Economic news digest

What connects computer screens, green cars and military power? Rare earth elements, required for the manufacture of many advanced technologies, from hybrid cars to guided missiles. China enjoys 98 per cent of REE production, cornering the market after a single US mine was closed in the mid 1980s. Chinese companies have bought stakes in Australian and Canadian rare earths prospects and have tried unsuccessfully to buy the still idle US facility.

The debt load of Eastern Europe is apparently putting off investors. But there is worse news for rich countries: investors are betting that rich countries will default on their bonds - the volume of such trades has doubled. Is sovereign debt the new subprime?

As the ECB unwinds liquidity support for banks, Meredith Whitney finds the looming end of government MBS purchases “scary”: the founder says bank stocks are “grossly overvalued”, and predicts more bankruptcies. Research suggests mortgage rates will rise by 35-50 bps when the Fed stops buying MBS.

Talking of which, Wall Street funds are back in the game: they are buying mortgage debt, reducing the principal, refinancing through lenders backed by GSEs, bundling them together and selling them on. Happy borrowers, presumably, but unhappy taxpayers.

The US government faces a shock akin to that of overstretched homeowners:

“With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher. In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.”

A proposal to audit the Fed has received support from part of the House of Representatives, the FSC. Just how independent is the Federal Reserve? “Congress made the Fed, and Congress can unmake the Fed,” says one blog. Others question the re-election of Ben Bernanke on December 3: “not necessarily” a foregone conclusion, apparently.

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