Global Economy in 2008

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"... Household spending will drop 1 percent in 2009, the biggest decline since after the attack on Pearl Harbor, according to the median estimate of 51 economists surveyed Dec. 4 through Dec. 9. By the middle of next year, the economy will have shrunk for a record four consecutive quarters, the survey showed. ..."

"... A report from the Commerce Department today showed wholesale inventories fell 1.1 percent in October, the most in seven years, as a record 4.1 percent drop in sales caused companies to scale back. ..."

"... Consumer purchases, the biggest part of the economy, may drop at a 4 percent rate this quarter, the survey showed. Following the 3.7 percent slump from July through September, it would be the first time on record that spending declined in excess of 3 percent in consecutive quarters. ..."

"... The drop in sales will prompt employers to keep cutting staff, sending the unemployment rate to 8.2 percent by the end of next year, a 25-year high, the survey showed. ..."

"... Investors concerned about the worst financial crisis in at least 70 years have rushed to the safety of U.S. government debt, causing three-month Treasury bills to trade yesterday at negative rates for the first time. ..."

"... “The big problem is that there’s no bottom in sight for consumers and for businesses,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “The negative sentiment makes it difficult to stabilize the situation. It’s very worrisome.” Businesses are pulling back as Americans retrench. Dow Chemical Co., the largest U.S. chemical maker, this week said it will cut 5,000 jobs, permanently shut 20 facilities, temporarily idle 180 plants and reduce the company’s contractor workforce by about 6,000. ... "

FROM: http://www.bloomberg.com/apps/news?pid=20601087&sid=aT3tIUszCRuY&refer=home

Billy T comment:
Rio Tinto killing 14,000 jobs today, etc. etc. all over the developed world. {US job losses now at 1/2 million per month rate or 6 million/ year. -Twice what closing the big three autos will also add. Obama needs to be a miracle worker to make any bottom, short of world's worst ever depression, IMHO.}

Even China had 2% drop in exports in November but internal consumption and infrastructure development more than off sets that - I.e. China's GDP growth still north of 8%. Brazil's 6.8% growth in 3Q08 is expected to slow to about 4% in the final quarter of 2008. US is negative and dropping fast despite trillions of stimulus. If not deep depression, where will it end? (But not for the suppliers of energy, raw materials & food stocks to Asia, especially China, of course.)

 

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First time Treasury even informally admits it may have trouble selling bonds to finance the growing debt - What I have predicted for years:

"... Dec. 10 --The U.S. Treasury said it may need to introduce new financing methods to sell a record amount of government debt.

“Given the broad range of deficit estimates, Treasury needs to be prepared to meet additional financing needs if necessary,” Treasury Assistant Secretary Karthik Ramanathan said in a speech today in New York. “This challenge may require novel approaches to debt management.”

Ramanathan, the Treasury’s head of debt management, cited private analysts’ estimates of borrowing needs that may reach $1.5 trillion to $2 trillion in the financial year that ends in September 2009. ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=an9ximBDa0Qc&refer=home

Billy T comment:
"novel approaches to debt management”
So is that the preferred way to refer to "printing press money" :shrug:

Or it it only what Ben Bernnache said a few days ago: I.e. the FED will begin (for first time ever) o buy the longer term bonds in the open market, to drive up their price and lower their interest rates.

 

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The US had a huge job loss of 533,000 in the month of November. Much of that loss was the result of bank mergers and downsizing throughout the financial and investment sectors. There are no forecasts that I have seen that predict 6 million for the coming year. Do you have any sources?

I don't follow what you are stating here, Billy. Are you suggesting the US will lose 6-9 million jobs next year regardless of what Obama does? Or, are you suggesting that if the US doesn't lose 6-9 million jobs next year, Obama will have worked a miracle? I support Obama personally, but it seems you are setting up a strawman (9 million job loss) after which you will later claim "Obama worked a miracle" if it doesn't happen, or "it's not Obama's fault" if large job losses do happen. That is politics, not economics.

No it doesn't, not in November. China had a 2.2% drop in exports in November compared with November last year. China's exports in October increased 19.2% from a year earlier. China's imports (consumption) increased 15.6% in October. Those numbers dropped off a cliff in November. Exports dropped 21.4% (2.2% plus 19.2%) from October to November. Imports plunged 17.9% in November, meaning internal consumption was way down, not increasing to offset the loss of exports. The recession is just now hitting the emerging market's bubble. That bubble will burst just like the housing bubble burst in the US. Just like in the housing bubble in the US (and elsewhere), the participants in the emerging market bubble didn't recognize the fact that the bubble couldn't continue to grow at those past rates without eventually bursting. Here are a few cut and pastes:

Although you haven't mentioned it, I'm sure you have read were China is attempting to lower the price of the iron ore and copper it imports by 82%. That doesn't seem good for Brazil's commodity export economy, as all commodities are falling in price. See Billy, it is easy for anyone to accent the negatives in any economy. Oh, and BTW, you didn't need to apologize for your earlier comments. This is just an internet forum, nothing was taken personally. I should have backed up my comments to begin with, but was lazy.

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To 2inquaitive:

No I have no sources that also project 6 million jobs will be lost in 2009. I only note the 530,000 lost last month and the almost daily announcment of more being layed off and store closings. You could be correct that last month was atypical, and not a step up to new rate, Lets wait to see if the big three autos 15 million bandaid gets thru the Senate to judge that.

I was not really trying to tie an "Obama miracle"to any job loss levels. Just repeating my old song that depression is coming, unless Obama can work a miracle. Just as I blame GWB's tax policy and wars and Republican "trickle down" economics for the coming depression, if it is avoided I will praise Obama for "doing the impossible." (You certainly do not expect me to say: Well it was not as surely comming as I predicted years ago, do you?

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)

Again you are more accurate than me on China. What I was trying to note was that although China's exports are down (US and EU buying less) they are trying to convert to mainly an internal consummer market and have put 550+ billion on the line to do that. It will take some months to make up for the loss of exports, but I am confident, China will continue to grow as US and EU sinks deeper and deeper in negative growth. Unlike the US, China (and Brazil) have larger reserves (compared to their economy's needs) with which to stimulate. (Brazil could also cut it 13.75% basic interest rate some.) Just today, for the first time, the US treasury informally acknowledged that financing the growing debt will require new measures.
See: http://www.bloomberg.com/apps/news?pid=20601087&sid=avK7zCQ1PjCs&refer=home

Also Ben Bernnache said FED would be (for the first time ever) buying longer term Treasury bonds IN THE OPEN MARKET (to drive interest rates down, so he said, but I think more truthful is as the buyer of last resort.) The short term notes (3 months or less) are now with negative interest for a very steep yield curve - clear indication that many others, like me, fear a flood of printing press dollars, as Obama tries to avoid depression.

I am not sure, but think the 82% price reduction (hope of China, not a "done deal") is on iron ore only, but that is not to say copper price will not be dropping too. (I preversely hope it does some as I have a GTC buy order in on PCU but probably have bid too low.) Yes Rio Tinto is killing 14,000 jobs and delaying openning a new ore body mine (in SE asia, as I recall). Vale is also contracting, but not as much yet. The dry bulk index is climbing now however so someone is expecting to be shipping something in greater bulk.

 

Billy T,

GWB's reduction of taxes on the wealthy and businesses, and war expenses, grow the government debt. Government debt did not create the current crisis. Excessive consumer and corporate debt, plus rampant speculation enabled by lax regulation, is the cause. The Glass-Stegall overnturn (mostly responsible for excessive bank leveraging) and the CFM Act of 2000 (making outright gambling by means of credit default swaps possible) were signed into law by Clinton before Bush came into office. I do not like Bush, have never voted for him, and I do hold him (and especially Cheney) responsible for an irresponsible and ill-concieved war in Iraq, adding immense sums to government debt. Alan Greenspan and an ignorant congress hold the most blame for the credit bubble and Wall Street speculation, the causes for the current crisis.

I knew China had commited 550 billion to fight contraction. How does China use that money to 'convert to mainly an internal consummer market'? Are they planning on giving the money directly to the citizens to spend (via a 'stimilus package') to increase consumption? Or, are they planning to increase the money supply (easy money) to chinese citizens and businesses, increasing private sector debt? Obama is putting over $700 billion 'on the line' to create jobs for US citizens, mostly through infrastructure projects.

Why are you confident China's plan will succeed, while Obama's plan is doomed to fail? You seem to have very little confidence in Obama.

China and Brazil keep large cash (mostly dollar) reserves mostly to manipulate the value of their currencies against the dollar. The US does not try to manipulate the value of the dollar by buying and selling the dollar with foreign currency. I know China has vast foreign reserves. Brazil is not in as good a shape as you often state. Back in Jan. 2008, Brazil's foreign reserves exceeded their foreign debt for the first time, making them a 'creditor' nation. That does not mean Brazil has no foreign debt, just that their foreign reserves were slightly greater than their foreign debt. Brazil's foreign debt is stated to be only 10% of their total debt, which is around 1.3 trillion real. Yes, Brazil has room to cut their basic interest rate to stimulate consumer debt and spending. That could be counter-productive though, as it will decrease foreign investment in Brazil's economy. The combination of increasing consumer debt and decreasing foreign money injected into the economy could very well cause problems down the road. Brazilian banks are limited by cash on hand as it is, so they do not want to decrease foreign money any further.

 

I think Obama's plan does address those systemic issues. All the money injected into the system to pay for the government make-work programs will weaken the dollar, as they are true printing press dollars, not loans that can hopefully be repaid. A weaker dollar decreases imports, making imports more expensive. A weaker dollar makes US manufactured goods more competitive on the world market, increasing exports and jobs. This transformation will take time to happen and the US will face many months of hard times. As the US, and other developed nations, consume less, hard times are also in store for the nations whose economies currently depend on exports. There has to be a balance between exports and imports for a world economy to work.

 

No, kmguru, there are other products to export besides DVD players and that chinese DVD player will not be $35 when the dollar losses value compared to the yuan.

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The largest exporter in the world today is Germany even with the current exchange rates. China overtook the US as the world's second largest exporter only this year. The US's trade imbalance is so large because we import so much junk. That will change as imports get more expensive.

 

kmguru,

When is what going to happen? As I stated, the trade imbalance will decrease as imports get more expensive due to a weaker dollar. I said nothing about the US running a trade surplus.

I would know when that $35 dollar DVD player cost $231. One dollar today will buy about 6.6 yuan. The chinese have artifically manipulated the value of the yuan to keep it low, mostly by buying US treasury notes, over a trillion dollars worth at last count. Do you believe they will continue to do that when the value of the dollar is weakened as 'printing press dollars' begin to flood the market? China can flood the world with exports because the exchange rate of the yuan is so low compared with other currencies. A decrease in the international value of the dollar is necessary to decrease US imports and increase US exports.

No, I stated Germany was the world's largest exporter.

The US was third. By your logic, the US economy should be better than those nations who had fewer exports than the US. Cheap IMPORTS into the US are costing jobs in US manufacturing, as US manufacturers cannot compete due to the current currency exchange rates. The only solution is not to pay US workers fewer dollars, but to adjust international exchange rates especially with respect to the yuan. A weaker international dollar will increase the cost of imports, including oil, but will have a much smaller effect on US-produced goods, though they will go up too because of the increased cost of imported oil. Increased production of hybrid-electric vehicles and the use of US-produced natural gas to power our trucks and some cars will decrease the need for imported oil. Yes, it is a long-term approach. There are no instant fixes for the current recession. Recovery will be painful for everyone and the recession will take a long time to overcome. That said, the cause of the financial crisis was not job loss. The financial crisis caused the recession and resulting additional job loss. Inflation (loss of dollar value) is necessary to stop the deflationary spiral. Economic growth can only happen in a controlled inflationary economy, never in a deflationary economy. The key is controlled inflation. That is the reason recovery must be slow, too much money injected too quickly and inflation could get out of control. The injected money must go to provide jobs, not given out freely with no lasting economic benefits.

 

kmguru,

No, it is a truthful answer. The financial crisis started around 18 months ago, the severe job loss has happened comparatively recently.

I said nothing like that. So, you are saying if McDonald's employees made $100 per hour, the economy would be fine and and jobs would be plentiful?

I paid about $231 for the DVD player I have now. I did not make $231,000 per year on my retirement income when I bought it, nor did I need to. Do you really have no clue about international exchange rate's effect on trade, or are you just trying to appear ignorant to antagonize me?

 

I agree that government debt did not create the current crisis; but think it will eventually lead to collapse of the dollar. (Currently Treasury can still easily sell shorter term bills, even occasionally people and institutions pay to buy them! There is sort of a “Treasury Note bubble” just now, but it will burst.) Permitting naked shorts, killing the "up-tick" rule and very lax regulation (50Billion Madoff's Ponzi scheme, just the latest example, but allowing 35+ fold leverage in dirivaties was more important.) also played important roles in the current crisis.

What was the main cause was the defect in Republican "trickle down" ideas continued by Paulson's unrestricted transfer of $335 billion to the financial system, which essentially of no help in freeing up credit in the USA; nor should one expect it to. - When you put more money in the hands of those who are already rich, they tend to invest it, not stimulate the US economy by buying things, like cars etc. Instead they invest it where the returns are the greatest, like China, Dubai developments etc. This means not only is Joe American saddled with more debt but his factory is closing as those funds built more modern ones outside of the USA. The steady decrease in Joe American's salary's real purchasing power during GWB's administration was an essential part of why many Joes cannot pay their mortgages. They expected the housing bubble to continue to inflate and pay it off with profit when they were forced to sell, but it did not turn out that way - as I foretold in post back in 2005.

China is huge creditor nation and its citizens huge savers, with essentially zero credit card debt. Also unlike GWB, who has given US two recessions, large war debts, etc. China has more than three decades of very wise economic management (average of about 9% annual GDP growth).

It is not that I doubt Obama's exceptional ability, intelligence and inspiring leadership. It is just that GWB is handing him a very deep hole to try to get out of while China is sitting on a mountain top of prosperity, even if slightly slowing to only 8% GDP growth.

Following from: http://www.moneymorning.com/2008/12/15/latin-america-outlook/
will give some more about China and Brazil's much more favorable economic positions and answers your question as to how China will spend the $586e9 stimulus money (None will be given as GWB did to the people as the frugal Chinese would just save it.):
"... Many investors think that the U.S. economic crash will lead to a dramatic drop in U.S. orders of emerging-market products, which will cause those economies to drop off. ... But that’s a mistaken assumption. And here’s why.

In Brazil, for instance, exports account for a mere 13% of gross domestic product (GDP). In China, exports are just 10% of GDP. So some contraction in U.S. and European orders can easily be counterbalanced by fiscal and monetary stimulus in these countries.
... And most emerging markets economies have plenty of fiscal and monetary maneuvering room. Leading the pack is China, which accounted for some 27% of global growth last year, and which has continued to use both fiscal and monetary tools to keep itself on a solid growth path.

It recently slashed interest rates again, down to 6.66% (a lucky number in the Chinese culture, meaning “things (are) going smoothly”). With record foreign reserves of $1.9 trillion, China also approved a “fast and heavy-handed” $586 billion stimulus, mainly in housing and infrastructure, to be implemented through 2010. And the Chinese yuan will drop almost 7% vis-a-vis the U.S. dollar to cushion losses in trade. It has also lowered taxes on investments in capital goods. And in a key move that’s been almost totally overlooked by the media, China has made huge market-oriented reforms in agriculture.

China has just allowed its 780 million farmers to rent, transfer or utilize as collateral their rights to their lands and eliminated all taxes on agricultural production and to farmers. This will allow for a massive increase in the scale of production by consolidating companies. In this way, China will keep its 120 million hectares dedicated to agriculture exclusively, with no possibility of urbanization, while at the same time allowing the millions of small farmers to sell out, and get capital to move to the cities. This will not only increase the productivity of Chinese farming dramatically by allowing for economies of scale to work and attracting billions in investments, it also will create a huge incentive for these millions of farmers to move to the cities, boosting housing and infrastructure demand.

Brazil’s plans are very similar to those of China. There’s a:

•Strong fiscal stimulus, allowing a drop in the value of the real currency (a decline that’s already been substantial) in order to cushion exports.
•An easing of capital requirements to Brazil’s strong banking system, which will incentivize housing and car loans.
•Export financing.
•And huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important. By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China’s massive infrastructure buildup and growing consumer demand.

Increasingly, a growing proportion of the infrastructure needs of industrial goods being bought by emerging economies are goods produced by other emerging economies. Trade between Latin America and China has increased by 13 times since 1995, from $8.4 billion to $100 billion. And China, now the second-most-important commercial partner to the region after the United States*, has finally been accepted as a member of the Inter-American Development Bank, committing itself to contribute $350 million to the bank. As an example of this growth in industrial trade, Argentina just bought 279 subway cars from China’s CITIC Group.
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*China may soon be more important than US as trade with US is rapidly decreasing and that with China rapidly increasing. USA supplies 14.4% of Brazil's total imports and China 11.3% during first half of 2008. (I do not have the their relative exports data. As commodities are cheaper, in October China had one month record trade surplus of 40 Billion dollars, even though exports fell 2.2%, Nov08 vs Nov07. (US & EU buying less as tightening belts.) China's trade surplus in first 10 months of 2008 was 255.9 billion dollars.

Without solitation, China has offered 10 billion for part of the action on Brazil's "pre-salt oil." China's Baosteel is building big sheet steel plant in Brazil.
Not yet firm, but China's Lenovo is trying to buy Brazil's computer company, Positivo, but Dell is also expressing interest. (Strong dollar, weak Real effect.)
China, Iran, Russia, and most countries of S. A. have big meeting tomorrow in Sao Paulo, but for first time, US was not invited as becoming less important to S. A. - Read details at: http://www.bloomberg.com/apps/news?pid=20601087&sid=a0a8IQrfwSFU&refer=home

 

While it is true that Brazil has that option, "stimulation" is not the problem. Brazil is needing to control / limit the rapidly growing internal demand (more details below).

A real problem associated with this is that a lot of "hot, carry-trade" money was attracted to Brazil by the world's highest real interest rates (still = or >8%). That money can leave just as quick and as these "investors" are now having credit problems (cannot borrow dollars) much of it has left in the last few months. This pulling of Brazilian Real invested funds out of Brazil has caused a dramatic recovery of the dollar's value vs. the Real in a few months. Hot money is not desirable money and fortunately not the main reason why FDI into Brazil is often relatively large (as compared to the GDP, etc.)

Brazil is blessed by nature and many want to make long term constructive investments here.
Here are two, very recent, related, examples:

(1) "... Brazil has made several major offshore oil finds in the past year, and believes up to 80 billion barrels could be recovered. That would make Brazil an oil powerhouse and turn it into a major oil exporting nation. ..."

From: http://www.thestreet.com/story/10449419/1/petrobras-find-may-hold-2b-barrels.html

(2) " ... Mines and Energy Minister Edison Lobao said Chinese officials contacted his ministry to propose a loan,* and Petrobras then negotiated directly with the Chinese. ... Lobao also told the Folha de S. Paulo newspaper that the United Arab Emirates has offered to finance field development, but he did not specify a price tag.
Petrobras, ... has historically searched for "varied sources of financing" and that recent deals will be included in its new investment plan, expected in the coming weeks.

Lobao told the privately run Agencia Estado news agency other countries also wanted to participate: "It's not just China. It's a range of opportunities that Petrobras has." Lobao said the ministry has talked with a Japanese consortium, Canadian banks and various foreign oil service companies that want to invest in or work on offshore finds. He offered no other details.

Brazil also is ready to tap its foreign reserves to offer a credit line for exploration by Petroleo Brasileiro SA if needed, he added. ..."

From: http://www.thestreet.com/story/10452038/1/china-seeks-to-invest-10-billion-in-brazil-oil.html
(but with Billy T transpose of some paragraphs)

Both these are oil related and even prior to the discovery of the "pre-salt" oil, on an energy basis, Brazil was a net oil-energy exporter; but a net buyer of oil as the exported oil has significantly less value per barrel than the newly discovered light, pre-salt oil, so the current low price of light oil is helping Brazil's trade balance, I think.

While becoming one of the world's major oil exporters (a few years from now at least) is nice, oil is not the long term basis of Brazil growing world economic status. That is its fertile soil, abundant fresh water, long growing season, high level of industrialized agricultural permitted by US mid-west like relatively flat expanses and the rich endowment of many minerals (world's largest exporter of many)

A major contributor to the long term growth is also the increasingly wise government. Corrupt politicians and judges are now going to jail. HFC's "Bolsa Famila," greatly expanded by Lula, has lifted millions out of poverty and transformed them into huge domestic market consumers. That is why Brazil needs to keep such high interest rates (13.75% nominal, 8% real), not the reasons you suggest.

Everyone here, at least, understand that the side effect of keeping inflation within it target range despite this rapidly growing domestic demand** with these high rates attracts the undesirable "hot money" to Brazil. Hot money hurts the economy by making financial planning less certain and the currency less stable. There has been, on several occasions, serious consideration of controlling its entry into Brazil, by large taxes, etc. on short term investments, but thus far, the "keep markets free" side of the argument has prevailed.
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*Unlike Uncle Sam, who now is turning to the FED’s printing presses for essential financing, nations and rich individuals are begging Brazil to be part of its long term growth, all can foresee.

**Like China, Brazil is a huge exporter, but exports are a decreasing part of GDP. The domestic markets are the rapidly growing sector. Neither China nor Brazil will have much need of customers in the USA in a few years, which is a good thing as they will not be buying much when in deep depression.

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As it happened to be in today's paper, here are some of the Real interest rates:

Brazil ........ 8% (Nice for me as I can easily live on a fraction of the bank interest from funds I moved to Brazil years ago when I foresaw the dollar’s coming collapse.)
Mexico ..... 2.3%
China.........1.5%
Germany ....1.1%
Russia ..... -0.7%
Japan ....... -1.4%
G. Britian .. -2.4%
U.S.A. …... -3.3% (This is probably wrong now with the FED's action) I bet the real rate in USA is more negative than India's now.)
India …......-4.0%

Fact that dollars are leaving Brazil, despite a possible US/ Brazil carry trade gain of 11.3% real (or more that 12% now) shows either one of two things:

(1) Everyone with fluid funds thinks Brazil is on the verge of collapse.
or
(2) Credit is essentially not available in the USA for essential business needs, (or to repay dollars used in carry trade as loans come due) so assets with great gains (in Brazil) are being sold to buy the needed dollars.

I am certain the true reason is (2). Do you agree? Or perhaps you want to suggest a (3)?

 

Yes and in Euro zone too. I think that the recent strength of the dollar is over. It will slide down rapidly now to get back on the relatively steady down slope it had more than 6 months ago.

The FED's surprising 0.75+% cut is only the start of the slide down. The FED's plan to print dollars and buy Treasury debt in the open market will have a much bigger effect as all realize the US is able to finance itself only by the printing presses.

The FED is skating on very thin ice. It is just a question of when double digit inflation starts.