Confused World before New Year’s Eve

From the Editorial

World is preparing for New Year and is anxious to declare by the end of this year that it has found bottom of financial crisis!

Despite positive dynamics of common macroeconomic showings, none of recognized experts would allow himself to say such thing. For instance, economic recession has decreased three times in comparison with the first quarter of 2009; Main indices of financial market have already returned to their old figures and considerable revival is noticed at the swap market; Derivatives are in good shape also!

Main development of November month was, the statement of the US Secretary of the Treasury – Timothy Geithner, published by agency Reuter. Timothy Geithner announced future arrangement of financial market, He claimed that no financial firm should be able to escape regulation, and the largest institutions need oversight from a single, strong regulator – “The regulation of the largest, most interconnected firms requires tremendous institutional capacity, clear lines of authority and single-point accountability. This is no place for regulation for council or by committee. The stakes are simply too high to allow diffuse authorities and responsibilities to weaken accountability” – he said. Minister added that the regulatory regime that failed leading up to the financial crisis is precisely the current regulatory regime in the US. Reform is required to ensure stability of system, protect consumer rights and stand the crisis wave, to refute the myth about so large financial institutions that their bankruptcy is unacceptable. Federal Reserve Chairman Ben Bernanke declared that same thing earlier in Senate. The main intrigue is that the US Secretary has not named the new regulation institutions – it is unclear whether this will be Federal Reserve System or… coming out from fierce criticism toward this institution in Congress, one might suppose that this new regulatory organ will be newly arranged Reserve System. One is obvious – US Secretary left this issue under the veil of secrecy. What will be new banking and financial regulation of the US and what lies in Obama Administration portfolio?
(Plan of the reform and old scheme might be seen at the website-
Plan of financial reforms will be introduced in congress next month. As an article By Tom Braithwaite published in Financial Times states that Critics maintain pressure on US Treasury chief as he is against nationalization of some problematic financial institutions demanded by some liberals.
Frederic Mishkin appeared at arena in November month – former ideologist of Federal Reserve System, professor who established new conception in economics (or tried to establish). Former ideologist published an article in Financial Times – “Not all bubbles present a risk to the economy”. Author defends Federal Reserve System that offers cheap money to business with almost zero-interest-rate and thus increases risk of inflation and arising of new bubble. Mishkin’s answer is – No! He distinguishes the types of bubbles – that is actual novelty in economic theory. First, “Credit Boom Bubbles” are extremely dangerous for economy. “A credit boom bubble, in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues” – says Mishkin. The second category of bubble – “pure irrational exuberance bubble”, is far less dangerous. For example, the bubble in technology stocks in the late 1990s and the bubble that burst in the stock market in 1987 did not put the financial system under great stress and the economy fared well in its aftermath. “Monetary policymakers, just like doctors, need to take a Hippocratic Oath to “do no harm”, added Mishkin.
The author does not see it necessary to tighten monetary policies in USA and Europe – this is the main leitmotif of Bernanke that was announced by Mishkin and this determines the main line of dollar exchange rate in 2010Y. One thing is for sure, this period is accompanied by golden line of confrontation between US Treasury and Reserve System. It seems that Federal Reserve System will not be the main financial institution with the new reform.
Bernanke declared at the meeting of New York Economic Club that decrease of dollar exchange rate is the first-priority issue, but increase of prices on main exchange commodities such as oil and gold is caused not only by fall of USD exchange rate, but by increased demand on these goods.
Bernanke reckons that despite reduced bank lending and increasing unemployment – the recent pickup reflects more than purely temporary factors, and that continued growth next year is likely.
According to research organization Conference Board, US leading indices increased by 0.3 percent. Index of pure capital inflow increased up to $133 billion in Oct – this is the highest indicator over several months.
Governments of foreign countries purchased long-term securities in amount of $25.3 billion in Sep and $28.5 in Oct. Despite astronomic foreign debt, such popularity of securities is caused by foreign confidence factor toward Obama administration. According to US Labor Department, consumer prices increased by 0.3 percent, Producer Price Index (PPI) has increased by 0.3 percent compared with previous month showing. Industrial Production rose by 0.1 percent this month; aggregate reduction of showing was 7.1 percent over 2009. (Source: FRS).
Retail trade increased by $347.58 billion in Oct. This is a 1.4% increase since previous month. Construction of new houses reduced by 10.6 percent and made up 529.000 units. Unemployment reached record-breaking rate; it has overstepped 10% barrier.
Euro Zone has different approach and prognoses about inflation – Deutsche Bank experts reckon that it might increase even more. Two factors are defining this: first, unprecedented state intervention and increase of volume of circulating money for weakening of devastating effects brought by crisis. Second, unprecedented increase of state debts. According to OECD data, state debts in many countries made up 23% of GDP and almost 100% in USA. This increases dangers of inflation pressure. Consequently Deutsche Bank experts suppose that the US FRS and Central Bank of the EU will slowly start to increase interest rate of refinancing as an attempt to stop advance in prices – it makes up 1-1.5% in 2010Y and 3% in 2013Y. Therefore, big changes are not expected in US Dollar to Euro Currency Exchange Rate. According to Eurostat, the cost of fuel purchased by Europe oil is $37 billion less this year (Russia incurred losses). This enabled to avoid huge balance of trade deficit and have 3.7 billion Euros surplus. This in the times when in Sep-2009, deficit in Euro Zone was 11.3 billion Euros.
Consumer Price Index made up 0.3 percent. Volume of construction has been decreased by 8 percent in comparison of 2008Y. Sales of motor cars are increased by 11 percent. GDP increase by 0.4 percent. The recession in comparison with 2008Y is 4.1 percent. Thus the bottom is still far away.
The volume of industrial production increased by 0.3 percent in comparison with previous month, but decreased compared to 2008Y (12.9%). Commodity market was distinguished by price slump. The reasons of this are creation of excessive reserves and carefulness of speculators toward market behavior. Leader of price reduction were lead – 2%, zinc – 1.5%, copper – 0.66%, aluminum – 0.5% and nickel – 0.29%.
Information spreads that China is going to export the part of industrial metal reserves. This means that there will be no serious fluctuations at the market in 2010Y. As due to volatility and dollar exchange rate variations, operations on futures contract have decreased.
Leaders of world economy will find it hard to discover bottom of crisis. According to calculations, US should have found bottom of the crisis this year and Europe in I quarter of the next year. Now, it is clear that this is delayed and approximate term will be I-II quarters of 2010Y. Legend that Asia would lead the world out of crisis appeared to be a myth. The key to crisis is still lying in United States.
One might make a conclusion towards Georgia: Crisis peripeteia is still ahead. We will reach the bottom in III-IV quarters of 2010Y, if the crisis of real sector does not start in whole world.