Strong Gold, Strong Dollar

"Because the Dollar Index (DX) is an outmoded and artificial measure of dollar strength, containing nothing to account for the Chinese renminbi for example, it may not be a true reflection of the progress of this inflation."
The Fed Is Monetizing Debt and Inflating the Money Supply

A number of people have remarked about the strong dollar and strong upmove in gold today. It does seem counterintuitive.

The euro is weak because of the solvency situtations in Ireland and Spain. This is taking the euro down and the dollar higher.

At the same time there is a flight to safety occurring into gold, but not into commodities in general.

It is not a flight from inflation, it is a flight from risk to relative safety. At least for today.

But by the way, keep an eye on the Treasuries, particularly the longer end of the curve, as we have previously advised.

There is 'the tell.'

Some Thoughts on the Debt Disaster in the US and UK and Possible Alternatives

This is a rather important essay in that it nicely frames up the problem that we face, and the constraints on the remedies at our disposal.

We will be speaking more about that in the near term, but for now here is a framework by which to understand the boundaries, the 'lay of the land.'

The key point is that the debt to GDP ratio has become unsustainable. The way to correct this is to lower it to a level that is manageable and to work it down.

It will likely require a combination of inflation and debt reduction by bankruptcies and writedowns in order to restore the economy to something which can be used to achieve a balance.

Liquidationism is a trap because it reduces GDP and cripples the productive economy as it reduces debt. It is similar to poisoning a patient to treat an infection. It is favored only by those who believe that they can insulate themselves and profit by it.

Without serious systemic reforms, any remedies will not obtain traction, merely provide a new step function for a repetition of the cycle of debt expansion, as was done in the series of credit bubbles under Alan Greenspan and Bush-Clinton.

The impact will be felt around the globe because of the interconnectedness of the world economy and finance, but the heart of the problem is in the US and the UK.


Economic Times
US and UK on brink of debt disaster
20 Jan, 2009, 0419 hrs IST

LONDON: The United States and the United Kingdom stand on the brink of the largest debt crisis in history.

While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing. (Quantitative easing, bad banks, and state guarantees are the instruments of inflation. The amount of inflation that the West can manage will greatly affect the amount of these more draconian measures - Jesse)

To understand the scale of the problem, and why it leaves so few options for policymakers, which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

In 1952, the United States was emerging from the Second World War and the conflict in Korea with a strong economy, and fairly low debt, split between a relatively large government debt (amounting to 68 percent of GDP) and a relatively small private sector one (just 60 percent of GDP).

Over the next 23 years, the volume of debt increased, but the rise was broadly in line with growth in the rest of the economy, so the overall ratio of total debts to GDP changed little, from 128 percent in 1952 to 155 percent in 1975.

The only real change was in the composition. Private debts increased (7.8 times) more rapidly than public ones (1.5 times). As a result, there was a marked shift in the debt stock from public debt (just 37 percent of GDP in 1975) toward private sector obligations (117 percent). But this was not unusual. It should be seen as a return to more normal patterns of debt issuance after the wartime period in which the government commandeered resources for the war effort and rationed borrowing by the private sector.

From the 1970s onward, however, the economy has undergone two profound structural shifts. First, the economy as a whole has become much more indebted. Output rose eight times between 1975 and 2007. But the total volume of debt rose a staggering 20 times, more than twice as fast. The total debt-to-GDP ratio surged from 155 percent to 355 percent.

Second, almost all this extra debt has come from the private sector. Despite acres of newsprint devoted to the federal budget deficit over the last thirty years, public debt at all levels has risen only 11.5 times since 1975. This is slightly faster than the eight-fold increase in nominal GDP over the same period, but government debt has still only risen from 37 percent of GDP to 52 percent.

Instead, the real debt explosion has come from the private sector. Private debt outstanding has risen an enormous 22 times, three times faster than the economy as a whole, and fast enough to take the ratio of private debt to GDP from 117 percent to 303 percent in a little over thirty years.

For the most part, policymakers have been comfortable with rising private debt levels. Officials have cited a wide range of reasons why the economy can safely operate with much higher levels of debt than before, including improvements in macroeconomic management that have muted the business cycle and led to lower inflation and interest rates. But there is a suspicion that tolerance for private rather than public sector debt simply reflected an ideological preference.

THE DEBT MOUNTAIN

The data makes clear the rise in private sector debt had become unsustainable. In the 1960s and 1970s, total debt was rising at roughly the same rate as nominal GDP. By 2000-2007, total debt was rising almost twice as fast as output, with the rapid issuance all coming from the private sector, as well as state and local governments.

This created a dangerous interdependence between GDP growth (which could only be sustained by massive borrowing and rapid increases in the volume of debt) and the debt stock (which could only be serviced if the economy continued its swift and uninterrupted expansion).

The resulting debt was only sustainable so long as economic conditions remained extremely favorable. The sheer volume of private-sector obligations the economy was carrying implied an increasing vulnerability to any shock that changed the terms on which financing was available, or altered the underlying GDP cash flows.

The proximate trigger of the debt crisis was the deterioration in lending standards and rise in default rates on subprime mortgage loans. But the widening divergence revealed in the charts suggests a crisis had become inevitable sooner or later. If not subprime lending, there would have been some other trigger.

WRONGHEADED POLICIES

The charts strongly suggest the necessary condition for resolving the debt crisis is a reduction in the outstanding volume of debt, an increase in nominal GDP, or some combination of the two, to reduce the debt-to-GDP ratio to a more sustainable level.

From this perspective, it is clear many of the existing policies being pursued in the United States and the United Kingdom will not resolve the crisis because they do not lower the debt ratio.

In particular, having governments buy distressed assets from the banks, or provide loan guarantees, is not an effective solution. It does not reduce the volume of debt, or force recognition of losses. It merely re-denominates private sector obligations to be met by households and firms as public ones to be met by the taxpayer.

This type of debt swap would make sense if the problem was liquidity rather than solvency. But in current circumstances, taxpayers are being asked to shoulder some or all of the cost of defaults, rather than provide a temporarily liquidity bridge.

In some ways, government is better placed to absorb losses than individual banks and investors, because it can spread them across a larger base of taxpayers. But in the current crisis, the volume of debts that potentially need to be refinanced is so large it will stretch even the tax and debt-raising resources of the state, and risks crowding out other spending.

Trying to cut debt by reducing consumption and investment, lowering wages, boosting saving and paying down debt out of current income is unlikely to be effective either. The resulting retrenchment would lead to sharp falls in both real output and the price level, depressing nominal GDP. Government retrenchment simply intensified the depression during the early 1930s. Private sector retrenchment and wage cuts will do the same in the 2000s.

BANKRUPTCY OR INFLATION

The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

Bankruptcy would ensure the cost of resolving the debt crisis falls where it belongs. Investor portfolios and pension funds would take a severe but one-time hit. Healthy businesses would survive, minus the encumbrance of debt.

But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).

The final option is to raise nominal GDP so it becomes easier to finance debt payments from augmented cashflow. But counter-cyclical policies to sustain GDP will not be enough. Governments in both the United States and the United Kingdom need to raise nominal GDP and debt-service capacity, not simply sustain it.

There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

The need to work down real debt and boost cash flow provides the motive, while the massive liquidity injections into the financial system provide the means. The stage is set for a long period of slow growth as debts are worked down and a rise in inflation in the medium term.

Murkiness in the NYMEX Pits As the Banks Hoard Oil

"Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from the contango, two shipbrokers said in reports earlier today."

There is a sharp contango in the near months in the NYMEX oil pit, and it will get sharper as the attempts to suppress the price near term, most likely to punish Russia, Venezuela and Iran, falter. Then it will flatten as market adjusts prices to normalcy.

Let's see if Bloomberg gives us a more coherent update. But its funny that Citigroup, Morgan Stanley, and probably other banks are buying oil now to store in tankers and deliver later when the paper chase falters. Nice use of the bailout money. Why lend when you can speculate on market inefficiency which you help to create?

Bloomberg
Goldman Sees ‘Swift, Violent’ Oil Rally Later in Year
By Grant Smith

Jan. 19 (Bloomberg) -- Goldman Sachs Group Inc. commodity analyst Jeffrey Currie said he expects a “swift and violent rebound” in energy prices in the second half of the year.

Oil prices may have reached their lowest point already, after falling to $32.40 in mid-December, and are expected to rise to $65 by the end of this year, the analyst said. There is scope for a “new bull market” in oil, Currie said. (The December '09 futures are trading around there already - Jesse)

World oil demand is likely to fall by about 1.6 million barrels a day this year, the Goldman analyst said today at a conference in London. That’s bigger than the reduction expected by the International Energy Agency, which last week forecast a decrease of about 500,000 barrels a day, or 0.6 percent, this year.

A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is “difficult” to profit from and is “near the end of this process” anyway, the Goldman analyst said. (We can only use the NYMEX 'front month' to punish Iran, Venezuela, and Russia for so long - Jesse)

New York crude futures for delivery in December, trading near $56 a barrel, currently cost some $15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery. (This is poorly worded at best - Jesse)

The contango is likely to flatten as supply cuts by OPEC and other producers take effect, reducing the availability of oil for immediate delivery, Currie said. (Contango is when the future months are higher in price. This is the case for the futures. But December delivery, according to this article, is in backwardation, where true 'spot' is higher than paper prices, and a sure sign of price manipulation. - Jesse)

The Organization of Petroleum Exporting Countries started another round of supply cutbacks at the start of this month. The group’s compliance with its overall efforts to cut production will probably peak at 75 percent, or a reduction of about 3 million barrels a day out of an announced aim of 4.2 million barrels a day, Goldman Sachs said.

In several steps, 10 OPEC members have pledged to reduce production to 24.845 million barrels a day, a cut of 4.2 million barrels a day from September’s level.

Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from the contango, two shipbrokers said in reports earlier today.

West Texas Intermediate Benchmark Diverging Widely from World Oil Prices

If there indeed is a glut of oil in the US at a bottleneck, as NYMEX appears to contend, then world prices should diverge, and more oil would be flowing to other venues.

Interestingly enough, there is also a huge difference in price between the February contract at 36.51 for WTI and the March contract at 42.57.

So let's see how this short term oil glut in Oklahoma gets squared away. Sure to be interesting. It would be a shame if the NYMEX loses some of its credibility as a price discovery mechanism.


Reuters
Signs of shift away from WTI
By Javier Blas in London
January 18 2009

Oil traders are quietly pricing some of their deals away from the West Texas Intermediate contract, traditionally the world’s most important oil benchmark, as it is being distorted by record inventories at its landlocked delivery point.

The move is a setback for the benchmark that since the launch of the Nymex WTI futures in the early 1980s has dominated physical and financial oil markets.

The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed its value not only against other global benchmarks, such as Brent, but also against other domestic US crudes.

Julius Walker, an oil market analyst at the International Energy Agency in Paris, said there was “anecdotal evidence” of traders moving away from WTI and “doing deals based on other US oil benchmarks”.

The IEA monthly report said Brent was now “arguably more reflective of global oil market sentiment”. However, Bob Levin, managing director of market research at Nymex said that the WTI contract was performing “transparently”, reflecting a “loss in oil demand and sharply rising inventories”.

“WTI is better reflecting global oil fundamentals than Brent,” Mr Levin said. “The oil industry has not abandoned the WTI contract and it has confidence in it.”

Nevertheless, traders in London, New York and Houston confirmed a small number of transactions away from WTI after its price plunged last week to record discounts against other global and domestic benchmarks. The traders cautioned that the move could reverse if the WTI situation normalised. Lawrence Eagles, at JPMorgan, said any move away from WTI would face “strong resistance as none of the other US benchmarks have the price transparency of an exchange market”.

Highlighting the price disconnection with the global market, WTI, which usually trades at a premium of $1-$2 a barrel to Brent, last week plunged to an all-time discount of $11.73. The detachment hit the US market too, where Light Louisiana Sweet, jumped to a $9.50 premium, the highest in 18 years.

Brent ended last week at $46.18 a barrel, well above WTI at $36.

Walter Lukken, outgoing chairman of the Commodities Futures Trading Commission, told the FT the regulator was following “very closely” the WTI disconnection.

This is not the first time WTI has diverged from other benchmarks, but the discrepancy is far more severe this time.

Royal Bank of Scotland to Report $37 Billion in Losses and Goodwill Writedowns

RBS
RBS to unveil up to $37 billion of losses
By Adrian Croft
18/01/09

LONDON (Reuters) - Royal Bank of Scotland will unveil up to 25 billion pounds ($37.30 billion) of losses for 2008 on Monday due to bad debts and writing off goodwill on its acquisition of ABN AMRO, a British newspaper said on Monday.

RBS will say it incurred about 7 billion pounds of losses in 2008 and that it is taking a goodwill writedown of between 15 billion and 20 billion pounds, The Daily Telegraph reported, calling it the "biggest loss in UK history."

RBS declined to comment on the report.

Britain is set to throw its banks another multi-billion pound lifeline on Monday by allowing them to insure against steep losses and guaranteeing their debt to stop the credit crunch pushing the economy into a deep slump.

The British government will swap up to 5 billion pounds of preference shares in Royal Bank of Scotland for ordinary shares, increasing its stake in the British bankL, a person familiar with the matter said on Sunday.

The move aims to remove pressure on RBS -- whose shares fell 13 percent on Friday -- to pay 12 percent annual interest on the preference shares.

The government owns 58 percent of RBS after buying 15 billion pounds of ordinary shares last November. The stake could rise to near 70 percent if all the preference shares are converted. RBS again declined to comment.

RBS, once Britain's second-biggest bank, was left short of capital as a result of hefty write-offs against debt-backed securities. The 2007 acquisition of parts of Dutch rival ABN AMRO put further strain on its capital reserves.

The Fed is Monetizing Debt and Inflating the Money Supply

Here are the latest figures on the growth of the various money supply measures.

See Money Supply: A Primer for a review of measures and their differences.

The charts indicate that the growth in the money supply is due to a significant monetization of debt by the Fed in expanding its balance sheet and deficit spending by the Treasury, rather than organic growth from credit expansion from commercial sources and economic activity. The negative GDP figures confirm this.

You could imagine this as a tug of war if you wish. On one side is the deflationary force of bad debt and falling aggregate demand. On the other is the Treasury, the Fed, and the Congress, using the triple threat of deficit spending, monetization of debt, and stimulus programs. The limits of the power of the Feds are the value of the dollar and the acceptability of Treasury debt.

There is no lack of debt that can be monetized. To think otherwise is fantasy. But there are limitations about how much the dollar can bear, which is why the banks and moneyed interests have shoved their way to the front of the line, and are gorging themselves now with a little help from their friends in the Treasury and the Fed. When the time comes they intend to throw the public agenda under the bus. Its an old script, many times performed with minor enhancements.

If the current trend continues, it will have an inflationary effect on certain financial assets and commodities, and a negative impact on the dollar. There are lags in the appearance of this, but it will come.

Because the Dollar Index (DX) is an outmoded and artificial measure of dollar strength, containing nothing to account for the Chinese renminbi for example, it may not be a true reflection of the progress of this inflation. Time will tell.

A similar case might be made for certain strategic commodities, gold and oil, which are the instrument of government policy. Although it is much less important, silver may be one of the first commodities to break out because the government maintains no significant physical inventory of it as it does for gold and oil.

The huge short interest in silver may be an ignored scandal on the order of the Madoff Ponzi fund, not in dollar magnitude, but likely in terms of regulatory lapse and deep capture.



M1 has become a much less useful measure of the money supply these days because of changes in banking rules and technology. However, M1 is a good intermediate measure of the impact of the growth in the Fed's balance sheet as it feeds through the system.





Growth in MZM frequently results in financial asset expansion once it gains traction.



The US Dollar does not generally react well to aggressive growth in MZM.



The growth of credit, organic growth from economic activity, is sluggish.



The growth in the Monetary Base due to Fed inflationary activity has been nothing short of spectacular, without equal in US monetary history. This makes all Money Multiplier measures that use the AMB in the denominator meaningless for now.



The spike in Treasury settlement failures is one measure of the stress in the financial system. It seems to be quieter now, after spiking in response to seizures in the bonds trading. We will maintain a watch on this.

The Plot to Overthrow FDR - The History Channel

The beginnings of the Great Depression, and the conflicts that tested the Republic to its foundations, and the commitment to freedom around the world.


Video Documentary The History Channel

The Plot to Overthrow FDR



The American Liberty League


Responses to the Great Depression 1929-1939

Charts in the Babson Style for the Week Ending 16 January

As a reminder, all US markets will be closed on Monday for a national holiday.

Congressional Budget Offices Estimate TARP Losses at $64 Billion

Congressional Budget Office
Troubled Asset Relief Program (TARP) Report

CBO is required by law to report semiannually on OMB’s assessment of expenditures under the Troubled Assets Relief Program (TARP). Today, CBO released the first of these reports. (For more on the TARP program, this blog post from October includes CBO’s analysis of the financial rescue legislation).

Through December 31, 2008, the Treasury disbursed $247 billion to acquire assets under that program. CBO valued those assets using discounted present-value calculations similar to those generally applied to federal loans and loan guarantees, but adjusting for market risk as specified in the legislation that established the TARP.

On that basis, CBO estimates that the net cost of the TARP’s transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions) amounts to $64 billion—that is, measured in 2008 dollars, we expect the government to recover about three quarters of its initial investment.

The Office of Management and Budget’s (OMB’s) report on the TARP, issued in early December, only addressed the first $115 billion distributed under the program. CBO and OMB do not differ significantly in their assessments of the net cost of those transactions (between $21 billion and $26 billion), but they vary in their judgments as to how the transactions should be reported in the federal budget.

Thus far, the Administration is accounting for capital purchases made under the TARP on a cash basis rather than on such a present-value basis—that is, the Administration is recording the full amount of the cash outlays up front and will record future recoveries in the year in which they occur. That treatment will show more outlays for the TARP this year and then show receipts in future years.

Weekend Listening: The White House Coup of 1933 - BBC4

This is an interesting topic, not because we believe in a plot by the wealthy and powerful Americans to throw in their lot with the more pro-business Hitler and Mussolini, but because it helps to portray the early days of the Great Depression in a more realistic light.

They were not a time of dignified suffering and widespread acts of kindness and compassion. They were often mean-spirited, violent, fraught with scams and snares for the weak, a particularly dangerous time in America with the rise of demagogues from both the Left and Right.

This was a difficult period in our history, poorly understood and insufficiently studied in our schools. Here is one aspect of it of which you may never have heard. It tends to upset people, because it disturbs the conventional view of history. This is not particular to the US.

There is no smoking gun in this program. There was a plot. It was investigated and the details of the investigation were not disclosed An American military hero, Smedley Butler, exposed it. This much we do know.

BBC4 does a reasonably even handed job of presenting facts, and surmise, and differentiating them.

Our friend Bart, at NowandFutures.com, has converted the radio broadcast to MP3 and has made it available here:

The White House Coup of 1933


Additional Reading:

The Business Plot of 1933 - Wikipedia

Smedley Butler - Wikipedia

American Liberty League - Wikipedia

Where is Bernie's Trade Book? Who Were His Partners?

FINRA has found no evidence of trades by Bernie Madoff on behalf of his private investment fund through Bernard L. Madoff Investment Securities, a commercial brokerage founded in 1960.

This appears to be a brick in the wall of 'rogue trader' status. He could do it himself because he made no trades at all.

However this was not Bernie's only commercial operation in the securities business, in addition to his now nefarious private fund.

Primex was registered as Primex Holdings, L.L.C. in NYS in October of 1998. Primex is a joint venture involving a digital trading auction which operates out of Bernie's 18th floor office at 885 Third Ave.

Madoff's business partners in the Primex Exchange were Citigroup, Morgan Stanley, Goldman Sachs, and Merrill Lynch.

Did Bernie give any business to this joint venture? Did any of the above brokers have any investments or losses with the Madoff Fund? If not why not? It was one of the most successful funds, on paper, on the Street?

More questions than answers. Let's hope this one does not disappear down a black hole like the enormous put option positions placed on the airline stocks just prior to 9/11.


Madoff's fund may not have made a single trade
By Jason Szep
Fri Jan 16, 2009 6:55am EST

BOSTON (Reuters) - Bernie Madoff's investment fund may never have executed a single trade, industry officials say, suggesting detailed statements mailed to investors each month may have been an elaborate mirage in a $50 billion fraud.

An industry-run regulator for brokerage firms said on Thursday there was no record of Madoff's investment fund placing trades through his brokerage operation.

That means Madoff either placed trades through other brokerage firms, a move industry officials consider unlikely, or he was not executing trades at all.

"Our exams showed no evidence of trading on behalf of the investment advisor, no evidence of any customer statements being generated by the broker-dealer," said Herb Perone, spokesman for the Financial Industry Regulatory Authority.

Madoff's broker-dealer operation, Bernard L. Madoff Investment Securities, underwent routine examinations by FINRA and its predecessor, the National Association of Securities Dealers, every two years since it opened in 1960, Perone said.

Madoff, a former chairman of the Nasdaq Stock Market who was a force on Wall Street for nearly 50 years, allegedly confessed to his sons the firm's investment-advisory business was "basically a giant Ponzi scheme" and "one big lie," according to court documents.

He estimated losses of at least $50 billion from the Ponzi scheme, which uses money from new investors to pay distributions and redemptions to existing investors. Such schemes typically collapse when new funds dry up.

Each month, Madoff sent out elaborate statements of trades conducted by his broker-dealer. Last November, for example, he issued a statement to one investor showing he bought shares of Merck & Co Inc, Microsoft Corp, Exxon Mobil Corp and Amgen Inc among others.

It also showed transactions in Fidelity Investments' Spartan Fund. But Fidelity, the world's biggest mutual fund company, has no record of Madoff or his company making any investments in its funds.

DISCREPANCIES

"We are not aware of any investments by Madoff in our funds on behalf of his clients," Fidelity spokeswoman Anne Crowley said in an e-mail to Reuters.

Neither Madoff nor his firm was a client of Fidelity's Institutional Wealth Services business, their clearing firm National Financial or a financial intermediary client of its institutional services arm, she said.

"Consequently, his firm did not work with our intermediary businesses through which firms invest their clients' money in Fidelity funds," she added.

There also appear to be discrepancies between monthly statements sent to investors and the actual prices at which the stocks traded on Wall Street.

For example, his November statement showed he bought software maker Apple Inc's securities at $100.78 each on November 12, about a month before his arrest. But Apple's stock on that day never traded above $93.24. The statement also showed he bought chip maker Intel Corp at $14.51 on November 12, but Intel's highest price on that day was $13.97.

"You could print up any statements you want on the computer and send it out to a client and the chances are the client wouldn't know, because they are getting a statement," said Neil Hackman, president and chief executive of Oak Financial Group, a Stamford, Connecticut-based investment advisory firm.

To some, the numbers did not add up.

About 10 years ago, Harry Markopolos, then chief investment officer at Rampart Investment Management Co in Boston, asked risk management consultant Daniel diBartolomeo to run Madoff's numbers after Markopolos tried to emulate Madoff's strategy.

DiBartolomeo ran regression analyses and various calculations, but failed to reconcile them. For a decade, Markopolos raised the issue with the U.S. Securities and Exchange Commission, which has come under fire in Congress in recent weeks for failing to act on Markopolos's warnings.

Bank of America to Receive Additional $138 Billion in Government Assistance

The situation must have been rather dire indeed. They did not even wait for the weekend.

Its a nice amount of government aid for a single company. Too bad GM is not a bank.

Some animals are more equal than others.


Bloomberg
U.S. Gives Bank of America $138 Billion Lifeline
By Scott Lanman and Craig Torres

Jan. 16 (Bloomberg) -- The U.S. government agreed to invest $20 billion more in Bank of America Corp. and backstop $118 billion of its assets to help the lender absorb Merrill Lynch & Co. and prevent the financial crisis from deepening.

The government agreed to the rescue “as part of its commitment to support financial market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said today in a e-mailed joint statement.

Hours earlier, the U.S. Senate voted to allow the release of $350 billion in financial rescue funds, the second half of the $700 billion Troubled Asset Relief Program enacted Oct. 3 by President George W. Bush.

The U.S. already had injected $15 billion into Bank of America, the country’s biggest lender, and another $10 billion to Merrill to bolster the combined company against the global credit crunch.

Bank of America will absorb the first $10 billion of losses in the pool, of which the “large majority” of assets were assumed by the company in the Merrill purchase, the government said. The Treasury and FDIC will share the next $10 billion of losses.

The Fed will backstop assets with a loan after the government’s first $10 billion in losses, the agencies said.

Future Losses

The asset pool includes cash assets with a current book value of as much as $37 billion and derivatives with maximum potential future losses of as much as $81 billion, according to the term sheet provided by the government.

Separately, the FDIC said it plans to propose changing its bond-guarantee program for banks to cover debt as long as 10 years, from the current three-year maturity. The FDIC will soon propose rule changes to the Temporary Liquidity Guarantee Program, today’s statement said.

“The U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks,” the joint statement said.

Shares of Bank of America plunged 18 percent yesterday, sliding to $1.88 to $8.32 in New York Stock Exchange composite trading after hitting $7.35, its lowest level since February 1991.

The bank moved up its fourth-quarter report to today at 7 a.m. New York time.

Bank of America Requires Significantly More Government Aid, Gives New Life to Nationalisation Rumours

Apparently some of the rumours and early reports may be true, at least with regard to the troubles at the Bank of America.

Just off the Bloomberg wire at 3:30 EST, Bank of America is formally requesting financial assistance and guarantees from the government to complete its acquisition of Merrill Lynch, according to 'people familiar with the matter.'

A later report on CNBC cites the amount of $200 billion to be requested in a new bailout tranche.

Los Angeles Times
Nationalization rumors slam Citigroup, Bank of America
By Tom Petruno
11:09 AM PST, January 15, 2009

The hottest rumor on Wall Street today was that the government was planning to effectively nationalize Citigroup Inc. and Bank of America Corp., perhaps as early as this weekend.

That talk has devastated many financial stocks, and hammered the broader market for a second straight session -- although buyers have been returning in the last half-hour.

The nationalization rumors were put to Federal Deposit Insurance Corp. Chairwoman Sheila Bair at an appearance in New York today, and her non-denial answer wasn’t likely to make investors feel better.

"I’d be very surprised if that happened," she said, according to Bloomberg News.

Some investors weren't sticking around to find out if the rumor was true: Citigroup fell as low as $3.36 early in the session and about 11 a.m. PST was off 43 cents to $4.10.

Bank of America fell as low as $7.35 and was off $1.56 to $8.64 about 11 a.m PST.

The Dow Jones industrial average was off as much as 205 points but has pared that to a loss of 43 points at 8,156.

The Dow’s closing low in the fall market collapse was 7,552, reached on Nov. 20.

The latest dive in the financials began early this week on fears that some of the biggest players have become bottomless pits for government capital, as bad loans continue to mount.

Those fears soared late Wednesday on news reports that Bank of America, which got $25 billion under the financial-system bailout Congress approved in October, was negotiating another capital infusion from the Treasury.

Ryan Larson, head trader at Voyageur Asset Management in Chicago, said the rumor today was that the government would take control of Citigroup and Bank of America via a "nationalization in AIG style" -- referring to insurance giant American International Group. The government took a 79.9% stake in AIG last fall in return for loans and capital injections to keep the company afloat.

AIG shares now trade for about $1.40.

The nationalization rumors may just be so much hysteria, but they show how faith in the financial system has again frayed badly. The average big-bank stock has plunged 24% just since Dec. 31.

GM Cuts 2009 US Sales Outlook to 27 Year Low - Wall Street Rallies

A grim outlook from General Motors today as it continues to attempt to wring concessions and donations from anyone and everyone.

The market rallied after this news. If this is confusing, read this blog entry from earlier today on the technical state of the SP500 futures.

Its reassuring to see that the economic carnage has not made the banks and hedge funds too glum to engage in the usual option expiry market manipulation. They'll never learn. Keep your powder dry because there are some rough seas dead ahead.

"As a dog returns to its vomit, so a fool returns to his folly. " Proverbs 26:11

Bloomberg
GM Says U.S. Auto Sales May Tumble to 27-Year Low on Economy
By Jeff Green

Jan. 15 (Bloomberg) -- General Motors Corp. cut its estimate for 2009 U.S. industrywide auto sales to 10.5 million units, a total that would be the lowest in 27 years, as a worsening economy crimps demand.

The new outlook replaces a projected range of 10.5 million to 12 million vehicles, GM said in slides for a Deutsche Bank AG conference today in Detroit. Global sales will fall to 57.5 million autos from 67.1 million last year, GM said.

GM is using the sales estimates to craft a proposal to cut costs, revamp operations and show it can repay $13.4 billion in Treasury Department loans. A weakening economy may force the biggest U.S. automaker to seek additional government funding after it completes the viability plan due March 31.

“We’re on track,” Chief Executive Officer Rick Wagoner told analysts. “We’re confident GM will come through this a stronger company.”

Wagoner said this week that the loans were sufficient for now and that he would review GM’s needs at the end of this quarter. He joined Chief Operating Officer Fritz Henderson and Chief Financial Officer Ray Young at the Deutsche Bank meeting.

GM gained 5 cents, or 1.3 percent, to $3.90 at 2:32 p.m. in New York Stock Exchange composite trading.

Global economic growth may slow to 0.5 percent this year from 2.3 percent, GM said today.

The U.S. recession is ravaging consumers’ auto purchases, sending deliveries plummeting to 13.2 million vehicles in 2008 after an average of about 16 million annually during the past decade. U.S. job losses last year were the worst since 1945.

Industrywide sales of 10.5 million vehicles in the world’s biggest auto market would be the lowest level since the 10.36 million units of 1982, according to research firm Autodata Corp. of Woodcliff Lake, New Jersey. The total in 1981 was 10.6 million.

Union Workers, Bondholders

GM is seeking concessions from its largest union and is chopping debt in half because the government can call the loans unless the company shows progress in reshaping itself by the March deadline. The Detroit-based automaker plans to drop or de- emphasize half of its brands and seeks to cull 1,700 dealers from its total of 6,400.

It’s premature to discuss how GM might work with bondholders to win their assent in reducing debt, Wagoner said this week. Government loan conditions require GM to cut its unsecured public debt by at least two thirds in an exchange with bondholders for equity or other methods.

The debt exchange is designed to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity, Young said.

Health-Fund Costs

GM also needs to reduce its obligations to a union retiree health fund to $10.2 billion, a 50 percent trim, in a separate equity swap, Young said. About $14.1 billion in other debt won’t be affected.

After saying it would run short of operating cash by the end of 2008 without an infusion of financial aid, GM received the first $4 billion in loans on Dec. 31 from the Troubled Asset Relief Program. The money is being used to pay bills, mostly to the automaker’s 3,000 suppliers.

An additional $5.4 billion is due this month. Should Congress agree to release a second $350 billion in TARP funds, GM will get $4 billion more in February. An initial progress report must be presented to the Treasury Department by Feb. 17.

The loans are secured by almost all of GM’s available unsecured assets and as a secondary lien against other assets already secured, Young said today. GM also plans to draw $1 billion in Treasury loans granted to the automaker as part of a $6 billion bailout of the GMAC LLC finance unit.

SP Futures At Key Support on the Hourly Chart

Even if you trade on fundamentals, it is a good idea to keep an eye on the charts to select your entry and exit points.

If we break down out of the short term trend (the hourly chart) then we would look to the SP daily and weekly charts to see where support might be found. Although things may seem obvious, they are rarely certain.

Keep in mind tomorrow is stock options expiry and the put buyers have been active. We are also going into a three day weekend in the States as Monday is a national holiday. There is significant worry about the Citi earnings report due out tomorrow.

Here is a snapshot of the SP500 emini futures at 10:30 AM.

The Worst Is Yet to Come (But We Beat the Numbers) - J. P. Morgan

Interesting quotes from Jamie Dimon, CEO of J.P. Morgan, the Fed's instrument of policy, their house bank, king of the derivatives pyramid, as the world is amazed that they beat the EPS numbers again this morning, at least on paper.

The problem is not so much the banking system and a lack of confidence in it. They do not deserve any. Our financial system has become a shell game, an extended accounting fraud, that permeates and selectively destroys whole segments of the real economy.

The problem is that the average consumer in the United States is a wage earner, and their real wages have been stagnating for the past twenty or more years, despite a rosier-than-reality set of CPI figures from the last two administrations.

The fact that most in New York and Washington have not quite realized yet is that the average American consumer is exhausted, tapped out, broke.

Providing easier credit terms, new sources of debt to feed the machine, may stretch this out a bit longer, may cushion the impact as the overloaded and imbalanced economy hits the wall, butit will do nothing to create sustainable growth.

Unless and until something is done to address the real median wage, to provide sources of income, rather than fresh sources of debt, to the middle class, there will be no recovery other than more monetary bubbles, that will be increasingly fragile and destructive in their collapse, ultimately testing the foundations of democracy.

The economic, and then the political, situation in the United States will deteriorate, perhaps much more rapidly than most would expect or even allow, unless something is done to break this cycle of debt and wealth transference, this illusion of vitality and stability.


AFP
JPMorgan chief says worst of the crisis still to come
Wed Jan 14, 10:13 pm ET

LONDON (AFP) – The chief executive of US bank JPMorgan Chase, Jamie Dimon, told the Financial Times on Thursday that the worst of the economic crisis still lay ahead as hard-hit consumers default on their loans.

"The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009," he told the business daily.

"In terms of our sector, we expect consumer loans and credit cards to continue to get worse."

Dimon said the bank -- which bought rivals Bear Stearns and Washington Mutual last year -- was prepared for a deterioration in consumer-orientated businesses but if things were worse than expected, it would have to cut costs further.

The interview was published after a fresh wave of selling hit US and European stock markets Wednesday, as an unrelenting flow of bad economic and corporate news sparked fears of a deepening global downturn.


Bloomberg
JPMorgan Profit Drops 76 Percent, Less Than Analysts Estimated
By Elizabeth Hester

Jan. 15 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank by assets, said profit fell 76 percent, beating analysts’ estimates, as the company navigates the credit crisis with more success than most of its peers.

Fourth-quarter net income was $702 million, or 7 cents a share, compared with $2.97 billion, or 86 cents, a year earlier, the New York-based bank said today in a statement. Fourteen analysts surveyed by Bloomberg had an average earnings estimate of 1 cent a share.

JPMorgan’s $20.5 billion of writedowns, losses and credit provisions through the third quarter were less than a third of those at Citigroup Inc., which was forced to sell control of its Smith Barney brokerage to Morgan Stanley for $2.7 billion this week. Chief Executive Officer Jamie Dimon has used JPMorgan’s relative strength to acquire troubled rivals, including Bear Stearns Cos. in March and Washington Mutual Inc. in September.

“JPM is better positioned against deteriorating loan portfolios than many of its peers given its strong loan-loss reserves,” KBW Inc. analyst David Konrad wrote in a Jan. 14 research note.

JPMorgan, which moved up its earnings announcement by six days, is the first of the largest U.S. banks to disclose fourth- quarter figures. New York-based Citigroup reports tomorrow, and Bank of America Corp., which bought Merrill Lynch & Co. two weeks ago, is scheduled to release results on Jan. 20. San Francisco- based Wells Fargo & Co. will follow on Jan. 28 as it works to absorb Wachovia Corp.

...Federal Reserve officials and President-elect Barack Obama have said more government help will be needed to shore up the U.S. financial system.

Fed Chairman Ben S. Bernanke said Jan. 13 that banks’ holdings of hard-to-sell investments raise questions about the companies’ underlying value, and called for the government to take on or insure the assets. Obama is deciding how to use the remaining $350 billion of the $700 billion Troubled Asset Relief Program that Congress approved in October, with some Democrats saying the plan should favor homeowners and community banks over larger financial-services companies.

Its Official - Obama Fatigue

Well this time we didn't even make it to the Inauguration before becoming disenchanted with a candidate. That beats our record set by ... wait for it ... Bill Clinton.

The straw that broke the camel's back, at least for us, was Obama's nomination of Eric Holder as his Attorney General.

After suffering through that continuing assault on the Constitution known as Alberto Gonzales, one might have expected the President-elect to appoint someone with a sterling reputation for upholding the rule of law, and not performing as a compliant tool to a particular Administration.

As the Deputy to Janet Reno from 1997, Eric Holder was intimately involved in many of the more controversial actions in the twilight of the Clinton Administration, including a key role in the infamous pardon of financial fraudster, Marc Rich.

Obama has spent much of his goodwill now with a series of highly cynical appointments of Clinton insiders, with virtually no signs of any type of a reform government.

He still has all our best wishes of course, but a healthy skepticism has already replaced much of the initial optimism. The honeymoon is over before it got started.

Bush II did not lose this voter's support until it was proven, at least to our satisfaction, that he systematically lied to the nation about something important, the case for the Iraq war.

The same criteria will apply to this President as well. But the goodwill has been spent.

Charts in the Babson Style for Midweek January 14

As a reminder, this Friday January 16 is options expiration.

Also, US markets will be closed on Monday January 19 for the Martin Luther King national holiday.

The markets will be open on Tuesday January 20 which is the Inauguration Day for the incoming President Barack Obama.

US Military Warns on 'Sudden Collapse' of Mexico and Pakistan

It is easy to accept that Pakistan is risky, and nuclear, but Mexico seems more like a toss up with Detroit.

There may be an Amero in Mexico's future.

El Paso Times
U.S. military report warns 'sudden collapse' of Mexico is possible
By Diana Washington Valdez
01/13/2009 03:49:34 PM MST

EL PASO - Mexico is one of two countries that "bear consideration for a rapid and sudden collapse," according to a report by the U.S. Joint Forces Command on worldwide security threats.

The command's "Joint Operating Environment (JOE 2008)" report, which contains projections of global threats and potential next wars, puts Pakistan on the same level as Mexico. "In terms of worse-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico.

"The Mexican possibility may seem less likely, but the government, its politicians, police and judicial infrastructure are all under sustained assault and press by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

The U.S. Joint Forces Command, based in Norfolk, Va., is one of the Defense Departments combat commands that includes members of the different military service branches, active and reserves, as well as civilian and contract employees. One of its key roles is to help transform the U.S. military's capabilities.

In the foreword, Marine Gen. J.N. Mattis, the USJFC commander, said "Predictions about the future are always risky ... Regardless, if we do not try to forecast the future, there is no doubt that we will be caught off guard as we strive to protect this experiment in democracy that we call America."

The report is one in a series focusing on Mexico's internal security problems, mostly stemming from drug violence and drug corruption. In recent weeks, the Department of Homeland Security and former U.S. drug czar Barry McCaffrey issued similar alerts about Mexico.

Despite such reports, El Pasoan Veronica Callaghan, a border business leader, said she keeps running into people in the region who "are in denial about what is happening in Mexico."

Last week, Mexican President Felipe Calderon instructed his embassy and consular officials to promote a positive image of Mexico.

The U.S. military report, which also analyzed economic situations in other countries, also noted that China has increased its influence in places where oil fields are present.

ECB to Consider Rate Cut at its Thursday Meeting

The European Central Bank will be meeting tomorrow to consider a change in the Euro interest rate target.

The market widely expects a 50 basis point cut from 2.5% to 2.0%, which is still at a substantial premium to the US interest rate range of 0 to .25%.

Yesterday rumours of a deeper 100 basis point rate cut swept the trading desks and roiled the Euro/Dollar cross taking it down below support at 1.32. This provided a lift to the euro-heavy Dollar DX Index.

There is key support for the euro at 1.30. If Trichet holds the line at 50 basis points and does not signal rate cuts commensurate with the aggressive quantitative easing of the US Fed we would expect the euro to a few more sparks for the week, in addition to the JPM and Citi earnings reports.


Wall Street Journal Europe
ECB Expected to Cut Rates as Inflation Worries Ease
By NINA KOEPPEN
JANUARY 13, 2009, 6:15 P.M.

FRANKFURT -- Most economists say they believe the European Central Bank will continue with its monetary easing campaign and cut interest rates by half a percentage point Thursday to stem the risk of a deepening recession in the euro zone, although policy makers have given no clear signal about their decision.

Thirty-four of 42 private-sector banks polled by Dow Jones Newswires expect the ECB to cut the key policy rate to 2% from 2.5% currently. The ECB has already lowered interest rates by 175 basis points ...

Citi and JPM Move Their Earnings Reports to This Week

On Tuesday J. P. Morgan surprised the market by moving its earnings release from January 21 to tomorrow, January 15th, the day before the options expiration.

Today Citi announced that it is moving its own earnings release to this week, on Friday.

Is there a significance to this?

Perhaps. One likely reason is that they did not wish to put their earnings out at the same time as an historic event with the inauguration of Barack Obama on Tuesday January 20, with what is likely to be considered bad news.

There is also a likelihood that Citi and JPM wished to 'throw their cards on the table' ahead of the initial decision by Congress with regard to the disposition of TARP funds which is likely to occur next week. Economic blackmail is de rigeur for Wall Street when it is back on its heels.

Whatever does happen, we are certainly in for an interesting month of January.


Citi Fourth Quarter and Full-Year 2008 Earnings Review - Revised Date

NEW YORK -- (Business Wire) --

Citi announced it will review fourth quarter and full-year 2008 results on Friday, January 16, 2009, at 8:00 AM (EST), instead of January 22. Fourth quarter results will be issued via press release at approximately 6:00 AM (EST) on January 16, 2009.

A live webcast of the presentation, as well as financial results and presentation materials, will be available at http://www.citigroup.com/citigroup/fin. A replay of the webcast will be available at http://www.citigroup.com/citigroup/fin/pres.htm.

Corporate and US Treasury Yields from 1926 to 1934

The Bonds held up much better than one might have expected, and the spreads between corporates and longer dated Treasuries was remarkably uniform.

Bear in mind that these are yields on this chart, and the value of the underlying bonds moves in the opposite direction to the yield.

The Fed's Game Plan: What Ben Bernanke Is Thinking

Bernanke's game plan is becoming more apparent. Based on a reading of his papers and his public statements, here is a distilled view of what we think is his game plan.

1. Grow the money supply quickly and abundantly

2. Stabilize the Banking System to avoid destructive banking failures

3. Do not withdraw the monetary stimulus prematurely to fight inflation.

4. Manage 'confidence' aggressively to dampen the expectation of inflation later, and a panic liquidation now.

Each of these legs of his policy is a reaction to lessons he believes the Fed learned from the Great Depression.

As you consider the specific things he is doing, it is likely that they will fit very nicely into this framework.

He is obviously fighting the 'last war,' the last great battle that the Fed is known to have waged, and lost. For it did lose, as there was no lasting recovery until the world suffered through the Second World War.

Whether he will be successful or not remains to be seen. It is important to bear in mind that the Fed is absolutely confident that they know how to stop inflation once it gets started, even if it becomes rather serious.

The over-arching theme is that this is an emergency, and so long term niceties like moral hazard and systemic reform will be left for later: the ends justify the means.

William Poole says that this is a dangerous approach, because longer term consequences like inflation appear with a one to two year lag after a significant monetary stimulus such as we have just seen.

The timing of the Fed's dampening of inflation will be critical, and perhaps constrained by the real economy. How can the Fed tighten sufficiently if the real economy remains sluggish?

Bernanke is determined to err on the side of too much stimulus, given the trauma of the Fed's experience in the Great Depression. Coupled with the Fed's confidence in their ability to stop any monetary inflation, this raises a higher level of probability in the most likely outcome of the Fed's latest and greatest monetary experiment.

We cannot help but wonder what he thinks the Fed will be doing this time that will be different than 2003-2007 when they reflated the financial system after a market crash the last time without meaningful reforms, resulting in the stock market and housing bubbles.

Whatever happens, it will certainly provide the raw material for economic papers yet unwritten.

Serious Instances of Inflation Since World War II

Presented here is a summary of the major instances of inflation post World War II.

Although each country had its particular set of conditions and triggers for their painful experience of monetary inflation, the most common thread seems to be unpayable debts due to war or civil and societal dislocation.

Particularly strong labor union movements or protectionist policies against offshoring and imports do not appear to be common factors.

An expanded list with additional countries including the pre WWII era can be found at Wikipedia.

Inflation is the common condition of a fiat monetary system. Less probable outcomes are hyperinflation and deflation, with a serious inflation and disinflation nearer the norm.

Hyperinflation is normally associated with some outlier event in the political sphere and/or a series of policy errors by the monetary authority. Hyperinflation is more common when associated with an external monetary standard, but this is not a prerequisite.

Although not uncommon for a short term (less than one year) after unusual and intense monetary expansion, normally referred to as deleveraging or disinflation, a true deflation is a relatively rare phenomenon, especially in fiat currency regimes, usually attributable to a protracted series of policy errors or intentional actions to contract the money supply by a nation's monetary authority. The most familiar instances of a significant deflation are the Great Depression, particularly in the United States, and Japan during the 1990's.


Angola

Angola went through its worst inflation from 1991 to 1995.

In early 1991, the highest denomination was 50,000 kwanzas. By 1994, it was 500,000 kwanzas. In the 1995 currency reform, 1 kwanza reajustado was exchanged for 1,000 kwanzas. The highest denomination in 1995 was 5,000,000 kwanzas reajustados. In the 1999 currency reform, 1 new kwanza was exchanged for 1,000,000 kwanzas reajustados. The overall impact of hyperinflation: 1 new kwanza = 1,000,000,000 pre 1991 kwanzas.

Argentina

Argentina went through steady inflation from 1975 to 1991.

At the beginning of 1975, the highest denomination was 1,000 pesos. In late 1976, the highest denomination was 5,000 pesos. In early 1979, the highest denomination was 10,000 pesos. By the end of 1981, the highest denomination was 1,000,000 pesos. In the 1983 currency reform, 1 Peso argentino was exchanged for 10,000 pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos argentinos. In the 1992 currency reform, 1 new peso was exchanged for 10,000 australes. The overall impact of hyperinflation: 1 (1992) peso = 100,000,000,000 pre-1983 pesos.

Belarus

Belarus went through steady inflation from 1994 to 2002.

In 1993, the highest denomination was 5,000 rublei. By 1999, it was 5,000,000 rublei. In the 2000 currency reform, the ruble was replaced by the new ruble at an exchange rate of 1 new ruble = 1,000 old rublei. The highest denomination in 2008 was 100,000 rublei, equal to 100,000,000 pre-2000 rublei.

Bolivia

Bolivia went through its worst inflation between 1984 and 1986.

Before 1984, the highest denomination was 1,000 pesos bolivianos. By 1985, the highest denomination was 10 Million pesos bolivianos. In 1985, a Bolivian note for 1 million pesos was worth 55 cents in US dollars, one-thousandth of its exchange value of $5,000 less than three years previously. In the 1987 currency reform, the Peso Boliviano was replaced by the Boliviano at a rate of 1,000,000 : 1.

Bosnia-Herzegovina

Bosnia-Hezegovina went through its worst inflation in 1993.

In 1992, the highest denomination was 1,000 dinara. By 1993, the highest denomination was 100,000,000 dinara. In the Republika Srpska, the highest denomination was 10,000 dinara in 1992 and 10,000,000,000 dinara in 1993. 50,000,000,000 dinara notes were also printed in 1993 but never issued.

Brazil

From 1986 to 1994, the base currency unit was shifted three times to adjust for inflation in the final years of the Brazilian military dictatorship era. A 1967 cruzeiro was, in 1994, worth less than one trillionth of a US cent, after adjusting for multiple devaluations and note changes. A new currency called real was adopted in 1994, and hyperinflation was eventually brought under control. The real was also the currency in use until 1942; 1 (current) real is the equivalent of 2,750,000,000,000,000,000 of those old reals

Chile

Beginning in 1971, during the presidency of Salvador Allende, Chilean inflation began to rise and reached peaks of 1,200% in 1973. As a result of the hyperinflation, food became scarce and overpriced. A 1973 coup d'état deposed Allende and installed a military government led by Augusto Pinochet. Pinochet's free-market economic policy ended the inflation and except for an economic depression in 1981 the economy has recovered. Overall impact of the inflation: 1 current Chilean Peso = 1,000 Escudos.

China

The Republic of China went through the worst inflation 1948-49.

In 1947, the highest denomination was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan. The 1948 currency reform replaced the yuan by the gold yuan at an exchange rate of 1 gold yuan = 3,000,000 yuan. In less than 1 year, the highest denomination was 10,000,000 gold yuan. In the final days of the civil war, the Silver Yuan was briefly introduced at the rate of 500,000,000 Gold Yuan. Meanwhile the highest denomination issued by a regional bank was 6,000,000,000 yuan (issued by XinJiang Provincial Bank in 1949). After the renminbi was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 old Renminbi in 1955.

Georgia

Georgia went through its worst inflation in 1994.

In 1993, the highest denomination was 100,000 coupons [kuponi]. By 1994, the highest denomination was 1,000,000 coupons. In the 1995 currency reform, a new currency lari was introduced with 1 lari exchanged for 1,000,000 coupons.

Israel

Inflation accelerated in the 1970s, rising steadily from 13% in 1971 to 111% in 1979. From 133% in 1980, it leaped to 191% in 1983 and then to 445% in 1984, threatening to become a four-digit figure within a year or two. In 1985 Israel froze all prices by law. That same year, inflation more than halved, to 185%. Within a few months, the authorities began to lift the price freeze on some items; in other cases it took almost a year. By 1986, inflation was down to 19%.

Madagascar

The Malagasy franc had a turbulent time in 2004, losing nearly half its value and sparking rampant inflation.

On 1 January 2005 the Malagasy ariary replaced the previous currency at a rate of one ariary for five Malagsy francs. In May 2005 there were riots over rising inflation, although falling prices have since calmed the situation.

Nicaragua

Nicaragua went through the worst inflation from 1987 to 1990.

From 1943 to April 1971, one US dollar equalled 7 córdobas. From April 1971 to early 1978, one US dollar was worth 10 córdobas. In early 1986, the highest denomination was 10,000 córdobas. By 1987, it was 1,000,000 córdobas. In the 1988 currency reform, 1 new córdoba was exchanged for 10,000 old córdobas. The highest denomination in 1990 was 100,000,000 new córdobas. In the 1991 currency reform, 1 new córdoba was exchanged for 5,000,000 old córdobas. The overall impact of hyperinflation: 1 (1991) córdoba = 50,000,000,000 pre-1988 córdobas.

Peru

Peru went through its worst inflation from 1988 to 1990.

In the 1985 currency reform, 1 inti was exchanged for 1,000 soles. In 1986, the highest denomination was 1,000 intis. But in September 1988, monthly inflation went to 132%. In August 1990, monthly inflation was 397%. The highest denomination was 10,000,000 intis by 1991. In the 1991 currency reform, 1 nuevo sol was exchanged for 1,000,000 intis. The overall impact of hyperinflation: 1 nuevo sol = 1,000,000,000 (old) soles.

Poland

Poland went through its worst inflation between 1990 and 1993.

The highest denomination in 1989 was 200,000 zlotych. It was 1,000,000 zlotych in 1991 and 2,000,000 zlotych in 1992. In the 1994 currency reform, 1 new zloty was exchanged for 10,000 old zlotych.

Romania

Romania is still working through steady inflation.

The highest denomination in 1998 was 100,000 lei. By 2000 it was 500,000 lei. In early 2005 it was 1,000,000 lei. In July 2005 the leu was replaced by the new leu at 10,000 old lei = 1 new leu. Inflation in 2005 was 9%. In 2006 the highest denomination is 500 lei (= 5,000,000 old lei).

Russia

In 1992, the first year of post-Soviet economic reform, inflation was 2,520%, the major cause being the decontrol of most prices in January. In 1993 the annual rate was 840%, and in 1994, 224%. The ruble devalued from about 40 r/$ in 1991 to about 30,000 r/$ in 1999.

Turkey

Throughout the 1990s Turkey dealt with severe inflation rates that finally crippled the economy into a recession in 2001. The highest denomination in 1995 was 1,000,000 lira. By 2005 it was 50,000,000 lira. Recently Turkey has achieved single digit inflation for the first time in decades, and in the 2005 currency reform, introduced the New Turkish Lira; 1 was exchanged for 1,000,000 old lira.

Ukraine

Ukraine went through its worst inflation between 1993 and 1995.

In 1992, the Ukrainian karbovanets was introduced, which was exchanged with the defunct Soviet ruble at a rate of 1 UAK = 1 SUR. Before 1993, the highest denomination was 1,000 karbovantsiv. By 1995, it was 1,000,000 karbovantsiv. In 1996, during the transition to the Hryvnya and the subsequent phase out of the karbovanets, the exchange rate was 100,000 UAK = 1 UAH. This translates to a hyperinflation rate of approximately 1,400% per month. And to this day Ukraine holds the world record for most inflation in one calendar year, which was set in 1993.

Yugoslavia

Yugoslavia went through a period of hyperinflation and subsequent currency reforms from 1989 to 1994.

The highest denomination in 1988 was 50,000 dinars. By 1989 it was 2,000,000 dinars. In the 1990 currency reform, 1 new dinar was exchanged for 10,000 old dinars. In the 1992 currency reform, 1 new dinar was exchanged for 10 old dinars. The highest denomination in 1992 was 50,000 dinars. By 1993, it was 10,000,000,000 dinars. In the 1993 currency reform, 1 new dinar was exchanged for 1,000,000 old dinars. But before the year was over, the highest denomination was 500,000,000,000 dinars. In the 1994 currency reform, 1 new dinar was exchanged for 1,000,000,000 old dinars. In another currency reform a month later, 1 novi dinar was exchanged for 13 million dinars (1 novi dinar = 1 German mark at the time of exchange). The overall impact of hyperinflation: 1 novi dinar = 1027 pre 1990 dinars. Yugoslavia's rate of inflation hit 5 × 1015 percent cumalative inflation over the time period 1 October 1993 and 24 January 1994.

Zaire (now the Democratic Republic of the Congo)

Zaire went through a period of inflation between 1989 and 1996.

In 1988, the highest denomination was 5,000 zaires. By 1992, it was 5,000,000 zaires. In the 1993 currency reform, 1 nouveau zaire was exchanged for 3,000,000 old zaires. The highest denomination in 1996 was 1,000,000 nouveaux zaires. In 1997, Zaire was renamed the Congo Democratic Republic and changed its currency to francs. 1 franc was exchanged for 100,000 nouveaux zaires. The overall impact of hyperinflation: 1 franc = 3 × 1011 pre 1989 zaires.

Zimbabwe

At Independence in 1980, the Zimbabwe dollar was worth about USD 1.25. Since then, rampant inflation and the collapse of the economy have severely devalued the currency, causing many organisations to favour using the US dollar or South African rand instead.

In Defense of Economics

Yves Smith at Naked Capitalism has an interesting essay on her site Why So Little Self-recrimination Among Economists? which we would urge you to read if you are interested at all in this topic, as it is sincerely well thought and written, for which we her readers are always grateful.

It is difficult to assess the quality of an unfamiliar game if one does not know the rules, and even more if one does not understand the objectives. What is the 'goal' of the economics game which we all have been observing with greater than usual interest these past few years?

For the past twenty five years at least modern economics has not been seeking objective truth and the advancement of learning as much as the rationalization of policy positions in pursuit of power, awards, grants, and influence. This is not to say that there was a utopia before this, but rather that the less admirable aspects of the profession were in the minority, and not so widely accepted and tolerated and respected.

Our society on the whole does not value the truth as it had done before, but worships money and power and cleverness. That is both the long and short of it. We obtain the politicians and economists and news commentators that we encourage according to the character of the age.

Economics is a social science, with somewhat murky experimental methods, more like redacted statistical vignettes, and difficult to measure theories with grading periods too widely interspersed to be meaningful. This introduces a strong element of peer pressure and factionalism, of quack theories and nostrums hiding in the safe harbors of ambiguity and plausible error.

Granted, the academics are protected by tenure, but tenure is a weak consolation to the ambitious. It can be at worst a kind of exile, a quiet humiliation. And professors are weak in their resources as compared to the think tanks who have no qualms about pursuing their desired objectives. There is a power to the lie that can overwhelm those who stumble about in pursuit of the truth, or at least a better approximation of it.

Economics is not a purely objective science, because its theories are not readily verifiable through controlled experimentation, even allowing for the work of some of the behaviourists.

In this economics is not alone among the sciences, not at all, especially to those in the leading edge of some disciplines like theoretical physics, where experimentation is difficult, and grading periods are also interspersed widely. We often hear of courageous minds who hold out through years of isolated persistence to be eventually vindicated by new discoveries from experimentation and observation.

But is economics so much the problem? We would suggest that its condition, its character, merely makes it vulnerable, a thing to be encouraged and protected, but not to be relied upon as a bulwark against adverse societal influences.

If anything, economics is guilty of pretension, of having more influence and authority than its knowledge would allow. Was there anything so artfully disingenuous as the Congressional testimony of Alan Greenspan regarding critical policy decisions? Or more craven than the way in which many of the Congressmen sought to gain cover for their action under his prevarication?

How can there be self-recrimination where there is no outrage in general? Where is the objective analysis of what went wrong, and proposals to change things to correct this?

Most academics are notorious followers, trodding the well worn and well marked paths, no matter where they might lead. It is only the exceptional, both in mind and spirit, that dare to blaze new trails. Tenure is no armor for the ego, and there are no politics more vicious and petty than those of academia, excepting perhaps the fashion industry.

We ought not to blame economics, beyond its pretensions to administer advice from some position of authority because of superior knowledge. That has been shown to be hollow, false, a totemism. The pseudo-religious aspects of the extreme elements of some economic schools of thought is apparent, almost hysterically funny, when viewed from a distance.

We ought not to single out economists for not being virtuous because there were too few virtuous people on the whole both then and now, if one defines 'virtuous' as one who tells the truth, come what may, as the facts and their analysis leads them even in their lack of certainty.

This is not to say there is no blame to be attached, no criminality to be assessed, that 'society is to blame.' The problem is that there is so much of it that we can spend years striking at the branches, the scapegoats, without approaching the root.

The remedy is the law, and to affect this we must take back the rule of law from those who have corrupted it.

The Federal Reserve raised an enormous debt bubble to lift the economy out of the slump of 2002, and for this trouble we were rewarded with a housing and stock market bubble, and remarkable imbalances that are just now being unwound. This is what happens when one liberally applies monetary and Keynesian stimulus without reform. And we are doing it again.

Things will change for the study of economics, and probably for the better. There are more extreme examples of professions which were co-opted by the political world, like psychology in the Soviet Union and medicine in the Third Reich, sciences subjected to what some might call deep capture.

How can a society which defines its first principle, the ultimate good, as greed be anything but what it is? Cruel, self-absorbed, shallow, unjust, delusional and imbalanced. Nothing made this more apparent than the spectacle of the outgoing President's press conference today. And, we might add, the actions of his predecessor in that office.

Fear is the tool of a tyranny, and greed is a horse to be harnessed, not the measure of policy or an administrator of justice to run maximized, or even unchecked.

Why the lack of self-recrimination among the economists? Because they are no different than anyone else who failed to exercise their stewardship and basic human obligation to protect the innocent and to stand for justice, and uphold the standards of their profession. In this they are no different than politicians and lawyers and accountants and the mainstream media, although we foolishly expected more.

Economics will recover eventually from this lapse, as the majority of economists look back in quiet horror at the carnage that was inflicted on the world, accommodated by their silence. There were many who spoke out. There were even some who took the time and trouble to go to places where economists frequently discuss things, and caution that their silence would discredit the profession.

What is the next step? Forward, off the beaten path.

US Dollar Weekly Chart with Commitments of Traders

Citi Unloading Robert Rubin and Salomon Smith Barney

We hope that Teflon Bob will not be finding a position with the Obama Administration. If he does they might have to drop the 'reform' label on that Administration. This is starting to look more like the shift change at the Rogues Gallery.

Citi is also said to be shopping (trying to unload) its Salomon Smith Barney brokerage division. They are said to be in talks with Morgan Stanley. Apparently MS is finding its current life as a bank holding company a bit timesome, coming in at 10 and out on the links by 3.

How fast time flies on the Street. It seems like only yesterday that little Philbro was in short pants, and then its first pair of white shoes. Then they grow up and rig the Treasury market and help set up the dotcom bubble, those little scamps.

Both Citi and JP Morgan continue to be plagued by rumours of large undisclosed losses and troubled positions.

Since Bob Rubin was on Sandy's and Vikram's A team, one has to wonder. As Pliny the Elder observed, "Ruinis inminentibus musculi praemigrant:" When collapse is imminent, the little rodents flee.

Wall Street Journal
Rubin to Leave Citigroup
By DAVID ENRICH

Robert Rubin, the former Treasury secretary who has been sharply criticized over his role in the financial turmoil at Citigroup Inc., is leaving the bank.

Mr. Rubin is senior counselor and a director at the New York company, which has suffered $20 billion in losses over the past year and got a government bailout of at least $45 billion. Citigroup's troubles cast an awkward spotlight on Mr. Rubin, who received $115 million in pay since 1999, excluding stock options.

Citi said in a statement that Mr. Rubin retired decided to retire as senior counselor effective Friday and decided not to stand for re-election as a director at the company's next annual meeting.

"Since joining Citi nearly 10 years ago, Bob has made invaluable contributions to the company," said Vikram Pandit, Chief Executive Officer of Citi.

While Mr. Rubin has defended his performance since joining Citigroup in 1999, insisting that the bank's problems were due to wider turmoil in the financial system, not failures by Citigroup, he is "tired of it," a person familiar with the matter said. Mr. Rubin now wants to focus instead on his non-profit work and other outside interests.

The exit of Mr. Rubin likely will do little to ease the questions swirling around Citigroup, now just the fifth-largest U.S.-based bank as measured in stock-market value. Since late 2006, Citigroup's share price has plunged nearly 90%. On Friday, the stock was down more than 5% in recent New York Stock Exchange composite trading.
Besides an initial $25 billion injection as part of a broad rescue of financial firms, the government agreed in November to put in $20 billion more and vowed to protect Citigroup against most losses on $306 billion of its assets.

The second infusion, which the government as the bank's largest shareholder, with a 7.8% stake, coincided with federal regulators putting Citigroup on a tighter regulatory leash, according to people familiar with the situation said.

Federal banking regulators have toughened their scrutiny of Citigroup, becoming involved in internal discussions about the company's strategic direction and discouraging executives from pursuing certain acquisitions.

In an interview with The Wall Street Journal in late November, Mr. Rubin said risk-management executives are responsible for navigating around problems like those now battering Citigroup. "The board can't run the risk book of a company," he said in the interview. "The board as a whole is not going to have a granular knowledge" of operations.

Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions.

Mr. Rubin also played a major role in getting Mr. Pandit appointed as Citigroup's chief executive in December 2007, following the resignation of Charles O. Prince.
In the Journal interview, Mr. Rubin said Mr. Pandit was doing a good job and would prosper in its current structure once the financial crisis eases.