The New Paranoia: Hedge-Funders Are Bullish on Gold, Guns, and Inflatable Lifeboats

During the final months of 2008, as the financial markets imploded, talk on trading desks turned to food and water stockpiles, generators, guns, and high-speed inflatable boats. “The system really was about six hours from failing,” says Gene Lange, a manager at a midtown hedge fund, referring to the week in September when Lehman went bust and AIG had to be bailed out. “When you think about how close we were to the precipice, I don’t think it necessarily makes a guy crazy to prepare for the potential worst-case scenario.”

Preparations, in Lange’s case, include a storeroom in his basement in New Jersey stacked high with enough food, water, diapers, and other necessities to last his family six months; a biometric safe to hold his guns; and a 1985 ex-military Chevy K5 Blazer that runs on diesel and is currently being retrofitted for off-road travel. He has also entertained the idea of putting an inflatable speedboat in a storage unit on the West Side, so he could get off the island quickly, and is currently considering purchasing a remote farm where he could hunker down. “If there’s a financial-system breakdown, it could take a year to reset the system, and in that time, what’s going to happen?” asks Lange. If New York turns into a scene out of I Am Legend, he wants to be ready.

He’s not the only one. In his book Wealth, War, published last year, former Morgan Stanley chief global strategist Barton Biggs advised people to prepare for the possibility of a total breakdown of civil society. A senior analyst whose reports are read at hedge funds all over the city wrote just before Christmas that some of his clients are “so bearish they’ve purchased firearms and safes and are stocking their pantries with soups and canned foods.” This fear is very much reflected in the market—prices of corporate bonds have been so beaten down at various points that they suggest a higher default rate than during the Great Depression. Meanwhile, while the overall gold market has fluctuated, the premium for quarter-ounce gold coins—meaning the difference between the price for gold you can hold in your hand and that for “paper gold,” such as exchange-traded funds—rose to an all-time high of 20 percent. “Gold is transportable, it’s 100 percent liquid, and it’s perfectly divisible in the context of ounces, bars, or coins,” says the head of a California research firm who keeps a supply of it, along with food, water, and guns, on hand. “And most important, there’s no counterparty”—i.e., it’s an investment beholden to no one, and perhaps one of the few assets that will retain value if the financial system collapses.

While it may look like these Wall Streeters are betting on such a collapse, their embrace of survivalism is an outgrowth of their professional habits of mind: Having observed the economy’s shaky high-wire act from their ringside seats, they are trying to manage their risk and “hedge” against a potential fall. “It’s like insurance,” says an investor who has stockpiled MREs and a hand-cranked radio. “And by the time you need it, it’s way too late.” Leave it for others to weep for the collapse of the social order. These guys would prefer to be in a high-speed boat or ex-military vehicle, heading off toward their fully provisioned compounds in pursuit of the ultimate goal: to win the chaos.

Gun dealers experiencing shortages of bullets

Selling bullets may be the most secure job in Florida as long as supplies last.

After months of heavy buying, gun dealers across the state are experiencing shortages.

Some say it began with the election of President Barack Obama. Others say it's about the economic downturn or fear of crime. Whatever the reasons, ammunition has been selling like plywood and bottled water in the days before a hurricane.

"The survivalist in all of us comes out," said John Ritz, manager of East Orange Shooting Sports in Winter Park. "It's more about protecting what you have."

Demand for bullets is so strong that suppliers are restricting deliveries.

"Where we used to get 20 to 30 cases [in a shipment], we may get two to three cases now," said Vic Grechniw of Florida Ammo Traders in Tampa. "The supply just isn't there. . . . Everybody is pretty much rushing out to get their hands on whatever they can."

Most in demand is handgun ammunition, including 9 mm and .45-caliber for semiautomatic pistols and .38-caliber for revolvers. Clerks at local Walmart stores, including Apopka and Kissimmee, say those sizes, along with .22-caliber, are on back order at the chain's warehouses.

American gun owners buy about 7 billion rounds of ammunition yearly, according to the National Rifle Association. It has been warning its several million members that Obama favors raising taxes on bullets to make them prohibitively expensive.

"Anecdotal evidence certainly suggests that the demand for ammunition is continuing to increase, and that is certainly attributable to gun owners' concerns with the current administration," said Ted Novin, a spokesman for the National Shooting Sports Foundation, a trade association representing 4,700 members.

The scarcity of bullets piggybacked on more widely publicized sales of assault rifles.

"Everybody kind of got caught with their pants down," Larry Anderson, manager of Shoot Straight in Apopka, said about the demand for bullets, which surprised even longtime gun dealers.

Each day he spends one to two hours on the phone talking to suppliers to buy ammunition for Shoot Straight's store and shooting ranges in Apopka, Casselberry and Tampa.

"We're fortunate with the buying power we've got and the connections we've got," Anderson said.

Despite being able to buy 100,000 rounds at a time, Shoot Straight can't find any copper-jacketed bullets for .380-caliber pistols, popular as concealed weapons. The shops have adequate supplies of other calibers.

"You've got to beat the bushes and take deals," Anderson said. "Now I take whatever I can get instead of being finicky."

National chains are seeing the same increased levels of customers buying guns and ammunition in recent months, said Larry L. Whiteley, a spokesman for Bass Pro Shops.

"Why, we don't know," he said.

One major regional manufacturer, Georgia Arms, has seen bullet sales jump 100 percent since the November election.

"People are just stockpiling," said company spokeswoman Judy Shipley. "A gun is just like a car. If you can't get gas, you can't use it."

Georgia Arms sells more than 100 types of ammunition for handguns, shotguns and rifles at gun shows from South Florida as far north as Virginia. It now cautions online buyers, "Attention: Due to a huge increase in demand, our shipping times have been delayed 5-7 weeks on most orders. Please be patient with us and know we will fill your orders ASAP."

Demand has been so strong for all things gun that the Oak Ridge Gun Range south of Orlando is moving to a new, larger range in three weeks.

"It used to be you'd order bullets and get them in the next day. Now it can take a couple of months," said owner John Harvey, who has seen demand for state concealed-weapons classes increase 300 percent since the election.

"I haven't been able to get any smaller concealed guns that I'd recommend come in in two months," Harvey said. "Basically, Smith & Wesson is out of Smith & Wesson."

The latest surge is pushing already high costs still higher.

"It was going up long before the political thing got started," Drew Huy, owner since 1981 of Ammo Attic in Melbourne, said of prices that have increased as much as 40 percent in recent years.

He and other dealers, including Ritz, attributed rising costs to shortages of brass, copper and lead brought on by the industrial consumption in India and China. In addition, rising fuel prices dramatically increased shipping costs for ammunition, heavy by nature.

"I'm spending a lot more on it now [to buy it] than I was selling it for two years ago," Ritz said. At his shop in Winter Park he has seen the cost of bullets rise as much as 10 percent every three months for the past two years.

Suppliers to law-enforcement agencies are doing better than retail shops.

"We're in good shape," said Tom Falone of Florida Bullet in Clearwater, who sells Federal and Spear brand ammunition to police departments and sheriff's offices. The only slight problem has been obtaining .40-caliber bullets, and those are delivered within 30 days.

"I called about .22 [bullets] the other day, and they had 12 million rounds in the warehouse."

Ailing Banks May Require More Aid to Keep Solvent

Some of the nation’s large banks, according to economists and other finance experts, are like dead men walking.

Multimedia

Graphic

A Breakdown of Bank Losses

A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent.

None of the experts’ research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are federally insured. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.

But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department’s plan outlined this week.

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.

It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years.

Japan endured a lost decade of economic stagnation in the 1990s before it adopted such measures from 2001 to 2003.

The Swedish government took tough steps in 1992 and Washington did so in 1987 to 1989 to overcome the savings and loan crisis.

“The historical record shows that you have to do it eventually,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics. “Putting it off only brings more troubles and higher costs in the long run.”

Of course, the Obama administration’s stimulus plan could help to spur economic recovery in a timely manner and the value of the banks’ assets could begin to rise.

Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed in the United States range to $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.

Meanwhile, the loss estimates keep mounting.

Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Mr. Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.

Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad.

“The United States banking system is effectively insolvent,” Mr. Roubini said.

For its part, the banking industry bridles at such broad-brush analysis. The industry defines solvency bank by bank, and uses the value of a bank’s assets as they are carried on its books rather than the market prices calculated by economists.

“Our analysis shows that the banks have varying degrees of solvency and does not reveal that any institution is insolvent,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a trade group whose members include the largest banks.

Edward L. Yingling, president of the American Bankers Association, called claims of technical insolvency “speculation by people who have no specific knowledge of bank assets.”

Mr. Roubini’s numbers may be the highest, but many others share his rising sense of alarm. Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the United States banks have a capital shortage of $500 billion. “In a more severe recession, it will take $1 trillion or so to properly capitalize the banks,” said Mr. Johnson, an economist at the Massachusetts Institute of Technology.

At the end of January, the I.M.F. raised its estimate of the potential losses from loans and other credit securities originated in the United States to $2.2 trillion, up from $1.4 trillion last October. Over the next two years, the I.M.F. estimated, United States and European banks would need at least $500 billion in new capital, a figure more conservative than those of many economists.

Still, these numbers are all based on estimates of the value of complex mortgage-backed securities in a very uncertain economy. “At this moment, the liabilities they have far exceed their assets,” said Mr. Posen of the Peterson institute. “They are insolvent.”

Yet, as Mr. Posen and other economists note, there are crucial issues of timing and market psychology that surround the discussion of bank solvency. If one assumes that current conditions reflect a temporary panic, then the value of the banks’ distressed assets could well recover over time. If not, many banks may be permanently impaired.

“We won’t know what the losses are on these mortgage-backed securities, and we won’t until the housing market stabilizes,” said Richard Portes, an economist at the London Business School.

Raghuram G. Rajan, a professor of finance and an economist at the University of Chicago graduate business school, draws the distinction between “liquidation values” and those of calmer times, or “going concern values.” In a troubled time for banks, Mr. Rajan said, analysts are constantly scrutinizing current and potential losses at the banks, but that is not the norm.

“If they had to sell these securities today, the losses would be far beyond their capital at this point,” he said. “But if the prices of these assets will recover over the next year or so, if they don’t have to sell at distress prices, the banks could have a new lease on life by giving them some time.”

That sort of breathing room is known as regulatory forbearance, essentially a bet by regulators that time will help heal banking troubles. It has worked before.

In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.

In the current crisis, experts warn, banks need to get rid of bad assets quickly. The Treasury’s public-private investment fund is an effort to do that.

But many economists and other finance experts say that the government may soon have to take on troubled assets itself to resolve the credit crisis. Then, they say, the government could wait for the economy to improve.

Initially, that would put more taxpayer money on the line, but in the end it might reduce overall losses. That is what happened during the savings and loan crisis, when the troubled assets, mostly real estate, were seized by the Resolution Trust Corporation, a government-owned asset management company, and sold over a few years.

The eventual losses, an estimated $130 billion, were far less than if the assets had been sold immediately.

“The taxpayer money would be used to acquire assets, and behind most of those securities are mortgages, houses, and we know they are not worthless,” Mr. Portes said.

There Goes your Retirement

With their finances in shambles, many in the 60-plus crowd are looking for jobs. Here's how some are finding work -- and adjusting to new lives.

By KELLY GREENE

The advice in recent months -- from financial planners, economists and educators -- has been unvarying: Retirees whose nest eggs have cracked wide open should go out and find a job.

Easier said than done.

Across the country, retirees who never imagined themselves returning to the workplace are polishing résumés and knocking on employers' doors. The problem: Most are running smack into the worst job market in almost three decades. Nearly 5% of workers age 55 and older were unemployed in December, a 58% jump from a year earlier and the highest percentage since 1983, according to the Bureau of Labor Statistics.

Of course, the idea of "working in retirement" isn't new. In the past decade, many older Americans have started businesses or sought out part-time employment -- sometimes to help with household budgets, but frequently to follow long-deferred dreams. Today, though, with retirement savings in shambles and the economy in turmoil, job searches have taken on a new sense of urgency -- and, in some cases, desperation.

"That's all people talk about...[that] they have to go back to work," says Dan Sweeney, 62 years old, a former court officer who lives in the Villages, a large retirement community in central Florida. Mr. Sweeney has been working part time as a ranger at a local golf course, where he drives around in a cart making sure the pace of play is what it should be, handing out water and generally helping golfers. Last month, he started doing direct-marketing work at home, too, but he's also looking for a job with better pay.

Meanwhile, a neighbor -- who had invested his nest egg with Bernard L. Madoff, the New York financier accused of running a giant Ponzi scheme -- is trying to land work similar to Mr. Sweeney's. "He lost his life savings, and he was applying for [a] little golf-course job," Mr. Sweeney says.

Despite sizable hurdles, some retirees are finding work. How did they land those jobs, the first that some had applied for in several decades? What are the best and worst parts of their newfound employment? We spoke with dozens of older adults who had retired -- but who returned to work during the past year as the recession deepened. Here are several of their stories:

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

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.

Job cuts swell ranks of homeless in Japan

In corporate Japan, losing your job can mean losing your home as well.

As major companies cut their work forces in the economic downturn, many Japanese workers are finding themselves out on the street because they have to move out of company-run dormitories.

Sadanori Suzuki was one of them.

The 26-year-old lost his job at a car factory in December, and by mid-January he was kicked out of the dorm run by his employer. He moved from Internet cafes — which often have private rooms and double as flop houses — to "capsule" hotels, which are coffin-like individual compartments just for sleeping. But within two weeks he was nearly broke and out on the street.

He found his way to a Shinto shrine in Kawagoe, a Tokyo suburb, where he planned to take temporary refuge. But the worship hall was locked. Exasperated, Suzuki set fire on the shrine, then called police from a nearby pay phone and turned himself in. When he was arrested, last week, he had only 10 yen (11 cents).

In a country where lifetime employment has long been held up as an idealized standard, Japanese are finding out fast that the unemployment safety net for part-time, temporary or contract workers has become painfully obsolete.

"In Japan, people quite often become homeless as soon as they lose their jobs," said Makoto Yuasa, head of Independent Life Support Center, a grass-roots activist group. "There is no protection for people who are able to work but are out of jobs."

On Monday, the government reported that the Japanese economy shrank at its fastest rate in 35 years in the fourth quarter — at an annual pace of 12.7 percent — and shows no signs of reversing course anytime soon. It is more than triple the 3.8 percent annualized contraction in the U.S. in the same quarter.

According to the latest government estimates, released last month, some 125,000 part-time workers will lose their jobs by March. Labor officials cannot follow what happens to all those who lose their employment, but of the 45,800 who have been tracked, the government found 2,700 became homeless.

Private estimates go much higher — to upward of 400,000 new jobless by the end of next month — and say more than 30,000 of them will become homeless, nearly double the country's nationwide homelessness figure. By the official count, the number of homeless is 16,000 and has been slightly decreasing for several years.

"This is just the beginning," said Hitoshi Ichikawa, a ministry official in charge of labor policies. "There will be many more in coming weeks and months."

The wide use of temps in manufacturing was only legalized in 2004, allowing corporate giants such as Toyota Motor Corp. and Canon Inc. to rely on seasonal workers. Using temporary workers allows companies to adjust production to gyrating overseas demand through hiring agencies that often provide dormitories.

Nearly one-third of the Japanese work force is made up of temporary workers, including 3.8 million bottom-tier workers who are sent countrywide to provide labor on demand.

A key to Japan's fragile economic recovery has been the explosion in temporary employment agencies, brokers who allow corporations to take on labor without having to pay benefits — and then unload workers at will. Another factor is "freeters" — a growing segment of young people who choose to move from one part-time job to the next.

Independent union organizer Makoto Kawazoe said temporary workers are given low-paying, tough factory jobs, with an average basic monthly salary of about 150,000 yen ($1,650), barely enough to make ends meet. When they are laid off and evicted from employer-provided housing, they often have no savings. Three-quarters of Japan's temporary workers earn less than 2 million yen ($21,740) a year.

"They have no choice but rely on their job agencies to find another job that comes with a dormitory," Kawazoe said. "Once you get trapped in the cycle, it's very difficult to get out."

The job-with-a-room package allows job agencies to supply workers who can start the job right away, without wasting time finding a place to live, Kawazoe said. "It's a scheme to attract the poor to take the low-paying, hard labor and keep them in the system."

Japan's unemployment rate jumped in December to 4.4 percent, up 0.5 points from a month earlier. That means 2.7 million people are out of jobs, up 390,000 from the previous year. The number of people on government welfare has risen by more than 46,000 since last year. In Tokyo and major cities across the country, welfare rolls rose 35 percent in January alone.

On the streets, the statistics are becoming a visible reality.

The government-run Hello Work job agencies are packed with young jobseekers, many carrying duffel or shopping bags with their belongings. They apply for a one-time 100,000 yen ($1,090) allowance and low-rent housing, which opposition lawmakers and advocacy groups say is far too little.

In a parliamentary debate last week, Economy Minister Kaoru Yosano urged companies to do more to protect their workers.

"Major companies have a social responsibility to sustain their work force," he said. "They are useless if they ignore that responsibility."

But Prime Minister Taro Aso — who has promised to create 1.6 million jobs over the next three years — said the government has put in place programs such as housing loans and subsidies to companies to maintain their work forces.

"We have provided support for those who have lost both jobs and homes, and we'll continue to take appropriate steps," he told a parliamentary session Monday.

Even so, the situation has gotten so bad that some Tokyo neighborhood offices have set up temporary showers for those who need to clean up before resuming their job search.

Over the New Year holidays, a tent village set up by a group of labor union members in Tokyo's Hibiya Park was almost instantly filled, prompting the Labor Ministry to open a nearby public gymnasium to accommodate the overflow. Hundreds came from out of town when word got around. The government later made available vacant public housing for 4,000 people in several locations in Tokyo through a relief package of financial aid and rent.

Companies say they are also working to respond. Toyota has announced it will slash its temporary workers by 1,700 through March — from 4,700 — by not extending their contracts. But it has promised to shift some to full-time positions or transfer them to subsidiaries or affiliates.

"We are doing the best we can," a Toyota spokesman said on condition of anonymity, because of the sensitivity of the topic.

From December, Toyota has also started allowing temporary workers to stay at company-run dormitories for up to a month without charge.

Before that, a temp worker had only three days to pack up and leave.

Guardian: Irish Government Faces Growing Fears of National Debt Default

Fears are growing that Ireland could default on its national debt after the

cost to insure against possible losses on loans to the country rose to

record highs at the end of last week. Credit ratings agency Moody's

recently followed rival Standard & Poor's in warning it might downgrade

Irish debt, amid fears that one of Europe's former success stories is falling

into a deepening recession. The cost to hedge against losses on Irish debt

tripled last week to a record 355 basis points - meaning t for every £100 of

debt, investors have to pay £3.55 to insure against default, according to

data firm CMA Datavision. It was about 262 basis points at the end of

January. Moody's has warned there is a more than fifty percent chance

Ireland will lose its triple A rating within 12 to 18 months . . .

Hurting on the High Street

Store closures, layoffs, and bankruptcies among British retailers underscore the seriousness of the economic downturn.

If 2008 was the year financial services melted down in Britain, 2009 is shaping up as retail's moment to implode. The once-booming retail sector -- known in Britain as the High Street -- is reeling as weak consumer confidence, tight credit, and rising unemployment throttle sales and profits.

The list of victims is eye-popping. Upscale clothing and food seller Marks & Spencer said Jan. 8 that its fourth-quarter sales fell 7.1 percent, and announced plans to close 27 outlets and lay off 1,230 workers. Woolworths, which failed to find a white knight last year as it wobbled toward insolvency, closed the last of its 807 British outlets on Jan. 6, putting 27,000 employees out of work. And music emporium Zavvi, originally owned by Richard Branson, has called in the administrators and closed 22 of its 114 outlets as management struggles to sell the business.

Retail's Drag on Broader Economy

All told, says insolvency and restructuring consultancy Begbies Traynor, nearly 2,000 retailers already are in bankruptcy proceedings in Britain. The carnage is likely to get worse. By yearend, predicts credit researcher Experian, some 135,000 storefronts -- one in seven across Britain -- may be vacant. And up to 135,000 retail workers could lose their jobs by the end of 2009, says the London-based Center for Economics & Business Research. "There definitely are tough times ahead," says Jonathan De Mello, director of Experian's retail consultancy.

The implications for the broader economy are worrisome. Consumer spending accounts for 65 percent of British gross domestic product, and retail is the third-largest source of employment behind business services and health care. A High Street slowdown thus translates quickly into sharply lower economic performance, declining tax revenues, and higher spending on jobless benefits. Economists figure Britain's GDP contracted 1.2 percent in the fourth quarter of 2008, after falling 0.6 percent in the previous quarter. Brokerage Morgan Stanley now predicts Britain's overall GDP will shrink 1.1 percent in 2009.

Even before the most recent spurt of retail layoffs, Britain's unemployment rate already had jumped almost one percentage point annually, to 6 percent, as of October, according to the Office for National Statistics. The last time joblessness was that high was in the first half of 1999. Now, with retailing expected to remain in the doldrums until 2010 at the earliest, Morgan Stanley figures unemployment could hit 7.4 percent this year. Other, more pessimistic estimates range up to 9 percent.

Government Intervention

So far, government efforts to help the retail sector haven't made much difference. To spur spending, the government trimmed Britain's value-added tax (VAT) before Christmas as part of an overall stimulus package. Most analysts say the modest cut was too little, too late. Likewise, the Jan. 8 decision by the Bank of England to chop interest rates to a record low of 1.5 percent may not do much to ease credit or kick-start consumer spending. Prime Minister Gordon Brown is now rumored to be mulling a new round of tax cuts to goose the economy.

Until stimulus sets in, retailers are left scrambling to save themselves. Over the Christmas holidays, some offered discounts of up to 90 percent to woo shoppers. That brought short-term relief for a few: Upmarket department store Selfridges, for instance, recorded the most profitable hour in its 100-year history on Dec. 26 as customers snatched up luxury brands like Louis Vuitton and Burberry for knocked-down prices.

More Carnage to Come

But slashing prices cuts both ways. "All the discounting has done is squeezed margins," says Tarlok Teji, head of British retail at consultancy Deloitte. He reckons that sales promotions will help keep like-for-like sales broadly flat over the first half of this year, but cautions that discounting will hit profits. Margins will likely fall 30 to 40 percent in 2009, and demand for big-budget items such as flat-screen televisions and home furnishings will remain weak even despite price cuts.

"More retailers will enter administration in February and March," Teji says. "Companies will have to batten down the hatches until the economy starts to recover."

More than 3 million will be out of work next year, CBI warns

Britain faces a toxic combination of a deep and prolonged recession, deflation and soaring unemployment this year and next, the CBI warns today.

It says that the country's economic output will fall by 3.3 per cent this year - the sharpest annual contraction since the Second World War - and will all but stagnate in 2010. The recession will force companies to axe hundreds of thousands more jobs and unemployment will top three million next year.

The CBI Director-General attacked the Government for failing to head off the worst of the downturn. Richard Lambert criticised the attempt to stimulate consumer spending by cutting VAT from 17.5 per cent to 15 per cent. He said: “Was a VAT cut the best way to spend £12billion in the face of the onset of the most severe recession in decades? No.”

Mr Lambert said that the Government needed to draw up a timetable to outline when its multibillion-pound package of measures, announced last month, would come into force. “Business needs the Government to hurry up,” he added.

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• CBI calls for easier credit as job cuts grow

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The CBI said that consumer spending would plummet by 2.7 per cent this year, reversing the 1.7 per cent rise last year, as workers, worried about falling house prices and deteriorating employment prospects, conserved their cash.

Businesses grappling with the slump in demand and difficulties in securing funding from banks were taking drastic action to cut costs, the CBI said. As a result, unemployment was likely to climb by more than a million to peak at 3.04million between April and June next year - the highest since 1986. The CBI said that dole queues would nearly double to 2.36million by the end of 2010.

Unemployment levels reached nearly two million between October and December, official figures show. The sharp deterioration in the global economy will compound Britain's problems because businesses cannot rely on trade with other countries.

The CBI said that GDP would drop by between 1 and 1.5 per cent in the first three months of this year and fall by a further 0.75 per cent in the next quarter. Although the CBI said that the pace of decline would ease later this year, it predicted there would be no quarterly growth until April next year. Even then, the recovery will be so shallow that GDP will stagnate at 0 per cent on an annual basis.

Despite the dismal figures, the CBI said that the peak-to-trough drop in GDP would still be more modest than that of the recession of the 1980s.

The CBI's outlook is even more gloomy than that of the International Monetary Fund (IMF), which said last month that Britain would be harder hit than any other advanced nation, shrinking by 2.8 per cent this year.

The Government estimates that GDP will drop by between 0.75 per cent and 1.25 per cent this year.

A separate survey out today shows that 39 per cent of British manufacturers are finding it more difficult to get finance now than they did three months ago. The Markit Credit Conditions survey shows that one in six factories said that this holds them back.

In a further blow for savers, the CBI said it expected interest rates to remain low as the Bank of England battled falling inflation. But it said that consumer prices would continue to drop, pushing the country into deflation for several months this year and keeping inflation at well below the Bank of England's 2 per cent target until 2011. Pay or pensions linked to the alternative RPI measure of inflation could suffer from a dip in the rate as low as minus 4.4 per cent this year, the CBI said.

Government finances will also be hit hard as tax revenue falls. The CBI expects that the Treasury's tax receipts will have slid by £60billion by 2010, while its borrowing will nearly double this year to £148 billion and rise to nearly £170 billion next year.

Only one part of the Government's stimulus package, including a scheme to guarantee banks' toxic loans to help them to lend, has started. The Bank of England began pumping up to £50billion into British companies in return for short-term IOUs on Friday.

Britain’s bankers plumb new depths

Jon Moulton, the private equity chief, warned a City lunch this week that he feared serious civil unrest. There was, he said, a 25 per cent chance of one of the 15 member countries of the eurozone pulling out of the currency club. That, he said, would be a catastrophic shock leading to a “far greater financial crisis” than the current one.

The mind boggles at a financial crisis far worse than the current one. Is such a thing possible? Even with this one, it may already be too late to prevent social unrest, especially in Britain, which is tipped to be one of the worst-hit countries economically.

The spectacle of bankers continuing to award themselves bonuses while taking taxpayer support is feeding an extraordinary public rage and a fierce sense of injustice. With 40,000 people losing their jobs each month, it is a recipe for trouble, come the traditional rioting months of the summer.

It won’t be bankers being lynched, of course, but small shopkeepers in inner-city areas having their windows smashed and their stock looted. The only surprise is there haven’t already been antibanker demonstrations in Threadneedle Street – secretly cheered on by 99 per cent of Middle England.

The seething sense of unfairness is almost palpable. The view that a small elite not only caused the crisis, but continues to profit at the expense of everyone else, is near universal. Gordon Brown’s promise of no rewards for failure in state-supported banks is looking ever more threadbare. We now know that Peter Cummings, the highest-paid person on the HBOS board, headed a division responsible for £7 billion of losses last year, yet he was still given a reported £660,000 payoff when he left in early January clutching his £6 million pension pot.

The suggestion by Lord Myners, the City minister, that some bankers simply have no sense of the broader society around them is getting harder to refute. To be preparing to pay out billions of pounds in discretionary bonuses over the next few weeks suggests an ignorance of the public mood and a single-mindedness bordering on sociopathic.

All this may be a bit of a side show for Sir Victor Blank and Eric Daniels, chairman and chief executive, respectively, as they try to stop the water slopping over the gunwales of the combined Lloyds/HBOS. Yesterday’s bombshell was grave for the bank, dispiriting for taxpayers and damaging to the chief executive. The timing is acutely awkward, coming just 48 hours after he appeared before the Commons Treasury Select Committee. MPs might have pressed him rather harder if they had known what was just around the corner.

The £10 billion loss at HBOS is humiliating enough, but the admission that the losses are £1.6 billion worse than when shareholders were asked to approve the deal in November is worse. Lloyds got HBOS to sweeten the terms twice. With hindsight it still wasn’t enough. Mr Daniels admitted to Parliament this week that he was not able to conduct as much due diligence as in a normal deal. His shareholders and UK taxpayers are now paying a heavy price for that failure.

The 32 per cent slump in the Lloyds share price yesterday speaks volumes about the market’s fears. Although Lloyds insists its balance sheet is still strong, the need for additional capital will be back on the agenda. If HBOS’s corporate loans could have soured by £1.6 billion in the space of just a month, its surplus capital cushion could quickly be wiped out. That could lead to full nationalisation eventually.

Lloyds says that one of the reasons for the losses was the more conservative methodology it uses for gauging potential loan losses. That comes close to suggesting the old HBOS board was somewhat less than conservative itself. If the reputation of the old guard at HBOS, including Gordon Brown’s former favourite Sir James Crosby, is capable of sinking any lower in the public estimation, it will now be doing so.

IMF chief Dominique Strauss-Kahn warns second wave of countries will require bail-out

A "second wave" of countries will fall victim to the economic crisis and face being bailed out by the International Monetary Fund, its chief warned at the G7 summit in Rome.

Edmund Conway in Rome

Dominique Strauss-Kahn's warning comes amid growing concern that at some point in the next year a major economy could have to seek support from the Fund. Mr Strauss-Kahn, who was yesterday attending the Group of Seven leading finance ministers' meeting in Rome, said: "I expect a second wave of countries to come knocking."

The IMF managing director also said the rich world was now in the midst of a "deep recession". It came as the G7 pledged to avoid slipping into protectionism and repeating the same political and economic mistakes as were made in the 1930s. Ministers also pledged to do more to support their banking systems, sparking speculation that a number of countries, including Germany and France, will unveil new bail-outs and possibly set up "bad banks" as they scramble to fight the crisis.

But with some countries' economies effectively dwarfed by the size of their banking sector and its financial liabilities, there are fears they could fall victim to balance of payments and currency crises, much as Iceland did before receiving emergency assistance from the IMF last year.

Some have speculated that the UK may have to seek IMF support if capital markets become frightened of the size of its foreign financial liabilities, which increasingly appear to have become supported by the state. But there are a swathe of Eastern European countries which appear particularly vulnerable and may need IMF support.

With the Fund's warchest expected to run dry later this year, the Japanese confirmed in Rome that they would supply an extra $200bn of capital to the Washington-based institution.

Mr Strauss-Kahn, who warned recently that his resources could run dry within six months, said: "This is the largest loan ever made in the history of humanity.

"The biggest concrete result of this summit is the loan by the Japanese... now I will continue with the objective of doubling the Fund's resources."

He added that it was now essential for countries to support their banking sectors.

BMW to cut 850 jobs at Oxford Mini plant

BMW, the German vehicle maker, today announced plans to lay off 850 weekend agency staff at its Mini factory in Cowley, near Oxford, as the slowdown in demand for cars worsens.

Agency workers leaving Cowley this morning expressed their anger at being given just one hour’s notice of losing their job. The company made the announcements just as the staff affected were finishing their shift.

"It’s a disgrace. I feel as though I’ve been used. We should have been given one month’s notice, not one hour," said one worker.

John Cunningham, who has worked at the factory for more than two years, said he felt betrayed. "We’ve been given a week’s pay for an enforced week off, which I suppose is a week’s notice. I don’t know what’s going to happen to me and my family. It’s very scary."

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Union sources said workers booed and threw apples and oranges at managers after being told the news.

"Sacking an entire shift like this, and targeting agency workers who have no rights to redundancy pay, is blatant opportunism on BMW’s part and nothing short of scandalous," said Tony Woodley, the joint leader of the Unite union.

"BMW’s parent company couldn’t attempt this in Germany because it would be illegal to do so. It is a disgrace, therefore, that workers in this country can be so casually thrown to the dole."

The number of production days at the factory will be reduced from seven to five once the job cuts come into force on March 2, and permanent staff deployed on weekend shifts will be redeployed to the week.

BMW also announced today that it will close down production at the plant for one week in response to plunging demand for new cars.

The company said in a statement: "While Mini has been weathering the economic downturn, it is not immune from the challenges of the current situation.

"Against this backdrop the company felt that a review of its shift patterns was necessary. This decision has not been taken lightly. The plant’s union representatives have, of course, been involved in the discussions."

A spokeswoman said that there were "no current plans" to make permanent staff redundant. The plant employs 940 agency staff alongside 4,300 permanent workers.

BMW's factories at Swindon and Hams Hall near Birmingham, which supply parts to Cowley, will not be affected by the cuts, the company said.

The job cuts at BMW follow 220 jobs cut last week by Bentley, the luxury carmaker, around 10 per cent of its workforce. Ford axed 850 jobs earlier this month. Last month Nissan cut 1,200 jobs in Britain and Jaguar Land Rover cut 450.

Toyota and Vauxhall, which is owned by General Motors, are also considering reducing their British workforces and Honda enforced a four-month lay-off at its Swindon plant.

Derek Simpson, joint leader of Unite, said the job losses showed how deeply the recession was now affecting the motor industry, given that BMW was a "hugely profitable" firm and Cowley was an efficient factory.

He said: "There is a huge onus on the Government to take drastic action to support the motor industry and to encourage people to buy cars. The banks will also have to start making credit available again or this is going to lead to disaster."

Malcolm Harbour, a Conservative MEP for the West Midlands and a former director of the Rover car company, said: "The British Government is not tackling the underlying cause of manufacturers’ woes: the lack of demand for new vehicles.

"Getting loans to car and commercial vehicle customers now is essential, but all the Government has done so far is set up a committee. The Government should be seeking to make the vehicles already on the forecourts more attractive to hesitant consumers."

In January, Lord Mandelson, the Business Secretary, outlined a £2.3 billion aid plan for the motor industry that will guarantee loans to car and components companies.

Gordon Brown’s spokesman said that the job losses at Cowley were very disappointing news. "All I can say really is the Government is doing and will do all that we can to help those affected.”

The Mini celebrates its 50th anniversary in August of this year. Cowley was one of the factories that produced the original 848cc model designed by Sir Alec Issigonis.

After production of the old design finally ceased in 2000 it was replaced by a new, more powerful version with a 1.4 litre engine which has also proved hugely successful, especially abroad, with 80 per cent of the factory’s output sold for export. But worldwide sales were down by 35 per cent last month and by a similar amount in the UK, in line with a slump which hit all car manufacturers.

Cowley started building the new Mini in 2001 and the factory has a capacity to produce 260,000 models a year.

Failure to save East Europe will lead to worldwide meltdown

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.

By Ambrose Evans-Pritchard

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.

Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.

"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

• More on Ambrose Evans-Pritchard

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