It amazes, shocks & pains me to no end you could conceive and pronounce such outlandish lies and naive notions that our federal government is the answer, and can fix anything, much less our economy (see red highlights below). Heretofore, and ever so shall be, government is a major part of the problem, never part of the solution. A massive public works project funded on the backs of desperate & struggling American taxpayers, borrowed from foreign investors whom we can never repay, & printed with increasingly worthless dollars, is hardly a recipe for economic recovery. In truth, it is exactly a recipe for national disaster of historic proportions...
____________NEWS_____________
Obama economic recovery plan speech
January 8, 2009
FAIRFAX, Va., Jan. 8 (UPI) -- President-elect Barack Obama unveiled his American Recovery and Reinvestment Plan at George Mason University in Fairfax, Va.
Here is the transcript:
"Thank you so much. Let me begin by thanking George Mason University for their extraordinary hospitality and to thank all the great friends, the governors, the mayors who are in attendance here today. Throughout America's history, there have been some years that simply rolled into the next without much notice or fanfare. And then there are the years that come along once in a generation, the kind that mark a clean break from a troubled past and set a new course for our nation. This is one of those years.
"We start 2009 in the midst of a crisis unlike any we have seen in our lifetime, a crisis that has only deepened over the last few weeks.
"Nearly 2 million jobs have been now lost. And on Friday, we're likely to learn that we lost more jobs last year than at any time since World War II. Just in the past year, another 2.8 million Americans who want and need full-time work have had to settle for part-time jobs.
"Manufacturing has hit a 28-year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers are watching their life savings disappear. And many, many Americans are both anxious and uncertain of what the future will hold.
"Now, I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible. If nothing is done, this recession could linger for years.
"The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity, which translates into more than $12,000 in lost income for a family of four.
"We could lose a generation of potential and promise as more young Americans are forced to forego dreams of college or the chance to train for the jobs of the future. And our nation could lose the competitive edge that has served as a foundation for our strength and our standing in the world.
In short, a bad situation could become dramatically worse.
"This crisis did not happen solely by some accident of history or normal turn of the business cycle. And we won't get out of it by simply waiting for a better day to come or relying on the worn-out dogmas of the past.
"We arrived at this point due to an era of profound irresponsibility that stretched from corporate board rooms to the halls of power in Washington, D.C.
"For years, too many Wall Street executives made imprudent and dangerous decisions, seeking profits with too little regard for risk, too little regulatory scrutiny, and too little accountability. Banks made loans without concern for whether borrowers could repay them, and some borrowers took advantage of cheap credit to take on debt they couldn't afford.
"Politicians spent taxpayer money without wisdom or discipline and too often focused on scoring political points instead of problems they were sent here to solve.
"The result has been a devastating loss of trust and confidence in our economy, our financial markets, and our government.
"Now, the very fact that this crisis is largely of our own making means that it's not beyond our ability to solve. Our problems are rooted in past mistakes, not our capacity for future greatness.
It will take time -- perhaps many years -- but we can rebuild that lost trust and confidence. We can restore opportunity and prosperity.
"We should never forget that our workers are still more productive than any on Earth. Our universities are still the envy of the world. We are still home to the most brilliant minds, the most creative entrepreneurs, and the most advanced technology and innovation that history has ever known. And we are still the nation that has overcome great fears and improbable odds.
"If we act with the urgency and seriousness that this moment requires, I know that we can do it again.
That is why I have moved quickly to work with my economic team and leaders of both parties on an American Recovery and Reinvestment Plan that will immediately jump-start job creation and long-term growth. It's a plan that represents not just new policy, but a whole new approach to meeting our most urgent challenges.
"For if we hope to end this crisis, we must end the culture of 'anything goes' that helped create it, and this change must begin in Washington.
"It's time to trade old habits for a new spirit of responsibility. It's time to finally change the ways of Washington so that we can set a new and better course for America.
"There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short term.
"But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy.
"It is true that we cannot depend on government alone to create jobs or long-term growth. But at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the cycle that are crippling our economy, where a lack of spending leads to lost jobs, which leads to even less spending, where an inability to lend and borrow stops growth and leads to even less credit.
"That's why we need to act boldly and act now to reverse these cycles. That's why we need to put money in the pockets of the American people, create new jobs, and invest in our future. That's why we need to restart the flow of credit and restore the rules of the road that will ensure a crisis like this never happens again.
"This plan begins with -- this plan must begin today, a plan I'm confident will save or create at least 3 million jobs over the next few years.
"It's not just another public works program. It's a plan that recognizes both the paradox and promise of this moment: the fact that there are millions of Americans trying to find work, even as all around the country there's so much work to be done.
"And that's why we'll invest in priorities like energy and education, healthcare and a new infrastructure that are necessary to keep us strong and competitive in the 21st century.
That's why the overwhelming majority of the jobs created will be in the private sector, while our plan will save the public sector jobs of teachers, police officers, firefighters, and others who provide vital services.
"To finally spark the creation of a clean energy economy, we will double the production of alternative energy in the next three years. We will modernize more than 75 percent of federal buildings and improve the energy efficiency of 2 million American homes, saving consumers and taxpayers billions on our energy bills. In the process, we will put Americans to work in new jobs that pay well and can't be outsourced, jobs building solar panels and wind turbines, constructing fuel-efficient cars and buildings, and developing the new energy technologies that will lead to even more jobs, more savings, and a cleaner, safer planet in the bargain.
"To improve the quality of our healthcare while lowering its cost, we will make the immediate investments necessary to ensure that, within five years, all of America's medical records are computerized. This will cut waste, eliminate red tape, and reduce the need to repeat expensive medical tests.
"But it just won't save billions of dollars and thousands of jobs; it will save lives by reducing the deadly but preventable medical errors that pervade our health care system.
"To give our children the chance to live out their dreams in a world that's never been more competitive, we will equip tens of thousands of schools, community colleges, and public universities with 21st-century classrooms, labs, and libraries. We'll provide new computers, new technology, and new training for teachers so that students in Chicago and Boston can compete with children in Beijing for the high-tech, high-wage jobs of the future.
"To build an economy that can lead this future, we will begin to rebuild America. Yes, we'll put people to work repairing crumbling roads, bridges and schools, by eliminating the backlog of well- planned, worthy, and needed infrastructure projects, but we'll also do more to retrofit America for a global economy.
"That means updating the way we get our electricity, by starting to build a new smart grid that will save us money, protect our power sources from blackout or attack, and deliver clean, alternative forms of energy to every corner of our nation.
"It means expanding broadband lines across America so that a small business in a rural town can connect and compete with their counterparts anywhere in the world.
"It means investing in the science, research, and technology that will lead to new medical breakthroughs, new discoveries, and entire new industries.
"And, finally, this Recovery and Reinvestment Plan will provide immediate relief to states, workers, and families who are bearing the brunt of this recession. To get people spending again, 95 percent of working families will receive a $1,000 tax cut, the first stage of a middle-class tax cut that I promised during the campaign and will include in our next budget.
"To help Americans who have lost their jobs and can't find new ones, we'll continue the bipartisan extension of unemployment insurance and health care coverage to help them through this crisis.
Government at every level will have to tighten its belt, but we'll help struggling states avoid harmful budget cuts, as long as they take responsibility and use the money to maintain essential services, like police, fire, education, and health care.
"Now, I understand that some might be skeptical of this plan. Our government has already spent a good deal of money, but we haven't yet seen that translate into more jobs, or higher incomes, or renewed confidence in our economy.
"And that's why the American Recovery and Reinvestment Plan won't just throw money at our problems. We'll invest in what works.
"The true test of policies we'll pursue won't be whether they're Democratic or Republican ideas, whether they're conservative or liberal ideas, but whether they create jobs, grow our economy, and put the American dream within the reach of the American people.
"Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made transparently and informed by independent experts wherever possible.
"Every American will be able to hold Washington accountable for these decisions by going online to see how and where their taxpayer dollars are spent.
"And as I announced yesterday, we will launch an unprecedented effort to eliminate unwise and unnecessary spending that has never been more unaffordable for our nation and our children's future than it is right now.
We have to make tough choices and smart investments today so that, as the economy recovers, the deficits start coming down. We cannot have a solid recovery if our people and our businesses don't have confidence that we're getting our fiscal house in order.
"And that's why our goal is not to create a slew of new government programs, but a foundation for long-term economic growth.
"That also means an economic recovery plan that is free from earmarks and pet projects. I understand that every member of Congress has ideas about how to spend money. Many of these projects are worthy; they benefit local communities.
"But this emergency legislation must not be the vehicle for those aspirations. This must be a time when leaders in both parties put the urgent needs of our nation above our own narrow interests.
"Now, this recovery plan alone will not solve all the problems that led us into this crisis. We must also work with the same sense of urgency to stabilize and repair the financial system we all depend on.
"That means using our full arsenal of tools to get credit flowing again to families and businesses, while restoring confidence in our markets. It means launching a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes.
"It means preventing the catastrophic failure of financial institutions whose collapse could endanger the entire economy, but only with maximum protections for taxpayers and a clear understanding that government support for any company is an extraordinary action that must come with significant restrictions on the firms that receive support.
"And it means reforming a weak and outdated regulatory system so that we can better withstand financial shocks and better protect consumers, investors, and businesses from the reckless greed and risk- taking that must never endanger our prosperity again.
"No longer can we allow Wall Street wrongdoers to slip through regulatory cracks. No longer can we allow special interests to put their thumbs on the economic scales. No longer can we allow the unscrupulous lending and borrowing that leads only to disruptive cycles of bubble and bust.
"It is time to set a new course for this economy, and that change must begin now.
"We should have an open and honest discussion about this recovery plan in the days ahead, but I urge Congress to move as quickly as possible on behalf of the American people, for every day we wait or point fingers or drag our feet, more Americans will lose their jobs, more families will lose their savings, more dreams will be deferred and denied, and our nation will sink deeper into a crisis that at some point we may not be able to reverse.
"That is not the country I know. It is not a future I accept as president of the United States. A world that depends on the strength of our economy is now watching and waiting for America to lead once more, and that is what we will do.
"It will not come easy or happen overnight. And it is altogether likely that things may get worse before they get better.
"But that is all the more reason for Congress to act without delay.
"I know the scale of this plan is unprecedented, but so is the severity of our situation. We have already tried the wait-and-see approach to our problems, and it is the same approach that helped lead us to this day of reckoning.
"And that is why the time has come to build a 21st-century economy in which hard work and responsibility are once again rewarded. That's why I'm asking Congress to work with me and my team day and night -- on weekends, if necessary -- to get the plan passed in the next few weeks.
"That's why I'm calling on all Americans, Democrats and Republicans and independents, to put -- to put good ideas ahead of the old ideological battles, a sense of common purpose above the same narrow partisanship, and insist that the first question each of us asks isn't 'What's good for me?' but 'What's good for the country my children will inherit?'
"More than any program or policy, it is this spirit that will enable us to confront these challenges with the same spirit that has led previous generations to face down war and depression and fear itself.
"And if we do, if we are able to summon that spirit again, if we are able to look out for one another and listen to one another, and do our part for our nation and for posterity, then I have no doubt that, years from now, we will look back on 2009 as one of those years that marked another new and hopeful beginning for the United States of America.
"Thank you. God bless you. And may God bless the United States of America."
_______________________________CBO sees record $1.2 trillion '09 deficit
WASHINGTON - The federal budget deficit will hit an unparalleled $1.2 trillion for the 2009 budget year and the U.S. economy will likely contract by more than 2 percent, according to a new Congressional Budget Office report.
The eye-popping estimates reflect plummeting tax revenues because of the recession and about $400 billion spent to bail out the financial industry and take over mortgage finance companies Fannie Mae and Freddie Mac. Last year's deficit was $455 billion.
The CBO estimate released Wednesday also sees the U.S. economy shrinking by 2.2 percent this year and recovering only slightly to grow by 1.5 percent in 2010. It foresees the unemployment rate eclipsing 9 percent early next year unless the Obama administration steps in.
"The recession — which began about a year ago — will last well into 2009," the CBO report says. The agency said that "ongoing turmoil in the housing and financial markets has taken a major toll on the federal budget."
The dismal figures come a day after President-elect Barack Obama warned of "trillion-dollar deficits for years to come."
CBO's figures don't account for the huge economic stimulus bill Obama is expected to propose soon to try to jolt the economy.
The shrinking economy has led to a sharp drop in estimated tax revenues of $166 billion from 2008 levels, which is largely responsible for the deficit, along with big outlays from the Wall St. bailout.
The agency expects the $700 billion bailout to actually cost taxpayers $189 billion, with the costs reflected in its estimates for this year and next. CBO estimates take into account the net value of the assets the government holds from financial institutions.
Under Treasury Department accounting, the bailout spending is reflected only as the government makes the payments; as of mid-December, those disbursements totaled $238 billion. Exposure to the taxpayer stemming from the Federal Reserve Board's extensive interventions in the financial markets — such as acquiring 80 percent control of insurance and financial giant American International Group Inc. — are not reflected in the estimates.
The CBO report also said the federal takeover of Fannie Mae and Freddie Mac last year added $240 billion to this year's deficit.
Obama and Congress are promising quick enactment of the economic recovery plan, which will blend up to $300 billion in tax cuts with big new spending programs and could cost up to $775 billion over the next few years.
Obama said the flood of red ink probably won't affect that measure but could crimp other items on his agenda.
"Despite the record deficits facing us, our number one task is an economic recovery package," said House Budget Committee Chairman John Spratt Jr. "With Americans concerned about their jobs, their homes, their retirement and their children's future, our economic situation is so severe that stabilizing the economy must take precedence over short-term deficits."
The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1.
Just in September, CBO predicted a 2009 deficit of $438 billion, but revenue projections have dropped by $362 billion on top of the approximately $400 billion federal intervention in the financial system.
Senate Republican Leader Mitch McConnell called the budget figures "a stunning and sobering reminder that Congress must strengthen its efforts to be good stewards of the taxpayers' money."
CBO predicts the deficit will come under relative control within a few years, dropping to the $250 billion range by 2012. But such predictions depend on the expiration of President George W. Bush's tax cuts at the end of next year; Obama has promised to renew most of them except for those aimed at people making more than $250,000 a year.
Fully renewing the Bush tax cuts, as well as indexing the alternative minimum tax for inflation, would add $380 billion to a deficit otherwise projected at $327 billion for 2012, CBO says.
At the same time, Democrats are expected to increase domestic agency budgets as they complete the leftover 2009 spending bills, and Obama is likely to recommend further increases in next month's budget submission.
While expected, the deficit numbers will give lawmakers second thoughts about creating new spending programs without finding ways to pay for them. And it is likely to prompt a debate about whether tax increases are necessary after the economy recovers from the current recession.
On Wednesday, Obama said, "Unless we take decisive action, even after our economy pulls out of its slide, trillion dollar deficits will be a reality for years to come."
"I'm going to be willing to make some very difficult choices in how we get a handle on this deficit," Obama said Tuesday.
Economists warn that large and sustained budget deficits put upward pressure on interest rates. In the short term, however, efforts to restrain the deficit could have a contracting effect on the economy.
"As we address our economy, it is vital that we simultaneously take steps to put our budget back on a sound long-term fiscal path," said Senate Budget Committee Chairman Kent Conrad.
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Companies face $409 billion pension deficit: study
NEW YORK (Reuters) – Volatile markets have saddled U.S. companies with a $409 billion deficit on pension plans, reversing a $60 billion surplus a year earlier, and will cut into earnings in 2009, consulting firm Mercer said.
As of December 31, pension plans among members of the Standard & Poor's 1500 had $1.21 trillion of assets and $1.62 trillion of liabilities, Mercer said in a report released on Wednesday. At the end of 2007, pension plan assets totaled $1.66 trillion and liabilities totaled about $1.6 trillion, Mercer said.
The S&P 1500 is a broad portfolio representing large-cap, mid-cap and small-cap segments of the U.S. equity markets.
The shortfall suggests that more companies will have to pump cash into their pension plans to ensure they can meet their commitments to retirees.
Mercer estimated pension expenses will increase to about $70 billion this year from $10 billion in 2008, reducing overall profitability by about 8 percent.
"The decline in funded status will be capitalized and reflected in corporate balance sheets for many companies," Adrian Hartshorn, a member of Mercer's financial strategy group, said in a statement.
He said this will reduce balance sheet strength and could affect companies' ability to make capital expenses, meet loan covenants and preserve their credit ratings.
Mercer is a unit of New York-based Marsh & McLennan Cos Inc (MMC.N), which also runs a large insurance brokerage.
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Jobless rolls at 26-year high
WASHINGTON (Reuters) – Unemployment benefit rolls swelled to a 26-year high in the last week of December, data showed on Thursday, while retailers, including market leader Wal-Mart, reported poor sales as the year-long economic slump deepened.
The Labor Department said the number of people still on jobless rolls after drawing an initial week of aid jumped 101,000 to 4.61 million in the week ended December 27, the latest for which the data is available.
That was the highest since November 1982 and beat analysts' expectations for a 4.50 million total.
"You are still seeing a lot of people of collecting unemployment claims, so the underlying conditions are very poor. The bad news in the continuing claims is relentless," said Pierre Ellis, senior global economist at Decision Economics in New York.
While the overall size of the benefit rolls has been marching steadily higher, the number of U.S. workers submitting new claims for state unemployment aid dropped unexpectedly last week, a second consecutive decline.
Initial claims fell 24,000 to 467,000 in the week ended January 3, the department said, well below the 540,000 new claims economists had expected. It was the lowest reading since the week ended October 11, when it was at 463,000.
Normally this would be seen as a suggestion that the labor market's deterioration was abating, but analysts said the decrease was likely due to people holding back their applications because of the holidays.
"It covers a holiday period, so people were delaying filing their claims. There is going to be a surge next week," said David Watt, a senior currency strategist at RBC Capital Markets, in Toronto. "I don't think this is indicative of the trend."
RECESSION DEEPENS
The surge in workers drawing benefits reflects a deepening of the recession that started in December 2007, a downturn many economists think could turn into the longest since the Great Depression of the 1930s.
The data came a day before the government issues a report on December nonfarm payrolls. That report is expected to show the economy lost 550,000 jobs last month, with the unemployment rate jumping to 7 percent from November's 6.7 percent.
The collapse of the U.S. housing market and the resulting financial crisis have led the economy to shed a huge number of jobs across a wide spectrum of sectors.
Faced with an uncertain economic picture and mounting job insecurity, consumers have cut back on spending.
On Thursday, Wal-Mart Stores Inc (WMT.N), which has been the retailer of choice for consumers watching their wallets, led U.S. retailers in posting disappointing December same-store sales. It also cut its quarterly earnings forecast.
Wal-Mart said groceries and health-related products recorded mid-single-digit percentage sales gains in December, while demand for clothing and jewelry was soft.
The weak retail sales reports and the jobless numbers sent Wall Street stocks tumbling and fueled a safe-haven bid in U.S. Treasury debt, which tends to benefit from news of economic distress.
"The message is the weak economy is hurting the job market and that will affect consumer spending going forward. There is a serious snowballing process underway," said Decision Economics' Ellis.
President-elect Barack Obama, in a speech on his economic recovery plan, said on Thursday he would offer working families a $1,000 tax cut and improve energy efficiency in millions of American homes in order to create jobs and stimulate the economy.
He also said the plan would extend jobless aid and healthcare coverage for the unemployed and include proposals to double production of alternative energy in the next three years.
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China Losing Taste for U.S.Debt
HONG KONG — China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.
On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.
In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.
But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.
“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.
Fitch Ratings, the credit rating agency, forecasts that China’s foreign reserves will increase by $177 billion this year — a large number, but down sharply from an estimated $415 billion last year.
China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.
For now, of course, there seems to be no shortage of buyers for Treasury bonds and other debt instruments as investors flee global economic uncertainty for the stability of United States government debt. This is why Treasury yields have plummeted to record lows. (The more investors want notes and bonds, the lower the yield, and short-term rates are close to zero.) The long-term effects of China’s using its money to increase its people’s standard of living, and the United States’ becoming less dependent on one lender, could even be positive. But that rebalancing must happen gradually to not hurt the value of American bonds or of China’s huge holdings.
Another danger is that investors will demand higher returns for holding Treasury securities, which will put pressure on the United States government to increase the interest rates those securities pay. As those interest rates increase, they will put pressure on the interest rates that other borrowers pay.
When and how all that will happen is unknowable. What is clear now is that the impact of the global downturn on China’s finances has been striking, and it is having an effect on what the Chinese government does with its money.
The central government’s tax revenue soared 32 percent in 2007, as factories across China ran at full speed. But by November, government revenue had dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn on Monday that 2009 would be “a difficult fiscal year.”
A senior central bank official, Cai Qiusheng, mentioned just before Christmas that China’s $1.9 trillion foreign exchange reserves had actually begun to shrink. The reserves — mainly bonds issued by the Treasury, Fannie Mae and Freddie Mac — had for the most part been rising quickly ever since the Asian financial crisis in 1998.
The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars, so a weaker euro means that euro-denominated assets are worth less in dollars, decreasing the total value of the reserves.
But the pace of China’s accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appeared to reflect much broader shifts.
China manages its reserves with considerable secrecy. But economists believe about 70 percent is denominated in dollars and most of the rest in euros.
China has bankrolled its huge reserves by effectively requiring the country’s entire banking sector, which is state-controlled, to take nearly one-fifth of its deposits and hand them to the central bank. The central bank, in turn, has used the money to buy foreign bonds.
Now the central bank is rapidly reducing this requirement and pushing banks to lend more money in China instead.
At the same time, three new trends mean that fewer dollars are pouring into China — so the government has fewer dollars to buy American bonds.
The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinationals are hoarding their cash and cutting back on construction of new factories.
The second trend is that the combination of a housing bust and a two-thirds fall in the Chinese stock market over the last year has led many overseas investors — and even some Chinese — to begin quietly to move money out of the country, despite stringent currency controls.
So much Chinese money has poured into Hong Kong, which has its own internationally convertible currency, that the territory announced Wednesday that it had issued a record $16.6 billion worth of extra currency last month to meet demand.
A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses.
China’s trade surplus set another record in November, $40.1 billion. But because prices of Chinese imports like oil are starting to recover while demand remains weak for Chinese exports like consumer electronics, most economists expect China to run average trade surpluses this year of less than $20 billion a month.
That would give China considerably less to spend abroad than the $50 billion a month that it poured into international financial markets — mainly American bond markets — during the first half of 2008.
“The pace of foreign currency flows into China has to slow,” and therefore the pace of China’s reinvestment of that foreign currency in overseas bonds will also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets Ltd., a Hong Kong securities firm.
Two officials of the People’s Bank of China, the nation’s central bank, said in separate interviews that the government still had enough money available to buy dollars to prevent China’s currency, the yuan, from rising. A stronger yuan would make Chinese exports less competitive.
For a combination of financial and political reasons, the decline in China’s purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets.
Many Chinese companies are keeping more of their dollar revenue overseas instead of bringing it home and converting it into yuan to deposit in Chinese banks.
Treasury data from Washington also suggests the Chinese government might be allocating a higher proportion of its foreign currency reserves to the dollar in recent weeks and less to the euro. The Treasury data suggests China is buying more Treasuries and fewer bonds from Fannie Mae or Freddie Mac, with a sharp increase in Treasuries in October.
But specialists in international money flows caution against relying too heavily on these statistics. The statistics mostly count bonds that the Chinese government has bought directly, and exclude purchases made through banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly than in the past.
The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said.
China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.
“This is a political decision,” he said. “This is not purely an investment decision.”
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