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Fedspeak, China's lead & more

Jun 11, 2008

Fed says it again!
But will you believe? "The Fed's powerful doses of interest rate cuts, the government's US$ 168 bn stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for US exports should help the economy over the remainder of this year," says Ben Bernanke, the US Federal Reserve chief. Another set of lies Chairman Sir, despite maintaining that the housing pain continues to hurt and rising energy prices continue to pose serious threats to the US economy? The fact that the Fed had been denying the stretching of housing and credit bubble till about a few months back and had protected the banks for all their misdemeanors that led to the crisis in the first place?

  • How the Fed 'created' the crisis?

    Americans cutting back?
    Another 'believe it or not' for the day! Sounds strange, but the spendthrifts who have not really been concerned about 'economics' all these years and have splurged on consumption, with or without money (using their credit cards), are gradually cutting back on consumption. This is seen from the results of a poll conducted by CNN's financial website which shows that most Americans think gas prices will continue to rise and that current economic conditions are poor.

    Facing the spectre of gasoline (petrol) prices rising to as high as US$5 per gallon, 'they are driving less and seriously considering chucking their gas guzzlers', says the outcome of the poll. Interestingly, the effects of high gas prices go beyond driving habits. The poll also shows that a majority of respondents are cutting back significantly on household spending. Now that's pain at the pump and in the house!

    Oil to cool down, says energy agency...
    Cutting back by the Americans as also lower demand from emerging economies in light of high fuel prices and an economic slowdown are cited as factors that will led to lower demand for oil going forward. This is a forecast of the International Energy Agency (IEA), which is an energy policy adviser to the Organisation for Economic Co-operation and Development (OECD), a group of 30 advanced economies, mostly in the West.

  • Boiling oil, falling stocks & more

    The agency has forecasted that global oil consumption would average 86.8 m barrels per day in 2008, still 0.9 % higher than the demand in 2007. Its report further states that the reduction of price subsidies in recent weeks for fuel in non-OECD countries including Indonesia, Malaysia, Sri Lanka, Taiwan and India should slightly tame oil demand growth in these regions. The rush by consumers in the West to buy more fuel efficient vehicles as also a higher usage of public transport shall aid the overall slowdown in oil demand going forward. Utopian thoughts? In the meanwhile, the chief executive of a Russian energy giant has forecasted crude prices to reach US$ 250 a barrel in the 'foreseeable future'!

    ...but the argument will continue
    Bloomberg reports that cold and wet weather has delayed corn and soybean planting and seed emergence in the US, increasing the risk of lower yields and reduced inventories for the crop in 2009. That should intensify the ongoing debate of food vs. fuel, considering that green fuel pros have been accused of diverting a large produce of corn towards production of ethanol, an environment friendly fuel. As reported, corn harvest in the US will be 10% lesser than a year ago. Further, inventories are projected to fall to a 13-year low. As a matter of fact, corn is the biggest crop in the US, valued at US$ 52 bn in 2007, with soybeans in the second place at US$ 27 bn.

  • Food vs. Fuel: Why the argument?

    China leads India...
    ...even when one considers the drop in stock prices! As reported, the Shanghai Composite Index plunged 7.7% yesterday after the country's central bank tightened credit norms. Chinese financial markets were closed Monday for a national holiday, so Tuesday was the earliest chance for investors to react to a weekend decision by the central bank ordering banks to keep more deposits on hand. Chinese stocks have fallen by almost 50% over the past eight months (double of the Indian markets' 25% decline), making the country as amongst the worst performing stock markets in the world during this period.

    As a matter of fact, late last weekend, the People's Bank of China announced a 1% increase in cash reserve ratio (CRR - amount of funds that banks have to keep with the central bank as reserves; higher CRR means lower funds with banks to lend), to be effected in two equal tranches on June 15 and June 25. After the increases, banks will be required to keep 17.5% of their deposits in reserve - a record high ratio. This latest increase in the CRR, the fifteenth in the past 18 months, has been aimed at easing inflation that is at 12-year highs.

    As for the Indian central bank - the Reserve Bank of India (RBI) - rising inflation has added pressure to hike interest rates, especially with economists expecting inflation to rise to a 13-year high of 9.5% over the next few months. That will be a severe blow for Indian banks' credit growth prospects with the same already slowing down on the back of high interest rates and a general slowdown in economic activity.


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