Breaking ranks (over busted banks) with the financial establishment

There are some unusually gutsy remarks being made by Adair Turner who heads up the FSA, the main financial regulatory body in the UK. An article in the Financial Times quotes from remarks which Turner has made in a journal about the need for a "banker's tax" as well as the over-reliance of the UK economy on financial services.

The head of Britain’s top banking watchdog supports the idea of new global taxes on financial transactions, warning that a “swollen” financial sector paying excessive salaries has grown too big for society.

Adair Turner, chairman of the Financial Services Authority, says the debate on bankers’ bonuses has become a “populist diversion” and that more drastic measures may be needed to cut the financial sector down to size.

He also says the FSA should “be very, very wary of seeing the competitiveness of London as a major aim”, claiming the city’s financial sector has become a destabilising factor in the British economy.

It is actually quite astonishing that an establishment figure, so close to the current very banker friendly Labour government, should even be questioning the future of the City culture in such an outspoken manner. One can only wonder at this stage how Gordon Brown and Peter Mandelson, who have never met a banker that they didn't immediately want to honor with a knighthood at least, might be reacting to the comments from someone who carries a lot of credibility in the UK.

As the FT suggests the remarks by Turner have a candid quality which could even gain some traction with other members of the global financial establishment and suggest that it may not just be Nicolas Sarkozy who is serious about taking on the almighty banking constituency.

Lord Turner’s suggestion that a “Tobin tax” – named after the economist James Tobin – should be considered for financial transactions is also likely to reverberate around the world. The proposed tax, which has previously been championed by development economists and the French government as a means of funding the developing world, has been fiercely opposed by the finance industry.

The FSA chairman also claims that parts of the financial services sector had grown “beyond a socially reasonable size”, including derivatives and hedging and aspects of the asset management industry and equity trading.

Predictably the reaction from the British Bankers Association was not in favor of Turner's suggestions and is stressing that financial services are a vital pillar of the UK economy which "could be undermined by the wrong kind of taxes or regulation."

US Dollar poised to breakout of wedge pattern against Swiss Franc

There is growing technical evidence that the US dollar index could be headed higher in coming weeks as positive divergences are emerging in the current basing pattern.
The chart above highlights a remarkable descending wedge pattern in which the US currency appears to be preparing to make a decisive move upwards against the Swiss Franc.

Looking back to the top of the wedge pattern it coincides almost exactly with the beginning of the March recovery. After the S&P 500 bottomed on March 6th and the early adopters became more adventurous making allocations to riskier assets again, the safe haven appeal of the dollar began to decline. Since then the dollar has moved steadily downwards into the thin end of the wedge with no further room to postpone the directional decision that will be made imminently.

The question remains - if the greenback is header higher, does it suggest that the risk aversion trades may be ready to come back into play again or that there is a new dynamic at work which sees less systemic risk and a more upbeat view of the comparative advantages of the US recovery scenario?

London’s ability to attract talent has gone down

London’s ability to attract talent has gone down according to a report
from Bloomberg

The number of U.S. citizens in Britain fell 3.8 percent to 126,000 in the 12 months through September, according to the Office for National Statistics. The trend probably continued this year, with the Confederation of British Industry estimating the U.K. financial industry will lose about 45,000 jobs in the first nine months of 2009, or 4.3 percent of the total.

Americans are heading home as Britain plans a 50 percent tax rate for those who earn more than 150,000 pounds ($248,000) a year and employers cut benefits for workers living abroad, reducing the allure of London. That comes a year after the U.K. said foreigners who have lived in the country for more than seven years must pay 30,000 pounds annually or give up the special status that shields overseas income from British taxes.

“Expats feel the tone has changed; it’s less welcoming,” said Mark Tilden, a consultant at CRA International Inc. who wrote a report for the City of London last year on the impact of taxation on corporate relocation decisions.
“We are fed up with all the stealth taxes, the non-doms levy, and now the 50 percent tax rate,” Sherbow said. “Six American families have moved from my street in the last six months.”

Quality of Life

Forty-one percent of employers plan to review expatriate programs, according to a study by KPMG International. KPMG surveyed about 100 companies, 60 percent based in the U.S., and found that 22 percent had recalled overseas workers or turned them into local employees in the past 12 months.

Huddling under an umbrella during a July downpour, Wesbecher said he was no longer willing to put up with the frustrations of life in London after his commissions dropped and Palo Alto, California-based Tibco eliminated his expatriate benefits, cutting his take-home pay by 75 percent.

“This is what passes for summer in London,” he said, sipping an iced latte in the city’s main financial district. “The quality of life is a lot harder. Things are more expensive and the houses are smaller. Even public transport is cramped. A New York subway car is like real estate in comparison.”

The economic picture is also gloomier in Britain. The U.K. economy shrank 5.6 percent in the year through June, compared with 3.9 percent in the U.S. London’s financial industry lost 29,371 jobs, or 8.3 percent of the total, last year, according to the Centre for Economic and Business Research. Financial companies in New York cut 20,200 jobs, or 4.3 percent, data from the state Labor Department show.

Orphan items at the check out desk - do I really need that?

There's quite an insightful article from Mike Shedlock on the manner in which consumers are changing their minds, at the last moment, about whether to purchase items at the supermarket or online. When they do dump some item out of their trolley and leave it by the register this is called creating an "orphan" item.

In increasing numbers, cash strapped consumers are abandoning items at the checkout counter or dumping items from their virtual shopping baskets online. The former creates orphan items that have to be restocked.

Last second abandonment is a new twist in the "Do I really need that?" shopping psychology that has set in. Now more than ever, shoppers are thinking twice in the checkout line.

Internet research company Forrester Research estimates as much as 59 percent of online purchases are being dumped during checkout. Those rates had ranged from 47 percent to 53 percent in the past six years, according to industry surveys.

The Container Store, which sells storage items, has seen its online abandonment rate rise to 68 percent. The company has launched an e-mail campaign to remind shoppers of their abandoned purchases and a service that lets shoppers pick up online purchases at the store to avoid shipping costs.

Let's hope that as a result of the more frugal types of behavior that a lot of the junk that had been previously considered as deserving a place in people's homes will no longer be manufactured if it fails to find any more gullible buyers.

EMI Records is on the brink of default

Great catalogue bought at the height of the private equity boom by someone who didn't have a clue how to run a record company but wanted to be in showbiz anyway

Aug. 14 (Bloomberg) -- EMI Group Ltd., bought by Guy Hands's Terra Firma Capital in a leveraged buyout in 2007, is working to keep its record-music unit, EMI Music, from defaulting on loans, the Wall Street Journal reported, citing unidentified people familiar with the matter.

EMI Music isn't making enough money to comply with a 950 million pound loan ($1.56 billion) from Citigroup Inc., the Journal said, citing the people.

I find it surprising that all of the copyrights owned by this company could not be more easily financed. Some form of re-organization may be avoidable but it is hard not to believe that there could be some new consortium that would try to rescue this great musical catalogue.

One of Antarctica's largest glaciers is thinning four times faster than it was ten years ago, researchers have warned.

This startling report on the rapid breakup of the Antarctic ice mass suggests that worries about National Debt/National Income ratios, horrendous as they are, should not overwhelm the attention and focus of policy makers.

Satellite measurements of the Pine Island glacier in West Antarctica have revealed that the surface of the ice is dropping at a rate of up to 16 metres a year and since 1994, has lowered by as much as 90 metres.

Fifteen years ago, it was estimated that the rate of ice melt would see the glacier disappear within 600 years. Now, the data suggests it could be gone in little more than 100.

If the Pine Island glacier collapses, it would have major implications for rising sea levels and could be followed by the rapid disintegration of the West Antarctic ice sheet.

Professor Andrew Shepherd of Leeds University, one of the authors of a report in the publication Geophysical Research Letters, said that the melting from the centre of the glacier would add about three centimetres to global sea levels.

"But the ice trapped behind it is about 20-30cm of sea level rise and as soon as we destabilise or remove the middle of the glacier we don't know really know what's going to happen to the ice behind it," he told BBC News.

"This is unprecedented in this area of Antarctica. We've known that it's been out of balance for some time, but nothing in the natural world is lost at an accelerating exponential rate like this glacier."

The alarming revelations came as scientists working in the Arctic reported evidence of a dramatic change in the levels of sea ice and large cracks appearing in the large Petermann glacier.

Borrowing from the future

1.With a negative discount rate you can't (theoretically and sustainably) borrow from the future
2.With a discount rate that is higher than the real economic growth rate (i.e. adjusted for inflation) you also can't borrow (theoretically and sustainably) from the future.

Hard questions and easy answers

Question of the day

Who will continue to loan us (i.e. the advanced and sophisticated western world) the money to continue with our misguided policies?

Answer of the millenium

The future.

Debt addiction

Zero interest rates tell us pretty much all we need to know about how our financial system works in the 21st century. The western economic system is totally addicted to debt but cannot face a cold turkey program.

As long as our policy makers can present forecasts and hopeful scenarios with even a glimmer of hope for a better future, as a society we will continue to use an inflated discount rate for future cash flows. With this in place we will continue to rationalize the fact that we can borrow more money from the future to feed our bad habits today.

Fed easing up on Treasury purchases

Here is the statement from Federal Reserve Bank of New York regarding the easing of Treasury purchase by the Fed by the end of October

The Federal Reserve is in the process of buying $300 billion of Treasury securities. On Wednesday, August 12, 2009, the Federal Open Market Committee announced that it decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. This approach is intended to promote a smooth transition in markets as these purchases of Treasury securities are completed. To implement this decision, the Federal Reserve Bank of New York Open Market Trading Desk will gradually reduce both the size of individual operations and the frequency of operations, beginning with the two-week schedule to be released on Wednesday, August 19, 2009.

Not included in the statement was the (implicit) warning "Subject to change without notice"

UK unemployment - laid off white collar workers are too "posh" to claim

As outlined here the numbers of unemployed in the UK continue to mount

Unemployment in Britain jumped by 220,000 in the three months to June to 2.435 million, official data showed today, the highest level since 1995.

The Office for National Statistics said that the jobless rate was now 7.8% of the workforce - the highest since 1996, before Labour came to power.

The figures also showed a huge 271,000 drop in the number of people in work - the biggest fall since records began in 1971 although there was a similar fall in the February to April period this year.

The ONS also reported a relatively small rise of 25,000 in the number of people claiming job seeker's allowance. Under that measure there are now 1.58 million people claiming benefit, equivalent to 4.9% of the workforce which is the highest rate since October 1997.

One of the more remarkable features of the statistics is that the level of those claiming benefits is not rising commensurately with the numbers losing jobs. Anecdotal evidence suggests that many white collar, professionals who have been losing jobs in abundance are "too posh" to sign on for benefits and are currently depleting savings and redundancy payments.

Maybe it is a case of "Too posh to claim" now, but as the decimation of the traditional middle class carries on in the UK - it still has some catch-up to go before it reaches the levels now being witnessed in the US, there surely will be a capitulation and recognition that even WASP professionals can fall on hard times.

Intercontinental Hotels sees no sign of recovery

The following piece from BBC News provides a sober assessment of the global travel and leisure industry.

The world's biggest hotel group has warned it has seen no sign of recovery and has said it could take two years for trade to return to previous levels.

Intercontinental Hotels - which operates the Crowne Plaza and Holiday Inn brands - said the downturn was continuing to stifle travel budgets.

Its operating profits fell 38% to $179m (£108.5m) in the first half of 2009.

The group added that while occupancy levels were stabilising, room rates were under pressure.

"We can't see any sign of recovery and it could be two years before we get back to levels of travel we were at before," said chief executive Andrew Cosslett.

"This is one of the toughest years on record with little respite and it will continue to be challenging this year and into next."

The firm added that while reservations for July had benefited from improved demand from leisure travellers, it did not know what future booking trends would be.

Intercontinental has about 4,300 properties with almost 630,000 rooms.

Tim Geithner wants to raise the $12 trillion debt limit to boost confidence

Reuters is carrying the following report about how Tim Geithner wants the US debt ceiling, currently at $12 trillion, to be raised in order to preserve confidence in the USA.

U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit on Friday, saying that it could be breached as early as mid-October.

"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Geithner said in a letter to Senate Majority Leader Harry Reid that was obtained by Reuters.
Treasury officials earlier this week said that the debt limit, last raised in February when the $787 billion economic stimulus legislation was passed, would be hit sometime in the October-December quarter. Geithner's letter said the breach could be two weeks into that period, just as the 2010 fiscal year is getting underway.

The latest request comes as the Treasury is ramping up borrowing to unprecedented levels to fund stimulus and financial bailout programs and cope with a deep recession that has devastated tax revenues.

It is expected to issue net new debt of as much as $2 trillion in the 2009 fiscal year ended September 30 and up to $1.6 trillion in the 2010 fiscal year, according to bond dealer forecasts.

Hopefully on reading this we've all had our confidence boosted.

Global stocks could correct by 30% says Mobius

Bloomberg has a story dated August 10th which quotes Mark Mobius saying that global stocks will drop as much as 30 percent following their recovery from last year’s rout as companies take advantage of the rebound to sell more shares. The chart of the MSCI World Index can be gauged from the chart above which tracks ACWI the exchange traded sector fund based on this index.

Here are some of the relevant quotes

“When you have these rapid increases, almost without correction, you will definitely have a correction at some point, so we can expect a lot of volatility,” Mobius, the executive chairman of Templeton Asset Management Ltd. said in an interview in Kuala Lumpur today. “Increases of 70 percent will be followed by decreases of 20 to 30 percent.”

The MSCI World Index has climbed 54 percent from a 13-year low on March 9, boosting valuations as governments worldwide spent more than $2 trillion to end the global recession. The rebound prompted a revival in share sales. China State Construction Engineering Corp. and Visa Inc.’s Brazilian affiliate VisaNet raised about $11.9 billion in the world’s largest initial public offerings this year.

The biggest risk for global stocks is the increase in initial share sales and bond issues, Mobius said today. Investors will be “selling to take up new stocks, that will impact the prices,” he said. Mobius, who oversees about $25 billion, on July 29 said he plans to double Templeton Asset Management’s emerging-market assets within two years.

Among the 315 IPOs announced globally this year, the average deal size was $118.9 million, Bloomberg data show. U.S. companies issued $851 billion of bonds this year in the busiest period since at least 1999, when Bloomberg began collecting the data.
‘Anytime’

The so-called correction “can happen anytime, probably this year,” Mobius said. “It may not be all at once, you may not see a decrease of 20 percent suddenly, it could be 10 percent here, and a rise of 5 percent then another 10 percent, you’ll see this kind of volatility in the markets.” He added that he was referring to shares “globally.”

The Bank of England has cornered the gilts market

The surprise decision by the Bank of England yesterday to increase the ceiling on its Quantitative Easing (QE) program to £175 billion caught many City slickers by surprise and there was an immediate drop in sterling (as seen in the chart above) and an equally abrupt drop in yields in the gilt market.

It turns out that the QE program exactly matches the government's projected deficit this year - or at least the figure that Chancellor Darling last gave to Parliament - and further research shows that in effect the Bank of England now owns the majority of outstanding gilts and has "cornered the market" in Treasuries as this piece from the Daily Telegraph reveals.

So much of the gilts market does the Bank now own that, in a landmark move, it also agreed that it would temporarily lend out gilts through the Debt Management Office to ensure that banks are able to close out positions as necessary.

The Bank has also suspended its purchases of four particular maturities of gilts after it emerged that it had bought as much as 70pc of their total issue. In a further sign of the rate at which it is exhausting the gilt market, the Bank will also start buying gilts of both shorter and longer maturities than the 5 to 25 year set it was originally buying.

Danny Gabay of Fathom Consulting said the news "reflects the fact that the Bank has to all intents and purposes 'cornered' the market for certain Gilts or bonds, to which market participants may still need to have access. Innocent enough - but it makes the charge that the whole [scheme] is an elaborate smokescreen for monetising the government's ballooning deficit even harder to refute.

"So, while we welcome the news of an extension to the asset programme, we would once again urge the MPC to consider a much wider range of assets to purchase than government bonds."

Yesterday's decision means that the Bank will soon own almost half of the entire gilts market, currently worth around £400bn, raising further questions about the Government's reliance on the QE programme to keep its financing under control.

The worrying question must surely be -- what about next year's projected deficit which according to the Chancellor is about the same as this year's i.e. £175 billion?

Will the Treasury be able to sell gilts to anyone other than the Bank of England?

Some cynics of my acquaintance are even asking whether this system of completing the daisy chain between the Bank's printing press and the funding of the public finances needs a new moniker as Ponzi scheme doesn't quite fit the bill.

On a cautionary note there will be few wanting to short the gilt market as they will in effect have to ask the Bank of England to lend them the security so they can sell it back to them where the Bank effectively runs the market . We may also need some new terminology to augment our notions of repos and reverse repos.

About half of U.S. mortgages seen underwater by 2011

What has happened to the "wealth" of the typical middle class American? This helps to connect the dots.

NEW YORK (Reuters) – The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.

Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,

Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.

Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

"For many, the home has morphed from piggy bank to albatross," the analysts said.

Short term technical sell signal on S&P 500

The chart above shows the 15 minute action on the S&P 500 for Wednesday August 5th and displays a co-occurrence of short term sell signals indicating that a correction in this time frame is beginning. [Clicking on the image should produce a larger graphic which will be easier to read]

The indicators are as follows:

1. Tuesday's higher prices above 1000 were diverging with the momentum and RSI indicators which as the arrows reveal were moving in the opposite direction to price.
2. There was a classic Ichimoku crossover of the 9 day line crossing the 26 day line as indicated on the chart
3. This crossover had the appropriate context i.e. the green cloud lies below the crossover.
4. The initial target in this time frame is the base of the green cloud approximately 995 on the S&P 500 cash index.

The slump in demand for electricity in the UK is unprecedented

The slump in demand for electricity in the UK is unprecedented according to this article from the Guardian.

Electricity demand from British industry has fallen by an unprecedented 8% this year as factories have shut down in droves, power station operator Drax said today.

Household demand has also declined – by 2% – but that was due to mild weather rather than economic reasons, the company's chief executive, Dorothy Thompson, said, as she unveiled half-year results.

Overall demand for the power station's electricity fell by 6% in the first six months of 2009, compared with the same period a year earlier. The station, in Yorkshire, is the largest coal-fired power station in Europe and supplies around 7% of Britain's electricity.

Thompson said it was usual for energy demand to fluctuate in line with changes in overall economic output, but this time the drop was abnormally large. "For our sector it's a very unusual movement ... in fact, unprecedented in my experience," she said.

A slump in world trade volumes in the second half of last year and a collapse in demand for things like new cars meant Britain's industry has borne the brunt of the recession. Many car plants closed for several months around the turn of the year as they tried to run down stocks of unsold cars. That also caused many parts suppliers to shut down temporarily, which could explain such a sharp drop in electricity demand.

The last time the government's revenues were this bleak was in 1932

The following piece of sober realism comes from Associated Press.

WASHINGTON – The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem."

While much of Washington is focused on how to pay for new programs such as overhauling health care — at a cost of $1 trillion over the next decade — existing programs are feeling the pinch, too.

Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.

The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.

For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.

Is there a way out of the financial mess?

A key factor is the economy's health. The future of current programs — not to mention the new ones Obama is proposing — will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.

"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers.

"If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."

A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.

Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated.

"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.

The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.

The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.

"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."

The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.

"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.

President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.

Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.

Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.

Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.

Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.

Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."

China is rapidly accelerating its efforts to internationalise its currency

The following article from the Times caught my eye.

China is rapidly accelerating its efforts to internationalise its currency with a series of manoeuvres that could see the renminbi soar to become one of the top three traded monetary units in the world.

By 2012, say analysts in Shanghai, as much as $2 trillion (£1.69 trillion) worth of trade flows may be settled using the “redback” as China stretches its commercial tentacles throughout the commodity-producing world and the emerging economies of Asia, Latin America and the Middle East.

The radical change in attitude may arise from a desire to protect China from the “dollar trap” — the problem that emerges when exporting countries are effectively forced to shovel large chunks of their reserves into the US treasury and suffer the consequences in times of high volatility.

The rising financial power of the renminbi may also prove to be the salvation of Hong Kong in its intensifying rivalry with Shanghai for international relevance.

The former British colony, say economists at Barclays Capital, may be able to secure its status as a premier global financial hub by rebranding itself as China’s offshore renminbi banking centre. Renminbi internationalisation is essential if Hong Kong “is to have any long-term hope of being like London or New York,” according to the bank.

Political analysts believe full international currency status for the renminbi could take some time to become politically acceptable to the full spectrum of views within the Communist Party, warning that there would be significant policy hurdles surrounding the perceived loss of currency control.

However, China’s soaring economic growth and global financial turmoil could be pushing the process ahead faster than the market expects. Recent measures, including currency swap agreements with several central banks and the allowing of renminbi-denominated crossborder trade, have significantly changed the environment, HSBC said in a research note.

If, as some predict, China overtakes Japan to become the world’s second biggest economy next year, the pressure for the renminbi to internationalise will mount faster. Wensheng Peng, chief China economist at Barclays Capital, believes that market turmoil and the Wall Street crisis has changed the terms of a debate on the renminbi that has been brewing for years.

“The global financial crisis, and along with it increased concern from the Chinese perspective on the reliance of the global monetary system on the US dollar has brought to the fore the importance of increasing the use of the renminbi in international trade and finance,” he said.

A consensus among policymakers has grown from the grudging acceptance that one of the fundamental reasons the country has fallen into the dollar trap is that China’s currency is not international and the global crisis has made the dollar less predictable.

Others believe that raw economic growth makes the globalisation of the renminbi inevitable. “If the history of sterling and the dollar’s ascendancies as international currencies are any guide, said Hongbin Qu, HSBC’s chief China economist, the internationalisation of the renminbi is “long overdue” because of China’s rising economic power relative to the limited use of the renminbi overseas.

Most significant are the policy gambits in the past few months as the global financial crisis has given motive and opportunity for Beijing to test out renminbi internationalisation. China has signed bilateral currency swap agreements with Korea, Malaysia, Indonesia, Belarus and Argentina worth 650 billion renminbi (£57 billion). Last month, China selected five mainland cities — accounting for 45 per cent of the country’s foreign trade — that can trade with Hong Kong and Macau in renminbi. The programme, said Mr Qu, could be rolled out to cover all of China’s trade with Asia except Japan.

US Treasury two-year note yields rose the most in eight weeks

The following report from Bloomberg illustrates the stress now being endured by the ongoing refinancing of the US deficit:

Aug. 1 (Bloomberg) -- Treasury two-year note yields rose the most in eight weeks after mixed results at this week’s four note auctions renewed concern a deluge of borrowing of will overwhelm investor demand.

Government securities have posted losses for four consecutive months, the longest losing streak since 1996. The Treasury sold $115 billion of notes over the five days ended July 31, including a record $42 billion of two-year securities and $39 billion of debt maturing in five years, also a record, both of which drew lower-than-forecast interest from investors.

“Supply was the focus this week,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 18 primary dealers that trade with the Federal Reserve. “Clearly some of these auctions are getting up to sizes where they are getting more difficult for the market.”

The benchmark two-year note yield rose 12 basis points on the week, or 0.12 percentage point, to 1.11 percent, according to BGCantor Market Data. The yield touched 1.22 July 29, the highest since June 25. The 1 percent security maturing in July 2011 rose 3/32, or 94 cents per $1,000 face amount, to 99 24/32 after closing at 99 21/32 after its sale on July 28.

Government securities of all maturities handed investors a 0.03 percent gain this week through July 30, according to Merrill Lynch & Co.’s U.S. Treasury Master index. For the month, the debt lost 0.3 percent. The last time the securities slid for four straight months was from February to May of 1996, amid signs of growth in the U.S. economy. Treasuries have fallen 4.7 percent in 2009.

Out the Curve

Indirect bidders, an investor class that includes foreign central banks, purchased 33 percent of the two-year notes offered July 28, compared with 68.7 percent in the previous auction in June, which was the most in at least six years. That class bought 36.7 percent of the five-year notes sold July 29, down from 62.8 percent at the June sale, which was the highest since December 2004.

The record $28 billion offering of seven-year notes drew stronger-than-forecast demand after yields on the existing security rose to the highest level in a month prior to the auction. Indirect bidders bought 62.5 percent of the notes, compared to 67.2 percent at the June auction and an average of 40 percent at the past five auctions.

“Central bank interest is moving further out the curve,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Securities USA Inc. “Everyone has been defensive in the front end of the curve for a long time. Maybe they want to get ahead and the opportunity to pick up yield and duration.”