Sunday, June 28, 2009

Sparks... to timber soaked in lighter fluid.

Honduran coup early test for Obama's Latam policy

Sun Jun 28, 2009 8:38pm EDT

By Ross Colvin

WASHINGTON (Reuters) - The Honduran military's ouster of President Manuel Zelaya on Sunday could be an early test for U.S. President Barack Obama as he tries to mend the United States' battered image in Latin America, a regional expert said.

"This is a golden opportunity to make a clear break with the past and show that he is unequivocally siding with democracy, even if they (Washington) don't necessarily like the guy," former Costa Rican Vice President Kevin Casas-Zamora told Reuters in Washington.

Shortly after news of the coup broke, Obama issued a statement expressing his "deep concern" at Honduran troops arresting Zelaya at his residence and exiling him to Costa Rica. The leftist president had angered the army, Congress and the courts by pushing for constitutional changes to allow presidential re-election.

Casas-Zamora said he had heard reports that the U.S. State Department had got wind of plans for a coup and had tried to prevent it, but this could not be independently confirmed.

Obama's statement urged Hondurans to resolve the dispute peacefully but did not explicitly call for Zelaya's reinstatement as president. A senior administration official said later, however, that the United States recognized only Zelaya's government as legitimate.

Waking up next to the Paper Dragon...

...mainstream media is quickly "getting it". Original article here.

By Ambrose Evans-Pritchard
Published: 5:38PM BST 28 Jun 2009

China's banks are veering out of control. The half-reformed economy of
the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new
lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used
to keep bankrupt builders on life support. It is doing very little to
help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China's lenders are
wading into dangerous waters, but its latest report is even grimmer
than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of
the few countries where the financial system continues to function
largely without a glitch, but Fitch is growing increasingly wary," it

"Future losses on stimulus could turn out to be larger than expected,
and it is unclear what share the central and/or local governments
ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk"
indicator for China threatens to jump from category 1 (safe) to
category 3 (Iceland, et al). This is a surprise to me but Michael
Pettis from Beijing University says China's public debt may be as high
as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it
has given banks an implicit guarantee for what Fitch calls a "massive
lending spree".

Bank exposure to corporate debt has reached $4,200bn. It is rising at
a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut
interest on reserves to 0.72pc. Bankers responded to this "margin
squeeze" by ramping up the volume of lending instead. Over half the
new debt is short-term. Roll-over risk is rocketing. China's monetary
stimulus since November is arguably more extreme than the post-Lehman
printing of the US Federal Reserve, though less obvious to the
untrained eye.

Under the Taylor Rule, US policy remains tight (for the US). China's
policy is loose (for China). New loans doubled in May from a year
earlier, almost entirely to companies.

Saturday, June 27, 2009


Plenty of it in congressional measures to "assist" the economy. Nice article by here detailing some of the provisions in the stimulus package to went under the readar.

The meat of the article:

Congress inserted the tax benefits for companies other than banks in a fog of confusion and panic after the House of Representatives rejected the first attempt to fund the bank support effort urged by then President George W. Bush and Treasury Secretary Henry Paulson.

Rubber Stamped

Lawmakers rubber-stamped the package of arcane, if innocuous-sounding, tax items with one eye on the calendar. An election was only a few weeks away, and legislators were desperate to return home to campaign for their own re-election.

A year later, lawmakers and the public are just now discovering some of the curious subsidies tucked into TARP and the government’s other massive intervention programs. Four months after TARP took effect, President Barack Obama pushed through a $787 billion bill intended to pump up the nation’s economy.

That legislation included $20 billion in tax breaks for companies that produce energy from wind and other alternative sources as well as $1.6 billion in relief related to the tax treatment of canceled debt for Sprint Nextel Corp., the third- largest U.S. mobile-phone-service company, and other firms.

Like TARP, the stimulus bill was passed quickly, with little scrutiny.

‘Backroom Deals’

“You had this remarkable brief period with no transparency, filled with backroom deals being made and an absolute blackout of information,” saysJim Lucier, a senior political analyst at Capital Alpha Partners LLC, a Washington firm that tracks legislation for hedge funds and institutional investors.

Friday, June 26, 2009

Auspicious research timing... say the least. More evidence of Fed papers as trial balloons.

JEL classification: E42, N22, E58

William L. Silber

After a month-long run on American banks, Franklin Delano Roosevelt proclaimed a Bank Holiday, beginning March 6, 1933, that shut down the banking system. When the banks reopened on March 13, depositors stood in line to return their hoarded cash. This article attributes the success of the Bank Holiday and the remarkable turnaround in the public’s confidence to the Emergency Banking Act, passed by Congress on March 9, 1933. Roosevelt used the emergency currency provisions of the Act to encourage the Federal Reserve to create de facto 100 percent deposit insurance in the reopened banks. The contemporary press confirms that the public recognized the implicit guarantee and, as a result, believed that the reopened banks would be safe, as the President explained in his first Fireside Chat on March 12, 1933. Americans responded by returning more than half of their hoarded cash to the banks within two weeks and by bidding up stock prices by the largest ever one-day percentage price increase on March 15—the first trading day after the Bank Holiday ended. The study concludes that the Bank Holiday and the Emergency Banking Act of 1933 reestablished the integrity of the U.S. payments system and demonstrated the power of credible regime-shifting policies.

The NBER comments...

...on themes readers of this blog already know about. Note the flows and ramifications for the dollar.

The U.S. net international investment position at yearend 2008 was -$3,469.2 billion (preliminary), as the value of foreign investments in the United States continued to exceed the value of U.S. investments abroad (table 1).  At yearend 2007, the U.S. net international investment position was -$2,139.9 billion (revised).     The -$1,329.3 billion change in the U.S. net investment position from yearend 2007 to yearend 2008 resulted from (1) declines in the prices of U.S.-held foreign stocks that surpassed declines in the prices of foreign-held U.S. stocks, (2) the depreciation of most major currencies against the U.S. dollar that lowered the dollar value of U.S.-owned assets abroad, and (3) net foreign acquisitions of financial assets in the United States that exceeded net U.S. acquisitions of financial assets abroad.  The impact of these differences was partly offset by “other” changes (such as changes in reporting panels and capital gains and losses) that raised the value of U.S.-owned assets abroad and lowered the value of foreign-owned assets in the United States.     The following are highlights for 2008:  *  Foreign acquisitions of financial assets in the United States, excluding    financial derivatives, were $534.1 billion in 2008, down substantially from    $2,129.5 billion in 2007.  In 2008, foreign acquisitions of Treasury    securities and foreign direct investment in the United States were especially    strong.  In contrast, foreign residents sold more U.S. securities other than    Treasury securities than they purchased, and U.S. banks’ and nonbanks’    liabilities to foreign residents fell sharply.  
*  U.S. acquisitions of financial assets abroad, excluding financial    derivatives, were $0.1 billion in 2008, down substantially from $1,472.1    billion in 2007.  In 2008, U.S. banks’ and nonbanks’ claims against foreign    residents fell sharply and U.S. residents sold more foreign securities than    they purchased.  However, U.S. direct investment abroad remained robust and    U.S. government holdings of foreign currencies increased substantially as a    result of unprecedented net drawings on temporary reciprocal currency    arrangements between the U.S. Federal Reserve System and foreign central    banks.

Domestic Demand... Asia's problem. In light of the recent post on Mr. Bernanke and the limit of zero-bound nominal interest rates, raise your hand here if you think "accomadative monetary policy" alone can wrest an economy out from recession.

I will post a rant about "nominal vs. real" rates soon as well.

TOKYO, June 26 - Japanese consumer prices fell a record 1.1 per cent in the year to May, with falling demand increasingly blamed as the country’s second bout of deflation in less than two years deepens.

The slide may make the Bank of Japan less willing to end unconventional policies due to expire in September. But the central bank will likely stop short of a return to full-blown quantitative easing as the world’s second largest economy is expected to resume growing after contracting for a full year, analysts say.

“Deflation is getting worse and underscores that the BOJ cannot move for a considerable time,” said Masamichi Adachi, senior economist at JP Morgan.

“Even with deflation going further, as long as the real economy is on an uptrend, I think the BOJ will not activate quantitative easing.”

Kaoru Yosano, finance minister, also expressed concern about the impact of weak output and demand as the nationwide core consumer price index fell 1.1 per cent in May from a year earlier.

It was the largest fall in records dating back to 1970, but slightly less than a consensus forecast for a 1.2 per cent drop.

Wednesday, June 24, 2009

An academic paper...

...worth revisiting...

The success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely on “non-standard” policy alternatives. To assess the potential effectiveness of such policies, we analyze the behavior of selected asset prices over short periods surrounding central bank statements or other types of financial or economic news and estimate “noarbitrage” models of the term structure for the United States and Japan. There is some evidence that central bank communications can help to shape public expectations offuture policy actions and that asset purchases in large volume by a central bank would be able to affect the price or yield of the targeted asset.

The pattern...

...of green shoot statistical releases promptly followed by donward previous month "revisions" continues. With error bands elongating, why would anyone attribute market movements to (exclusively) statistical releases?

Of course the short answer is they don't. And yet the public marches on in its addiction to these "eureka" moments when an answer is not found but provided by financial media. Of course, next month, when downward revisions to the durable goods orders are released, this will not be news.

June 24 (Bloomberg) -- U.S. stocks rose for a second day after orders for durable goods unexpectedly jumped and earnings topped estimates at Oracle Corp. and Monsanto Co.

Thursday, June 18, 2009

The new Cold War...

The following article details a new cold war with another communist power, only this time spheres of influence are replaced by tetrabytes of sensitive information. There will be spillovers into "IRL" but the major conflicts will be waged Tron-like (the movie has the added convenience of "blue vs. red" as well) over computers. An interesting Detente and a net win for the U.S. by occupying (and probably hiring away) the time of talented uber-nerds.

MELBOURNE, Fla. — The government’s urgent push into cyberwarfare has set off a rush among the biggest military companies for billions of dollars in new defense contracts.

The exotic nature of the work, coupled with the deep recession, is enabling the companies to attract top young talent that once would have gone to Silicon Valley. And the race to develop weapons that defend against, or initiate, computer attacks has given rise to thousands of “hacker soldiers” within the Pentagon who can blend the new capabilities into the nation’s war planning.

Nearly all of the largest military companies — including Northrop Grumman, General Dynamics, Lockheed Martin and Raytheon — have major cyber contracts with the military and intelligence agencies.

The companies have been moving quickly to lock up the relatively small number of experts with the training and creativity to block the attacks and design countermeasures. They have been buying smaller firms, financing academic research and running advertisements for “cyberninjas” at a time when other industries are shedding workers.

The changes are manifesting themselves in highly classified laboratories, where computer geeks in their 20s like to joke that they are hackers with security clearances.

At a Raytheon facility here south of the Kennedy Space Center, a hub of innovation in an earlier era, rock music blares and empty cans of Mountain Dew pile up as engineers create tools to protect the Pentagon’s computers and crack into the networks of countries that could become adversaries. Prizes like cappuccino machines and stacks of cash spur them on, and a gong heralds each major breakthrough.

The young engineers represent the new face of a war that President Obama described Friday as “one of the most serious economic and national security challenges we face as a nation.” The president said he would appoint a senior White House official to oversee the nation’s cybersecurity strategies.

Computer experts say the government is behind the curve in sealing off its networks from threats that are growing more persistent and sophisticated, with thousands of intrusions each day from organized criminals and legions of hackers for nations including Russia and China.

“Everybody’s attacking everybody,” said Scott Chase, a 30-year-old computer engineer who helps run the Raytheon unit here.

Wednesday, June 17, 2009

The angular momentum of conflict...

When satellite countries and dissident regimes suddenly enter into the fold of large alliances, trouble is on the way. It likely will not be physical conflict that begins.

Several blocks are forming, some based on trade, others on culture, still others purely on geographical proximity. One of the problems with blocks is the tendency for powder kegs to form. We have seen this repeatedly throughout history, and once this "angular momentum" of conflict starts spinning ever-faster, we can be assured that the ending will be more explosive than thought when examining the individual components in a steady state.

Or, like Kipling said (far more eloquently than the above)

Four things greater than all things are, --
Women and Horses and Power and War.

And so we see the jockeying that is guaranteed to happen during the fallout from economic bubbles, and must monitor the subsequent events very, very carefully.

Sino-Russian alliances...

...have not had a good run, historically speaking.

Bloviating about currencies is a populist measure and does more to deflect blame than to solve any problems relating to trade. I see why this is important to Medvedev, but its less obvious to me why China is involved...other than to continually probe the U.S. for weakness.

MOSCOW, June 16 (RIA Novosti) - The leaders of Shanghai Cooperation Organization countries backed on Tuesday Russia's proposal on using national currencies in mutual settlements and introducing a common currency for the group.

The common currency would be similar to the European currency unit, in use in the EC until the introduction of the euro in 1999.

The SCO, which comprises Russia, China and four ex-Soviet Central Asian republics - Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan - held a summit in the Russian Urals city of Yekaterinburg on Tuesday.

The summit's participants said that the current structure of the world currency system, dominated by the U.S. dollar as the major global reserve currency, was far from ideal and that the appearance of new reserve currencies was inevitable.

Russian President Dmitry Medvedev told the summit that the Shanghai group member states should increase the share of national currencies in mutual settlements to reduce dependence on the dollar and improve the health of the global financial system.

"The current set of reserve currencies and the main reserve currency - the U.S. dollar - have failed to function as they should," Medvedev told the summit, adding that the Russian ruble could hopefully become a reserve currency in the foreseeable future.

Tuesday, June 16, 2009

Persian parellels...

...thank goodness I live in a country where efforts like this are not repressed. Draw your own conclusions regarding the time and investment involved and why the below is necessary.

That being said, all eyes on Iran at the moment. As Stalin put it "he who votes decides nothing, he who counts the votes decides everything".

By Pat Boyle

Wednesday June 10 2009

A top economist at Massachusetts Institute of Technology(MIT) in the United States is close to finalising a new index which will change the way countries measure inflation and allow it to be done on a daily basis, a conference in Dublinheard yesterday.

Roberto Rigobon, professor of applied economics at the MIT Sloan Business School, has for the past few years been collecting price data from major retailers including Tesco,Ikea and Wal-Mart. He has also compiled indexes of property price changes around the globe as he bids to assemble a new measure of inflation which will replace existing measures using daily instead of monthly bulletins on price changes.

The detailed work involves collating millions of price changes daily and will allow Prof Rigobon to issue accurate data on inflation on a daily basis in countries around the globe, including Ireland.

He said existing inflation measures were unreliable and that his new measure would also allow economists and other researchers access to almost unlimited price data.

Prof Rigobon says he will insist that all information used to compile the release are made available to researchers, which is currently not the case with official inflation statistics.

- Pat Boyle

Saturday, June 13, 2009


A diluge of believers in the Chinese miracle have been beating their drums lately regarding the wonderful prospects and continued growth of the middle kingdom.

But ask yourself a question (and building off my last post): If U.S. statistical reports can be "smoothed" via political pressure, what can happen in an autocratic plutocracy like China?

There is no "decoupling" happening and the more likely scenario is a massive retrenchment (economically and sociologically) by the Chinese leadership. Asian economies simply do not understand or will not tolerate weak export markets and free trade...with predictable imabalances as a result.

Friday, June 12, 2009

Behemoth and Leviathan...

The battle between inflation and deflationary pressures continues. This is one of the major questions for market participants at the moment.

From my standpoint, taxation will be the lynchpin on this issue. With monetary policy at full spigot and not producing the effects the Fed thought it would, as evidenced vividly here, Fiscal policy is the key to understanding the inflation/deflation debate. Monetary policy acting alone is simply not that powerful.

In our fiat currency system, the primary mechanism for monetary growth is credit-driven bank activity. Loans create deposits only constrained by the fractional reserve system employed by our banking system. The other way to create money is to lower taxes and/or increase government spending. Untaxed currency obviously remains "in the system".

Setting aside the issues of the government's ability to manage such a system (because it will not likely get this scenario right...that is an impossibility)

The spending part seems to be progressing (albeit with Congress's characteristic glacial speed). However, these warning from the current administration about raising taxes at this crucial stage is worrying. With the coming implosion (to the tune of another Trillion dollars in my estimation) of several types of residential and commercial mortgage derivatives, deflationary pressures should be offset by lower taxation. Increasing taxes in such a deflationary environment would be a disaster.


The below was buried in the BEA's June 1st release regarding personal income and outlays. A presentation on the "comprehensive revision" can be found here.

Predictably, the revisions result elevated income from 2000 to present. It turns out with some revisions on statistical emphasis that we are all more wealthy than we thought we were.

A serendipitous development for the new administration. I wonder what the protocal is for making these revisions, as I have seen far too many times the effects of "arbitrarily" changing statistical rules for political expedience.

Wednesday, June 10, 2009


This from the Congressional oversight report regarding the Bank Stress Tests.  Please hold your chuckling until reading the entire quote...

And, as usual for value-adding governmental actions, we must now learn what "SCAP" (Supervisory Capital Assessment Program) and "ILR" (indicative loss range...what a strange concept) entail.
"... All the same, the stress tests should not be taken for more than they are.  As indicated above, they were conducted within the present supervisory context only, and they are a  temporary two-year projection of a one-time capital buffer that need not be rebuilt.  They do not  model BHC performance under “worst case” scenarios, and as a result they do not project the capital necessary to prevent banks from being stressed to near the breaking point.  Most important, for some observers, they do not address the question whether the values shown on bank balance sheets for certain classes of assets are too high; by restricting themselves to a two-year time frame, their conclusions thus do not take into account the possibility that the asset values assumed (particularly for so-called toxic assets) may undervalue bank liabilities to the extent that those liabilities result in losses after 2010. 

   "... From what we are able to discern about the specifics of the stress tests, the Fed’s approach appears to hybridize numerous canonical risk modeling approaches, and in broad strokes seems most consistent with a conditional loss approach. That is, the stress tests attempted to elicit information from the nineteen largest bank holding companies (BHCs) about likely losses that would be visited upon their asset portfolios over a two year time horizon under specified macro-economic conditions. The implementation of this approach ultimately boiled down to a four-step process. In the first stage, SCAP designers posited two macroeconomic hypothetical states – a “baseline” scenario and a “more adverse” scenario. Second, within each of these states, the Fed attempted to for-mulate expected Indicative Loss Rate (ILR) ranges within each asset class and across all institutions, which reflected estimates of both the frequency of default and losses given default under each scenario. In the third, the BHCs and the Fed applied a process that allowed each BHC to vary from the predetermined ILR ranges (above) into loss and resource estimates tailored at the firm level. In the fourth step, the banks reported their asset and exposure levels under each macro-economic scenario, which implied what (if any) additional common equity buffer was necessary at the BHC level.

 "... At the same time, SCAP’s design and implementation do leave some open questions in our minds. Perhaps the most significant of these questions concern the SCAP’s transparency and replicability. Each of the four stages outlined above evidently involved the combination of quantitative and qualitative measures. For example, in the initial setting of ILRs, the Fed evidently attempted to synthesize numerous alternative macro-economic models (which themselves produce noisy estimates of losses) with subjective judgments of experts in different asset classes. The precise mechanism for combining these various inputs, however, was left largely unspecified. In addition, the process by which the initial ILRs became tailored to each BHC in Stage 3 appeared analogously opaque. While such synthesis is sometimes a good way to deal with model uncertainty, data availability, confidentiality, and measurement error, it renders the results virtually incapable of replication (or even much detailed understanding) by an outsider. This lack of transparency and replicability is a potential cause for concern, and it ultimately confines our analysis to a general assessment of the program’s broad-brush approach.  In addition, we discuss a number of other concerns that we believe also to be material.  These include concerns that the SCAP was insufficiently sensitive to BHC ownership structure; that it neglected other sorts of micro- and macro-economic risks (such as interest rate, inflation, and cash flow / liquidity risks) that may be relevant in predicting loss ranges1 ; that the SCAP used a short time horizon (two years) that may have been insufficient relative to the maturity of the underlying illiquid assets; and that the Fed might have done additional robustness checks by varying the sizing of the cap or the measure of equity capital employed."

Next Domino

This has been known for some time.  The CMBS market and roll-over financing for existing projects have a long way to go before recovery.  Note also the current effects of quantitative easing in light of rising mortgage rates.

June 10 (Bloomberg) -- MetLife Inc. Chief Investment
Officer Steven Kandarian said commercial mortgage defaults will
rise in the next two to three years after the economic slump
     “The worst is to come,” Kandarian said in an interview
today with Bloomberg Television in New York, where the biggest
U.S. life insurer is based. “Typically there’s a lag between
when the economy softens and when the defaults actually occur.”
     The default rate on commercial mortgages held by U.S. banks
may rise to 4.1 percent, the highest in 17 years, by year-end as
debt for refinancing remains scarce and the recession drags down
rents, research firm Real Estate Econometrics LLC. said
yesterday in a report. Kandarian, whose portfolio contains about
$36 billion in loans on commercial property, said he expects
delinquencies for MetLife will be “relatively small.”

Thursday, June 04, 2009

Trichet at it again...

...ah, now THIS time his observations must be correct, given his record for assessing economic conditions and projecting likely outcomes.

June 4 (Bloomberg) -- The European Central Bankkept its benchmark interest rate at a record low of 1 percent today after first signs of an economic recovery emerged.

President Jean-Claude Trichet also said the ECB will start its plan to buy 60 billion euros ($85 billion) of covered bonds in the primary and secondary markets next month. The Bank of England today left its rate at 0.5 percent.

“The current rates are appropriate,” Trichet said at a press conference in Frankfurt. “For the remainder of the year economic activity will decline with much less negative rates.”

The 22-member Governing Council has been split over whether to follow the Federal Reserve and Bank of England, which have cut their key rates close to zero and are buying government and corporate bonds to tackle the worst recession in six decades. The debate over how far the ECB should go reached the highest level of European government this week, with German Chancellor Angela Merkel backing the Bundesbank’s view that asset purchases are a step too far.

Dormant assets... interstate highways?  This article is more evidence of the future trajectory for effective (all-in) tax rates.

Attendees at the ITS America annual conference at National Harbor Maryland say they are very encouraged by  Obama administration officials' interest in road pricing and other ITS technologies. 

With what will I defend it with, dear Liza?

A cursory glance at the success rate of emerging countries attempting to defend their currency pegs in the last half century does not reveal a positive outcome here.

By Aaron Eglitis
     June 4 (Bloomberg) -- Latvia’s central bank pledged to
defend its currency’s peg to the euro as some investors shunned
assets linked to the Baltic nation on concern its economic
collapse will precipitate a devaluation.
     The bank “has explained and clearly said that it will
maintain the stability of the lats until the lats is replaced by
the euro,” it said in a statement on its Web site today. “It’s
clear that such a mechanism as a fixed currency exchange rate
allows the Bank of Latvia to achieve this policy.”
     The Baltic country, which is suffering the severest
recession in the European Union, is struggling to rein in its
budget gap in order to secure the continued payment of an
international bailout. Latvia’s economic collapse is threatening
the prospect of recovery in Sweden, known for its textbook
handling of its 1990s banking crisis, because the largest Nordic
nation’s banks are the biggest in the Baltic region.
     The situation in Latvia is “markedly worrisome,” Swedish
Finance Minister Anders Borg said in a statement on the
government’s Web site today. The economy shrank an annual 18
percent in the first quarter.
     Credit-default swaps linked to Baltic government debt rose
for a second day today. Contracts on Latvia soared 60 basis
points to 735, the highest since April 28, according to CMA
DataVision prices at 12:20 p.m. in London. Default swaps linked
to Lithuania climbed 35 basis points to 485 and Estonia rose
12.5 to 365.

Wednesday, June 03, 2009

Not welcome...

The reserve status of the dollar is a lynchpin for the global economy, and any attempt to deviate from this understanding invites more instability, both of the political and financial types.

However, the below trial balloons are merely more mercantilist saber-rattlling.  The world is not ready for a weak dollar.

Malaysia, China Consider Ending Use of Dollar for Trade

BEIJING -- Malaysia's prime minister said China and his country are
considering conducting their trade in Chinese yuan and Malaysian
ringgit, joining a rising number of nations thinking of phasing out
the dollar.

"We can consider whether we can use local currencies to facilitate
trade financing between our two countries," Malaysian Prime Minister
Najib Abdul Razak told reporters at a briefing Wednesday after meeting
with China's premier, Wen Jiabao.

"What worries us is that the [U.S.] deficit is being financed by
printing more money," Mr. Najib said. "That is what is happening. The
Treasury in the United States is printing more notes."

China has been promoting the idea of replacing the dollar as the
global currency, suggesting that a basket of currencies less linked to
the fate of one economy would make more sense. It also has been
talking about using the yuan for trade settlements, starting gradually
in the region and then expanding farther abroad.

On Monday, U.S. Treasury Secretary Timothy Geithner urged China to
move toward a more-flexible exchange rate for the yuan. If the yuan
were to strengthen, that would increase China's domestic buying power
and reduce the country's dependence on exports.