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Sunday, October 26, 2008 4:58 PM

Economic Crisis Around The Globe Continues

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The economic crisis around the globe is touching every country. Let's take a look at a few headlines. Note: Most of the snips below are small. To improve readability I am forgoing my usual blockquote style. My comments appear at the very end starting with a bold "My Comments"

United States

With wreckage piling up, Fed eyes another rate cut

Sunday October 26, 2:08 pm ET
WASHINGTON (AP) -- As the economic wreckage piles dangerously higher, the Federal Reserve is prepared to ratchet down interest rates -- perhaps to their lowest point in more than four years -- with the hope of relieving some of the pain felt by many Americans. Alan Greenspan, who ran the Fed for 18 1/2 years, called it a "once-in-a century credit tsunami," and conceded that he made mistakes that may have aggravated the economy's slump.

Vanishing jobs and shrinking paychecks have forced consumers to cut back sharply. Millions of ordinary Americans have watched their 401(k)s and other nest eggs shrink and the value of their homes drop, making them feel in even worse financial shape. In turn, businesses have cut back on hiring and other investments as customers hunker down and credit problems make it harder and more costly to get financing.


Canadian Dollar Falls for a Fourth Week; Government Bonds Gain

Oct. 25 (Bloomberg) -- Canada's dollar fell for a fourth week, its longest losing streak in almost a year, and two-year bond yields touched the lowest in almost two decades on speculation the economic slump will deepen and oil will decline.

Canada's currency, dubbed the loonie for the aquatic bird on the one-dollar coin, is poised for its worst month since at least 1950 after touching the lowest since September 2004 yesterday. It has declined 17 percent since September.

"We're right off the charts in terms of how big this decline is," said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. "We continue to see tremendous volatility in all financial markets and that's most definitely affecting the currency markets as well."


German minister: Crisis far from over

Germany's finance minister said in comments published Sunday that global financial markets could still collapse and that the situation remains dangerous despite government efforts to bailout lending institutions.

"The danger of a collapse is far from over. Any `all clear' would be wrong," Finance Minister Peer Steinbrueck told the Bild am Sonntag weekly. "We are still dealing with a very dangerous situation."


IMF offers $16.5 billion loan to Ukraine

NEW YORK (MarketWatch) -- The International Monetary Fund said Sunday it plans to lend $16.5 billion to Ukraine to support a policy package the country has assembled to maintain its economic and financial stability.

The package is designed to help the country following the collapse of steel prices and the global financial crisis, IMF Managing Director Dominique Strauss-Kahn said in a statement. The funding is contingent on approval by the body's executive board and would follow approval of legislative changes in Ukraine, the statement said.


Pakistan Extends August Stock Trading Curbs Until Oct. 31

Oct. 26 (Bloomberg) -- Pakistan extended trading restrictions on its stock market for the third time in a month to prevent a further slide. Since the curbs were imposed, Pakistan's credit rating has been cut, giving it the world's second-lowest grade.

South Korea

Bank of Korea Calls Emergency Meeting, May Lower Interest Rates

Oct. 27 (Bloomberg) -- The Bank of Korea monetary policy board called an unscheduled meeting for today, possibly to discuss an interest rate cut after the stock market lost a fifth if its value last week.


Bank of Israel May Cut Main Rate by a Quarter Point

Oct. 26 (Bloomberg) -- The Bank of Israel may lower the benchmark lending rate for a second time this month as global financial turmoil imperils domestic economic growth. Governor Stanley Fischer will cut the rate to 3.5 percent, according to eight of 14 economists surveyed by Bloomberg.

Fischer unexpectedly reduced the rate on Oct. 7 as the benchmark stock index fell to a two-year low because of the global credit crisis. The cut marked a turnaround for Fischer, who had raised the base rate four times earlier in the year in an effort to slow inflation.


Malaysia Holds Rate, Vows Action to Support Economy

Malaysia's central bank pledged it will take action to prevent the economy from deteriorating after keeping the benchmark interest rate unchanged for the 20th straight meeting.

"In the face of diminishing inflationary pressures, and in the event of heightened downside risks to growth, the bank will take swift monetary policy action to provide support to the economy," Bank Negara Malaysia said yesterday, after maintaining the overnight policy rate at 3.5 percent.

United Kingdom

U.K.'s Darling to Say Crisis to Be Deeper, Longer Than Expected

Oct. 26 (Bloomberg) -- The U.K. economy shrank in the second quarter, its first contraction in 16 years. Prime Minister Gordon Brown and Bank of England Governor Mervyn King admitted for the first time last week that Britain is heading for a recession, while Charlie Bean, the central bank's governor for financial stability, said in an Oct. 24 interview with the Scarborough Evening News that the turmoil in the banking industry is the worst ever.

"After 15 years of economic growth the party is over," Graeme Leach, the IoD's chief economist, said in an e-mailed statement. "Budget setting for 2009 is going to be a very tough process in order to squeeze out every possible cost saving."


Kuwait moves to prop up major bank after losses

Sunday October 26, 11:20 am ET
KUWAIT CITY (AP) -- Kuwait's Central Bank stepped in Sunday to prop up one of the country's biggest banks and said it was considering guaranteeing deposits in domestic banks -- in one of the first concrete signs that the global financial crisis may next hit the oil-rich Gulf.

The two moves came just a day after finance ministers from the six-nation Gulf Cooperation Council held an emergency meeting to echo assurances, which they have repeatedly voiced over the past few weeks, that the region's banks face no liquidity crisis.

Kuwait's decision to stop trading in shares of Gulf Bank sent a shock wave through the country's bourse, which closed down almost 3.5 percent and brought its year-to-date losses to over 19 percent.

"The halting of Gulf Bank shares spread panic in the bourse today, because the government has been saying banks are safe from (global financial crisis) losses," said investor Ahmed al-Fadhli in a telephone interview.

Saudi Arabia, Qatar, United Arab Emirates

Saudi Arabia Provides $2.67 Billion to Help Citizens

Oct. 26 (Bloomberg) -- The Saudi government will inject 10 billion riyals ($2.67 billion) into the government-run Saudi Credit Bank to provide no-fee loans to low-income citizens, Saudi Press Agency said, citing the finance minister.

The measure, ordered by King Abdulla of Saudi Arabia, follows last week's injection of about $5 billion in the form of deposits into Saudi commercial banks and a reduction in reserve requirement.

The Central Bank of Kuwait has taken measures to increase liquidity at commercial banks in recent weeks, including raising the loan-to-deposit ratio, cutting interest rates, injecting funds into the interbank market and, today guaranteeing commercial bank deposits. The United Arab Emirates said Oct. 12 that it would guarantee all bank deposits for three years.

The Qatar Investment Authority, the emirate's sovereign wealth fund, said Oct. 13 that it would acquire stakes in banks.


Japan's Bonds Complete Best Week Since June on Stocks Rout

Japan's 10-year bonds yesterday capped the biggest weekly gain since June as investors sought to preserve their capital amid a global stocks rout that wiped out more than $10 trillion of market value this month.

The yield on the 1.5 percent bond due September 2018 fell 9 basis points this week to 1.48 percent in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.773 yen on the week to 100.172 yen. A basis point is 0.01 percentage point.

My Comments

Deflation is here. That fact can no longer be denied. Central bankers around the globe are fighting it. However, there is no reason to expect this economic crisis to abate anytime soon. The mother of all consumer led recessions is upon us and unemployment is going to soar as noted in Businesses Slash Jobs.

Until the crisis ends, stocks are going to be under pressure while government bonds will be a safe haven.

Those looking for a "bubble in bonds", need look no further than Japan. 10 year bonds at 1.5% are proof of how low yields can go. Those who see a bond bubble in the US, right here right now, are barking up the wrong tree.

Spare me the "US is not Japan" comments.

I know all about the differences between Japan and the US. I have commented on them many times. Inquiring minds should take a look at Q&A on the Psychology of Deflation written January 11,2007 and Deflation American Style written January 18, 2008.

Those how argue "It's Different In Japan" need to weigh the impact of those differences. The pent up deflationary forces in the US are such that Deflation American Style figures to be far worse than Deflation Japanese Style.

All the people who said US consumers would keep spending forever and banks would keep lending forever have now been proven wrong. US consumers are tossing in the towel on spending, and banks have tossed in the towel on lending.

Still more are going to be tossing in the towel as unemployment rises and home prices and the stock market continues to sink.

Mike "Mish" Shedlock
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