Economy - writings in English

aureliano · ♣ El Capitán ♠

Australian dollar to follow Canadian example topping its US brother

The Australian dollar hit a 23-year high Monday as stronger-than-expected U.S. jobs data eased fears for the U.S. economy.
But analysts remain divided on future direction for the currency, with an uncertain global economic outlook and concerns over the credit crisis still hovering in the background.

Early in the Asian session, the local unit spiked over the US$0.90 mark, its highest level since 1984. The Australian dollar is now within ten cents of parity with the U.S. dollar, which would be a first for the currency since it was floated in 1983. While the near term trend is upward, the gains cannot be sustained, said John Horner, a currency strategist with Deutsche Bank. "It's supported by expectations of resilience of global growth and the return to favor for high risk," Horner said. "In the more medium term we remain cautious though about the outlook, given ... more widespread signs of slowing economies, not just in U.S." Horner isn't predicting parity with the U.S. dollar.
The local currency has been volatile since the global credit crisis erupted in August, but it has now fully retraced heavy losses incurred during the peak of the squeeze, when it dipped below US$0.7700.
The Australian currency was trading at US$0.8800 in late July, the AP reports.
Wise-owl analyst Tim Morris said booming Middle Eastern states such as Saudi Arabia, the United Arab Emirates and Bahrain could "provide another devastating blow for the greenback". These countries, along with Qatar and Oman, have their currency exchange rates fixed - or "pegged" - to the US dollar and are under increasing pressure to abandon these pegs.
"Their pegged currency regimes have provided a great deal of indirect support for the US dollar over the years, as it forces them to hold large US dollar reserves," he said.
Mr Morris said because exchange rates were pegged, these countries were usually forced to follow the US lead when it dropped interest rates, as it did last month because of the credit crunch and weakening economy.
"The last thing that these booming Arab economies need is an interest rate cut," he said.
"A reduction in borrowing costs would provide further unnecessary stimulation to their economies, potentially igniting inflation.
"Abandoning the US dollar peg is one of the few available means of dealing with these pressures, meaning the Arabian support pillar currently under the US dollar could be in jeopardy."
Kuwait and Syria have already abandoned their US dollar currency pegs this year, news.com.au reports.
"The downside risks to the US dollar are likely to keep on building as the pressure on Arabian central banks heats up and their patience towards the greenback continues to wane," Mr Morris said.

pravda.ru

aureliano · ♣ El Capitán ♠

50 Factors that Affect the Value of the US Dollar

Would you believe something as mundane as a rainstorm in New England can affect the value of the Dollar? It’s true. The US Dollar is subject to numerous influences, from politics to Walmart, and everything in between. The following list contains 50 factors that affect the value of the US dollar, both big and small.

Balance of trade and investment

The balance of trade and investment is often cited by analysts as the most important influence on the value of the dollar, with good reason. The balance of trade, related to the current account, represents the difference between what the US exports and imports in terms of goods and services.
The balance of investment, or financial account, represents the difference in exports and imports of capital. If exports exceed imports, in either the current account or financial account, it is called a surplus. When imports exceed exports, on the other hand, it is referred to as a deficit. The following points elaborate on how the current account and financial account affect the USD.
1. Balance of trade: Otherwise known as the current account balance, the trade balance is equal to the difference between imports and exports. The US has been running a trade deficit with the rest of the world for most of recent memory. At $2 billion a day and growing, the trade deficit is making foreign investors increasingly nervous and can affect the dollar significantly.
2. Falling prices on foreign goods: When the prices of foreign goods decrease, they become more attractive to American consumers, creating a larger trade deficit. Conversely, a rise in the prices of foreign goods, through natural price inflation or because or increased demand, can make American goods look more attractive and help to narrow the trade deficit. This also supports American industry and the economy. All of this serves to help the dollar.
3. Balance of investment: When the US imports more than it exports, it means investors from other countries have to buy US assets to keep the dollar from falling. Simply stated, if the US imports more than it exports, foreign investors must buy dollar-denominated assets like bonds or treasury securities in order to offset the difference.

Politics

Government policies often have a great impact on the value of the dollar. Savvy foreign investors know to keep an eye on the state of our political affairs, especially as they impact the strength of our economy and our ability to service the national debt.
4. Budget deficit and national debt: The US government’s budget can affect the dollar’s value, too. If foreign investors see that the government is spending more money than it currently has, they know that it will be forced to borrow from future generations as well as from the private sector from foreign entities. The US national debt currently stands at $9 trillion and is growing by over $1 billion per day.
5. Little or no default on debt: When the government keeps a good credit history, risk goes down and the dollar goes up. Fortunately, the US is currently considered the world’s most credit-worthy borrower, which in large part explains why the dollar has remained strong.
6. President’s popularity: Often, the popularity of the US president is tied to the value of the dollar. Experts debate whether or not the two have an effect on each other, but reports point out that “international investors like to a see a strong U.S. executive because they prefer a single national decider setting the agenda and fear a fractious, parochial Congress.”
7. Terrorist attacks and war: Attacks damage consumer and business confidence, hampering economic growth. They also increase the likelihood of war, and consequently, a budget deficit to support associated spending. An ongoing war can quickly become expensive. It makes investors nervous because it will likely increase our national debt, and slightly increase the risk of default.
8. Geopolitical events: Anything that could be seen as precipitating a conflict or foreign involvement can affect the dollar negatively. The value isn’t necessarily about what it’s actually worth, but rather what investors think it’s worth. Perception is often reality in the forex markets.
9. Consistent policies: If investors feel that things will largely stay the same, they’ll flock to the dollar because it’s a safe bet. This increases demand and thus, the value of the dollar. Remember, unlike many other investment vehicles, forex is hurt by volatility. This is especially true with regard to financial policy: if investors believe US policy is on the right track, they’ll want to put money in dollar-denominated investments. Conversely, investors can lose faith in an economy that can change with new policies, so they’ll see the dollar as less of a safe bet.
10. Government expansion: New departments and increased government functions cost money, too. Like other government expenses, expanding or creating new groups like the TSA and the Department of Homeland Security can lower the dollar’s value due to their opportunity cost against other expenses in the budget.
11. Elections: Confidence in or wariness of a new administration can cause investors to flock to or flee from the dollar. Also, as new members of Congress are elected, new laws are passed which can affect our economy. Foreign investors may react positively or negatively to these changes, affecting the dollar’s value.
12. Tax cuts for consumers: Tax cuts for consumers fuel spending, which can improve the economy of our country as well as others, like China. This can be good for the dollar as long as it does not deepen the trade deficit or our budget deficit. On the other hand, increases in taxes discourage personal spending, but they help with government spending and debt. This can slow the economy, but at the same time lessen our deficits.

Other countries

Political impact on the dollar does not originate entirely from the US; it can come from all over the world. Trade, conflict, consumption, and other issues can affect the dollar from outside our country.
13. Turmoil in other countries: When other countries are in a state of conflict, their respective currencies may be perceived as unstable. In this case, investors may flock to the dollar because it is considered a safer bet.
14. Stability in other countries: On the other hand, if other countries are consistent in their policy-making as well as politically and economically stable, the dollar may weaken because investors have more confidence in these alternative currencies. They’ll see them as less risky and diversify into non-dollar denominated assets.
15. A change in foreign reserves: The USD benefits strongly from being the world’s reserve currency. Most central banks hold more dollars than any other currency, but the dollar faces problems when they decide to diversify their currency investments. This could mean that they sell dollars, or simply just stop buying more. This is especially damaging when a large purchaser like China decides to stop adding to its foreign reserves.
16. A strengthening Euro: The dollar faces competition from the rising Euro. It’s an attractive alternative to the dollar when investors choose to diversify or if the dollar becomes unstable.
17. Acceptance of oil in dollars: As long as the majority of world oil contracts are settled in USD, other countries have to use the currency. This increases demand for the dollar and therefore, its value. Additionally, most oil exporters hold a significant portion of their oil proceeds in dollars.
18. Strong foreign economies: If other countries’ economies are booming, the dollar may fall because it will become a relatively less attractive place to invest.

Entitlements

As a significant government expense, entitlement programs can have a large impact on the way investors view the value of the dollar. If it looks like the US is letting things get out of hand, these programs can shake the confidence of investors. These are a few of the programs and issues that affect the dollar.
19. Social Security: It’s apparent to Americans and foreigners alike that Social Security is a sinking ship that will only get worse with time. Clearly, this causes investors to lose faith in the US money management system, but when the US works to reform the program, some of this confidence is restored and the dollar can benefit.
20. Medicare/Medicaid: Like other costly entitlements, government sponsored-health care programs are becoming difficult to maintain, which could drive investors to seek countries with more stable budgets.

Economic theory

The laws of supply and demand are ever-present in economics, and currency trading offers a prime example of this law in action. These are a few of the effects that supply and demand exert on the value of the dollar.
21. Demand for dollars: This factor can be tied to most others, but it can function on its own as well. For example, “if French investors saw an opportunity in the U.S., they might be willing to pay more francs in order to get dollars to invest in the U.S.” More francs per dollar means the dollar’s value has risen.
22. Demand for physical currency outside the US: Some countries accept dollars as a physical currency, so they need a supply. For example, “large international demand for US currency bills in the 1990s gave the US government a unique and inexpensive-to-produce export.” Although it requires supplying more currency, this is a factor that can strengthen the dollar’s value.
23. Increase in money supply: With every new dollar printed, each one is valued less than before. The more dollars there are in circulation, the less the currency is valued because the supply has been increased. In practice, this usually causes inflation, which directly eats into the value of the dollar. While this would seem difficult to measure, the Federal Reserve periodically publishes M2 and M3 data reports on the US money supply.

Interest rates

Just like consumers might shop around for the highest-yielding savings account, foreign investors look for the best deal in currencies. Here’s how interest rates affect the dollar’s value.
24. Rise in interest rates: Higher interest rates mean more profit for investors, so a US rate hike will generally strengthen the dollar. In the long-term, however, the law of interest rate parity dictates that currency valuations and interest rates should move in opposite directions. The opposite also holds true. If the Fed lowers interest rates, investors might drop the dollar in the short-term because there’s not enough profit in it.
25. Attractive interest rates in other countries: Regardless of whether US interest rates are rising or falling, the dollar’s value also depends on how US interest rates stack up to those of other countries. If US rates are lower, investors may switch to different currencies that can offer a better return. On the other hand, if other currencies have unattractive interest rates, that allows us to entice investors with a better deal.
26. News about interest rates: Investors like to be ahead of the game, so if news of an interest rate hike or fall is released, the dollar may fluctuate in response to the coming inflow or outflow of investments that are expected to happen in the future.

American consumers

American consumers have the most at stake in the dollar’s value. A fall in the dollar makes consumers’ money worth comparatively less, putting a squeeze on the budgets of the Average Joe. Yet there are several things that consumers do that serve to drive down the buying power the dollar. Here’s how Americans do it.
27. Consumer savings: Americans aren’t big on savings. In fact, most families have a negative net worth. While this has contributed to a strong economy in the short-term, it means the US is ill equipped to support the economy in the long-term. Additionally, negative domestic savings drives us to import foreign savings, which harms the dollar.
28. Gas prices: Rising gas prices leave consumers with less money to spend elsewhere, or worse, drive them to borrow money to keep up their standard of living.
29. The Walmart/Honda factor: When Americans buy foreign goods like items at Walmart or Honda cars, we contribute to an economy that supports more imports than exports. This creates a trade deficit that weakens the dollar.
30. Slow spending: Just as too much spending can hurt the dollar, too little spending can have a negative effect as well. Analysts report that when we hit a slow shopping season, “the Fed might see that as a sign of consumer fatigue and choose to cut rates in an attempt to stimulate growth. That could hurt the dollar.”

Housing

Recently, we’ve seen how a housing boom and subsequent bust can cause problems for families, investors and lenders in the form of defaulted loans and drops in the value of homes. These same issues cause problems for the dollar, too.
31. Slow housing market: A slow housing market creates a domino effect. Sellers are forced to lower their asking prices, which creates a decline in household spending and results in slowed economy growth, all of which hurts the dollar.
32. Strong housing market: A growing, steady housing market builds the equity and net worth of home owners, spurring spending and growing our economy. This supports the dollar.
33. Overinflated housing market: This kind of housing market results in a fall of equity and personal wealth, but it doesn’t stop there; it makes the dollar fall as well, as the effect of declining home prices ripples throughout the economy.

Industry and economic indicators

American industry both affects and reacts to the value of the dollar. When the dollar falls, our goods become cheaper and more attractive. However, when we have a strong dollar, our industries have to compete harder against cheaper foreign labor and goods.
34. Low growth in manufacturing: Manufacturing levels serve as an indicator for the health of the US economy. An industry slowdown means a general slowing in the economy and can cause investors to become wary of the dollar.
35. Strong manufacturing growth: Conversely, strong manufacturing growth can indicate that the economy is picking up, creating a more attractive dollar.
36. Outsourcing: Outsourcing creates a trade deficit and causes US employment to suffer, resulting in a fall of the dollar. However, outsourcing also makes US companies more profitable and more attractive targets for foreign investment.
37. Entrepreneurship: Entrepreneurship creates attractive investment opportunities for foreign investors, supporting a stronger dollar.
38. Employment growth: Like manufacturing growth, employment growth is a good indicator for the overall health of the economy. Positive employment growth will attract more investors and create a stronger dollar. Unnaturally high unemployment causes the dollar to drop because the government loses tax revenue that could help with the deficit. It also takes consumer purchasing power away, which causes the economy to suffer.
39. Wage data: Higher or lower wages can either attract or scare off investors, creating a fluctuation in the dollar’s value.

US capital markets

US stocks, bonds, and other investments can be appealing no matter where you are in the world. The performance of US capital markets can either attract or reduce foreign investment, which directly affects the dollar.
40. Bear markets: Falling values create investment losses that shake investor confidence and cause them to diversify or liquidate their portfolios, resulting in a loss for the dollar if the diversification involves an exodus from dollar-denominated assets.
41. Bull markets: Strong market values have the opposite effect, creating profits that attract new investors and encourage current investors to put more money into dollar-denominated assets. A booming market can attract investors, but it can also cause the dollar to fall when it corrects itself and investors pull out.
42. Accounting scandals: Accounting scandals like Enron can burn investors and cause foreign investment in US stocks to fall.

Economy

The current performance of the US economy is synonymous with the financial health of our nation. It signals to investors our ability to pay back debts as well as the profit level they may earn.
43. Economic growth and stability: In general, a strong economy will raise confidence, assuring foreign investors that they’ll earn a good profit on a stable investment. Economic growth is even better, attracting investors who hope that their investment will grow, too. A boom in the economy can cause an investment rush that results in a temporary overvalue of the market. This can lead to a dollar loss when it corrects itself in a slow of the economy.
44. Economic recession: What goes up must come down. A slowing economy hurts the dollar, causing investors to pull out for fear that their investment will lose value.
45. Outperforming other economies: Economic performance is all relative. If the US economy is stronger than others, investors may turn to the dollar as a safe bet.

Weather

Weather affects the agricultural industry, energy consumption, and local economies. Any change, for better or for worse, can create a ripple affect that impacts the economy as a whole and causes the dollar to fluctuate.
46. Unfavorable farming conditions: Unfavorable farming conditions can result in slow crops and force grocers to turn to other countries to satisfy US agricultural needs. This further opens up the trade deficit and weakens the dollar.
47. Unusually hot summers: An unusually hot summer can cause a rise in energy costs for both consumers and industries. This can create a strain on the economy and cause the dollar to fall. Just like an unusually hot summer can sink the dollar, an excessively cold winter can do the same thing. It can cause energy costs to rise, and since must of our energy is imported, the dollar may be adversely affected. Additionally, consumers will presumably have less disposable income to pour into other areas of the economy.
48. Natural disasters: Natural disasters like Hurricane Katrina create a strain on local economies as well as the local and federal government as we work to repair damage and spend money on relief and rebuilding. This can cause the dollar to struggle.

Inflation

Inflation directly eats into the value of the dollar. The law of purchasing power parity (PPP) holds that a nation’s currency and its general price levels should move in opposite directions.
49. Slow in inflation of foreign goods: A slow in inflation of foreign goods keeps prices of those goods steady, allowing American consumers to purchase the same amount or more of the same goods. This does not help to close the trade deficit and can weaken the dollar.
50. News about inflation: Of course, any news about possible inflation of the dollar or foreign goods can cause the foreign exchange market to react preemptively and fluctuate the dollar one way or another.

By Jessica Hupp

aureliano · ♣ El Capitán ♠

Will world economies survive without USA?

Recently, when reports coming from the USA caused much panic on stock exchanges around the world, the amount of stabilizing investment has increased 1.5 times as compared to the volumes fixed after the 9/11 terrorist attacks. And America may shatter the stability of the world economy. A looming default makes us suppose that the Pax American epoch is coming to its end.

The global financial markets were fevering during the two past weeks. Pessimists state this is just the beginning of something more radical and much is still to come. Optimists on the contrary say that there is no reason for nervousness and the panic on the basic financial sites is just a temporary hardship.

As information that has caused so much panic on the financial markets came from the USA it makes sense to consider the role of America in the world and its influence on international processes.
Americans actually believe that the strongest power is the right one. If so, then Washington believed the United States became the greatest power after the breakup of the Soviet Union.

Zbignev Brzezinski wrote in five years after the triumph of the free world over the empire of evil: “America holds the domination in four spheres essential for the world power: its army deployment opportunities are the best in the world; despite the competition of Japan and Germany in some spheres the USA is still the key driving force of global development; it is the leader in progressive science and engineering. Also, although some may say that it is primitive but the American culture is very attractive especially for the youth all over the world. All the facts guarantee the United States as great political influence as no other country in the world has.” The above facts make America the super power of the world, Brzezinski wrote.

Right after the first reports about terrorist attacks on the Pentagon and the WTC appeared, many people in former Soviet republics revealed a rather strange tactics. They rushed to currency exchange offices to exchange dollars for the currencies of their countries. What was next?

According to liberal economists, over abundant supply brings prices down. So on the first night after the terrorist attacks in the USA bank presidents ordered bank officials to buy dollars at a rate that was twice or three times lower than the official rate. Ukrainian banks had applied the same technique during the 1998 default in Russia. As a result, the rate of the Russian ruble to the Ukrainian currency dropped several times within a couple of days.

During the mid-August chaos on the financial markets this year analysts said that key central banks of the world applied the same measures that they had done after 9/11 to cope with the current stock collapse. A week before last, central banks increased the number of transactions in liquidity supply to stop the paralysis of credit markets.

According to the BBC, the number of current investment has increased 1.5 times as compared to the amount of interventions of the world central banks on the first days after the 9/11 terrorist attacks. So, the different reasons of panic such as the 9/11 terrorist attack on the WTC and the Pentagon and the recent collapse of the American mortgage system entailed similar consequences for financial markets.

The problem is that the global financial system is based upon the unified measure of value, the American national currency. Having the annual gross domestic product at the rate of about $13 trillion, the United States has the national debt of about $50 trillion. The USA produces one fifth of the global gross domestic product but at the same time it consumes twice as much.

To secure its current debts the USA issues new securities, short term and long term debt instruments. And the whole of the world has to make the convention as nobody knows what consequences a collapse of the system may entail. Economies of many countries are oriented toward the American market; gold and FOREX reserves of many countries including Russia are made of American securities.

However, market makers feel they are on the breaking point. It has been clear for several years already that there are enough reasons for a default in the USA, and any possible scandal or incident starting from a terrorist attack or a campaign against Chinese toys may cause a default.

After the gold standard was abolished in 1971, many countries of the world started turning their currencies into securities. And this situation concerns the USA first of all. If a country is successful its securities are popular as a profitable investment. But remember the Enron situation when the company’s quite nice shares turned into absolute trash next day.

Experts know that the American economy is rather disproportionate, and the global financial system is unstable. At the same time, many of them stated that the above statements of Brzezinski were rather convincing. Probably it is time to revise them as they were made about ten years ago, and many tragic events has taken place in the world since that time.

As for the US’s military power, the army budget equal to the army spending of several countries at once do not guarantee invulnerability and triumph of the army in general. The 9/11 terrorist attacks proved that the only super power was quite vulnerable, and the campaigns in Afghanistan and Iraq have demonstrated rather scanty potentialities of the US armed forces.

In the past years it was believed that the American economy was the strongest and the most dynamic; many treated it as a locomotive that can be used to achieve success. For the moment present the situation has changed. The more economy of a country is connected with the USA the less stable it is. The USA is one of the strongest destabilizing factors in the global economy.

However, some countries still make their economies oriented on the USA. And the way is quite inexpedient as the US economic system is not that stable as it was ten or twenty years ago. So, pro-American regimes are the most inadequate in the world. Poland preferred closer relations with Washington thus opposing itself against its European neighbors. It is quite natural that this may entail problems for the country in the future.

Alexey Kovalev
pravda.ru

aureliano · ♣ El Capitán ♠

Gulf countries are rethinking their currency pact with the dollar

HARDLY a week goes by without a new reason to be gloomy about the dollar. The latest scare is that members of the oil-rich Gulf Co-operation Council (GCC) might loosen their links to the greenback, depriving the foreign-exchange markets of a reliable buyer of the troubled currency.

The United Arab Emirates (UAE), through its central bank governor, recently hinted that it would like to free itself from the dollar peg, but would prefer to do it in concert with the other GCC members—Saudi Arabia, Kuwait, Qatar, Oman and Bahrain. Last May Kuwait broke ranks and decided to track a basket of currencies. Since then, the Kuwaiti dinar has risen by nearly 5% against the dollar.

Now others might follow Kuwait's lead. Someone close to the GCC says that some members are advocating a substantial revaluation—perhaps by as much as 20-30%—if the dollar's slide continues. Another option being talked about would be to link the Gulf currencies to euros as well as dollars, with up to half the basket in the European currency. Further discussions will take place at a council summit on December 3rd and 4th. Futures markets are already pricing in a slight loosening of the dollar peg—though the UAE's central bank sought to quell speculation on November 22nd by cutting short-term interest rates.

The immediate problem for the Gulf states is that the inflationary effects of the oil-price boom are being amplified by their yoke to a weakening currency. Inflation, which until 2003 was rarely above 3% in the Gulf, is now around double-digit rates in Qatar and the UAE (see chart). Even in Saudi Arabia, where inflation has been more muted, it picked up to nearly 5% in September. Much of the pressure is from rising world food prices, which are a bulky item in consumer-price indices.

A revaluation would help cap inflation by making imported food cheaper. But housing costs are the biggest contributor to inflation in the UAE and Qatar, say Gerard Lyons and Marios Maratheftis, economists at Standard Chartered Bank. Spurred by strong oil revenues, these two economies have been growing at an annual rate of 8-10%, drawing in more workers from overseas and pushing up rents.

The rigidity of the exchange-rate regime gets in the way of policies that might temper these forces. Countries with pegs to the dollar have to mimic the policy of the Federal Reserve. If a GCC state tried to tighten its monetary policy when, as now, the Fed is easing, it would push its currency above the dollar peg.

The trouble is, a policy setting that is right for recession-threatened America is wrong for the GCC, especially at a time when oil prices are reaching record highs, as they briefly did on November 21st, of $99.29 a barrel. The pressures are made worse by speculative deposits, in anticipation of a revaluation, that drive down interest rates and add more fuel to the boom. The broad-money supply grew last year at an annual rate of 15-40% in GCC countries, according to Standard Chartered.

If, as seems likely, some GCC members let go of their existing dollar pegs, what might they put in their place? The simplest gambit would be a one-off revaluation: keep the link with the dollar but at a higher exchange rate. That would cap import prices and soak up the speculative hot money that has added to liquidity. It should also take the steam out of asset markets—and perhaps housing costs—by making investments more expensive for foreigners, including imported workers.

Yet a revaluation would not address the problem of policy inflexibility; the GCC would still be yoked to the Fed. A bolder course would be to follow Kuwait's lead and peg to a basket of currencies. Mr Lyons reckons that the dollar accounts for around 70% of the Kuwaiti basket, the rest made up of the euro and other currencies. Fuzziness about the precise make-up of the currency weighting allows Kuwait some discretion on interest rates—a “great benefit,” says Mr Lyons.

But even this is not ideal. Benchmarking to any rich-world interest rate is unlikely to suit the Gulf, since high crude prices depress income for oil importers but boost it for oil exporters. Brad Setser of the Council on Foreign Relations suggests one way around this problem is to have oil as one of the prices targeted in the basket.

A revaluation has costs. The huge stock of dollar assets held in the GCC would be worth less in terms of the home currencies. But unchecked inflation would also erode the domestic value of foreign assets and in a more damaging way.

A shift towards a looser peg in the GCC would undoubtedly hurt the greenback. At the very least, dollars would be purchased at a slower rate—leading to what Mr Lyons calls “passive diversification”. At worst, the policy might encourage others to follow, sparking panic sales of American assets. That is the main reason why Saudi Arabia is reluctant to move now, when dollar sentiment is so precarious. But given the inflation problem elsewhere in the GCC, the odds are that one or two more members will follow Kuwait.

economist.com

aureliano · ♣ El Capitán ♠

Philosophy of money

• "Money is not the most important thing in the world. Love is. Fortunately, I love money."
(Jackie Mason)
• "In God we trust. All others must pay cash."
(American Saying)
• "Money is better than poverty, if only for financial reasons."
(Woody Allen)
• "Sex is like money; only too much is enough."
(John Updike)
• "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem"
(JP Getty)
• "It doesn't matter if you're black or white... the only color that really matters is green."
(Family Guy)
• "The only way not to think about money... is to have a great deal of it."
(Edith Wharton)
• "If you want to know what God thinks about money, just look at the people He gives it to."
(Old Irish saying)
• "Be rich to yourself... and poor to your friends."
(Juvenal)

• "If you would know the value of money, go and try to borrow some."
(Benjamin Franklin)
• "Bart, with $10000, we'd be millionaires! We could buy all kinds of useful things like... love!"
(Homer Simpson)
• "The easiest way for your children to learn about money is for you not to have any."
(Katharine Whitehorn)
• "Finance is the art of passing money from hand to hand until it finally disappears."
(Robert W. Sarnoff)
• "All I ask is the chance to prove that money can't make me happy."
(Spike Milligan)
• "What's the use of happiness? It can't buy you money."
(Henry Youngman)
• "Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like"
(Will Smith)
• "If God only gave me a clear sign... like making a large deposit in my name at a swiss bank."
(Woody Allen)
• "I was so poor growing up ... if I wasn't a boy ...I'd have nothing to play with"
(Rodney Dangerfield)
• "He who marries for love without money has good nights and sorry days."
(Anonymous)
• "Between work and family, I'm really not spending enough quality time with my money"
(Anonymous)
• "The difference between a divorce and a legal separation is that a legal separation gives a husband time to hide his money"
(Johnny Carson)
• "A bank is a place that will lend you money if you can prove that you don't need it"
(Bob Hope)

• "Whoever said money can't buy happiness simply didn't know where to go shopping"
(Bo Derek)
• "When I was young I thought that money was the most important thing in life; now that I am old I know that it is"
(Oscar Wilde)
• "A nickel ain't worth a dime anymore"
(Yogi Berra)
• "Every day I get up and look through the Forbes list of the richest people in America. If I'm not there, I go to work."
(Robert Orben)
• "Always borrow money from a pessimist... he doesn't expect to be paid back"
(Anonymous)
• "If you think nobody cares if you're alive, try missing a couple of car payments."
(Earl Wilson)
• "Don't tell me where your priorities are. Show me where you spend your money and I'll tell you what they are."
(James W. Frick)
• "Formal education will make you a living; self-education will make you a fortune."
(Jim Rohn)

aureliano · ♣ El Capitán ♠

Best Careers for a Changing Job Landscape

It has only been a year since U.S. News published Best Careers 2007, yet much has changed. As a result, in Best Careers 2008, we've dropped five of the 25 profiled careers and added 11 new ones.

We've also added a new section on Ahead-of-the-Curve Careers. These 12 careers are too nascent or narrow to justify inclusion as a Best Career, but they are currently viable and promise to grow further in demand and importance to society. If you'd enjoy being on the cutting edge, they're certainly worth a look.

The factors that prompted changes in the list of Best Careers have implications for all career seekers. Here is a glance at some trends and a word on how to search for your best career:

Even college grads might want to consider blue-collar careers. Last year, because U.S. News readers tend to be college educated, we included only careers that typically require at least a bachelor's degree. This year we've added four careers that don't. Why? More and more students are graduating from college at the same time that employers are offshoring more professional jobs. So, many holders of a bachelor's degree are having trouble finding jobs that require college-graduate skills. Meanwhile, society has been telling high school students that college is the way, so there's an accelerating shortage of skilled people in jobs that don't require college. (Why else do you think you have to pay $100 an hour for a plumber?)

The four noncollege careers we added would be rewarding even to many college graduates, especially because college grads are likely to stand out against the competition. Those added careers are: biomedical equipment technician, firefighter, hairstylist/cosmetologist, and locksmith/security system technician. Other skilled blue-collar careers that scored well on our selection criteria: machinist (manufacturers report a shortage), nuclear plant technician (few people are entering the field, yet plans are on the books for building more plants), and electrician/electronics tech (above-average pay, and it's easier on the body than many other blue-collar careers). The takeaway: Many college graduates should consider skilled-trade careers.

Government is becoming an employer of choice. Corporations, fueled by pressures to compete globally, continue to get ever leaner. Nonprofits are increasingly strapped because of donor fatigue and continued scandals. Government, beneficiary of increased tax revenues in good times and often able to raise taxes in bad times, has the luxury of continually paying employees well, whether it's an economically sound practice or not. As the last bastion of job security, government offers good pay, ample sick days, holidays, vacation days, health insurance, and retirement benefits. With signs pointing to the Democrats taking control of the White House plus both houses of Congress, government hiring of nonmilitary personnel can be expected to increase. So, we have added government manager to the list of Best Careers.

Consider a career's resistance to offshoring. Well-publicized failures of offshoring may have led the public to think that companies are reducing its use. In fact, companies are quietly increasing offshoring efforts, even jobs previously considered to be better left in the United States: innovation and marketing research, for example. So, we have added offshore resistance to the criteria we used in selecting the Best Careers. Offshore resistance was one of the factors that led to adding these careers to this year's list: curriculum/training specialist, genetic counselor, ghostwriter, investment banker, mediator, and usability/user experience specialist.

Status may be the enemy of contentment. It seems the pursuit of status is greater than ever. People are flocking in greater numbers to such careers as medical research, medicine, and architecture. Yet recent surveys and other indicators of job satisfaction in those professions paint a less-than-rosy picture. So, we've added those three careers to our list of Most Overrated Careers, which includes other high-status but often unrewarding careers such as attorney and chef.

A list of careers is a great place to start. We've tried to identify careers likely to be enjoyable to many people and to write short profiles that will give you a real feel for what each career is like. But these profiles, like any, should be only a starting place for your career search. If a career's profile appeals, read the recommended website or book.

If the career still turns you on, visit a few people in the career to get a balanced view. Ask questions like: "Would you walk me through your career from the moment you chose it up to today? What's good and bad about the career that might not appear in print? In the end, what ends up being key to being good at this career? Why do people leave this career?"

Next, browse textbooks used in training for this career. Would you be good at that stuff? Finally, volunteer to work alongside someone in this career for at least a week. If you're still excited, you've probably found a career in which you'll be happy and successful. Congratulations.

U.S. News Contributing Editor Marty Nemko is a veteran career coach and host of "Work With Marty Nemko" on KALW, 91.7 FM in San Francisco. He is the author of Cool Careers for Dummies (fully revised third edition).

----------

Ahead-of-the-Curve Careers

Cutting-edge careers are often exciting, and they offer a strong job market. Alas, the cutting edge too often turns out to be the bleeding edge, so here are some careers that, while relatively new, are already viable and promise further growth. They emerge from six megatrends:

Growing healthcare demand. The already overtaxed U.S. healthcare system will be forced to take on more patients because of the many aging baby boomers, the influx of immigrants, and the millions of now uninsured Americans who would be covered under a national healthcare plan likely to be enacted in the next president's administration. Jobs should become more available in nearly all specialties, from nursing to coding, imaging to hospice. These healthcare careers are likely to be particularly rewarding. Health informatics specialists will, for example, develop expert systems to help doctors and nurses make evidence-based diagnoses and treatments. Hospitals, insurers, and patient families will hire patient advocates to navigate the labyrinthine and ever more parsimonious healthcare system. On the preventive side, people will move beyond personal trainers to wellness coaches, realizing that doing another 100 pushups won't help if they're smoking, boozing, and enduring more stress than a rat in an experiment.

The increasingly digitized world. Americans are doing more of their shopping on the Net. We obtain more of our entertainment digitally: Computer games are no longer just for teenage boys; billions are spent by people of all ages and both sexes. Increasingly, we get our information from online publications (just look where you're reading this), increasingly viewed on iPhones and BlackBerrys. An under-the-radar career that is core to the digital enterprise is data miner. Online customers provide enterprises with high-quality data on what to sell and for individualized marketing. Another star of the digitized world is simulation developer. The growing ubiquity of broadband connectivity is helping entertainment, education, and training to incorporate simulations of exciting, often dangerous experiences. For example, virtual patients allow medical students to diagnose and treat without risking a real patient's life. A new computer game, Spore, allows you to simulate creating a new planet, starting with the first microorganism.

Globalization, especially Asia's ascendancy. This should create great demand for business development specialists, helping U.S. companies create joint ventures with Chinese firms. Once those deals are made, offshoring managers are needed to oversee those collaborations as well as the growing number of offshored jobs. Quietly, companies are offshoring even work previously deemed too dependent on American culture to send elsewhere: innovation and market research, for example. Conversely, large numbers of people from impoverished countries are immigrating to the United States. So, immigration specialists of all types, from marketing to education to criminal justice, will be needed to attempt to accommodate the unprecedented in-migration.

The dawn of clinical genomics. Decades of basic research are finally starting to yield clinical implications. Just months ago, it cost $1 million to fully decode a person's genome. Now it's $300,000 and just $1,000 for a partial decoding, which, in itself, indicates whether a person is at increased risk of diabetes, cancer, heart disease, Alzheimer's, and 15 other conditions. Within a decade, we will probably understand which genes predispose humans to everything from depression to violence, early death to centenarian longevity, retardation to genius. Such discoveries will most likely give rise to ways to prevent or cure our dreaded predispositions and encourage those in which we'd delight. That, in turn, will bring about the reinvention of psychology, education, and, of course, medicine. In the meantime, the unsung heroes who will bring this true revolution to pass will include computational biologists and behavioral geneticists.

Environmentalism. Growing alarm about global warming is making environmentalism this generation's dominant initiative. The most influential panel on the topic, the Intergovernmental Panel on Climate Change, and the most visible advocate of curbing carbon emissions, former Vice President Al Gore, shared the 2007 Nobel Peace Prize for insisting that vigorous action is needed. The environmental wave is creating jobs in everything from sales to accounting in companies making green products, regulatory positions in government, and grant writing, fundraising, and litigation work in nonprofits. Among the more interesting green careers, thousands of engineers are working on such projects as hydrogen-powered cars, more efficient solar cells, and coal pollution sequestration systems. But those jobs require very high-level training and skills and are at risk of being offshored. In contrast, so-called green-collar consulting is offshore resistant and often requires less demanding training (for example, learning how to do green-building audits). It is a worthy option for people who love novelty and don't want to be stuck in the same office every day, for years. Many environmental consultants are peripatetic, solving new and different problems at constantly changing worksites—often blending office work with time in the great outdoors.

Terrorism. The expert consensus is that the United States will again fall victim to a major terrorist attack. Jobs in the antiterrorism field have already mushroomed since 9/11, but if another attack were to occur, even more jobs would surely be generated. Demand should particularly grow in such areas as computer security and Islamic-country intelligence, but their required skill sets are difficult to acquire. More accessible yet also likely to be in demand is emergency planning.

For more career options, consult U.S. News profiles of 31 Best Careers.

US News

Vlada_R · ///M

Philosophy of Money 2

"Give me the power to issue a nations money and I care not who makes the rules"
(Mayer Anselm Rothschild)

aureliano · ♣ El Capitán ♠

Analysts say more U.S. banks will fail

By Louise Story

Published: July 14, 2008

As home prices continue to decline and loan defaults mount, U.S. regulators are bracing for dozens of American banks to fail over the next year.

But after a large mortgage lender in California collapsed late Friday, Wall Street analysts began posing two crucial questions: Just how many banks might falter? And, more urgently, which one could be next?

The nation's banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

"Everybody is drawing up lists, trying to figure out who the next bank is, No. 1, and No. 2, how many of them are there," said Richard Bove, the banking analyst with Ladenburg Thalmann, who released a list of troubled banks over the weekend. "And No. 3, from the standpoint of Washington, how badly is it going to affect the economy?"

Many investors are on edge after federal regulators seized the California lender, IndyMac Bank, one of the nation's largest savings and loans, last week. With $32 billion in assets, IndyMac, a spinoff of the Countrywide Financial Corporation, was the biggest American lender to fail in more than two decades.

Now, as the Bush administration grapples with the crisis at the nation's two largest mortgage finance companies, Fannie Mae and Freddie Mac, a rush of earnings reports in the coming days and weeks from some of the nation's largest financial companies are likely to provide more gloomy reminders about the sorry state of the industry.

The future of Fannie Mae and Freddie Mac is vital to the banks, savings and loans and credit unions, which own $1.3 trillion of securities issued or guaranteed by the two mortgage companies. If the mortgage giants ever defaulted on those obligations, banks might be forced to raise billions of dollars in additional capital.

The large institutions set to report results this week, including Citigroup and Merrill Lynch, are in no danger of failing, but some are expected to report more multibillion-dollar write-offs.

But time may be running out for some small and midsize lenders. They vary in size and location, but their common woe is the collapsed real estate market and souring mortgage loans. Most of these banks are far smaller than the industry giants that have drawn so much scrutiny from regulators and investors.

Still, only six lenders have failed so far this year, including IndyMac. In 1994, the Federal Deposit Insurance Corporation listed 575 banks that it considered to be troubled. As of this spring, the agency was worried about just 90 banks. That number may go up in August, when the government releases an updated list.

"Failed banks are a lagging indicator, not a leading indicator," said William Isaac, who was chairman of the FDIC in the early 1980s and is now the chairman of the Secura Group, a finance consulting firm in Virginia. "So you will see more troubled, more failed banks this year."

And yet IndyMac, one of the nation's largest mortgage lenders, was not on the government's troubled bank list this spring — an indication that other troubled banks may be below the radar.

The FDIC has $53 billion set aside to reimburse consumers for deposits lost at failed banks. IndyMac will eat up $4 billion to $8 billion of that fund, the agency estimates, and that could force it to raise more money from the banks that it insures.

The agency does not disclose which banks it thinks are troubled. But analysts are circulating their own lists, and short sellers — investors who bet against stocks — are piling on. In recent weeks, the share prices of some regional banks, like the BankUnited Financial Corporation, in Florida, and the Downey Financial Corporation, in California, have stumbled hard amid concern about their financial health. A BankUnited spokeswoman said the lender had largely avoided risky subprime loans.

In his "Who Is Next?" report over the weekend, Bove listed the fraction of loans at banks that are nonperforming, meaning, for example, that the assets have been foreclosed on or that payments are 90 days past due. He came up with what he called a danger zone, which was a percentage above 5 percent. Seven banks fell in this category.

An important issue for the regional and community banks will be whether they have managed to sell their riskiest loans to Wall Street firms.

And the government may have fewer failures than in the past because private investment funds might buy some troubled lenders. Regulators are considering rule changes that would allow private equity firms to buy larger shares of banks, and several prominent investors, like Wilbur Ross, have raised funds to leap in.

Eric Dash contributed reporting.

International Herald Tribune

aureliano · ♣ El Capitán ♠

'The World As We Know It Is Going Down'

By Marc Pitzke in New York

Panic is the word of the hour on Wall Street. Now even Morgan Stanley is fighting for survival. The commercial bank Wachovia and China's Bank Citic are being discussed as possible rescuers. The crisis has led President Bush to cancel a trip.
The original plan actually called for humor. On Wednesday evening, actress Christy Carlson Romano was supposed to ring the closing bell on the floor of the New York Stock Exchange (NYSE) to mark her debut in the Broadway musical "Avenue Q." She plays two roles on stage -- a romantic kindergarten assistant, and a slutty nightclub singer.
After that day on the floor, the stock traders could have used a bit of comic relief. But it was not to be. Instead of Christy Carlson Romano, a NYSE employee in a joyless gray suit stood on the balcony and silently pressed a button. The bell rang and he disappeared. No waving, no clapping, none of the usual jubilation.
By the end of Wednesday, no one here was in the mood for laughter. The bad news on Wall Street was coming thick and fast. All the US indexes were crashing again after Tuesday's brief and deceptive breather. In its wild, rollercoaster ride, the Dow Jones lost about 450 points, which was almost as much as it lost on Monday, the most catastrophic day on US markets since 2001.
Investors were turning their back to the market in droves and fleeing to safer pastures. The price of gold broke its record for the highest increase in a one-day period.
Panic Is the Word of the Hour
Traders abandoned the NYSE temple visually defeated and immune to the TV crews waiting. The disastrous closing prices were flickering on the ticker above the NYSE entrance: American Express -8.4 percent; Citigroup -10.9 percent; JPMorgan Chase -12.2 percent. American icons, abused like stray dogs. Even Apple took a hit.
"I don't know what else to say," stammered one broker, who was consoling himself with white wine and beer along with some colleagues at an outdoor bar called Beckett's. Ties and jackets were off, but despite the evening breeze, you could still make out the thin film of sweat on his forehead. His words captured the speechlessness of an industry.
Things got worse after the markets closed. Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale. The Wall Street Journal reported that both Wells Fargo and the banking giant Citigroup were interested in taking over the battered American savings bank.
And then came the announcement that would dominate all of Thursday's market activities: Morgan Stanley -- the venerable Wall Street institution and one of the last two US investment banks left standing -- had lost massive amounts and was fighting for survival. Media reports were saying that it was even in talks about a possible bail-out or merger. Rumor had it that possible suitors might include Wachovia or China's Bank Citic.
China?
"Folks," economist Larry Kudlow, a host on the business channel CNBC begged his viewers that evening, "don't give up on this great country!"
End of an Era
In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are the only giants left standing. Despite tolerable quarterly results, even they have been hurt by mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared themselves for the end.
"Nothing will be like it was before," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going down."
Many are drawing comparisons with the Great Depression, the national trauma that has been the benchmark for everything since. "I think it has the chance to be the worst period of time since 1929," financing legend Donald Trump told CNN. And the Wall Street Journal seconds that opinion, giving one story the title: "Worst Crisis Since '30s, With No End Yet in Sight."
But what's really happening? Experts have so far been unable to agree on any conclusions. Is this the beginning of the end? Or is it just a painful, but normal cycle correcting the excesses of recent years? Does responsibility lie with the ratings agencies, which have been overvaluing financial institutions for a long time? Or did dubious short sellers manipulate stock prices -- after all, they were suspected of having caused the last stock market crisis in July.
The only thing that is certain is that the era of the unbridled free-market economy in the US has passed -- at least for now. The near nationalization of AIG, America's largest insurance company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering move. The sum is three times as high as the guarantee provided by the Federal Reserve when Bear Stearns was sold to JPMorgan Chase in March.
The most breathtaking aspect about this week's crisis, though, is that the life raft -- which Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie Mac -- is being handed out by a government whose party usually fights against any form of government intervention. The policy is anchored in its party platform.
"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."
Bush Cancels Trip
The situation appears to be so serious that George W. Bush cancelled two domestic trips he had planned for Thursday on short notice. Instead, the president will remain in Washington to discuss the "serious challenges confronting US financial markets." He said the president remained focused on "taking action to stabilize and strengthen the markets." Bush had originally planned to travel to events in Florida and Alabama.

So far, the US presidential candidates have made few helpful remarks about the crisis other than the usual slogans. Both are vaguely calling for "regulation" and "reform" -- bland catchphrases almost universally welcomed with applause.
Republican Party presidential candidate John McCain had the most to say. On Monday, he said "the foundation of our economy" was "strong," adding that he opposed a government-led bailout of US insurer AIG. But now he's promising further government steps "to prevent the kind of wild speculation that can put our markets at risk." McCain's explanation for the current crisis: "unbridled corruption and greed."
But Democratic presidential hopeful Barack Obama didn't move past superficialities, either. "We're Americans. We've met tough challenges before and we can again."
What else are they supposed to say? After all, US presidents have very little influence on stockmarkets. And Wall Street is expecting the status quo for the next president. On Wednesday an almost palpable mix of tension and melancholy filled the air above New York's Financial District. The beloved trader bar Bull Run was half empty, and many tables were free at fine-dining establishments like Cipriani, Mangia and Bobby Van's, which are normally booked days in advance.
At the side entrance to Goldman Sachs on Pearl Street, limo chauffeurs sat waiting for their customers, still above in their office towers cowering over the accounts. "If they go under," said Rashid Amal, who works as a chauffeur for a firm called Excelsior, "then I will soon be out of a job, too."

Der Spiegel

anchi22 · **•• 20:01 ••**

Banks need more capital

GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis.

For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”

Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily (see chart). It is not a stretch to infer that these heightened levels will be the basis of a new regulatory system.

The three-month LIBOR/Overnight Index Swap (OIS) spread, a measure of market perceptions of potential bank insolvency and thus of extra capital needs, rose from a long-standing ten basis points in the summer of 2007 to 90 points by that autumn. Though elevated, the LIBOR/OIS spread appeared range-bound for about a year up to mid-September 2008. The Lehman default, however, drove LIBOR/OIS up markedly. It reached a riveting 364 basis points on October 10th.

The passage by Congress of the $700 billion Troubled Assets Relief Programme (TARP) on October 3rd eased, but did not erase, the post-Lehman surge in LIBOR/OIS. The spread apparently stalled in mid-November and remains worryingly high.

How much extra capital, both private and sovereign, will investors require of banks and other intermediaries to conclude that they are not at significant risk in holding financial institutions’ deposits or debt, a precondition to solving the crisis?

The insertion, last month, of $250 billion of equity into American banks through TARP (a two-percentage-point addition to capital-asset ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming modest further write-offs, simple linear extrapolation would suggest that another $250 billion would bring the spread back to near its pre-crisis norm. This arithmetic would imply that investors now require 14% capital rather than the 10% of mid-2006. Such linear calculations, of course, can only be very rough approximations. But recent data do suggest that, while helpful, the Treasury’s $250 billion goes only partway towards the levels required to support renewed lending.

Government credit has in effect acted as counterparty to a large segment of the financial intermediary system. But for reasons that go beyond the scope of this note, I strongly believe that the use of government credit must be temporary. What, then, will be the source of the new private capital that allows sovereign lending to be withdrawn? Eventually, the most credible source is a partial restoration of the $30 trillion of global stockmarket value wiped out this year, which would enable banks to raise the needed equity. Markets are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind). Human nature being what it is, we can count on a market reversal, hopefully, within six months to a year.

Though capital gains cannot finance physical investment, they can replenish balance-sheets. This can best be seen in the context of the consolidated balance-sheet of the world economy. All debt and derivative claims are offset in global accounting consolidation, but capital is not. This leaves the market value of the world’s real physical and intellectual assets reflected as capital. Obviously, higher global stock prices will enlarge the pool of equity that can facilitate the recapitalisation of financial institutions. Lower stock prices can impede the process. A higher level of equity, of course, makes it easier to issue debt.

Another critical price for the return of global financial stability is that of American homes. Those prices are likely to stabilise next year and with them the levels of home equity—the ultimate collateral for global holdings of American mortgage-backed securities, some toxic. Home-price stabilisation will help clarify the market value of financial institutions’ assets and therefore more closely equate the size of their book capital with the realities of market pricing. That should help stabilise their stock prices. The eventual partial recovery of global equities, as fear inevitably dissipates, should do the rest. Temporary public capital injections into banks would facilitate this process and arguably provide far more benefit per dollar than conventional fiscal stimulus.

Even before the market linkages among banks, other financial institutions and non-financial businesses are fully re-established, we will need to start unwinding the massive sovereign credit and guarantees put in place during the crisis, now estimated at $7 trillion. The economics of such a course are fairly clear. The politics of draining off that much credit support in a timely way is quite another matter.

economist.com

anchi22 · **•• 20:01 ••**

Bank stress tests: Not open to debate

Regulators shouldn't have to invent justifications for regulating properly. That gives banks too much power.

Informed debate is a crucial part of public policy development. But the behind the scenes tug-of-war between banks and the U.S. government over the results of their recent stress tests strains the exercise's already tenuous credibility. It also shows that banks have become too powerful.

How so? First, banks and their overseers run stress tests all the time, on individual products, divisions and the institutions as a whole. Without them, it would be very difficult to manage risk or allocate capital among business lines.

The current crisis proved these tests were inadequate - or in some cases, ignored. But that's largely because of management incentives to take outsized risks, and the fact that the scenarios used in the tests were not sufficiently grim.

So it's curious that regulators have put so much stock in the tests they unveiled in February. The release of their results has been delayed until next week, while banks ask for clemency. Since the results will determine which institutions will be forced to raise private capital or take further government infusions, the stakes are high.

But like the banks' earlier and insufficient stress tests, the government's worst-case scenarios aren't all that far-fetched. They also use banks' own estimates - meaning unscrupulous managers could tweak them to get a better grade. And bankers say they'll produce very little information that regulators don't already have.

Because of this, bank risk managers (admittedly, not the most credible group these days) tend to view these tests as a public relations stunt that regulators will use to force their institutions to toe Uncle Sam's line.

That, in itself, is worrying. Regulators shouldn't have to invent justifications for regulating properly. The right response by a bank when its overseer says jump is "how high?"

That regulators are wrangling with banks over the results of these tests shows that they are not confident in their ability to understand the institutions. That gives banks too much power.

It would be better for watchdogs to demand that they reduce their complexity to comprehensible levels. Otherwise they'll retain the upper hand - and no amount of testing will be sufficient to diagnose their problems.

By Dwight Cass, breakingviews.com

anchi22 · **•• 20:01 ••**

Manufacturing rebound in the works

Survey of purchasing managers climbs more than expected in 4th straight gain, but continues at contraction levels.

A key measure of manufacturing activity rose for the fourth straight month in April, suggesting the sector may be stabilizing even though the indicator has been at the contraction level for 15 months in a row, a purchasing management group said Friday.

The Tempe, Ariz.-based Institute for Supply Management said its manufacturing index rose to a reading of 40.1 in April from 36.3 in March. A reading below 50 indicates manufacturing activity is shrinking.

Economists had forecast a reading of 38.4, according to consensus estimates gathered by Briefing.com.

"The decline in the manufacturing sector continues to moderate," said Norbert Ore, chair of the ISM's survey committee, in a statement. "This is definitely a good start for the second quarter."

The index, which fell to an all-time low in December, has risen every month in 2009 and is gradually approaching 41, which is the level typically associated with a recession. The index has been below 41 since October.

John Silvia, chief economist at Wachovia Economics Group said the index "suggests we have come off the bottom but are still in recession."

The employment index, which rose 6.3 points to 34.4, remained below breakeven 50, which signals further job losses in manufacturing, according to Silvia.

"Manufacturers will continue to cut jobs as a reflection of the current recession and lower growth expectations for future consumer demand," Silvia wrote in a research report.

While most of the components that make up the index remained in recession territory in April, the report contained signs that manufacturing activity is stabilizing.

The index also showed that new orders and production increased in April compared with March.

Manufacturers reported that customer inventories are "too low" for the first time since July 2008, according to the ISM.

By Ben Rooney, CNNMoney.com