Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

China, faced with factory closures and slowing export growth as the global economy slows, is apparently prepared to weaken the value of its currency against the US dollar in defiance of a key policy goal of the United States, even as US Treasury Secretary Henry Paulson visits Beijing this week.

A weaker yuan, which would signal an about-turn by Beijing after three years of appreciation, will help to hold down prices of China's exports, raising the likelihood of further increases in its already contentiously high trade surplus with the US. At the same time, a lower yuan will make imports to China from the US more expensive at a time when American workers are fast losing jobs....

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Paulson's leverage on the issue is considered limited as China is already the biggest foreign holder of US Treasuries, surpassing Japan. In the event of a dispute, a strong move by China to reduce its Treasury and US corporate debt holdings could severely undermine already weakening global confidence in the US financial system. It would also threaten an end to the dollar standard system from which the US has benefited since the start of the 1944 Bretton Woods regime.

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"The impact of China's currency devaluation should be very big, ... It [could] lead to international competition by currency devaluation - a beggar-my-neighbor policy."

Competitive devaluations have been cited by some writers as a key cause of the Great Depression that started in 1929, leading eventually to the onset of World War II.....

Caravans of cash-rich Chinese in Hummers and Lincoln Navigators have been weaving through American neighborhoods in recent months, looking for foreclosures and other bargain properties to buy.

With housing prices crashing in the U.S., home-buying trips to America are becoming one of the more popular tour group packages in China. New U.S. visa rules for Chinese tourists and a loosening of foreign investment policies by China have made it easier for people such as Zhao Hongjun of Beijing to go house hunting across the Pacific.

DOHA, Dec. 1 (Xinhua) -- The United Nations released here Monday a report recommending a massive economic stimulus packages to counter the global economic downturn.

    The report, entitled the Global Outlook Report, is part of UN's assessment of the world economic situation in 2009....

In the report, the UN recommends that massive and COHERENT economic stimulus must take place soon to counter the global economic downturn.

    According to the report, the U.S. dollar and world per capita income will decline further next year, while export growth and capital inflows will fall and borrowing costs for developing countries will increase....

The world body also recommends stronger regulation of financial institutions, an overhaul of the international reserve system and a more inclusive global economic governance.

"Day by day, we are getting closer to the pessimistic scenario"

The United Nations says the world economy faces its worst downturn since the Great Depression.

It expects world economic output to shrink by as much as 0.4% in 2009, due to a slump among developed countries - particularly the US and in Europe.

This would mark the world economy's first year of contraction since the 1930s, the UN said.

The report added there had been complacency about the impact of the financial crisis on poorer countries.

"It seems inevitable that the major countries will see significant contraction in the immediate period ahead and that recovery may not materialise any time soon, even if the bail-out and stimulus package succeed," it says.

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The UN expects developed economies to shrink by up to 1.5%, while developing nations should expand by at least 2.7%.

But because of higher population growth in developing countries, income per capita for the world as a whole is expected to fall in 2009.

Even as global economies unravel before our eyes, there's been growing speculation equity markets have bottomed.

Permabears like Robert Shiller and Steve Leuthold argue that stocks have been driven down to levels that are historically cheap. I wish I could believe them, but I don't....

....as I wrote here last week, I believe that the world economy will not be a hospitable place for equities for some time. A long, deep recession, massive debt liquidation, fiscal strains on governments around the world, and a new frugality among consumers could produce sub par economic growth well into the next decade.

And by some key measures, stocks aren't very cheap at all.

At its recent closing low of 7,552, the Dow Jones Industrial Average had lost nearly half its value from last October's closing peak above 14,100. The Standard & Poor's 500 Index was down nearly 52% from its all-time closing high of 1,565.15.

But even at those lows, stocks don't reflect the bargain-basement valuations we've seen at the bottom of other bear markets....

....according to S&P's senior index analyst Howard Silverblatt, the S&P 500 now trades at above 19 times reported earnings for the 12 months ended Sept. 30.

That's much lower than it was in the fourth quarter of October 2002, the last bear market's nadir, when it changed hands at nearly 32 times reported earnings. That period featured substantial write-offs across corporate America, seriously depressing earnings.

But it's also much higher than the 14 times reported earnings at which the S&P 500 traded in the third quarter of 1990 (that bear market's bottom) and the incredible seven times earnings at which the S&P changed hands in the third quarter of 1974, the end of that ferocious bear.

in the long term, things are not so rosy; over the next 15 years, Americans and Europeans may suffer a worse fall in their living standards than during the Great Depression, albeit played out agonizingly slowly.

Benchmarking first: According to Bureau of Economic Analysis statistics, GDP declined 26.6% between 1929 and 1933.... In terms of living standards, real per capita personal consumption expenditures did not recover to their 1929 level until 1941, giving American consumers 12 years of living standards lower than they had become used to.

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Today, however, globalization has gone so far that US self-reliance would be economically impossible except at inordinate cost. All kinds of global supply chains and product relationships would have to be unwound....

A second factor intensifying the decline in US living standards is the appallingly low US savings rate and the reduction in the US capital pool that has resulted from over a decade of excessively low interest rates....

In a time of tight credit such as we are now experiencing and are likely to continue experiencing for some time to come, that borrowing crowds out other more productive uses of capital....

The speed of globalization and the balance between factors tending to mitigate its adverse effects on the US and Western Europe and those tending to intensify those effects is unclear. Nevertheless, the probability of a long-term decline in US living standards comparable to if not deeper than the Great Depression must be rated as fairly high. It will take the form, not of a single catastrophic collapse as in 1929-33, but of a series of sharp unpleasant recessions, interspersed with feeble unconvincing recoveries in a downward saw-tooth pattern. The result will be the same, albeit over a longer period.