Perspectives on the global economic meltdown

Abhijeet
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Re: Perspectives on the global economic meltdown

Postby Abhijeet » 04 Jan 2010 17:50

I've heard this as well. In previous eras, being fat was a sign of being prosperous - it meant you didn't have to perform manual labour. Today, at least in the US, better off people will go to great lengths to maintain their weight. Poor people - who have no time for such niceties - will eat every night at the neighborhood McDonalds, becoming unhealthily fat in the process.

This is the first time in human history in which this is true - primarily due to the fact that processed calories are actually cheaper than unprocessed calories. I remember reading about some study done at a supermarket, comparing the "dollars per calorie" for a variety of foods. Inevitably, highly processed foods like junk food had much lower dollars per calorie than unprocessed or fresh food.

The disclaimer is that this applies only to developed countries with efficient supply chains and manufacturing processes. In India, the old rule that the poor are thin still applies. Weak, bony body structures are the norm (perhaps partly due to genetic reasons, but largely because of inadequate and unbalanced nutrition).

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Re: Perspectives on the global economic meltdown

Postby Dileep » 04 Jan 2010 20:58

Exactly. I was pointing at the varying definition of being poor.

Massa poor = someone who can't afford the fad food and gym membership.
Desi poor = someone who don't have anything to eat.

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Re: Perspectives on the global economic meltdown

Postby vera_k » 04 Jan 2010 21:07

Tanaji wrote:There is an argument that the obesity is due to being poor. The poor cant afford stuff like meat and vegetables, hence are reduced to eating highly processed food either from the grocery store or from the fast food chains. This food is empty calories and not nutritive and hence they get obesity.

Not sure if this is scientifically right.


It isn't settled yet, but there's definitely talk of a link between the two. The healthier food definitely costs more and the better off seem to go for the Organic stuff.

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Re: Perspectives on the global economic meltdown

Postby ldev » 05 Jan 2010 01:29

In The Year 3000: Predicting The Liability Side Of The Fed's Balance Sheet

And the world is relying on this US consumer to pull it out of recession.

So here is our take. As we pointed out a few days ago the Freddie 30 year fixed has started to rumble, and hit a 4 month high of 5.14%. Of course, actual end-consumer rates are markedly higher. Why is this dangerous? While a topic of a future post, interest rates are the biggest household net worth killer, much more so than the stock market. For instance, the lifetime payments of a $100,000 30 year fixed mortgage (with standard terms) comes down to $193k at a 5% rate... and $316k at 10%! Netting out, this implies a nearly 40% loss in the worth of the home to compensate merely for the greater interest outflows, all else equal. (the same lifetime payments for a $100k mortgage at 5% are about equal to a $60k mortgage at 10%). Of course, this analysis is simplistic and avoids discounting, but optically this is precisely what the biggest threat from higher interest rates is to the household balance sheet. And as the bulk of American net worth is not in the stock market, but merely in their home, the adverse impact from a rise in interest rates by 5, 4 or even just 3% will undo all the hard fought 2009 stock market gains (not to mention what an additional 40% loss in home values will do to bank balance sheets).
So here is our take. As we pointed out a few days ago the Freddie 30 year fixed has started to rumble, and hit a 4 month high of 5.14%. Of course, actual end-consumer rates are markedly higher. Why is this dangerous? While a topic of a future post, interest rates are the biggest household net worth killer, much more so than the stock market. For instance, the lifetime payments of a $100,000 30 year fixed mortgage (with standard terms) comes down to $193k at a 5% rate... and $316k at 10%! Netting out, this implies a nearly 40% loss in the worth of the home to compensate merely for the greater interest outflows, all else equal. (the same lifetime payments for a $100k mortgage at 5% are about equal to a $60k mortgage at 10%). Of course, this analysis is simplistic and avoids discounting, but optically this is precisely what the biggest threat from higher interest rates is to the household balance sheet. And as the bulk of American net worth is not in the stock market, but merely in their home, the adverse impact from a rise in interest rates by 5, 4 or even just 3% will undo all the hard fought 2009 stock market gains (not to mention what an additional 40% loss in home values will do to bank balance sheets).

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Re: Perspectives on the global economic meltdown

Postby svinayak » 05 Jan 2010 02:10

http://www.zerohedge.com/article/us-gov ... ing-stocks
Given that Roubini was previously a senior adviser to Tim Geithner, he probably knows what he's talking about.

Now, Charles Biderman, CEO of TrimTabs, argues that the government may, in fact, have been buying stocks to prop up the stock market. Given that 25% of the top 50 hedge funds in the world use TrimTabs' research for market timing, it is a credible source.

Specifically, Biderman writes:

As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices.

For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”

In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.”

In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”

Why the Stock Market can get lost .... great article
in December 2008, Nouriel Roubini wrote the month before that the government might buy U.S. stocks:

The Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Some of such policy actions seem extreme but they were in the playbook that Governor Bernanke described in his 2002 speech on how to avoid deflation.

Given that Roubini was previously a senior adviser to Tim Geithner, he probably knows what he's talking about.

Now, Charles Biderman, CEO of TrimTabs, argues that the government may, in fact, have been buying stocks to prop up the stock market. Given that 25% of the top 50 hedge funds in the world use TrimTabs' research for market timing, it is a credible source.

Specifically, Biderman writes:


As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices.

For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”

In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.”

In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”
Mike Whitney - in commenting on Biderman's essay - adds another juicy quote:

Consider the comments of former Clinton advisor George Stephanopoulos who verified the existence of the PPT in an appearance on Good Morning America on Sept 17, 2000. He said:

"What I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets . . . perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally . . . I don't know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall."

Biderman continues:

This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. For example, Tyler Durden of ZeroHedge has pointed out that virtually all of the market’s upside since mid-September has come from after-hours S&P 500 futures activity.

If we were involved in a scheme to manipulate the stock market, we would want to keep it in place until after the “wealth effect” put a floor under the economy of, say, three quarters of positive GDP growth. Assuming the economy were performing better, then ending the support for stock prices would be justified because a stock market decline would not be so painful.
Whitney summarizes another of Biderman's arguments:

"We cannot identify the source of the new money that pushed stock prices up so far so fast. For the most part, the money did not from the traditional players that provided money in the past."

Huh? So, this vast infusion of liquidity--which helped the banks to avoid painful deleveraging--did not come from the usual suspects?
That's right. According to Biderman, the money did not come from (a) companies ("which were a huge net seller") (b) retail investor funds, (c) retail investors, (d) foreign investors ..., (e) pension funds .

Has it happened? Has the government or it's primary dealers really purchased stocks?

http://www.roubini.com/index.php

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Re: Perspectives on the global economic meltdown

Postby svinayak » 05 Jan 2010 02:18

MONDAY, JANUARY 4, 2010

Nouriel Roubini There Is a Global Deflationary Risk
Central bankers around the world are pulling out all the stops in order to combat a severe economic downturn that threatens to get even worse."There is a global deflationary risk," says Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor. "That's what central bankers are worried about."In Europe today, the ECB and Bank of England slashed rates by greater than expected levels. Meanwhile, the Fed and Bank of Japan are taking "unorthodox actions" to pump liquidity into their economies. Both central banks are engaged in "quantitative easing," meaning rates are effectively zero regardless of what the official policy is."The Fed is trying to preemptively avoid a deflation trap [which] is very dangerous," Roubini says. "Whether they'll be successful or not, I don't know."The problem, he says, is there's going to be a "severe recession" both in the U.S. and globally in 2009. That means falling demand for goods and increased slack in the labor markets. That will put further downward pressure on prices and raise the risk of outright deflation, which is defined as: A persistent decline in general price levels, typically accompanied by a severe contraction in employment and economic output."It's hard to undo the structural factor" of falling demand meeting a supply glut of goods and services, he says, recommending the following policy actions to try and stem the deflationary tide:

A "huge" fiscal stimulus package: $500-$700B.
Recapitalize the banks faster, i.e., get TARP money distributed sooner.
Rather than focusing on mortgage rates, reduce the face value of debt owed by "insolvent homeowners" in order for them to be able to spend again and avoid a "tsunami of foreclosures." via youtube


http://www.youtube.com/watch?v=YR4oKNHpaJg

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Re: Perspectives on the global economic meltdown

Postby svinayak » 05 Jan 2010 02:21

http://www.huffingtonpost.com/stewart-a ... 09326.html

Stewart AcuffDirector of Organizing, AFL-CIO
Posted: January 2, 2010 10:31 AM
BIOBecome a Fan Get Email AlertsBloggers' Index
A Decade of Disaster for Workers

You have to hope that Lawrence Summers and the economic team at the White House are reading the Post.
You cannot grow the economy from the top. You must have broadly shared prosperity.

As the Post put it: "Capital was funneled to build mini-mansions in the Sun Belt, many which now sit empty, rather than toward industrial machines or other business investment that might generate economic output and jobs for years to come."

The prescription for a policy of broadly shared prosperity is clear:

Pass the Employee Free Choice Act to allow workers to freely form unions and bargain for a fair and greater share of the wealth they create and the productivity they generate.
Reform health care. Take the system from the grip of insurance companies, create a large public plan to make sure everyone is covered and to compete with the insurance companies--and do not tax the benefits of working families. Force every employer to provide health care for their workers.
Invest now, immediately in sustainable energy--wind farms, solar farms and small scale solar energy generation. Make sure all elements of new energy generation are produced here with wages that can sustain middle class lifestyles. No more impoverishing our own people. That means wind turbines built here, not in China, erected here by union operations. Power lines and a new electricity grid erected by members of the Utility Workers Union.
Create a real industrial policy and investment incentives and re-think trade policy to re-create an American manufacturing base so we get back to creating wealth instead of borrowing it.

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Re: Perspectives on the global economic meltdown

Postby svinayak » 05 Jan 2010 02:24

DECEMBER 30, 2009, 7:36 P.M. ET
Why Japan Needs a 'Hatobama'
Tokyo's new leader faces a rough 2010 without some pragmatic adjustments.
By IAN BREMMER AND NOURIEL ROUBINI
http://online.wsj.com/article/SB1000142 ... 66698.html

Like President Barack Obama, Japan's new Prime Minister Yukio Hatoyama made lots of extravagant economic and foreign policy promises on the road to victory earlier this year. Mr. Obama has shown flexibility and the willingness to compromise. Will Mr. Hatoyama do the same? If not, Japan will be in for a rough ride in 2010.

In some ways, Mr. Hatoyama's victory was even more historic than the American election. His Democratic Party of Japan (DPJ) ousted the Liberal Democratic Party (LDP) that had held power virtually without interruption for more than five decades. Like Mr. Obama, he's had to come to grips with enormous immediate challenges, beginning with the need to kick start a stalled economy. Japan's public debt is approaching 200% of gross domestic product—by far the largest debt-to-GDP ratio in the industrialized world.

Mr. Hatoyama's promises were ambitious, and sometimes even contradictory. Recognizing Japan's financial limitations, he and his party pledged to slash wasteful state spending. Yet he has also called for "an economy of the people" that includes considerable state subsidies, and his government put forward a record high initial budget request of 95 trillion yen.

The government has now moved ahead with a new bond issuance, with a promise to cap the new debt at about 44 trillion yen. Mr. Hatoyama has announced plans to halt the privatization of Japan Post bank, an enormous enterprise with more than $3 trillion in assets that helps finance state spending. And he has reiterated a pledge that Japan will reduce carbon emissions 25% below 1990 levels by 2020, a promise that will soon prove too costly to keep.


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Re: Perspectives on the global economic meltdown

Postby svinayak » 05 Jan 2010 02:39

5 Reasons Gold Is Going to Rise: A Response to Nouriel Roubini 80 comments
December 14, 2009 |
The U.S. Senate passed a $1.1 trillion spending bill this Sunday, December 13th. Five other appropriation bills for fiscal year 2010 were previously passed earlier this year and one more still remains, a $626 billion defense appropriation. The defense appropriation bill will contain a clause to raise the national debt ceiling. The national debt ceiling is currently $12.1 trillion and the U.S. is tapped out once again. As of now, it looks like Congress will raise the debt ceiling by $1.8 trillion to $13.9 trillion. The last increase was only $0.8 trillion, but that would only last months at this point. Even with a $1.8 trillion increase, the U.S. Congress will be fortunate if it doesn't have to raise the ceiling again before 2010 runs out.

The increase in the U.S. national debt is now so great that the monthly rise can be as high as the entire debt load in the 1960s (before the U.S. went off the gold standard). The U.S. is also by no means unique. The spending spree taking place is global and includes all major economies. In the midst of this spending and money printing orgy, there are a number of economists who claim it will not hurt the U.S. dollar and will be a negative for gold. In order to come to this conclusion, they have had to ignore a greater than 2000 year history that indicates otherwise. The Romans engaged in long-term debasement of their coinage and paid for it with out of control inflation. Since then, the use of paper money has made currency debasement much easier and quicker. Nowadays, central banks can create any amount of currency they want through a simple computer entry. What they can't create out of thin air is actual money.

History is littered with fiat currencies (currencies not backed by hard assets) that have failed. There is no fiat currency that has survived over time. There is also no case of currency creation that significantly exceeds economic growth that hasn't led to inflation. This idea is by no means new. Copernicus the famous astronomer was one of the first to articulate it in the 1500s. It is based on simple arithmetic. If you double the amount of currency in circulation, but the economy doesn't change in size, goods and services will approximately double in price. This does not happen instantly, however. There is a delay from when a government increases money supply and when consumer prices rise. In the 1970s, money supply in the U.S. increased by the largest amount in 1971, inflation peaked 9 years later, as did the price of gold. So don't expect to see the full impact of today's monetary policy actions until late in the next decade.

Economist Nouriel Roubini has just released an article on why the price of gold will fall. It should be kept in mind that Professor Roubini is an economist and not a professional investor. Unlike myself and a number of other bloggers, he does not publish when he buys and sells assets, but tends to make broad sweeping generalized comments. This approach is rarely helpful to investors who are trying to make money in the market and usually works to accomplish the opposite
http://seekingalpha.com/article/178111- ... el-roubini

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Re: Perspectives on the global economic meltdown

Postby svinayak » 05 Jan 2010 02:43

Where is the world economy going?

Is the worst post-war economic downturn coming to an end? Are the green shoots of recovery really visible, as many politician would have us believe? Opinion is divided, with some commentators counting down to the next crisis. What is clear, is that this is a time of acute economic instability. Any growth is likely to be slow, with governments and big business out to offload the costs onto working-class people. LYNN WALSH reports.

WORLD CAPITALISM HAS been shaken to its foundations by the economic crisis that has unfolded since the end of 2007. Nobody disputes that it is the worst crisis since the 1930s. "The downturn has been global in scope", comments the Organisation for Co-operation and Economic Development (OECD), a grouping of 30 advanced capitalist countries, "even though its financial epicentre was in the OECD area. Indeed, trade and financial linkages prompted a synchronised collapse in activity and trade after financial markets froze in the second half of 2008". (OECD press release, 24 June 2009)

World trade, the engine of globalisation, collapsed with a 16% fall expected for 2009. The cumulative output losses since the beginning of 2008 have been severe: minus 5.14% for OECD-Europe, minus 8.4% for Japan, minus 3.55% for the US, with an OECD average of minus 4.7%. In Britain, the cumulative loss has been minus 5.54%, and the recession may continue longer than in most of the other advanced capitalist countries. Ireland and Iceland have suffered cumulative losses of about minus 9% of output, while Turkey has fallen by minus 13.92%. (Source: Office for National Statistics, Economic and Labour Market Review, October 2009) There have been even deeper falls in some of the central and east European countries: 18.4% in Lithuania, 16% in Latvia, 14% in Ukraine, and 13.2% in Estonia.

The economic crisis is also a serious political blow to capitalism, especially to the prestige of the advanced capitalist countries. "The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe". (Roger Altman, The Great Crash 2008, Foreign Affairs, Jan/Feb 2009)
http://www.socialismtoday.org/134/world.html


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Re: Perspectives on the global economic meltdown

Postby svinayak » 05 Jan 2010 02:47

03
01/10
THE DECADE THAT WAS (PART 3): THE END OF AMERICAN CAPITALISM
21:22 by Administrator. Filed under: Whatever
By John Galt

January 3, 2010

As we reflect on an era of utter amazement with the nonsense that has spewed forth since the creation of the .com bubble to the .realty bubble and now the .gov bubble, the past decade reeks of desperation and meddling, two things which make for neither a strong economic base nor promising future. The Bubblemedia (CNBC, FBN, Bloomberg) continue to do all they can to convince the now somewhat financially obliterated sheeple to drain whatever remaining holdings they have and reinvest into the new bull market but the instability created by a decade of lying, theft, Ponzi schemes and a government, both Republican controlled and Democrat, willing to violate the rule of law and Constitutionally guaranteed contract law leaves little reason for anyone to trust the markets or our politicians with what little monies are still in the retirement accounts of the American investor.

The flight to safety started with the collapse of the tech bubble accelerated during the decade and then under the foolish policies of Sir Alan Greenspan’s easy money program the savings of millions of retirees were destroyed in the easy money frenzy which created the real estate fiasco we are now enduring. To add to investor’s and saver’s confidence what do we do next? Well good old Hammerin’ Hank Paulson the Secretary of the Treasury in 2008 proclaims that if we don’t give him a blank check for $700 billion that cats would sleep with dogs, Red Dawn would go from a movie to reality and that children and cockroaches would fight over bits of food on the floor. The ever responsible (snicker) Legislative branch turned down this blank check proposition and one page memo turned legislation from the Treasury Department and of course we all remember what happened next:
So after the threat of martial law and everything else did not work, then Hank dialed his private line to 1-800-GOLD-MAN and they gave the Dow the Goldman Sachs massage. After that brutal sell off and complete and total panic hitting as the already shattered 401K’s now became as viable as Zimbabwe dollars, the Congress agreed to slop everything their piggish snouts could grab on to the bill and passed the TARP program to get the Treasury to start buying all the garbage Mortgage Backed Securities and bail out the banksters.

Whew, relief, right?

Uh, no.

No sooner than Paulson going out and creating a jobs program for millionaires by giving them control over hundreds of millions of taxpayer dollars in the TARP program, he turns around and does what? On November 12, 2008 he changed the program from one of taking bad assets off the books of the nation’s banks, probably because $700 billion was about 1/100th of what he needed to do it right and decided instead to turn the United States Government into a partner with Bubblevision, the Bubbleconomists, the Bubblefed and created the Bubblegovernment. The government began buying shares in banks which of course evolved into buying auto companies which of course evolved into buying into insurance companies, REITs, auto finance, credit card companies, etc. and then decided to give anyone who could contribute more than $100,000 to any political party a bank charter so they could belly up to the taxpayer trough and steal money to invest in their arbitrage laden trading systems so if they gambled and lost the taxpayers eat the mistakes and not the banks.

Great plan. We just destroyed American Capitalism in order to preserve the jobs of a bunch of incompetent jerks who destroyed the savings and retirements for millions of Americans, either via open Ponzi schemes (Madoff, etc.) or using the largest one of them all located inside the Federal Reserve banking system. American Capitalism as we grew up, knew it and loved died in the decade of the 2000’s and that is a mark on history that can and will never be denied. We are now an integrated quasi-socialist system where the rules are changed to accommodate the political class or their cronies, where foreign nations who own our debt determine the future of our foreign and in some cases domestic policy, and the ideas of working, saving and retiring are now foreign concepts for the majority of the American middle class as we continue to force the idea of an internationalized economic system on to the citizens of this country instead of exporting the idea of true laissez-faire American entrepreneurial upon the rest of the world.

Then we had President Bush’s insane commentary of:

“I’ve abandoned free-market principles to save the free-market system,” Bush told CNN television, saying he had made the decision “to make sure the economy doesn’t collapse.”

That statement is indicative of just how far we have fallen as a nation. The nanny state, a centralized planned and controlled economy has fallen across the borders of America much like a Chinese Iron Curtain where the inhabitants are now enslaved to making debt service payments to our overseas masters and those that have political access or egress can control the ebb and flow of the bread crumbs remaining within the economy. This is not capitalism in any way, shape or form.

Face it gang, this decade begins as the era of American socialism and I do not care what one lard ass “economist” on CNBC or otherwise says, a total collapse and rebuilding would have been far more beneficial to our future than an integrated government hybrid socialist system where centralized planning fails as it inevitably always does.

The Government bubble.

Unless we begin to withdraw the United States government and its socialistic policy ideas and meddling from our economic system, we can officially declare the concept of American Capitalism dead and buried and prepare for a hyperinflationary fiscally sponsored economic expansion with over 60% of our society dependent on or working for the government for their survival.

http://johngaltfla.com/blog3/2010/01/03 ... apitalism/


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Re: Perspectives on the global economic meltdown

Postby Sanjay M » 05 Jan 2010 06:01

Acharya wrote:
You cannot grow the economy from the top. You must have broadly shared prosperity.


It sounds like you're quoting the language of "Command Economy"

This "commanding heights" crap is worthless, whether the redistributionism is propagated from the top, or whether it's propagated from op-ed pages.

Certainly broadly shared prosperity is needed, but that just means that broadly shared ethics of personal responsibility must be put into place.


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Re: Perspectives on the global economic meltdown

Postby Neshant » 05 Jan 2010 20:08

The saving grace is that they are a white country. So they will get away with it without losing any limbs. God forbid if an African country refused to pay its debts.

---

Icelandic president angers Britain, Dutch over bank bill

http://ca.news.yahoo.com/s/afp/100105/w ... cs_banking

REYKJAVIK (AFP) - Iceland's president said on Tuesday he would not sign an unpopular bill to compensate Britain and the Netherlands over the failure of Icesave bank, threatening the survival of the government and triggering anger in London and The Hague.

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Re: Perspectives on the global economic meltdown

Postby g.sarkar » 05 Jan 2010 23:29

Did anyone post this? Guys, things are looking very bad over here:

http://www.newgeography.com/content/001 ... a-defaults

Gautam


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Re: Perspectives on the global economic meltdown

Postby Hari Seldon » 06 Jan 2010 10:44

Who was it that said that a picture == 1000 words?
Pls find below the 10 year returns of some favorite investment classes only.
click here for enlarged version
Image

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Re: Perspectives on the global economic meltdown

Postby svinayak » 06 Jan 2010 11:13

The inside story of America’s economic ‘firefighters’
Andrew Ross Sorkin entertainingly describes the dithering and panic at the heart of the US financial system as the 2008 banking crisis unfolded, but is too generous to those who allowed it to happen in the first place.
by Sean Collins


‘Paulson, who had been living on barely three hours of sleep a night for a week, was beginning to feel nauseated. Watching the financial industry crumble in front of his eyes – the world he inhabited his entire career – was getting to him. For a moment, he felt light-headed. From outside his office, his staff could hear him vomit.’


Andrew Ross Sorkin’s Too Big to Fail provides a richly detailed, behind-the-scenes account of the unravelling of the financial crisis in the US in 2008. Puking, swearing, infighting – it’s all here. Sorkin, a New York Times journalist, gained remarkable inside access to the key players. His book reads like a gripping novel, and he manages to keep the dramatic tension high even though we know the outcome.

Too Big to Fail focuses on the US government’s response to the crisis, from the aftermath of the Bear Stearns rescue in March 2008 to capital infusions directly into banks in October 2008. The central character is the treasury secretary, Henry Paulson, with support from Federal Reserve chairman Ben Bernanke and New York Federal Reserve head Timothy Geithner (who is now treasury secretary under Obama). Sorkin also draws detailed portraits of the leading bankers, especially the gloomy head of Lehman Brothers, Dick Fuld, who becomes something of the villain of the piece.

Sorkin’s tale is useful because it provides raw material for understanding how American government officials sought to respond to this extraordinary crisis. A number of people have credited the US authorities with taking decisive action to prevent the system from collapsing. In particular, Paulson and Bernanke’s establishment of the $700billion Troubled Asset Relief Program (TARP) is often cited as a creative and daring move to stabilise the financial sphere. But Sorkin’s tale reveals the opposite: a disoriented and panicked group of regulators whose actions were dithering and indecisive.

Paulson, Bernanke and Geithner changed tack frequently – even from one day to the next – leading to confusion in the markets and compounding the problems of the crisis. The government’s support for Bear Stearns – the Federal Reserve provided a huge emergency loan and, with the Treasury, arranged its fire sale to JP Morgan Chase – in March 2008 suggested that it believed that investment banks that were big and interconnected should not fail, lest their collapse should wreak havoc on the wider economy. The Bear Stearns deal would set a precedent that they could not escape: throughout the crisis officials found it hard to arrange for stronger banks to acquire weaker ones, as the potential buyers would all hold out for a ‘Jamie deal’ - referring to the generous terms provided to JP Morgan Chase CEO Jamie Dimon when he bought Bear Stearns for a song.

“With markets freezing up in response to the Lehman collapse, Paulson et al’s principled stand lasted 48 hours”

In early September 2008, US officials took over the teetering Fannie Mae and Freddie Mac, the quasi-government mortgage agencies, once again suggesting that the government would step in. However, in mid-September they reversed course and let investment bank Lehman Brothers go to the wall, arguing that they did not want to create ‘moral hazard’ (whereby companies could make bad decisions and not pay the consequences). With markets freezing up in response, Paulson et al’s principled stand lasted 48 hours, before they announced that the government was taking a 79.9 per cent stake in the insurance giant American International Group (AIG).

As Sorkin writes, this vacillation had negative consequences: ‘The confidence that had supported the financial system had been upended. No one knew the rules of engagement anymore. “They pretended they were drawing a line in the sand with Lehman Brothers, but now two days later they’re doing another bailout”, Nouriel Roubini, a professor at New York University’s Stern School of Business, complained that morning.’

After the AIG takeover, the officials decided that they needed to take a more systemic approach, and thus created the TARP. But even at this point there was disarray. Sorkin reveals that the $700billion requested for TARP was a made-up number, with no support in analysis. A trillion sounded too high; $700 billion was the most they thought they could get approved by Congress. When presented to legislators, TARP was a plan to buy so-called ‘toxic’ assets from the banks. But then Paulson and crew changed their minds, and decided to inject capital into banks: ‘Of course, what none of the Congress members or the public knew was that TARP was being completely re-thought within Treasury, as [administrators] began developing plans to use a big chunk of the $700billion to invest directly into individual banks.’

Sorkin also shows how fear was a motivating factor. On one hand, the government officials were uncertain, and feared the worst; Paulson said ‘this is an economic 9/11’. On the other, they cynically used the fear of the unknown consequences as a stick to beat Congress. As one of Paulson’s advisers told him before he met with congressmen to discuss the TARP proposal: ‘This is only going to work if you scare the shit out of them.’ And rather than spell out the specifics of the financial situation, Paulson, according to Sorkin, followed that ‘scare the shit’ line, repeating more than once to representatives: ‘I don’t want to think about what will happen if we don’t do this.’

Sorkin also depicts US officials as myopically parochial, nearly oblivious to the international aspects of the crisis. The Treasury and the Fed thought they had arranged the sale of Lehman to Barclays Capital, only to find at the last minute that neither Callum McCarthy, the head of the UK Financial Services Authority, nor Alistair Darling, the UK chancellor of the exchequer, would approve the deal, saying they did not want to ‘import’ the US ‘cancer’. The jilted Paulson told a room full of American bank CEOs that the British had ‘****** us’, but he and Geithner only had themselves to blame.

The real problem, however, was not day-to-day tactical errors, but a lack of strategic vision. At one point, Fed chairman Bernanke is quoted as saying: ‘We’re working on a number of initiatives. We’re just trying to stay ahead of this thing.’ But the reality was that he and others were continually behind the curve. Lehman had significant subprime mortgage exposure and was clearly next in line after Bear Stearns’ fall in March 2008, yet as Sorkin shows, there was no decisive government intervention for months (and then its rescue attempts in September failed to save Lehman). Only in mid-summer did the Treasury appoint a liaison with the Fed and the Securities and Exchange Commission to consider a contingency plan for a Lehman bankruptcy. A high-level ‘break the glass’ plan for dealing with systemic collapse was created in April 2008, but sat on the shelf.

“Bankers gave Geithner the nickname ‘eHarmony’ because of all the match-making calls they received from him”

Instead of facing up to the problem, the officials resorted to attempting short-term fixes, such as playing matchmaker to try to arrange mergers. In this, Paulson operated like the dealmaker he was earlier in his career at Goldman Sachs, but Bernanke and Geithner were actively pushing deals too (bankers gave Geithner the nickname ‘eHarmony’ behind his back, after the internet dating service, because of all the calls they received from him).

Given that Paulson and Bernanke, like many in the American establishment, upheld the ideal of the ‘free market’, it is understandable that they would seek to avoid government bailouts (Paulson insisted ‘I can’t be Mr Bailout’). But once they recognised they faced a problem of bank insolvency and not just liquidity, and that government action was necessary to avoid financial collapse, they needed to get over criticisms of ‘nationalisation’ and ‘socialism’. For instance, a decisive and early-on state takeover of failing financial institutions - whereby the government facilitated their sorting out and oversaw the bankruptcy process - would have been a huge task, but would have shown leadership. But, as we know, they shied away that.

While Sorkin’s investigative approach provides valuable insights, it also has its limitations. The book does not provide much in the way of analysis. In particular, its starting point in March 2008 means that it has little to say about the roots of the crisis, which began well before 2008. In the epilogue, Sorkin is critical of how Paulson handled the crisis once it emerged, but he is quite generous to him (and Bernanke) when he argues that Paulson could not have prevented the crisis or done much to minimise its damage before its onset.

As Sorkin notes, Paulson did warn of potential financial unravelling shortly after his appointment as treasury secretary in 2006. But Sorkin downplays the fact that Paulson did not take steps to address this problem. Bernanke was even more complicit in the making of the crisis: he argued that asset price bubbles were not a problem to be addressed, and pursued a low-interest-rate policy that fuelled the credit expansion. In March 2007, when problems were in evidence, Bernanke said: ‘The impact on the broader economy and the financial markets of the problems in the subprime markets seems likely to be contained.’

Some may argue that the American officials’ approach, while clumsy, nevertheless worked. Financial markets have indeed stabilised. But there has been a price to pay. First and foremost, there is the actual cost, which has increased US debt levels substantially. Even if the TARP money is being re-paid and the government is making a profit on some investments, the tab is increasing in other areas, such as the investment in AIG.

Furthermore, the government solutions have not addressed the key underlying problems, and thus hold out the possibility of future crises. For example, a key issue throughout the subprime crisis has been that the securitised bundles of assets are opaque – that is, it’s not clear whether they contain healthy underlying assets or not. Private industry could not find a way, and government has avoided this task. And so today we still have toxic assets – in fact, speculation in them has picked up thanks to government programmes – but no one has yet figured out how to assess their true worth and overcome this blockage in the credit markets.

“Few are asking why finance became such a big part of our overall economy in the first instance”

Likewise, the problem noted in Sorkin’s title - ‘too big to fail’ – remains unresolved. Paulson and company argued that TBTF was the reason they had to intervene. But in response they encouraged the consolidation of the industry, which means they contributed to making the banks even bigger and more interconnected than before.

Perhaps most importantly, there has been little in the way of longer-term strategic thinking. The Obama administration has proposed new regulations of the financial sphere, but these exhibit short-termist tinkering rather than overhaul. And while some question why finance blew up, few are asking why finance became such a big part of our overall economy in the first instance.

Much of the drama in Too Big to Fail comes from following Paulson, Geithner and Bernanke’s frantic fire-fighting. But the more you know about their hand in the crisis (which isn’t drawn out in the book), the less you sympathise with their efforts. It reminds me of when, as a teenager, I woke to see my family’s barn garage engulfed in flames. Standing in our pyjamas outside, my parents, four siblings and I were very grateful to the firemen, whose swift arrival prevented the fire from reaching our house. But, when I later learned that two firemen had set off the fire, my perspective changed. I’m not saying that Paulson, Geithner and Bernanke were ‘arsonists’ or personally to blame for the crisis, but the fires they were putting out were, in part, of their own making.

Obama’s appointment of Geithner to replace Paulson as treasury secretary signalled that this short-term, fire-fighting outlook would continue. America’s political leaders are so wedded to the past that their instinct is to try to restore the financial house of cards that existed before the crisis and hope for the best. This seems like a good way to ensure that there will be a fire next time, and sooner rather than later.

Sean Collins is a writer based in New York.

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis – and Themselves, by Andrew Ross Sorkin, is published by Viking Press. (Buy this book from Amazon(UK).)
http://www.spiked-online.com/index.php/ ... icle/7853/

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Re: Perspectives on the global economic meltdown

Postby svinayak » 06 Jan 2010 11:44

http://www.youtube.com/watch?v=JZpah7WvNyE

The Descent of Finance
Niall Ferguson, Harvard professor, discusses the history -- and future --
of finance with Harvard Business Review editor-in-chief Adi Ignatius.


Nouriel Roubini says the U.S. Recovery may be anemic and weak
Nouriel Roubini interviewed by Tom Keene says the U.S. recovery may be anemic and weak.
http://www.youtube.com/watch?v=1xc7rH6XjvE

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Re: Perspectives on the global economic meltdown

Postby svinayak » 06 Jan 2010 12:01

Dick Morris discusses how the United States, at the G20 conference, put itself under the guidance and, ultimately, control of the International Monetary Fund even as it succeeded in turning more power in that organization over to debtor nations. The Declaration of Independence is being repealed before our eyes.

US Cedes Economic Independence To IMF
http://www.youtube.com/watch?v=xbTCmSdHvrk
Your country is bankrupt. I am have more real wealth than your government. I at least have no debt. Your countries debt is more than 70 trillion. You and every US citizen owe it $238,000. Your president surrendered US soveriegnty at Copenhagen. It too is subservient to the UN (NWO)- controlled by the British Empire/Rothschild. YOur country has always been that anyway- its paid taxes to the Crown and never really had independence. The USA is owned. Fed, Nasa, US ARMY, CIA, etc NOT USA OWNED_UN!

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Re: Perspectives on the global economic meltdown

Postby svinayak » 06 Jan 2010 12:04

Sanjay M wrote:
It sounds like you're quoting the language of "Command Economy"

It is not my word. I am just quoting it to show everybody is worried about it

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Re: Perspectives on the global economic meltdown

Postby shyam » 06 Jan 2010 12:54

Peter Schiff gives data points that suggest that real estate crisis was not an accident

http://www.youtube.com/watch?v=HV3i5JFzieo

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Re: Perspectives on the global economic meltdown

Postby Neshant » 06 Jan 2010 16:10

Niall Ferguson, Harvard professor,


Niall Ferguson = clueless. He was pumping banks until it all came crashing down.

Too many clowns have made gurus of themselves writing books to explain the economic crisis when they never saw it coming themselves!

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Re: Perspectives on the global economic meltdown

Postby amol.p » 06 Jan 2010 17:55

New Year but No Relief for Strapped States

On Wednesday, governors in California, Kentucky and New York kick off the season of addresses to state lawmakers as at least 36 states struggle to close budget shortfalls and also begin confronting the next fiscal year’s woes.

“A budget gap of 5 percent or 10 percent in any given year is a tough problem,” said Corina Eckl, fiscal director at the National Conference of State Legislatures. “But we’re talking about gaps in excess of 20 percent over multiple years. The size of these gaps is staggering.”

California’s problems, including a projected budget deficit of $20 billion, are as outsized as the state itself.

In his state-of-the-state message here, Gov. Arnold Schwarzenegger, a Republican, will proclaim California close to incapable of paying for social services in the next fiscal year, which begins in July, unless the Obama administration greatly increases aid to the state...{OFFICIAL BAILOUT} That will be just one of many bleak assessments — and far-from-slam-dunk prescriptions — that Mr. Schwarzenegger will proffer as he and nearly every other governor face another year of extraordinary fiscal distress.

High unemployment, continued reverberations from the foreclosure crisis and a severe drop in all forms of taxes have combined to leave states — which historically have lagged behind the private sector in recession recoveries by about two years — reeling. State tax collections for the third quarter of 2009 showed a drop of 10.7 percent,

Revenues for Michigan, one of the nation’s most fiscally challenged states, are at a 45-year low, when adjusted for inflation. Many of the states that increased spending generally during the rosier years of the last decade are paying for it now.Oklahoma’s projected budget gap of $1.3 billion for the next fiscal year is the largest since the Depression, said Scott Meacham, the state treasurer.


Further, the federal stimulus dollars that helped keep many local governments afloat last year will begin to evaporate. Debt service — a Peter-Paul system for many states last year — has also grown. The cost of keeping citizens in government programs, like Medicaid, has also risen, as unemployment funds have teetered toward insolvency over the last 18 months.

Last year nine states raised income taxes, and 15 states and the District of Columbia raised taxes on cigarettes. “There is pressure for more tax increases in more states,” said Joseph Henchman, the director of state projects for the Tax Foundation, a research group. “It will be a hard sell in states where people think spending hasn’t been cut enough.”

http://www.nytimes.com/2010/01/06/us/06states.html?hp


All the states are deep into debt....and GOD know how many more days states will keep on handing out EOU's.

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Re: Perspectives on the global economic meltdown

Postby amol.p » 06 Jan 2010 18:00

Slowing Pace of Home Sales Raises Fears of New Retreat

The number of houses placed under contract fell sharply in November in the first drop in nearly a year, figures released Tuesday show. It was the clearest sign yet that predictions of another downturn in real estate may become a reality. :cry:

The National Association of Realtors said that its index of pending home sales plunged to 96 from a revised level of 114.3 in October. Analysts had predicted a drop, but nothing like that.
................{ How come all the datas issued earlier in USA are revised multiple times...???? any madrassa math..???}

We thought it would drop 2 percent,” said Jennifer Lee of BMO Capital Markets. “When you see 16 percent, the first thing you say is, what the heck happened here?”

The data indicates that the weakest parts of the country are the Northeast and Midwest, both of which fell 26 percent in November from the previous month after adjusting for seasonal variations. The South dropped 15 percent, while the West was off 3 percent.


http://www.nytimes.com/2010/01/06/busin ... f=business

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Re: Perspectives on the global economic meltdown

Postby amol.p » 06 Jan 2010 18:06

Nippon Oil May Sell Head Office Worth Up to $1.2 Billion

Nippon Oil Corp. is considering selling its head office building in central Tokyo, a move that may help Japan’s biggest oil refiner rebound from a record full-year loss.

http://www.bloomberg.com/apps/news?pid= ... hRw&pos=15

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Re: Perspectives on the global economic meltdown

Postby Chinmayanand » 06 Jan 2010 18:26

Pimco warn of '80pc' chance of UK rating downgrade

Britain will lose its gold-plated sovereign credit rating if Labour wins the coming election and refuses to take tougher action on the public debt, the world's biggest bond house has warned.


In a second swipe at the UK in as many days, Pimco, the American investment group, said there is an "80pc" chance of Britain losing its AAA-rating if the Government does not move swiftly. Scott Mather, head of global portfolio management, told Dow Jones Newswires that the current debt reduction plan "is lacking in conviction and lacking in details".

Asked if the UK faced a risk of a downgrade, Mr Mather said: "I think so ... It's just a question of when ... not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50pc likelihood. Call it more like 80pc."

A sovereign downgrade would be national embarrassment and push up the cost of borrowing to fund the UK's record £178bn of debt. The higher cost could tip Britain into a deadly debt spiral and trigger the first debt crisis since the 1970s.

Mr Mather expects borrowing costs to rise regardless of any downgrade as the Bank of England's £200bn bond buying programme comes to an end next month. "Common sense would tell you that if you had a buyer which was taking the majority of the sector ... and then they disappeared ... you would expect a repricing," he said. "It could be 50 basis points, it could be 100 basis points."

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Re: Perspectives on the global economic meltdown

Postby Hari Seldon » 06 Jan 2010 20:58


Aha. Eh? Sri Denninger notes:
Note that PIMCO's decision was not reported in the American media to the best of my ability to determine. You don't think that might have something to do with their bias and attempt to drive Americans into the equity markets and cause them to (again) wind up on the losing end of these trades, do you?


Here's another cute report:
The American investment group [PIMO] said it will be a net seller of UK Government bonds this year, at the very point when the Bank of England brings its £200bn programme of purchases to and end and the Treasury attempts to raise unprecedented sums through the capital markets.

The move is doubly embarrassing for the [UK] Government because the head of Pimco's European investment team is Andrew Balls, brother of Schools Secretary Ed Balls, who is mastering the Government's re-election strategy. The move will be seen as a financial vote of no-confidence in the Government's handling of the economy.


PIMCO in bonds is like GS in everything else. It pays to listen to what they're saying.

More Denninger:
Folks, PIMCO has a record of being not only right but privvy to "analysis" that you and I simply never, ever have or will get access to. How that happens is the matter of some conjecture - there are many, myself included, who believe that they're privvy to information sources that "ordinary peons" never will be given access to and in the debt markets insider trading is (for the most part) legal.

As a result when an announcement like this is made you're a rank idiot to ignore it or believe "it doesn't matter." It most certainly does matter and the odds are that they're right - and if you go against them you will be proved in the fullness of time to not only be wrong but poor on top of it.

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Re: Perspectives on the global economic meltdown

Postby Hari Seldon » 06 Jan 2010 21:02

Elsewhere int he khanate, seems like the jostling between public employee unions and the public over unsustainable benefits and obligations will soon start to get unavoidable and ugly. Long overdue, in fact.

Some instances:
Unions refuse nominal paycuts in Cleveland

Illinois too broke to pay school bills for services already rendered

Plunder: How public unions are bankrupting the nation

And on and on. Of course, don;t get alarmed. The sky isn't gonna fall yet. They'll all get bailed out, I reckon. Whatever it takes.


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Re: Perspectives on the global economic meltdown

Postby Hari Seldon » 07 Jan 2010 08:35

There are now more Government employees than manufacturing workers in the US

Theek hai, no sky-is-falling stuff here but a notable milestone nonetheless, IMHO.

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Re: Perspectives on the global economic meltdown

Postby Singha » 07 Jan 2010 09:19

lol in that sense US is more sarkari than China :rotfl:

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Re: Perspectives on the global economic meltdown

Postby vera_k » 07 Jan 2010 09:33

Investment Outlook - Bill Gross

What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return.


But check out Chart 3 and the worsening situation in India.

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Re: Perspectives on the global economic meltdown

Postby Chinmayanand » 07 Jan 2010 13:07

Euro brinkmanship escalates as ECB shuts door on Greek bail-out

The European Central Bank has given its clearest warning to date that there will be no EU bail-out for Greece if it fails to control its spiralling deficit, raising the stakes in a game of brinkmanship over the future of the euro.
:(( :(( :((

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Re: Perspectives on the global economic meltdown

Postby Hari Seldon » 07 Jan 2010 13:18

But check out Chart 3 and the worsening situation in India.


True. On the fiscal front, things do look bad for Dilli. And the public debt as % of gdp is another scary looking statistic.

However, most of our debt is internal i.e. denominated in INR so is practically riskless (w.r.t. default) to that extent. Also, our savings rate has inched upward smartly and is ~35% today. So yes, while we will have a rough ride, it won't be calamitous. It won;t be fun either, so no lungi dances. Already there're concerns our recovery may be jobless in nature.

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Re: Perspectives on the global economic meltdown

Postby rohiths » 07 Jan 2010 14:06


amol.p
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Re: Perspectives on the global economic meltdown

Postby amol.p » 07 Jan 2010 17:49

durgesh wrote:Euro brinkmanship escalates as ECB shuts door on Greek bail-out

The European Central Bank has given its clearest warning to date that there will be no EU bail-out for Greece if it fails to control its spiralling deficit, raising the stakes in a game of brinkmanship over the future of the euro.
:(( :(( :((




British people are the most selfish people...they made EU for their gains and will break EU to save themselves from current default situation. I bet that EU will disintigrate some where at peak of another recession. Most of EU nations are runing huge deficit and british, french,german,scotish banks can go to any level to get there money back.

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Re: Perspectives on the global economic meltdown

Postby amol.p » 07 Jan 2010 17:53

Hari Seldon wrote:
But check out Chart 3 and the worsening situation in India.


True. On the fiscal front, things do look bad for Dilli. And the public debt as % of gdp is another scary looking statistic.

However, most of our debt is internal i.e. denominated in INR so is practically riskless (w.r.t. default) to that extent. Also, our savings rate has inched upward smartly and is ~35% today. So yes, while we will have a rough ride, it won't be calamitous. It won;t be fun either, so no lungi dances. Already there're concerns our recovery may be jobless in nature.


The chart should be arranged in decending order...the data is in random manner....psy ops to show indian in top 5.

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Re: Perspectives on the global economic meltdown

Postby amol.p » 07 Jan 2010 18:03



Its not just Arnie....all the states are going the same way.....to start with steep decrease in tax collection.........

State Tax Revenue in U.S. Drops Most Since 1963, Study Says

U.S. state tax collections fell the most in 46 years in the first three quarters of 2009 as the recession shrank revenue from sources including personal income, the Nelson A. Rockefeller Institute of Government said. Revenue dropped 13.3 percent, or $80 billion.

“2010 is going to be very difficult for the states and the next year is likely to be significantly worse,” Rockefeller Deputy Director Robert Ward said in an interview. corporate income tax declined 22.6 percent, according to the study........{ how come US GDP is expanding at 2.2%........seems some madrassa maths is being used}

The Obama administration’s $787 billion stimulus package made up as much as 40 percent of the revenue losses states suffered, Ward said by telephone.

“It is a very significant amount of compensation but by no means eliminates the problem,” he said.

http://www.bloomberg.com/apps/news?pid= ... 39Yk&pos=5


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