UK economy downturn 'frightening'

Workers in Staffordshire reflect on shorter hours and job fears

Business leaders have painted a bleak picture of the UK economy, with a survey suggesting the end of 2008 saw a "frightening deterioration".

The British Chambers of Commerce (BCC) said its survey results were "awful" and the worst since it began in 1989.

Elsewhere, a separate report suggested it had been the worst December for UK retail sales in at least 14 years.

On 23 January, official figures are set to confirm the UK is in recession with six months of negative growth.

Margins hit

The British Retail Consortium figures on sales from the High Street and online said that like-for-like sales in December were down 3.3% on a year ago while total sales shrank 1.4%.

This is despite the government cut in value added tax (VAT), which took effect in December.

Many hard-pressed customers couldn't be seduced into spending Stephen Robertson Director-general, BRC Tesco sees 'challenging' trading House sales 'continuing to fall' Is it really all doom and gloom?

This made for the worst December since the survey began in 1995.

Some High Street retailers, including Sainsbury's and Greggs, have been reporting strong Christmas trading - suggesting that the economic picture is not yet entirely bleak.

But food retailers were almost the only sector to show growth, the BRC said, amid what it described as "truly awful numbers".

"Non-food retailers had a torrid December despite a blizzard of promotions and deals, which would have hit margins," the BRC's director general Stephen Robertson said.

"Many hard-pressed customers couldn't be seduced into spending."

Earlier, supermarket giant Tesco reported a 2.5% increase in like-for-like sales in the key Christmas period.

'No positives'

The BCC report, based on a survey of almost 6,000 firms which employ 680,000 people, pointed to plunging domestic demand, falling exports and plummeting confidence in the last three months of 2008.

Quite frankly the last time I saw anything of this magnitude of decline was when I worked in the West Midlands in the early 1980s David Frost Director-general, British Chamber of Commerce Robert Peston's blog Hugh Pym: Economic analysis

"It is clear that the UK economy is facing a very serious recession, and the downturn is deepening at an alarming pace," said the BCC report.

"The results highlight a frightening deterioration in the UK economic situation."

Its latest survey - which covered the last three months of 2008 - showed "no positive features" it added, with both the manufacturing and service sectors worsening.

Manufacturing, home sales and orders, employment expectations, investment, confidence and cash-flow have all hit record lows.

In the service sector, every key area was at a new low.

BCC director general David Frost called for a national recovery plan to be "rolled out as soon as possible".

"These are truly awful results with the scale and speed of the economic decline happening at an unprecedented rate.

"Quite frankly the last time I saw anything of this magnitude of decline was when I worked in the West Midlands in the early 1980s," he said.

"The sheer scale of this comes as a surprise to many of us."

Printing money

The BCC's chief economist David Kern said that he now expected the UK economy to shrink by up to 2.4% in 2009, rather than the 2.2% he had earlier forecast.

"One must say that unfortunately in terms of GDP, this recession is worse than in the 1990s," he said.

The manufacturing sector is gloomy about its outlook, the survey found

But he added it was not worse than the 1980s, so it was still possible "to avoid a prolonged depression".

Last week, the Bank of England cut the cost of borrowing from 2% to 1.5% - the lowest since the Bank was founded in 1694.

Mr Kern said more rate cuts were likely, but that the authorities would have to go further to avoid a prolonged depression, including printing more money.

"The MPC is running out of conventional bullets," he added.

The suggestion that investment in factories and machinery was at record lows was particularly worrying, said Ross Walker, chief UK economist at Royal Bank of Scotland.

This indicated that private sector firms would see their capacity for recovery hindered when the UK came out of economic crisis, he said.

Shoppers 'Sidelined' In Long Retail Slump

A bankruptcy judge in Richmond will determine the fate of electronics retailer Circuit City. He will decide whether the company will be sold as a whole or be liquidated. (By Jeremy Bales -- Bloomberg News)

By V. Dion Haynes

Washington Post Staff Writer
Thursday, January 15, 2009; Page D03

Americans drastically curtailed their shopping last month, according to government data released yesterday, and consumers who have come to expect big price cuts are unlikely to increase their spending anytime soon, analysts said, causing trouble for retailers in the months ahead.

"The recession will be longer, deeper and the recovery disappointing because consumers are sidelined," said Mark Zandi, chief economist for Moody's Economy.com.

December retail sales fell more than twice as forecast, dropping 2.7 percent from November, according to the Commerce Department.

October to December sales were down 7.7 percent from the same period in 2007, the worst quarter for sales in at least four decades. The drop in spending was accompanied by rapidly rising unemployment and an uptick in savings.

"This is a record decline since 1967," said Michael Niemira, chief economist for the International Council of Shopping Centers, a trade group. He projected the annual sales decline in 2009 would be 1.3 percent, compared with 0.4 percent in 2008.

"I think the storyline there is we had so much contraction in the last part of '08," Niemira said. "It's difficult to dig out of the hole."

Consumer spending, which represents two-thirds of gross domestic product, has in some recent slowdowns helped drive economic recoveries, analysts said. But the growing jobless rate means some consumers have less to spend and others are nervous about spending. Analysts are forecasting that in 2009 the unemployment rate will increase to at least 8.5 percent from 7.2 percent and the savings rate will rise to 5 percent from 2.8 percent.

"You're not going to get a recovery without a faster pace of consumer spending," said Alan Levenson, chief economist for T. Rowe Price Associates.

During some previous recessions, shoppers resumed buying such big-ticket items as appliances, cars and houses despite flat salaries. The difference was that credit was much more available to consumers than it is now.

Although increased federal spending from President-elect Barack Obama's stimulus package is expected to boost the economy, analysts said they think it will do little to help lift consumer confidence.

"I think the retail sector will lag the typical economic recovery," said John Silvia, chief economist for Wachovia.

"The game is different" now, Silvia added. "Consumers have less access to credit and don't have the income to support spending."

The fallout on retailers has been pervasive.

Neiman Marcus, which reported a 31.2 percent sales decline in December, has announced it is laying off 375 employees. Gottschalks, a Fresno, Calif.-based department store, has filed for bankruptcy protection.

Tomorrow, a bankruptcy judge in Richmond will determine the fate of electronics retailer Circuit City. He will decide whether the company will be sold as a whole and remain a going concern or be liquidated.

Analysts ticked off a list of other retailers grappling with plummeting stock prices and/or declining sales: Dillard's, Eddie Bauer, Chico's, Borders, Bon-Ton and Pier 1. To survive, retailers are cutting jobs, closing stores, reducing inventory or delaying renovations and expansions.

"We've reduced our capital spending budget for '09," said Jim Sluzewski, spokesman for Macy's, which reported a 7.5 percent decline in same-store sales for November and December. "We initially planned to spend $1 billion, but we're going to reduce it by $550-$600 million or even a little more."

The December sales plunge, despite some of the most aggressive price-cutting in memory, suggested a long-term shift in consumer behavior. Consumers, analysts say, are accustomed to deep discounts and may no longer tolerate full prices. "People concerned about their jobs move into survival mode and slash all their spending by 20 and 30 percent," said C. Britt Beemer, chairman and founder of America's Research Group, a Charleston, S.C firm that tracks consumer behavior.

"We're going into January with extremely low consumer excitement," he said. "If 70 percent off doesn't excite them, I don't know what else will."

In a survey released yesterday by the firm, 33.2 percent of 1,000 consumers interviewed over the weekend said they felt pressured by credit card bills and debt, compared with 23.6 percent a year ago. Nearly 29 percent said they were buying only essential items and merchandise on sale, compared with about 18 percent a year ago. Only 4.8 percent said they were purchasing full-price items, compared with 10.8 percent a year ago.

The survey illustrates a decline in high-end retailers and growth of discounters. For instance, nearly 100 percent of the consumers surveyed over the weekend bought items at a discount store, compared with 90 percent a year ago. And only 1.2 percent bought jewelry, compared with 15.4 percent in 2008.

The slowdown is "conditioning consumers to look for deep discounts of 30 to 50 percent vs. the 15 to 20 percent" range of the past, said Tom Chin, managing director of Telsey Advisory Group in New York.

As a result, mall developers are beginning to think more about asking discount retailers such as Costco to anchor shopping centers, rather than relying only on traditional department stores, Chin said.

"Everyone is trying to evaluate who will be the winners in the next three to five years," he said.

Even online sales, which had been growing 19 to 28 percent over the past few years, were off. More people were buying online, but they were spending less.

Sales declined 3 percent in November and December, said Andrew Lipsman, director of industry analysis at ComScore, a digital marketing firm in Reston. "E commerce fell off the cliff this year," said Lipsman, attributing the decline to consumers cutting back on discretionary spending.

Economic Picture Bleak in Fed Report

Declines Span Regions, Industries

By Annys Shin

Washington Post Staff Writer
Thursday, January 15, 2009; Page D01

Business conditions across a broad range of regions and industries have continued to deteriorate in recent weeks, according to a Federal Reserve report released yesterday.

The Fed's "beige book," a compilation of anecdotes about business activity around the country, bears out gloomy forecasts of a weak start to 2009. It said that across the country, retail and auto sales were weak, manufacturing activity kept falling and banks remained reluctant to lend.

"If you're looking for something uplifting, you won't find it in the beige book," said Bernard Baumohl, an economist for the Economic Outlook Group, a consultancy in Princeton, N.J.

Last week, the Labor Department said unemployment rose in December to 7.2 percent, its highest point since 1993. Still, as bleak as the employment picture is already, the Fed report suggested significant job losses had yet to be counted.

In New York, for instance, substantial job reductions in the financial industry have yet to show up in government payroll statistics. The report also found that year-end bonuses at financial firms were estimated to be down 20 to 30 percent compared with a year ago at some of the smaller firms and more substantially at larger ones.

Several other districts also said employers were considering pay freezes and smaller bonuses.

The report indicated a long-anticipated decline in construction of office buildings, apartments and shopping centers has begun as commercial projects that had been in the works for several years reach completion and the pipeline for new projects dries up. Developers said they were unable to fund new projects and blamed tightfisted lenders. Potential tenants were as scarce as financing. In Manhattan, for instance, the office vacancy rate climbed to its highest level in two years.

The energy industry, which showed signs of softening in November, weakened more as demand has fallen.

Duke Energy, one of the biggest electric utilities in the country, saw electricity use drop last year compared with 2007 and expects another decline this year. James E. Rogers, chief executive of the Charlotte company, said in an interview with Washington Post reporters and editors that Duke has never seen two consecutive annual declines in electricity use.

Falling demand has also helped drive down prices for oil and natural gas and, in turn, production levels. The Dallas area reported a decrease in drilling activity and a decline in the number of active oil rigs since the previous survey.

"We're seeing projects almost on a daily basis tabled or canceled," said John Kilduff, an energy analyst for the futures and options brokerage MF Global. He added that the oil and natural gas production that shut down as a result of hurricanes Gustav and Ike last year is not likely to be completely restored.

Half of the regions reporting said businesses planned to reduce capital spending this year. Chemical giant DuPont is among them. DuPont Chairman Charles O. Holliday Jr. said in an interview that DuPont has cut its capital spending plans for 2009 by about 20 percent, with the biggest cuts in areas that serve the automobile and housing industries.

There were a few exceptions to the otherwise glum string of anecdotes. Defense and medical-device production in the Minneapolis area were up. Aerospace manufacturing held steady in the San Francisco area, as did food manufacturing and processing in the Philadelphia and Dallas regions.

Lower prices at the gas pump, coupled with end-of-the-year deals, inspired some consumers to get back behind of wheel of larger automobiles. Sales of large vehicles, for example, were up slightly in the San Francisco area. So were sales of light trucks in the Chicago region.

"We have seen some shifting in vehicle mix with gas prices coming down so much so quickly," said Mike Wall, an analyst with CSM Worldwide, a market research firm in Detroit. "We have seen some folks gravitate back toward the pickup truck segment, [but] not the very large SUVs."

Latvia Is Shaken by Riots Over Its Weak Economy

Ilmars Znotins/Agence France-Presse — Getty Images

Military personnel faced off with protesters in Riga, Latvia, on Tuesday night.

MOSCOW — Violent protests over political grievances and mounting economic woes shook the Latvian capital, Riga, late Tuesday, leaving around 25 people injured and leading to 106 arrests.

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Officers cleared demonstrators on Wednesday in Sofia, Bulgaria. Several countries have faced protests over economic issues.

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Ilmars Znotins/Agence France-Presse — Getty Images

A protester faced riot police officers on Tuesday in Riga, Latvia. About 25 people were injured when the rally turned violent.

In the wake of the demonstrations, President Valdis Zatlers threatened Wednesday to call for a referendum that would allow voters to dissolve Parliament, saying trust in the government, including in its ability to deal with growing economic problems, had “collapsed catastrophically.”

For years, Latvia boasted of double-digit economic growth rates, but it has been shaken by the global economic downturn. Its central bank has spent a fifth of its reserves to guard against a steep devaluation of its currency, the lat, and experts expect a 5 percent contraction of the country’s gross domestic product in 2009. Salaries are expected to fall substantially, and unemployment is expected to rise.

The violence followed days of clashes in Greece last month over a number of issues, including economic stagnation and rising poverty as well as widespread corruption and a troubled education system. In Bulgaria on Wednesday, separate riots broke out in the capital, Sofia, after more than 2,000 people — including students, farmers and environmental activists — demonstrated in front of Parliament over economic conditions, Reuters reported.

Mr. Zatlers has long been aligned with the governing coalition, so his threat to dissolve Parliament came as a surprise — and was testament to nervousness about how economic troubles in the region could intersect with simmering political grievances.

The rioting broke out Tuesday after around 10,000 people protested in historic Dome Square over the economic troubles and grievances involving corruption and competence of the government.

Several hundred protesters lingered after most of the crowd had left and started throwing snowballs and cobblestones at government buildings.

Several demonstrators also threw Molotov cocktails, according to Mareks Mattisons, a spokesman for Latvia’s Interior Ministry. In a public statement on Wednesday, President Zatlers denounced the violence, but said it was more important to ask “why people gathered in Dome Square.”

“We must not face further confrontation, we must do the things that are demanded by the public,” he said. “I refer to constitutional amendments, a plan to stimulate the economy, and reform of the national system of governance.”

Krisjanis Karins, a member of Parliament and former leader of the opposition New Era party, said the violence showed that financial woes had injected a new vehemence into old political complaints.

Protests in Latvia, he said, tended to follow a pattern of “standing, singing and just going home,” but the young protesters who showed up on Tuesday evening “seem to think the Greek or French way of expressing anger is better,” he said.

“In our neck of the woods, this just doesn’t happen,” he said. “But it did this time. Everyone is trying to figure out how much of this was provoked. Who are these people? Where did they come from?”

Whatever the answer, he said, Tuesday’s protests seem likely to force political change.

“In six months, we’re going to look back and yesterday will be a watershed,” he said. “I would be deeply surprised if it were not.”

President Zatlers made a series of strict demands of the Parliament, including a constitutional amendment that would allow voters to dismiss Parliament, and a new supervisory council to oversee economic development and the state’s use of loans.

He called for “new faces in the government,” chosen for competence rather than “their influence in the relevant party.” He said the changes must be made by March 31, or else he would propose a referendum that could dissolve Parliament.

“Only with such specific work can we calm the public down and offer at least a bit of hope that the process in this country will develop in a favorable direction,” he said.

The Peak Oil Crisis: Civil Unrest

Written by Tom Whipple

Before grappling with 2009, it might be useful to remind ourselves that there is a dark side to what lies ahead.

There was a little flurry in the news last week when it was discovered that the Army War College had released a report talking about preparing for civil unrest in the U.S. When you read the report, it turns out to be yet another warning about generals preparing for the last war. It devotes only three pages to the idea that the Army might soon find itself so embroiled in helping local authorities cope with civil unrest that international commitments, such as the war on terrorism, could become secondary concerns.

Since the close of the Civil War, America has enjoyed nearly 150 years of domestic tranquility. There were, of course the Indian wars, some labor disputes and a handful of urban riots in recent decades, but these were isolated and did not last for long. Even during the great depression of the 1930's America's social fabric stayed largely intact. Signs that these idyllic decades may be coming to close are starting to arise. In the last few weeks the deteriorating economic situation has seen serious disturbances in Greece and Thailand. We are beginning to read of disturbances in Russia and China.

Most realists foresee that 2009 will be a bad year with stock markets declining, unemployment rising, real estate values falling, government bailouts continuing, deflation morphing into inflation, the dollar falling, and oil prices rising. Thus far the economic downturn has not had a serious social impact. However, food banks are running short, shoplifting and other property crimes are on the rise, child neglect is increasing as is infant mortality. However, considering the pace at which people have been thrown out of work during the last year most seem to be getting by - so far.

Of all the world's nations, America is probably the worst prepared to deal with deep, prolonged economic hardships, for more of us have disconnected from 19th century, rural, somewhat self-sufficient, lifestyles than in most other countries. In the 1930's many found that they could still return to the family farm, where food, shelter, and meaningful work was available. In 2010 that option exists for very few; we have become dependent on a complex infrastructure fueled by oil for our food, water, clothing and warmth. Start reducing the flow of oil and increasing numbers of us are going to become increasingly desperate.

There are too many turns in the twisting paths that the current economic and oil depletion crises could take to speculate on the details of what is likely to happen. However, there are many potential "failed states" around that we are likely to have concrete examples, shortly, of what happens in the 21st century when civil order breaks down.

It is clear that we are already seeing the opening ripples of what might turn out to be the major social problem of the century - caring for large numbers of destitute people. Most of the social nets in America such as unemployment insurance, charities or shelters have strict time or limited resources. Already charity and religious contributions are starting to drop.

As the situation worsens, it is going to be much cheaper for governments at all levels to provide essential food, shelter and other services, rather than wait for desperate people to start stealing and become ensnared in the criminal justice system. One of the key benchmarks of the next few years is how quickly governments will redeploy resources away from 20th Century priorities such as space travel, expensive weapons systems, and highways towards simply getting people through the decades of transition from current lifestyles. The change will not be an easy one.

Before we get to mobs in the streets, we are likely to go through a time of increasing petty crime and the ensuing pressures on the criminal justice system. Somebody is going to have to think through the appropriate response to major increases in shoplifting and burglaries by people who are trying to feed children after having exhausted all other avenues of assistance.

It is likely that who is kept in prison and for what is going to have to be rethought. State and local revenues are already dropping rapidly and the day is not far away when choices between funding school systems and maintaining vast prison systems will need to be addressed. Alternative forms of deterring criminal behavior and forms of punishment will need to be devised. Indeed the economic situation could deteriorate so rapidly that some of these changes may need to be made in months rather than years.

It is likely that part of the of the solution to getting hundreds of millions through decades of shortages will involve increasing infringement on what many now consider their civil liberties. Better forms of personal identification will be necessary. It is likely that rationing of many things we take for granted such as fuel, food, medical services and travel and even places of residence may become necessary. Other societies have found such measures necessary in times of crisis.

America has not faced a serious domestic crisis for 150 years. We have never faced a situation where 300 million of us bound up in a complex and interdependent society has had to make major involuntary changes in our lifestyles.

U.S. military report warns 'sudden collapse' of Mexico is possible

By Diana Washington Valdez / El Paso Times

Posted: 01/13/2009 03:49:34 PM MST

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Mexico's President Felipe Calderon announces a new economic stimulus package in Mexico... (AP photo)

EL PASO - Mexico is one of two countries that "bear consideration for a rapid and sudden collapse," according to a report by the U.S. Joint Forces Command on worldwide security threats.

The command's "Joint Operating Environment (JOE 2008)" report, which contains projections of global threats and potential next wars, puts Pakistan on the same level as Mexico. "In terms of worse-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico.

"The Mexican possibility may seem less likely, but the government, its politicians, police and judicial infrastructure are all under sustained assault and press by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

The U.S. Joint Forces Command, based in Norfolk, Va., is one of the Defense Departments combat commands that includes members of the different military service branches, active and reserves, as well as civilian and contract employees. One of its key roles is to help transform the U.S. military's capabilities.

In the foreword, Marine Gen. J.N. Mattis, the USJFC commander, said "Predictions about the future are always risky ... Regardless, if we do not try to forecast the future, there is no doubt that we will be caught off guard as we strive to protect this experiment in democracy that we call America."

The report is one in a series focusing on Mexico's internal security problems, mostly stemming from drug violence and drug corruption. In recent weeks, the Department of Homeland Security and former U.S. drug czar Barry McCaffrey issued similar alerts about Mexico.

Despite such reports, El Pasoan Veronica Callaghan, a border business leader, said she keeps running into people in the region who "are in denial about what is happening in Mexico."

Last week, Mexican President Felipe Calderon instructed his embassy and consular officials to promote a positive image of Mexico.

The U.S. military report, which also analyzed economic situations in other countries, also noted that China has increased its influence in places where oil fields are present.

Trading in gold soars by 60pc

Gold, investors' traditional safe haven in times of financial turmoil, experienced record levels of trading last year.

By Richard Evans
Last Updated: 8:54AM GMT 14 Jan 2009

Trading in gold soars by 60pc

The turnover in gold increased by 58pc in 2008 to a record $20.2 trillion, according to International Financial Services London, a body that promotes the City of London. Silver trading also saw a dramatic increase during the year, rising by 39pc to a new record of $2.6 trillion.

The growth in turnover was partly due to an increase in prices of precious metals during the year, with gold reaching its highest ever price of $1,011 per ounce in March, IFSL said.

Daily reported net trading in gold on the London Bullion Market Association (LBMA) averaged $20bn in the first 11 months of 2008, a rise of 45pc on the same period of the previous year. Daily trading in silver on the LBMA increased by 32pc to $2bn.

"The actual volume of London market turnover is probably three to five times the reported turnover because transactions which are netted out do not appear in the published statistics," IFSL added.

Futures and options trading of gold on exchanges increased by more than 80pc in 2008 to a record $5.1 trillion. Trading of silver also hit a new high, rising by 60pc to a $1.2 trillion.

Exchange traded gold and silver funds have been the strongest source of growth in demand since their introduction in 2003, IFSL said.

The price of gold is expected to average $910 an ounce in 2009, 4.3pc more than last year, according to a panel of 20 analysts, traders and investors surveyed recently by Bloomberg. But silver and platinum prices will decline this year, the survey predicted.

Soaring cost of living drives residents from California

The Californian dream is turning sour for increasing numbers of West Coast residents who are abandoning the Golden State and heading east in search of a better life.

Even the state's celebrated assets - year-round sunshine, sandy beaches and proximity to the glamour of Hollywood - can't compensate for the soaring cost of living in the nation's most populous state, according to those that have decided to leave.

For the fourth year running, more residents left California than moved there from other states. In the year ending July 1, 2008, the state lost 144,000 people, more than any other US state, according to census estimates.

California, which has lured people throughout history from the Gold Rush to Hollywood, the Dot com boom and beyond, hasn't witnessed such a prolonged period of departures since the downturn of the early 1990s.

Those leaving cite the worsening unemployment rate - 8.4 per cent, the third-highest in the nation - high taxes and rents, rampant foreclosure rates yet property prices still out of the reach of many families.

Most businesses are shedding jobs - even in the entertainment industry - and with the state grappling a budget gap projected to swell to over 41 billion dollars in 18 months, higher taxes and drastic cuts to public services seem all but inevitable.

"You see wages go down and the cost of living go up," Mike Reilly, 38, who is moving his family to Colorado, told the Associated Press.

The engineering contractor, who lives 80 miles north of Santa Barbara, said his move followed years of rising taxes, dissatisfaction with schools, illegal immigration and traffic congestion, all of which had tarnished his image of his home state. In Colorado, his family will pay less than one third of the property taxes they pay in California.

The flow of people leaving dates from the housing bubble, which propelled property prices far higher than most could afford, then continued as the downturn began and recession kicked in.

The most popular destinations for those quitting California are Texas, Nevada, Arizona and Washington state, the U-Haul truck rental company told the Los Angeles Times.

Overall, the number of people leaving remains tiny given the state's population - 38 million - which is actually increasing due to births and immigration from overseas.

Despite this, some believe California's current situation is so dire it will only encourage more to flee. Although it boasts the world's eighth largest economy, the state is facing "financial Armageddon", according to governor Arnold Schwarzenegger, and could soon become the first in the US to go broke.

"Who can blame them?" writes Whittier Daily News columnist Frank Girardot of those leaving the state. "We have traffic problems, crime problems, immigration problems and state and local governments that are completely dysfunctional. Wages are falling. The cost of living is rising - fast.

"The Golden State is quickly becoming something other than the promised land it was since the first Spanish explorers set foot here all those centuries ago."

Others see the situation as calling for re-evaluation rather than rejection.

"I don't think the California dream, per se, is over. It has become and will continue to become grittier," Gregory Rodriguez, New America Foundation senior fellow, told the Associated Press. "Now, perhaps, we have to reassess the California of our imagination."

State Pensions’ $865 Billion Loss Affects New Workers

By Adam L. Cataldo

Jan. 13 (Bloomberg) -- State governments from Rhode Island to California have run up estimated pension-fund losses of $865.1 billion, forcing some to cut benefits for new hires.

Assets for 109 state funds declined 37 percent to $1.46 trillion over the 14 months ended Dec. 16, according to the Center for Retirement Research at Boston College. The Standard & Poor’s 500 Index of stocks fell 41 percent in the period.

“Not a whole lot of people get too excited about pension funds,” Philadelphia Mayor Michael Nutter said in an interview. “But if you have to pay those costs, they do grab your attention.”

After Philadelphia’s fund lost $650 million in the first nine months of last year, Nutter joined the mayors of Atlanta and Phoenix in writing a letter to Treasury Secretary Henry Paulson seeking financial help for U.S. cities. Their November letter cited investment deficits and rising pension costs.

The $865 billion in losses, which exceed the $700 billion Troubled Asset Relief Program that Congress approved in October, comes as states face budget deficits totaling $42 billion.

The Boston College center analyzed holdings reported on financial statements from 2006, when the 109 funds had about 20.4 million members. It didn’t specify which of the 218 U.S. state funds it studied.

To return to 2007 actuarial funding levels by 2010, the 109 funds would need annual returns of 52 percent on assets, the analysis found. Annual returns of 18 percent would achieve the goal by 2013, the center said. The projections are based on a 5.7 percent annual increase in liabilities and a $50 billion increase in assets from contributions above annual payouts.

‘Accelerating Complications’

State funds have enough money on hand to pay benefits for the foreseeable future, said Alicia Munnell, the center’s director. “Even if markets recover, this will be a one-time loss that will have to be made up in the future by taxpayers,” she said.

“We can’t make enough on investments to drive out of this hole if all you do is depend on investments,” said Mike Burnside, executive director of the Kentucky Retirement Systems in Frankfort.

As of June 30, Kentucky’s largest fund for state workers held about 52 percent of the assets needed to pay current and future benefits to its 117,000 members. The plan had an unfunded liability of $4.8 billion at that time, while the entire system’s liabilities totaled about $16 billion.

‘Negative Cash Flow’

“When we are experiencing a negative cash flow and we are having to eat capital to make payroll, we are accelerating the complications,” Burnside said.

Increasing taxes to fill the pension gap has little support, said Frank Karpinski, executive director of the Employees’ Retirement System of Rhode Island in Providence.

“I don’t think anybody wants to do that, likes to do that or would say it would be an easy sell anywhere, especially given the current economic situation,” he said.

State and local governments contributed $64.5 billion to pension plans in fiscal 2005-06, according to data from the U.S. Census Bureau. That’s about 57 percent of the $113.2 billion spent on police and fire services.

Attempts to reduce benefits also face opposition.

“I believe that our members will oppose such initiatives in collective bargaining or in state legislatures,” said John Adler, a director with the Capital Stewardship Program in New York for the Service Employees International Union, which represents public workers. The union’s 850,000 members were in retirement plans with more than $1.5 trillion in assets as of Jan. 1, 2008, Adler said.

Two-Tiered Plans

To cut pension costs, some states are creating two-tiered systems offering less to new hires.

Kentucky lawmakers this year set the state’s first minimum retirement age, 57, for employees hired after Sept. 1, and required 30 years of service, up from 27, to receive full benefits. They capped cost-of-living adjustments, which had been tied to the Consumer Price Index, at 1.5 percent. The system had an unfunded liability of about $16 billion as of June 30, executive director Burnside said.

New York Governor David Paterson, trying to close a $15.4 billion budget gap over 15 months, wants to reduce new workers’ benefits and raise the retirement age to 62 from 55. New York’s pension system was over funded, with assets of $153.9 billion, as of March 30.

‘Weakest Cases’

Of the 109 state funds, 43 were funded at 79 percent or less of estimated current and future costs. Those below 80 percent “constitute the weakest cases,” said Ted Hampton, an analyst with Moody’s Investors Service Inc. in New York. The average level is 85 percent, according to an analysis prepared for a Moody’s report published in July 2008, Hampton said.

A survey of state funds found they owed $2.35 trillion to pension payments over 30 years, a December 2007 report by the Pew Center on the States found.

Company pension funds have also lost assets in the stock- market decline. The value of so-called defined benefit plans fell to $1.2 trillion at Dec. 31 from $1.6 trillion a year earlier, according to Mercer LLC, a New York-based pension consulting unit of Marsh & McLennan Cos.

Last month, after Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies said losses could force them to make unexpectedly large contributions, Congress voted to delay provisions of the Pension Protection Act of 2006. The law would have penalized employers that didn’t cover at least 94 percent of their liabilities this year.

Membership Growth

For state plans, which weren’t covered by that mandate, the funding issue is complicated by 12 percent growth in membership since 2002, with 23.1 million now participating, according to census data.

Excluding Social Security, public employers’ pension costs are three times the retirement costs of their private counterparts, according to a June 2008 report by the Washington- based Employee Benefit Research Institute.

Some state retirement systems have seen losses in derivatives as well as stocks. Public pension funds bought more than $500 million in so-called equity tranches of collateralized debt obligations, according to public records compiled by Bloomberg in 2007. CDOs are packages of securities that are backed by bonds, mortgages and other loans. Their equity tranches are considered their riskiest portions.

The Missouri State Employees’ Retirement System invested $25 million in half the equity portion of the BlackRock Senior Income Series 2006 collateralized loan obligation, managed by New York-based BlackRock Inc. Moody’s last month cut ratings on parts of the debt, saying a drop in value of the underlying collateral may cause “an event of default.”

Finding Funds

Chris Rackers, the manager of investment policy and communication for the Missouri fund, didn’t return calls seeking comment.

In Rhode Island, state and local governments were scheduled to make contributions equaling 25 percent of their payroll expenses to retirement plans in 2010, said Karpinski, the executive director. Barring a recovery, the contributions may increase to as much as 30 percent in 2011, he said.

“That is kind of the elephant in the room,” he said. “Where are the funds going to come from to make these kinds of required contributions?”

Ohio Unemployment Fund Runs Out

COLUMBUS, Ohio -- Ohio's unemployment compensation fund has been depleted, forcing the state to begin borrowing federal funds.Officials said no disruptions in benefits are expected.The Ohio Department of Job and Family Services said Monday the federal government has already approved $500 million to be borrowed by Ohio to pay benefits in January and February.The state has requested that it be able to use $50 million of that amount to pay benefits this week.Agency spokesman Dennis Evans said Ohio is committed to preventing the unemployed fund from missing any payments.Ohio and many other states have seen their unemployment funds decrease drastically as the number of unemployed workers has surged amid the recession.

New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'

LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:

• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems

A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.

In this 30th issue of the GEAB, the LEAP/E2020 team describes these three destabilizing processes (two of them are described in this public announcement) and gives recommendations to cope with the surge in risks. In addition, this issue also provides the opportunity to make an objective assessment of the reliability of LEAP/E2020's anticipations and specifies a number of methodological aspects of the analytical process used. In 2008, LEAP/E2020's success rate reaches 80%, and even 86% when it comes to strictly socio-econimic anticipations. In a year of major upheavals, our teal ise altogether quite proud of this result.

The crisis will last at least until the end of 2010

Evolution of the US money base and indications of related major US crisis periods (1910 – 2008) - Source: Federal Reserve Bank of Saint Louis / Mish’s

Global Economic Analysis

As we already explained in GEAB N°28, the crisis will affect in different ways the different regions of the world. However, and LEAP/E2020 wishes to be very clear on that aspect, contrary to the dominant stance today (coming from those experts who denied the fact that a crisis was coming up three years ago, who denied that it was global two years ago, and who denied the fact that it was systemic six months ago), we anticipate that the minimum duration of the decanting phase of the crisis is 3 years (1). It shall be finished neither in spring 2009, nor in summer 2009, nor at the beginning of 2010. It is only towards the end of 2010 that the situation will start stabilizing again and improving a little in some regions of the world, i.e. Asia and the Eurozone, as well as in countries producing energy, mineral and food commodities (2). Elsewhere, it will continue; in particular in the US and UK, and in all the countries depending on their economy, were the duration could approximate a decade. In fact these countries should not expect any real return to growth before 2018.

Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.

The risk of sudden collapse of all capital-based pension systems

Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7), knowing that it is only in a few weeks time that most of these funds will start calculating their total losses (8). Most of them are still deluding themselves about their capacity to build up again their capital after the markets turn around. In March 2009, when pension fund managers, pensioners and governments will become simultaneously aware of the fact that the crisis is there to last, that it coincides with the « baby-boomer » generation’s age of retirement and that the markets will not resume their 2007 levels until many long years (9), chaos will flood this sector and governments will reach the moment when they will be compelled to nationalize all these funds. And Argentina, who took this decision a few months ago already, will appear a pioneer.

All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide.

Shipping rates hit zero as trade sinks

Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October.

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 3:39PM GMT 14 Jan 2009

The cost of shipping goods from Asia to Europe has tumbled

"They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster."

Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Container fees from North Asia have dropped $200, taking them below operating cost.

Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.

Korea's exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.

"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

Idle ships are now stretched in rows outside Singapore's harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes.

It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.

The World Bank caused shockwaves with a warning last month that global trade may decline this year for the first time since the Second World War. This appears increasingly certain with each new batch of data.

Mr de Trenck predicts Asian trade to the US will fall 7pc this year. To Europe he estimates a drop of 9pc – possibly 12pc. Trade flows grow 8pc in an average year.

He said it was "illogical" for shippers to offer zero rates, but they do whatever they can to survive in a highly cyclical market.

Offering slots for free is akin to an airline giving away spare seats for nothing in the hope of making something from meals and fees.