Chińska agencja ratingowa Dagong Global Credit Rating obniżyła rating wiarygodności kredytowej rządu USA z AAA, do AA, z perspektywą negatywną. Rating wiarygodności kredytowej rządu Chin jest wyższy, na poziomie AA+.

Dyrektor agencji Dagong powiedział:

“Jednym z głównych powodów globalnego kryzysu finansowego i kryzysu greckiego jest fakt, że system międzynarodowych ratingów nie był w stanie rzetelnie odzwierciedlić wiarygodności kredytowej wierzycieli”.

Ciekawe jak ten ruch skomentują trzy amerykańskie agencje ratingowe.

Before I go on to answer the questions of who will be the next world superpower, let me suggest that you take a look at the most recent issue of OECD leading indicators. Media have recently been very bullish on the speed of recovery, reading financial newspapers you could almost smell it, almost feel recovery at your fingertips. Take as big breath and then look again at the OECD data, showing that global economy will be badly deteriorating in the next six months or so. So much for the hopes of recovery, fasten your seat belts and brace for a roller coaster ride.

Now back to the topic.

I read two books this weekend: one is George Friedman’s “The next 100 years”. Mr Friedman is a founder of Stratfor, a forecasting think tank. It is probably linked to the CIA and it focuses on geopolitics and military aspects. After reading the book, which was an excellent read and helped me understand how the world looks when one puts on US glasses, I found that Stratfor analysis is not very well founded in economics and finance. They do provide a great coverage of the implications of demographic trends (although fail to notice the recent positive changes in France and Scandinavian countries) and explain why sharia law in the world of Islam will not survive when Arab women start having fewer children, but if or when it happens is still an open question. This book predicts that US will remain the global superpower in the 21st century, and other countries will rise or fall only when US wishes so. I bet British had the same vision in late 19th century. Interesting part of the book is a forecast that new global powers will be (after Russia and China disintegrate) Japan, Turkey, Poland and Mexico. We talking 2050 here, but with today’s level of intellectual capital in the last three countries it is hard to imagine they become global powers.

My article “There is no free zombie lunch ” has been published by opendemocracy.net. It argues that Obama plan is deeply flawed. I invite both humans and zombies to comment.

China car sales are bigger than in US. Capital flows from emerging to developed economies (call it a Lucas puzzle if you like). Former global leaders UK and USA nationalized their financial sectors and run 10 percent fiscal deficits, enjoying AAA ratings. I know that rating agencies missed the Asian crisis in 1997, they cheated investors on CDO ratings, but it is nothing comparing to their assessment of US or UK sovereign risk, you can call it any letter, but not triple A, just think of US government planning to issue 2 billion dollars worth of debt, and that is not taking into account president Obama printing press. Super-class (following David Rothkopf analysis) that ones ruled the world is gone, Russian oligarhs became micro- and then nano-garhs. Interest rates became meaningless, including USD and EUR LIBOR, the most important interest rate in the world. Nothing seems working, economic theory is of little help, and experience earned in the past 20 years it of even less help. Forget great moderation, this is not even the Greenspan’s age of turbulence. It is a great moment of reckoning it is also a Minsky moment. Anything can happen these days, even IMF is recommending high fiscal deficits to fend off recession. Remember the phrase called “Washington consensus”, a set of politically correct rules, ten commandments of US led economics religion. These gods are gone now. Godless world. Pain. Suffering.

Just released ISM PMI index fell to 32.4%, lowest since 1980, values below 50 indicate that economy is contracting. There are also two even more worrisome bits of data: new orders index fell to 22.7% (13th consecutive month of decline) which is the lowest readig on record for this index going back to 1948! The ISM Pirces index fell to 18%, the lowest reading for the index since 1949, which indicates possibility of deflation.

In Poland just relased PMI published by RBS/Markit fell to 38.3%, employment, output and new orders posted sharp declines, largest in many years. Also prices dropped despite signifant weakening of the zloty, which indicates that price pressures are receding very fast. I suggested that MPC cut interest rate by 175bp in December to 4%, the did only 75 bp (more than markets expected anyway). Both foreign and domestic data suggest that they should cut by 100 bp in January, but MPC is a prisoner of the gradual approach and is likely to split into two 50s. As I wrote in December I see no value in delaying rate cuts when big credit crunch is coming to town, orders are falling off the cliff and price pressures are yesterday’s story.

What really scares economists about the present crisis? That despite spending more than 11 trillion dollars (including guarantees) by governments and central banks the crisis will spiral into global recession and deflation. One very effective way to trigger global recession is trade protectionism, when countries trying to protect their troubled industries impose import duty or non-tariff barriers on offshore producers. When one country does this then other countries follow with retaliation and trade collapses, more jobs are lost which  leads to recession. We have seen this happening in 1930s.

See chart below (thanks go to David Wheelock from Fed St.Louis), which shows monthly value of imports in 75 countries between 1929 and 1933. Trade implosions happen, you have been warned.

There is an interesting article in Financial Times today asking a question (in the Latin America context) whether huge US government bond issues will crowd out emerging market sovereign issues from the market next year. A quote:

“The risk that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year has not been much emphasised in the scramble to save the US economy. But the economists said “powerful and innovative” new mechanisms were required to deal with the threat in order to direct money back into the region” [...] In the absence of adequate international actions, beggar-thy-neighbour policy responses may be politically inevitable, seriously undermining the basis of the global co-operative system that emerged in the aftermath of World War II [that] allowed for unprecedented rates of growth of trade and incomes and a reduction in global poverty”.

Poland has usually placed sovereign debt in January each year, maybe Ministry of Finance should give some thought ot the idea of placing debt already in December. Today we can still market it on a basis of 2012 EMU membership, next year it will be more difficult.

I will speak today on the New World Order at the conference organized by the British embassy in Warsaw. My speech is here.

My recommendations are below:

1. The Global Strategic Council that I propose should be formed by leaders of 8-10 biggest countries. The metric used to rank countries should be very simple and intuitive, it should be country GDP according to purchasing power parity divided by global GDP and country population divided by global population, each with 50% weight. 8-10 countries with highest scores should form the new group of G8 or G10 and should establish the Global Strategic Council. Vision and strategy agreed by the Council should be shared and implemented by the biggest countries, while others will follow on a voluntary basis. There should be incentives to ensure that no country will chose to opt-out (possibly with rare exceptions of countries such as North Korea, Myanmar, Cuba  or Belarus). An innovative proposal how such incentives should be designed, that adopts Strategic Asset Allocation methodology from the world of finance, is presented in the recent book Rybinski, Opala, Holda (2008) “Gordian knots of the 21st century”.
2. Global Strategic Council would seem an outside-the-box idea to many politicians, especially those whose mindset was shaped by the 20^th century and who failed to notice how fast the world has changed. I documented in this speech that the failed global governance and lack of global vision produced many global Gordian knots. Traditional methods will fail to untie them and we do need Alexandrian solutions.
3. Every four years the National Intelligence Council – which oversees America’s baroque collection of intelligence agencies – releases a global trends report, which is given to the new president. The latest report , published on 20th November stated that “the most dramatic difference” between the new report and the one issued four years ago is that it now foresees  a world in which the US plays a prominent role in global events, but the US is seen as one among many global actors.”. The report issued four years ago had projected “continuing US dominance”. The heart of US security establishment has acknowledged that global landscape had changed. It is high time indeed to reflect this change in the new global governance setup. The New World Order should be established.

Comments  are very warmly welcome.

Everything is frozen. Banks do not lend money to each other, only overnight and at very high rates. Corporates cannot refinance their commercial paper, so Fed will buy CPs. If Fed also moves into unsecured lending to banks (as reported by some sources) it would be a truly dramatic decision. Why would you borrow from interbank market at very high rates, borrow from Fed cheaply. Why lend to another bank and take the counterparty risk, park liqudity at the Fed and sleep well. Why sell “toxic” assets at dirt cheap prices to the market (nobody wants to buy anyway) sell to government dear and make a buck.

Would all this together work and help restore confidence? Well, I saw reports predicting that housing market will drop by another 20-25% in 2009, so bank losses will continue to grow. US recession which now seems inevitable would lead to “traditional” loan portfolio deterioration, with further losses. My guess is that fear and lack of trust will remain with US banks for quite some time. Therefore the only action could be between Fed and banks, while interbank market will remain frozen. Siberia finance. This will last as long and banking sector capital reamin low and is being depleted by continuing losses.  I think that the best way to improve US banks credibitlity is to sell them to Chinese or Arab capital-rich investors, if they want to buy. I think that there exists a share price that will clear US banks demand for capital and Asian/Gulf supply of capital, now invested in US Treasuries. A mega-swap could delived a warm, spring wind of change to frozen markets.

There is a wild party, a long one. Every time alcohol supply dries up central bank shows up and keeps the party going and going, and people get more and more addicted to partying and drinking. At some stage premises are demolished and party is over. Paul and Ben show up and ask who did the most damage. John, people say, he broke four windows and crashed the table. Great says Paul, John will get 300 dollars, who is next on the did-most-damage list. Tim, crowd cries, he put a spray all over the place and burned the sofa. Excellent goes Paul, Tim will get 250 dollars. Who is next …
In a few days the next party will begin. People are planning to show up in large numbers, not only they can have a lot of fun (while others – obviously jerks and dorks – will go to work every morning), drink for free, and they will also get free cash handouts when the party is over.

How do you like the Paulson plan?