Mortgage applications hit almost 5-year high: MBA

Good news! The transmission mechanism (via housing) is not completely broken.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended December 19 soared 48.0 percent to 1,245.4, the highest reading since the week ended July 18, 2003, when it reached 1,284.3.

Spencer Rascoff, chief operating officer at Zillow.com, a real estate website based in Seattle, said historically low mortgage rates are a boon for the mortgage industry and to many borrowers, but it remains to be seen if they will have a substantial effect on the housing market.

"The good news is that these refis could help some homeowners avoid expensive resets on adjustable rate mortgages, and in turn prevent some foreclosures," he said on Monday.

Read full article here.

As Oil Sinks, U.S. Officials Plan to Fight Speculation

Let's hope Obama follows through on this.

"...lawmakers are emboldened, seeing both the crude-price collapse and the systemic failure of the credit-derivatives market as reason to push ahead with rules to prevent what they call "excessive speculation" in commodity markets."

This is good...

"Even if speculators only had a small impact [on price], that's not right. Our job is to guard against fraud and abuse," said CFTC Commissioner Bart Chilton, a Democratic appointee. "Congress should act expeditiously to prevent the type of excessive speculation and leveraging we have seen."

But this may represent the real attitude:

"The anti-speculation talk may have subsided in the market slide, but its ugly head is likely to rise again," said Greg Mocek, a former head of enforcement at the Commodity Futures Trading Commission, now a partner at law firm McDermott Will & Emery in Washington.

And Gary Gensler, Obama's CFTC Chairman, is a former Goldman Sachs partner, which makes it hard to imagine he is going to crack down on speculation.

Fed's foreign currency position rises $14 billion in latest week to $642 billion

Over a three month period the Fed's foreign currency holdings have gone from virtually zero to over $600 billion. Foreign currencies now comprise the largest single asset holding on the Fed's balance sheet. This accumulation has gone on virtually unnoticed. No one in the media or in Congress has asked about this.

The accumulation of foreign currencies have been negative for the dollar. These currency holdings also represent loans--in the same magnitude--to foreign central banks that are being used to fund foreign institutions. Neither the Fed nor the Federal Government has any oversight on these loans. Who are they going to? What collateral is being pledged? We know nothing.

It is highly likely that some of this money has gone to foreign automakers like BMW, Daimler, Volkswagon, Nissan, Toyota, Honda, Hyundai, Kia, etc. And for sure a big chunk of this money has gone to foreign banks and financial institutions.

As the debate rages on in America as to whether or not we should help our own businesses, the Fed is quietly lending money to foreign companies in amounts greater than what has already been spent through TARP.

It is an outrage!

The American electorate, and especially American workers who have recently lost their jobs, should be up in arms about this. Instead, we see near-universal-opposition to the token loans (with huge strings attached) that are being given to companies like GM and Chrysler.

Unless we wise up and complain about the right things, we will continue to see policy that is counterproductive and fashioned, by design, to make Americans poorer vis-a-vis the rest of the world.

Fed Loans Guided by Raters Grading Subprime Debt AAA

Fed basing its lending on credit ratings provided by S&P, Moody's, Fitch--the same idiots that said all the toxic subprime stuff was AAA. Amd the same idiots that will ultimately downgrade U.S. sovereign debt.

This is the blind leading the blind. Totally absurd!! God help us!!!

Read full story here.

The fox in charge of the henhouse

Barack Obama nominated Gary Gensler to head up the Commodity Futures Trading Commission.

Gensler is a former partner at Goldman Sachs--one of the biggest futures market speculators in the world--so it is hard to imagine that we will see any real change when it comes to speculative activity in the markets.

Earlier this year another former Goldman partner--Hank Paulson--testified before Congress that "speculation had nothing to do with the rise in the price of oil and other strategic commodities."

Obama again goes for the status quo in his selection of Gensler. Where's the "Change we can believe in???"

Read story here.

Bush Undecided on Auto Plan, Worried About Putting "Good Money After Bad"

Conservative Republican Senators from Tennessee, Alabama, Mississippi, Kentucky, South Carolina and Louisiana appear to be getting to Bush. Following the defeat of the aid package in the Senate the president gave flat-out assurances that he would not let the Big 3 go under.

Now, however, it appears that he is buying the arguments of Senators like Bob Corker (R-TN), when he says that giving help to Detroit is the equivalent of "throwing good money after bad."

These senators are monumental hypocrites and should be exposed as such. Their states receive far more from the Federal Government than they give to Washington, and they use that Federal money to subsidize the foreign automakers that set up shop in their states. Do their constituents benefit? Hardly. They are among the poorest in the nation.

Why there is zero risk of inflation

Inflation occurs when the economy is growing faster than its ability to produce given its resources and available capital. We are nowhere near this. Look at some of the current data:

Total industrial capacity utilization at 75.4 percent
3.1 million unsold cars
5.3 million unsold homes
10 percent more oil inventory than same time last year
10 million people unemployed
Wholesale inventories up $33 billion y-o-y
Real earnings by workers 17 percent below 1973 peak
40 million people without health care
Half of all families can't afford to send their kids to college

How do you know when the Fed and/or government has done too much? When the slack and excess in those numbers go away. We are a long way from that anytime soon. Another way to say that is that we are living far below our means.

If you had a child that had incredible talents and abilities you'd strive to make sure that he used those attributes to the fullest. Yet, when it comes to the economy, we are resigned to live below our means (become poorer, vis-a-vis the rest of the world) because of fears of deficits.

Madoff effect on currency markets

The yen hit a 13-year high against the dollar following news of the Madoff scandal and the euro is now at a two month high versus the greenback. Some of the foreign institutions that have been affected include: HSBC, Nomura, BNP Paribas, Reichmuth & Co, Union Bancaire Privee and Europe's second largest bank by market value, Banco Santander.

Foreign investors (and many Americans) view this as a massive regulatory failure by the SEC and other U.S. regulatory agencies. This is probably exacerbating the selling in the dollar. It could go on for several more days as fund selling and other liquidations are conducted.

More liars, hypocrites

Senator Bob Corker of Tennessee.

Tennessee offered huge tax incentives (read: subsidies) to foreign automaker, Volkswagon.

What did it do for the state's economy and its residents?

His state ranks 39th in the nation in per capita income, but 13th in the nation when it comes to receiving money from the Federal Government!

I watched him this morning on CNBC, where he gave such a phony display of dissapointment that they "couldn't reach a deal." It was sickening. He deserves and Oscar for that performance.

Free market fascists!

Senators Shelby, Vitter, McConnell, Cochran, Wicker et al.

I believe there is a widely held view in America that we are a nation of sinners--profligate spenders, debt-junkies and commie leeches of the government or advocates of the social cause who suck off the tit of the true "wealth creator," which is the free market.

In the eyes of most people, unfortunately, these sins must be punished. In their mind this is a fundamental requirement for absolution.

I am convinced that this view is held with a zealousness that rivals the most extreme form of religious fanaticism (Muslim extremism, for example) and those that hold it are prepared to sacrifice themselves, and innocents, in the name of this cause. (Just as Muslim extremists show no compunction in strapping a bomb on themselves or even their children, then walking onto a bus filled with innocents and blowing it up.)

In the movie "The Godfather II," there is a scene in which Michael Corleone is in Cuba and is about to make a signficant investment. Right before going ahead with the decision, however, he witnesses something that causes him to change his mind. On his way back to the hotel he watches as a group of rebels attack the government forces and in the skirmish some of the rebels blow themselves up, killing a few members of the government forces along with them.

Later on that evening, while everyone is celebrating their new "venture" in Cuba, Corleone expresses reservation. When asked why, he recounts the events he witnessed earlier that day and pointed out that those who are prepared to kill themselves along with innocents cannot be easily vanquished. He understood that the overthrow of the Cuban regime could not be far off. After all, he had just witnessed, first hand, the unwavering resolve of those who opposed it--willing to die freely for their cause.

The free market economic extremists in America today are of the same ilk. They are the economic equivalent of Cuba's revolutionaries or the Muslim extremists that routinely target civilians and innocents. The are driven by what can only be described as a fundamental fanaticism and their doctrine is the only true one. All others are corrupt, immoral and the preachings of the devil and the infidel.

That is why I think we cannot win this. I have become increasingly disheartened by what I see. It is useless to fight with logic, fact and reason, just as it is useless to tell fanatical Muslim extremists to sit down and "let's all just respect each other and get along."

Nothing good can come of this.

Lawmakers like Richard Shelby of Alabama, David Vitter of Louisiana, Mitch McConnell of Kentucky, Thad Cochran and Roger Wicker of Mississippi, who opposed giving aid to the U.S. automakers, represent states that sport some of the lowest economic rankings of all the states in the Union. They've enticed foreign automakers there with tax breaks and other lucrative incentives, yet the residents of their states are among the poorest in the nation. While their brand of capitalism may be good for Toyota, Honda, Hundai, BMW and Kia, it is nothing short of serfdom for the workers who labor for these companies.

Most egregious, however, is that these Senators, who preach so sanctimoniously about "looking out for taxpayer money," represent states whose per capita "take" from the Federal Government is among the highest in the nation. They are monumental hypocrites and liars, who want to do for America what they have done for their constituents: impoverish us all.

$14 billion auto bailout dies in Senate

That's what I said was going to happen all along!

Fed foreign currency position increases by $85.5 billion in the latest week

Another very large increase. Part of this gain could be due to mark-to-market forex adjustment of its currency holdings, however, most of it is probably new swap lines.

Get weekly statement here.

Excellent article on how foreign automakers used policy to achieve "comparative advantage"

Blaming U.S. automakers is naive. There are a whole set of complicated reasons that foreigners have "comparative advantage," but it pretty much all boils down to policy.

Read full article here.

Some excerpts...

"Under the new phenomenon called "globalization", the so-called "comparative advantage" which underpinned the early centuries is no longer God-given or determined by the weather, as was the case, two centuries ago, with David Ricardo's English woolens and Portuguese wine. Now commercial success is largely created, or not, by government policies, and the United States government refuses to compete for such success, even though, as The Economist magazine reported recently, "Business these days is all about competing with everyone from everywhere for everything."

Right after World War II, Japan started its trade war by competing in international trade for market share rather than profit. Japan closed its domestic market and sold its exports at cost, making up the profit in its closed market. It subsidized production and targeted certain items in trade - first textiles, then electronics, machine tools, robots and, finally, automobiles. As a consequence, Toyota is today #1 as General Motors, Chrysler and Ford struggle just to survive."

The United States Congress looks at the BMW plant in South Carolina, my home State, and the Nissan plant in Mississippi as examples of relative success and wonders what's the matter with Detroit?

• Yet BMW received a tax deferral benefit of $100 million to locate in South Carolina and Nissan received over $300 million to locate in Mississippi. And all Detroit got - Ford, GM and Chrysler alike - was tax incentives to leave the United States and offshore its jobs and production.

• The supervisory personnel from Germany and Japan who run BMW's and Nissan's plants have health care and retirement benefits paid for by Germany and Japan. Detroit has to pay for the health care and retirement benefits of its supervisory personnel.

• BMW and Nissan have deductible health care for its employees. Detroit has to pay full health costs on its employees.

• BMW and Nissan hire forty-five year olds and under in order to minimize health costs. Detroit has a lot of senior people and legacy costs.

• The major parts that BMW and Nissan use to assemble cars in the United States are produced 16% cheaper in Germany and 5% cheaper in Japan because BMW's and Nissan's VAT taxes are rebated when parts are shipped for assembly in the United States. Detroit pays all local, state and federal taxes on its parts.

• Nissan, with a largely closed domestic market, does not have to make a profit, and thus located in the United States for market share. Detroit needs to make profits.

• BMW and Nissan high-ball the costs of their imported parts so as to minimize profits and taxes to the United States. Detroit has to pay taxes on its profits.

Russians Buy Jewelry, Hoard Dollars as Ruble Plunges

"Russia has drained almost a quarter of its foreign-currency reserves, the world’s third-largest, since August as it tries to slow the ruble’s decline. The central bank has widened the trading band five times in the past month, effectively reducing its defense of the currency amid plunging oil prices."

Russia would be better off raising domestic spending and investment to boost the economy, rather than trying to support its currency. We're no longer on a fixed exchange rate or gold standard. I guess they haven't figured that out yet.

Read full article here.

Saudis Signal Deeper Oil Output Cuts Than Expected

There's a limit to what the Saudis and Opec can produce, but they have a lot of room to cut production and that's exactly what they are doing.

“The Saudis might have been impatient with the market’s skepticism, so they’ve decided some transparency is needed,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It shows they’re deadly serious about cutting already and serious about cutting more.”

Expect to see inventory overhangs reduced--even in this weak, global economy--and prices will rise again.

Read article here.

Dollar Falls on Speculation Senate Will Reject Automaker Deal

For the past three months the pattern has been that any bad news for the U.S. economy was good news for the dollar (and bad news for foreign currencies). However, this pattern has now been broken.

The dollar's trend has been reversed, thanks to large-scale dollar selling by the Fed. With a top in place, traders will view any negative event for the U.S. economy as bearish for the buck and they will sell it. In addition there are many who feel the dollar is due for a big fall thanks to bailouts and growth in the monetary base, etc. These folks already have their reasons to sell and as they see the dollar falling, there will be pile on effect.

Bang for the Buck. What a dollar of stimulus puts back into the economy...

Good article by Professor James K. Galbraith. Below is a chart that shows what a dollar of stimulus puts back into the economy, when spent on various things.



Read the entire article here.

Alabama Senator Shelby and Louisiana Senator Vitter should take responsibility for their states' terrible economies

Both Shelby and Vitter are opposed to the loans to the Big 3 automakers and they will try to block this legislation. If they succeed it will likely result in another major blow to the U.S. economy.

One look at the horrendous economic ranking of the states represented by these senators should expose them for the hypocrites and liars that they are.

Gross State Product
-Alabama gross state product 25th in the nation
-Louisiana gross state product 24th in the nation
-Michigan gross state product is 9th in the nation, even with all the difficulties they are having.

Per capita earnings
-Alabama per capita net earnings $20,965 43rd in the nation
-Louisiana per capita net earnings $22,720 34th in the nation
-Michigan per capita net earnings $23,204 29th in the nation (even with the problems and layoffs)

But here's the real kicker...

Transfer payments received from the Federal Government (per capita):

-Alabama: 13th in the nation when it comes to receiving transfer payments per capita
-Louisiana: 12th in the nation
-Michigan: 20th in the nation.

So the residents of Mr. Shelby's and Mr. Vitter's states are more on the dole from the Federal Government than the people in Michigan! Outrageous!!!

Let them know how you feel. Their email is below:

Vitter email: http://vitter.senate.gov/?module=webformiqv1
Shelby email: senator@shelby.senate.gov

Largest Fed holding? Foreign currencies!

While the public, lawmakers and the know-nothing media rail against the government's intervention to protect the U.S. economy, there has been zero mention of the massive buying of foreign currencies by the Fed. (Read: massive selling of the dollar.)

Foreign currency holdings of the Fed have gone from virtually zero three months ago, to above $600 billion and are now the single biggest asset on the Fed's balance sheet.

Foreign currencies are non-convertible, so all the Fed has is a piece of paper. In constrast, most of the U.S. bank regulated assets that the Fed lent against to help domestic institutions are cash flow positive.

There should be huge public outcry over this, but there isn't.

WSJ: Fed Weighs Debt Sales of Its Own

Fed already does this. They're called "Federal Reserve Notes." It's the cash you carry around in your wallet.

The Fed has unlimited ability to add to bank reserves, however, it needs things to sell to manage those reserves. Historically, Treasuries have served that purpose, however, if it decides to issue its own debt it's only to lend more flexibility to this function. Even so, it is only designed for reserve maintenence. That's it. The media will misconstrue this one big time.

Treasury spends by crediting bank accounts. Says so right in the government's own manual!!

This is taken verbatim from the Fed's, Federal Reserve System Purposes and Functions manual. (Chapter 3, page 34.)

It reads:

"The Treasury is not a depository institution, so a payment by the Treasury to the public (for example, a Social Security payment) raises the volume of Federal Reserve balances available to depository institutions."

That says it all. If the Treasury were like a bank, that took our money and kept it on deposit to be used at some point down the road for its spending needs, then payments by the Treasury to us would result in NO NET CHANGE IN RESERVE BALANCES IN THE SYSTEM. However, it is clearly stated that the Treasury is NOT a despository institution and that payments made to the public result in a rise in reserve balances available to depository institutions.

I don't know how much more clear that can be.

Access the full manual here.

Treasury Bills Trade at Negative Rates as Haven Demand Surges

Fed expanding bank reserves and that is what has pushed rates to zero (negative). Fed believes that low rates will spur credit demand, however, lending is pro-cyclical, meaning that credit demand is normally low in a weak economy. There is much history to suggest that this strategy may not work, particularly in the current environment.

In addition, many financial intermediaries are no longer in business or not functioning as before, so the transmission mechanism to the economy is impaired. Finally, a lot of banks are still struggling with capital issues and that is also constraining their ability to lend.

Weekly Monetary Base and Reserve Balance Update

Both the monetery base and bank reserves hit new highs in the past week.

Monetary Base

$1.51 Trillion, up from $886 billion on September 17

Reerve Balances at Federal Reserve Banks

$634 billion, up from $7.9 billion on September 10!

This is the money that will be used to buy Treasuries.

The money to buy government securities and pay taxes comes from government spending!! The media and nearly all mainstream economists don't understand this.

Foreigners do not LEND us money! Government spending funds the savings of foreigners!!!

Trichet’s Economy Hits Friedman’s Bump, Defies Breakup Forecast

"The euro area has so far defied Milton Friedman’s forecast that it would splinter as soon as the “global economy hits a real bump.” As it marks its 10th birthday, it’s hitting the biggest bump yet."

Yeah, but Friedman probably never thought the Fed would lend hundreds of billions to the Europeans to keep that from happening. If those loans were not made, Friedman's prediction would have come true.

Very ironic how we hear screams of "moral hazard" when applied to the U.S. and domestic policy, however, the mother of all moral hazard has been the Fed's decision to backstop the Eurozone. This eliminates all need for political and structural reform. Europe can continue as is, without having a viable fiscal and monetary authority, because it now has that in the form of the Fed and U.S. taxpayers.

Has China decided to allow the renminbi to depreciate against the dollar?

From Neil Mellor at the Bank of New York.

"For the first time since China abandoned its peg to the USD, it appears that the authorities there are now targeting a weaker CNY."

"Perhaps the clearest signal of the apparent change of policy, however, came from the currency market itself. Having fallen steadily from July 2005 onwards, USD/CNY’s downtrend came to an abrupt halt on July 16th of this year as the authorities stopped moving the daily band lower. The NDF market duly took this apparent shift in stance to heart with the one-year NDF rallying aggressively from mid-July onwards. Between July 18th and the end of last month the market moved from predicting a 6.1% y/y decline to calling for a 3% y/y rally.

Since the start of this week, however, there appears to have been a further palpable shift in policy. Following a clear shift in the wording in the latest quarterly monetary policy report and a speech over the weekend by President Hu Jintao (warning that China’s competitiveness and trade strength were being threatened), the PBOC on Monday set the central parity rate of USD/CNY aggressively higher. After four and a half months of sideward trading, the market reacted strongly to this apparent change in attitude by pushing USD/CNY to the top end of its band. The reaction in the NDF market was even more dramatic with the one-year NDF jumping 3.16% (its largest ever one day move in either direction). This upward pressure has continued over the last two days to leave the NDF now forecasting a 6% y/y rise (spurred on today by comments from Vice premier Wang Qishan that China will do all it can to stabilise exports)."

Interesting, July 2005 is exactly when housing stocks peaked. The reversal in the renmimbi trend could be very important.

Fed forex swaps increase by $21.6 billion in the latest week

The Fed's foreign exchange holdings increased by $21.6 billion in the week ending December 4. Could be due to mark-to-market exchange rate adjustment or some new forex swaps. This was the biggest gainer on the Fed's balance sheet for the week.

Access Fed's statement here.

Dodd, Frank Warn Paulson May Not Get TARP’s Next $350 Billion

Paulson went begging on his knees to Congress for $700 billion then decided he was not going to spend all of it. At the same time he told lawmakers what he thought was the real intent of the legislation, despite it being clearly spelled out in the bill.

"The Treasury has ignored the 'clear congressional intent' of the TARP to reduce home foreclosures, Frank, a Massachusetts Democrat, told reporters yesterday after a speech at a Consumer Federation of America conference in Washington. “At the very least, he’d have to agree that some of that money was going to be used for foreclosure relief."

Paulson's a joke. Who'd give this guy any more money?

Read full article here.

The legacy of debt

A generation or two ago our parents and grandparents handed us a legacy of debt. It was a debt that was enormous—nearly 10 times the size of the current debt we have today. That debt was the cost of fighting WWII.

According to the current crop of “Debt Doomsday” folks, that debt should have made us poorer. It should have resulted in us having to “pay back” that burdensome legacy. The things we enjoy today—our homes, cars, clothing, food, education, health care, leisure activities and the capital that creates all that—really doesn’t belong to us according to these people. By their analysis we haven’t the money to pay for it because we should be paying back the debt of a past generation. Rather than living at our current, higher standard of living, we should be poorer than our parents and far, far, poorer than our grandparents.

But it’s not the case. So what happened?

The debt back then provided the consumption and investment power that drove private production, which helped to employ people and create factories, plant, equipment and other things, which were the things that were part of the real heritage left to the future.

The same holds true now.

Government spending that brings us to a level where we are fully utilizing the resources of our nation—all of our capital and human capital—is not detrimental. Detrimental is not living at the level at which we are capable of, due to some irrational fear.

To be sure, government spending in excess of what the full and efficient use of our resources can achieve is bad, but we are nowhere near that. At the current time 6.5 percent of our workforce is out of work, only 75 percent of our industrial capacity is being utilized and millions of homes, automobiles, computers and other consumer items are sitting unsold. Food sits in storage facilities and elevators, rotting away.

Moreover, a rising number of people in this country cannot afford to go to college, though there is room for them, and millions don’t have health care when the services are there to provide it. That is an enormous underutilization of our resources and it is a tacit embrace of a declining standard of living.

During WWII much of the capital we created was eventually destroyed. The planes, ships, tanks and other war materiel was sent to the battlefield and blown up. However, even the destruction of so much of our capital did not result in us becoming poorer as a nation. We emerged from WWII far richer.

Spending by the government now, to bring us to a level where we are fully utilizing our resources and capital will make us richer, not poorer. It will provide the income and investment to create the real wealth that will become what we leave to our kids and grandkids. The debt used to create this wealth will, as a percentage, be far smaller to future generations, just as the debt our grandparents left to us is tiny now. In contrast, by not living to our capability now, we will leave a larger debt to our children and in so doing; reduce their standard of living.

If Roosevelt had worried about deficits we’d all be saying, “Heil Hitler” right now.

US, China headed for possible currency clash

Media picking up on this now.

BEIJING (AP) - The deepening world economic crisis and a possible spat over currency levels hung in the air as the United States and China sat down Thursday to discuss the future of their economic relations.
U.S. officials say Treasury Secretary Henry Paulson will press Beijing to let its yuan rise against the dollar to ease trade tensions at the two-day Strategic Economic Dialogue. American companies contend that China keeps the yuan undervalued, giving its exporters an unfair advantage and adding to its swollen trade surplus.

But with China's exporters suffering, the yuan plunged Monday in government-controlled trading—a possible message to Washington to go easy on the issue.

"The signal China sent on Monday is: We also have our own political problems and issues in a slowing economic environment," Frank F.X. Gong, chief Asia economist for JPMorgan Securities Ltd., said in a report to clients.

State media said Thursday a rapid rise of the Chinese currency would harm the global economy further as it would hurt Chinese exports and increase unemployment.

"China's foreign exchange policy should be aimed at helping domestic economic growth, for which the yuan should not rise too fast against the U.S. dollar now when the global financial market is in turmoil," said a report Thursday in the China Daily, an English-language newspaper aimed at foreign readers.

The twice-a-year dialogue, launched in 2006, is meant as a relationship-building exercise rather than a forum for negotiation. But Treasury Undersecretary David McCormick told reporters this week that officials at the dialogue would urge China to continue allowing the yuan to rise—a key issue for American lawmakers who are pressing for punitive action if Beijing fails to take faster action on trade complaints.

Both economies are struggling—the United States with a recession and China with a sharp slowdown in growth—and how well they keep one of the world's biggest trading relationships stable and productive could be of global importance.

"The need to coordinate and collaborate gets even more urgent as the current recession bites deeper," the China Daily said in an editorial Thursday.

The talks are to cover a broad agenda, including cooperation in energy conservation and environmental protection. Paulson's delegation includes the U.S. secretaries of agriculture, labor and health, the U.S. trade representative, officials of the Treasury and Commerce departments, and others.

Agreements on product quality, food safety and trade and investment could be signed, the newspaper said, citing sources with the Finance Ministry.

Beijing broke a direct link between its yuan and the dollar in July 2005 and has let its currency rise by about 20 percent since then. That has hurt Chinese exporters, which are seeing their goods get more expensive in foreign markets just as demand slows.

In a speech Tuesday, Paulson said it was important for China to stick to its currency reforms and rely more on domestic demand to drive growth.

"As I have said in the past, continued reform of China's exchange-rate policies is an integral part of this broader reform process," Paulson said.

The yuan's fall Monday was its sharpest one-day fall since 2005, erasing almost 1 percent of its value against the dollar.

Gong said Beijing's move might have been meant as a warning to President-elect Barack Obama, who has yet to say whether he will continue the dialogue, that talking will be more effective than confrontation.

"Our negotiators do disagree, and even quarrel from time to time. But the beauty of the SED lies in the fact that they have a platform to talk face to face," the China Daily said. "Listening to each other is conducive to avoiding ill-informed decisions."

Chinese exporters have lobbied the government to slow or reverse the yuan's rise against the dollar to make their goods more competitive abroad. But Gong said Beijing understands the problem is lack of demand, not price, and is likely to let the yuan continue to rise over the long term.

US 3-yr note auction shows decent demand - analysts

"It was a strong auction, the cover ratio was high," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co in New York, adding "it may speak more to the preference for short-term debt instruments than it does to (demand for) U.S. debt instruments on the whole."

No, Tony. It speaks more to the fact that recent actions taken by Treasury and the Fed have caused reserves in the system toswell by $600 billion!

Given this, how hard did you think it would be for $25 billion of those reserves to be swapped for higher interest bearing notes?

Duh!