Shadow of War: Dozens dead in Damascus as army regains control

Sarkozy: 'The United Kingdom has no industry any more'

A sneering Nicolas Sarkozy has attacked Britain for being a country with 'no industry'.

The embattled French President, who is hoping to be re-elected this spring, made the extraordinary outburst as he defended a VAT rise during a prime time national TV broadcast.

He had just announced a 1.6 per cent hike in VAT in a move designed to boost France’s failing economy.

But when a journalist pointed out that Britain had experienced a rise in prices after increasing its VAT contributions, Mr Sarkozy - who in 2009 claimed the UK rise had ‘absolutely failed’ to stimulate the economy - spat out the words: 'The United Kingdom has no industry any more.'

He said he was borrowing the measure from Germany, arguing that it had 'helped to boost German competitiveness' and had not led to a rise in prices.

The 11th-hour measures are a risky political gamble as the hugely unpopular Mr Sarkozy lags behind Socialist rival Francois Hollande in the polls.

Opinion polls also suggest the majority of the population is against an increase in sales tax, which will eat into their spending power.

It is not the first time Mr Sarkozy, who will come face-to-face with Prime Minister David Cameron at an EU debt summit today, has expressed his dislike of his cross-Channel neighbours.

In October at an EU-27 summit, after criticism from UK ministers over the euro, Mr Sarkozy bluntly told Mr Cameron: 'You have lost a good opportunity to shut up.'

He added: 'We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings.'

A month later, in response to a question at a press conference about whether France and Germany were trying to change the governments of Greece and Italy, Mr Sarkozy hit out, saying: 'Perhaps the fact that you come from an island, you can't understand the subtleties of the European construction.'

And today's meeting - where EU leaders will sign off on a permanent rescue fund for the eurozone - could potentially herald a repeat of 'Le Snub', when the French leader refused to shake Mr Cameron's hand after the Prime Minister vetoed proposed changes to the EU treaty in December.

Mr Sarkozy was not questioned on the latest comments by any of the carefully selected journalists assisting with the broadcast from the Elysee Palace.

It was perhaps a wise move; figures from the OECD show that in 2009, Industry accounted for 19 per cent of French Gross Value Added - a measure of the value of goods and services linked to GDP.

In 2010, in the UK the figure was 21.8 per cent.
In manufacturing alone, the UK figure stood at 11.5 per cent compared with 10.7 per cent in France.

Despite Mr Sarkozy's previous view on such measures in the UK last night he saw the VAT rise as an essential measure to reverse his country’s fortunes, as he praised Angela Merkel for applying it.

It came as the German Chancellor offered ‘active support’ at campaign rallies for Mr Sarkozy, who is widely expected to fail in his re-election bid.

A ‘Robin Hood’ tax on financial transactions was also imposed by Mr Sarkozy last night – despite fierce opposition from EU leaders including Prime Minister David Cameron who described it as ‘utter madness’.

The 0.1 per cent financial transaction levy will be introduced in August in France regardless of whether other European countries follow suit.

Read more: http://www.dailymail.co.uk/news/article-2093546/The-United-Kingdom-industry-Sneering-Sarkozy-attacks-Britain-French-TV.html#ixzz1kwr9ZQvm

US had a total of three aircraft carrier groups close to Hormuz

For months now we have been following US naval developments and deployments in the Arabian Sea, which serve one purpose and one purpose only - to demonstrate US military strength in the Straits of Hormuz region and to keep Iranian 'offensive passions' subdued. Yet never has the US had a total of three aircraft carrier groups in the vicinity, always topping out at 2 in the Bahrain-based Fifth Fleet, most recently these being the CVN-70 Vinson and CVN 72 Lincoln, with a third boat present merely until a rotation in or out of the theater of operations was complete. That is about to change, and with it the prevailing price of Brent, which we are confident is about to take a new step wise price higher as the US makes it all too clear what the endgame is, because as Naval Today reports, the "US navy to deploy third carrier group to Persian Gulf", probably the CVN-77 George H.W. Bush which departed Norfolk two weeks ago according to the most recent naval update.

The carrier group based in Norfolk, VA will also include a guided missile cruiser and three guided missile destroyers, reports Interfax.

USS Abraham Lincoln had already entered the Persian Gulf via the Strait of Hormuz on Jan 22. She is escorted by a guided missile cruiser and two destroyers (USN), one British and one French warships.

Meanwhile, another US Navy’s carrier strike carrier group headed by USS Carl Vinson is stationed eastward the Strait of Hormuz, in northern part of the Arabian Sea washing southwest coast of Iran.

At present, the US has 15,000-men force deployed in Kuwait, expeditionary marine battalion, and amphibious landing group.

Zero Hedge

Police use flashbangs & tear-gas against protesters in Oakland

Strong earthquake hits Peru's central coastline

Peru's central coastline has been hit by a 6.3 magnitude earthquake, the US Geological Survey (USGS) says.

The tremor, with its epicentre some 15km (nine miles) south-east of the city of Ica, hit just after midnight (05:00 GMT) at a depth of 39km (24 miles), the USGS said.

The quake was felt in central and southern parts of the country.

The scale of the damage is not yet clear but Peruvian officials said some 60 people had been injured.

"The majority are suffering trauma and cuts," Fernando Leon Castaneda, manager of a local hospital, told Radio Programas del Peru (RPP).

None of the injuries were considered life-threatening, officials said.

Electricity supplies were knocked out in Ica but so far there are no reports of major damage.

The province of Ica was struck by a 7.9-magnitude undersea earthquake in 2007 that left thousands homeless.

BBC

Navy wants commando ‘mothership’ in Middle East

The Pentagon is rushing to send a large floating base for commando teams to the Middle East as tensions rise with Iran, al-Qaeda in Yemen and Somali pirates, among other threats.

In response to requests from U.S. Central Command, which oversees military operations in the Middle East, the Navy is converting an aging warship it had planned to decommission into a makeshift staging base for the commandos. Unofficially dubbed a “mothership,” the floating base could accommodate smaller high-speed boats and helicopters commonly used by Navy SEALs, procurement documents show.

Special Operations forces are a key part of the Obama administration’s strategy to make the military leaner and more agile as the Pentagon confronts at least $487 billion in spending cuts over the next decade.

Lt. Cmdr. Mike Kafka, a spokesman for the Navy’s Fleet Forces Command, declined to elaborate on the floating base’s purpose or to say where, exactly, it will be deployed in the Middle East. Other Navy officials acknowledged that they were moving with unusual haste to complete the conversion and send the mothership to the region by early summer.

Navy documents indicate that it could be headed to the Persian Gulf, where Iran has threatened to block the Strait of Hormuz, a crucial shipping route for much of the world’s oil supply. A market survey proposal from the Military Sealift Command, dated Dec. 22 and posted online, states that the floating base needed to be delivered to the Persian Gulf.

Other contract documents do not specify a location but say the mothership would be used to “support mine countermeasure” missions. Defense officials have said that if Iran did attempt to close the Strait of Hormuz, it would rely on mines to obstruct the waterway.

With a large naval base in Bahrain, and one or two aircraft carrier groups usually assigned to the region, the Navy has a substantial presence in the Persian Gulf and surrounding waters. Adding the mothership would do relatively little to bolster U.S. maritime power overall, but it could play an instrumental role in secretive commando missions offshore.

The deployment of the floating base could also mark a return to maritime missions for SEAL teams, which for the past decade have spent most of their time on land in Iraq and Afghanistan.

Other details of the project became public Tuesday when the Military Sealift Command posted a bid request to retrofit the USS Ponce, an amphibious transport docking ship, on a rush-order basis.

Until December, the Navy had planned to retire the Ponce and decommission it in March after 41 years of service. Among other missions, it was deployed to the Mediterranean Sea last year in support of NATO’s air war over Libya.

Instead, the ship will be modified into what the military terms an Afloat Forward Staging Base. Kafka said it would be used to support mine-clearance ships, smaller patrol ships and aircraft.

The documents posted by the Military Sealift Command in December, however, specify that the mothership will be rebuilt so that it can also serve as a docking station for several small high-speed boats and helicopters commonly used by Navy SEAL teams.

Washington Post

'Assad should tell West to go to hell'

Davos policymakers are playing Global Apocalypse and running out of lives

Imagine the world economy as a video game, one observer said. You have to complete a number of stages before you win, and the idea is to dodge all the bad stuff that can come at you at any moment. If you really get it wrong, you are zapped and you have to start all over again.

The game being played by the policymakers who assembled in Davos last week should be called Global Apocalypse. It now even has its own Super Mario figure in the shape of the president of the European Central Bank, Mario Draghi.

Sad to say, it is taking those in charge of the global economy a long time to master the controls. After four and a half years they have made it to the first level but are now stuck there. Missiles rained down on them in 2011 and by the year's end there was a very real fear of a wipeout as the euro crisis deepened.

A bit of clever footwork from Super Mario has averted the immediate danger. The ECB has flooded Europe's financial system with cheap money and that has prevented banks from going to the wall. Mark Carney, Canada's central bank governor and chairman of the financial stability board, said on Saturday that the long-term refinancing arrangements meant there was no longer the risk of a repeat of the chaos that followed the collapse of Lehman Brothers in September 2008.

But as Churchill said after Dunkirk, wars are not won by retreats, however brilliantly executed, and getting beyond level one is still proving challenging, at least for the developed countries in the west, where it has taken unprecedented intervention from central banks to prevent it from being game over. Martin Wolf, of the Financial Times, aptly describes the current state of affairs as a contained depression.

In a sense, it should come as no surprise that victory has so far proved elusive. George Osborne is right when he says that recoveries from recessions are always more difficult when the downturns are caused by excessive debt, but this slump has been accompanied by two other shocks: a big technological shift from an analogue to a digital world and a big geographical shift that has seen the centre of gravity of activity move from Europe and North America to Asia. Companies such as Nokia that were viewed as world-beaters only a few years ago are finding out exactly what the economist Joseph Schumpeter meant by creative destruction, but that process also seems to be at work between countries and regions.

Even so, there is a way through the labyrinth provided policymakers avoid the obvious pitfalls and work methodically. One problem has been that they have tried to find short cuts over the past few years rather than work their way through the levels in the right sequence.

So, if getting to the first level called for urgent and aggressive action to ease monetary policy and shore up the financial system, the next phase should be to deal with the global imbalances that caused the problem in the first place. The fundamental issue in the years leading up to the 2007 financial crisis was not the number of US sub-prime mortgages or even the explosion in derivatives; it was the instability caused by one half of the world running massive current account surpluses and the other half running massive current account deficits.

What needs to happen now is that the surplus countries accept the need to increase domestic demand, thereby soaking up exports from the debtor countries, resulting in more balanced growth all round.

Once the global economy has enough demand to allow the resumption of solid growth, there will be the right environment to repair the damage to the banking system. Regulation needs to be improved; banks have to provide themselves with bigger capital and liquidity buffers, and a solution has to be found to the "too big to fail" issue.

Stronger banks will reduce the risk of a second credit crunch, making it easier for private-sector firms to finance expansion or secure working capital. Higher investment by the private sector will mean that governments will no longer have to shoulder so much of the burden of growth. Once a vigorous private-sector recovery is under way, finance ministries can adopt tougher fiscal policies without the risk of pushing their economies back into recession.

By this stage, an end to the game is in sight. Governments can use the fruits of stronger growth to finance supply-side improvements to their economy, including extra spending on education, skills and infrastructure. Growth can be made sustainable by championing vibrant green technology sectors. Regulatory regimes can be tinkered with to prevent "irrational exuberance".

There was little sign in Davos last week of this sort of strategy. In part, that's because some of the measures taken by central banks to prevent catastrophe have had unintended consequences: the impact of quantitative easing on commodity prices and hence on inflation, for example. In part, it has been the result of "black swan" events, such as Japan's tsunami. But mostly, it has been due to inertia, complacency and error.

Policymakers have put the question of global rebalancing into a box labelled "too hard to deal with", and have been dilatory in sorting out the problems of their financial sectors. Instead, whether through a misguided belief in financial orthodoxy or a fear of the bond markets, they have concentrated on heavy-handed and blanket austerity, something that should have come at the very end of the game.

The result has been sluggish growth in the west because every element of growth – public expenditure, consumer spending and investment – has been choked off simultaneously. If government is to retrench without causing recession, private demand has to rise, but the squeeze on real incomes and a reluctance to invest means this is not happening. The result is an unbalanced global economy, drifting towards a double-dip recession (in the west at least), a dysfunctional financial system and – a new ingredient in the toxic mix – a deeply disaffected public.

Christine Lagarde, the International Monetary Fund's managing director, spent last week rattling the tin in the hope of getting contributions for a $2 trillion (£1.3tn) war chest. European policymakers were trying to put the finishing touches to a Greek debt deal. Draghi made it clear that providing liquidity to Europe's banks would not be enough on its own to bring an end to the crisis.

What does it mean? It means that blanket austerity is not working, and. It means that what was originally a global response to a global crisis has become a series of national responses to national crises. It means that Europe is treating a three-dimensional problem (growth, banks, public finances) with a one-dimensional fix of deficit reduction. It means that the global economy is still struggling to get beyond level one of Global Apocalypse. And if policymakers don't start showing a bit more skill, it will soon be Game Over and time to play Global Apocalypse 2.

The Guardian

Pundits fear 'perfect storm' despite official optimism

AFP - Despite attempts by political and business leaders to suggest the eurozone has turned a corner, the prevailing view of pundits is things can only get worse and a "perfect storm" is brewing.

The five-day Davos forum which ended Sunday, was dominated by the sovereign debt crisis in the single currency zone and was held against a backdrop of frantic negotiations on a write-down deal between Greece and its creditors.

Some of the players most closely involved with the crisis since the 2008 financial meltdown insisted there was now light at end the tunnel with European Central Bank president Mario Draghi hailing "outstanding progress".

"Outlook Less Bleak From Alpine Retreat" was the assessment on the news pages of the Financial Times, suggesting the cool mountain air and pristine snow had raised the spirits of leaders more used to Brussels summits.

But, in an end of forum debate, experts predicted the break-up of the eurozone, economic malaise in the United States and a rise of militancy -- and then there are the consequences of a conflict over Iran's nuclear programme.

Nouriel Roubini, professor of economics at New York University, said the world might just about muddle through in 2012 but not much longer.

"2013 could be a perfect storm where you have a full eurozone crisis, where the fiscal problems of the United States come to a head and ... there is an investment bust and you have a hard landing in China as well," he said.

New York Times columnist Thomas Friedman had a similarly bleak forecast.

"I feel we will be back here next year and the hole will be that much deeper," he said.

Google executive chairman Eric Schmidt was among those who argued at Davos that globalisation had been a huge force for good, raising two billion people out of poverty.

But Friedman said the growing inter-connectivity meant the woes felt in one corner of the world impacted on everyone.

"If the world were a table with four legs -- the American economy, the European Union, the Arab world and China/India -- what strikes me right now is that all four legs are really shaking and they have never before been more interconnnected and interdependent," he said.

European leaders such as Germany's Angela Merkel and Denmark's Helle Thorning-Schmidt were among those who argued the eurozone crisis meant more integration was needed on the continent.

But Gideon Rachmann of the Financial Times warned of a potential backlash against the European Union and a rise of extremist parties as a consequence.

He raised the possibility that far-right wing leader Marine Le Pen could beat incumbent Nicolas Sarkozy in the first round of France's presidential election in March.

"You will see a radicalisation in politics," he said. "The potential for the unravelling, not just of the euro but the political structures which underpin the European Union, is really quite real."

Roubini said it was only a matter of time before the 17-nation eurozone started breaking up, warning starkly: "The eurozone is a slow motion train wreck. Not only Greece but other countries are insolvent.

"Probably not all members of the eurozone will be able to stay in the eurozone ... Greece (will exit) in the next 12 months, Portugal might take longer."

Perhaps second only to the eurozone, the issue that most exercised minds here was the possibility of Iran acquiring the nuclear bomb.

Friedman said Israel was "keeping its options open" as its leaders regarded a nuclear-armed Iran as an existential threat to the Jewish state.

He said the US government had made clear to Israel it did not want to see it launch any attacks on Iran as "the consequences could be so unpredictable".

"The deepest, deepest American fear is that Israel would start a war with Iran that America could be forced to finish," he said.

And Roubini said a war with Iran would have devastating consequences for the world economy.

"Oil prices would spike at least 50 percent and you would have a global recession," he said. "If we decide we are going to attack Iran let's think about the consequences."

The Number Of Americans Dependent On The Government Is At An All-Time High

A higher percentage of the American population is receiving government benefits than ever before.  Yes, there have always been poor people that have needed our assistance, but what does it say about our economy that the number of Americans dependent on the government is at an all-time high?  Every night on the evening news we are told that the economy is improving, and Barack Obama is endlessly giving speeches about the "economic recovery" that is supposedly underway.  But that is not the reality on the ground for those on the bottom rungs of the income ladder in America.  People are really hurting out there, and the number of Americans that are turning to the government for financial assistance just continues to increase.  Yes, we should always have a "safety net", but right now our "safety net" is becoming massively overloaded as millions more Americans jump on to it every single year.  What all of these impoverished Americans really need are jobs, but the U.S. Congress and the past several administrations have been systematically killing job growth in America.  So unfortunately the number of poor Americans is going to continue to rise, and that is really bad news for a nation that is already drowning in debt.

Some people out there want to blame the poor for the statistics that you are about to read, but that is a mistake.  Yes, there are a lot of people out there that are abusing the system, and that needs to be stopped.

But many Americans that are dependent on the government are in that situation because there simply are not enough jobs in this country.

And unfortunately, the Obama administration and the U.S. Congress continue to pursue the same job-killing policies that have gotten us into this mess in the first place.  So millions of Americans that have learned to survive as government dependents are not being given the opportunity to break out of that cycle.  When there is a shortage of decent jobs, it is easy to give up.  Many tend to become more and more comfortable being dependent on the government as time goes by.

Once you become addicted to getting a government check in the mail, it can be very difficult to give that up.  There are some that get trapped in a life of government dependence for years or even decades.

The following are 16 statistics which show that the number of Americans dependent on the government is at an all-time high....

#1 According to the Census Bureau, 49 percent of all Americans live in a home that gets direct monetary benefits from the federal government.  Back in 1983, less than a third of all Americans lived in a home that received direct monetary benefits from the federal government.

#2 The amount of money that the federal government gives directly to Americans has increased by 32 percent since Barack Obama entered the White House.

#3 The number of Americans receiving Social Security disability benefits has increased by 10 percent since Barack Obama first took office.

#4 Back in 1990, the federal government accounted for 32 percent of all health care spending in America.  Today, that figure is up to 45 percent and it is projected to surpass 50 percent very shortly.

#5 The number of Americans on food stamps recently hit a new all-time high.  It has increased by 3 million since this time last year and by more than 14 million since Barack Obama first entered the White House.

#6 Today, one out of every seven Americans is on food stamps and one out of every four American children is on food stamps.  This is unprecedented in American history.

#7 In 2010, 42 percent of all single mothers in the United States were on food stamps.

#8 Back in 1980, government transfer payments accounted for just 11.7% of all income.  In 2010, government transfer payments accounted for 18.4% of all income, which was a new all-time high.

#9 By the end of 2011, approximately 55 million Americans received a total of approximately 727 billion dollars in Social Security benefits.  As the retirement crisis becomes much worse, that dollar figure is projected to absolutely skyrocket.

#10 According to the Congressional Budget Office, the Social Security system paid out more in benefits than it received in payroll taxes in 2010.  That was not supposed to happen until at least 2016.

#11 Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, one out of every 6 Americans is on Medicaid, and things are about to get a whole lot worse.  It is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

#12 The U.S. government now says that the Medicare trust fund will run out five years faster than previously anticipated.

#13 The total cost of just three federal government programs - the Department of Defense, Social Security and Medicare - exceeded the total amount of taxes brought in during fiscal 2010 by 10 billion dollars.

#14 It is being projected that entitlement spending by the federal government will nearly double by the year 2050.

#15 Right now, spending by the federal government accounts for about 24 percent of GDP.  Back in 2001, it accounted for just 18 percent.

#16 When you total it all up, American households are now receiving more money directly from the federal government than they are paying to the government in taxes.

Once again, I am not blaming the poor.  Almost all of us know of someone that is on government assistance.  Most of them are not dependent on the government because they are lazy or because they want to cheat the system.  Most of them have just had their dreams crushed by this horrible economyand need a helping hand.

It is incredible how anyone can run around claiming that the U.S. economy is heading in the right direction with all of this going on.

Yes, things are going fairly well for the boys and girls down on Wall Street, but for the vast majority of Americans things are looking quite bleak.

For example, things have gotten so bad that the state of Florida is actually considering using ballparks and sports stadiums as shelters for the homeless.

But when it comes to so many people being financially dependent on the federal government, there is a major problem.

The problem is that the federal government is absolutely drowning in debt.

So why don't our politicians just explain to the American people that we need to start cutting back and reducing the size of some of these programs?

Well, if any of our politicians try to do that they won't get elected next time around.

The truth is that the American people are deeply addicted to government money.

Any politician that proposes significant cuts to Social Security or Medicare is a goner.

Every poll or survey that is done on this subject shows that the American people are overwhelmingly against cuts to programs like Social Security and Medicare.

So politicians will just keep spending money like there is no tomorrow, and the American people will just keep sending them back to Washington.

But just like we saw in Greece, a day of reckoning comes eventually.

There will come a time when the federal government will not be able to steal 150 million dollars an hour from our children and our grandchildren.

There will come a time when there will not be enough money for all of these growing social programs.

So once the government checks stop rolling in, what is going to happen then?

Economic Collapse

Time to Greece take over

Lucas Papademos said that unless the country’s international backers agreed to a new bail-out, Greece would be unable to pay off its loans and be forced out of the eurozone.

EU leaders will meet in Brussels tonight amid growing concern that Greece will fail to implement the austerity measures its international backers are demanding as a condition of the latest package of financial support. Without that bail-out, Greece will be unable to repay €15 billion of loans due in March.

Amid doubts about Greek willingness to cut spending and raise taxes, Germany has suggested that a European commissioner should take effective control of Greek fiscal policy to ensure the country accepts austerity. Evangelos Venizelos, the Greek finance minister, rejected that plan, saying it would undermine Greece’s “national identity and dignity”.

Philipp Rösler, the German economy minister, insisted that some external control over Greek policies had to be considered. “If the Greeks fail to do this themselves, the leadership and monitoring must come in a stronger way from outside, for example via the EU,” he said.

Iain Duncan Smith, the Work and Pensions Secretary, suggested that the German plan was a threat to European democracy.

“If you fiddle around with democracy because you don’t like quite what it does, then you open the door to those who say, 'Why democracy at all?’ ” he said.


The Telegraph

Shanghai New Home Prices Tumble 41% In Past Week

While the number is likely influenced by the Chinese Lunar New Year, property consultant Shanghai UWin Real Estate Information Services Co. released an update on the Chinese new home sales market which is, to say the least troubling. Specifically, according to UWin, Shanghai new home prices fell 40.96% in the week ended January 29, compared to the previous week, to 16,144 yuan/square meter. If correct, it means that local homeowner violence is about to come back with a vengeance, as happened back in October when property developer office were stormed by angry mobs of home purchasers who saw an implosion in the indicated values of their purchases. Furthermore, not only has the market stalled, but it appears to be frozen, with just 4,400 square meters of new transactions closing, or an 89.21% drop on the week. And while the holiday has an impact, the volume is 36% of the 7 year average for Chinese holidays, so there is more in play here than just a seasonal grind. So just like the Baltic Dry where everyone is expecting a surge "any minute now" that the Chinese new year is over, nervous China bulls will have this new vertical to keep track of and make sure that it is merely a blip, as the alternative is a full blown Chinese housing bubble collapse.

More specifics from Bloomberg:
New home transactions by area plunged 89% W/w in Jan. 23-Jan. 29 to 4,400 sq/m, Uwin says in e-mailed statement.
Sales during Chinese New Year holiday decline to lowest level since 2006 for same period; volume 36% of 7-yr avg. for CNY holiday
Avg. new home price down 41% W/w
New home supplies plunged 87% W/w
Property developers may have to continue price cuts for cashflow to survive, Uwin analyst Zhijian Huang says
China may remove or relax home purchase restrictions during June-Oct period: Huang
Policy turnaround may boost sales before home prices rebound moderately: Huang

Zero Hedge

Why Are the Chinese Buying Record Quantities of Gold?

This month, the Hong Kong Census and Statistics Department reported that China imported 102,779 kilograms of gold from Hong Kong in November, an increase from October’s 86,299 kilograms. Beijing does not release gold trade figures, so for this and other reasons the Hong Kong numbers are considered the best indication of China’s gold imports.

Analysts believe China bought as much as 490 tons of gold in 2011, double the estimated 245 tons in 2010. “The thing that’s caught people’s minds is the massive increase in Chinese buying,” remarked Ross Norman of Sharps Pixley, a London gold brokerage, this month.

So who in China is buying all this gold?

The People’s Bank of China, the central bank, has been hinting that it is purchasing. “No asset is safe now,” said the PBOC’s Zhang Jianhua at the end of last month. “The only choice to hedge risks is to hold hard currency—gold.” He also said it was smart strategy to buy on market dips. Analysts naturally jumped on his comment as proof that China, the world’s fifth-largest holder of the metal, is in the market for more.

There are a few problems with this conclusion. First, the Chinese government rarely benefits others—and hurts itself—by telegraphing its short-term investment strategies.

Second, the central bank has less purchasing power these days. China’s foreign reserves declined in Q4 2011, falling $20.6 billion from Q3. The first quarterly outflow since 1998 was not large, but the trend was troubling. The reserves declined a stunning $92.7 billion in November and December.

Third, the purchase of gold would be especially risky for the central bank, which is already insolvent from a balance sheet point of view. The PBOC needs income-producing assets in order to meet its obligations on the debt incurred to buy foreign exchange, so the holding of gold only complicates its funding operations. This is not to say the bank never buys gold—it obviously does—but there are real constraints on its ability to purchase assets that do not provide current income.

Apart from China’s central bank, there is not much demand from the country’s institutional investors for gold. There are industrial users, of course, but their demand is filled from domestic production—China is the world’s largest gold producer. Most of China’s gold demand from foreign sources, therefore, is from individuals.

So why are individuals now buying gold? The easy answer is that the demand is only seasonal, as Jeff Wright of Global Hunter Securities believes. The Chinese traditionally buy gold presents in the run-up to the Lunar New Year, which started a week ago. Yet gift-giving does not begin to explain the surge in gold purchases that started as far back as July. November was the fifth-consecutive month of China’s record gold purchases from Hong Kong.

A better explanation for the gold-buying binge of Chinese citizens is that they are using the shiny commodity as an inflation hedge, as the Financial Times recently suggested. Yet the buying of gold has increased while inflation has eased. And that means there must be another explanation. The best explanation is that individuals in China are using gold as a substitute for capital flight.

Forbes

Senate Vote Approves Rise in Debt Limit

WASHINGTON — The Senate voted on Thursday to allow a further increase in the federal debt limit, permitting President Obama to borrow $1.2 trillion more to operate a government that spent about 55 percent more than it collected in revenue last year.

The 52-to-44 vote generally followed party lines, with Democrats supporting the increase in borrowing authority and Republicans opposed.

In the House last week, Republicans passed a “resolution of disapproval” to stop the increase in the debt limit. But the Senate refused on Thursday to take up that measure.

The upshot is that the debt limit will rise immediately to $16.4 trillion, from the current ceiling of $15.2 trillion.

House Republicans, led by Speaker John A. Boehner, boast that they have changed the conversation in Washington so that lawmakers focus on how to cut spending.

But Senator Tom Coburn, Republican of Oklahoma, complained that the Senate was allowing the debt limit to rise in a perfunctory way, with little debate.

“Little has changed in Washington in the last five years,” Mr. Coburn said. “We’ve argued, debated and lamented on how to rein in the federal government’s costs and out-of-control spending. All the time that was going on, we were on a spending binge, spending money we do not have on things we do not need. Even though we knew we had to borrow more money, Congress has done nothing to avoid raising the debt limit further. Nothing.”

The 2009 economic stimulus law set the debt limit at $12.1 trillion. Congress increased the limit in December 2009 and February 2010 and again last summer, as part of a bipartisan budget agreement.

Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, defended the new increase in the debt limit, saying it would not authorize additional spending, but just ensure that the United States could honor past commitments.

“Increasing the debt limit permits the Treasury Department to pay the bills we have already incurred,” Mr. Baucus said.

Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, said that many Republicans who voted against the increase in the debt ceiling had also voted in recent years to spend more on the wars in Iraq and Afghanistan and on domestic programs.

Mr. Durbin admonished his colleagues: “Don’t vote for the spending if you won’t vote for the borrowing, because we know now that they are linked together. They are one and the same.”

In an address to Congress in February 2009, a week after signing the economic stimulus law, Mr. Obama said he would “cut the deficit in half by the end of my first term in office.”

Republicans said Thursday that Mr. Obama was far from that goal. The deficit — $1.3 trillion in each of the last two fiscal years — has declined slightly from 2009, when it totaled $1.4 trillion.

The federal budget deficit is the difference between money spent and money collected by the government in a single year, while the debt represents amounts borrowed by the government over many years to fill those gaps.

With the latest increase in the debt limit, Republicans said, the debt will cross a significant threshold, as it will be roughly the same size as the economy, measured by the gross domestic product.

About two-thirds of the debt is held by the public in the form of Treasury bills, notes and bonds. The rest consists mainly of special-issue government securities held by trust funds for Social Security, Medicare and other programs.

The Treasury still finds that it can borrow at extraordinarily low interest rates. But Senator Orrin G. Hatch, Republican of Utah, said the United States should learn from the experiences of European countries that spent beyond their means.

New York Times

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