Wednesday, January 28, 2009

PIIGS Threaten collapse of Euro So worried are the Brussels elite that this might actually happen that they are threatening to force Germany and some of the other stronger countries to bail-out the PIIGS.

Tuesday, January 20, 2009

What Obama Must Do: Krugman

What Obama Must Do: An Open Letter to the new President from Paul Krugman

January 18, 2009 02:57 PM EST

views: 281 | rating: 10/10 (12 votes) | comments: 47

First Posted on Rolling Stone, Wednesday, 14 January 2009.
Written by Nobel Prize winning economist, Paul Krugman

A Letter to the new president. What Obama must do.

Dear Mr. President:

Like FDR three-quarters of a century ago, you're taking charge at a moment when all the old certainties have vanished, all the conventional wisdom been proved wrong. We're not living in a world you or anyone else expected to see. Many presidents have to deal with crises, but very few have been forced to deal from Day One with a crisis on the scale America now faces.

So, what should you do?

In this letter I won't try to offer advice about everything. For the most part I'll stick to economics, or matters that bear on economics. I'll also focus on things I think you can or should achieve in your first year in office. The extent to which your administration succeeds or fails will depend, to a large extent, on what happens in the first year - and above all, on whether you manage to get a grip on the current economic crisis.

The Economic Crisis

How bad is the economic outlook? Worse than almost anyone imagined.

The economic growth of the Bush years, such as it was, was fueled by an explosion of private debt; now credit markets are in disarray, businesses and consumers are pulling back and the economy is in free-fall. What we're facing, in essence, is a yawning job gap. The U.S. economy needs to add more than a million jobs a year just to keep up with a growing population. Even before the crisis, job growth under Bush averaged only 800,000 a year - and over the past year, instead of gaining a million-plus jobs, we lost 2 million. Today we're continuing to lose jobs at the rate of a half million a month.

There's nothing in either the data or the underlying situation to suggest that the plunge in employment will slow anytime soon, which means that by late this year we could be 10 million or more jobs short of where we should be. This, in turn, would mean an unemployment rate of more than nine percent. Add in those who aren't counted in the standard rate because they've given up looking for work, plus those forced to take part-time jobs when they want to work full-time, and we're probably looking at a real-world unemployment rate of around 15 percent - more than 20 million Americans frustrated in their efforts to find work.

The human cost of a slump that severe would be enormous. The Center on Budget and Policy Priorities, a nonpartisan research group that analyzes government programs, recently estimated the effects of a rise in the unemployment rate to nine percent - a worst-case scenario that now seems all too likely. So what will happen if unemployment rises to nine percent or more? As many as 10 million middle-class Americans would be pushed into poverty, and another 6 million would be pushed into "deep poverty," the severe deprivation that happens when your income is less than half the poverty level. Many of the Americans losing their jobs would lose their health insurance too, worsening the already grim state of U.S. health care and crowding emergency rooms with those who have nowhere else to go. Meanwhile, millions more Americans would lose their homes. State and local governments, deprived of much of their revenue, would have to cut back on even the most essential services.

If things continue on their current trajectory, Mr. President, we will soon be facing a great national catastrophe. And it's your job - a job no other president has had to do since World War II - to head off that catastrophe.

Wait a second, you may say. Didn't other presidents also face troubled economies? Yes, they did - but when it came to economic policy, your predecessors weren't actually running the show. For the past half century the Federal Reserve - a more or less independent institution, run by technocrats and deliberately designed to be independent of whoever happens to occupy the White House - has been taking care of day-to-day, and even year-to-year, economic management. Your fellow presidents were just along for the ride.

Remember the economic boom of 1984, which let Ronald Reagan run on the slogan "It's morning again in America"? Well, Reagan had absolutely nothing to do with that boom. It was, instead, the work of Paul Volcker, whom Jimmy Carter appointed as chairman of the Federal Reserve Board in 1979 (and who's now the head of your economic advisory panel). First Volcker broke the back of inflation, at the cost of a recession that probably doomed Carter's re-election chances in 1980. Then Volcker engineered an economic bounce-back. In effect, Reagan dressed up in a flight suit and pretended to be a hotshot economic pilot, but Volcker was the guy who actually flew the plane and landed it safely.

You, on the other hand, have to pull this plane out of its nose dive yourself, because the Fed has lost its mojo.

Compare the situation right now with the one back in the 1980s, when Volcker turned the economy around. All the Fed had to do back then was print a bunch of dollars (OK, it actually credited the money to the accounts of private banks, but it amounts to the same thing) and then use those dollars to buy up U.S. government debt. This drove interest rates down: When Volcker decided that the economy needed a pick-me-up, he was quickly able to drive the interest rate on Treasury bills from 13 percent down to eight percent. Lower interest rates on government debt, in turn, quickly drove down rates on mortgages and business borrowing. People started spending again, and within a few months the economy had gone from slump to boom. Economists call this process - from the Fed's decision to print more money to the resulting pickup in spending, jobs and incomes - the "monetary transmission mechanism." And in the 1980s that mechanism worked just fine.

This time, however, the transmission mechanism is broken.

First of all, while the Fed can still print money, it can't drive interest rates down. Why? Because those interest rates are already about as low as they can go. As I write this letter, the interest rate on Treasury bills is 0.005 percent - that is, zero. And you can't push rates lower than that. Now, you might think that zero interest rates would lead to an orgy of borrowing. But while the U.S. government can borrow money for free, the rest of us can't. Fear rules the financial markets, so over the past year and a half, as the interest rates on government debt have plunged, the interest rates that Main Street has to pay have mostly gone up. In particular, many businesses are paying much higher interest rates now than they were a year and a half ago, before the Fed started cutting. And they're lucky compared to the many businesses that can't get credit at all.

Besides, even if more people could borrow, would they really want to spend? There's a glut of unsold homes on the market, so there's very little incentive to build more houses, no matter how low mortgage rates go. The same goes for business investment: With office buildings standing empty, shopping malls begging for tenants and factories sitting idle, who wants to spend on new capacity? And with workers everywhere worried about job security, people trying to save a few dollars may stampede into stores that offer deep discounts, but not many people want to buy the big-ticket items, like cars, that normally fuel an economic recovery.

So as I said, the Fed has lost its mojo. Ben Bernanke and his colleagues are trying everything they can think of to unfreeze the credit markets - the alphabet soup of new "lending facilities," with acronyms nobody can remember, is growing by the hour. Any day now, the joke goes, everyone will have a Visa card bearing the Fed logo. But at best, all this activity only serves to limit the damage. There's no realistic prospect that the Fed can pull the economy out of its nose dive.

So it's up to you.

Rescuing the Economy

The last president to face a similar mess was Franklin Delano Roosevelt, and you can learn a lot from his example. That doesn't mean, however, that you should do everything FDR did. On the contrary, you have to take care to emulate his successes, but avoid repeating his mistakes.

About those successes: The way FDR dealt with his own era's financial mess offers a very good model. Then, as now, the government had to deploy taxpayer money in order to rescue the financial system. In particular, the Reconstruction Finance Corporation initially played a role similar to that of the Bush administration's Troubled Assets Relief Program (the $700 billion program everyone knows about). Like the TARP, the RFC bulked up the cash position of troubled banks by using public funds to buy up stock in those banks.

There was, however, a big difference between FDR's approach to taxpayer-subsidized financial rescue and that of the Bush administration: Namely, FDR wasn't shy about demanding that the public's money be used to serve the public good. By 1935 the U.S. government owned about a third of the banking system, and the Roosevelt administration used that ownership stake to insist that banks actually help the economy, pressuring them to lend out the money they were getting from Washington. Beyond that, the New Deal went out and lent a lot of money directly to businesses, to home buyers and to people who already owned homes, helping them restructure their mortgages so they could stay in their houses.

Can you do anything like that today? Yes, you can. The Bush administration may have refused to attach any strings to the aid it has provided to financial firms, but you can change all that. If banks need federal funds to survive, provide them - but demand that the banks do their part by lending those funds out to the rest of the economy. Provide more help to homeowners. Use Fannie Mae and Freddie Mac, the home-lending agencies, to pass the government's low borrowing costs on to qualified home buyers. (Fannie and Freddie were seized by federal regulators in September, but the Bush administration, bizarrely, has kept their borrowing costs high by refusing to declare that their bonds are backed by the full faith and credit of the taxpayer.)

Conservatives will accuse you of nationalizing the financial system, and some will call you a Marxist. (It happens to me all the time.) And the truth is that you will, in a way, be engaging in temporary nationalization. But that's OK: In the long run we don't want the government running financial institutions, but for now we need to do whatever it takes to get credit flowing again.

All of this will help - but not enough. By all means you should try to fix the problems of banks and other financial institutions. But to pull the economy out of its slide, you need to go beyond funneling money to banks and other financial institutions. You need to give the real economy of work and wages a boost. In other words, you have to get job creation right - which FDR never did.

This may sound like a strange thing to say. After all, what we remember from the 1930s is the Works Progress Administration, which at its peak employed millions of Americans building roads, schools and dams. But the New Deal's job-creation programs, while they certainly helped, were neither big enough nor sustained enough to end the Great Depression. When the economy is deeply depressed, you have to put normal concerns about budget deficits aside; FDR never managed to do that. As a result, he was too cautious: The boost he gave the economy between 1933 and 1936 was enough to get unemployment down, but not back to pre-Depression levels. And in 1937 he let the deficit worriers get to him: Even though the economy was still weak, he let himself be talked into slashing spending while raising taxes. This led to a severe recession that undid much of the progress the economy had made to that point. It took the giant public works project known as World War II - a project that finally silenced the penny pinchers - to bring the Depression to an end.

The lesson from FDR's limited success on the employment front, then, is that you have to be really bold in your job-creation plans. Basically, businesses and consumers are cutting way back on spending, leaving the economy with a huge shortfall in demand, which will lead to a huge fall in employment - unless you stop it. To stop it, however, you have to spend enough to fill the hole left by the private sector's retrenchment.

How much spending are we talking about? You might want to be seated before you read this. OK, here goes: "Full employment" means a jobless rate of five percent at most, and probably less. Meanwhile, we're currently on a trajectory that will push the unemployment rate to nine percent or more. Even the most optimistic estimates suggest that it takes at least $200 billion a year in government spending to cut the unemployment rate by one percentage point. Do the math: You probably have to spend $800 billion a year to achieve a full economic recovery. Anything less than $500 billion a year will be much too little to produce an economic turnaround.

Spending on that scale, at a time when the weakening economy is driving down tax collection, will produce some really scary deficit numbers. But the consequences of too much caution - of a failure on your part to do enough to stop the economy's nose dive - will be even scarier than the coming ocean of red ink.

In fact, the biggest problem you're going to face as you try to rescue the economy will be finding enough job-creation projects that can be started quickly. Traditional WPA-type programs - spending on roads, government buildings, ports and other infrastructure - are a very effective tool for creating employment. But America probably has less than $150 billion worth of such projects that are "shovel-ready" right now, projects that can be started in six months or less. So you'll have to be creative: You'll have to find lots of other ways to push funds into the economy.

As much as possible, you should spend on things of lasting value, things that, like roads and bridges, will make us a richer nation. Upgrade the infrastructure behind the Internet; upgrade the electrical grid; improve information technology in the health care sector, a crucial part of any health care reform. Provide aid to state and local governments, to prevent them from cutting investment spending at precisely the wrong moment. And remember, as you do this, that all this spending does double duty: It serves the future, but it also helps in the present, by providing jobs and income to offset the slump.

You can also do well by doing good. The Americans hit hardest by the slump - the long-term unemployed, families without health insurance - are also the Americans most likely to spend any aid they receive, and thereby help sustain the economy as a whole. So aid to the distressed - enhanced unemployment insurance, food stamps, health-insurance subsidies - is both the fair thing to do and a desirable part of your short-term economic plan.

Even if you do all this, however, it won't be enough to offset the awesome slump in private spending. So yes, it also makes sense to cut taxes on a temporary basis. The tax cuts should go primarily to lower- and middle-income Americans - again, both because that's the fair thing to do, and because they're more likely to spend their windfall than the affluent. The tax break for working families you outlined in your campaign plan looks like a reasonable vehicle.

But let's be clear: Tax cuts are not the tool of choice for fighting an economic slump. For one thing, they deliver less bang for the buck than infrastructure spending, because there's no guarantee that consumers will spend their tax cuts or rebates. As a result, it probably takes more than $300 billion of tax cuts, compared with $200 billion of public works, to shave a point off the unemployment rate. Furthermore, in the long run you're going to need more tax revenue, not less, to pay for health care reform. So tax cuts shouldn't be the core of your economic recovery program. They should, instead, be a way to "bulk up" your job-creation program, which otherwise won't be big enough.

Now my honest opinion is that even with all this, you won't be able to prevent 2009 from being a very bad year. If you manage to keep the unemployment rate from going above eight percent, I'll consider that a major success. But by 2010 you should be able to have the economy on the road to recovery. What should you do to prepare for that recovery?

Beyond the Crisis

Crisis management is one thing, but America needs much more than that. FDR rebuilt America not just by getting us through depression and war, but by making us a more just and secure society. On one side, he created social-insurance programs, above all Social Security, that protect working Americans to this day. On the other, he oversaw the creation of a much more equal economy, creating a middle-class society that lasted for decades, until conservative economic policies ushered in the new age of inequality that prevails today. You have a chance to emulate FDR's achievements, and the ultimate judgment on your presidency will rest on whether you seize that chance.

The biggest, most important legacy you can leave to the nation will be to give us, finally, what every other advanced nation already has: guaranteed health care for all our citizens. The current crisis has given us an object lesson in the need for universal health care, in two ways. It has highlighted the vulnerability of Americans whose health insurance is tied to jobs that can so easily disappear. And it has made it clear that our current system is bad for business, too - the Big Three automakers wouldn't be in nearly as much trouble if they weren't trying to pay the medical bills of their former employees as well as their current workers. You have a mandate for change; the economic crisis has shown just how much the system needs change. So now is the time to pass legislation establishing a system that covers everyone.

What should this system look like? Some progressives insist that we should move immediately to a single-payer system - Medicare for all. Although this would be both the fairest and most efficient way to ensure that all Americans get the health care they need, let's be frank: Single-payer probably isn't politically achievable right now, simply because it would represent too great a change. At least at first, Americans who have good private health insurance will be reluctant to trade that insurance for a public program, even if that program will ultimately prove better.

So the thing to do in your first year in office is pass a compromise plan - one that establishes, for the first time, the principle of universal access to care. Your campaign proposals provide the blueprint. Let people keep their private insurance if they choose, subsidize insurance for lower-income families, require that all children be covered, and give everyone the option to buy into a public plan - one that will probably end up being cheaper and better than private insurance. Pass legislation doing all that, and we'll have universal health coverage up and running by the end of your first term. And that will be an achievement that, like FDR's creation of Social Security, will permanently change America for the better.

All this will cost money, mainly to pay for those insurance subsidies, and some people will tell you that the nation can't afford major health care reform given the costs of the economic recovery program. Let's talk about why you should ignore the naysayers.

First, let's put the costs of the economic-recovery program in perspective. It's possible that reviving the economy might cost as much as a trillion dollars over the course of your first term. But the Bush administration wasted at least twice that much on an unnecessary war and tax cuts for the wealthiest; the recovery plan will be intense but temporary, and won't place all that much burden on future budgets. Put it this way: With long-term federal debt paying the lowest interest rates in half a century, the interest costs on a trillion dollars in new debt will amount to only $30 billion a year, about 1.2 percent of the current federal budget.

Second, there's good reason to believe that health care reform will save money in the long run. Our system isn't just full of holes in coverage, it's also grossly inefficient, with huge bureaucratic costs - such as the immense resources that insurance companies devote to making sure they don't cover the people who need health care the most. And under a universal system it will be much easier to use our health care dollars wisely, to spend money only on medical procedures that work and not on those that don't. Since rising health care costs are the main source of the grim, long-run projections for the federal budget, the truth is that we can't afford not to move forward on health care reform.

And let's not ignore the long-term political effects. Back in 1993, when the Clintons tried and failed to create a universal health care system, Republican strategists like William Kristol (now my colleague at The New York Times) urged their party to oppose any reform on political grounds; they argued that a successful health care program, by conveying the message that government can actually serve the public interest, would fundamentally shift American politics in a progressive direction. They were right - and the same considerations that made conservatives so opposed to health care reform should make you determined to make it happen.

Universal health care, then, should be your biggest priority after rescuing the economy. Providing coverage for all Americans can be for your administration what Social Security was for the New Deal. But the New Deal achieved something else: It made America a middle-class society. Under FDR, America went through what labor historians call the Great Compression, a dramatic rise in wages for ordinary workers that greatly reduced income inequality. Before the Great Compression, America was a society of rich and poor; afterward it was a society in which most people, rightly, considered themselves middle class. It may be hard to match that achievement today, but you can, at least, move the country in the right direction.

What caused the Great Compression? That's a complicated story, but one important factor was the rise of organized labor: Union membership tripled between 1935 and 1945. Unions not only negotiated better wages for their own members, they also enhanced the bargaining power of workers throughout the economy. At the time, conservatives warned that wage gains would have disastrous economic effects - that the rise of unions would cripple employment and economic growth. But in fact, the Great Compression was followed by the great postwar boom, which doubled American living standards over the course of a generation.

Unfortunately, the Great Compression was reversed starting in the 1970s, as American workers once again lost much of their bargaining power. This loss was partly due to changes in the world economy, as major U.S. manufacturing corporations started facing more international competition. But it also had a lot to do with politics, as first the Reagan administration, then the Bush administration, did all they could to undermine the ability of workers to organize.

You can make a start on reversing that process. Clearly, you won't be able to oversee a tripling of union membership anytime soon. But you can do a lot to enhance workers' rights. One is to start laying the groundwork to pass the Employee Free Choice Act, which would make it much harder for employers to intimidate workers who want to join a union. I know it probably won't happen in your first year, but if and when it does, the legislation will enable America to take a huge step toward recapturing the middle-class society we've lost.

Truth & Reconciliation

There are many other issues you'll need to deal with, of course. In particular, I haven't said a word about environmental policy, which is ultimately the most important issue of all. That's because I suspect that it won't be possible to pass a comprehensive plan for dealing with climate change in your first year. By all means, put as much environmentally friendly investment as possible - such as spending to enhance energy efficiency - into the initial recovery plan. But I'm guessing that 2009 won't be the year to introduce cap-and-trade measures to reduce greenhouse gas emissions. If I'm wrong, that's great - but I'm not counting on big environmental policy moves right away.

I also haven't said anything about foreign policy. Your team is well aware of the need to wind down the war in Iraq - which is, by the way, costing about as much each year as the insurance subsidies we need to implement universal health care. You're also aware of the need to find the least bad solution for the mess in Afghanistan. And I don't even want to think about Pakistan - but you have to. Good luck.

There is, however, one area where I feel the need to break discipline. I'm an economist, but I'm also an American citizen - and like many citizens, I spent the past eight years watching in horror as the Bush administration betrayed the nation's ideals. And I don't believe we can put those terrible years behind us unless we have a full accounting of what really happened. I know that most of the inside-the-Beltway crowd is urging you to let bygones be bygones, just as they urged Bill Clinton to let the truth about scandals from the Reagan-Bush years, in particular the Iran-Contra affair, remain hidden. But we know how that turned out: The same people who abused power in the name of national security 20 years ago returned as part of the team that, under the second George Bush, did it all over again, on a much larger scale. It was an object lesson in the truth of George Santayana's dictum: Those who refuse to learn from the past are condemned to repeat it.

That's why this time we need a full accounting. Not a witch hunt, maybe not even prosecutions, but something like the Truth and Reconciliation Commission that helped South Africa come to terms with what happened under apartheid. We need to know how America ended up fighting a war to eliminate nonexistent weapons, how torture became a routine instrument of U.S. policy, how the Justice Department became an instrument of political persecution, how brazen corruption flourished not only in Iraq, but throughout Congress and the administration. We know that these evils were not, whatever the apologists say, the result of honest error or a few bad apples: The White House created a climate in which abuse became commonplace, and in many cases probably took the lead in instigating these abuses. But it's not enough to leave this reality in the realm of things "everybody knows" - because soon enough they'll be denied or forgotten, and the cycle of abuse will begin again. The whole sordid tale needs to be brought out into the sunlight.

It's probably best if Congress takes the lead in investigations of the Bush years, but your administration can do its part, both by not using its influence to discourage the investigations and by bringing an end to the Bush administration's stonewalling. Let Congress have access to records and witnesses, and let the truth be told.

That said, the future is what matters most. This month we celebrate your arrival in the White House; at a time of great national crisis, you bring the hope of a better future. It's now up to you to deliver on that hope. By enacting a recovery plan even bolder and more comprehensive than the New Deal, you can not only turn the economy around - you can put America on a path toward greater equality for generations to come.


Paul Krugman

Monday, January 19, 2009

Investors turn hostile to ‘mega buy out firms’ as large stocks of unsold cars pile up

Growing stocks of unsold cars around the world Guardian Investors are turning hostile to "mega-buy-out" groups as many of their heavily leveraged, multi-billion-dollar takeovers of large companies are hit by the financial and economic crisis, according to research published today.

Wednesday, January 14, 2009

ODL shaken out of US market, following ACM lead

Dear Introducing Broker:

After a recent strategic business review at our parent company (ODL Group Limited), a decision was made to no longer accept and/or service customers from the USA at this time.  As a result, we are ending our introducing broker relationships and have made arrangements to transfer client accounts to Forex Capital Markets, LLC ("FXCM") or return funds to the account owner(s) as desired by the client. 

If clients wish to redeem funds and Opt Out of the transfer to FXCM they will need to notify us at and complete and return the attached Request for Redemption Form.   For your reference, attached is the client notification that will soon be sent as well as the Request for Redemption Form.

Thank you again for your business with ODL Securities, Inc. and we wish you and your clients the very best.


ODL Securities, Inc.

Tuesday, January 13, 2009

Capitalism Freezes in Worldwide Winter of Discontent (Update2)

Capitalism Freezes in Worldwide Winter of Discontent (Update2)


By James G. Neuger

Jan. 12 (Bloomberg) -- As capitalism staggers through its first globalized economic crisis, the costs won't be measured only in dollars and cents.

From newly rich Russia to eternally impoverished sub- Saharan Africa, social strains are threatening the established political order, putting some countries' very survival at risk.

In the past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell an anti-tax protest in Siberia and China's communist leadership warned of social agitation as the 20th anniversary of the Tiananmen Square massacre looms.

The disillusionment and spillover effects of the global recession "are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general," says Louis Michel, 61, the European Union's development aid commissioner in Brussels.

Somewhere in the wreckage may lurk an unexpected test for U.S. President-elect Barack Obama, 47, one that upstages his international agenda just as Afghanistan's backwardness and radicalism led to the Sept. 11 attacks that defined the era of George W. Bush only eight months into his term.

Among the possible outcomes: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia, a strengthened, drug-financed insurgency in Colombia and a more warlike North Korea.

Cascading Into a Crisis

The U.S. housing slump that began in 2007 has cascaded into a worldwide crisis that forced central bankers to cut interest rates to near zero to unlock credit markets, pushed governments to bail out their biggest banks amid a $1 trillion of writedowns, and sent titans like General Motors Corp. and American International Group Inc. begging for bailouts.

The World Bank reckons trade will shrink for the first time in more than 25 years, deepening the economic hole for governments in developing nations, where higher food and fuel prices cost consumers an extra $680 billion last year and pushed as many as 155 million people into poverty.

Nuclear-armed Pakistan, once touted by Bush as the key U.S. ally in the war on terror, sits at the nexus between economic insecurity and extremism.

"Blood and tears" may be Pakistan's fate, says Thaksin Shinawatra, 59, who as prime minister of Thailand fought rural poverty during a stormy five-year tenure until his ouster by a military coup in 2006. "That's where I'm worried, and also about political stability, and the terrorist activities are there," he said in an interview.

IMF Bailout

On Nov. 25, Pakistan clinched a $7.6 billion International Monetary Fund bailout to avert a debt default amid ebbing growth and an inflation rate of 23 percent in December that is ruining the livelihoods of its poor.

A day later, an Islamic terrorist group went on a rampage in Mumbai, India's financial hub, killing 164 people and adding a bloody new chapter to six decades of animosity on the subcontinent. India accused Pakistan of harboring the militants, much as the Taliban uses ungoverned Pakistani tribal regions as a launch pad for attacks on Afghanistan.

Neighboring Iran is among the energy-exporting states afflicted by the 74 percent drop in oil prices from last July's peak of $147.27. The government, reliant on oil income for more than half the budget, may pare subsidies for utility bills, adding to the pain of October's 30 percent inflation rate.

Axis of Evil

Elections in June may determine whether Iran, part of Bush's "axis of evil," presses ahead with its nuclear program -- or may change little regardless of outcome, says Yousef al- Otaiba, the United Arab Emirates' ambassador to the U.S. Whether or not President Mahmoud Ahmadinejad is re-elected, power will remain with Ayatollah Ali Khamenei and religious leaders.

"Whoever comes to office in June is going to be a different face of what I think is the same policy," al-Otaiba said in an interview.

On a global scale, the spiral of economic distress and political radicalism has been at work throughout history, from the bread riots that stoked the French Revolution to the mass unemployment that brought the Nazis to power in Germany. Some dictators, like Hitler and Stalin, turned on their neighbors after disposing of internal enemies. Others, like Mao, walled off their societies, condemning millions to misery.

The increasingly lopsided world economy "provides fertile ground for extremism and violence," French President Nicolas Sarkozy said at a conference last week in Paris. With globalization, he said, "we expected competition and abundance, and in the end we got scarcity, debt, speculation and dumping."

Extremism and Violence

Historians say it's too early to declare the end of the intertwining of the global economy, under way at least since the collapse of the Soviet bloc in 1989. For one thing, developed nations still have a huge stake in the system: Even with $29 trillion wiped off the value of global equity markets last year, the Dow Jones Industrial Average is back where it was in 2003, hardly a time of privation.

As a result, disturbances in the West -- from Greece's worst riots since the 1970s, to a 31 percent increase in New Year's Eve car torchings in France, to a pickup in shoplifting at 84 percent of major U.S. retailers -- won't shake the foundations of those societies.

Failed and Failing

It's the failed or failing states that stand to lose the most. "The punch line: Poverty does cause violence," says Raymond Fisman, a professor at Columbia Business School in New York. Researchers led by Edward Miguel of the University of California have even quantified it: a 5 percent drop in national income in African countries increases the risk of civil conflict in the following year to 30 percent.

The frailest nations are those concentrated south of the Sahara desert, plagued by a legacy of despotism, corruption, disease and economic misfortune -- often all at once. The region accounts for seven of the top 10 countries in a ranking of "failed" states compiled by the Fund for Peace, a Washington- based research group.

With commodity prices sinking, cutting the UBS Bloomberg Constant Maturity Commodity Index by almost half in the past six months, mining companies including Anglo-American Plc, De Beers, Lonmin Plc, and Xstrata Plc are slashing jobs, adding to Africa's economic woes.

Nigeria, holder of Africa's biggest fossil-fuel reserves, is staring into a $5 billion budget hole due to the oil-price swoon. It also confronts an emboldened guerrilla movement in the southern Niger Delta, the oil-producing region that has attracted the likes of Royal Dutch Shell Plc and Chevron Corp.

'Not Optimistic'

"The outlook is not optimistic," says Pauline Baker, president of the Fund for Peace, which ranks Nigeria 18th on the most-at-risk list. "Unless Nigeria begins to pull itself together, I think with the lowering oil price in particular it is quite vulnerable."

As incomes shrivel in the poor world, the economically troubled rich world isn't able to fill the gap. Even when the going was good, the Group of Eight industrial powers were struggling to meet a 2005 commitment to increase annual aid to poor countries by $50 billion by 2010. Now, official donations are set to fall by as much as 30 percent, the European Commission predicts.

The IMF may need another $150 billion to help reverse the damage to emerging markets, Managing Director Dominique Strauss- Kahn says. While "demand may be above what we have," Strauss- Kahn said in an interview that he is convinced the IMF could scrounge up the extra funds.

Putin's Role

Perched between advanced economies and the raw-materials exporters in the southern hemisphere is Russia, which used the eight-fold oil-price surge from 2002 to 2008 to reassert its claim to the great-power status that evaporated along with the Soviet empire.

Under President-turned-Prime Minister Vladimir Putin, that newfound clout became manifest in last year's invasion of neighboring Georgia and this month's shutdown of gas shipments to Europe. The tactics deflected domestic attention from the onset of the first recession since Russia's debt default in 1998. The ruble dropped 19 percent against the dollar in 2008, the steepest slide in nine years. Today, it fell to 31.0533 per dollar, the lowest level in almost six years.

Belligerency fueled by sudden wealth is likely to be inflamed by sudden scarcity, says Harold James, a history professor at Princeton University.

"Economic difficulties are always a spur to foreign political adventurism," James says. "In Russia, there's already a big devaluation, there's unrest in Siberia and other provincial cities. This is really where the destabilization is going to come from."

China's Course

As Russia clashes with its neighbors, China may be headed toward domestic repression. While growth of 7.5 percent as predicted by the World Bank will outstrip the industrial economies, the pace will be the slowest since 1990, the year after the army put down the Tiananmen pro-democracy uprising.

China's recipe for raising the standard of living has relied on creating jobs in coastal boomtowns like Shanghai as a magnet for millions of poor from the vast, rural interior. Now that formula is breaking down. More than 10 million migrant workers lost their jobs in the first 11 months of 2008, an unidentified Labor Ministry official told Caijing Magazine last month.

Using Communist Party code for riots and civil disorder, the state-controlled Outlook Magazine last week warned that a spike in "mass incidents" will test the government's ability to preserve the social peace.

Dissent Insurance

At stake is the endurance of the Chinese hybrid of an open economy and closed political system. During its two-decade rise that has increased gross domestic product almost 10 times to make China the world's fourth-largest economy and engine of global growth, a buoyant economy provided insurance against political dissent.

In a worst-case scenario, U.S. intelligence agencies warn, the communist leadership would roll back China's integration into the world economy.

"Although a protracted slump could pose a serious political threat, the regime would be tempted to deflect public criticism by blaming China's woes on foreign interference, stoking the more virulent and xenophobic forms of Chinese nationalism," the U.S. National Intelligence Council concluded in November.

China has known outbursts of chauvinism in the past and remained intact, thanks to a social hierarchy dating back to the age of Confucius. Poorer countries lacking that political anchor face a bleaker outlook.

The crisis "could undermine the development momentum," Liberian President Ellen Johnson Sirleaf said in an interview. "It would mean joblessness would increase, and that could undermine the stability of nations."

To contact the reporter on this story: James G. Neuger in Brussels at

Last Updated: January 12, 2009 11:11 EST

Sunday, January 11, 2009

Chinese Central Bank to Test Program to Settle Trade in Yuan Rather Than Dollars

Chinese Central Bank to Test Program to Settle Trade in Yuan Rather Than Dollars

While it would be easy to dismiss this move by the People's Bank of China to inch away from dollar based invoicing, the fact is that the use of other currencies for denominating trade transactions has been on the rise. We cited this Globe and Mail story back in February:

The chief executive of jewellery giant De Beers SA made waves this week when he suggested the global diamond industry consider pricing the shiny gems in a currency other than the U.S. dollar.

That comment, from the head of the world's largest diamond company, is the latest in a string of signs that the greenback's glory days could be fading.

A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. "The use of the U.S. dollar as an international reserve currency is in decline," said UBS economist Paul Donovan.

"The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error - or considerable fiscal strain - is likely to cause the dollar to lose reserve currency status entirely."

The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world's central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

"The private sector's use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation," Mr. Donovan said. "There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000."...

A Financial Times story in March said that Chinese exporters in particular were leery of the greenback:

Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.

According to, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk.

So one could read the pending PBoC pilot of a yuan-based trade settlement system as a response to realities on the ground. But there have also been US reports of far more fundamental discontent with the dollar, per the New York Times in August:

Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People's Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution's losses [on dollar assets].

He said the officials blamed the United States and believed the controversial assertions set forth in the book "Currency War," a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

"A lot of policy makers in China, at least midlevel policy makers, believe this," Mr. Shih said.

And Reuters reported a more frontal attack in October in an article that appears likely to have been sanctioned:

The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies...

The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.

So seen against this backdrop, the pilot program looks to be part of a more concerted effort to reduce exposure to the dollar, even if it is not very significant in isolation.

From the Shanghai Daily (hat tip reader Bill):

China's central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.

The People's Bank of China will expand financial cooperation with overseas economies and "properly deal with the global financial crisis," the central bank said.

"We'll actively join international efforts to tackle the global financial crisis while safeguarding national interests," the central bank said...

China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China's two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.

Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.

Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.

The dollar's exchange rate has become more volatile since the global financial crisis began.

The central bank said it will make the exchange rate of the yuan more flexible and keep it "basically stable on a reasonable, balanced level."

There has been speculation that the yuan's appreciation will slow down, which would help Chinese exports maintain price advantages in overseas markets.

Note that China has been arguing for a fixed currency regime for some time. From their perspective, it makes perfect sense. Currency volatility is a deterrent to trade, since it increases uncertainty.

More on this topic (What's this?)

If You Want a Forecast for China's Economy, Ask a Hairy Crab (Money Morning, 1/8/09)

China's Massive Shell Game is a Cautionary Tale for Investors (Contrarian Profits, 1/6/09)

China Starting to Regurgitate US Debt (Blogging the Commodity Bull Market, 1/9/09)

Rich turn to physical gold, shunning ‘paper’ proxies
Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.

"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.

Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.

The cost of living has finally begun to fall, ending months of spiralling bills for families hit by rising petrol and household costs, research for the Daily Telegraph has disclosed.


Friday, January 9, 2009

One World Scam has closure as principles are charged with wire fraud

Malibu Man Arrested In Ponzi Scheme

A Malibu man arrested in an alleged $15 million Ponzi-like scheme that financed a lavish lifestyle that included private jets and the production of a movie starring Busta Rhymes is scheduled to make his initial appearance in a Los Angeles federal courtroom today.

Charles G. Martin, 43, was arrested late Tuesday in Los Angeles, federal agents said. A second defendant, John E. Walsh, 60, of Glencoe, Ill., was picked up in the Chicago area today, the U.S. Attorney's Office said.

Both men were charged with one count each of wire fraud in a federal criminal complaint filed Tuesday and unsealed today, officials said.

Martin, who has a Malibu address, and Walsh were allegedly principals of a Winnetka- and New York-based firm called One World that purportedly specialized in trading foreign currency, prosecutors said.

According to the complaint, beginning no later than April 2006 through December 2007, the two men engaged in a scam to obtain One World customer funds earmarked for over-the-counter foreign currency trades -- called "forex" -- for their own use and to finance lavish lifestyles, including helping finance a movie that was never released.

A former One World employee, according to court papers, told investigators that Martin "spent money like a billionaire." Credit card and bank statements show he spent more than $1 million at a strip club and restaurants, nearly $1 million at elite hotels and another $1 million renting private jets, officials said.

Martin bought a fleet of luxury cars, donated hundreds of thousands of dollars to celebrity charity events and hired security guards to accompany him in public, according to the allegations. Similarly, Walsh allegedly used his One World credit card to charge personal expenses, including more than $140,000 in jewelry, papers show.

Prosecutors said One World clients lost about $15 million, but the criminal complaint did not specify the number of customers or other potential victims in the case. Federal agents executed multiple search and seizure warrants today, including warrants to search homes owned by Martin and Walsh in the Chicago area, as well as bank safety deposit boxes issued to the men, prosecutors said.

In addition to the luxury items, bank records show Martin and Walsh spent more than $569,000 diverted from One World to help finance the production of "Order of Redemption," an unreleased action film starring Rhymes, Tom Berenger and Armand Assante. Martin is listed as a contributing producer, officials said.

Prosecutors said the scheme operated when One World, acting as a foreign currency dealer, accepted funds for over-the-counter transactions but allegedly diverted secured client funds for Martin and Walsh's own uses.

Like all Ponzi schemes, the plot unraveled when customer redemption requests could not be honored because the money was gone, officials said. An audit by the National Futures Association confirmed the worst.

Martin is due to make his initial court appearance today in U.S. District Court in Los Angeles. Walsh was expected to appear before a federal judge in Chicago this afternoon.

Wire fraud carries a maximum penalty of 20 years in federal prison and a $250,000 fine upon conviction.

Related Stories

NFA permanently bars Illinois forex firm, One World Capital Group LLC and its principal

January 5, Chicago - National Futures Association (NFA) has permanently barred One World Capital Group LLC (One World) and its principal, John E. Walsh from NFA membership. One World is a Futures Commission Merchant and Forex Dealer Member located in Winnetka, Illinois. The Decision, issued by NFA's Business Conduct Committee, is based on a Complaint filed in September 2008.

The Committee found that One World and Walsh failed to cooperate with NFA in an investigation of One World's activities, provided false and misleading information to NFA and failed to supervise its preparation and maintenance of books and records. Additionally, the Committee found that One World failed to maintain required minimum adjusted net capital and failed to maintain books and records.

The Decision is one of a series of actions taken against One World and Walsh. In June 2007, the Committee issued a Complaint against One World and Walsh charging them with various violations, including failure to meet minimum adjust net capital requirements and maintain adequate books and records. Although One World settled the Complaint by agreeing to pay a fine of $100,000 and an additional fine of $50,000 unless certain conditions were met, One World has not made any payments to date. See previous press release.

Additionally, NFA issued a Member Responsibility Action (MRA) against One World and Walsh in November 2007 based, in part, on complaints received by One World's forex customers. The MRA charged that One World and Walsh had failed to demonstrate that One World had sufficient capital to comply with its minimum net capital requirement and discharge its liabilities to customers. See previous press release.

In December 2007, the Commodity Futures Trading Commission (CFTC) also filed an action against One World and Walsh in federal court in Chicago charging them with failing to demonstrate compliance with capital requirements and failing to maintain required books and records. The Court entered a temporary restraining order against One World which froze One World's assets, prohibited One World and Walsh from destroying books and records and ordered the firm to cease doing business.

Thursday, January 8, 2009

Currencies trade all over the map Currencies including the dollar and the euro have entered a period of extreme volatility that is hindering global commerce and adding further uncertainty to a world economy facing its worst downturn in decades.

Monday, January 5, 2009

Hedge Fund Manager: Goodbye and F---- You

Hedge Fund Manager: Goodbye and F---- You

From the Scorched Earth Files:

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866 percent betting against the subprime collapse.

Last month, he did the unthinkable -- he shut things down, claiming dealing with his bank counterparties had become too risky. Today, Lahde passed along his "goodbye" letter, a rollicking missive on everything from greed to economic philosophy. Enjoy.

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

by Matthew Malone

Sunday, January 4, 2009

Karam discussed as potential Gulf Currency
MUSCAT, Dec. 30 (Xinhua) -- The Gulf leaders are discussing the naming of a possible single currency across the region, a well-informed Omani source revealed Tuesday.

    The single currency may be called "Karam," which means honor in Arabic, or "Gulf dinar," the source said.

    The source added that the heads of state of the Gulf Cooperation Council (GCC) have reached consensus on issuing the single currency in 2010 in accordance with the plan.

    The 29th annual GCC summit continued its second-day session in the Omani capital of Muscat, with key focus on approving a long-planned agreement to adopt a single currency in the Gulf region.

    On Sept. 17, GCC's finance ministers have hammered out a draft agreement on the monetary union, which involves a single currency and a unified Gulf monetary authority, two key steps toward economic integration.

    The draft deal has been referred to heads of state for approval at the ongoing Muscat summit.

    Convinced by the success of euro zone, the Gulf leaders decided in 2001 to set up a monetary union and adopt a single GCC currency in 2010, a key step toward full regional economic integration.

    However, Oman announced in 2006 that it would not join the single currency by the self-imposed 2010 deadline, and Kuwait said in 2007 that it will peg its currency dinar with a basket of main currencies instead of the dollar alone, giving a further blow to the tentative project.

    The Omani source said if Oman cannot join the single currency in 2010, it could be issued initially in other Gulf nations.

    Established in 1981, GCC is a regional political and economic alliance aimed at enhancing cooperation among its six member countries.

    The GCC groups Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which pumps 16 million barrels of crude oil per day and possesses about 45 percent of the world's proven crude reserves.


Yuan to replace Dollar Beijing has launched the experiment of using the yuan as a reserve currency in relations with 8 countries. Chinese exporters are asking to charge in yuan instead of dollars, because the U.S. currency is losing value. But China needs to revise its model of development, too much inspired by eighteenth century mercantilism.

Milan (AsiaNews) - While the comments of economic observers have focused on what is happening to U.S. public debt and to financial markets overseas, the news media rarely mention what is happening in Asia, almost as if there were not a strong correlation between the two phenomena. But it is logical that a substantial accumulation of foreign exchange reserves in China, Japan and throughout Asia corresponds to an unprecedented supply of dollars, the global reserve currency.

But Asia now understands that the increase of money supply decreases the intrinsic value of a currency. That is why China is seeking a possible and rational attempt to decouple Asian currencies from the dollar, as recent news stories report [1].

In practice, China is trying to make its currency convertible and give it a role as a reserve currency. The first experiment is limited to transactions between Hong Kong and the neighboring provinces. It is also proposed that the yuan renminbi be used in 8 neighboring countries, including Russia. With these countries, agreements have already been signed for the settlement of contracts in the Chinese currency. Perhaps it is no coincidence that the news was released on Christmas Day, when Western markets are closed, reducing the impact on the dollar. In addition, the first weeks of January are usually fairly quiet. This means that although for now the trial is limited, China is preparing to establish full convertibility of its currency to all other currencies. Many in China have spoken out directly or indirectly in this regard: for example, Wu Xiaoling, former vice governor of the central bank, and Zhao Xijun, a professor of finance at Renmin University of China. The current governor of China's central bank, Zhou Xiaochuan, in early December in Hong Kong had indicated that if the value of the dollar fluctuated drastically, its use as a settlement currency (for commercial transactions) would cause problems. It is clear that Chinese exporters, behind the scenes, are asking the government for permission to charge in yuan instead of dollars, which are losing value. Other warnings came in the middle of last December: the increase in purchases of U.S. Treasury bonds should not lead to the supposition that the U.S. can borrow its way out of the financial crisis [2]. Finally, on January 1, a well-known Chinese economist, Wu Jinglian, wrote that China must change its development model [3], with reference to the paradigm of economic growth driven by exports. We note, incidentally, that even the pope, who obviously has mainly pastoral responsibilities, has said the world must change its model of development [4] ("Are we are prepared to conduct together an in-depth review of the dominant development model, to correct it in a comprehensive and forward-looking way?" Benedict XVI asked).

Toward full convertibility of the yuan

If, after a trial period, China makes its currency convertible, the consequence is that importing countries must have reserves of yuan renminbi. To get them, central banks around the world will have to divest themselves of U.S. assets and Treasury bonds. The euro has a rather limited role in Asian exchange. In this case, a currency crisis would be triggered by the substantial and artificial lowering of the exchange rate of the yuan, of which we have written in the past [5]. The intention of the Chinese leadership is to correct this undervaluation, of which they are fully aware. The newspaper of the Chinese Communist Party, the People's Daily, summarizes the thinking of China's foreign trade minister, Chen Deming, with the questionable assertion that China does not intend to promote exports by the depreciation of (its) currency [6]. It would have been more correct to say that it no longer does so, since that is what it had done since January 1, 1994, when the Chinese currency was devalued in real terms by about 55%. Western businessmen, first and foremost Americans, attracted by wages at the margin of subsistence and a workforce without rights, on the verge of slavery, have financed the transformation of the country from a Stalinist economy. They provided 80% of investments. Industrial-style development has taken aim at maximizing profits as soon as possible, and therefore resulted in a significant waste of resources, namely labor and raw materials. Today, therefore, production lines have largely been transferred to China. Chen Deming says that if America and Europe are unable to pay, we will continue our expansion by exporting to emerging countries like India and Brazil.

The problems of mercantilism

China's problems don't end there. In the words of Chen Deming, and of a substantial part of the Chinese leadership, there are signs pointing to attempts to deal with another imbalance that is at the heart of the global financial crisis. Globalization, namely the lowering of tariffs, cannot help but produce imbalances if some countries are counting on growth driven by exports and protect their domestic markets by non-tariff barriers of various kinds. For AsiaNews, we noted in 2004 [7] that this trade distortion severely disrupts the use of resources. With a GDP - gross domestic product - (at current prices) in 2003 amounting to a little less than 4% of the world total, and with 20% of world population, China consumed 31% of the coal, 30% of the ore iron, 27% of the steel, 25% of the aluminum, 40% of the cement. In 2007, the proportion of Chinese consumption was even higher: for coal, it was 41.3%, more than 50% for iron ore, for steel 34%, more than 33% for aluminum and more 50% for cement. In the words of Chen Deming, this reveals, in other words, the persistence among the Chinese authorities of a concept of international trade unchanged since the European mercantilism of the eighteenth century: the wealth of nations is the quantity of gold and silver they possess. The devastating impact of this conception can be illustrated by just one example. According to a "flash" on the Dow Jones Newswire (November 19, 2008) the Chinese central bank is considering increasing its gold reserves from 600 tons to 4,000 [8]. At current prices, 3,400 tons of gold are only 95 billion dollars, compared with reserves at the end of October of 652.9 billion dollars in U.S. Treasury bonds, for total Chinese foreign exchange reserves of over 2 trillion dollars. These rumors are not fully confirmed. If China intended to stockpile that much gold, the price of the yellow metal would skyrocket, but the rural population and migrant workers wouldn't be much better off.

We hope that the mercantilist view will not prevail in China. Wu Jinglian writes in the Chinese magazine "Caijing": "Without this transformation [from an export driven development model to one based on internal needs], China could not solve the problems caused by excess consumption of natural resources, or environmental pollution, or the problem of too much investment [in fixed capital, plants and machinery] and insufficient domestic consumption, or the problem in the financial sector [the Chinese banks]."

[1] See Xinhua, 25/12/2008, Senior official: Renminbi likely to be used as currency for forex reserves, and ibid. China to begin yuan-settlement trials

[2] See China Daily, 17/12/2008, Keys to the Treasury

[3] See Xinhua, 1/1/2009, Noted economist urges China to change the pattern of growth

[4] See AsiaNews, 1/1/2009, Follow God who "became poor" to fight "unjust" poverty

[5] See AsiaNews, 09/12/2008 Economic crisis: US, China and the coming monetary storm, AsiaNews, 19/12/2008 U.S. debt approaches insolvency; Chinese currency reserves at risk

[6] See People's Daily Online, 24/12/2008, Commerce minister: China not to promote exports through currency depreciation

[7] See AsiaNews 24/04/2004 Greater conflict in Gulf would spark economic and social crisis. See also "Man" at risk in China's great development

[8] See DJNewswire cited by China PBOC Mulls Raising Gold Reserve Tons By 4000 - Report. Dow Jones keeps stories in its public archive for only two days.

[9] The items in square brackets are the author's clarifications.