Friday, December 28, 2007

U.S. Economy's Pulse Weakens

Fresh economic data painted a poor picture of U.S. employment and business activity Thursday morning.

The Labor Department reported that jobless claims rose by 1,000 to 349,000 last week; economists were expecting claims to drop to 340,000.

Meanwhile, orders for durable goods, or big-ticket items, ticked up a mere 0.1% in November, far worse than expectations for a 2.2% increase. The results seemed to provide further evidence that corporate spending and employment is slowing in the wake of the mortgage meltdown.

Investors were also eagerly awaiting the Conference Board’s consumer confidence report, due out at at 10 a.m. The report is expected to show that confidence edged down just slightly in December. With a weak housing market and soaring fuel prices, consumers likely pulled back this holiday shopping season.

Stock futures fell and gold futures rose Thursday morning following reports that Pakistani opposition leader Benazir Bhutto had been killed by a suicide attacker at a rally.

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New home sales hit 12-year low

Annual rate of 647,000 marks worst level since April 1995 after a 9% drop in November.

Sales of new homes have plunged even more than expected to their lowest level in more than 12 years, leaving the market glutted with unsold homes and pointing to more trouble ahead for the battered housing market.

New home sales tumbled 9 percent in November to a seasonally adjusted annual rate of 647,000, according to a Census Bureau report Friday.

That was the worst showing since April 1995, when the pace of sales was 621,000, and is much worse than the 715,000 sales pace forecast by economists surveyed by Briefing.com.

The sales pace is down more than a third from year-ago levels. Furthermore, the decline is widespread nationwide, ranging from a 28 percent drop in the Northeast to a 38 percent plunge in the Midwest.

The weak sales pace still probably overstates demand for new homes since it counts a home as sold when a contract is signed, even though in many cases a contract is cancelled before a sale is closed. In fact, most major builders have reported sharp increases in cancelled orders in recent months because buyers have struggled to arrange financing or sell their existing homes.

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How they got housing wrong

Experts thought 2007 would bring a real estate recovery - not the worst collapse on record. What does that say about forecasts of a turnaround next year?

Before you put much hope in forecasts for a 2008 rebound in the battered housing market, consider this: A year ago at this time many top economists were looking for that recovery to begin in 2007.

Instead, the year saw historic declines in nearly every measure of housing strength and home building, and left a trail of predictions from some of the nation's top economists that look - at best - foolish.

Former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke, after reviewing home sales and mortgage rates in fall 2006, were hopeful that the market had bottomed out.

"It may be too soon to say that it's over. It may not be too soon to say that the worst is over," said Greenspan in an October 2006 speech in Richmond, according to press reports.
In a November 2006 speech, Bernanke said he saw some "encouraging" signs in recent housing
reports.

"Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets," Bernanke said.

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Subprime's Hidden Cost Is Shrinking Leverage: Michael R. Sesit

In this season of stock taking, the picture past and future for financial markets is far from pretty. The reason? Subprime

If you didn't know what subprime meant at the start of the year, it was hard to avoid its meaning by year end.

The big question now is what will the subprime crisis and ensuing credit crunch cost. In mid-July, Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee that estimates of losses associated with subprime-credit products were $50 billion to $100 billion. Those numbers ``are far too low,'' Jan Hatzius, New York-based chief U.S. economist at Goldman Sachs Group Inc., said in a mid-November report.

Based ``on historical default and loss patterns in different home-price environments,'' he estimates U.S. losses will be roughly $400 billion.

Assuming that U.S. and European residential property prices fall 5 percent to 10 percent over the next year, investors in non-prime mortgages and securities linked to them -- including banks, hedge funds, asset managers and mortgage insurers -- stand to lose between $350 billion and $500 billion, according to London-based consultants Independent Strategy. Adding in expected losses from prime mortgages would lift the tally to more than $650 billion.

Yet these loss projections tell only part of the story. The other portion relates to the impact of the losses on the willingness and ability of so-called leveraged investors, institutions that finance their activities with borrowed funds, to keep lending. These include banks, broker-dealers, government- sponsored enterprises, savings institutions and hedge funds.

Ripple Effect

A September 2007 study by Tobias Adrian of the Federal Reserve Bank of New York and Hyun Song Shin of Princeton University, published by the New York Fed, found that leveraged investors, particularly banks and brokers, seek to maintain constant capital ratios. As such, when they lose money, they scale back lending to keep their capital ratios -- assets divided by equity or risk-free capital, such as cash -- from falling.

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SUBPRIME LOSSES SET TO SOAR

Goldman Sachs warned of deepening subprime woes for the world's largest banks yesterday, forecasting that massive writedowns at some banks will be almost double previous estimates.
Banks on Wall Street and around the world, including in Canada, have announced losses of more than US$70-billion tied to the U.S. subprimemortgage market.

But Goldman said those losses will rise significantly, forecasting its rivals Merrill Lynch & Co., Citigroup Inc. and JPMorgan Chase & Co. will take combined charges of US$33.6-billion in the fourth quarter of 2007, compared with earlier forecasts of US$18.7-billion.

Goldman said Citigroup's losses will rise from previous estimates of US$11-billion to US$18.7-billion, likely leading to slashed dividends and further capital-raising efforts at the world's largest bank.

Merrill's subprime losses will jump from US$6-billion to US$11.5-billion and JP-Morgan's losses will rise from US$1.7-billion to US$3.4-billion, according to the report from William Tanona, Gold-man's banking-sector analyst.

Most of the forecast losses relate to collateralized debt obligations (CDOs) -- a form of asset-backed security, often with a significant exposure to troubled U.S. subprime mortgages.

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U.S. economic forecast for 2008: Bleak

The outlook is for a rocky time ahead for the US economy as it moves into 2008.

Many economists predict that America will move closest to a downturn since the current expansion began seven years ago. If the economy does contract, economic seers expect a shallow retrenchment, most likely in the first six months of the year. Most see only limited improvement in the latter half.

A lagging economy is likely to have wide ramifications. In the heat of a presidential election year, unemployment would start to rise, making the economy a major issue for the candidates. An anemic economy would also present a challenge to the Federal Reserve Board, which might opt to keep cutting interest rates. Soft economic numbers, moreover, could have a detrimental effect on corporate profits – depressing financial markets and lowering tax receipts, straining government budgets.

"There is not much margin for error. It would not take much to push us over the edge," says Dennis Hoffman, an economist at the W.P. Carey School of Business at Arizona State University (ASU) in Tempe. "It's hard to come up with boom-time scenarios."

Of course economists and Wall Street have been pessimistic – and wrong – before. This past year, for example, strong exports, thanks to the weak dollar, and an unexpected inventory buildup resulted in a surge of 4.9 percent growth in the third quarter, much higher than the forecasts.

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Thursday, December 27, 2007

Trade policy emerges as vital in '08

Rep. Kevin Brady of The Woodlands is an unabashed free-trader. He believes that international commerce is good for America. He'd like to see new pacts negotiated to open more foreign markets to U.S. goods and services.

But the sixth-term Republican is concerned about the future of trade policy amid a public outcry over unfair foreign competition and unsafe imports.

"More Texans are worried about all the changes in the global economy," he said. "They're worried about China, the outsourcing of jobs to India, and (they) generally feel that other countries don't have to play by the same rules we do."

As he watches the 2008 presidential campaign unfold, Brady sees free trade under siege.
"It's just so tempting to be populist," he said.

The 2008 presidential candidates can see that voters are in a sour mood on trade. An NBC News/Wall Street Journal poll earlier this year found that 46 percent of adults thought that free trade agreements hurt the United States, 16 points more than in 1999. Protectionist sentiment seems to be growing fastest among Republicans. In a September NBC/Wall Street Journal poll, 59 percent of Republican primary voters said trade has been bad for America.

Many of this year's major presidential candidates — nearly all Democrats and Republican populist Mike Huckabee — have responded by promising tough trade negotiations to give American workers a break and raise standards worldwide.

"We need trade without tradeoffs for America," former Sen. John Edwards, D-N.C., said in a speech at an Iowa union hall on Aug. 6. He vows, if elected, to put "regular families" ahead of the interests of multinational corporations.

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Dollar dips on weak US economic data

The European single currency on Thursday hit a two-week high against the dollar in thin trade and following a batch of weak US data, dealers said.

However, the foreign exchange market remains light with many traders still sidelined after the Christmas holidays and ahead of the year-end, they added.

In early morning deals, the euro surged to 1.4516 dollars, the highest level since December 14. It later stood at 1.4503 dollars, which compared with 1.4487 in New York late on Wednesday.
The dollar also slid to 114.20 yen from 114.29.

Later Thursday, dealers will digest US consumer confidence data for December, and November new home sales on Friday amid ongoing jitters about the health of the US economy and its slumping housing sector, dealers said.

On Wednesday, the S&P/Case-Shiller's 20-city composite US home price index fell 6.1 percent in October from the same month last year.

Dealers said the news exacerbated concerns over the US subprime housing crisis, which stems from home loans dished out to high-risk borrowers with patchy credit histories.

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Few Saw Mortgage Storm Brewing

It’s hard to believe now, but at the start of 2007 few people outside the mortgage industry knew or cared what a subprime loan was.

Fewer still had any inclination of the far-reaching impact these loans would have on the global economy during the next 12 months.

Nevertheless, the fallout from the collapse of the market for subprime loans -- loans made to people with poor credit histories -- became without question the most significant story on Wall Street in 2007.

“The severity and sudden onset of the crisis caught people off guard,” said Mike Larson, a real estate analyst with Weiss Research in Jupiter, Fla.

Larson said the writing was on the wall as 2006 wound down. Signs of a pending storm included reports of overbuilding by homebuilders, rising inventories of existing homes for sale, and, most ominously, perhaps, a jump in mortgage delinquencies.

“There were clearly problems in ’06,” Larson noted, “but in ‘07 it exploded into the mainstream. Very few people realized the depth and severity of the downturn we were headed into.”

The cracks began to show in February. European banking giant HSBC Holdings, a big investor in securities backed subprime loans, said it needed to set aside billions more than previously expected to offset losses in its subprime investments. This would become a trend.

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Worst decline in American house prices may not be finished yet

American house prices declined at their fastest rate for more than six years in October, with homes in Miami losing 12 per cent of their value, it emerged yesterday.

According to the Standard & Poor’s/Case Shiller index of house prices in the US, the value of existing, single-family homes fell 6.7 per cent in October compared with the same period the year before.

The figures indicate that America’s housing recession – already the worst for 16 years – is far from over. Professor Robert Shiller, co-founder of the index and an economics academic at Yale University, said: “No matter how you look at these data, it is obvious that the state of the single-family housing market remains grim.”

The 6.7 per cent fall surpasses a 6.3 per cent drop in April 1991.

While Washington has sought to limit the number of Americans at risk of losing their homes by negotiating with lenders to freeze mortgage repayments, there is still a glut of unsold property on the market, depressing prices.

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Wednesday, December 26, 2007

Economy faces weak winter

Conference Board index of leading indicators falls by 0.4 percent in November, adding to fears of 2008 recession.

A gauge of future business activity fell last month, indicating the economy could be dragged down further amid rising costs and housing woes, a business research group said Thursday.

The Conference Board said its index of leading indicators dropped 0.4 percent in November, after falling 0.5 percent in October and rising by a slight 0.1 percent in September.

It was at 136.3 in November, versus a revised 136.9 in the previous month.

Last month's drop was close to what economists surveyed by Thomson/IFR had predicted, who on average said there would be a drop of 0.5 percent.

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'Santa's Sweatshop:' U.S. trade policy responsible for increased imports of unsafe toys

A new report called ‘Santa’s Sweatshop,’ released locally by the Minnesota Fair Trade Coalition, argues that the massive relocation of toy production from the United States to countries with weaker consumer safety enforcement is an underlying cause of the recent surge in dangerous toy recalls.

The Public Citizen report features new analysis of over four decades of data on toy imports, production jobs and safety recalls, and concludes that changes are needed to both consumer protection standards and international trade policy in order to improve toy safety.

“The massive recalls we keep hearing of, that are bringing so much anxiety this holiday season are not a random act of coincidences,” said Alicia Ranney, director of the Minnesota Fair Trade Coalition. “They are the expected result of our manufacturing industry being outsourced to countries that don’t have the most basic consumer protection standards that Americans deem critical.

“As we’ve seen with the thousands of manufacturing jobs lost in Minnesota since NAFTA was passed, these trade deals mean more than trade,” said Ranney. “The trade rules benefit the bottom line of large corporations but in turn they harm our working people, family farms, the environment and unchecked imports threaten the safety and health of our children and families.”

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U.S. Sinks Deeper Into Credit Card Debt

Americans are increasingly unable to keep up with credit card bills. An Associated Press analysis of financial data from many major credit card companies showed double-digit percentage increases in bill payment delinquency.

Accounts at least 30 days late increased 26% over the previous October to $17.3 billion—a $4.5 billion increase. Discover Financial Services Co. reported a jump of 25,716 accounts that were more than 30 days late over November 2006. The number rose at least another 6,000 during October of this year.

Accounts more than 90 days overdue saw the greatest increase; some lenders reported a 50-plus% increase over the number from the same month in the previous year.

According to the Federal Reserve Bank, Americans carry $920 billion in credit card debt. Credit card companies saw an 18% rise in defaults (in which companies write off debt, deeming the card holder unable to pay) over the previous October. These defaults total about another $961 million that is owed but cannot be repaid.

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Soaring US Debt Threatens Dollar

What else should we be worried about in 2008?

Else? Haven't the headlines already been filled with enough fearful forecasts from financial experts apparently keen to outdo each other in their expectations of Armageddon?
Correct, but unfortunately it never rains, but it pours...
...and Yes, there's another nasty out there, a time bomb waiting to nuke the dollar and shake the
UK.

The US national debt.

At a towering $9.13 trillion, up from $2.7 trillion in 1989 and $5.7 trillion when President Bush arrived in the oval office in January 2001, the sum that America owes has grown from about 35% of national output in 1975 to almost 68% today. Now equivalent to over $30,000 for each man, woman and child in the States, it's ticking up at some $1.4bn a day, nearly $1m a minute.
Scary numbers. And getting scarier all the time.

Firstly because demands on the government purse are escalating...with the number of ‘65+' Americans expected to double within the next 25 years, and the working population growing less quickly, what is already the biggest bit of state spending will need more and more funding.
Secondly, without getting too political, the cost of ongoing conflict in Iraq and Afghanistan is more than the States can really afford, with a potential cost of some $2.4 trillion over the next ten years.

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Monday, December 24, 2007

Merrill raises $6.2 billion in slew of deals

Embattled bank sells $4.4B stake to Singapore investment fund, $1.2B stake to U.S. firm and announces sale of its financial arm to GE Capital; analysts still weary.

Merrill Lynch announced three deals Monday which will allow the beleaguered bank to raise much needed cash as its new CEO John Thain tries to save the company from the huge losses it incurred after the mortgage market meltdown.

The company said it will raise as much as $6.2 billion by selling stakes to two investment firms.
Singapore-based financial firm Temasek Holdings will buy $4.4 billion of common stock, and has the option to purchase an additional $600 million by March 28, 2008, Merrill said.

In the same announcement Merrill Lynch said that Davis Selected Advisors, a U.S based investment firm, will purchase $1.2 billion in Merrill common equity.

The firms will not have a controlling stake in the company, Merrill said and the deals are expected to close in mid-January.

GE buying Merrill Lynch finance unit

Also on Monday, Merrill said that GE Capital, the financial unit of General Electric (GE, Fortune 500), would buy the bulk of operations from the company's financial arm: Merrill Lynch Capital, but terms of that deal were not disclosed.

Merrill Lynch & Co.'s (MER, Fortune 500) shares closed Christmas Eve's abbreviated trading session at $53.90, down $1.64 or nearly 3 percent.

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Evidence of China's rise everywhere in 2007

FROM the depths of Earth's oil fields to the rarefied atmosphere of space, evidence of China's modernisation seemed to be everywhere in 2007 - a rise set to be enshrined with next year's Olympics.
China will soon overtake Germany as having the world's third biggest economy after a fifth straight year of double-digit growth, and its expanding wealth had huge impacts at home and abroad over the past year.
In Shanghai, the value of China's stock market climbed spectacularly as investors continued to plough in their new riches, while around the country the building of skyscrapers and new factories pushed ahead at a frantic pace.
But while the rest of the world enjoyed the countless cheap products exported from China and the increasing economic opportunities offered inside the country, its growing influence in world trade also caused problems.
The United States and Europe hauled China before the World Trade Organisation over a range of what they alleged were unfair trade practices, with one of the complaints from the US side being about rampant copyright abuse.

Trade deficit: China keeps beating up on U.S.

When is the United States going to start getting tough with China about international trade and, more specifically, about the trade deficit?

Month in an month out, the U.S. gets hammered with a ballooning trade deficit, and the country that's pounding on us most is China -- which shows little sign of wanting to help.

If there's any good trade news to be gleaned, it's that U.S. exports of goods and services hit an all-time high of $141.7 billion in October. But that gain was submerged by an increase in imports to $199.5 billion.

And according to Commerce Department figures, the deficit with China vaulted to $25.9 billion, an increase of 9.1 percent and a single-month record.

Simplified, a deficit occurs when a country imports more than it exports. And that's where China has us over the trade barrel -- Americans just can't seem to get enough of Chinese goods, despite tainting and other safety scares.

The grumbling index in Congress is increasing right along with the trade deficit. Literally dozens of bills have been introduced that would punish China for what are being called unfair trade practices. Critics point to 3 million manufacturing jobs lost since 2000.

However, recent talks in China showed that the Chinese are quite comfortable in their present position, and even belligerently arrogant. In talks with Treasury Secretary Henry Paulson, Chinese Vice Premier Wu Yi said of threatened economic actions, "I need to be quite candid about this: If these bills are adopted, they will severely undermine U.S. business ties with China."

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A holiday lesson from the subprime mortgage crisis

Turn on your television this holiday season and chances are the movie "It's A Wonderful Life" will be playing on some channel. This classic film has come to embody that sense of community and caring for one's neighbors often referred to as the "holiday spirit."

You remember the plot line. The bad guy, Mr. Potter, played by Lionel Barrymore, schemes to extract rents from slum housing and take over the Building and Loan, run by good guy George Bailey, played by Jimmy Stewart. George's bank makes loans to families who otherwise wouldn't be able to get them - low-income families, families of color, people who, in his words, "do most of the working and paying and living and dying in this community."

As far as we know, George doesn't sneak escalation clauses into his mortgages or base his business model on getting big fees for foreclosing on those families off-screen. Still, he makes a living. He is not rich but he can care for his family and keep a roof over their heads.

Fast-forward to Christmas 2007, when 2 million Americans are facing the very real possibility they will not be able to do even that because they took out mortgages on exploitative terms. From January to November of this year 15 out of every 1,000 households in Utah received a pre-foreclosure warning notice. That was just the continuation of a miserable trend. In 2006, in Weber County alone, there were 36 pre-foreclosure notices sent for every 1,000 households.

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Faltering U.S. Economy Takes Toll; Salvation Army Reports Dip In Holiday Donations

The sub-prime crisis, oil price increases and economic uncertainty has taken its toll on one of the world's most recognized charity organizations.

The Salvation Army reported a dip in donations for 2007 across America.

Thomas Langdon, Salvation Army officer in Boston, said collections went down by 8 percent.
The cut was larger at 30 percent in Maine and New York City, while Florida had a biggest cut at 40 percent.

The Yuletide gloom is also felt by other charity organizations, ranging from slight declines to a major slash in contributions. The Catholic Charities of Boston said it only suffered a minor slowdown in cash and gift donations. Toys for Tots, a foundation run by the U.S. Marines, almost had a shortfall, were it not for a $78,000 donation from Olivia's Organics, which enabled the organization to purchase 15,000 toys to be given to poor children this Christmas.

While donations were decreasing, the number of people seeking help was on the rise. According to Jake Kennedy, operator of Christmas in the City, a charitable organization that provides assistance to homeless children in Boston, 900 families sought help from it this year, almost double last year's 500 families.

Virginia Reynolds, a spokeswoman for the Catholic Charities of Boston, explained, "Prices are going up, the obvious stuff. It's becoming increasingly difficult for people to pay their bills, pay rent and also get presents for Christmas."

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Friday, December 21, 2007

Fed Tightens Loan Rules After Failing to Stem Subprime Crisis

Federal Reserve Chairman Ben S. Bernanke took steps to restore the central bank's reputation after lawmakers blamed it for failing to contain the subprime mortgage crisis, announcing rules to rein in abusive lending.

Fed governors unanimously proposed banning subprime mortgages that lack income documentation and eliminating most prepayment penalties. The plans, announced yesterday after a six-month review, also make lenders responsible for determining whether borrowers can afford their mortgages even after low starter rates expire.

``Against a background of doing nothing, this is a step in the right direction,'' said Democratic Representative Brad Miller of North Carolina, who had urged stronger regulation. The Fed ``has had rule-making authority since 1994, and this is the first time they've proposed rules, so I'm not inclined to come down on Mr. Bernanke like a ton of bricks,'' he said.

The Fed's efforts to restrict some lending practices while steering away from a complete ban on some products drew a mixed reaction from lawmakers and consumer advocates, who both praised and criticized the Fed.

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Sovereign wealth funds strike again

Morgan Stanley becomes the latest financial firm to score an investment from the new power players in global finance.

Wall Street bank Morgan Stanley said Wednesday it received a $5 billion injection from China's state-run investment arm, becoming the latest financial firm to look overseas for cash.

Morgan Stanley (MS, Fortune 500), addled by bad bets on risky home loans, joins the ranks of Citigroup, UBS and Bear Stearns, which all have received infusions from foreign players in recent months.

Sovereign wealth funds, which act as a country's investment arm, have long been investing money gained through exports or from the sale of commodities such as oil. But the credit crisis, which has left several financial strapped for cash, has created even more opportunities for these funds.

The investment by China Investment Corp., which took a stake in private equity titan Blackstone Group (BX) in May, comes on the heels of the $7.5 billion cash infusion Citigroup (C, Fortune 500) received from Abu Dhabi's state investment fund last month.

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Congress itching to pin blame for manufacturing loss

Pressure from manufacturing groups in the U.S. has Congress pushing paper to punish China for its unfair tactics that have cost the U.S. millions of jobs.

The Associated Press reported the U.S. trade deficit rose to the highest level in three months, with record oil prices, and a flood of toys and other imports from China swamping a solid gain in American exports.

U.S. exports of goods and services rose for an eighth consecutive month, climbing 0.9% to an all-time high of $141.7 billion.

This gain was offset by a 1% rise in imports to $199.5 billion, also a record, as a surge in global oil prices sent America’s oil bill soaring.

So far this year, the trade imbalance with China is running at an annual rate of $256 billion, putting it on track to surpass last year’s $233 billion deficit, which had been the highest deficit ever recorded with a single country.

Those record deficits have triggered a backlash in Congress, with dozens of bills introduced seeking to penalize China for what critics see as unfair trade practices contributing to the loss of 3 million U.S. manufacturing jobs since 2000.

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Pain Street USA: '08 housing outlook

The forecast is for a longer, deeper home-price slump than previously expected, with double-digit declines in many markets.

The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon.

In a new survey, Moody's Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.

80 of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas such as California and Florida.

The steep losses were bound to arrive sometime. Throughout the housing slump, which began in the summer of 2006, experts kept expecting prices to tumble, but it wasn't until recently that they dropped substantially, according to Mark Zandi, chief economist for Moody's Economy.com.

"There has been a sea change in seller psychology since the subprime shock this summer," he said. "Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets."

One such place is Punta Gorda, Fla. In Moody's outlook, prices there will undergo the steepest correction of any U.S. market. From their peak during the first three months of 2006, to their bottom, forecast for the second quarter of 2009, prices will decline 35.3 percent. That's in nominal dollars; adjusted for inflation, the loss will be even greater.

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Chrysler CEO: We're 'operationally' bankrupt

Automaker scrambling to sell assets just months after private equity buyout as credit crunch deepens - report

Chrysler Corp., the troubled automaker bought by private equity just four months ago, is scrambling to sell assets amid indications of huge losses, as access to cash becomes increasingly scarce, according to a published report Friday.

"Someone asked me, 'Are we bankrupt?'" the Wall Street Journal quoted Chrysler boss Robert Nardelli telling employees at a meeting earlier this month. "Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with."

To raise money, Chrysler is looking to sell over $1 billion in land, old factories, and other holdings, even if it has to let those properties go for under book value, the Journal said.
In an interview with the Journal, Nardelli confirmed the comments and declined to give a financial forecast for 2008, saying only that Chrysler "will make a pretty significant improvement" over the $1.6 billion the company is set to lose this year. The Journal said Nardelli originally hoped to turn a profit in 2008.

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Thursday, December 20, 2007

Bear Stearns Posts Loss After Mortgage Writedowns

Bear Stearns Cos., the securities firm that helped trigger the collapse of the subprime market, reported its first-ever loss after writedowns for mortgage holdings and declines in trading and investment banking.

The fourth-quarter loss of $854 million, or $6.90 a share, was almost four times wider than the average estimate of analysts surveyed by Bloomberg. Bear Stearns fell as much as 2.9 percent in New York Stock Exchange composite trading.

Chief Executive Officer James ``Jimmy'' Cayne and senior managers will forgo bonuses for the year after producing ``unacceptable results,'' he said today in a statement. The $1.9 billion writedown wiped out the New York-based company's revenue for the three months ended Nov. 30. Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. posted
gains for the quarter from trading stocks and advising on mergers.

``We had weak trading results in a number of businesses, and the size of our fee-based businesses aren't large enough to offset that,'' Bear Stearns Chief Financial Officer Sam Molinaro said today in a conference call with analysts.

Return on equity dropped to 1.8 percent for the year from 19 percent in 2006. Morgan Stanley reported a 7.8 percent return; Lehman generated 21 percent. Goldman Sachs delivered 33 percent for the year.

Bear Stearns has ``a myriad of problems,'' said Tom Jalics, an analyst at National City Bank in Cleveland, who helps manage $34 billion, including Bear Stearns shares. ``They're not as diversified, they don't have a big overseas presence, big investment banking or equities presence.''

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BlueScope Steel Agrees to Buy IMSA for $730 Million

BlueScope Steel Ltd., Australia's largest steelmaker, agreed to buy four U.S. building material businesses for $730 million, betting commercial construction demand will defy a worsening homebuilding slump.

The acquisition will boost earnings from 2009, BlueScope said today in a statement. The Melbourne-based company bought the businesses from Luxembourg-based Ternium SA to become North America's second-biggest supplier of ready-to-assemble buildings used as schools, barns and aircraft hangers.

The purchase will double BlueScope's sales in the $157 billion U.S. commercial and industrial building market, adding 23 plants from California to North Carolina. The U.S. economy grew at the fastest annual rate in four years in the third quarter as commercial construction increased, tempering a drop in housing.

``You have to be big to be efficient, successful and the leader in the market and that's what they are trying to do,'' Lucinda Chan, head of Asian business at Macquarie Equities Ltd. in Sydney, said by phone. ``North America is in a lot of trouble at the moment and obviously they are expecting a turnaround.''

BlueScope rose 26 cents, or 2.9 percent, to A$9.26 ($7.94) the 4:10 p.m. Sydney time on the Australian Stock Exchange. The stock has risen 7.4 percent this year.

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U.S. Initial Jobless Claims Climb to One-Month High

The number of Americans filing first-time claims for unemployment benefits rose more than forecast last week to a level that suggests the U.S. labor market is cooling.

Initial jobless claims increased by 12,000 to 346,000 in the week that ended Dec. 15, the most in a month, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, climbed to 343,000, the highest since the aftermath of Hurricane Katrina in 2005.

Homebuilders and mortgage lenders are cutting staff as the housing slump deepens and banks restrict credit, economists said. Slowing job growth raises concern consumers may limit their spending, which accounts for more than two-thirds of the economy.

``Clearly claims are drifting upward,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``I don't see a collapse here but this means consumer spending will be weakening.''

A separate government report today showed the economy expanded the most since 2003 in the third quarter, before the subprime collapse rippled through financial markets to threaten growth. The Commerce Department said gross domestic product increased at a 4.9 percent annualized pace, unchanged from a previous estimate.

After the reports, U.S. Treasury securities were little changed. The yield on the benchmark 10-year note was up 1 basis point to 4.04 percent at 9:40 a.m. in New York. The Standard & Poor's 500 stock index rose 7.5, or 0.5 percent, to 1461.2.

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Power Flow Reverses For Wall Street And China

Not so long ago, Wall Street banks were recapitalizing insolvent Chinese state-owned financial institutions as well as leading companies in the state-controlled economy.

Now the money is beginning to flow the other way, as evidenced by the $5 billion bailout of Morgan Stanley (nyse: MS - news - people ) by a Chinese government-owned fund, China Investment Corp., that was announced Wednesday.

Exactly a decade ago, Morgan Stanley became the first Wall Street bank to gain a foothold in China, taking a 34% stake in the first investment bank set up in China, the government-controlled China International Capital Corp., known as CICC.

In subsequent years, despite well-publicized power-sharing problems between Morgan and CICC’s state controllers, it has benefited from the relationship, securing a leading advisory role in billions of dollars worth of offshore initial public offerings by Chinese companies. It also has invested in the country through a private-equity fund.

Morgan Stanley is the top player in China’s fast-growing investment banking business with a 10.4% market share, garnering $690 million in net revenue in the seven years since 2000, compared to its No. 5 position globally with a 5.9% market share, according to Dealogic.

With its capital injection from China Investment Corp., or CIC--the new government agency responsible for investing $200 billion of the country’s $1.4 billion in foreign currency reserves--the one-way money flow from Wall Street has been reversed.

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Wednesday, December 19, 2007

Chinese parents prefer foreign-brand toys

Since Santa Claus outsourced elf toy production to China, you ever wonder what Chinese children play with amid all the product scares?

An Associated Press report buried on page 8 of a major metropolitan newspaper quotes a freelance writer for film magazines buying toys for her son, 5, as paying extra for Legos blocks from Denmark and Japanese train sets.

Foreign brands enjoy a reputation for higher quality, even among Chinese parents.

"We pay close attention to the news about toy and food safety," she said. "If I find a problem with a certain brand, I will just stop using it for sure."

How ironic.

When it comes to buying playthings for their own children, Chinese families who can afford it opt for foreign-made goods - even though they're made in China, too.

Quality and safety issues draw more attention as incomes rise and upwardly mobile Chinese grow more health conscious.

These Chinese parents assume that factories making foreign toy brands adhere to more rigorous standards to guard against lead paint and other harmful materials.

"I dare not buy cheap wooden toys or toys with paint," a professor at Shanghai International Studies University whose daughter, 7, tested for elevated levels of lead in her blood, told the AP. "I have a stupid standard: I buy her expensive toys in big department stores."

At the "gargantuan" New World Department Store in Shanghai, the AP said shelves are crowded with foreign brands, such as Mattel, which cost 40 to 50 percent more.

Chinese-brand toys are "crammed into a few shelves stacked with dolls and toddler toys made by StarMoon Toys," a manufacturer in Dongguan that also makes toys for some of the world's biggest brands.

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More woes for Morgan Stanley

Wall Street firm, suffering first quarterly loss ever, takes $5.7 billion writedown and announces sale of $5 billion stake to China fund.

Morgan Stanley posted its first quarterly loss ever Wednesday and stunned the rest of Wall Street by taking additional $5.7 billion mortgage-related writedown, while announcing a $5 billion cash injection from a Chinese state-run investment fund.

The Wall Street firm said it lost $3.59 billion, or $3.61 a share, during the fourth quarter ended Nov. 30, marking the first time Morgan Stanley has posted a quarterly loss in its 72-year history. Just a year ago, Morgan Stanley posted a profit of $2.21 billion or $2.08 a share.

The loss was steeper than expected, as analysts polled by Thomson Financial were anticipating a loss of 39 cents a share.

The company said it would take a $5.7 billion writedown during the quarter, on top of $3.7 billion it previously announced.

Morgan Stanley blamed the hit on continued deterioration in the credit markets and a lack of liquidity for subprime and other mortgage-related securities.

John Mack, Morgan's chairman and chief executive, said the writedown was "deeply disappointing" to the entire firm as well as the company's shareholders.

Mack also blamed the quarter's losses on a small trading team in one part of the firm, but shouldered some of the blame, adding that he would not accept a bonus for 2007.

"Ultimately, accountability for our results rests with me, and I believe in pay for performance,
so I've told our compensation committee that I will not accept a bonus for 2007."

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Fed to lend $20 billion to banks

Central bank, in a bid to ease credit crunch, gets strong demand for short-term funding. Wall Street is not convinced the loans will help.

The Federal Reserve announced Wednesday that it was lending $20 billion to banks in the first of four special auctions designed to help alleviate the credit crunch on Wall Street.

The Fed said that it received requests for $61.6 billion in loans from 93 bidders - illustrating strong demand by banks that need short-term funds. The winning bidders will receive their loans, which will mature in 28 days, on Thursday.

Initially, stocks moved modestly higher Wednesday following the release of the auction results but headed lower in early afternoon trading. The price of bonds fell at first but wound up rallying later in the morning, pushing the yield on the benchmark 10-year U.S. Treasury note down to 4.09 percent. Bond yields and prices move in opposite directions.

One market expert said the auctions will do little to ease the pain in the financial markets.
"This is a crisis of confidence, not of liquidity or rates. The problem is that people made bad loans this year. There's nothing the Fed can do to fix this. All they can do is try and reduce anxiety," said Barry Ritholtz, director of equity research for Fusion IQ, an asset management firm based in New York.

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Offshoring Santa: Even his suit is made in China

It's not just the toy-making elves who have seen their jobs off-shored.

Santa's new tailors are in China, too.

The last Santa suit manufacturer in the country was Halco, a Belle Vernon-based company that specialized in Santa's suits, dresses for Mrs. Claus and outfits for elves.

This year the last locally produced Santa suit was finished in May and the workers were laid off.
Santa suits were one of the last sectors of the apparel industry to be left in the United States.
Shoes that had been made in New England were made overseas decades ago, though there are a handful of manufacturers still left in the States. Textiles, which early in the last century were made in both New England and the South, are no longer made in this country. Glass and electronics are two other industries that have moved overseas, shifting jobs from the U.S. to India and Asia.

Confronted with a global economy in which cheaper labor is always just a border or two away, companies throughout the United States have shifted much of their work to Mexico or overseas. Halco is just the latest example of a situation that is already familiar to the workers in Westmoreland County who used to make televisions for Sony.

Now it's not just manufacturing that has moved. Calls from U.S. consumers are being handled overseas, including companies such as Intuit, Inc., which has workers in India answering questions about the TurboTax software designed to pay U.S. taxes.

Eric Dirnbach, a spokesman from Unite Here, which encompasses the unions that were formerly the International Ladies Garment Workers Union and the Amalgamated Clothing and Textile Workers, said the story of the loss of Santa suit manufacturing is too familiar.

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Auditor says feds' books in bad shape

The nation's budget watchdog on Monday criticized the federal government's financial practices, saying a new Treasury Department annual report wouldn't cut the mustard in the private sector. "If the federal government were a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company's management and directors needed a major shake-up," Comptroller David Walker said in a speech at the National Press Club.

As head of the Government Accountability Office, Congress' nonpartisan auditor, Walker said government finances are in such disarray he was unable to sign off on the books. In fact, "for the 11th straight year GAO was unable to express an opinion on the consolidated financial statements of the U.S. government," largely because of "very serious internal control weaknesses," he said.

Walker, a persistent critic of federal fiscal policies, conceded that there has been some good news recently. The nation's short-term budget deficits have been shrinking for three years and are "not unduly troubling as a percentage of our national economy," he said. But the long-term outlook is worse than ever, he said.

"The federal government's total liabilities and unfunded commitments for future benefits payments promised under the current Social Security and Medicare programs are now estimated at $53 trillion, in current dollar terms, up from about $20 trillion in 2000," he said.

"This translates into a de facto mortgage of about $455,000 for every American household, and there's no house to back this mortgage," he said.

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Mortgage applications tumble

Industry trade group's weekly survey says refinance and purchase volumes also declined sharply.

Mortgage application volume plummeted 19.5 percent during the week ending Dec. 14, according to the Mortgage Bankers Association's weekly application survey.
The trade group's application index fell to 653.8 from 811.8 the previous week.

Refinance volume tumbled 27.3 percent during the week, while purchase volume fell 10.6 percent. Refinance applications accounted for 53.2 percent of total mortgage applications, down from 57.6 percent during the prior week.

The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.

November foreclosures take a dip

An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume. A reading of 653.8 means mortgage application activity is 6.538 times higher than it was when the MBA began tracking the data.

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Offshoring Interests and Economic Dogmas Are Destroying the U.S. Dollar

On Dec. 8, Chinese and French news services reported that Iran had stopped billing its oil exports in dollars.

Americans might never hear this news, as the independence of the U.S. media was destroyed in the 1990s when Rupert Murdoch persuaded the Clinton administration and the quislings in Congress to allow the U.S. media to be monopolized by a few mega-corporations.

Iran's oil minister, Gholam Hossein Nozari, declared, "The dollar is an unreliable currency in regards to its devaluation and the loss oil exporters have endured from this trend." Iran has proposed to OPEC that the U.S. dollar no longer be used by any oil-exporting countries. As the oil emirates and the Saudis have already decided to reduce their holdings of U.S. dollars, the United States might actually find itself having to pay for its energy imports in euros or yen.
Venezuela's Hugo Chavez, survivor of a U.S.-led coup against him and a likely target of a U.S. assassination attempt, might follow the Iranian lead. Also, Russia's Vladimir Putin, who is fed up with the U.S. government's efforts to encircle Russia militarily, will be tempted to add Russia's oil exports to the symbolic assault on the dollar.

The assault is symbolic because the dollar is not the reserve currency due to oil exports being billed in dollars -- it's the other way around. Oil exports are billed in dollars because the dollar is the reserve currency.

What is important to the dollar's value and its role as reserve currency is whether foreigners continue to consider dollar-denominated assets sufficiently attractive to absorb the constant flow of red ink from U.S. trade and budget deficits. If Iran and other countries do not want dollars, they can exchange them for other currencies regardless of the currency in which oil is billed.

Indeed, the evidence is that foreigners are not finding dollar-denominated assets sufficiently attractive. The dollar has declined dramatically during the Bush regime regardless of the fact that oil is billed in dollars. Iran is dropping dollars in response to the dollar's loss of value. This is a market response to a depreciating currency, not a punitive action by Iran to sink the dollar.
Oil bills are only a small part of the problem. Oil minister Nozari's statement about the loss suffered by oil exporters applies to all exporters of all products.

A quarter century ago, U.S. oil imports accounted for the U.S. trade deficit. The concerns expressed over the years about "energy dependence" accustomed Americans to think of trade problems only in terms of oil. The desire to gain "energy independence" has led to such foolish policies as subsidies for ethanol, the main effect of which is to drive up food prices and further ravage the poor.

Today, oil imports comprise a small part of the U.S. trade deficit. During the decades when Americans were fixated on "the energy deficit," the United States became three to four times more dependent on foreign-made manufactures. America's trade deficit in manufactured goods, including advanced technology products, dwarfs the U.S. energy deficit.

For example, the U.S. trade deficit with China is more than twice the size of the U.S. trade deficit with OPEC. The U.S. deficit with Japan is about the size of the U.S. deficit with OPEC. With an overall U.S. trade deficit of more than $800 billion, the deficit with OPEC only comprises one-eighth.

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Tuesday, December 18, 2007

Subprime Shocks, U.S. Bank Dividends, Trackers' Demise

Aftershocks from the collapse of the U.S. subprime-mortgage market this year are taking an increasing toll on companies worldwide.

In the U.K., banks' reluctance to make money available to each other following the subprime debacle helps explain why home prices fell 3.2 percent this month. This decline is the steepest since Rightmove Plc, Britain's most popular online real-estate site, started providing figures in 2002.

``Buyers face limited availability of mortgages at attractive rates'' because lenders depend largely on ``log- jammed'' money markets for funding, the Milton Keynes, England- based company wrote in a report yesterday.

U.K. homebuilding shares declined in response to the data. Their second-half losses are now more in line with those of their U.S. counterparts. The average drop for the half among six builders in the FTSE 350 Index is 27 percent, just one percentage point from the comparable figure for the industry's half-dozen worst performers in Standard & Poor's benchmark U.S. indexes.

Australia's Centro Properties Group fell even harder yesterday after disclosing that ``tightened credit conditions'' prevented the company from reaching agreement with its banks to refinance A$1.3 billion ($1.12 billion) of debt maturing in May.

Centro, which suspended dividends and said asset sales may be needed to pay down debt, plummeted 76 percent. Centro Retail Group, a real-estate investment trust that the Melbourne-based company manages, tumbled 40 percent.

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Fed to tighten up lending rules

The central bank is expected to propose regulations that would offer greater protections for home buyers and curtail abusive lending.

The Federal Reserve on Tuesday will propose a much stricter set of rules for mortgage lenders as part of the central bank's effort to avert abusive lending.

The proposed rules are expected to crack down on lax practices in a number of ways. Among them, the rules are likely to:

Prohibit giving people unaffordable loans. One reason for the spike in foreclosures among those with subprime adjustable-rate mortgages (ARMs) was that lenders measured borrowers' ability to repay the loan based on the low introductory loan rate, but not on the higher rate that the loan would reset to. The Fed may propose that lenders base affordability on a borrowers' ability to repay a loan at the reset rate.

Restrict use of "liar" loans. The Fed is also expected to restrict the use of so-called "liar loans" or "stated income loans." When lenders make such a loan, they don't verify the income of the potential borrower. The end result: home buyers end up with homes they never could afford in the first place, let alone when their rate resets.

Prohibit or limit prepayment penalties. Homeowners who want to refinance into a more affordable loan are often prevented from doing so because of a punitive prepayment penalty - which can amount to the equivalent of six months of mortgage payments.

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Vulnerable US economy at risk of recession: analysts

THE chairman of the investment bank Morgan Stanley's Asian arm, Stephen Roach, had declared the US economy is headed towards recession and the rest of the world should be worried about the consequences.

Mr Roach said yesterday the US central bank, the Federal Reserve, would have to cut interest rates again to help boost the economy, after a smaller than expected cut of 25 basis points last week disappointed markets.

Asked if the Federal Reserve would have to reduce interest rates again, Mr Roach told Sky News's Sunday Business program: "Most assuredly. The US is going into recession.

"They [the Federal Reserve] have a lot more work to do. They could cut their policy short-term interest rate by one to 1.5 percentage points over the next nine to 12 months."

Mr Roach said the rest of the world should be concerned that the US was going into recession.
"What is interesting, and potentially disturbing, is that the rest of the world doesn't seem to think this is a big deal any more," he said. "There is a view that the world is somehow decoupled from the American growth engine.

"I think that view will turn out to be dead wrong, and this is a global event with consequences for Asia and Australia."

Mr Roach said the US was the world's biggest consumer economy at $US9.5 trillion ($11.04 trillion), compared to China at $US1 trillion and India at $US650 billion.

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Curb sovereign funds, warns Treasury

AMID fears of a Chinese bid for Rio Tinto, the Treasury department has warned that the power of sovereign wealth funds needs to be curbed.

A Treasury study has called for the International Monetary Fund to impose standards that would stop investment funds owned by sovereign governments from buying a majority or controlling stake in foreign corporations.

"Attempts by foreign interests to purchase controlling stakes in strategic industries or iconic domestic companies can sometimes cause broadly based domestic concerns," the study says.

"Resistance can be even stronger if the purchaser is an overseas government, and can raise suspicions over whether the purchase is ... for strategic or other non-commercial reasons."

The Treasury paper follows concerns raised by BHP Billiton chairman Don Argus at the company's annual general meeting about Asian sovereign wealth funds buying mining assets.

"If you get producers and consumers co-ordinating, you really have a different dynamic in all economies ... we will contribute to the debate in the various countries around the world where this affects us in the context of sovereign assets," Mr Argus said.

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Financial Outlook 2008: US Economy hits Danger Zone

The US economy is in the danger zone. GDP growth in the fourth quarter of 2007 (0.0pc) and first half of 2008 (0.8pc in the first quarter and 1.8pc in the second quarter) is expected to be very weak.

This will make the United States extremely vulnerable to another shock. Furthermore, it is unlikely that the rest of the world will be able to shrug off the expected sharp deceleration in spending by American households.

Global Insight currently predicts that world growth will be 3.3pc in 2008, compared with 3.7pc this year. With the potential for housing crunches in some European economies and a post-Olympics slowdown (or even bust) in China, the risks for the global economy are now overwhelmingly on the downside.

US growth will be the weakest since 2002, and possibly since the last recession
Growth in 2002 was a meager 1.6pc, as the economy struggled to recover from the twin shocks of the high-tech bust and the 9/11 terrorist attacks. Growth next year will be almost as low (1.9pc), and there is a mounting risk that it could be lower.

The main culprit is housing, which will cut real GDP growth by 1 percentage point during the year. However, consumer spending growth is also predicted to decelerate from 2.8pc in 2007 to 1.7pc in 2008. Moreover, capital spending is expected to increase a lackluster 2.6pc.

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Monday, December 17, 2007

Merrill Lynch swings bonus ax

The mortgage mess keeps wreaking havoc on Wall Street. Fixed-income bonuses at Merrill Lynch (MER) will drop 40 percent from a year ago on average, Bloomberg reported Monday, as new CEO John Thain seeks to steer the firm past this fall’s bond market meltdown. The bonus cuts will be steepest for traders in mortgage bonds and collateralized debt obligations, the risky debt whose collapse led to an $8 billion writedown at Merrill last quarter and cost former chief Stan O’Neal his job. Corporate bond and interest rate traders will see their bonuses cut as well, the report indicates.

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Oil Prices Fall on US Economic Worries

Oil prices fell Monday as concerns about the U.S. economy overrode expectations of increased fuel demand resulting from a winter storm in the United States.

Prices initially opened higher in response to the wintry conditions over the weekend in the eastern half of the United States.

Victor Shum, an energy analyst with Purvin & Gertz in Singapore noted that the "storm will stir heating oil use, and these expectations have temporarily overtaken worries about the state of the U.S. economy," he said.

But by afternoon in Europe, light sweet crude for January delivery had shed 85 cents to $90.42 a barrel in electronic trading on the New York Mercantile Exchange.

Brent crude fell 41 cents, going for $91.27 a barrel on London's ICE Futures exchange.

Worries about the state of the U.S. economy already affected the market Friday, when the contract fell 98 cents after Washington reported inflation jumped in November by the largest amount in more than two years.

Energy traders are concerned that rising inflation will cut consumers' buying power and reduce demand for gasoline and oil. They also worry that higher inflation means the Federal Reserve will stop cutting interest rates. Many analysts cite the Fed's recent rate-cutting campaign, and its role in depressing the value of the dollar, as a major factor behind oil's rise in November to a record above $99 a barrel.

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Tech: Made In America With The Jobs Overseas

Most manufacturing has gone out of the US. TVs, cars, steel.

What is left? Boeing (BA) and a service and technology economy. Companies like McDonald's (MCD) can't export cooking hamburgers and staffing the register. So, a lot of those jobs will be here forever. But, they are not worth much money.

Tech and financial services are now the strength of the US economy and the money business could be in for a long stay in the intensive care unit.

The world largest hardware, software, and internet companies are still here. They are run here and most of the work that keeps them in the vanguard is done here. At least until recently.

Microsoft, (MSFT), Hewlett-Packard (HPQ), Google (GOOG), IBM (IBM), and Intel (INTC) make up the backbone of the massive global technology industry. And, along with the financial industry, they create a very large portion of the high-end jobs in this country.

Yesterday word got out that IBM will have over 100,000 employee in Brazil, Russia, China, and India. Those countries had 85,000 IBM workers at the end of last year. The company is not growing in the US.

IBM is doing something that will spread to the other big techs. Google has most of its people here, but it is setting up a large tech operation in China and one in Europe. Microsoft is sending more jobs to Asia.

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Subprime: A Predictable Surprise

Michael Watkins on how the subprime crisis provides another textbook example of the theory of predictable surprises and how to prevent the disasters they bring

In 2004, my colleague Max Bazerman and I published Predictable Surprises: The Disasters You Should Have Seen Coming and How to Prevent Them. We defined "predictable surprises" as problems that (1) at least some people are aware of, (2) are getting worse over time, and (3) are likely to explode into a crisis eventually but are not prioritized by key decision-makers or have not elicited a response fast enough to prevent severe damage. We supported our thesis with detailed analyses of the September 11 attacks, the collapse of Enron, and the war in Iraq.

While embraced by many, our work on predictable surprises came under predictable attack. "Hindsight is 20:20" the critics said. In response, Max and I were able to point to specific instances where we had accurately predicted major problems: Max wrote about congressional testimony on conflicts of interest in the auditing of public companies, and I had written about the dire consequences of an invasion of Iraq for me. But some critics remained unmoved.

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Greenspan predicts recession in US

As the credit crisis continues to bite around the world, two eminent economists have predicted the United States will most likely fall into a recession next year.

The former chairman of the US Federal Reserve, Dr Alan Greenspan, says a recession is a 50 per cent chance while the chairman of the global investment bank Morgan Stanley, Stephen Roach, is tipping an even greater risk.

Both agree it will be impossible for other countries to avoid the impact of a slowdown in the world's biggest economy.

Speaking on America's ABC network, Dr Greenspan said the prediction was probably understated given the fear and suspicion in global credit markets.

"The probabilities of a recession have moved up to close to 50 per cent," he said.
"Whether it's above or below is really extraordinarily difficult to tell.
"The real story is, with the extraordinary credit problems we're confronting, why the probabilities are not 60 per cent or 70 per cent."

While Dr Greenspan believes the US Federal Reserve must be free to act, he says interest rates will continue to fall as the US economy moves into what he describes as "stall speed".

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The Sovereign Wealth Weapon

The recent purchase by Abu Dhabi of $7.5 billion in Citigroup is a reminder of the new power player in the global economy: sovereign wealth funds. These funds worth trillions of dollars are wielded by foreign states and are slowly subverting U.S. interests and the welfare of the American people.

SWF’s are like a giant wad of cash for the country that runs them. They are government controlled and operated, composing about $3 trillion in worldwide capital.

The funds are growing in wealth at a rapid rate of 27%, and as such, increasing in power as a potential bully pulpit in international relations. At the G7 meetings in October, world leaders expressed their concern that these vast holdings lacked transparency and would be used as a new international leverage.

Their concerns are justified. Countries in possession of these funds aren’t stupid- they want a return on their investment and a leg up on other ‘competitor’ nations. It is good for business- it is good for their economy- it is good for their country.

But what it isn’t good for is America. We have seen our ownership; technology and profits slip away through the continued acquisition of our best companies.

Though August, 785 companies worth $129 billion have been acquired by foreign purchasers- the fastest rate of purchasing since 2001.

And sovereign wealth funds have been a big contributor to that- here are some of their notable recent deals:

China 10% purchase of the private equity firm Blackstone group

United Arab Emirates purchase of the department store Barney’s for $942 million

United Arab Emirates purchase $622 in computer chip maker AMD

These purchases are part of the larger problem of America’s fiscal deficits coming back to bite us. As the value of the dollar drops, foreign nations will unload their vast dollar backed holdings into the ‘safer’ investment of ownership of American companies.

These countries will continue to buy up our best companies, as America continues to run up huge trade deficits like the $765 billion balance of trade deficit in 2006. This loss of company ownership will escalate our already towering deficits and devastate our nation.

We must demand that the candidates running for office in 2008 address how they would protect America from being the victim of strategic investments of distant and shady sovereign wealth funds.

Our country- and our children’s future may very well depend on it.

Friday, December 14, 2007

Web offers toy alternatives

Question: With all the concern over products made in China, could you provide parents and grandparents with Web sites or retailers where we can purchase "Made in USA'' toys, books, clothes and more for children?

Answer: Kerry and Andrew Menger are the parents of two children and shared your concerns -- so, on Nov. 1 they launched www.NMCtoys.com. NMC stands for Not Made in China.

"My daughter's birthday was in August. I didn't want to buy anything made in China,'' said Kerry Menger, who operates out of New York City's Queens borough. "I went online and kind of struggled. I couldn't find a Web site.'' The Mengers' Web site offers more than 400 products for children younger than 8 made in the United States and in European countries such as Poland, Germany and Spain.

Other toy company sites also are addressing customer requests to identify where toys were manufactured. Little Tikes and Step 2 both note which products are made in America.

On www.Littletikes.com, clicking on the American flag logo will show visitors toys made in the United States.

Step 2, catering to children ages 2 to 6, makes 90 percent of its toys at its plants in Georgia and Ohio, said Dotti Foltz, vice president of marketing communication.

Several months ago, it began labeling toys on www.step2.com with three classifications: "Made in U.S.A.,'' "Made in U.S.A. of U.S. and Imported Parts,'' and "Made in Country of Origin,''' meaning not the United States.

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High oil prices, slumping U.S. Economy expected to hit global airline industry

High oil prices and the slumping U.S. economy are expected to hit the global airline industry harder than originally expected next year, according to a forecast issued yesterday by the International Air Transport Association (IATA). IATA, which represents 240 of the world's leading airlines, said it expects the airline industry's collective earnings to dip to US$5-billion in 2008, after a projected profit of US$5.6-billion this year. In 2006, the industry reported a collective loss of US$500-million. "For the first time since 2000, we are profitable. That is good news," said Giovanni Bisignani, IATA chief executive, above, in a statement "The challenges get tougher in 2008."

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UBS accused of hiding sub-prime hit

UBS, the Swiss bank, has been accused in a court in New York of hiding losses and misleading shareholders as the US sub-prime mortgage market collapsed.

According to a lawsuit filed yesterday in the US District Court in Manhattan, the bank and employees including Peter Wuffli, its former chief executive, and Clive Standish, the former finance director, failed to write down the value of their investments quickly enough as the market plunged over the summer.

The lawsuit claims that the delay meant that shares in the group were trading at an inflated price. The lawsuit, which appeals to other shareholders to join a class action, is being handled by the US law firm Coughlin Stoia Geller Rudman Robbins.

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U.S.-China Talks Build Trust, but No Major Deals

Sitting next to each other after dinner this week and watching an acrobatics show, U.S. Treasury Secretary Henry M. Paulson Jr. and Chinese Vice Premier Wu Yi were chatting casually when the conversation turned to lawsuits.

Paulson said Wu told him: "In China, we don't sue each other. So if someone sued someone, that would be a really unfriendly act -- highly hostile." She said she had been talking to U.S. officials earlier in the day who told her that in their system, "you resolve things in the courts. This is normal."

The government leaders weren't talking specifically about the four World Trade Organization complaints that the U.S. government has filed against China over government subsidies for steel tubes, woven sacks and other products. But the context was clear.

In an interview Thursday after two days of talks with Chinese officials on economic issues, Paulson said his chat with Wu was an example of how the U.S.-China relationship has grown in the year since he and Wu began the twice-a-year cabinet-level meetings.

"I think there's much more communicating, listening, understanding and building a trust level that makes it easier to deal with the issues that are the most politically charged," Paulson said.

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Manufacturing can lead the way in new economy

Call it the "knowledge economy" or the "innovation economy" or just the "new economy."
Whatever it's called, as Grand Rapids wades into it, manufacturing is well positioned to lead the way, a trio of economic experts said Thursday. But that's not to say those Electrolux jobs are coming back.

In fact, the W.E. Upjohn Institute for Employment Research forecasts a 1.6 percent decline in goods-producing jobs next year for the Grand Rapids area, followed by a 0.5 percent decline in 2009. An increase in service jobs will help the work force hold steady overall.

"We'll be facing flat employment (in 2008)," said George Erickcek, senior regional analyst for the Kalamazoo-based think tank. "We cannot expect job gains in manufacturing. Productivity improvements simply require us to hire fewer workers with higher skills."

Still, "the good stuff is the labor dynamics behind those net figures," he said. Although robust productivity is eliminating many jobs, the manufacturing sector in West Michigan continues to create jobs at the rate of at least 1,500 per quarter.

Speaking at The Right Place Inc.'s annual economic outlook at the Amway Grand Plaza Hotel, Erickcek said data show manufacturers are meeting marketplace demand for inventive products.

"The fastest-growing areas have job losses. The difference between fast- and slow-growing areas is job creation," he said.

"These jobs can only be created in manufacturing if we're innovative. Routine production is going to leave."

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One in 5 homeowners see house price drop: survey

More than one in five U.S. homeowners expect their home to fall in value in the coming year, a Reuters-University of Michigan consumer survey said on Friday.

The survey found 21 percent of the 1,168 surveyed see a fall in prices, with those heavily concentrated in areas that have already seen values decline, the survey's director Richard Curtin said in a statement.

Even homeowners that expect gains in prices over the next five years are becoming less optimistic, the survey said. The 60 percent that expect higher prices see a mean increase of just 2.9 percent, which is down from 3.9 percent six months ago and fails to keep pace with inflation.

Survey results "indicate a broader and more lasting slump in home prices, and as a result, the data also points toward broader and deeper cuts in spending," Curtin said.

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Thursday, December 13, 2007

U.S., China sign pact on food safety

In an effort to reassure American consumers about the safety of food and medicine made in China, U.S. and Chinese officials signed agreements Tuesday giving U.S. officials a stronger hand in screening Chinese exports.

But consumer groups and lawmakers in Washington pointed out that the two agreements covered only a small number of products. And the success of the new regulatory effort depends on whether Chinese officials can get producers to meet U.S. safety standards and whether thinly stretched U.S. government agencies can ensure that China keeps its promises.

"Today's agreement applies only to a tiny fraction of the food we import from China," said Sen. Richard J. Durbin (D-Ill.). "And while it can be expanded, it doesn't cover nearly enough products to restore our confidence in Chinese goods.

"Some American consumers have grown wary of the "Made in China" label after a series of safety problems, including tainted pet food ingredients, lead paint in toys, defective automobile tires and toothpaste laced with an antifreeze ingredient. Chinese officials are concerned that their export-driven economy will suffer as a result.

The pacts, signed in Beijing ahead of high-level economic talks today, require companies that export certain foods and medicines to the United States to register with China's food and drug watchdog agencies and agree to annual inspections. The U.S. government will maintain an online list of registered exporters.

China also will implement new certification and testing systems to ensure that shipments meet U.S. standards.

The foods covered are canned vegetables and other preserved fare, pet food and treats, raw materials such as wheat and rice protein used in a wide variety of products, and farm-raised fish and shellfish.

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US vows to keep up trade pressure on China

The United States vowed on Thursday to maintain pressure on China over alleged unfair trade practices, as the world powers wrapped up two days of tense economic talks.

Treasury Secretary Henry Paulson, who urged China at the start of their Strategic Economic Dialogue on Wednesday to let its yuan currency rise, said the United States would continue to press Beijing on the issue.

"China isn't ready to have a market-determined currency yet but they need to move in that direction and they're going to continue to hear about it until they get a market-determined currency," he told reporters at the close of the talks outside Beijing.

Earlier on Thursday, US Trade Representative Susan Schwab said Washington would continue to haul China before the World Trade Organisation in commercial disputes, despite Chinese warnings that such moves threatened economic ties.

"If we are unable to (resolve disputes through negotiations), then we will absolutely protect our rights under our trade agreements," Schwab said, referring to the WTO option.

The leader of the Chinese delegation, Vice Premier Wu Yi, has cautioned the United States against "politicising" trade issues and took exception to recent US cases against China filed with the WTO.

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US economy 'definitely slowing': Bank of America chief executive

Bank of America chief executive Ken Lewis said Wednesday that the world's biggest economy is "definitely slowing," according to a transcript of a speech Lewis delivered at a financial conference.

Lewis, who manages the largest US banking company by market worth, also said Bank of America anticipates setting aside 3.3 billion dollars to cover fourth quarter losses and writeoffs mainly tied to an ongoing housing slump.

"The economy is definitely slowing. We expect weak fourth and first quarters, but at this point we are not forecasting a recession," Lewis said, according to the transcript.

The update on likely losses and writeoffs provided by Lewis comes after Bank of America's chief financial officer, Joe Price, said in mid-November that such losses and write-downs would likely amount to three billion dollars.

"While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing," Lewis said.

"In the past month, the markets have turned down again and will probably remain challenging into next year," he said, referring to a sharp downturn in US financial markets in August.

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Economy ousts Iraq as top issue for US voters

The state of the US economy has superseded Iraq for the first time as the voters' chief concern, according to a new CNN poll.

The ballooning trade deficit, weak dollar and mortgage crisis have contributed to 29 per cent saying the economy was their top issue, compared to 23 per cent citing Iraq.

Terrorism now ranks as only the fifth most important issue, falling behind both health care and immigration.

Hillary Clinton, the frontrunner for the Democratic party's nomination, said recently: "I'd describe the economy as a kind of trapdoor where you're one medical diagnosis or a missed mortgage payment away from dropping through and losing everything."

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USA : US manufacturing jobs to keep disappearing

The U.S. trade deficit totaled $57.8 billion for October 2007. The U.S. government also revised September’s trade deficit to $57.1 billion. Including this month’s revised figures, the overall U.S. trade deficit is down 8.25 percent this year compared to last. Nevertheless, the U.S. trade deficit is on track to hit approximately $696 billion in 2007.

The U.S. trade deficit with China in goods, however, jumped to $25.928 billion in October 2007, up 6.3 percent from the $24.397 billion deficit for October 2006.

“As long as China keeps cheating, both the U.S. trade deficit with that country will keep rising and U.S. manufacturing jobs will keep disappearing, said American Manufacturing Trade Action Coalition (AMTAC) Executive Director Auggie Tantillo.

“Both the Democratic leadership in Congress and the Bush Administration’s Treasury Department deserve grades of “F” this year for failing to act to stop the problem,” Tantillo continued.

The overall U.S. trade deficit with China grew by $23.84 billion in the first ten months of 2007. The January to October U.S. trade deficit with China totals $213.525 billion, up from $190.722 billion for the same time period last year – an increase of 12 percent. At its current pace, the U.S. trade deficit with China in goods will exceed $260 billion in 2007, dramatically up from last year's record of $232.5 billion.

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The Impending Destruction of the U.S. Economy

In part 1, we took a look at the causes of the current tug-of-war between forces that will fight over lower and higher interest rates in the coming days of our American economy.

To recap, here's our problem: Americans spend much, much more than they probably should and rely heavily on debt to fund their purchases. A huge amount of this debt is funded by foreign investors who enjoy the relative stability of American markets. As a result, we have an enormous account deficit -- nearly $800 billion per year.

With this massive account deficit comes a weakening dollar. With a weakening dollar, foreign investors will begin to demand higher interest rates to make their investment in the American economy worth their while. Sounds easy enough! But we have that pesky problem of our current real estate and credit disruptions that could place our economy in a tailspin and, hence, require lower interest rates to bail us out. Who is going to win this battle?

In this Fool's mind, it certainly isn't the American consumer. We won't stop our spend-happy ways any time soon, and foreigners will happily look elsewhere to put their money. Here's why.

Superpower America?Don't kid yourself. U.S consumers will go out kicking and screaming before they agree to slash consumption of foreign goods by $800 billion per year; not to mention doing so might self-destruct the economy in the first place. We can rule that option out:
Americans won't retreat from their debt-laden spending habits. But can we count on foreign investors to keep the party rolling? Don't count on that, either.

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Wednesday, December 12, 2007

China talks introduce world of import controls

A toy dog, an electric train and a blond-haired doll would bring smiles to most American homes this Christmas. When the giver is the Chinese government, and the recipients are visiting U.S. trade officials, the meaning is more pointed than simple festive cheer.

"It's a lot of fun. The gift is very nice," said U.S. Commerce Secretary Carlos Gutierrez in Beijing Monday, according to state news agency Xinhua, when he accepted a life-size toy dog from the chief of China's product quality watchdog.

STORY: Agreement opens door for more Chinese to visit USA

Worries about the safety of Chinese imports have defined the booming but often fraught Chinese-U.S. trading relationship in 2007. On Tuesday, during bilateral talks with Gutierrez that she described as "heated," Chinese Vice Premier Wu Yi, leader of a nationwide quality-raising campaign, complained that U.S. media had "hyped the product safety issue, causing serious damage to the image of Chinese products and China's national reputation."

Tensions surfaced in the spring, when thousands of American dogs and cats were poisoned by eating pet food made with tainted ingredients imported from China. A subsequent cascade of quality problems has included toxic toothpaste, unsafe tires, chemical-laden seafood and millions of lead-painted toys. On Thursday, Home Depot (HD) recalled about 64,000 Chinese-made festive figurines because of the lead paint hazard, the U.S. Consumer Product Safety Commission says.

FIND MORE STORIES IN: China BEIJING Chinese US trade Chinese government Vice Premier Juice

Product safety "engages at a deeper, more visceral level than other issues," said U.S. Secretary of Health and Human Services Mike Leavitt, who was also in the Chinese capital Monday.
The globalized marketplace, in which the USA imported $2 trillion worth of goods last year, means "you can't inspect your way to product safety. There's just too much of it," Leavitt said. "We are not just scaling up existing processes, we are inventing them."

On Tuesday, Leavitt unveiled what he sees as the new world of import controls. With Chinese counterparts, he signed two "strong and action-oriented" agreements to enhance the safety of food and feed, plus medical devices and drugs, that the USA imports from China.

Leavitt promised the new pacts would "enhance the safety and quality of products that Americans use every day" and "form the framework for agreements that will exist all over the world.

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U.S. deficit due to U.S. economic structure-China

America's trade deficit reflects the structure of the U.S. economy, Chinese Vice-Commerce Minister Chen Deming said on Wednesday.

Chen's remarks, made during a break in a two-day "strategic economic dialogue" with senior U.S. officials near Beijing, are in line with the belief of central bank governor Zhou Xiaochuan and other Chinese policy makers that exchange rate changes play only a supporting role in reducing economic imbalances.

Chen said his ministry was not opposed to a stronger yuan .

But he said the pace at which the currency rises should be measured. Overly rapid appreciation would be bad for the global economy, he said.

Chen, who is in line to take the top job at the ministry, said he would like to see a stronger dollar and expressed concern about the impact of the currency's weakness on global growth.

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Dollar slips on worries for US economy after Fed trims rates

The dollar fell against the euro on Wednesday after a quarter-point interest rate cut from the US Federal Reserve failed to dispel jitters about the outlook for the US economy.

In early European trading, the euro rose to 1.4685 dollars from 1.4655 dollars in New York late on Tuesday.

The dollar dropped against the euro in the wake of the decision by the US Federal Reserve's Federal Open Market Committee (FOMC) to lower its benchmark Fed funds rate by 25 basis points to 4.25 percent.

The cut disappointed some investors who had been seeking a more aggressive reduction to help shore up stocks and the American economy in the face of the ongoing fallout from the US subprime mortgage crisis, dealers said.

But a half-point reduction might have hurt the greenback if it discouraged investors from holding on to their dollar-denominated investments, they added.

The Fed also cut the discount rate, its lending rate for commercial banks, by a quarter point to 4.75 percent, despite some analyst forecasts for a sharper 50 basis point cut to help stimulate credit flows.

"The negative reaction in the financial markets to the decision of the FOMC to lower the federal funds and discount rates by 0.25 points underlined the very difficult financial market conditions that still prevail and indicated that more monetary easing will be required in order to limit the impact on the real economy," said analyst Derek Halpenny at The Bank of Tokyo-Mitsubishi.
The US cut followed a decision by the Bank of England to cut British interest rates to 5.50 percent last week while the European Central Bank held eurozone borrowing costs at 4.0 percent.

"The Fed's action does not match its view of the economy," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

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China tells US to fix its own economic problems

China told the United States Wednesday to fix its own economic problems rather than deliver lectures, as the two sides warned at top-level talks here that protectionism threatened their trade ties.

The United States came to the two days of talks on the outskirts of Beijing with a long list of complaints about China's economic and trade practices, with the value of the Chinese currency, the yuan, chief among its concerns.

But China's vice minister of commerce, Chen Deming, said a weakening US dollar was a bigger global economic concern than the value of the yuan.

"(The yuan) is not the key issue. Currently my focus is more on the depreciation of the US dollar and its possible impact and repercussions for the world economy," Chen told reporters on the sidelines of the conference.

"I sincerely wish to see a scenario where the US economy is getting stronger and the US dollar is getting stronger."

In her opening remarks to the third Sino-US Strategic Economic Dialogue, the head of China's delegation, Vice Premier Wu Yi, also told the United States bluntly to fix its own problems rather than complain about China.

"Obviously, to resort to trade protectionism and blame another country for the structural problems in the US economy is the wrong approach which would only harm the interest of the United States itself," Wu said.

Structural problems in the US economy include a low savings rate and a large public deficit, economists say.

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