3. Chart of the century - This chart from Jim Reid at Deutsche Bank (!) explains so much about the global economy, the meltdown and what's happening now in both the economy and in politics. It shows how the profit share of the US economy taken by banks exploded after the repeal of Glass Steagall in 1999, slumped in 2008 and is now rocketing again. How much proof do Obama and American politicians need before they reign in the 'Too Big to Fail' banks and strip them of their morally hazardous government guarantees. I also wonder what the same chart would look like for Australasia. Some work for us to do. FTAlphaville has the comments from Reid on what this all means. Compulsory reading for all bankers, regulators and customers.

The Global economy would be better served by slowly bringing down the size of financials and weaning the global economy off its reliance on the sector slowly over time. However that would allow the sector to still be making larger than trend profits for many years to come which as Politicians are finding is very difficult to sell to an electorate baying for blood.

4. China tightening - A lot of markets around Asia and Australia in particular are watching what is happening inside China's banking system very closely this week. The WSJ reports that both Industrial and Commercial Bank of China and CITIC have told their branches in Beijing and Shanghai respectively to stop lending for the rest of January. I also wonder how this might affect demand for property in some parts of Auckland from mainland Chinese.

Chinese banks, which traditionally rush out loans at the start of the year, have already issued more than 1 trillion yuan ($146 billion) in new loans in the first two weeks of the year, more than double the monthly average of 400 billion yuan in the second half of last year, according to Chinese media reports, which could not be independently verified. "In responding to such a credit surge, the People's Bank of China has launched more aggressive quantitative tightening than we previously have thought," said Credit Suisse economist Dong Tao. Mr. Tao said six Chinese banks he contacted had confirmed they had suspended "new lending" across the country starting Jan. 19.

5. Smart printing ? - There's a rumble of a proposal coming from deep within the Obama administration to 'encourage' workers with retirement plans to buy 'guaranteed income streams' (annuities) with their regular 401K and other tax preferred savings schemes. This seems sensible on the face of it, but actually means that private pension funds would have to buy US Treasury bonds, which are often the investments backing their annuities. Hey presto. The US government would have found a buyer for all this debt it's printing. Here's the Bloomberg piece from January 9 foreshadowing this move.

There is "a tremendous amount of interest in the White House" in retirement-security initiatives, Borzi, who heads the Labor Department's Employee Benefits Security Administration, said in an interview. In addition to annuities, the inquiry will cover other approaches to guaranteeing income, including longevity insurance that would provide an income stream for retirees living beyond a certain age, she said. "There's been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income," Iwry, a senior adviser to Treasury Secretary Timothy Geithner, said in an interview. "The question is how to encourage it, and whether the government can and should be helpful in that regard," Iwry said.

Needless to say, there's a few on the fiscally sceptical right who are unhappy about being forced to help fund profligate government spending and money printing. Cue outrage. Here's Jerome Corsi at WorldNetDaily: HT Troy via email.

The Obama administration appears to have come up with a novel way of financing trillion-dollar budget deficits "“ demanding IRA and 401(k) holders buy trillions of dollars in Treasury bonds. With the Treasury needing this year to see another $1 trillion in debt to finance the anticipated federal budget deficit, and the Federal Reserve about to discontinue its 2009 program of buying Treasury bonds for the Fed's asset portfolio, the Obama administration is scrambling to find ways to sell government debt without having to raise interest rates.

6. Inflation coming? - The IMF has raised its forecasts for global growth by 0.75% to 3.9% in 2010 and 4.3% in 2011. The full table is below. It doesn't see inflation being a problem. No worries then...

But the recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures, the IMF said in an update to its World Economic Outlook, published on January 26. "For the moment, the recovery is very much based on policy decisions and policy actions. The question is when does private demand come and take over. Right now it's ok, but a year down the line, it will be a big question," said IMF Chief Economist Olivier Blanchard in an IMF video interview. IMF Managing Director Dominique Strauss-Kahn has warned that countries risk a return to recession if anti-crisis measures are withdrawn too soon.

7. Big borrowing - Fitch is reporting that European governments will need to borrow 2,200 billion euros (17% 19% of GDP) from the capital markets in 2010 to roll over existing debt and raise new debt. Who will lend them all this money. Not the Japanese. The Chinese? They're too busy propping up the US dollar. Interest rates could spike, which will force these governments to cut back spending and raise taxes. Deflation and a double-dip recession beckon, I reckon.

This figure represents a marginal increase on 2009, which Fitch estimates to have been close to EUR2,120bn (17% of GDP) - itself the largest borrowing requirement seen in decades. Of the countries (EU15 plus Switzerland) covered in today's new report, gross borrowing (including maturing and short-term debt) in absolute terms is projected to be largest in France (EUR454bn) (AAA/Stable Outlook), Italy (EUR393bn) (AA-/Stable Outlook), Germany (EUR386bn) (AAA/Stable Outlook) and the UK (EUR279bn) (AAA/Stable Outlook). As a percentage of GDP, gross borrowing is expected to be largest in Italy, Belgium (AA+/Stable Outlook), France and Ireland (AA-/Stable Outlook) - all at around 25%. Fitch notes that several European governments sharply increased their stock of short-term debt in 2009, resulting in an aggregate 20% year on year increase, compared to 2008. France and Germany each covered over half of their net borrowing last year through increased treasury-bill issuance whilst for Spain (AAA/Stable Outlook) and Portugal (AA/Negative Outlook), the share was close to a third. Douglas Renwick, Author of the report and Associate Director in Fitch's Sovereign group said, "The increase in the stock of short-term debt is a source of concern to Fitch as it increases market risk faced by governments, notably exposure to interest rate shocks." Last year, financing conditions were favourable for most European governments, with low yields and increased demand from the private sector. However, 2010 is likely to be characterised by greater volatility in European government bond markets as the 'liquidity premium' enjoyed by sovereign issuers diminishes - driven by returning liquidity in other markets and a recovery in investor risk appetite, combined with market concerns over the medium-term fiscal and inflation outlook. Consequently, Fitch believes government bond yields are likely to rise, potentially quite sharply. However, it also believes it is unlikely that large, highly rated sovereigns will face hard constraints in accessing market funding on the scale required, albeit at more expensive rates.

8. Year of the Sovereign Downgrade - Standard and Poor's warned Japan overnight it may cut its AA sovereign credit rating because the government there was reducing its debt too slowly, the NYTimes reported. Japan is a real worry. If interest rates there spike it could create all sorts of havoc. It is still the world's 2nd largest economy (just) and one of our top 5 buyers of exports.

"The outlook change reflects our view that the Japanese government's diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures," S.&P. said. "The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected." The AA rating puts Japan in the same category as Slovenia, Chile and Ireland. "The ratings on Japan could fall by one notch if economic data remain weak and measures to boost medium-term growth are not forthcoming" given Japan's already high government debt burden and aging population, the agency said.

9. Recession over -  Britain's economy crawled out of recession in the December quarter, registering 0.1% growth, although many worry it will dip back in later this year before an election in May, FT reports.

In an inflammatory note to investors, Bill Gross, managing director of Pimco, one of the world's biggest bond funds, warned about the fragility of the UK government debt market. "The UK is a must avoid. Its gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors," he said. He said the UK's mounting public debt, forecast by the Treasury to rise to 77 per cent of gross domestic product by 2013, had prompted investors to sell the pound and UK government bonds. Without swift action to cut debt levels, he said there could be a run on the pound and a collapse in the gilts market.

10. Completely irrelevant funny video - It is actually called funny video and is in German. You're safe to turn down the sound, but the German commentary somehow makes it funnier. I'm not sure why...