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Crises Today and the Future of Capitalism

The seminar titled ‘Crises Today and the Future of Capitalism’ was organized by Institute of Social Science (ISS), Planning Commission (Government of India) and Swiss Agency for Development and Co-operation (SADC). The seminar was held on 20, December 2008 at Mavlankar Hall, Rafi Marg (near Planning Commission). The discussion started on a remark on the 9/11 event by George Matthew from ISS. He pointed out the problem with the Lehman Brothers case in the backdrop of the current recession being faced by the United States (U.S.). He informed the audience that Prof. Stiglitz’s area of research was on screening and asymmetric information. The importance of State cannot be rules out according to Stiglitz, he said. He also informed that Prof. Stiglitz worked on how coercive institutions of the State can be constrained.

The first point that Prof. Stiglitz said was that the world is facing depression. The problem is similar to the crisis that happened in the 1930s. He informed that what started in the United States (U.S.) has spread worldwide. He asked what is the nature, the consequences and the responses to the present economic crises. He emphasized upon the required reforms to tackle these kinds of crises. He said that the central banks are too much worried to curb inflation at the cost of growth and fiscal expansion. He asked for the need of better monetary policies. The crisis is similar to the Great Depression in the era of 1930s, he informed. 75 years back the banking system was relatively easier. Today, the banks are more into complex financial and business relations. The banks are more into gambling like buying derivatives, which is risky, Prof Stiglitz said. He emphasized upon the point that financial system is a means to an end for a steady and sustainable economy. The financial system should look at raising gross domestic product (GDP) and productivity. The banks in the U.S. did not mobilize savings. Instead, they created risks. There was a contradiction between private investments and social returns. The CEOs and management of these banks have walked out with the money that belonged to the society. The Central Bank took the credit of low inflation. There was no attention on the asset market. There existed loose monetary policy. It was the housing bubble that led to consumption boom. The savings rate in the US has gone down to zero. There is short sightedness in the policies pursued by the U.S. In the early 1990s, banks in the U.S. used to engage in securitization. There was under-estimation of the problem of price decline. Students of Stiglitz often forgot to understand the warnings that he delivered. The U.S. has sold many toxic mortgages to Europe in the past, Prof. Stiglitz informed. Diversifications of asset do not help in the time of recession. There is a notion that has cropped up, which is called self-regulation. But this thing would not work in the present scenario. The credit rating agencies need to be criticized. There is a need to understand the present macroeconomic problem. One has to understand the bubbles created by the U.S. economy in the past. The U.S. is facing both social and economic tragedy, according to Prof. Joseph Stiglitz. People do not have money to educate their children. But why bubbles?—asked Stiglitz. The reason: the Central Bank thinks there should be lesser regulations for achieving more economic growth. The U.S. in the past faced consumption led boom. The tax-cut for the rich Americans is a bad decision by Alan Greenspan. There is need to give tax-cut to the poor. President George Bush (junior) made a mistake to go for the Iraq war, according to Prof. Stiglitz. There was price associated with war, he informed. In the decade of 1970s, there was a depression. The import bills of the U.S. used to be high due to high value of petroleum and petro-products. Latin America used to survive just by borrowing, during those days. However, in the 1980s L. America faced poverty, recession and unemployment. In the present scenario one should mention that the problem started in August, 2007. The problem related to bail-outs should not be ruled out, he said. Almost 50 million Americans do not have health insurance. There was a Bill to ensure them health insurance. But it was due to President Bush the initiative never materialized because he vetoed the Bill. Recovery of the banking system is necessary but not sufficient. The U.S. is going to face national debt, Prof. Stiglitz informed. Fiscal responsibility in itself is not enough. He also talked about the case of Freddie Mac. He informed that initially AIG said that it owns a debt of US$ 20 billion but later it increased the amount to US$ 80 billion in order to get debt relief from the U.S. government. It is quite important that the money given for debt relief is spent well. In fact, the United Kingdom wanted such kind of regulation but it was the U.S. which opposed a mechanism for monitoring the spending of the money given as debt relief. Prof. Stiglitz informed that the trickle down policy is not working at all. It is good news that Obama has been elected as President. Obama has promised creation of 2.5 million jobs. But there is need for creating 8.0 million jobs because due to recession unemployment has increased. The banks have gambled enough. They have not kept their balance sheets well. If the US$ 700 billion is used to create new accountable institutions rather than supporting old, corrupt institutions, then that would have been good. The present crises would change the entire debate on sustaining capitalism. The World Bank and the IMF need to look at the problem in a different way. Probably, the Congress men have been bribed in the recent case of bail-outs, he alleged. There is need for regulations in the derivative market. The U.S. has privatized profits at the cost of social losses, which is against the basic theory of capitalism. In the economic classes, much is lectured on 19th century capitalism, rather than on 20th and 21st capitalism. Many Central Bankers were using excessively simpler models. The entire economics profession has failed. Today, everybody claims to be a Keynesian. But there are various kinds of Keynesians. Globalisation has failed because of pursuing failed economic ideology. The Washington Consensus has failed. People have not understood market failures. Money is leaving developing nations to the U.S., where the crisis is taking place. Globalisation is managed in an asymmetric way. India and China need not feel shy. The United Nation has some level of legitimacy. So, it has to be brought into the picture. The problem has to be solved at the global level. There is insufficiency in global effective/ aggregate demand. Many countries have learnt from the problem that happened in 1997. Money has gone to the people who do not have needs. There is need for regulatory arbitrage. The offshore secret banks need to be exposed. There are companies who evade taxes. The kind of lending, which the U.S. is giving is not fair. Corporations in the developing countries should have access to credit. There is need to address the governance problem. Capital outflows are taking place from the developing countries to the U.S. Not only global equity but also global stability is required. The fall of the Berlin wall indicates the end of Communism. There was problem with the Communist system. September 15, 2008 can be regarded as the defining moment of market fundamentalism. The invisible hand is invisible because it is not there at all. There is a need to make globalization work for all.

Mr. Somnath Chatterjee, Speaker, Parliament of India, thanked Prof. Stiglitz and said that the pitfalls of globalization need to be understood. He said that public sector banks in India are relatively more insulated from the current global crises. He said that there are needs for more regulations. He asked for more transparency and accountability in governance. He added that India pursued mixed economic planning in its early days after Independence in order to avoid the pitfalls of extreme communism and extreme free market.

Americans Struggle With The Concept Of Spending Less Than They Earn

These are some quotes from people who are repentant now.

"We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done," said Ms. Gamble, who earns about $2,600 a month as a grievance counselor at a local prison.

Now, she and her husband — a prison guard who brings home $2,000 a month — are grappling with $10,000 in high-interest debt. They no longer go to the movies or out to eat, except occasionally to McDonald's. They quit their Internet service. Their car was repossessed. "What we say now is, 'If we can't afford it, we can't buy it,' " Ms. Gamble said.

I want to dig into some old stats related to American savings. Americans are spending more than they are earning, pushing the national savings rate to lows not seen since the Great Depression. The Commerce Department released a report saying that personal savings fell to a negative 0.5% in 2005.

This means that people spent everything they earned and more. This is the third time that the savings rate has been negative, the previous two times were both during the Great Depression in 1932 and 1933. The savings rate has been declining since 1984 when it stood at 10.8%, in 2004 it was 1.8%.

One more repentant..

Fran Barbaro has an M.B.A. and a résumé of computer industry jobs with salaries reaching $150,000 a year. She used to have a stock portfolio worth about $1 million. She hung original art on the walls of her three-bedroom house in Boston.
But divorce, illness and motherhood drained her savings. Her home is worth less than she owes, and she owes another $200,000 to credit card companies, banks and tax collectors.

Ms. Barbaro, 50, said she knew she was living beyond her means. But her house demanded work. Her two boys needed after-school programs running $25,000 a year. Medical bills multiplied.

"These were simple day-to-day expenses," she said. "The money was always there."

Until it wasn't. Her take-home pay is $5,200 a month, but her debt payments reach $4,400.

Top 10 Reasons People Spend More Than They Earn

Rule #1 of financial freedom is spending less than you earn. If you can’t do that, you’ll never be financially successful no matter how hard you work, how many hours you put in, how many promotions you receive, or how much money you make.

It’s a simple rule, and most would consider it common sense. But, the U.S. has a negative savings rate, meaning this common sense rule may not be so common place. I recently saw a statistic that claimed that about 43% of American families spend more than they earn each year.

It’s helpful to understand why people over spend, and be aware of any that might apply to you.

10.Keeping up with the Jones’ - Psychology plays a big role in our spending habits. We want to feel as successful or more successful than those around us. We spend a lot of money to keep up that image. The reality is, the neighbors probably can’t afford that new boat either.

9. Avoiding the truth - It’s easy to overspend when you don’t keep tabs on how much you have. People will go for years unaware of their true financial situation because they’re afraid to look at what kind of mess they are in. It’s easier (temporarily) to just avoid it. They’ll pay their minimums and add new credit cards as necessary ignoring the growing debt total.

8. Counting the chickens before they hatch - In National Lampoon’s Christmas Vacation, Clark Griswold made a large down-payment on his swimming pool expecting that his upcoming Christmas bonus would cover it. Instead, he was enrolled in a Jelly of the Month club. We are often similarly optimistic about incoming money. It’s spent before it’s received, and it’s often not as much as was expected nor received when expected.

7. Plastic doesn’t feel like real money - It’s common to spend more when using credit cards than cash. The experience of hading over a card that you get back is just not the same as handing over some cold hard cash and seeing it disappear.

6. Immediate gratification - It’s all around us. We’re bombarded with the immediate gratification mentality. “Instant pain relief”, “fast food”, “on demand video”, and the big financial one, “buy now, pay later”. We’re too used to getting what we want now even if we don’t know how we’ll pay later.

5. Lifestyle maintenance - Most people increase their expenses as quickly as they increase their income. The same cannot be said for decreases in income. Once we become accustomed to a certain lifestyle, it’s pretty difficult to cut back, even if our financial situation changes for the worse.

4. Poor as a child - Whether they’re trying to make up for their deprivation as a child, a fear of money being taken away that isn’t spent immediately, or a lack of financial understanding, being poor as a child is an often used excuse of overspending adults.

3. Sense of power - Spending money actually makes some people feel powerful. The more they spend, the more powerful they feel, and the only way to get that rush is to spend more money.

2. Prove self worth - Buying that fancy new car proves you are somebody, right? For some people spending makes them feel like they are worth something to the world.

1. Can’t say no - Some people feel like a failure when they can’t meet the wants of others. Whether it’s new toys for the kids, new outfit for the spouse, or a night out with the friends, some people just can’t say no, even when they can’t afford to say yes.

The Inevitable Collapse Of The Dollar

US is emulating Japan Style Policy

US is emulating Japan style policy in solving the current crisis.

US economists have relentlessly harangued the Japanese for their supposed mismanagement of their post bubble era, which has lead to nearly 20 years of low growth, borderline deflation, with a not-much-discussed, robust export sector.

In the mid of the crisis we saw Fed/Treasury were taking one of the worst elements of the Japanese playbook, namely, trying to prop up the value of dud assets, rather than figuring out how to do more price discovery and ameliorate the attendant reaction (not damage, mind you, the damage was already done when the bad loans were made). Yes, the Treasury has made some capital injections into banks, but without cleaning up the balance sheets, the benefits are limited. Even with supposedly more aggressive action on realizing losses, our banks act a lot like their Japanese pre-writedown zombie counterparts.

Fed has copied the heretofore-seen-as-failed Japanese playbook.

Source New York Times:
The Bank of Japan kept rates near zero for most of the last decade in an effort to end a long economic stagnation, and raised them only two years ago. Many economists say they believe that the zero interest-rate policy finally worked in Japan after regulators took aggressive steps that succeeded in restoring faith in Japan’s financial system and Tokyo’s ability to oversee it.

Now, with the Fed and President-elect Barack Obama turning to the same sorts of unconventional policy tools to battle the worst global economic crisis since the Depression, economists and bankers say they hope that Japan’s lessons are not lost on Washington. They say the United States needs to take the same kinds of confidence-building steps, and much more quickly than Japan did....

Economists and former Bank of Japan officials say the biggest lesson they learned was that cutting rates alone has almost no effect when the financial system has fallen into a crisis as deep as the one Japan faced in the 1990s.

Japanese banks simply refused to lend in an environment where borrowers could suddenly go bankrupt, saddling lenders with huge, unforeseen losses. The Bank of Japan tried even more extreme measures, like using its powers to create money to essentially stuff cash into the nation’s commercial banks in hopes they would start lending again.

Exasperated central bankers found that commercial banks just let the money pile up instead of lending it out.

Economists say the United States faces a similar situation, after the sudden collapse in September of Lehman Brothers created fears of additional failures. Economists also fault Washington for its inconsistency in dealing with the financial crisis, leaving the impression that it does not have a clear strategy for dealing with ailing lenders.

In Japan’s case, economists and former bankers say, credit began to flow freely again only after 2003, when regulators adopted a tough new policy of auditing banks and forcing weaker ones to raise new capital or accept a government takeover. Economists said the audits finally removed paralysis in credit markets by convincing bankers and investors that sudden failures were no longer a risk, and that the true extent of problems at banks and other companies was finally being revealed.

Economists say Washington needs to do something similar to make banks and financial companies more transparent, and reassure investors that there were no more collapses like that of Lehman Brothers on the horizon.

Goldman Sachs Outlines 2009 Financial & Credit Expectations

Goldman Sachs has come out with a new financial sector outlook for 2009, and much of how you receive it will depend whether you see things as"half empty" or "half full." It is not a good outlook, but you can at least start to get an idea of what is left to come. Overall, Goldman Sachs expects that the fundamentals of the financial sector and economy will remain poor in 2009.

For starters, Goldman Sachs sees the total credit mess as a $1.8 trillion dollar problem. This implies that we are now roughly half way through the credit crisis without including the impact of a new de-leveraged financial world. Goldman Sachs also expects government intervention and government "assistance" to continue into 2009.

What is interesting here, albeit something we have expected for some time, is that the crisis will migrate away from residential mortgages. Goldman Sachs believes that the next waves of trouble spots will come from consumer loans and corporate loans.

Goldman's call also sees whole loans getting hurt further in the year with farther markdowns on the bank books.

Again, your take will revolve around whether you are a "half full" or "half empty" mindset. This does not at all argue that the worst is yet behind. But it also implies that the acceleration of bad news may be coming to a head despite more negative headlines.

That might not mark a bottom, but despite the massive numbers this scenario does not outline an Armageddon scenario.

Bush Shoe Attack

Image of Shoes used in Bush Attack

Bush Shoe Attack

George Bush Shoe Attack

Text of Fed statement

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.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

US Living Standards To Decline

US non-farm payrolls plummeted 533,000 in November, the largest drop since December 1974, as the credit crunch's toll on businesses mounted. But downward revisions to jobs figures for September and October suggest fierce global cost competition is also a factor, and one that may
persist beyond a credit market recovery.

“Largest since 1974” in a negative economic number is much more profound than the usual “largest since 2001” -- there have been some good-sized recessions since 1974. The November figure results partly from the credit crunch, which has begun to cause more companies to hit the wall than would be the case in a crunch-less downturn. However the September-November job
loss of 1,257,000 is an even more impressive number, and suggests that factors beyond the credit crunch are also to blame.

Economically, the intensification of globalisation since 1995 should have had two effects. It should have increased global real incomes, as billions of new productive workers began to fully articipate in the global economy. It should also have compressed income differentials, as emerging market workers gained skills and experience that made them more competitive with their US counterparts. Its overall effect on US living standards would depend on whether global differentials were compressed more or less rapidly than global incomes improved.

The stock bubble of 1996-2000 and the housing bubble of 2002-07 masked globalisation’s pressure on US living standards, because they artificially increased the US capital stock and in housing’s case provided substantial employment directly in construction and mortgage-related businesses. With those bubbles now popped, the effect of intensified global competition on the US workforce should be easier to see.

In a friction-free economy, US wages would decline as necessary, without increasing unemployment. However as Keynes pointed out, wages are sticky on the downside. Thus in November, wage rates actually increased 0.4%, even though unemployment skyrocketed.
Employment increased only in education, healthcare and government, all sectors that are protected from foreign competition. Similar wage stickiness was a problem in the 1930s, when unionised and government workers won chunky improvements in living standards while unemployment topped 20%.

Cyclically, Great Depression II still seems highly unlikely. However, globalization may be causing a longer-term secular decline in US living standards.

AIG owes $10 billion on trades gone bad: report

Fallen US insurance giant American International Group owes financial firms some 10 billion dollars on speculative trades that turned sour, the Wall Street Journal reported on Wednesday.

The trades have not been explicitly revealed before and would not be covered by the US government's bailout package of more than 150 billion dollars for the troubled company, the Journal reported, citing unnamed sources.

Details of the trades mark the first indication that AIG may have been gambling with its own capital, the Journal wrote.

The government intervened to rescue AIG from collapse in September and has since dramatically expanded its rescue funds as the firm suffers from failed bets on complex financial instruments.

An AIG spokesman told the Journal that the trades were not speculative bets but "credit protection instruments."

He said the trades have been fully disclosed already and amount to less than 10 billion dollars of the firm's 71.6 billion dollars exposure to derivative contracts on debt pools, or collateralized debt obligations, as of September 30.

AIG was the world's largest insurer before the global credit crisis brought it down.

The Third Phase – Hyperinflation

We are going to enter into the third phase of the crisis. Some economists worry about the way Fed is funding the bailout's. Fed officials could find it challenging to remove the cash from the system once markets stabilize and the economy improves. It's not a problem now, but if they're too slow to act later it can cause inflation.

From News Source:

Throughout the series of crises, politicians will attempt to interfere in the game, but the third stage of the crisis will nevertheless begin. Since banks were “saved” with large bailouts, politicians will also begin to lavish corporations with various aid packages. The recent charade of automakers begging for money is only the beginning. Thus, measures will be undertaken that, in the opinion of politicians, will help the economy and save jobs, something that will likely become known as Obama's “ New New Deal”. This will include a multitude of spending programs and, above all, the loaning of credit with astronomical increases in the money supply, together with the classifying of the corresponding numbers into the trillions. Just like now nobody talks any more in terms of millions, so in the not so distant future no one will be talking any more in terms of billions. Trillions will be the order of the day. Perhaps bank lending standards will be relaxed. Perhaps the government will lavish the banks with a lot more money than it does today, just to keep them lending. Perhaps the central bank will directly monetize private debt. Perhaps the government will guarantee many more corporate loans, just like it recently guaranteed the securities/loans of the GSEs. Perhaps GSEs will proliferate throughout the economy, transforming the U.S economy into the “GSE Economy”, transforming a former great capitalist economy into a modern-day nationalsozialistische economy. Perhaps the government will implement all of the above.

It will seem for awhile that peace has arrived, that the crisis has been overcome, as if the bankrupt companies have been “saved”, although this will only be the calm before the storm. If there is already more money in the financial system than actual goods, then after the subsequent injections of money, more like dropping money from helicopters or showering corporations with money, the economic ship will begin to heel.

In this stage, the third stage, the hyperinflation scenario will begin when people realize that the money in banks will buy them next month half as much as it did this month. Then panic will ensue. People will begin to buy essential and non-essential items, just as long as there is something of value that can be obtained in exchange for their colourful pieces of worthless paper. Manufacturing enterprises would no longer want to sell goods, because the money received in exchange for the sale of their goods is not sufficient to purchase the new raw materials. Everyone who sells an actual object or good for paper money is a loser, since the same money is no longer enough to purchase again the same goods. Money created out of thin air electronically has brought tremendous benefits to the initial users and issuers, but at the expense of the wider masses through the collapse in their standards of living in this stage.

The third phase will be chaotic and difficult. The details are difficult to predict, but if history is any judge, the politicians won't be asleep. They will likely pass a number of important laws, prices will be fixed, wages will be standardized, foreign currency accounts will be frozen; in general, everything that could be done, will be done, and this will only serve to extend the agony. Social upheaval and riots will be suppressed by brute force; many democratic freedoms and values will likely be lost. As of today, the hyperinflation spiral and Zimbabwe Syndrome have reached the point of no return.

A huge downshift.......

Employment is the #1 barometer to measure growth of any economy.

US companies slashed payrolls last month at the fastest pace in 34 years as the economy headed for its deepest and longest recession since World War II. Employers cut 533,000 jobs, bringing losses so far this year to 1.91 million, the Labor Department said on Friday in Washington.

• It’s unbelievable numbers, it seems US is on thier way to the worst recession of the postwar period.
• The plunge may spur incoming President Barack Obama to come up with an even bigger fiscal stimulus package than economists’ projections of about $700 billion.
• Friday’s figures also will add to pressure on the Federal Reserve to take radical steps to revive credit markets and on lawmakers to bail out the auto companies.
• This is a huge downshift, much larger than anyone thought. The upper bound on a stimulus package is going up, not down. As the hole gets larger, the amount you need to fill it gets larger.
• Payrolls are likely to keep sliding into next year as the collapse in credit and slump in spending hurt companies from General Motors Corp to Citigroup Inc and AT&T Inc, it will eliminate 8 per cent of its workforce.
• Obama said in a statement the job loss demonstrates the “urgent” need for a recovery plan and offers an “opportunity to transform our economy” through investments in infrastructure and alternative energy technology.
• Fed Chairman Ben S Bernanke this week outlined unorthodox policy action that officials can take beyond lowering interest rates. One option would be to purchase longer-term Treasuries on the open market to inject more cash into the financial system.
• US automakers have been particularly hard hit as sales last month dropped to the lowest level in 26 years. The top executives of General Motors, Ford Motor Co and Chrysler LLC this week appealed to Congress for as much as $34 billion in government assistance.

Rising Underemployment Contributes to Pain of Jobs Slump

The nation's unemployment report, released yesterday, was even worse than many economists had feared. But some say it was also incomplete. Workers like Toliver who are stuck in jobs for which they are overqualified went largely unnoticed.

In one of the worst recessions since at least the early 1980s, economists say, the ranks of the country's underemployed workers are growing. They include not only skilled laborers who are working in unskilled jobs, but also workers who are seeking full-time employment yet have had to settle for part-time alternatives.

Their misfortune, experts warn, is the economy's misfortune, too.

"It's a huge disservice to the economy, in that it means there are highly productive, hardworking people who are not maximizing their potential," said Heidi Shierholz, a labor market economist for the Economic Policy Institute. "They cut back on their consumption. That reduces demand. It's a downward spiral. It's a huge drain on the economy."

The government does not count some types of underemployed workers -- those who are overqualified for their current work, for instance. But it does count people who are working part time when they would prefer full time. That count has jumped by 2.8 million in the past 12 months, to 7.3 million.

Top Stories of The Day

According to Reuters, the Senate will return to auto bailout talks this week.

Reuters reports that Merrill Lynch (MER) CEO Thain is seeking his $10 million bonus.

Reuters reports that unsold cars are piling up, including formerly profitable hybrids.

Reuters writes that the Fed's Kroszner said that banks need to broaden their view of risk.

Reuters reports that 3M (MMM) will cut 1,899 jobs.

Reuters reports that The New York Times (NYT) will borrow against its new building.

Reuters reports that The Tribune Company is filing for a possible bankruptcy.

Reuters reports that UBS (UBS) may cut another 4,500 jobs.

The Wall Street Journal writes that pressure is growing to fire GM (GM) CEO Wagoner.

The Wall Street Journal reports that ad-spending forecasts are glum.

The Wall Street Journal reports that Kroger (KR) is about to post a solid profit.

The Wall Street Journal reports that hedge fund redemptions are picking up speed.

The Wall Street Journal reports that Deutsche Börse held exploratory talks with NYSE Euronext (NYX) about heightened cooperation -- including a possible merger -- but they ended without success.

The Wall Street Journal reports that HP (HPQ) has announce further plans to integrate EDS.

The Wall Street Journal report that Intel (INTC) say it has made further advances in silicon components.

The Wall Street Journal reports that mayors are lobbying for US bailout money.

The Wall Street Journal reports that venture capital investors are beginning to renege on their obligations.

The New York Times writes that the economic downturn has decimated the market for recycled materials.

The New York Times reports that new data show the recession is likely to be the longest and most severe since WWII.

The New York Times reports that The Big Three have to wrestle with the total cost of the car company bailout which could be as high as $125 billion.

The New York Times reports that Obama warned of further economic pain.

The New York Times reports that online shoppers are spending much less per transaction this year.

The FT reports that private equity firms are being asked by their investors to reduce commitments.

The FT reports that the trouble in Detroit could undermine development of green cars.

The Manhattan Project of 2009 by Jeff Wilson

In 2002, oil was $22 a barrel. Now oil is well over $100 a barrel, and has spiked to nearly $150. The total cost of this country's oil addiction is well over one trillion dollars a year. We are sending hundreds of billions of dollars overseas, making nutcase pertrodictators wealthier by the day, as we make the dollar weaker and weaker. We are driving off a cliff; something must be done and done fast.

"I wanted to find out for myself just what our situation really is, and what our options are," says author Jeff Wilson. "I dug deep to get the facts, I ran the numbers, and it became clear -- first, that our situation is far more serious than anyone seems to realize, but second, that there is a way out." The Manhattan Project of 2009 examines our situation in detail, studies our options, and crafts a detailed plan to get us off of oil.

Topics covered in this book-
- Are we depleting our oil reserves, and if so, at what rate?
- Who is competing with us for the world's oil supply, and just how serious
is this competition?
- What is the total cost of oil to our society?
- What does the oil situation mean for our nation security?
- What are the different uses for oil, and how much does oil does each one
need?
- What is the realistic potential for the different sources of alternative
energy?
- Wind
- Solar
- Biofuels
- Hydrocarbon synthesis
- Wave energy
- Ocean currents
- "The hydrogen economy"
- What electric cars are on the market now, and what ones will be availble
in the near future?
- What about conservation?
- Will the Cap and Trade legislation that is pending in Congress help?
- Why don't we just increase domestic production?
- What about drilling in ANWR
- Can the Pickens Plan work?
- What would it take to replace oil?

The final outcome of this book is a proposed legislative agenda. One that is bold, but realistic.

The plan needed to deal with the oil crisis is not for the faint of heart.

But, if devised with skill and executed with determination, it can lead us into a new world of affordable energy, national security, and a stable environment.

This is the Manhattan Project of 2009.

Obama warns economy will get even worse

U.S. ‘fragility’ tied to worldwide financial crisis, president-elect says

The economic recession will get significantly worse before it starts to improve, President-elect Barack Obama said, seeking in an interview broadcast Sunday to tamp down expectations as he prepares to assume the presidency in 44 days.

Financial Crisis has hit Santa Claus!!!!

Amidst news of bailouts, bankruptcies, layoffs and the like, it seems people from all walks of life — even Santa Claus — are feeling the impact of the current economic crisis.

Sad but true. And did you hear how many kids are sitting on Santa’s lap asking for a job for their daddy for Christmas?Not enough credit has been given to the role the high cost of fuel has played in our economy.

This past year’s historically high gas prices has directly resulted in a record number of jobs and homes being lost. Of all the many that have lost homes in my area none have been because of adjustable mortgages.Most families have gone broke this past year at the pump alone. Then the increased cost in fuel was passed on to the consumer through increased production and shipping costs of every single consumer product imaginable.The average family cut back this results in even more jobs being lost.

And while we are doing the happy dance at the pumps OPEC is planning more production cuts. It would cost the equivalent of 60 cents a gallon to drive an electric car. The electric to charge could be generated by wind or solar power. Bail us out of our dependence on foreign oil.

Use some of those billions to get some infrastructures set up, get some solar and wind projects going, Create clean , cheap energy, create badly needed new green collar jobs. It would be a win-win situation all the way around. I just read a book called The Manhattan Project of 2009 by Jeff Wilson. I suggest anyone concerned about these things read this book.

Santa Claus! | Funny Jokes at JibJab

‘Peace Of Mind’ Investing With Stock Indexed Annuities

How long does it take your portfolio to recover after a devastating bear market?

It took a little over a year to get even after the stock market crash of October 19, 1987, over four years to get back your money after the treacherous 2000 to 2003 bear market, and more than five years after the 1973 to 1974 debacle.

This time around, with the Dow down 40% from its high of a year ago, it may take three to four years to get back to even. Ouch! If you are waiting for the new administration to bring you back to even, you may have a long wait.

A Powerful "Peace of Mind" Investment

An indexed annuity is a tax-deferred annuity that combines the downside protection similar to a fixed annuity, money market or CD. But unlike these safe money investments, your interest earnings are calculated based on the performance of a stock market index such as the S&P 500, Nasdaq 100, or even European or Asian stock indexes. It enables you to profit from a market recovery.

Of course, you pay a price for eliminating your downside risk.

In exchange for the guarantee, indexed annuities typically pay slightly less than the full return of the S&P 500 Index. For example, an indexed annuity using “participation” might offer a “50% participation rate.” This means you'll earn 50% of the increase of the selected stock market index. If the index is up 20% for the year and your participation is 50%, your return would be 10%.

But in the long run, the total return can be outstanding because in years the market drops, your capital is preserved. You are ahead of the game when the market moves back up.

"Fixed annuity sales in the United States hit $27.1 billion in the third quarter, up by 54% from the third quarter of 2007, according to data from Beacon Research of Evanston, Ill."

Financial Turmoil - Year 2008

Sept 7, 2008 : U.S. bails out Fannie Mae and Freddie Mac
100 Billion Dollar to each.

Sept 9, 2008 : Lehman Brothers Struggles to Survive
Lehman Brothers struggled to survive after loosing more than half of its market value. Analysts feared that the investment bank was running out of time and options. Speculation rose that the government was unlikely to come to its rescue.

Sept 14, 2008 : Lehman Heads into bankruptacy, Merrill is sold
Lehman Heads into bankruptacy after it failed to find a buyer. Merrill Lynch agreed to be bought by Bank Of America.

Sept 16, 2008 : Fed's Loan Rescues AIG
The Federal Reserve agreed to lend AIG 85 Billion Dollar in exchange of control over AIG.

Sept 21, 2008 : Goldman Sachs and Morgan Stanly
The end of an era. Goldman Sachs and Morgan Stanly, the last big investment banks on Wall Street, got approval to become regulated bank holding companies.

Sept 25, 2008 : Washington Mutual Seized
Took over by FDIC, J P Morgan bough its deposits for $1.90

Sept 29, 2008 : Citi buys Wachovia
Initially Citigroup wanted to buy Wachovia’s banking operation for $2. Later Wells Fargo bought it for $15.1 billion.

Oct 01, 2008 : 700 Dollar Bailout Plan Reached
Senate passes $700 billion dollar financial bailout package.

Oct 06, 2008 : Global Markets Plummet

NEW BILL TARGETS JOB OUTSOURCING TO TRY TO PROTECT AMERICAN WORKERS

New Bill has been introduced in New Jersey assembly, that would prohibit the state from doing business with and investing in companies that outsource jobs overseas.

This sends a strong message as New Jersey workers and businesses grapple with the global economic meltdown.

Under the bill, businesses that eliminate jobs in the United States and send them to foreign countries would be ineligible to perform any state contract or receive any state grant. Also, state money could not be invested in such companies.

News Source

Treasuries: The Next Big Bubble?

Peter Schiff who predicted US recession 2 1/2 years ago, sees the collapse of the bond market sometime during Obama's first term, and he further says, interest rates are going to spiral out of control, and the dollar is going to just be destroyed.

The fear and the volatility we’ve seen in the past few months in the stock market has driven investors to safe-haven instruments like U.S. Treasuries, and prices for Treasury bonds and notes have soared. It’s looking like the next big bubble. Like any bubble, it should eventually burst.

"The sheer steep day after day appreciation of Treasuries is no different than the appreciation in tech stocks in 2000, or a REIT in 2006 or an energy stock just 6 months ago.”

Treasury prices and yields trade inversely to each other, so as prices have skyrocketed, yields have dropped to historic lows. The 10-year Treasury note yield has seen its lowest levels in half a century, falling under 3 percent. The 10-year Treasury note yield even briefly fell below the dividend yield on Standard & Poor’s 500, which hasn’t happened either in 50 years. This is certainly a sign the stock market is cheap right now, and that a bubble is forming in Treasuries. Some analysts say Treasury yields could drop even more.

There’s the exploding budget deficit and the ballooning bailout commitments of the U.S. Treasury. By our count the U.S. government has loaned, invested or committed …

* $200 billion to nationalize the world’s two largest mortgage companies, Fannie Mae and Freddie Mac;
* $25 billion for the Big Three auto manufacturers;
* $29 billion for Bear Stearns;
* $150 billion for AIG;
* $350 billion for Citigroup;
* $300 billion for the Federal Housing Administration rescue bill to refinance bad mortgages;
* $87 billion to pay back JPMorgan Chase for bad Lehman Brothers trades;
* $200 billion in loans to banks under the Fed’s Reserve Term Auction Facility (TAF);
* $50 billion to support short-term corporate IOUs held by money market mutual funds;
* $500 billion to rescue various credit markets;
* $620 billion for industrial nations, including the Bank of Canada, Bank of England, Bank of Japan, National Bank of Denmark, European Central Bank, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and Swiss National Bank;
* $120 billion in aid for emerging markets, including the central banks of Brazil, Mexico, South Korea and Singapore;
* Trillions to guarantee the FDIC’s new, expanded bank deposit insurance coverage from $100,000 to $250,000; plus …
* More trillions for other sweeping guarantees.

The grand total? A mind-blowing $7.8 trillion and counting! How much is that

That’s half the yearly output of the entire U.S. economy. It’s equal to $25,507 for every single man, woman, and child in the United States. In the more than 200 years the U.S. has been a nation, it has racked up almost $10.7 trillion in public debt. Now, in just a matter of months, policymakers have added contingent and direct obligations equal to almost three-fourths of that amount.


Bottom line: There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching.

Peter Schiff Was Right 2006 - 2007

Schiff heads Euro Pacific Capital, a brokerage in Darien, Conn. with more than $1 billion in assets under management. He has silenced critics because he predicted the collapse of the housing market, the subprime crisis and the soaring of oil prices in his market commentaries before they came to pass.

Peter Schiff predicted US recession 2 1/2 years ago. But he was mocked and ridiculed. I wonder if any of those people are feeling stupid now, or if they've somehow revised it all in their memories or explained it away to themselves.

The current crisis is due to Federal Reserve policies which created cheap money allowing people to get way over their heads in debt, which subsequently drove the prices of real estate and other things up. This is what he was saying happened, and its what did happen. Schiff has been kicked off the air for criticizing the Federal Reserve.

Thursday Wrapup........

• Federal Reserve Chairman Ben Bernanke called on the government Thursday to ramp up efforts to stem soaring home foreclosures, which are feeding into the country's deep economic troubles.
  
• Jobless rolls at 26-year peak, factory orders drop. The number of U.S. workers on jobless benefits rolls hit a 26-year high last month, data showed on Thursday, and it may head higher as a deepening economic slump forces a broad spectrum of firms to cut jobs.
• AT&T announces plans to cut 12,000 jobs, about 4 percent of its work force. The Dallas-based telecommunications company -- the nation's largest -- said the job cuts will take place this month and throughout 2009. The company also plans to reduce capital spending next year.
• Oil at nearly 4-year low ($45.84) with jobs slashed and factory orders plummeting. Oil prices fell Thursday to levels last seen nearly four years ago as the number of people continuing to receive government aid reached a 26-year high, factory orders hit an eight-year low and major corporations slashed jobs.

Wipro Technologies Offers BPO jobs to Engineers

Hedge fund assets fall $170 billion in third quarter

Global hedge fund industry assets fell by $170 billion in the third quarter of 2008 as negative returns of more than 10 percent combined with heavy net outflows, research firm Lipper TASS said.

he data provider said there was a net outflow of $18.6 billion in the third quarter, reversing the trend of the previous two quarters.

Global hedge fund assets fell to $1.63 trillion at end-September from $1.80 trillion at end-June as the industry also generally failed to post positive returns amid the volatility that many were designed to exploit.

The figures appear to confirm fears that investors spooked by the market turmoil have withdrawn from hedge fund products seen as opaque or too complex.

All hedge fund sub-strategies measured by Credit Suisse/Tremont posted negative returns in the quarter. Some funds did however, attract investment.

The Lipper TASS report published Monday showed there were positive flows into Global Macro, Managed Futures, Equity Market-Neutral and Dedicated Short-Bias sub-strategies in the quarter.

The largest hedge fund sub-strategy outflows were experienced by Long/Short Equity, Fixed Income Arbitrage, Multi-Strategies and Emerging Markets, which also posted the steepest negative returns during the quarter.

Economic Conditions To deteriorate Further

Two of the most accurate credit crisis forecasters predict that economic conditions will deteriorate further.

One is Nouriel Roubini, who predicted the financial crisis in July 2006. In February this year he forecast a ``catastrophic'' meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ``sharp drop'' in equities. He also predicted that Financial Markets May be Shutdown.

Meredith Whitney, who was the first banking analyst to call the crisis in financials, and has made some notably astute calls, recently said her outlook for the industry had been "too optimistic."

This is what she says

" As an analyst, it is my job to do fundamental research and call it as I see it, and my bailiwick is financials. My outlook has been negative for over a year and, technically, I have been “right” on my calls. Seeing massive capital destruction has brought me no pleasure, but unfortunately I see little on the horizon that would change my outlook. In fact, after observing the US economy so derailed, I feel that I must act as a citizen of this great country to attempt to offer solutions to this economic train wreck we are all involved in.

First, I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn (€2,365bn, £1,955bn) of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year. "

Black Friday (a day after Thanksgiving) sales up 3% from last year

The most awaited data as on today are coming out which is the sales figure for Thanksgiving day.....Strong discounts brought U.S. consumers to the stores on "Black Friday" -- the traditional first day of the holiday shopping season -- with estimated sales rising 3% from last year. This indeed a good news for wall street.

Preliminary sales for Black Friday totaled $10.6 billion. This year's rise in sales, while lower than the 8% increase seen for the day last year, comes despite plummeting consumer sentiment data and other economic turmoil. Retailers should be cautiously optimistic as deep discounts drove consumers en masse to various retail locations to spend, despite myriad economic pressures seen over the last two months.

Black Friday refers to the day after Thanksgiving, so called because many retailers begin to turn a profit on that day, moving from "red ink" to "black ink." Sales for the day are seen as a key harbinger for the overall holiday season.
-----------------------------------------------------------------------------------------

Just wait for the revision...these reports are just like GDP and unemployment always good enough to juice the markets then later revised down.

* Sales up as discounts are up. Reminds us of existing home sales numbers...in many parts of the country the sales were up but prices were way down.
* Amazing--you lower the price and people will buy it? Only products that were deeply discounted were selling. There go your margins. And, like the car manufacturers, this erodes future sales. How many laptops purchased at $0 or negative margin were sold on Black Friday that now won't be sold next year or the year after at a profit?
* They'll have made sales look better but there was no margin. You can only put off the pain for so long and then it's curtains for you.

Top Stories over the Weekend

Government bonds have performed well, but what happens when new issuance really hits home? (Economist.com)
Keep an eye on 10 year Treasury yields for a clue on risk aversion. (VIX and More)
30 year mortgage rates are down. (Bespoke)
Carl Icahn is buying senior debt. (Barrons.com)
After 15 years of being overvalued, the stock market is back to “fair value.” (Clusterstock)
“I think the Nasdaq is much more representative of the current American economy than the Dow.” (A VC)
Doubling down on losers is “dumb.” (Howard Lindzon)
“It is hard to say how successful monetary and fiscal policy will be in avoiding a deep downturn.” (NYTimes.com)
The gold-silver ratio in the spotlight. (MarketBeat, FT Alphaville)
Charles Kirk inteviews Jeff Miller. (Dash of Insight)
Secondary sales of private equity stakes indicate lower valuations than the current marks. (Economist.com)
Bob Rubin finally gets called to account for the Citigroup (C) debacle. (WSJ.com, Market Movers, naked capitalism, Big Picture)
“The economy has simply changed too much since then for experience to be a reliable guide.” (Slate.com)
Recession or depression, web companies have a raft of opportunities. (GigaOM also Silicon Alley Insider, Economist.com)
Look at the picture, not the words. (Odd Numbers)

Black Friday Stampede At Wal-Mart - Merry Christmas

A Wal-Mart employee in suburban New York was trampled to death by a crush of shoppers who tore down the front doors and thronged into the store early Friday morning, turning the annual rite of post-Thanksgiving bargain hunting into a Hobbesian frenzy.

The throng of Wal-Mart shoppers had been building all night, filling sidewalks and stretching across a vast parking lot at the Green Acres Mall in Valley Stream, N.Y. At 3:30 a.m., the Nassau County police had to be called in for crowd control, and an officer with a bullhorn pleaded for order.

Tension grew as the 5 a.m. opening neared. Someone taped up a crude poster: “Blitz Line Starts Here.”

By 4:55, with no police officers in sight, the crowd of more than 2,000 had become a rabble, and could be held back no longer. Fists banged and shoulders pressed on the sliding-glass double doors, which bowed in with the weight of the assault. Six to 10 workers inside tried to push back, but it was hopeless.

Suddenly, witnesses and the police said, the doors shattered, and the shrieking mob surged through in a blind rush for holiday bargains. One worker, Jdimytai Damour, 34, was thrown back onto the black linoleum tiles and trampled in the stampede that streamed over and around him. Others who had stood alongside Mr. Damour trying to hold the doors were also hurled back and run over, witnesses said.

http://www.nytimes.com/2008/11/29/business/29walmart.html?_r=1&ref=business

Things To Anticipate Over The Next Year

• Net earnings on the S&P 500 to be $50.
  
• State and local governments will be reducing spending significantly unless they get bailed out.
  
• A $500 billion fiscal stimulus package that focuses on rebuilding the US.
  
• Whatever solution the Fed comes up with, they will overdue it, but not before it’s too late.
  
• The government will continue to react to problems instead of anticipate them.
  
• Markets usually bottom when there is absolutely no hope left.
  
• Retailers, homebuilders, mortgage insurers, insurance companies (think annuities), banks, casinos and car manufacturers all going bankrupt at the same time, their stocks and bonds go to zero, and they start over.
  
• Highly dilutive secondary stock offers of which the proceeds will be used to pay down debt.
  
• Home prices to continue declining
  
• Increased savings. Obviously you then have decreased spending.
  
• GDP to decline 5%
  
• Unemployment to rise to 9% (That is a HUGE number)
  
• No IPO’s
  
• No Private Equity buyouts
  
• Limited corporate bond issuance
  
• A secular shift towards frugality

Things To Anticipate Over The Next 90 Days

• Service industries (retail, restaurants, hotels and affiliated) that had job growth in 2008 will begin to show declines along with everyone else.
  
• If the decline in the financials continues at the pace of the last 30 days then the whole financial system will be tested again. The short sellers are very interested in finding out what happens.
  
• Oil prices to continue falling (Still way too much supply out there in the short run)
  
• 50 basis point Fed rate cut (Effective funds rate is already at 0.30)
  
• Automaker(s) going bankrupt.
  
• Significant amount of companies being downgraded, which will mostly affect on bonds.
  
• Declining bond prices (Especially CMBS)
  
• Some companies will not be able to afford to rollover their debt and that will bankrupt them
  
• Even with all these problems, expect the government to NOT intervene as they wait for the new administration to take over. Looks like the short sellers are counting on it.

IndianFM PakistanFM - What They Say???

CNN Report on Indian Terror Attack

Bloggers Express Shock and Disbelief

Mumbai Terror Attacks - Taj Hotel Burning Fire!

Mumbai Terror Attack - Taj Hotel - Times Now Coverage

Indian commandos fought room-to-room battles with terrorists in two Mumbai luxury hotels early Friday morning as Prime Minister Manmohan Singh in effect blamed Pakistan for the attacks, reports the FT.

The rear of the five-star Taj Mahal Palace & Tower Hotel on Mumbai’s waterfront was on fire as India’s special forces worked through the 565-room building, freeing hostages trapped in their rooms. Explosions rocked the Taj and the Oberoi Hotel throughout Thursday. Police early Friday said terrorists were still holed up at both hotels along with an unknown number of hostages.

Below is the discussion thread from Google Finance.

http://finance.google.com/group/google.finance.983582/browse_thread/thread/d3a96080fda462eb/c6ed9cd4e8c23afb

Terrorist Attack India - Mumbai

Watch how terrorists enter into the Hotel. They Hijack police Sumo. They shoot at the police and Journalists.

India's political leadership to blame: Wall Street Journal

Mumbai Underworld provided arms and ammunition.

Pakistan ISI chief is coming to India on the request of Indian PM. India will provide evidences of Pakistan hand.

Arrested Fidayeen reveal terror route, LeT hand

Terrorist Attack India

Intelligence agencies around the world are scrambling to identify the source of this latest threat in view of the 'remarkable' coordination and sophistication.

More videos

http://meetglad.blogspot.com/2008/11/terrorist-attacks-what-analysts-have-to.html

Terrorist Attacks - What analysts have to Say.

Indian Government is bombarded by analysts on the terror attacks. Year 2008 was dreadful for India. Today's attacks were like US 9/11 for India. 

Terror attack in indian financial capital Bombay/Mumbai. Terror Attack on India. Its India 9/11. Attack on Taj, Trident, Oberoi Hotels. Taj hotel is the symbol of India.

Coordinated attacks on Mumbai India

Terror attack in indian financial capital Bombay/Mumbai. Terror Attack on India. Its India 9/11. Attack on Taj, Trident, Oberoi Hotels. Taj hotel is the symbol of India.

What others say about ZIRP??

FT: US and UK rates are negative in real terms – by at least 3% and 1.5% respectively – while eurozone rates are still positive by a whisker. So is the global economy headed towards zero interest rates? The answer is that, in real terms, it has already arrived.

CIBC: Cut the funds rate to zero, and there's nothing left to do. Not so. Central banks could move out the curve, buying longer-dated securities and forcing their rates down to zero. They could lend money in higher volumes directly to economic participants, as the Fed is doing in the commercial paper market.

Mishkin (via Thoma): One common view is that when a central bank has driven down short-term nominal interest rates to near zero, there is nothing more that monetary policy can do to stimulate the economy. That view is false. Expansionary monetary policy to increase liquidity in the economy can be conducted with open market purchases, which do not have to be solely in short-term government securities.

Goldman Sachs (not online): With riskless short-term interest rates now close to zero, conventional monetary policy is becoming ineffective. What are the alternatives? Three options with a relatively high likelihood of near-term implementation by the Fed: 1) a large-scale fiscal stimulus program, 2) more proactive use of Fannie Mae and Freddie Mac for purchasing and securitizing mortgages, and 3) a precommitment by Fed officials to keep the federal funds rate low for a "considerable period"If these policies fail to result in an economic pickup, Fed officials might (4) purchase long-term Treasury and Agency securities. The Treasury might (5) decide to purchase risky assets outright, and this could again perhaps be financed by Fed money creation.

What Zero Interest Rates Means to us??

If the Fed funds rate did drop to zero, it would not mean free money for consumers or businesses. The zero rate would only apply to the reserves that banks are required to maintain and that they lend to one another. Customers would still have to pay some interest, but the rates could be extremely low for some business borrowers.

But there are psychological reasons why the Fed would prefer not to cut its rate below 1%. The closer the Fed gets to zero, the more likely that investors will worry the U.S. economy is facing a long period of misery on par with what Japan faced after its real estate markets crashed in the early 1990s.

0% interest will also mean that I will pull my money out if that's that I get keeping in the banks, and possibly invest in gold because it will fuel inflation and not growth, with economy deteoriating, no chances of artifical growth with 0%. however it might take away billions of $ of deposits that folks will pull out and possibly either buy hard real estate on 100% cash or buy gold, some will buy stocks. All in all, Banks will feel the pinch more because they will lose deposit and 10 times the leverage on every single $ pulled out. When economy was doing OK, 1% interest rate in 2001 fueled housing.

U.S. and Global Economic Conditions

The most recent set of events and the string of economic data are a clear sign that the crisis is not over, and the worst might very well be ahead of us. 

On the one hand, consumer confidence got a boost from falling oil prices and new leadership in the U.S. government. On the other hand, yesterday’s Conference Board report confirms that the economy is in a deep recession (the confidence index is still at the lowest level on record since 1975) and points to further consumer spending declines in the coming quarters. 

The release of preliminary Q3 real GDP growth in the U.S. (revised down to -0.5% from the initial -0.3%) displayed a downward revision to personal consumption from the original -3.1% down to -3.7%. 

Consumption is expected to be a significant drag on the economy for a while. Analysts estimate that the fall in energy prices – a reflection of falling U.S. demand and a by-product of the fact that this severe recession is a global one – will boost real U.S. income by roughly $200bn (1.5% of GDP) but it is also. On the back of this, U.S. home prices keep falling, equity prices may still be very far from the bottom and employment losses are mounting.