Canadian Dollar Volatility could Spur Intervention

Since the Forex Blog last covered the Canadian Dollar - on July 29 - the Canadian Dollar appreciated another 2% against the US Dollar, reinforcing the perception that the currency is both too volatile and appreciating too rapidly. This concern is harbored by the Central Bank officials and policymakers, which fear that the rising currency represents the proverbial wrench in the Canadian economic recovery.

From a volatility standpoint, it looks like their concerns are justified. “For years it was traditional for the cost of a one-week option on the Canadian dollar to be 20 to 25 basis points…The cost is now commonly in the 50-point to 75-point range and in the last six months it has been as high as 100 points.” On a relative basis, the currency is also more volatile than the commodities with which it is commonly associated. In the last two months alone, it recorded both a 7.4% plunge and a 10% rise. To be fair, short-term volatility is lower than it was one year ago, but this isn’t going to placate those who insist that it’s still too high.

Looking at the charge that the Canadian Dollar has risen too rapidly, this too appears valid. One could argue that the thundering 20%+ rise since March was simply a retracement (in FX terminology), necessary to offset the even bigger decline that took place following the onset of the credit crisis. This argument, however, ignores the notion that the Loonie was probably overvalued before it fell. At that time, commodity prices were sky-high, and expectations were that they would remain high, if not soar even higher. Since then, they have fallen precipitously, to less than half of the record highs recorded during the peak of the bubble.

Speaking of commodity prices, “At the time of its [the Bank of Canada's] last statement, oil prices were about $75 a barrel, but now they are in the $60-to-$65 range. That suggests the currency’s appreciation has outpaced the demand for its commodity exports.” In other words, the Loonie’s recent rise can be attributed more to speculation, than to a change in fundamentals. “The rise in the dollar reflects ‘hot money seeking alternatives to the greenback,’ not the underlying economic strength,” agrees one analyst.

The Bank of Canada, naturally, views this as a problem, and “Bank of Canada Governor Mark Carney says he is prepared to intervene in currency markets if the Canadian dollar’s rise persists and threatens to smother the ‘nascent’ recovery. If not for the uncertainty surrounding the Loonie, in fact, BOC officials are quite confident that Canada’s economy would grow consistently in the near-term.

The Central Bank’s options are limited, since its main policy rate is already close to zero. This can still be tweaked, explains one analyst. “If you thought you were going to tighten in the first half of 2010 and the currency shoots to parity at some point, maybe that means you don’t get there until the end of 2010.” The bank’s only other monetary policy option is qualitative easing (i.e. printing money), which at this point in the cycle, seems unlikely. “Intervening in currency markets to quell the Canadian dollar’s strength is also an unattractive option for the bank, which views intervention without accompanying monetary policy action as ineffective. That leaves commenting on the currency as the only really agreeable option for the bank.” However, given that the Loonie has continued to appreciate in spite of Carney’s warnings, it seems traders have disregarded these threats as mere idle talk. To parity we go!

Korean Won Rebounds Strongly

Last year the Korean Won was one of the world’s weakest currencies- and that’s saying a lot when you you consider how many currencies tanked at the onset of the credit crisis. The Won lost nearly half of its value, driven by concerns that Korean creditors would be unable to pay their foreign debts. Since March, however, the currency has rebounded by an impressive 25%, as the government took action: “To avert a crisis, South Korea forged a dollar-swap agreement with the U.S., pumped money into the banking system, boosted fiscal spending, set up funds to replenish bank capital and cut rates.”

In the last quarter, South Korea’s economy grew 2.3%, the fastest pace in nearly six years, marking a significant turnaround from the 5% contraction recorded in the fourth quarter of 2008. Still, “South Korea’s economy will shrink 1.8 percent this year, the IMF said yesterday, revising a July prediction for a 3 percent contraction.” Exports, which account for 50% of GDP, have also recovered, and are now rising by nearly 20% on an annualized basis. Retail sales are climbing, and bank lending to households has risen for six straight months. Finally, “Stimulus measures at home and abroad are fueling South Korea’s revival. The government has pledged more than 67 trillion won ($53 billion) in extra spending, helping consumer confidence climb to the highest in almost two years in June.”

However, an inflow of speculative hot money - which has buttressed a rally in Korean stocks - threatens to undo the recovery. “With an anticipated increase in risk appetite, foreign investors may invest further in emerging-market equities, leading to more dollar supply,” said one analyst. The first half 2009 current account surplus set a record, with forecasts for the second half not far behind. Korea’s foreign exchange reserves, meanwhile, have recovered, and could touch $300 Billion within the next year.

Of course, the Central bank is not simply standing by idly. It has already lowered its benchmark rate to a record low 2%, and at yesterday’s monthly monetary policy meeting, it firmly refused to consider raising it for at least six months. Commented one analyst, “There is no urgent need to raise rates. The most likely course of action is that the Bank of Korea will wait until the economy fully recovers, and in particular, they will wait until the unemployment rate stops increasing.” Still, given both that interest rates remain above levels in the west (see chart below) and that the Korean Won is considered undervalued, funds could continue to flow in.

The Central Bank’s other tool is direct intervention in the forex markets, in order to depress the strengthening Won. But this, it is loathe to do: ” ‘It would be better to have a larger foreign exchange reserve in order to better deal with economic crises, but attempts to buy dollars to artificially boost the reserve volume could lead to accusations of currency manipulation, while excess won in the markets could stoke inflation,’ a high-ranking ministry official said.” Still, investors are growing increasingly nervous about this possibility:”A state-run bank that usually doesn’t participate much in the market bought some dollars at the day’s low, prompting speculation about a possible intervention, a local bank trader said.” Sure enough, after hitting the psychologically important level of 1,220 at the end of July, the Won dived. It has yet to bounce back.

Posted by Adam Kritzer | in Central Banks, Economic Indicators, Emerging Currencies | 1 Comment »

Fed to Hold Rates for the Near Term

Aug. 12th 2009

Over the last week, the markets have been abuzz with chatter about how the US recession will soon come to and end, followed by a quick and healthy recovery. According to investor logic, the result would be a rise in inflation and interest rates. This optimism was partially deflated today, as the Federal Reserve bank conducted its annual monetary policy meeting.

Excluding a brief uptick in June (see chart below courtesy of the Cleveland Fed), investors had long come to expect that the Fed would leave its benchmark Federal Funds rate unchanged, at 0-.25%. At the same time, there was a strong belief that the Fed would begin to hike rates at the end of 2009, and comment accordingly in the press release that accompanied its monetary policy decision. Barron’s predicted yesterday: “The statement will acknowledge some improvement in the U.S. economy, though it will imply that this nascent growth reflected in recent gross domestic product reports is fragile and will be monitored closely. This will leave open the specter that interest rates could be increased at some point in the future.”

Sure enough, the Fed left rates unchanged, and its press release conveyed a restrained sense of hope that the worst of the recession is now behind us: “Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks…Although economic activity is likely to remain weak for a time, the Committee continues to anticipate…a gradual resumption of sustainable economic growth in a context of price stability.” The Fed also announced that its Treasury buying activities would soon come to an end, although it may continue to buy mortgage securities as part of its quantitative easing program.

Perhaps the tone of the press release was slightly less positive than investors would have liked, since interest rate futures dived immediately on the news. Especially compared to last week, investors are now assuming that it will be a while before the Fed actually hike rates: “At Wednesday’s settlement price of 99.655, the February fed-funds futures contract priced in about a 38% chance for a 0.5% funds rate after the late-January meeting. That’s down sharply from about a 60% chance at Tuesday’s settlement, about a 76% chance at Monday’s settlement, and about a 96% chance at last Friday’s settlement.” Analysis of options trading activity reveals that the large brokerage houses believe similarly.

As for the Dollar, it now seems possible that last week’s rally was premature. If the Fed isn’t prepared to hike rates anytime soon, then the current interest rate differentials between the US and the rest of the world will remain intact. More importantly, the Dollar will remain a viable funding currency for carry trades, and the shift of funds into higher-yielding alternatives will probably continue for the time being.

Posted by Adam Kritzer | in Central Banks, US Dollar | No Comments »

British Pound due for Correction, Thanks to BOE

Aug. 11th 2009

The British Pound’s rise since the beginning of March has been nothing short of spectacular: “Improving economic data have helped the pound advance 14 percent against the dollar this year and 12 percent against the euro.” Due primarily to a recovery in risk appetite and the concomitant belief that the Pound had been oversold following the onset of the credit crisis, investors began pouring hot money back into the UK. As recently as two weeks ago, one analyst intoned that, “Longer term, we are in part of an uptrend for the pound. I don’t think this is over.”

Since then, however, a series of negative developments have cast doubt on such optimism. The first was the release of economic data, which indicated an unexpected widening in Britain’s trade deficit. While exports rose, imports rose even faster, causing analysts to wonder whether it would be realistic to expect the British economic recovery would be led by exports: “We remain skeptical that the U.K. is about to become an export-driven economy any time soon. A return to sustained growth continues to look unlikely in the near term,” said one economist.

The second development was the decision by the Bank of England to expand its quantitative easing program: “The central bank spent 125 billion pounds since March as part of the asset-purchase program and had permission to use as much as 150 billion pounds, about 10 percent of Britain’s gross domestic product. Chancellor of the Exchequer Alistair Darling has now authorized an extra 25 billion pounds.” This came as a huge shock to investors, which had collectively assumed that the program had already been concluded.

Upon closer analysis, it appears that the rise of the Pound and the expanding trade deficit might have contributed to the BOE’s decision: “According to the Bank’s rule of thumb, this [the Pound's rise] is equivalent to interest rate increases of 1.5 percentage points.” However, interest rates are already close to zero. The BOE has already conveyed its intention to maintain an easy monetary policy for the near-term (March 2010 interest rate futures reflect an expectation for a 75 basis point rate hike); otherwise, there is nothing else it could do on the interest rate front. “Unless the UK is ready to deflate its production costs heavily, it can only achieve required competitiveness by reducing the value of sterling…The BoE knows this and its decision to increase its quantitative easing efforts may well have to be seen in the context of summer sterling strength.”

The final factor has been the Dollar’s sudden reversal. Previously, the Pound had been helped as much by UK optimism as by Dollar pessimism. This changed last week, when positive US economic data triggered expectations of a near-term economic recovery and consequent Fed rate hikes. In short, the Pound must now rest on its own two feet, and can no longer count on Dollar pessimism for a boost: “The current gloomy sentiment, which has chipped some 3% off sterling’s value against the dollar in the past four trading days, represents a sharp turnaround.”

The prognosis for UK economic recovery should receive some clarity tomorrow, when the Bank of England releases a report on inflation and GDP. At this point, we will have a better idea as to what to expect from the Pound going forward.

Posted by Adam Kritzer | in British Pound, Central Banks, Economic Indicators | 1 Comment »

Dollar Reverses Course

Aug. 10th 2009

A recent WSJ headline reads, Good Economic News Threatens the Dollar, and summarizes the Dollar’s trading pattern as follows: “Demand for the U.S. currency continues to erode amid a tide of more encouraging economic data and corporate earnings that have fed a thirst for riskier assets such as stocks, commodities, and growth-sensitive currencies.”

Less than two weeks after that article was published, the Dollar rose by a healthy 2% against the Euro in only one trading session, as US labor market conditions improved slightly: “The U.S. unemployment rate fell in July for the first time in 15 months as employers cut far fewer jobs than expected, giving the clearest indication yet that the economy was turning around from a deep recession.” While technically another 250,000 jobs were lost and economists forecast that the employment rate will rise past 10% before peaking, investor sentiment is still at a high.

Unsurprisingly, the news triggered a stock market rally. More noteworthy, though, is that the Dollar also rallied. Since the beginning of 2009 and especially since the beginning of March, there has been a clear negative correlation between stocks and the Dollar, as a result of risk appetite. “At one point this year, the correlation between the euro-dollar rate and the S&P 500 index hit 50 percent, according to BNP Paribas calculations. That is, the euro and S&P 500 rose or fell in tandem half the time.”

This latest development suggests that this relationship has broken down, at least temporarily. Argues one analyst, “The dollar’s going to turn. The U.S. economy is more able to withstand shocks than other economies, especially Europe.” Perhaps going forward, the markets will be driven less by risk appetite and more by comparative growth trajectories and economic fundamentals.

Not so fast, though. Much of the Dollar’s recent slide has been a product carry trading patterns, as investors borrow in low-yielding Dollars and invest in higher-yielding alternatives. An improvement in economic conditions could compel the Fed to hike rates, which would seriously dent the attractiveness of the carry trade. “Indeed, long-dated U.S. interest rates have been quietly moving in the dollar’s favor while U.S. interest rate futures on Friday started pricing in a federal funds rate of 1.25 percent by the mid-2010, the highest since June.” Based on this paradigm, then, it’s still risk appetite that’s driving the Dollar, whether up or down.

Brazil Real Edging Up, Despite Efforts of Central Bank

The Brazilian Real has been one of the world’s best performers in 2009, having risen by a solid 25%. The currency is now close to pre-credit crisis levels, and is even closing in on an 11-year high. When you consider that only six months ago, most analysts were painting doomsday scenarios and predicting currency devaluations and bond defaults for the entire continent, this is pretty incredible!

The currency’s rise has been supported by a variety of factors, few of which are grounded in fundamentals. To begin with, while Brazil has staved off depression, it’s not as if the economy is firmly back on solid footing. The economy contracted by 5% in the first quarter, and forecasts for 2009 GDP growth still vary widely, from a slight contraction to modest expansion. Meanwhile, the economy is importing more than it exports, despite the rebound in commodity prices. “The central bank said the net trade result was based on $9.89 billion in receipts for exports and $12.72 billion in import payments overseas.”

“Investment inflows, meanwhile, totaled $33.88 billion, while outflows totaled $29.78 billion.” The disparity between investment and trade data goes a long way towards explaining the Real’s rise. Thanks to a recovery in risk appetite, foreigners have poured cash into Brazil at an even faster rate than they once removed it. As a result, Brazil’s “Bovespa stock index has risen 51 percent this year, the world’s 12th-best performer among 89 measures tracked by Bloomberg, as foreign investors moved 13.7 billion reais into the market through July, the most since the exchange began tracking data in 1993. Brazilian local bonds returned 37 percent in dollar terms after falling 13.8 percent in 2008.” The country’s foreign exchange reserves also just set a new record, surging past the $200 Billion mark.

Brazilian interest rates tell the rest of the story. Despite a gradual decline over the last decade (made possible by a moderation in inflation), Brazil’s benchmark SELIC rate stands at a healthy 8.65%, which is the highest in South America, after Argentina. Unlike Argentina - and the dozen or so other economies around the world that boast equally lofty interest rates - Brazil is perceived as relatively safe place to invest. Given interest rate levels in the western world, combined with the expectation that Brazil’s currency will appreciate further, investors are more than happy to accept a little bit of risk in order to earn an out-sized return.

Just like the Bank of Korea, Bank of England (both profiled by the Forex Blog in the last week), the Bank of Brazil is not happy with the resilience in its currency. “Brazil’s central bank said on Wednesday it bought $779 million on the spot foreign exchange market this month to Aug. 7 as dollar inflows to the country surged because of growing demand for local stocks and bonds.” This brings the total intervention expenditure to $9 Billion.

Unfortunately for the Bank of Brazil, the forces in the forex market are way beyond its control. “Dollar inflows to the country totaled $2.26 billion this month to Aug. 7, compared with inflows of $1.27 billion in all of July.” Analysts are also unconvinced, and are racing to revise their Real forecasts upward. One economist, caught completely off guard, just “changed his year-end real forecast to 1.8 from 2.5 at the start of the year. ‘The resilience of the Brazilian economy to weather this crisis has been spectacular,’ ” he explained.

Virtual Currency Exchange Website MyMMOShop.com Sells for 17 Trillion Star Wars Credits

UPDATE: The sale of MYMMOshop.com to MY MMO Inc. has recently been called into question. We are investigating this.

The web site MyMMOshop.com has been sold to My MMO Inc. for a whopping $10 million dollars. This is an extraordinary amount for a website, and in a recession no less! We decided to take a look at the value of this site is in VIRTUAL terms to see how much the site would be worth in the world’s currencies that they trade (see spreadsheet below).

My MMO Shop sells virtual currency, in markets with high demand. It is very similar to the currency exchange market in terms of the way they operate, except the the economy is a ficticious one rather than the real world economy.

The site sells virtual currencies from some of the biggest online multiplayer games in the world, and is considered to be in the top 3 “real money trading (RMT)” websites in the world. These Massively Multiplayer Online Role Playing Games (MMORPGs) have real world virtual economies behind them with.

The company has succceeded with two important tenants: 1. strong anti-fraud initiatives including requiring voice authorization. 2. Excellent 24/7 customer service. These important points have helped to make the site a leader in the space. There economies are substantial, with each currencies essentially ‘trading’ against US dollars or Euros.

Real money trading has not been looked on kindly by MMORPG communities and developers. The purchasing of virtual currency was widely regarded as an unfair advantage to those who had spent a lot of time to develop accounts. Capitalism has prevailed though for good or ill though, the trend has caught on, with the GDP of some games eclipsing those of small countries. Serious gamers now spend thosands of dollars per year to equip their gamers in the now $2 BILLION dollar industry (that’s a lot of WOW gold). The creation of Sony’s own RMT site - Station Cash - has helped to bring legitimacy to the industry that is proving to be recession proof.

As big fans of currency trading ourselves, we decided to take a bit deeper look at the conversion rates So we decided to run some quick calculations to see just how much MyMMOSHop would cost in the games they are trading currencies for. Here’s what we came up with:

Our two favorites - the site would cost:

$391,696,043,869,957.00
Eve ISK’s

and

$17,110,981,828,137.30
Star Wars Credits

**Pricing is based on information from MyMMOShop pricing for highest volume of currency available.

Oil, Other Factors Shift the Playing Board

There has been an incredible movement in the forex market this week, and it is the second round of changes that will re-shape the forex world for the duration of the global slowdown. Unlike the previous week, major developments were not mainly the product of the financial panic. Instead, traders shifted their attention to worsening economic fundamentals across the globe.

The euro fell against a wide variety of currencies, including the pound, US dollar and a basket of Eastern European currencies. Hungary’s forint was the big winner, beating back the flight to safety and concerns that the global economic slowdown would be particularly harsh on the Hungarian economy. Today the forint posted a massive 3.8% gain. Most Eastern European currencies edged up less than 1%, with the Czech korona being the only major loser, falling .7% against the euro.

There is little doubt, though, that the region’s currencies won’t be able to hold up for long, at least against the euro. Access to credit will be particularly scant for the region’s businesses, and several bond agencies announced today that they are reviewing the region’s governments’ debt with an eye towards possible downgrades.

A similar fate fell on South Korea’s won on Thursday, as S&P warned that many of the nation’s banks may be unable to refinance their debt.

New Zealand and Australia’s currencies also suffered from concerns about how vulnerable their economies are to a global recession. Today’s events reinforce a suggestion made earlier on this page: After the Australian currency bottoms out in the near term, look to place some long-term money in the Aussie, as the price of gold starts to make the currency look very attractive again.

The Canadian and Russian currencies, meanwhile, took a tough beating this week as oil tumbled to below $70 a barrel for the first time in recent history.

Norway’s currency took a similar hit on the forex market, losing over 3% of its value on Thursday against the dollar.

South America’s economies fared better on Thursday, as Mexico and Brazil’s central banks stepped in and purchased each over two billion and one billion dollars worth of their currencies, respectively.

That being said, earnings season may be tough for the real, as currency fluctuations and poor forex decisions throw off domestic firms’ third quarter profits.

In all, much of the shifted trader attention can be attributed to chairman Bernanke’s purposefully dour assessment of economic fundamentals. This re-orientation of market focus can be seen as the fed chairman’s way of smoothing out the inevitable fall in US markets resultant from the coming horrid macroeconomic news.

Be wary of the commodity currencies, and watch for a few short spikes in the euro over the course of a longer decline versus the dollar.

The economic fundamental news will continue to dominate until the relief package begins to be actually implemented.

How The Fall and Bailout of AIG Effects Everyone

How AIG Fell

American International Group, AIG, reported the largest quarterly loss in U.S. economic history on Monday. The $61.7 billion three month loss is mind boggling and leaves U.S. taxpayers shaking their collective heads and seemingly holding the bag.

Global markets reacted similarly. The DOW fell 300 points as the insurance giant’s 12 month loss stood at more than $100 billion. During this time, AIG has lost 99% of its market value.

Once again, taxpayers have come to the rescue as government officials revealed another infusion of cash totaling $30 billion and raising taxpayer investment to a startling $173 billion. The terms of the loan are dramatically changed from previous infusions and signal the severity of the deepening crises.

The new deal includes equity, lower interest rates and more credit clearly aimed at keeping AIG afloat. Even more importantly, the government has transitioned from “tough-love lender to a little more friendly equity investor,” say Terry Connelly, Dean of Business at Golden State University.

With taxpayers already heavily invested in troubled institutions like Citigroup, Bank of America and mortgage monsters Fannie Mae and Freddie Mac, the public has difficulty relating to the AIG dilemma.

The reality is that the failure of AIG would impact most persons who buy a home, purchase a vehicle, have a student loan, have insurance coverage or who are employees. American taxpayers may not realize it, but AIG is squarely in the middle of our economic profile.

How Bad is AIG?

The AIG statistics are overwhelming. The company has 74 million customers around the globe. 30 million of those clients are American based. AIG operates in more than 130 countries. Prior to the current market conditions, the company backed more than $298 billion in assets globally.

The company’s quarterly loss sent world markets into a spiraling crises. As the DOW lost 300 points, Asian markets toppled to new lows. Even a favorable A+ rating on the company’s four major Asian holding companies could not influence the lack of consumer confidence.

In fact, global investors correlate AIG’s demise to the breadth and depth of the recession. Many American taxpayers have begun to question the government’s strategy and handling of the bailout. As issues arise about AIG’s distribution of the proceeds from the initial bailout, President Obama’s stimulus package continues to receive criticism.

Billionaire Warren Buffett’s Berkshire Hathaway suffered its biggest-ever loss of 4.7% on Monday. Buffett echoed the popular theme that “the economy will be in shambles throughout 2009” and that AIG typifies the “reckless lending policies” that have led to the demise of world markets.

Realistically, President Obama arrived late to the bailout party. White House Press Secretary Robert Gibbs said on Monday, “we are focused on taking the steps necessary to restructure AIG that, in the long run, no longer pose the type of systemic threat that it poses right now.” The AIG problem existed long before the Obama administration took over, but the new president’s handling of AIG may very well become his benchmark for fiscal crisis management.

AIG Affects us All

Even as good news regarding gains in household income and increased consumer spending in January hit the markets, AIG dominated the scene. With more than half of the American population owning stocks and with markets reacting violently to AIG releases, every sector of the American economy, and indeed, the global economy, is affected by governmental actions to restructure the insurance monster.

Considering that since October of 2007 when the DOW hit 14,167, investors have lost 52% of their value and with a 25% fall since January 1st 2009, the bottom does not seem around the corner. Remarkably, the DOW has fallen from 8000 to below 7000 in just 14 trading sessions. On Monday, amidst the turmoil, crude oil dipped 10% and magnified the intensity of the product’s fall.

On Friday of this week, new labor department numbers will most likely reflect another 600,000 job losses. Unemployment has now reached more than 5 million Americans. Even as new stimulus jobs begin to kick in, production levels continue to shrink and layoffs outpace any growth.

Taxpayers and the government have so much invested that they cannot allow AIG to fail. And, the pit seems bottomless. Some economists project another $200 billion may be necessary to steady the wavering AIG flagship.

These figures leave taxpayers shaking their heads and wondering if the tail is wagging the dog. Accompanying Monday’s cash infusion, a joint statement from the U.S. Treasury and Federal Reserve saying that “given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high” did little to inspire confidence.

What’s Ahead for AIG?

Simply put, AIG is not a viable company. As such, the repercussions are far reaching and pose the biggest obstacle for the Obama recovery plan. The government now controls the company and CEO Edward Liddy’s representations that taxpayers will be reimbursed seem unfounded.

American International Group is a public burden that requires a systematic reduction in scale and definition of the size of future funding. The company then needs to be dismantled and broken into small corporations that can be profitable.

Although AIG is committed to pay down $38.9 billion by December 2009 by divesting itself of its two largest international life insurance divisions, there appear no takers in the wings. These companies are expected to yield a $26 billion return, but their values are declining by the day.

Additionally, AIG has provided the government with rights to the cash flow generated from thousands of life insurance policies. While the cash flow exceeds $8.5 billion, it seems a drop in the bucket compared to the giant’s exposure and risk. Even the U.S. Treasury describes AIG as a “systematically significant failing institution.”

The company is headed to a government reorganization and liquidation sale. The hope is that as the layers are peeled off, they can sustain market value. If AIG were to fail, Americans could expect a global chain reaction that would include a deeper recession and monumental unemployment.

As the government sets about returning the company to the private side, it is hoped that a broader sense of optimism will take place. Given the American propensity for entrepreneurial success, a rebound will occur and employment will rise as markets stabilize. To everyman, AIG is a burden, but its new look will most likely attest to the resurrection of the U.S. and world economy.

Obama’s 2010 Federal Budget Explained in Plain English

The US Federal Budget for 2010 was released today, February 26,2009. Overall, roughly half of spending goes to the US Department of Defense with the remaining money divided among 22 other departments. As one of a very small number of Americans who have read through the 140 page docket outlining the plan, I have analyzed and detailed it below. Overall, Departments like Agriculture show great detail while other departments like that of State use broad language and provide few clues into what programs will actually receive the billions. Unsurprisingly the National Intelligence Agency has no details about either total budget nor allocation.

2009 Federal Budget Breakdown

Overall, close to half of the federal budget goes to the Department of Defense. When the funds from the Recovery Act are added in, The Department of Education is allocated a vast amount of money to help improve public school and increase access to higher education. The Department of Transportation also see a great deal of money for programs that will improve air traffic control and create an efficient and green fast interstate rail system.

To better understand the allotment of funds, the following chart shows the distribution of capital in the 2010 Federal budget.

Department of Education - $46.7billion+$81.1billion from Recovery Act

Obama’s commitment to bettering the US educational system can be seen through the $81.1 billion he dedicates to education in the Recovery Act as well as the $46.7 billion in the 2010 federal budget. He wants to strengthen public schools, reward effective teaching and expand opportunities for higher education.

Department of Education Budget Highlights

Innovative Solutions

• Expand access to high quality early childhood education – no monetary value given
• Funds education research – no monetary value given
• Increase funding for charter schools – no monetary value given

College Access and Completion

• Access and Completion Incentive Fund, which supports state efforts that help low-income students finish college - $2.5 billion over 5 years
• Increase mximum Pell Awards - $5,500 as new maximum
• American Opportunity Tax Credit made permanent - $2500 per credit

Department of Defense - $663.7 billion+$7.4 billion from the Recovery Act

The Department of Defense receives the lion’s share of the Federal Budget to be used both internally and externally. $533.7 billion is requested for specific programs with another $50-100 billion earmarked should the Department of Defense need it. The budget will cover the draw down of US troops from Iraq, the aid of struggling states like Pakistan and the funding of programs that help to monitor cyber, biological and nuclear threats. Overall, a large amount of funds are not detailed

Major Budget Allocations for the Department of Defense

Military Operations

• Military Operations in Iraq and Afghanistan - $130 billion
• Money that currently has no allocation but is budgeted should the Department of Defense need it - $50 billion

Soldiers

• Pay for service members that will keep pace with or exceed private sector jobs – exact amount not provided
• Expansion of military retired pay and Veterans Disability Compensation to all retirees receiving disability retired pay – exact amount not provided
• Expansion on integrated mental health professionals with deployed unites – amount not provided
• Improved medical care and housing for Wounded, Ill and Injured Servicemembers – amount not provided
• Quality of life improvements for American Soldiers, Sailors, Airmen and Marines include modernization of barracks – amount not provided

Department of Transportation - $72.5billion + $48.1billion from the Recovery Act

The Department of Transportation is to use their budget to improve safety and reduce congestion as well as provide a financially viable system for the government. These improvements should also lead to new jobs for Americans. The money under the authority of the DOT increases from $17 billion to $70 billion. Overall, very few details are given as to why and exactly where the money is going

Major Expenditures

Modernize Traffic Control

• Improve rural access to the aviation system as demand for subsidized commercial airspace increases - $55million
• Improve the efficiency, safety and capacity of air traffic control through the Next Generation Air Transportation System - $800 million
• Supports moving from ground-based radar surveillance to satellite surveillance – no amount provided

High-Speed Rail Networks

• Creation of a high speed rail network as an environmentally friendly alternative to flying or driving - $5billion over 5 years

Department of Health and Human Services - $76.8billion+$22.44billion from the Recovery Act

We all know that the US health care system is broken. Obama’s 2010 budget attempts to lay the groundwork for a full scale American health care reform. Major points in his plan are: aligning incentives towards quality health care, promoting efficiency and accountability, encouraging shared responsibility. Obama also sets up a $630 billion 10year reserve fund to help finance the reform. Interesting provisions include several billion dollars to improve Alaskan Natives health care.

Highlights from the Department of Health and Human Services Budget

More Effective Health Care

• Increase health care providers in certain areas - $330 million
• Increase resources to detect, prevents and treat HIV/AIDs domestically – no monetary value stated

Funding for Research

• Support and eventually double cancer research withing the National Institutes of Health (NIH) - $6 billion
• Increase funding for research into cause and treatments for Autism Spectrum Disorders - $211 million

Support for Families and Youth

• Additional funds for the President’s Zero to Five plan which provides health care to children in need - $1.1 billion
• Expand the Head Start program - $1 billion
• Expand the Child Care and Development Block Grant - $2 billion
• Help low-income families heat and cool their homes - $3.2 billion

Additional Provisions

• Improvement of Native American and Alaskan Natives healthcare - $4 billion
• Improve access to and quality of health care in rural areas - $73 million

Department of Energy - $26.3billion+$38.7billion from the Recovery Act

Although Obama’s $26.3 billion budget allocation to the Department of Energy is far less than the $33.9 billion projected to be spent in 2009 it is still $2billion over the prior 3 years. A percentage of the budget goes to the promotion of a clean energy agenda and the advancement of Carbon Capture Storage technology. Obama also focuses on improving the safety and disposal of nuclear energy.

Highlights of Department of Energy Plan

New Energy Infrastructure

• Provide additional funding to the Office of Electricity Delivery and Energy Reliability, which received $11 billion form the Recovery Act – no monetary value given for 2010 budget

Clean Air Technology

• Supports loan guarantees for renewable energy projects and carbon caputaure store projects. – no monetary value given
• Along with $3.4 billion from the Recovery Act the 2010 budget supports the advancement of low-carbon coal technologies – no monetary value given

Increased Nuclear Security

• Supports efforts to secure and dispose of nuclear material – no monetary value given
• Supports efforts that will deter nuclear smuggling – no monetary value given

Department of Housing and Urban Development - $47.5billion+$13.6billion from the Recovery Act

The Department of Housing and Urban Development has a lot of ground to cover with its $47.5billion budget. Key goals for the money include creating sustainable communities, combating mortgage fraud and predatory lending and fully funding the Community Development Block Grant program. The budget also provides initial funding for the Affordable Housing Trust Fund.

Budget Highlight from the U.S. Department of Housing ad Urban Development

Safe and Affordable Housing

• Through the Affordable Housing Trust fund, the Obama budget tackles development, rehabilitation and preservation of affordable housing for very low-income residents - $1 billion
• Increase government funding for rental assistance – no monetary value given
• Combat mortgage fraud – no monetary value given
• Help communities to invest in and expand economic opportunities for low-income families - $4.5billion

Department of Veteran Affairs - $55.9 billion + $1.4 billion from the Recovery Act

Over the next 5 years, Obama plans on increasing funding for the Department of Veterans Affairs by $25 billion. Unfortunately the budget does not focus on the exact details of where this $25 billion will go. The budget focuses on increasing high-quality health care for veterans, the developments of Centers for Excellence and increased access to mental and cognitive health care. It also provides for a pilot program with non profit organization to help veterans avoid homelessness.

Major Department of Veterans Budget Expenditures

Increased Funding and Benefit Expansion

• General expansion of services and budget increases - $25billion increase over 5 years
• Restoration on health care eligibility for modest income veterans – no amount provided
• Enhanced outreach and services related to mental health and cognitive injuries for veterans – no amount provided
• Supports quick implementation of comprehensive education benefits - no amount provided
• Supports effective implementation of post-9/11 GI Bill – no amount provided

Department of State and Other International Programs

The United States needs to renew its leadership role in the world. The 2010 budget for the Department of State and Other International Programs aims to increase foreign aid to help education children in some of the poorest nations, increase global food supply and security, and stabilize post-conflict areas. The budge also includes an increase in funding for global health programs and non-military assistance to Afghanistan and Pakistan. No exact numbers are given in the budget as to where the money will go. There is a very large discretionary budget.

Plan highlights

Foreign Policy Goals

• Increase funding for global health programs that commbat HIV/AIDs, malaria and TB – no specific amount given
• Funding the first year of a multi year counterterrorism and law enforcement program – no specific amount given
• Promotion of safe civilian uses of nuclear energy – no specific amount given

International Support

• Expansion of diplomatic and development ties by increasing the number of state and USAID Foreign services officers – no specific amount given

Department of Homeland Security - $42.7billion+$2.8billion from the Recovery Act

The Department of Homeland Security budget focuses on safeguarding transportation systems, strengthening border security and immigration services and increasing research and development for cybersecurity.

Major Department of Homeland Security Expenses

Transportation

• 15 new Visual Intermodal Protection Response teams to increase in random force protection capability - $50,000,000
• DHS and DoT Planning and modernization of freight infrastructure linking coastal and inland ports to highway and rail networks - $25,000,000

Cybersecurity and Technology R&D

• Increase resilience and security of private and public sector cyber infrastructure - $355,000,000
• Ongoing support and improvement of surveillance technologies to detect biological threats - $36,000,000

Border Security and Immigration Enforcement Services

• Expansion of exit pilot and key land points of entry and general border secutiry priorities - $45,000,000
• Support of existing Customs and Border Protections - $368,000,000
• Expansion of electronic employment verification system, E-Verify, that hlps US employers to comply with immigration laws - $110,000,000

State Homeland Security Activities

• Addition of state and local level intelligence analysts - $260,000,000

Department of Agriculture - $26billion + $6.9billion from Recovery Act

The $26billion budgeted for the Department of Agriculture is aimed at helping family farmers and rural Americans. Some of the more notable plans are expanding broadband to rural areas, development of renewable energy and to provide strong support for childhood nutrition.

Major Expenditures

Rural and Farm Economic Growth

• Five Rural Development Programs - $61,000,000
• Increase rural broadband - $1,300,000,000
• Increase national supply of home-grown renewable fuels - $250,000,000
• Rural teaching incentives and lands grants for minority-serving institutions - 70,000,000

US Natural Resources

• Forest Protection - $50,000,000
• Wildfire Protection - $1,382,000,000
• Land conservation - $119,000,000

Food Safety and Nutrition Assistance

• Child Nutrition Reauthorization - $1,000,000,000

Department of Justice - $26.5billion + $4 billion from the Recovery Act

The Department of Justice budget addresses funding for National Security and crime fighting agencies like the FBI and COPS. It also ensures that prison and detention programs receive adequate funding.

Major Expenditures Budgeted for the Department of Justice

Law Enforcement

• Funding for the FBI - $8billion
• Hire an additional 50,000 police officers – exact amount not provided
• Strengthens funding to combat racial, ethnic, sexual preference, gender and religious discrimination through the Civil Right Division - $145 million

Prisoner and Justice Programs

• Bureau of Prisons - $6billion
• Office of the Detention Trustee, which ensures criminals and detainees are housed in safe, humane and secure facilities - $1.4billion
• Prisoner re-entry programs - $109 million
• Expansion of Office of Justice Programs authorized by Second Chance Act to provide job training, counseling and drug treatment - $75million

Department of Labor - $13.3billion+$4.8billion from the Recovery Act

The 2010 budget for the Department of Labor focuses on modernization and reform on the Unemployment Insurance system, building green jobs and the improvement on American working conditions.

Highlights from the 2010 Department of Labor Budget

Improve Unemployment Insurance System

• Reduce improper payments and employer tax evasion by more than $4 billion over the next 10 years through modernization of system – no monetary value given

Increase labor standards

• Increase funding for OSHA – no monetary value given
• Increase funding for Office of Federal Contract Compliance Programs – no monetary value given
• Increase funding for the Wage and Hour Division – no monetary value given

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Department of Commerce - $13.8billion+$7.9billion from Recovery Act

To help the Department of Commerce with its mission to create jobs, Obama’s proposes a budget increase for the Department of Commerce from $9.3 billion in 2009 to $13.8 billion in 2010. Money will be divided among several projects like an increase in funding for weather satellites and climate centers, Technology Innovation Program and Manufacturing Extension Partnership to fund regional economic development and entrepreneurship in distressed areas.

Expenditure Highlights

Competitiveness and Innovation

• Technology Innovation Program - $70,000,000
• Hollings Manufacturing Extension Partnership - $125,000,000
• Initiative to create new businesses in distressed areas - $50,000,000

Environmental Monitoring and Management

• Weather forecasting and global climate monitoring - $1,300,000,000

2010 Census

• Resources to conduct Census efficiently - $7,000,000,000

National Aeronautics and Space Administration - $18.7 billion+$1 billion from the Recovery Act

NASA is allocated nearly $20 billion (including funds from the Recovery Act) to do more than just explore space. NASA is partially responsible to help the US understand the effects of climate change on the planet.

Understanding NASA budget allocation

Climate change research and monitoring

• Development of new space-based sensors to conduct global climate research – exact amount not provided

Space Exploration

• Additional robotic space exploration missions – exact amount not provided
• Completion of the International Space Station – exact amount not provided
• Continuous support of the International Space Station – exact amount not provided
• Additional research in air transportation to support future aircrafts

Environmental Protection Agency - $10.5 billion +$7.2 billion from the Recovery Act

The funds budgeted to the Environmental Protection Agency are for the restoration of the Great Lakes, additional funding for the Clean Water State Revolving Fund, the Drinking Water Supply Revolving Fund, the Water Security Initiative, and the Water Alliance for Threat Reduction. It also allows for more than $1billion to clean up the most contaminated sites in the Superfund program.

Highlights of the US Environmental Protection Agency Budget

Clean Water

• Funding of clean water initiatives through the Clean Water State Revolving Fund and the Drinking Water State Revolving Fund - $3.9 billion
• Acceleration of the restoration of the Great Lakes - $475 million

Greenhouse Gas Reduction

• Lay groundwork for a reduction in greenhouse gases and develop a comprehensive climate change plan to reduce 2005 greenhouse gas levels by 14$ by 2020 and 84% by 2050 - $19million

Water Safety and Security

• Fully funding the Water Security Initiative and Water Alliance for Threat Reduction which creating drinking water contamination warning systems - $24 million

Superfund Program

• Cleaning up the most toxic and contaminated sites in the US - $1 billion

Department of the Interior - $12billion + $3 billion from the Recovery Act

The U.S. Department of the Interior budget supports programs that expand environmental education activities, strengthen Native American communities and promote renewable energy. Obama’s budget also includes provisions to close loopholes that give oil companies excessive royalty relief.

Major Programs Receiving Money From U.S. Department of Interior Budget

US Natural Resources

• National Park Service will receive funds to protect and maintain natural resources - $25 million
• Land and Water Conservation Fund - $420 million
• Create a dedicated funds to fight wildfires - $75 million

Clean Energy

• Research and testing for renewable energy - $50,000,000
• Wetlands conservation - $10,000 budget increase

Strengthening Native American Communities

• Increase funding to the Bureau of Indian Affairs for law enforcement and education - $100 million

Department of the Treasury - $13.3 billion + $300 million from the Recovery Act

The Department of the Treasury exists to promote economic prosperity and financial security of the United States. The 2010 budget supports the Financial Stability Plan, emphasizes transparent and accountable program management. In addition to the 2010 Budget, there is a $250 billion contingent reserve for further efforts to stabilize the financial system.

Highlights of the Department of Treasury Budget

IRS Services

• Additional funds to assist the IRS with tax collection abroad - exact amount not specified
• Improve quality of taxpayer experience - exact amount not specified

Lending and Community Development

• Double funding for the Community Development Financial Institutions Fund to help locally based financial institutions offer small business, consumer and home loans - exact amount not specified

Additional Point of Interest

• Funds are set aside as a reserve to be used in and when necessary to stabilize the financial system - $250 billion

Social Security Administration - $11.6 bullion +$1.1 billion from the Recovery Act

The Social Security Administration is indispensable to seniors, survivors, workers and the disable, but unfortunately the SSA can only pay full benefits until 2041. The 2010 Federal budget does not plan for 2042, but instead provides a 10% increase to help process claims more quickly. The budget also intends to help improve framework to extend the viability of the program as best possible.

Highlights of the 2010 Social Security Administration Budget

Program Integrity and Operation

• Increase staffing at the SSA to help process claims and appeals more quickly – exact amount not disclosed
• Increase Social Security card processing and Social Security Number distribution – exact amount not disclosed
• Increase integrity of SSA to ensure efficient government spending - $759 million

National Science Foundation - $7 billion +$3 billion from the Recovery Act

Climate change is an integral part of several departmental budgets, including the National Science Foundation. Other goals for the NSA 2010 budget include increased high-risk, high-reward research and increased graduate research fellowships.

National Science Foundation Budget Highlights

Research in Global Climate Change

• Support for research to improve the ability to predict future environmental conditions and develop strategies to respond to global environmental changes – exact amount not specified
• Establishment of a climate change education program - exact amount not specified

High-Risk, High-Reward Research

• Increased support for exploratory and high-risk research proposals that could alter our understanding or nature, revolutionize the fields of science or radically change new technologies
• Graduation Research Fellowships and Early-Career Researchers
• Substantial increase to NSF’s Graduate Research Fellowship and Faculty Early Career Development programs - exact amount not specified
• Increased support for the Advanced Technological Education program - exact amount not specified

Corps of Engineers – Civil Works - $5.1 billion + $4.6 billion from the Recovery Act

The 2010 Obama Administration budget gives the Corps of Engineers – Civil Works a $5.1 billion discretionary budget. It should help to strengthen the Nation’s water resources infrastructure and restore Gulf Coast wetlands

Budget Emphasis for the Corps of Engineers – Civil Works

Construction on High-Return Investments

• Facilitate commercial navigation – discretionary
• Reduce the risk of flood and storm damage – discretionary
• Restore significant aquatic ecosystems – discretionary
• Phasing out of excise tax on diesel fuel for inland waterways and replace it with a lock usage fee – discretionary

Maintenance

• Safe and reliable operation of facilities – discretionary
• Gulf Coast Commitment – discretionary
• Continued funding to restore Louisiana coastal wetlands – discretionary
• Restoration of wetland affected by the Mississippi River Gulf Outlet – discretionary

Small Business Administration - $700 million +$700 million from the Recovery Act

Between the Recovery Act and the 2010 federal budget, the Small Business Administration (SBA) is given $1.4 billion, which can be used for distributing capital through guaranteed loans and investment products. It also strives to improve Federal contract opportunities for small business. Although compared to other departments, this is not a large amount, but the Federal government does provide for small businesses during the credit crisis through Section 504 of Guaranteed Loan program.

Details about the Small Business Administration Budget

Agency Operations

• Improve technological infrastructure of the SBA to help it remain transparent – amount not given
• Purchase of modern loan accounting system – amount not provided
• Streamline and automate lending and contracting systems – amount not provided

Contract Opportunities for Small Business

• Provide additional counseling and business development experts to assist small businesses – amount not provided
• Improve Women’s Business Centers, SCORE, and Small Business Development Centers – amount not provided
• Increase small business access to Federal prime and sub-contracting opportunities – amount not provided

Small Business Assistance Covered in Other Parts of the Budget

• Guaranteed Disaster Loan Program – amount given to small businesses not provided

Corporation For National Community Service - $1.1 billion + $200 million from the Recovery Act

The Corporation For National Community Service provides opportunities for Americans to volunteer and serve their community. The $261 million budget increase will help to create a new Social Innovation Fund and expand service-learning in American schools.

Highlights from the Corporation For National Community Service 2010 Budget

Expansion of National Service

• Expand AmeriCorps from 75,000 funded slots 250,000 - exact amount not specified
• Increase the amount of the Eli Segal Education Award - exact amount not specified
• Expand and improve Senior Corps programs allowing more retirees to help meet the needs in their communities - exact amount not specified
• Grow service-learning in US schools by providing additional research for Learn and Serve America - exact amount not specified

Strengthen Management Capacity of the Corporation For National Community Service

• Increase funding for administration and strengthen capacity to manage programs, measure performance and conduct evaluations - exact amount not specified