So if everybody is saving more, who will be dissaving?

TO BE NOTED: From the FT:

"Down and out for the long term in Germany

By Wolfgang Münchau

Published: June 7 2009 19:03 | Last updated: June 7 2009 19:03

Let me attempt, perhaps foolhardily, to map out a scenario of how the global economic crisis could evolve in continental Europe.

Even if we assume a recovery elsewhere, Europe’s economy may be stuck at low growth for some time. To understand why, it is perhaps best to look at sectoral balances for households, companies and the public sector.

The current account can be expressed as the difference between national savings and investments. Of the world’s 10 largest economies, the US, the UK and Spain used to run the largest current account deficits before the crisis. The US household sector has been shifting from a negative savings rate before the crisis to a positive rate of 4 per cent of disposable income now. The US corporate sector used to have a large negative savings rate, but this has almost disappeared. So far, the increase in net savings in the US private sector has been balanced by increased borrowing from the US government.

I am making three assumptions: the first is that the return to a positive US household savings rate is permanent – even under a scenario of a strong economic recovery. US households will take time to repair their balance sheets after the housing and credit disaster. Second, I also expect US companies not to return to the high level of borrowings that prevailed before the crisis. Third, I expect the US government to reduce its deficit after 2010. The recent rise in long-term bond yields should serve as a reminder that deficits cannot go on rising forever.

Taking all three factors together, the US will shift from a strongly negative current account balance towards neutrality, perhaps even a small surplus for a short period. I expect similar shifts in the UK and Spain at different magnitudes.

Among countries with large current account surpluses, the three biggest are China, Japan and Germany. I am focusing on Germany here. The German household sector will maintain its high savings rate. The German government increased its deficit during the crisis, but is now looking for a quick fiscal exit strategy. The Bundestag has recently voted through a constitutional balanced-budget clause, which requires cuts in the deficit almost right away. Japan will probably maintain its larger fiscal deficit for longer, but if we take Germany, China and Japan together, we will not see a sufficient and sustained fiscal expansion to compensate for the sectoral shifts elsewhere.

Global current account surpluses and deficits add up to zero. So if everybody is saving more, who will be dissaving? It will have to be the corporate sector in the countries with large net exports. So if the US, the UK and Spain are heading for a more balanced current account in the future, so will the surplus countries.

The current account balance can also be expressed as the sum of the trade balance, net earnings on foreign assets, and unilateral financial transfers. In several countries, including the US and Germany, the gap between exports and imports serves as a good proxy for the current account. A fall in the trade deficit in the US, UK and Spain implies a fall in the combined trade surplus elsewhere. And as some of the shifts in the US and the UK are likely to be structural, this will have long-term effects on others. In particular, it means the export model on which Germany, China and Japan rely, could suffer a cardiac arrest.

What about the argument that a large part of German exports goes to the rest of the eurozone? This is true, but there are imbalances within the eurozone too. Spain has been running a current account deficit of close to 10 per cent of gross domestic product. As that comes down, so will Germany’s equally unsustainable intra-eurozone surplus.

Through what mechanism will this export-sector meltdown come about? My guess is that in Europe it will happen through a violent increase in the euro’s exchange rate against the US dollar, and possibly the pound and other free-floating currencies.

Exchange rate devaluation would greatly help the US and others to reduce their current account deficits, but it will impair the economic recovery in countries with large trade surpluses and free-floating exchange rates. Last week’s remarks by Angela Merkel, who criticised the Federal Reserve and other central banks for running inflationary policies, sharpened investor perceptions of transatlantic policy divergence and decoupling. Many investors are now starting to bet on a strong appreciation of the euro – the last thing Ms Merkel wants.

Neither Germany nor Japan is politically equipped to deal with an exchange rate shock. China may continue to manage its exchange rate, but the Europeans are much less likely to intervene in foreign exchange markets. For the time being, the governments of the classic export nations cling on to their export-based economic model, the model they know best. Their only strategy, if you call it that, is to hope for a miraculous bail-out from the US consumer – which is not going to happen this time.

If my predictions prove correct, Germany will be down and out for a long time with a huge and still unresolved banking crisis, an overshooting exchange rate and lower net exports, presided over by politicians who panic about domestic inflation. This will not end well.

munchau@eurointelligence.com"

Countries which have said they cannot reach such deep 2020 goals, led by the United States, could contribute to a new pact in other ways

TO BE NOTED: From Reuters:

"France, Germany urge more flexible climate pact

Mon May 25, 2009 1:36pm EDT

By Alister Doyle, Environment Correspondent

PARIS (Reuters) - France and Germany suggested on Monday that rich nations should collectively guarantee deep cuts in greenhouse gases by 2020 while giving flexibility to laggards such as the United States to catch up later.

France said the idea, floated at talks among 17 top greenhouse gas emitters including China, United States, Russia and India, could help toward a new U.N. climate treaty due to be agreed at a meeting in Copenhagen in December.

"There can be more flexibility among us," French Environment Minister Jean-Louis Borloo told a news conference on the first day of the two-day talks among ministers, called by U.S. President Barack Obama to help work out a new climate treaty.

He said France and Germany reckoned that developed nations could collectively sign up to cut their overall emissions by 25 to 40 percent below 1990 levels by 2020 -- the level outlined by a panel of U.N. scientists to avoid the worst of global warming.

"There may be some who act faster and others who do more later," he said. A collective goal would undercut criticisms by developing nations, led by China and India, that the rich are not serious in fighting climate change.

Countries which have said they cannot reach such deep 2020 goals, led by the United States, could contribute to a new pact in other ways, for instance via a bigger share of financing or green technologies for developing nations, Borloo said.

"There may be constraints on such and such a developed nation -- but we must reach this 2020 objective of 25 to 40 percent," he said. Nations meeting in Paris emit 80 percent of world greenhouse gases, mainly from burning fossil fuels.

HEATWAVES

"We have to find a compromise," he said, noting scientists' forecasts that global warming would bring more heatwaves, rising sea levels, extinctions, floods and droughts. Rich nations might need a meeting to discuss the idea, he said.

Obama has promised to cut U.S. emissions back to 1990 levels by 2020, a cut of 14 percent from 2007 levels. A bill approved by a key congressional panel last week would cut U.S. emissions by 17 percent from 2005 levels by 2020.

By contrast, the European Union has promised deeper cuts, of 20 percent below 1990 levels by 2020, and by 30 percent if other rich nations follow suit

U.N. Secretary-General Ban Ki-moon said on Sunday that he wanted Washington to do more, saying it was lagging the European Union in promises to fight global warming. Obama's plan are for far tougher curbs than by his predecessor, George W. Bush.

"I don't think it's correct to say that Europe is proposing a lot and the United States little," Todd Stern, U.S. Special Envoy for Climate Change, told Tuesday's edition of the French daily Le Monde.

"If you look at things from the point of view of the progress that each nation will have to make to reach its objectives, the U.S. level of effort is probably equal, or superior, to that of Europe," Stern said.

Analysts say the Major Economies Forum (MEF) talks at the French Foreign Ministry, the second of three preparatory meetings before a summit in Italy in July, are a chance to air differences away from the public gaze.

"The U.N. negotiations have somewhat fallen back to North-South finger-pointing," said Jake Schmidt of the Natural Resources Defense Council in Washington. "The MEF is a crucial place where you can make progress on some of the difficult issues out of the limelight."

(Editing by Charles Dick)"

Norway has been overtaken by Germany as the safest country in terms of sovereign CDS

TO BE NOTED: From Alphaville:

"Erstwhile Samfundets Støtter Posted by Tracy Alloway on May 07 13:57.

CMA reports on Thursday that Norway has been overtaken by Germany as the safest country in terms of sovereign CDS. Here’s the data, as it stands now:

This entry was posted by Tracy Alloway on Thursday, May 7th, 2009 at 13:57 and is filed under Capital markets. Tagged with CDS, germany, norway."

At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests

TO BE NOTED: From Bloomberg:

"Fed Is Said to Seek Capital for at Least Six Banks After Tests

Share | Email | Print | A A A

By Robert Schmidt and Rebecca Christie

April 29 (Bloomberg) -- At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said.

While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.

By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.

“The challenge that policy makers will confront is that more will be needed and it’s not clear they have the resources currently in place or the political capability to deliver more,” said David Greenlaw, the chief financial economist at Morgan Stanley, one of the 19 banks that are being tested, in New York.

Final results of the tests are due to be released next week. The banking agencies overseeing the reviews and the Treasury are still debating how much of the information to disclose. Fed Chairman Ben S. Bernanke, Treasury Secretary Timothy Geithner and other regulators are scheduled to meet this week to discuss the tests.

Options for Capital

Geithner has said that banks can add capital by a variety of ways, including converting government-held preferred shares dating from capital injections made last year, raising private funds or getting more taxpayer cash. With regulators putting an emphasis on common equity in their stress tests, converting privately held preferred shares is another option.

Firms that receive exceptional assistance could face stiffer government controls, including the firing of executives or board members, the Treasury chief has warned.

Today, Kenneth Lewis, chief executive officer of Bank of America, faces a shareholder vote on whether he should be re- elected as the company’s chairman of the board. While Lewis has been at the helm, the bank has received $45 billion in government aid.

‘Out of Our Hands’

Scott Silvestri, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on Lewis yesterday. Lewis said earlier this month that the firm “absolutely” doesn’t need more capital, while adding that the decision on whether to convert the U.S.’s previous investments into common equity is “now out of our hands.”

Citigroup, in a statement, said the bank’s “regulatory capital base is strong, and we have previously announced our intention to conduct an exchange offer that will significantly improve our tangible common ratios.”

Along with Bank of America and New York-based Citigroup, some regional banks are likely to need additional capital, analysts have said.

SunTrust Banks Inc., KeyCorp, and Regions Financial Corp. are the banks that are most likely to require additional capital, according to an April 24 analysis by Morgan Stanley.

By taking the less onerous path of converting preferred shares, the Treasury is husbanding the diminishing resources from the $700 billion bailout passed by Congress last October.

‘Politically Constrained’

“Does that indicate that’s what the regulators actually believe, or is it that they felt politically constrained from doing much more than that?” said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution in Washington.

Geithner said April 21 that $109.6 billion of TARP funds remain, or $134.6 billion including expected repayments in the coming year. Lawmakers have warned repeatedly not to expect approval of any request for additional money.

Some forecasts predict much greater losses are still on the horizon for the financial system. The International Monetary Fund calculates global losses tied to bad loans and securitized assets may reach $4.1 trillion next year.

Geithner has said repeatedly that the “vast majority” of U.S. banks have more capital than regulatory guidelines indicate. The stress tests are designed to ensure that firms have enough reserves to weather a deeper economic downturn and sustain lending to consumers and businesses.

‘Thawing’ Markets

He also said there are signs of “thawing” in credit markets and some indication that confidence is beginning to return. His remarks reflected an improvement in earnings in several lenders’ results for the first quarter, and a reduction in benchmark lending rates this month.

Financial shares are poised for their first back-to-back monthly gain since September 2007. The Standard & Poor’s 500 Financials Index has climbed 18 percent this month, while still 73 percent below the high reached in May 2007.

Finance ministers and central bankers who met in Washington last weekend singled out banks’ impaired balance sheets as the biggest threat to a sustainable recovery. Geithner has crafted a plan to finance purchases of as much as $1 trillion in distressed loans and securities. Germany has proposed removing $1.1 trillion in toxic assets.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net"

Berlin's plans include a complete takeover -- by expropriation, if necessary.

TO BE NOTED: From Spiegel Online:

"THE STATE'S SILENT TAKEOVER

Germany's Big Banking Bailout

By Christian Reiermann and Wolfgang Reuter

The German government wants to buy up large segments of the domestic banking sector. In addition to the partial nationalization of many ailing financial institutions, Berlin's plans include a complete takeover -- by expropriation, if necessary.

Josef Ackermann, the CEO of Deutsche Bank, likes to come across as generous. A few days ago in Berlin, he said that he is by no means too proud to take advantage of the government bailout program for banks, and that all he wants is to see it benefit those banks that truly need it. "We are a long way from that," he said.

But the competition is skeptical, especially when the industry leader is having trouble hiding the fact that it lost about €4 billion ($5.2 billion) in 2008. In addition, both competitors and politicians have noted with interest Ackermann's behind-the-scenes involvement in the development of a "bad bank," that is, a sort of government dumping ground for unmarketable, high-risk securities.

DDP

Storm clouds gather over Frankfurt, Germany's banking center.

Industry insiders suspect that Deutsche Bank hopes to shift its own toxic waste into this new entity -- saving face in the process because, after all, everyone else will be doing the same thing.

Ackermann is receiving support for the project from the Association of German Banks, in which Deutsche Bank exerts substantial influence. Last Monday Hugo Bänziger, the chief risk officer at Deutsche Bank, appeared before members of the conservative Christian Democratic Union's (CDU's) finance committee to promote the potential benefits of a "bad bank."

FROM THE MAGAZINE

Find out how you can reprint this DER SPIEGEL article in your publication.

But all of Ackermann's and Bänziger's efforts proved to be in vain. On Friday, a fundamentally different approach to solving the problems of German banks emerged at a meeting of the two members of the coalition government, the CDU and the Social Democratic Party (SPD). Instead of a single, government-run landfill for the banks' toxic securities, the new plan calls for a large number of privately held "bad banks." Contrary to the arrangement Ackermann and his allies comrades-in-arms envisioned, this would see the banks' shareholders being the ones who would primarily vouch for risks in the future rather than the government and taxpayers.

Nevertheless, the government is not abandoning all responsibility. Should the healthy parts of the banks lack equity, the government will provide the necessary funds. This would make it a major shareholder in the German banking sector, turning the federal government into a silent power in the skyscrapers of Frankfurt's banking district.

The bailout program will be costly. The government will have to more than double the €80 billion ($104 billion) capital injection included in its first bank rescue package. Experts at the Finance Ministry anticipate that the stripped-down banks will require up to €200 billion in additional capital.

Making the Bailout More Appealing

It is a development that would have been unthinkable only a few months ago, but is now being surpassed by another of the government's rescue projects, as it discreetly prepares to nationalize the stricken lender Hypo Real Estate.

Both programs may seem disconcerting for a market economy. And yet, in the state of the emergency brought on by the continuing financial crisis, they may be unavoidable.

The German government is more likely to face criticism from economists for considering bailouts for individual companies, like ball-bearing maker Schaeffler-Conti or Airbus. But the bank bailout plan involving many small "bad banks" has received widespread support.

Unlike the Ackermann concept, under the new plan the government would not simply take on the banks' risks. Instead, that would be left up to shareholders. Chancellor Angela Merkel and Finance Minister Peer Steinbrück hope that this approach will generate more support with the public for the government's second bid to use taxpayer's money to rescue the banks.

Most important, the federal government would not be acquiring the worthless parts of a bank, but instead would invest in its promising aspects. This also makes the proposal politically appealing.

After the first bank bailout package, this is the government's second major attempt to stabilize the center of the ongoing economic and financial crisis, the banking world. It is still deeply shaken by the collapse of the US real estate market in 2007, when millions of mortgage loans lost their value. Since then, these toxic assets have crippled banks' ability to do business virtually everywhere in the world.

Because the banks do not know how much of their old risk they can even write off anymore, they prefer not to assume any new risk. The consequences have been fatal. As the banks issue too few loans, companies lack the necessary funds for investment, causing the economy to slow down.

The amounts of money involved are already largely beyond the scope of human imagination. In Germany alone, the biggest 18 banks are carrying a volume of €305 billion ($397 billion) in toxic assets on their balance sheets, less than a quarter of which has already been written off.

Further value adjustments seem unavoidable. The International Monetary Fund (IMF) estimates that worldwide losses could total $2.2 trillion (€1.7 trillion). No one has a formula for how best to recapitalize the banks and get credit flowing again.

RELATED SPIEGEL ONLINE LINKS

• The World from Berlin: 'German Banks Are on the Edge of the Abyss' (01/23/2009)

• The State as Über-Entrepreneur: Berlin Sees No Limits to Economic Intervention (01/21/2009)

• 300 Billion Euros in Toxic Securities: German Banks Face Further Big Losses (01/19/2009)

• Germany's Faltering Bank Bailout Program: The Bottomless Pit (12/23/2008)

Great Britain, for example, is placing its hopes on a government insurance system under which the banks, in return for a fee, could insure themselves against further losses. The new US administration under President Barack Obama is doing what Ackermann would have liked to see happen in Germany: It plans to establish a giant, government-owned "bad back" for toxic loans.

This American deposit fund would spend an additional $2 trillion (€1.54 trillion) to buy high-risk securities from lenders. The hope is that the banks, provided with fresh capital and freed of their toxic assets, could then devote themselves to their actual business: lending money to citizens and companies.

The government in Berlin does not consider either of the two Anglo-Saxon approaches to be suitable. The Germans see the British model as too costly and the American approach as inequitable.

Why should the government buy up billions in worthless securities and take all risk off the hands of those responsible for the crisis in the first place, ask those behind the new bailout plan? They characterize the US and British plans as gifts for shareholders at the expense of taxpayers. For this reason, the German government prefers a different concept, which it hopes to implement within the next four weeks. The plan, conceived by staff at the Finance Ministry, amounts to a radical modification of the German banking industry. Hardly any of the ailing lenders will likely manage without government investment in the future.

There are two possibilities for the disposal of bad loans. Either the securities are depreciated before being deposited into the special funds, or the "bad banks" receive large portions of the remaining equity to offset losses. Either way, the newly streamlined banks will lack capital to conduct their transactions.

Following Sweden's Example

This is where the government comes in. It provides the healthy banks with capital via its Special Fund for Financial Market Stabilization (Soffin). As a result, the government becomes a shareholder in many banks, initially through silent deposits. But if it comes to the aid of publicly traded banks, it soon finds itself forced, as in the case of Commerzbank, to acquire a blocking minority consisting of 25 percent plus one share. This is the only way it can prevent a buyer from simply clearing out the government's money.

The concept makes sense for both the government and taxpayers. The government can hope that its investment will eventually pay off. Once the banking crisis has been weathered, its deposits are returned and it can resell its shares, possibly even at a profit. This, at least, was the Swedes' experience during their banking crisis in the 1990s. German government experts were inspired by the Swedish experiences when developing their own rescue plan.

The establishment of "bad banks" within existing institutions also has a psychological effect, for employees and customers alike. Separating out the bad assets into a "bad bank" has a liberating effect on the healthy part of a bank. From then one, it can operate without the constant threat of further write-offs.

But the removal of their troubled assets also creates new challenges for banks. The risks are not decreased simply because they have been separated from the actual bank. The management of so-called troubled loans requires skills beyond those needed to issue ordinary loans, which merely require routine monitoring.

Hardly anyone is more aware of this than Jan Kvarnström. A Swedish national, Kvarnström headed the Institutional Restructuring Unit, the "bad bank" with which Dresdner Bank overcame its troubles, from 2002 to 2005. The job description of a chief liquidator ranges from tough negotiations with delinquent borrowers to the receivership and subsequent forced sale of the securities. He handles a wide assortment of large and small assets.

DER SPIEGEL

German Banks' Write Downs.

During the course of his career as a liquidator, Kvarnström has sold a bank in Chile, many forms of financial holdings in companies, real estate and a collection of guitars once owned by the Beatles.

"All of this has nothing to do with the normal work of a banker," Kvarnström recalls. For this reason, he says, it makes sense "to concentrate the bad investments, together with the corresponding personnel, in a bad bank."

The drawback of the plan is that the money made available in the bank rescue package, €80 billion ($104 billion) will not be sufficient for government equity capital injections. Soffin's authority to issue credit must be augmented by about €120 billion ($169 billion). This would make it the largest shadow budget in the history of postwar Germany.

Commerzbank, under CEO Martin Blessing, has already received €18 billion ($23.4 billion). The nationalization debate over ailing Hypo Real Estate is already burdening the Soffin budget. The bank needs at least €10 billion ($13 billion) in additional funds.

But that isn't the extent of it, because the government will also be called upon to spend even more money to buy up at least 95 percent of the Munich-based lender. This is the second front in the government rescue concept: The takeover of Hypo Real Estate is intended to prevent a possible bankruptcy from leading to other bank failures, thereby bringing down large segments of the German financial market.

Nationalization and Expropriation

This scenario could materialize, as a result of Hypo Real Estate having gambled away funds for the purchase of long-term government bonds. To be able to afford the transactions, the bank took out short-term loans. As long as the interest rates on those loans were low enough, the business was profitable. But then loan terms deteriorated as a result of the financial market crisis. Since then, the bank has accumulated an uninterrupted series of losses, which could only be offset with a constant stream of new government loan guarantees.

The government believes that it has only one option left to stop the downward spiral: to essentially nationalize Hypo Real Estate. This would allow the lender to take up new loans under the favorable terms of publicly owned financial institutions and turn a profit with most of its transactions. Only then would the previous liquidity injections of more than €90 billion ($117 billion) not be lost.

To minimize conflicts with owners during the takeover, the government will pursue an escalation strategy. Its preferred method would be to acquire the bank with the consent of previous shareholders, through a simple takeover bid.

But the shareholders are not biting, leading government representatives to believe that they are holding out for a better offer. The shareholders know that the government has a strong interest in a takeover, and they want to be handsomely compensated in return, which the government wants to avoid. When the negotiations ended on Friday evening, no results had been achieved.

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As a next step, the government plans to amend the law on stock corporations and strengthen the rights of shareholders' meetings so that refractory minority shareholders can be booted out. It is also unlikely to shy away from expropriation of the lender's shareholders.

A proposed expropriation law to be debated by the cabinet in the coming weeks reveals how serious the government is. The nine paragraphs of draft legislation would define the conditions for the government's compulsory takeover of a company.

Because the German constitution bans nationalization without compensation, the draft legislation also contains compensation rules for the former owners of a nationalized company.

The compulsory nature of these measures has left a sour taste in the mouths of federal government experts. Because the constitution expressly protects private property, the German government hopes never to have to apply its emergency legislation. According to ministry officials, the purpose of the plan is to provide a credible threat of nationalization to encourage shareholders to negotiate. Members of the Grand Coalition already joke that the bank rescue program now apparently follows the logic of the Cold War: "You have to threaten with a nuclear bomb so that you will never have to use it."

Translated from the German by Christopher Sultan"

This week, economic reports around the world tell the story of an ongoing economic contraction

TO BE NOTED: From News N Economics:

"Economic reports around the world (April 1-7): still scary

Wednesday, April 8, 2009

This week, economic reports around the world tell the story of an ongoing economic contraction. Overall this week's reports suggest that there is still a lot for global policymakers to worry about.

EXPORT GROWTH IS STILL IN THE RED ZONE

The chart below illustrates monthly exports through March for South Korea and Taiwan, and through February for Malaysia and Indonesia (export numbers are not seasonally factored and listed in $US). Over the year the annual growth rates show ongoing weakness.

INFLATION FALLS - STILL MOSTLY ON ENERGY AND COMMODITIES....

The chart below illustrates annual inflation rates through March for Thailand, South Korea, Switzerland, and Taiwan. Serious weakness in global demand has dragged down energy and commodity prices, taking inflation to deflation in some cases. However, eventually this will pass through to core prices (prices ex energy and food) at a lag, and core inflation (which is still very positive in the US) will fall, too. Switzerland is now negative, -0.4%, and Taiwan and Thailand have experienced deflation for two and three consecutive months, respectively.


UNEMPLOYMENT IS WEAK IN THE EUROZONE AND THE US

The chart below illustrates the annual change in the unemployment rate for the Eurozone through February and the US through March. Both registered 8.5% unemployment rates in each respective month, or a serious deterioration in labor market conditions over the year.

The labor market is generally lagged to overall economic conditions - it takes a while for firms to internalize the economic situation, firing late and hiring late. So these economies may be recovering well-before the unemployment rate starts to decline (jobless recovery).

BUT IT DOES LOOK LIKE THE ECB IS WAY LATE

The chart below illustrates the policy rates for the European Central Bank (ECB) and the Bank of Japan (BoJ). The ECB cut by 25 bps to 1.25%, and the Bank of Japan left its rate unchanged at 0.1%. Given the previous chart, which illustrates the sharp decline in labor market conditions across the Eurozone, it seems that the ECB started to ease too late. Perhaps it is because wages are a little stickier in Europe.


ANOTHER OMINOUS SIGN OF WEAKNESS IN CONSUMER SPENDING

The chart below illustrates annual retail sales growth through February for Germany and Hong Kong. Hong Kong sales are clearly tumbling, falling 13.9% over the year. German retail sales growth, however, are quite volatile; it's 5.3% decline does not show any weakness beyond normal activity since early 2007. Interesting.

THE LANDSLIDE IN UK INDUSTRIAL PRODUCTION CONTINUES

The chart below illustrates UK industrial production in levels and its growth over the year. Nosedive. According to jka online blog, the sector breakdown was:

Consumer non durables, (-5%), textiles (-5.4%) and food and drink (-4%) were relatively lightly hit. Fuel products, the only sector showing growth up by just 1%.

Auf Wiedersehen, Rebecca Wilder"

They realize that their economy is driven by exports, and therefore they are planning to free ride off of the U.S. stimulus package.

From The Baseline Scenario:

"Payback Time

with 15 comments

Once upon a time there was a president named George. He liked to do things his own way, which annoyed some of his “friends” in Europe. But then a new president named Barack was elected, who not only promised to be nicer to his friends, but was actually very popular in most parts of the world. And the people of the world thought we would see a new era of international cooperation, at least between the U.S. and Europe.

Not so much.

On this side of the Atlantic, the Obama administration and the Fed have been working night and day in an attempt to turn around the economy: Fed funds rate reduced to zero, $800 billion stimulus package, new plan to aid struggling homeowners, new plan for buying toxic assets, new budget, decision by the Fed to buy long-term Treasury bonds, new domestic regulatory framework outlined this week, etc. We’ve been plenty critical of various aspects of the U.S. response, but at least they’re trying.

(Continental) Europe, by contrast, has decided they’ve done enough and it’s time to sit back and watch.

First, in an interview for Monday’s Wall Street Journal (no-subscription-required summary here), Jean-Claude Trichet, head of the European Central Bank, said that no new measures are needed to combat the global economic crisis. Then Mirek Topolanek, the prime minister of the Czech Republic and the president (in this rotation) of the European Union called the U.S. emphasis on fiscal stimulus “the way to hell.” And all of this is coming in the week leading up to the next G20 summit. What happened to diplomacy?

While it is relatively easy to write off a prime minister whose government collapsed on Tuesday night, there is a very real divide between the United States and, in particular, Germany, the heavyweight in the European economy. And it’s very clear that the Germans (and the French) do not want to spend more money, increase their budget deficits, or do anything except talk about international financial regulation.

I think there are three possible reasons for this attitude.

1. The Germans believe that the economy will recover on its own from this point. Given that not even the optimists in the Treasury Department believe this, I don’t see how this could be the case.
2. They are so afraid of any risk of inflation that they would rather suffer through an extended recession and high unemployment. This could be possible, although misguided, especially since Germany is already in worse shape than the U.S., with its economy expected to shrink by 3.8% this year (vs. 2.5% for the U.S.).
3. They realize that their economy is driven by exports, and therefore they are planning to free ride off of the U.S. stimulus package. In this scenario, Germany gets to contain its national debt and minimize the risk of inflation, while letting other countries turn the global economy around.

Now, we’re not blameless here, what with our “Buy American” provision in the fiscal stimulus. But at least our government isn’t closing its eyes and assuming the problem will go away.

Written by James Kwak

March 27, 2009 at 5:00 am"

Me:

“They realize that their economy is driven by exports, and therefore they are planning to free ride off of the U.S. stimulus package. In this scenario, Germany gets to contain its national debt and minimize the risk of inflation, while letting other countries turn the global economy around.”

I’ve been assuming that it’s this, but, since they can’t come out and say this, they’re throwing out any other plausible reason that they can. Whether they can resist the pressure to spend a lot more is an open question, but they’re really working at it.

donthelibertariandemocrat

27 Mar 09 at 10:40 am

Germany's parliament passed a law that would allow Berlin to expropriate HRE shareholders as a way to nationalize the bank.

TO BE NOTED: From Spiegel Online:

"THE FIGHT TO SAVE HRE

Bank Expropriation Bill Clears Parliament

The German Bundestag on Friday passed a law that gives Chancellor Merkel the power to expropriate shareholders in the ailing real-estate lender HRE. It could become the first such expropriation in Germany since the 1930s.

When it comes to financial problem children, the mortgage lender Hypo Real Estate has in recent months proven a particularly difficult case. Already, Berlin has provided the bank over €100 billion in aid, in the form of bailouts and guarantees. A further, and far more controversial, step was taken on Friday. Germany's parliament passed a law that would allow Berlin to expropriate HRE shareholders as a way to nationalize the bank.

DPA

Berlin is taking extreme measures to save Hypo Real Estate.

The law, passed by a vote of 379 to 107 with 46 abstentions, allows Chancellor Angela Merkel's government to initiate expropriation proceedings only until June 30. Berlin is seeking to obtain over 90 percent of HRE shares as part of its plan to prevent the collapse of the bank, but has been hampered by the unwillingness of US private equity investor J.C. Flowers to sell its 25 percent stake in the ailing lender. Negotiations with J.C. Flowers will continue, but little progress has been made recently.

Despite widespread support for the bill from the Social Democrats, and reluctant support from much of Merkel's Christian Democrats, the bill is a controversial one. The Federation of German Industries has blasted the bill, calling it "completely wrong." And the opposition Free Democrats (FDP) are also opposed to the measure. Indeed, the FDP has even managed to attract some conservatives away from the CDU lately, partially as a result of its opposition to the expropriation measure and other state-heavy reactions to the financial crisis by the Merkel government.

Some have even said the law represents the breaking of a taboo in Germany given the country's experience with expropriations under the Nazis and, in East Germany, under the communists. Were Berlin to carry out an expropriation of HRE, it would be the first such move since the 1930s.

Still, the law is narrowly formulated in an effort to limit Berlin's reach. Furthermore, it expires at the end of June.

HRE was among the first of Germany's banks to be hit by the financial crisis. In early 2008, the bank wrote down €390 million before needing a €50 billion bailout last October. When Germany passed a €500 billion bank bailout bill later that same month, HRE was the first bank to take advantage. The bank has now tapped Berlin for €102 billion in aid and there has been speculation recently that more will be necessary."

A customer can prove in court either that his bank gave him erroneous advice, or that his advisor concealed hidden commissions.

TO BE NOTED: From Spiegel Online:

'O FOR OLD, D FOR DUMB'

How German Seniors Lost Nest Eggs in Lehman Collapse

By Hauke Goos

Bankers called them "OD customers" -- "old and dumb" investors who let their advisors talk them into buying Lehman Brothers securities last year. They lost their savings in the financial storm, but now the injured parties are fighting back, with help from an experienced fighter.

They arrive like a flock of birds, a few minutes ahead of schedule. They laugh and hug each other, presumably pleased not to have to deal with their anger alone anymore. They wear stocking caps to ward off cold and carry signs to protest the indifference of society. The signs include slogans like "Phony Advice -- Total Loss" or "No More Money -- No More Confidence." They've come together to hold a vigil in downtown Frankfurt, and for many it's the first time they have ever demonstrated.

Housewives, retirees, teachers and plumbers have gathered on this cold February afternoon in the city's Bornheim neighborhood. They include small investors, ordinary savers, women who watch the popular "Tagesschau" TV news program. They are not speculators. They wanted their money managed conservatively. They didn't want to have to worry about their savings. They just wanted to watch their assets grow.

As conservative investors, they bought securities their bank advisors had recommended -- supposedly safe proucts with relatively low yields, issued by US investment bank Lehman Brothers. But last September, far away in New York, Lehman declared bankruptcy and suddenly these German investors were part of the crisis. The certificates their banks had sold them were nothing but gambles.

Some people lost only a few thousand euros, perhaps money they had set aside for their funerals. Others lost anywhere from €10,000 ($12,800) to €50,000 ($64,000) on these speculative investments. Many of the protesters in Frankfurt are between 65 and 75 years old. A relatively young man is standing in the cold on behalf of his 89-year-old mother. She lost her savings because her investment advisor had placed her into "Risk Group 4," which is defined as "speculative."

Some bought the securities in late 2007, some in February or March 2008, and some in June, when many Lehman employees had a hunch that the bank would not survive 2008 as an independent firm. Did the German investors know the securities were certificates, and that they were subject to issuer risk? No.

Did they know what a certificate was? No.

Did they know they could lose their money? No, they say, outraged. "If I had known," says one of the protestors, "I would never have done this." Three banks have branches on this square in Frankfurt-Bornheim: Citibank, Dresdner Bank and Frankfurter Sparkasse, the three institutions that were especially zealous about selling Lehman securities in Germany. Frankfurter Sparkasse has admitted that it sold Lehman securities to 5,000 of its customers, for a total of about €75 million ($96 million) -- securities it touted as "absolutely safe," which are absolutely worthless today.

The people picketing on this Frankfurt square know that Lehman is now being run by a bankruptcy administrator. They have read that deposits with Lehman's German subsidiary are covered by the deposit guarantee fund of the Association of German Banks (BdB), but they also know that this makes no difference in their cases, because Lehman only had institutional investors in Germany. Those investors will get their money back, but small investors will not, because the certificates they purchased were issued by the parent company in the United States.

"I went to my investment advisor," says an old man. "I'd invested €50,000 ($64,000). It was everything I had. The advisor looked at his screen and said, 'Your account has been set to zero.'"

In one case a bank advisor in the northern port city of Bremerhaven sold his customer a Lehman certificate for about €93,000 ($119,000) as late as Aug. 21. According to a flyer the advisor brought to the meeting, Lehman was rated A+. But by then Standard & Poor's had downgraded Lehman to an A rating, "outlook negative."

When I'm 64

One of the Lehman casualties in Frankfurt holds a sign that reads, "A safe capital investment??? Never again!" Another sign reads, "Advised and sold by bank experts." Yet another, "Investors in the tank, robbers in the bank."

That evening about 60 investors who lost their money as a result of the Lehman bankruptcy convene in Sachsenhausen, another part of Frankfurt. They've invited an attorney, Matthias Schröder, of the law firm Leonhardt Spänle Schröder, experts in investment fraud. They ask Schröder how to get their money back. He is a tall, slim, matter-of-fact man. During a bank traineeship he once worked for a few months as a customer advisor; the program included a stint in the legal department at Commerzbank, where he learned how to ward off claims for damages. Schröder understands banks.

The Lehman bankruptcy has brought him hundreds of new clients. He's established himself as one of the clean-up men in this mess. His job is to examine the wreckage and make sure small investors are not lost in the fray.

According to Schröder, the average Lehman casualty is 64. Schröder will be 40 in June. The people who come to see him in his office are old enough to be his parents. They feel betrayed and ashamed, and they want to show the banks that they are not about to take this sort of treatment lying down.

Of the roughly 300 clients he now has, no more than 15 are still working, says Schröder. The overwhelming majority are retirees who spent their lives saving for old age. Most were customers of the same bank for decades. They knew and trusted their advisors, which made them attractive targets for the banks' sales strategists. Two received calls from their advisors in a retirement home, says Schröder. One thought Schröder, who visited him later, was from his bank, "because you too are such a nice man."

Schröder's oldest client will celebrate his 100th birthday in May. He "survived both world wars and the Turnip Winter (1916-17, when a frost destroyed harvests)," he told Schröder, "and now Frankfurter Sparkasse is burning up the last of my money."

Investment advisors referred to agreeable elderly customers as "flexible Lehman grandmas." These were people they would call when it was time to show sales results and fulfill quotas, or when they were short on time. Bankers called them "OD customers" -- O for old, D for dumb (or "AD" in German, for alt und doof). "These were conditions you would normally expect only in a gray market," says Schröder.

He says there are two ways to win a lawsuit against Frankfurter Sparkasse, Dresdner Bank or Citibank. A customer can prove in court either that his bank gave him erroneous advice, or that his advisor concealed hidden commissions.

Schröder has brought a file containing documents from bank employees he knows in Frankfurt. Some are confidential, marked "for internal use only," and some are evidence. He produces an email written by a bank advisor three months before the Lehman collapse. In the message, the advisor promises "hedging of the invested capital with 100 percent protection of capital on the maturity date." The prospects for winning this particular case are good, says Schröder.

Most of the customers were unaware that certificates, unlike investment funds, carry an issuer risk. If the issuer goes under, a certificate automatically becomes worthless. There is no such thing as "100 percent protection of capital," as the Lehman investors have since learned.

Schröder holds up the folder and tells his audience that every issuer is required to file a detailed prospectus with the German Federal Financial Services Authority, or BaFin.

"The bonds are not subject to any capital protection," is written in bold lettering on page 1 of the prospectus. "A partial or total loss of invested capital is possible." Further back, the prospectus notes that buyers of certificates should have experience with derivatives, options and warrants, and that before buying these instruments investors should "consult with their own legal and tax advisors, accountants or other advisors." A murmuring sound passes through the room.

The flyer handed to some of the Lehman casualties by their advisors makes no mention of risks.

For Schröder, the methods used by banks to unload these Lehman securities on long-standing customers were nothing short of "perverse" and "unscrupulous." The sole purpose of certificates, he explains, is to let a bank make a killing without its customers noticing. "These are standard gaga products," says Schröder. "As an investor, you simply cannot make money with them, because you are betting against top professionals." His goal is to prove "that the sale of certificates in Germany was a huge scam," Schröder says in his Frankfurt office. "And I am not the least bit concerned that we will not succeed."

Translated from the German by Christopher Sultan

URL:

• http://www.spiegel.de/international/germany/0,1518,613102,00.html

"While a simple one-word translation may be elusive, measuring the degree of Schadenfreude in English is easy"

Another excellent FT post:

"Outside Edge: An über language for the Zeitgeist

By Frederick Studemann

Published: December 29 2008 18:35 | Last updated: December 29 2008 18:35

Schadenfreude is one of those words for which there is no simple direct English equivalent. What in German is a delightful tongue-rolling, lip-stretcher of a word, needs to be ploddingly spelled out as “the delight in the misery of others”.

While a simple one-word translation may be elusive, measuring the degree of Schadenfreude in English is easy. Usage of the word among Britain’s national newsprint media is up 29 per cent this year with 543 mentions in the period to December 15, compared with 422 in the same period in 2007; in the US news media it has risen 30 per cent (223 against 171).

How fitting that just as most other indicators are pointing downwards, the use of a word that so neatly describes one of the popular feelings of these times is in bullish form. Compound nouns – a German speciality( SANSKRIT AS WELL ) – with their ability to express different things lend themselves to the complex nature of the current crisis.

Schadenfreude is not the only one suited to neatly capturing the Zeitgeist. Angst, which has been doing English service (on and off the couch) for decades is an obvious case – though its usage this year has slipped (down 3 per cent in the UK and 8 per cent in the US). Perhaps we have moved on from plain fear to something far more dramatic( I AGREE ) – a full-blown Götterdämmerung, maybe( STEADY MATE )? When it comes to expressing volatile market behaviour, try Sturm und Drang.

Seen from the other end of the dictionary the increasing use of German words in English is a surprise. For a long time traffic has flowed the other way. German is littered with English words to the point where it is now almost possible to construct a complete German sentence using just English words.

But it is not just the credit crunch that has offered the chance for some payback. Take über. A handy little prefix that elevates all that follows, über was supposedly brought into English by a combination of George Bernard Shaw and Nietzsche (think übermensch)( I HAVE A CHARACTER NAMED THIS IN MY THIRD NOVEL ). It has not looked back since. In the UK its appearance in media has risen nearly sixfold in the last decade; in the US fourfold.

In showbusiness anyone who has not earned the title of an über-agent, über-director, über-publicist, or über-whatever should probably be seeking career counselling. In politics, real players are über strategists, those who don’t make the cut “über goobers”. Global warming must be serious: commentators call it the über issue. Leonardo DiCaprio’s house goes on the market not as an ordinary domicile, but as an über home. Finance has not been spared. Market pessimists get to be “über bears”. Warren Buffett is, predictably, the über investor. Über is über all.

In Germany, reports of über proliferation – and the annoyance it is starting to create – are cause for some quiet satisfaction. “It’s the revenge for ‘super’,” notes one writer with reference to the widespread adoption of that word into German. Cause for a bit of Schadenfreude, perhaps?"

And so here's my movie pick of the day. An Uber-...Sorry:

"prosecutors are investigating alleged "false statements," "market manipulation," and "breach of trust"

From Spiegel Online, a German AIG:

"A Black Hole in the Banking Bailout

By Beat Balzli, Dinah Deckstein and Jörg Schmitt

Prosecutors in Germany are investigating accusations of insider trading( COLLUSION ) at Hypo Real Estate, the Munich-based mortgage lender that has recieved billions of euros in government bailouts -- the most of any company so far -- as a result of risky investments in US subprime loans.

They arrived early in the morning in large teams and they raided numerous offices and private residences at the same time. In November 2006, the Siemens corruption scandal came to light with a major police raid -- an affair whose first chapter ended several days ago with a multibillion dollar settlement with the United States government.

DPA

Former Hypo Real Estate CEO Georg Funke: What will remain of the company will be a shell of its former self.

As news came recently of the Siemens judgment in the US, it almost seemed like deja vu when investigators launched spectacular raids in what could become Germany's next great business scandal.

Yet again, dozens of investigators mounted simultaneous raids on numerous locations. But this time the investigations aren't into corruption. Investigators are looking into charges of speculation, market manipulation, breach of trust and deception, insider trading and incompetence( NEGLIGENCE, FIDUCIARY MISMANAGEMENT, FRAUD, COLLUSION ) among greedy finance managers at the Munich-based Hypo Real Estate, one of the German banks that has been the most deeply entangled in the finance crisis. The sums of money involved in this scandal far exceed those in the Siemens affair.

Just three months ago, the German government, the German central bank (Bundesbank) and several credit institutions agreed to provide HRE with €50 billion ($71.7 billion)( THAT'S MORE THAN THEIR STIMULUS! ) in liquidity to prevent the bank's collapse and a chain reaction( CALLING RUN ) that would have hit other German banks. The government then had to provide an additional €30 billion in credit guarantees to the crippled bank.

The Munich mortgage lender, together with the Irish subsidiary Depfa that it acquired in 2007, had burned massive amounts of money through risky US real estate securities and other reckless business dealings. The company also appears to have covered up the scope of its misdealings. That, at least, is the assumption of public prosecutors who are now investigating HRE executives. According to the search warrant issued, prosecutors are investigating alleged "false statements," "market manipulation," and "breach of trust" by current and former members of HRE's board. In a six-page paper, prosecutors take a tough stance on managers. They claim they made "deliberately false statements" about the company's dramatic situation and that they were guilty of "deliberately concealing" important information and that they had violated their obligation to safeguard company assets.

Prosecutors believe that the company's former board withheld information from the public about the company's true state for more than a year. The Munich public prosecutor's office has also confirmed that it has been investigating the company since February for suspected insider trading among other things. According to several criminal complaints, HRE managers or their relatives and friends are accused of having sold large numbers of HRE shares before the company first warned of its financial woes on January 15. Share prices in HRE have hit rock bottom since the company's financial troubles hit the headlines.

In their search warrant, investigators claim the main reason for the company's current financial misery is that the board failed to take steps( WHAT WERE THESE? ) needed to restructure the company at the necessary time.

Contacted by SPIEGEL, a spokesman refused to comment on the developments. Other executives, however, have defended the company's leadership, saying it had not been given sufficient warning about the true state of HRE.

The former chief excutive, Georg Funke, 53, along with other top executives, has since been fired. The bank's new chief, Axel Wieandt, 42, who was hired in October, has just fired two other members of the management board and announced that by 2011, he will have to lay off more than half of the bank's 1,800 employees. What will remain of the company will be a shell of its former self -- and a raft of unanswered questions.

HRE's holiding company, HRE Holding, was only partially regulated under Germany's Banking Act. The country's banking regulator, BaFin, was in charge of supervising HRE's domestic subsidiaries in Germany and, together with its Irish colleagues, HRE's Depfa unit in Dublin. But it appears that nobody had a complete picture of what was happening at HRE. That led to a disastrous lapse in banking supervision. "So far, we have not been able to comprehensively oversee financial holding companies," a BaFin spokeswoman confirmed.

German lawmakers are now moving to change existing legislation. According to the latest amendment to German securities law, firms can voluntarily subject themselves to the rules and implement systems to reduce their risks. But experts are calling for tougher rules.

"HRE is to Germans what insurance company AIG is to the Americans," said one prominent banker. Both firms were long considered trouble-free, slumbering giants, but in the end, they have emerged as black holes in the industry in which billions in bailout money are rapidly disappearing. The casual approach that had been taken by management should have served as a warning signal long before. As early as May 2007, Michael Thiemann, the manager of HRE subsidiary Collineo, admitted, "You don't have the time to take a close look at each borrower." Shortly afterward, Collineo and Citigroup sold a massive package of highly complex property loan investments, of which almost half were US subprime mortgages.

Recklessness, bravado and greed were the hallmarks of the troop of executives surrounding Gerhard Bruckermann, who ran Depfa -- a company registered under Irish law for the financing of government projects -- before selling it to HRE in the summer of 2007.

Five years earlier he had moved important parts of the company, which was supposedly rock solid but whose management took too many risks, to tax havens in order to save on taxes( GOING OFFSHORE ).

Bruckermann rewarded himself and his management board for such creativity by raising the board's salary by 100 percent in 2003 -- to €20 million. He went on amass an even greater personal fortune: he is believed to have earned €100 million through the HRE deal."

This is clearly illegal behavior. Also, notice the government bailout. Implicit guarantee?

No matter how one wishes to describe it, the US will have to default on its sovereign debt, most likely on a selective basis

Here's a proposal that I thought China, Germany, or Japan (For Export Reasons ) might make, because the Saver Countries love the current arrangement and don't want to change. From Bloomberg:

"By Stanley White and Shigeki Nozawa

Dec. 24 (Bloomberg) -- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.( TRUE )

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.( TRUE )

“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”( TRUE )

The U.S. budget deficit may swell to at least $1 trillion this fiscal year as policy makers flood the country with $8.5 trillion through 23 different programs to combat the worst recession since the Great Depression. Japan is the world’s second-biggest foreign holder of Treasuries after China.

The U.S. government needs to spend on infrastructure to maintain job creation as it will take a long time for banks to recover from $1 trillion in credit-market losses worldwide, Mikuni said. The U.S. also needs to launch public works projects as the Federal Reserve’s interest rate cut to a range of zero to 0.25 percent on Dec. 16. won’t stimulate consumer spending because households are paying down debt, he said.( POSSIBLE )

U.S. President-elect Barack Obama wants to create 3 million jobs over the next two years, more than the 2.5 million jobs originally planned, an aide said on Dec. 20. Obama takes office on Jan. 20.

Marshall Plan

Japan should also invest in U.S. roads and bridges to support personal spending and secure demand for its goods as a global recession crimps trade, Mikuni said.

Japan’s exports fell 26.7 percent in November from a year earlier, the Finance Ministry said on Dec. 22. That was the biggest decline on record as shipments of cars and electronics collapsed.

Combining debt waivers with infrastructure spending would be similar to the Marshall Plan that helped Europe rebuild after the destruction of World War II, Mikuni said.

“U.S. households simply won’t have the same access to credit that they’ve enjoyed in the past,” he said. “Their demand for all products, including imports, will suffer unless something is done.”( TRUE )

The plan was named after George Marshall, the U.S. secretary of state at the time, and provided more than $13 billion in grants and loans to European countries to support their import of U.S. goods and the rebuilding of their industries

Currency Reserves

The Japanese government could use a new Marshall Plan as a chance to shrink its $976.9 billion in foreign-exchange reserves, the world’s second-largest after China’s, and help reduce global economic imbalances, Mikuni said.

The amount of foreign assets held by the Japanese government and the private sector total around $7 trillion, Mikuni said.

Japan will also have to accept that a stronger yen is good for the country in order to reduce excessive trade surpluses and deficits, he said. The yen has appreciated 23 percent versus the dollar this year, the most since 1987, as the credit crisis prompted investors to flee riskier assets and repay loans in the Japanese currency.( FLIGHT TO SAFETY )

“Japan’s economic model has been dependent on external demand since the Meiji Period” that began in 1868, Mikuni said. “The model where the U.S. relies on overseas borrowing to fuel its property market is over. A strong yen will spur Japanese domestic spending and reduce import prices, thereby increasing purchasing power.”

I thought that China would offer this first, but Japan's drop in exports is obviously panicking them. I'll repeat my point: It will not be easy for the Saver Nations to change, so that they will try and come up with creative plans to keep this system going. This is an example.

Now, I had actually missed this Bloomberg story, which I believe is important, but Jesse's Cafe Americain picked it up. So here's Jesse's take:

"Japanese Economist Urges Selective Default on US Treasury Debt

Here is an interesting proposal for a 'selective default' of US Treasury debt to head off a massive devaluation of the dollar, and to promote the US recovery from the ravages of its self-inflicted financial damage.

No matter how one wishes to describe it, the US will have to default on its sovereign debt, most likely on a selective basis, writing down the rest through an inflated dollar. The Japanese recognize this and are volunteering a tentative plan to accomplish it to support their industrial policy.

Although there is a potential for a voluntary debt forgiveness from Japan as a loyal client state, we wonder if the rest of the world will be inclined to support an unreformed dollar hegemony.

Can the economic world so woefully lack the will, knowledge, and the imagination to develop a more equitable mechanism for international trade?

Financial reforms, although not even on the table yet, are certain to come with any sustained recovery. There has been nothing even seriously proposed yet as Bernanke and Paulson rush to supply fresh capital to prop up the status quo and aid their cronies on Wall Street.

We can surely do better than this."

I disagree. From the point of view of the Saver Countries, this would be the easiest and cleanest solution, and would allow the symbiosis of Saver and Spender Countries to continue. If not this, they will soon be floating other similar options.

"and that we can learn things about how to handle our present problems by looking at the experience of 1930s"

From A Fistful Of Euros:

"Well, one good turn deserves another. So if, like Paul Krugman (and me, I think, though I hadn’t gotten as far as thinking through all the implications of what was happening when I posted the original piece) you take the view the Ukraine industrial output chart I put up yesterday is the smoking gun (or starter’s pistol, or line judge flag, or whichever metaphor works for you) that tells us that the second great depression has now begun, then here are some more of those tell-tale charts to put in you pipe and smoke - or if , like Huck Finn that is your preference, to chew on.

(Update: someone in comments has made the perfectly legitimate point that Paul Krugman may only be saying that a Great Depression has broken out in Ukraine, and obviously only he can say what he really thinks, but as far as I am concerned, since one of the hallmarks of the original Great Depression was a sudden sharp drop in output, sustained over a number of years, and in a large group of countries, accompanied in several cases by outright price deflation, then I do think that a depression rather than a recession( DON'T AGREE ) is what we now have on our hands, and what makes me more or less sure about that is looking not only at what is happening in Ukraine, but also at neighbouring Russia, and China, and so on and so on. Evidently, since history never exactly repeats itself, I am certainly not saying that this is going to last a decade, or end in a big war, or anything like that, but that it is already in the history books, and already in the class of large and unusual economic phenomena, and that we can learn things about how to handle our present problems by looking at the experience of 1930s, of all of this I am absolutely sure, and I have a pretty good idea that both Bernanke and Krugman are too, if you look at the constant references to those years in almost everything they say and do these days( THE 1930s ARE OF LIMITED USE. IT WAS A COMPLETELY DIFFERENT CONTEXT )

Now For Some Charts

Japan industrial output isn’t exactly falling at the same dramatic pace as Ukraine, but a 16.2% year on year fall isn’t to be sniffed at either, and this is what they informed us today happened in November. Worse still, according to Japan’s Economy Ministry output is expected to decrease by a further 8.0% between November and December, which, if accurate, will surely push the year on year decline in December over the 20% mark, not the great depression, but then again, not exactly enjoyable.

And exports, which drive the Japanese economy, were down by 26.7% in November. Even more to the point, deflation is baaack, or almost back, since “core” core prices hit zero (or 0.1% below current overnight BoJ interest rates) in November, and outright deflation surely isn’t far behind.

You can find more detail on all today’s Japan data over at the Japan Economy Watch Blog, and for those of you who want some more deflation background on Japan, well, Krugman has the goods here (extremely wonkish).

Moving nearer to home we have Germany. Here is the latest (flash) December manufacturing PMI for Germany, which is just about as point of the spear as you can get in terms of just in time data.

The slope of that line looks pretty telling doesn’t it, especially if you are into depression economics. Then we have the November new orders chart, another shocker, and indicator of much worse to come, I think.

Now going back to this point:

“There is a burgeoning economic crisis in the European periphery,” Krugman said on the ABC network Dec. 14. “The money has dried up. That’s the new center, the center of this crisis has moved from the U.S. housing market to the European periphery.”

I think this is largely true, if we mean by the periphery the UK, Ireland, Eastern and Southern Europe, but the periphery in a very literal sense always ends up biting the hand that feeds it, since German industry depends on exports to that periphery perhaps more than to anywhere else, so it is not surprising that once the periphery folds, the shock wave moves on in towards the centre. I don’t know if the blast which is about to hit Germany next year will count as a depression, but if it doesn’t, it is going to be a damn close call. And the hard part for Germany is when you get to ask yourself where exactly the new demand will come from to drive the exports( THE GOVERNMENT COULD SPEND, WHICH IS WHAT WILL HAPPEN )?

Moving off now towards the periphery, we have Spain to the south, where the money certainly has dried up, and with it internal demand for Spain’s manufactured products. The November PMI showed Spanish industry contracting at an all time series maximum for any country.

Central Europe

The whole of central European manufacturing is now contracting rapidly. First off, the Czech Republic

Then Poland

And finally (for this little illustration) Hungary

Then There Is Russia

Moving on now to Russia, industrial output was down by 8.9% year on year in November, so it hasn’t yet reached Ukraine levels, but at the rate of contraction they are experiencing I wouldn’t be too confident that that state of affairs will last too long.

And Finally China

Where the November PMI also showed quite a strong contraction:

So where does that leave us? Well basically I’m not sure. We still need to see more data. (Do I sound horribly like Jean Claude Trichet at this point?). If we look at the chart for US industrial output which Krugman presents, the first thing which is pretty obvious is that the 1928-1930 boom-bust was a pretty rapid affair.

After that output dropped very sharply, going in the space of twelve months from a 20% expansion to a near 30% contraction, and the contraction continued at those levels until mid 1932, when the position started to improve - although all this year on year % contraction data is a bit misleading for non specialists, since to have a 30% contraction in mid 1932, following near 30% contraction in mid 1930 and (what) a 15% contraction in mid 1931 (taking into account base effects) then the drop is really massive, and I doubt even Ukraine (barring very worst case scenarios where the country simply disintegrates) will get this. But where this current output slump (or call it what you will) in a number of key countries already does resemble the 1930s more than any other drop in activity since (remember, Japan’s November fall in output is greater than anything that has happened in the entire lost decade-and-a-half) is in the sharpness of the drop, and in the sequencing of events. By sequencing I mean the fact that we have had a pretty dramatic financial crisis, which has lead to a generalised loss of confidence in the banking sector( THIS IS TRUE. THE AVERSION AND FEAR OF RISK ), and this in turn has produced a credit crunch, which is now working its way right through the real system( TRUE, IT'S ALL THE FEAR AND AVERSION TO RISK ). And nothing, but nothing, at this point, seems to be barring its pass( IT WILL SUBSIDE NEXT YEAR ). That is the worrying bit, and that is why I don’t think we are going to see a generalised “turnaround” in activity in 2010, or even 2011, this show is going to run and run, at least in some of the worst affected countries. And we still don’t know just how many icebergs there are lying out there for our convoy to hit. Life, as we know, is always full of surprises, and we should ever be ready for them, for good or for ill."

I don't see things this way. For one thing, the steep decline tells you that it can't be fundamentals, which don't fall off a cliff like that. Rather, like a Bank Run, this is a generalized Fear and Aversion to Risk and the Accompanying Flight to Safety. Because it began in the US, it has rippled around the world. When the US turns around, that will ripple around the world as well. The movement of information is also a main cause of the speed of this tsunami of fear.

I'm saying that the resemblance of the charts, similar in both Spender and Saver Countries, should be a clue that this is not fundamentals driven. It is more like mass panic.