund, a Bretton Woods I institution) news, the UK is pressuring Saudi Arabia to contribute more to the fund's coffers in order deal with threats to sovereign financial stability. Saudi Arabia accumulated over $500 bn in foreign assets during the boom in oil prices. It is unlikely the Saudis will give into the pressure without an agreement that would redefine Saudi Arabia's role in new financial order (in this case, their role within the decision making structure of the IMF).

Strikes are expected in Europe's largest economy, Germany. Over 130,000 trade unionists have voted to strike over the rejection of a wage increase that was proposed in August. IG Metall is the trade union leading the strike. It is an important union in Germany because many other unions look to IG Metall as benchmark for wages.
Portugal is set to nationalize a small bank that has become insolvent. The Socialist Party government rejected pleas from the bank for a bail-out (capital injection). Instead the government determined that it was in the interest of the people of Portugal that the bank be nationalized.

This is what Bloomberg columnist, Mark Gilbert has to say about the macroeconomic outlook:

"The Shipping News Suggests World Economy Is Toast:

In the third quarter of 2007, Volvo AB booked 41,970 European orders for new trucks. Guess how many prospective purchases Volvo, the world's second-biggest maker of heavy rigs, received in the third quarter of this year?

Here's a clue. Picture a highway gridlocked by 41,815 abandoned trucks -- because Volvo's order book got destroyed to the tune of 99.63 percent, with customers signing up for just 155 vehicles in the three-month period, the Gothenburg, Sweden-based company said last week.

The pathogen that has fatally infected swathes of the banking industry is now contaminating non-financial companies. ``We're heading toward the sharpest downturn I've ever seen in Europe,'' said Chief Executive Officer Leif Johansson.

Volvo has company. Daimler AG, the world's biggest truckmaker, said earlier this month that its U.S. deliveries slumped by a third in the first half of the year.

After months of money-market madness, slumping stock markets, collapsing currencies and bank bailouts, the headlines from the broader economy are starting to roll in -- and the news is all bad and getting worse, fast.

Let's begin with the shipping news. If nobody is buying your trucks, you don't need to rent a vessel to carry that shiny new 18-wheeler to its new owner. Hence the Baltic Dry Index, which tracks the cost of shipping goods and commodities, fell below 1,000 this week for the first time in six years.

Slow Boats From China

Put another way, it is now almost 90 percent cheaper to ship goods over the oceans than it was at the beginning of the year. And because the huge vessels known as capesize ships can't currently charge much more than their daily operating cost of about $6,000 per day, their captains have slowed down to economize on fuel and save money, to about 8.68 knots from 10.33 knots in July, according to data compiled by Bloomberg.

It isn't just the oceans that are emptying. Air freight traffic dropped 7.7 percent in September, according to the latest figures from the International Air Transport Association. That's the steepest decline since the trade group began compiling the data in January 2003.

Figures this week showed U.S. consumer confidence collapsed to a record low in October; retail therapy probably isn't the cure. With Christmas looking like it might be canceled, why bother fighting with your bankers for the letters of credit you need to export the stocking-stuffers you make in the factory?

`Growing Anxiety'

``The October reading signals the deepening concern about the marked deterioration in the overall economy as well as the growing anxiety arising from the continued travails in the financial markets,'' David Resler, chief economist at Nomura Securities in New York, wrote in a research report. ``Confidence declined across all regions, all age groups and all income categories.''

One way in which the current recession/depression/meltdown (take your pick) will differ from previous economic collapses is the granularity of information now available. The world is awash with more data than ever before, generating a plethora of ways to scare yourself silly.

The Bank of England, for example, produces what it calls a Financial Market Liquidity Index, a global measure of stress that gauges how far a basket of nine indicators strays from its historical mean. The index gets updated twice a year; this week's bulletin, which recalculates the level up to Oct. 17, showed liquidity at its lowest level in at least 17 years.

Default Danger

The next wave of headlines to scare shoppers out of the mall is likely to come when companies find they can't pay their debts. Credit-rating company Moody's Investors Service predicts that the default rate among sub-investment grade borrowers will surge to 7.9 percent in a year, from 2.8 percent at the end of the second quarter of 2008 and from just 1.3 percent 12 months ago.

``With the global credit crisis intensifying and credit spreads widening, it is increasingly likely that corporate default rates will spike sharply in the next 12 months,'' Kenneth Emery, the director of default research at Moody's, said in a research report published earlier this month.

The Markit iTraxx Crossover index of credit-default swaps on mostly speculative-grade companies traded as high as 920 basis points this week. That level suggests investors and traders are anticipating more than half of the companies in the index will default, based on bondholders recouping 40 percent of their money from companies that fail to keep up their debt payments.

Going Bust

At a recovery rate of 20 percent, the implied default level is about 45 percent. At a salvage percentage of just 10 percent, the index is still suggesting about 40 percent of its members will renege on their commitments. It is hard to see how consumer confidence will recover when companies start going bust.

``Worries about defaults are mounting as liquidity is strained,'' Guy Stear and Claudia Panseri, analysts at Societe Generale SA, wrote in a research note this week. ``Earnings expectations still look optimistic, with analysts projecting 2009 earnings for the S&P 500 rising by 19 percent.''

There's a great scene in the film version of Annie Proulx's Pulitzer Prize-winning novel ``The Shipping News.'' A grizzled journalist explains to rookie hack Kevin Spacey how dark clouds on the horizon justify the hyperbolic headline ``Imminent Storm Threatens Village.''

``But what if no storm comes?'' Spacey asks. The veteran replies with a second-day headline: ``Village Spared From Deadly Storm.'' Unfortunately, the global village we live in is unlikely to survive unscathed"

Thursday, 30 October 2008

Crisis exported...

Yesterday the United States Federal Reserve lived up to global expectations and cut the Fed Funds rate from 1.5 to 1 per cent. This implies that the Fed has abandoned fears about inflation and will be concentrating, first and foremost, on the threat of recession.

On the same day that rates were cut, the Fed has agreed to lend $120 billion to Mexico, Singapore, Brazil and South Korea ($30 billion each). This move is in response to the unmet demand for U.S. dollars in the national banking systems of the four countries. Emerging economy banks want dollars to counteract volatility in currency, to meet obligations that must be in dollars, and to shore up confidence.

This is yet another sign that the world's financial leaders are recognizing that this crisis is no longer isolated to the industrialized nations. In fact, while the direct effects of the crisis have not fully hit the emerging economies, the effects of it on their currencies and indices have been magnified. This is partly due to emerging nation's reliance on foreign direct investment and trade. That said, for now it appears that the bulk of the instability in the emerging economies is a result of currency pressures and insecurity.

Production cuts in China are spreading fear that the world's work-shop is decelerating much faster than expected. Manufacturers are closing their doors all over the industrial regions of China. This is happening while China has reduced interest rates in an attempt to stimulate the economy. As an economy that relies heavily on export, China's output should be heavily effected by large shifts in global demand. These factory closures, however, might best be understood as a preemptive reduction in costs to prepare for what is seen as an inevitable downturn in the advanced countries (read: U.S., Japan and the E.U.), the main destination for China's exports.

While forecasts for China's growth are still highly positive they have been reduced from previous estimates and are sure not to reach the pre-crisis levels. China is a special case. It is not special because it is immune to the global recession--it certainly is not immune. It is special because the rate at which the economy must grow in order to maintain employment levels is much higher than other countries. Thus a reduction in the growth rate has grave implications for China's enormous workforce. Increasing unemployment and an inability to absorb workers migrating from the country to the cities in search of jobs could spell dangerous instability for China's government. Increasing unemployment could result in substantial social unrest.

Japan, another export dependent economy, has just announced that its industrial output was down 1.2% in the last quarter (July-September).

In European news, a poll shows the majority of Germans would favor the nationalization of large swaths of the economy.

In the U.S., consumer confidence fell to lows not seen in 41 years. Consumer confidence is an indicator that is said to measure, in some form, expected consumer spending, which accounts for two-thirds of US economic growth. Confidence has waned as falling home values, rising official unemployment, and financial insecurity have consumers tightening their belts and putting away their credit cards.

It has been reported that more than half of the bailout money given to banks has gone to dividend payments to shareholders and not lending to potential borrowers. Amidst recent nationalizations, it is about time that Americans start thinking about exerting their democratic will on the economic institutions that effect our day-to-day lives.

Tuesday, 28 October 2008

No End in Site: Global Markets Exhibit Continued Weakness

The extreme turbulence that has characterized markets in recent weeks shows no signs of subsiding. Yesterday global stock prices fluctuated between huge losses and huge gains until finally settling on losses in most western exchanges by the close of trading (including massive losses in Toronto's TSX, -8%). China's main exchange, in contrast, experienced a gain of nearly 15% by the end of trading. Extreme volatility has persisted today (12:30 pm).
In addition to violent movements in almost all classes of assets, currency has failed to provide any haven for the cautious. Currency 'imbalances' have left the global economic outlook even more precarious. The financial news today is awash with articles commenting on the destabilizing nature of the current valuation of currencies. The Yen (Japan's currency) has been, and is still, rapidly appreciating in value against other currencies while the dollar has continued its somewhat slower rise as well. We are seeing a catastrophic depreciation of developing nation currencies.

How do we interpret this?

Let's begin with asset price volatility. Investors do not like extreme price fluctuations. For markets to function investors need to be able, or feel able, to reasonably assess the riskiness of their prospective investments. This means that when markets behave moderately (exhibiting slow, steady, secular changes) people feel as though they have a better grasp of the future and are therefore more willing to put their money where their expectations are--this could mean betting up or down. When prices are subject to erratic shifts, the outlook for the future is more difficult to determine. Thus investors feel less comfortable about their ability to make good decisions in the market. This leads many to sit out. This phenomenon is frequently referred to as risk aversion.
Even with the prospect of huge gains in some assets and some exchanges (yesterday only China), extreme volatility is yet another factor compounding the deterioration of the global financial world. The period of relative tranquility experienced in the five years leading up to the beginning of the crisis of global capitalism (2002-2007) was heralded as a sign that a new era of predictability had arrived. It was called the "Great Moderation." It seems now that those days are gone. In fact, present turbulence in the markets and the retrospective view of huge asset bubbles, calls into question the very logic of the moderation. The fate of the global market remains precarious. This is new to investors accustomed to predictability but those of us who work for a living have become increasingly accustomed to the precarious nature of employment and compensation in the past decade.

Currency fluctuations are directly linked to the current crisis, however, the connection is far from intuitive. The rapid appreciation of the Yen is a result of the market actors' belief that Japan's economic strength provides a haven for investors. This has proved a self-fulfilling prophecy as increased demand for the Yen has forced the currency higher. The dollar is benefiting not from a perception that the U.S. economy is healthy (no fool would believe that), but because the dollar is still the global currency. Possibly more importantly, investment funds that are pulling out of the markets (hedge funds especially) are liquidating their holdings in global markets and money is returning home to the United States. This is another reason we are seeing devastating depreciation of developing market currencies, though it is probably the tip of the iceberg. Hungary, Pakistan, Iceland, and Ukraine are all teetering on the edge of all out financial collapse. South Korea, Brazil Philippines and Indonesia are moving quickly towards crises induced (at least partially) by rapid falls in their currencies.
To put this in perspective, an appreciation in the dollar all but eliminates the chances of an early rise of U.S. exports to save the economy from a recession and will, in all likelihood, help to maintain or worsen the trade imbalances that contributed to the crisis in the beginning. For developing nations, currency devaluation will exacerbate the food crisis by counteracting the recent falls (from all-time highs) of food prices. On a related note, the U.S. and Japan can feel free to keep cutting interest rates as the appreciation in their currencies has finally laid low any remaining fears about inflation--although these fears have probably been of the irrational variety since August 2008.

The IMF could soon deplete its reserves to an extent that would leave it essentially impotent in the face of the crisis just as it is hitting nations hardest. It is the IMF's mandate to prevent nations from collapsing. Now as many national governments balance on the brink of catastrophe, the IMF is in a position in which it will very likely have to pick and choose who it will lend to.

Surplus-rich China, Russia and the Gulf States may be asked to step up to the plate to prevent the failure of national governments... but didn't we (the West) want them to start generating growth through increasing internal demand? It seems unlikely that they can do both.

As we all watch the international economy breakdown, we all become acutely aware of the fragility and complexity of the capitalist mode of production. It now seems justifiable to step back and marvel at the fact that it was ever able to function smoothly.

Saturday, 25 October 2008

Nosedives in fictitious and productive capitals Oct 24-25

Recession fears manifested in plunging markets on Friday. Stock markets in Asia, Europe and finally the Dow Jones in the U.S. fell to five year lows. The Wall Street Journal fears there are no safe havens in the global economy left to hedge with.

Following Marx, I would argue that market falls and crashes are not destructions of value but rather are redistributions of value. What is destroyed is the title of ownership, which Marx called fictitious capital. If I own a $50 stock in a company, and the stock collapses to zero, I have simply transfered $50 to the company and received nothing. That is to say, stockholder ruin does not necessarily imply the destruction of real societal wealth. We can say there has been destruction of value only if the collapse generates the abandonment or depreciation of plants, machinery or other fixed investments.

The fallacy is thinking that a debt is a commodity with real value (despite the fact that it is traded on the market). Marx, in Volume III of Capital wrote that "unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital."

Of course, stoppages of production and traffic in the real economy have indeed been appearing across the globe. Data published on Friday revealed a significant drop in third quarter British output, the sharpest decline since 1990. Though a single quarter decline does not meet the technical definition of recession, there is virtual consensus that the country is in one. The Industrial and Commercial Bank of China announced a significant decline in third quarter profit growth. In expectations of declining demand, Chinese steel and aluminum industries have cut production by 20 and 18 per cent, respectively. Chinese car sales are expected to flatten. Despite Opec's production cut on Friday, oil prices continue to decline as fears of slowing demand growth mount.

In the US, amidst a 25 per cent drop in annual sales, Chrysler announced that by the year end it will lay off 25 per cent of its white collar workforce. Meanwhile merger talks with GM escalate.

Thursday, 23 October 2008

News from the financial press Oct. 23

The depth and severity of the global crisis has prompted the U.S., with support from its Western European allies France and Britain, to call for a 20 nation summit to discuss the causes of the global crisis and forge a united response.
The call for the conference was made amid another day of highly volatile equity (stock market) prices and steep declines for the prices on commodity markets (especially oil and gold). The decline of equity and commodity markets is a result of the market's (meaning those people who invest in the markets) belief that a recession is unavoidable.
The dollar is still rising against global currencies. This should not be taken as an indication of U.S. strength and resilience but as a continuation of investor fears and the volatility of markets. Despite claims by many that this crisis signals an immanent decline of U.S. economic power, the dollar is still the international reserve currency (the currency that is accumulated by central banks) acting as a de facto universal currency.
It is significant that the "underlying causes of the financial crisis'' will be among the topics of the summit. To analyze the determining factors of the crisis is fundamentally different than simply trying to fix it. It is very difficult to imagine the world's industrialized nations coming to any conclusion more profound than a critique of deregulation. There will most likely be some discussion of trade imbalances as well, though I predict most of the discussion will revolve around questions of finance. As far as a new financial infrastructure is concerned, we can definitely count on new emboldened roles for the IMF and the World Bank. We can also look forward to some agreement on guideline or principles for financial regulations. This, of course, would be enforced by national governments and regulatory bodies.
The Wall Street Journal and the Financial Times are both predicting a growing role for the worlds rapidly developing nations in the new world financial order. This is significant. What is really impressive, however, is the fact that there is talk of a new financial order at all. More than anything else, the G20 conference (dubbed Bretton Woods ll) can be understood as the end of an epoch. Neoliberal capitalism, the ideology of the free and self-regulating market, is dead. Anti-globalization activists could not defeat it and neither could Hugo Chavez. The free market imploded under the weight of its own contradictions.*

* see http://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis

Fear of recession drove down the worlds major stock indices. Wall street was was the big victim with losses that brought the market to lows not seen in five years. The continued pessimism and risk aversion (unwillingness to engage in risky behavior with the potential of high payoffs) comes at a time when credit markets are loosening. The interbank overnight lending rate (usually called the Libor) has gone down for another day, thus making it easier for banks to meet obligations and helping to ensure the overall health of the banking system. (Note that the Libor is seen as an important indicator for the health of the banking system.) This good news in the banking system was expected to calm investors. However, fear of a recession in the real (non-financial) economy has prompted many would-be investors to steer clear of markets. This comes after the release of data showing very poor earnings for U.S. companies. U.S. companies are cutting jobs and cancelling investment plans.
News from the markets today is showing that the crisis, which first emerged in the financial sector, has spread to the real economy. This is happening faster than many analysts had expected. Given the speed at which the crisis is spreading, we can expect many preemptive job cuts. This is worrisome because a reduction in employment will have two fold (multiplier) effect: 1) an increase in the unemployment rate will reduce the bargaining power of labor and drive the wage down; i.e., you re willing to work for less if you feel that there is no alternative job that could pay better. 2) an increase in the unemployment rate leads to a reduction in the total wages paid out in the whole economy. This in turn leads to a reduction in the demand for goods and services in the economy therefore prompting more employment reductions. In its most basic form, this is the immediate process underway right now. Crises have self-perpetuating tendencies and are therefore very difficult to stop once the process has begun. Just how strong the counter-cyclical tendencies are is yet to be seen. The situation appears to be such that only massive intervention by the state could stop the blood-letting. We may see the government forced to tackle the problem in the role of "employer of last resort."

In related news, 478,000 workers filed for unemployment last week. This statistic is substantially lower than the total number of people who lost their jobs because it does not include people who have been employed for less than six months, part-time employees who lost their jobs, 'under-the-table' workers, illegal immigrants, or employees forced to register as independent contractors.

Tuesday, 21 October 2008

Short View: Is it safe to go back in the water?

Short View: Is it safe to go back in the water?

By John Authers

Published: October 20 2008 20:58 | Last updated: October 20 2008 20:58

Credit Default Swaps (from here on CDS, the cost to ensure debt default) on the world's major banks have gotten cheaper. That means that investors believe the likelihood of a major bank collapse has decreased. Sounds like stability. Markets believe things are moving in the right direction but the CDS are still much more expensive than they were before the implosion of Lehman Brothers.

In even more positive news for finance, the interest rate at which banks lend money to one another overnight has dropped from 5.37 to 1.5. This indicates an increase in trust between institutions--they are more willing to lend to one another. Note: this market is very important for the banking industry because it is what allows the banks to meet their balance sheet obligations without having to liquefy assets etc... However the rate at which banks are willing to lend to one another over a three month period is still far above historical levels. This indicates a fear of instability in the coming months.

All this seems like good news for the capitalists. Although, the CDS and interbank lending rates do not reflect only internal market conditions, so a strong argument can be made that the loosening of lending and the cheapening of insurance are reflections of the government's guarantees and not the health of the system.

And, finally, money markets, now flooded with cash, are experiencing a continuation of a flight to safety. This phenomenon is marked by high demand for Treasury Bills (considered to be the safest investment because the U.S. government isn't likely to collapse any time soon) and the subsequent decrease in their yield (the interest that they pay) to 0.06 percent.

Bernanke backs new stimulus package

Bernanke backs new stimulus package

By Krishna Guha in Washington

Published: October 20 2008 20:33 | Last updated: October 21 2008 00:30

This seems like pretty good news. A new stimulus package means more spending money for me and people I know. Does this mean that the U.S. Gov. has finally taken to helping out average Joe (six pack or plumber)? I would not jump to that conclusion. Never mind that the $300bn package is less than half the massive bailout we (taxpayers, the working class) gave to the bankers. This stimulus package will do very little to ease the pains of a labor market that is quickly loosening. In fact, this package is intended to be little more than a quick supplement to consumer spending; i.e., this money is expected to be handed right over to capitalists anyway.
The theory behind this type of stimulus package is that a quick injection of cash to the economy will encourage consumer spending. This consumer spending will raise demand and compel firms to do some hiring and investment to meet the new demand. This is supposed to alleviate some of the suffering caused by the crisis. This stimulus package, in theory at least, is supposed to help turn things around.
In reality, I would say that it is a very safe bet that it will initially increase demand (by way of increasing consumption). However, this increase in demand should not be expected to effect the gloomy outlook of American producers in the long run. Retailers, on the other hand, can look forward to increased sales but there is no reason to believe that they will need to hire any new labor to deal with the increase in consumer volume. Neither Wal-mart nor local hardware stores will need to hire anyone new to deal with an increased flow of customers to their aisles. The injection of consumer demand will help capitalists deal with excess inventory and keep the prices high on those very goods that are being purchased. This package will help profits but should have no effect on wages or employment.
Capitalist firms are not blind nor are they stupid. They understand that increased sales are prompted by a stimulus package and, accordingly, they will not be investing in plant, equipment or capacity. There will be nothing to show for this $300bn package with regard to the long term productive capacity of our society. For the more economically inclined readers, this package will increase capacity utilization, not productive capacity; that is to say, the rate of exploitation and the rate of profit should be propped up for U.S. capitalists.
That said, when you get it... spend it. Have drinks and food with your friends or use it to promote anti-capitalist causes. Please do not expect it to improve your job prospects.
In conclusion this could be taken as a sign that Bush and Co. have finally turned around on internationalism. This should be good for exporters with piling surpluses of inventory that needs to be poured into the U.S. market. It will be a continuation of the pro-trade deficit policy that has the American working-class consumer the motor of global growth for the past half decade. But aren't these huge imbalances a source of instability? Oh, and aren't we (see above "we") going to have to pay this back some day? It looks like the government just forced us to take another credit card...