Weekend's Featured: China's Rough Capitalism Creates Pitfalls

Safety Scares, Rip-Offs: China's Rough Capitalism Daunts Foreign Buyers but Still They Come.

Ron Rust and Beve Kozub were poking around the toy booths at China's biggest trade fair two years ago when something caught their eye: pouty-faced baby dolls snuggling in light blue and pink fleece blankets, their eyes tightly shut or gazing with a newborn's woozy stare.

The American dealers plunked down $22,052 for a shipment of 2,740. But the lifelike dolls turned out to be knockoffs. Rust and Kozub were slapped with a lawsuit that could have cost them their home in Harmony, Pa. Despite getting burned, they were back in China this fall. For new products at the right price, China is "the only option at this time," Rust said.

The Americans fell prey to one of the many dangers of China's rough and raw capitalism. It's a cutthroat, predatory world where many factories cut corners to make an easy buck or just stay ahead of the thousands of others vying for their business. Safety scares, copyright ripoffs and outright thuggery are endemic.

Yet, foreign buyers keep snapping up toys, clothes, laptops and a myriad of other products that the world's factory floor churns out. Getting your hot product made in China is seen as a sure moneymaker. In the first 11 months of 2007, China's exports totaled $1.1 trillion, up 26 percent from the same period in 2006, according to China's Commerce Ministry. Chinese exports to the U.S. totaled $212.7 billion, a 15 percent increase from 2006, the ministry said.

The buyers are not blameless: Many breeze in on buying missions and don't stick around to ensure the goods are made right. For consumers, it can be a dangerous and even deadly game. Chinese-made toy trains coated with lead paint ended up in playrooms worldwide. Cough syrup containing a poisonous chemical used in antifreeze killed dozens in Latin America. A tainted pet food ingredient killed dogs and cats in North America.

Chinese officials defend their factories, saying only a tiny fraction of the billions of dollars in exports each year have problems. But it takes just one bad batch of toothpaste to cause deaths. American doll dealers Rust and Kozub have come to China on buying missions twice a year for the past four years. "Before we ordered the dolls, we asked if the design was theirs and they said, 'Yes,' " said Rust.

The dealers had sold most of the order when they got sued by Ashton-Drake Galleries, a major American dealer that owns the copyright to the doll's design, including its clutchy little hands. "When you're in China, how can you check on copyrights?" Kozub asked. "How would you know as a buyer to go check a hand?"

Their lawyers said they didn't stand a chance in court and would likely lose their home in a legal defeat. So they paid a settlement of $14,400 and destroyed the 107 unsold dolls. "Our business was just starting to turn a profit," said Rust, who launched Springers Wholesale with Kozub five years ago. In October, they returned to China's biggest trade show, the Canton Fair in the southern city of Guangzhou, to scout for new products and confront the supplier of the copied dolls.

The dollmaker's vice general manager, David Qin, sat at a booth lined with blonde, blue-eyed dolls -- all different from those the Americans had bought two years ago. Qin, a pudgy man sporting a buzz cut and a blue polo shirt, wouldn't talk to them until he finished his takeout lunch.

He crossed his arms over his chest as Rust explained the lawsuit and requested a shipment of dolls as compensation. In the middle of the conversation, a saleswoman flicked a switch on a display doll dressed like a punk rocker with a mohawk, leopard skin coat and red guitar. The toy belted out the song, "Who let the dogs out! Hoo, hoo, hoo, hoo!"

Qin said the Americans were misled by a sales representative who no longer works at the company, Yangzhou Zhongyi Toys Co., Ltd. He repeatedly told Rust to find the former employee and take up the issue with him. He was unsympathetic to Rust's argument that the company should take responsibility for the dolls it produced.

Later, a company saleswoman, who declined to be named, tried to explain the piracy issue to an Associated Press reporter. "Well, you know, there are a lot of factories that make dolls in our city and our designs usually all end up looking the same," she said before pausing abruptly and adding, "But I'm not sure how it happens. It's unclear."

After the meeting, Kozub and Rust sat at a coffee shop at the trade show and shook their heads as they rehashed the meeting. "Sometimes we scratch our heads and wonder what we're doing here," he said.

Such incidents feed perceptions in the West that the Chinese can't be trusted. But Robert Kapp, a business consultant with a doctorate in Chinese history, noted that the term "snake oil" was invented in the United States during the era of cowboy capitalism. "Every country goes through this period," said Kapp, who headed the U.S.-China Business Council from 1994 to 2004. "It may be that China is going through a growth phase we went through some time ago."

Most Chinese industrial leaders have relatively little experience. Companies that are at least 10 years old are rare. Modern principles of market research, quality control and corporate governance are virtually unknown to the new capitalists. On the Chinese side, companies complain of incessant pressure from foreign buyers to lower prices, despite rising labor and material costs.

Toy prices haven't increased much in recent years, according to NPD Group Inc., a market research group. The average selling price of a toy was $7.53 in 2006, up from $7.17 in 2005 and $6.97 in 2004. Some foreign buyers don't even care about quality, said Christopher Devereux, the Guangzhou-based managing director of Chinasavvy HK Ltd., which matches foreign buyers with Chinese factories.

Devereux, a tall silver-haired Briton, was contacted recently by an American who wanted to order 4,000 to 5,000 MP3 players. The buyer wasn't deterred when Devereux told him Chinasavvy lacked the expertise to do quality checks on the devices. "He just said he wasn't too worried about the quality," said Devereux, who declined the request. "They think: 'Everything is made in China. Let's just place an order over the phone.'"

Foreign buyers play Chinese manufacturers off against one another, insisting that those with solid reputations match the prices of smaller factories that even the buyers know can't produce quality products, said Harry Chin, who was managing the booth for Guangdong Huawei Toys Crafts (Group) Co. Ltd. at the Canton Fair.

But Chin thinks last year's high-profile recalls, including Mattel Inc.'s, are curbing this practice. "More and more customers are going to the big factories. They no longer go to the small factories," said Chin, whose big booth was lined with plastic dinosaurs, toy binoculars and singing Santa Clauses in red and green fleece snow suits.

Just 20 yards away lurked Zhang Mingliang, vice president and export manager for rival Jiansheng Arts & Gifts Co. Ltd. Zhang was watching for buyers who showed an interest in the Santa Claus dolls. Sporting a Beatles hairdo with reddish brown highlights and a lavender shirt that reeked of cigarette smoke, he ambushed buyers as they came his way.

His company didn't rent a booth, because he feared someone would steal its designs, he said. He offered to produce the same Santa Claus dolls for a much lower price. "We can do it because we have the most modern work force and production lines," he said.

Figuring out whether to trust someone like Zhang is difficult for a smaller traders. Furniture seller Frank Carroll learned that lesson after he closed his 20-year-old factory in Dublin, Ireland, and came to China six years ago. The Irishman, who now prefers Tsingtao beer over Guinness, worked with a family-run factory in the southern Chinese city of Foshan. They became so close that he was invited to the matriarch's birthday party at the family's luxurious compound with swimming pool and snooker table.

But one day, the quality control worker employed by Carroll discovered invoices at the factory office for American-standard foam. That meant the 2,000 upholstered Regency-style chairs that Carroll had ordered couldn't be sold in the British market, which requires flame retardant "BS-standard foam."

The factory owner and his brother at first denied that the contract specified BS-standard foam, Carroll said. When he showed them the contract, they stalled for time. Later, the mother, father, three brothers and two of their wives showed up at Carroll's hotel. "They weren't willing to fix the problem," he said. "They said, 'Can't you sell these chairs anyway? We won't tell anyone. Nobody will know.'"

One of the wives began sobbing and urged him to forgive her husband and take the chairs as a face-saving gesture. Carroll refused: "Had I been found out, my business would be dead. If one person found out, I'd never be able to trade in the U.K. again." It wasn't the last time he saw the chairs. "At a furniture fair six months later," Carroll said, "they were selling the chairs at a discount price."

The experience didn't scare him away. The trick is finding good factories and micromanaging them, said Carroll, who splits his time between Guangzhou and Dublin. He doubts the product recalls will drive away buyers. Rather, the market will become more crowded. "My biggest problem next year," he predicted, "will be finding suppliers."

Sovereign Funds Investigated by US Agency

Congressional Watchdog Investigates U.S. Oversight of Sovereign Wealth Fund Investments.

A congressional watchdog agency has begun a review of foreign state-run investment funds and the U.S. government's oversight of them, an agency spokeswoman said Friday. The review could lead to heightened congressional scrutiny of the state-run funds, also known as sovereign wealth funds, just as U.S. banks and investment firms are increasingly turning overseas for much-needed capital.

Citigroup Inc. and Merrill Lynch & Co. Inc., facing up to $25 billion of additional losses from the ongoing housing slump and credit crisis, are expected to seek additional capital from the funds to shore up their balance sheets, according to a report Thursday in the Wall Street Journal. Most large wealth funds are in the Middle East and Asia. They have invested about $27 billion in Merrill, Citi, Switzerland's UBS AG and Morgan Stanley.

The Government Accountability Office formally began a review this week, but there's no timeline for completion, agency official Yvonne Jones said. The GAO will report its findings to Congress.

Last fall, Alabama Sen. Richard Shelby, senior Republican on the Senate Banking Committee, requested the review. Shelby requested the report "because he believes it's important to conduct vigilant oversight and understand the issues associated with the major role that sovereign wealth funds play in the global economy," said Jonathan Graffeo, a spokesman for the senator.

Graffeo said the report will focus on countries with sovereign wealth funds, the funds' size, the type of investments they make and their potential impact on the U.S. economy. In addition, the report will look at whether that impact is "effectively monitored," Graffeo said, and how U.S. laws governing security reviews of foreign investments apply to the sovereign wealth funds.

Closer inspection could make business groups and the Bush administration, both advocates of sovereign wealth funds, nervous. The Senate Banking Committee spearheaded legislation last year that toughened the foreign investment review process. Among other things, the law required a more extensive investigation by U.S. security agencies when a foreign investment in the United States is made by a government-owned company.

The sovereign wealth funds, however, have been trying to avoid such scrutiny by buying small stakes in U.S. companies and downplaying their influence by not taking board seats. Generally, passive investments that amount to ownership of less than 10 percent can avoid review by a government panel.

The GAO report could become the basis for hearings later this year. An aide to Sen. Chris Dodd, D-Conn., chairman of the Banking Committee, has said the panel is likely to hold hearings on the subject later this year.

Gold Soars to Record $900 an Ounce

Gold Futures Surge to Record $900 an Ounce on Weak Dollar, Fears of U.S. Recession.

Gold futures briefly rose above $900 an ounce -- an all-time high -- before pulling back Friday as growing worries of a U.S. recession prompted uneasy investors to keep buying the precious metal.

An ounce of gold for February delivery on the New York Mercantile Exchange jumped $6.50 to $900.10 in morning trading, an all-time high and a psychologically important milestone. The precious metal later fell on profit-taking but still ended $4.10 higher to settle at $897.70 an ounce, a new closing record.

"It's a reflection of market sentiment: Gold is a hedge against uncertainty and right now it's the best bet," said Carlos Sanchez, a precious metals analyst at CPM Group in New York. "None of the other investment options look that great and gold does." Still, when adjusted for inflation, gold remains well below its all-time high. An ounce of gold at $875 in 1980 would be worth $2,115 to $2,200 today.

Gold has had a meteoric rise the past year -- rising nearly 32 percent in 2007 -- boosted by a falling dollar, rising prices for oil and other commodities and increased Middle East instability. Those trends have lifted the metal's appeal as a haven; gold is seen as a safe investment in times of political and economic uncertainty around the world.

Also driving gold higher was Federal Reserve Chairman Ben Bernanke's pledge Thursday to cut interest rates to boost the economy, which some fear may be sliding toward recession amid turmoil in the housing and credit markets.

Lower interest rates tend to depress a country's currency and drive investors to shift funds to hard assets, like gold. A cheap dollar can make commodities more attractive as an alternative investment, and can also raise demand from foreign buyers as their currencies gain strength.

"Concerns of a recession will keep pushing up gold prices," Sanchez said. "Depending upon what happens in the economy and in the Middle East, we could see gold testing $1,000 an ounce, maybe even this quarter."

Hedge and pension funds, along with other long-term investors, also flocked to gold as the mortgage and credit crisis in the U.S. intensified. "The funds are really heavily at play ... The momentum with gold is almost like mania. We keep wondering how high it will go," said Jon Nadler, an analyst with Kitco Bullion Dealers in Montreal.

Investors looking to get in on the gold rush can expect continued volatility for the rest of the year, said Nadler, whose firm forecasts a trading range of $750 to $950 an ounce. The steep rise in precious metals will also mean consumers in the United States -- the biggest buyer of gold after India -- can expect to pay higher prices for gold earrings, bracelets and other jewelry. "People are going to feel that sticker shock when they go down Fifth Avenue," Nadler said. "You'll start seeing the increase reflected as early as Valentine's Day."

Fed Expected to Cut Interest Rates Again

Federal Reserve Chief Bernanke Says Central Bank Ready to Cut Interest Rates Again As Needed.

Federal Reserve Chairman Ben Bernanke pledged Thursday to slash interest rates as needed to prevent housing and credit problems from plunging the country into a recession. The Fed chief made clear the central bank was prepared to act aggressively to rescue a weakening economy. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.

Bernanke showed his hand in terms of the Fed's likely next move amid mounting concerns that the economy may be in danger. Many economists now believe the Fed will slice its key interest rate by a bold one-half of a percentage point when the Fed meets next Jan. 29-30. Some, however, think the Fed will go with a more modest one-quarter point reduction, given concerns that high energy prices could spark inflation.

Wall Street was buoyed by Bernanke's words. The Dow Jones jumped 117.78 points to close at 12,853.09. "The Federal Reserve is not currently forecasting a recession," Bernanke said, fielding questions after his speech. It is, however, "forecasting slow growth," he said.

To bolster the economy, the Fed lowered its key rate three times last year. Its last cut, on Dec. 11, left the rate at 4.25 percent, a two-year low. Still, Bernanke has come under criticism for not acting more aggressively to deal with the economy's problems.

Worries about the country's economic health have gripped voters, galvanized presidential candidates and spurred the White House and Congress to explore ways to stimulate the economy to avoid a recession. The White House is considering a tax cut.

Hiring practically ground to a halt in December, pushing the unemployment rate up to 5 percent, a two-year high, the government said in a report last week that rattled Wall Street and Main Street.

Bernanke, in a speech to a housing and economic forum in Washington, cautioned against reading too much into one report. But he said that if employment conditions were to continue to deteriorate, that would raise risks to the economy. The big worry is that consumers might cut back on their spending, sending the economy into a tailspin.

Incoming information suggests that the outlook for economic activity for this year has worsened and that the "downside risks to growth have become more pronounced," Bernanke warned. A housing slump, weaker home values, harder-to-get credit and high energy prices all "seem likely to weigh on consumer spending as we move into 2008," Bernanke said.

Many analysts predict upcoming reports will show the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first three months of this year as consumers -- major shapers of overall economic activity -- tighten their belts. Major retailers reported Thursday weak sales for December, raising uncertainty about the economy's outlook. In light of such risks to the economy's growth, "additional policy easing may well be necessary," said Bernanke.

Former Fed Chairman Alan Greenspan, who ran the Fed for 18 1/2 years, recently warned that the economy is "getting close to stall speed." Some economists said the odds of a recession are up to 50 percent.

The housing slump -- aggravated by harder-to-get credit -- has weighed heavily on national economic activity. Foreclosures have soared to record highs and financial companies have wracked up multibillion losses because of bad mortgage investments. The problems, which are expected to persist well into this year, have unnerved Wall Street. Financial markets remain fragile, Bernanke said.

The situation raises the biggest challenge yet to Bernanke, who took over the Fed in February 2006. "Bernanke was very clear: He rang a siren call. The economy is ailing and it needs stronger medicine -- a good shot of adrenaline," said Brian Bethune, economist at Global Insight. Bethune predicts a half-point cut on Jan. 30, followed by other reductions that would lower the Fed's key rate to 3.25 percent by the late spring.

"It's hard to imagine after hearing such strong comments from Bernanke that the Fed will not cut by half a percentage point," said Richard Yamarone, economist at Argus Research. "Anything less would roil the financial markets," he added.

Asked about a stimulus package being explored by the White House, Bernanke did not offer details. He did say he is interested in seeing "what emerges" and what options might be put on the table.

Galloping energy prices -- oil recently surged past $100 a barrel before easing -- can put a damper on economic growth and can also spread inflation through the economy if they force companies to boost the prices of many goods and services.

Bernanke acknowledged the situation could complicate the Fed's job of trying to keep the economy growing, while making sure that inflation is under control. So far, he said, people and companies have "reasonably well-anchored" expectations about where they think inflation will head in the months ahead, Bernanke said. "However, any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate" the Fed's task of maintaining stable prices, he said.

To help squeezed banks deal with credit problems, the Fed recently created a new auction facility for financial institutions to go to for short-term loans. The Fed in December provided $40 billion worth of loans to banks and will provide another $60 billion in two auctions in January.

Bernanke said these auctions will continue "as long as necessary" to help banks get over credit humps so that they will keep lending to people and companies. The auctions, Bernanke said, "may thus become a useful permanent addition to the Fed's toolbox."

Will the upcoming presidential elections color the Fed's decisions on interest rates? Bernanke offered a flat no. "Political considerations will play no role. We will be objective. We will be analytical, and we will do what is right for the economy."

China's Trade Surplus and Foreign Reserves Hit Records

China's 2007 Trade Surplus Surges 48 Percent to Record $262 Billion.

China's trade surplus soared nearly 50 percent in 2007 to a record, despite safety worries about Chinese products and a slowdown in export growth late in the year, according to government data released Friday.

The sharp rise could add to pressure on Beijing to act on currency controls and import barriers, possibly giving ammunition to U.S. lawmakers who are calling for trade sanctions. The country's annual trade surplus -- or the amount exports exceed imports -- ballooned to $262.2 billion, up 47.7 percent from 2006, the General Administration of Customs said.

That was below the $300 billion figure forecast by some economists but reflected strong demand for low-cost Chinese exports at a time of concern about the safety of products, ranging from toothpaste and seafood to tires and toys.

"The overall number actually was lower than what we expected, and I suspect it had something to do with, partly, the U.S. story," said Citigroup economist Yiping Huang, referring to recent weaker American retail spending, especially during the key Christmas holiday.

December's monthly surplus was $22.7 billion, the customs agency said. That was up 9.5 percent from the same month of 2006 but well below October's record monthly high of $27 billion.

"The country's soaring trade surplus eased a bit in the fourth quarter last year, with imports catching up and exports slowing down," said a customs agency statement quoted by the official Xinhua News Agency.

China has tried to cool export growth by imposing curbs on sales of steel and some other goods. But Huang said exports should continue to grow strongly so long as the United States avoids a recession. "We are not expecting the surplus to decline substantially," Huang said. "We are still expecting the overall trade surplus to rise a bit further" as 2008 progresses.

China's politically-sensitive trade gap with the United States expanded 19 percent to $163.3 billion, according to customs data. The United States reported a $232.5 billion trade deficit with China in 2006 and last year's gap is on track to pass that. The two governments count and compile trade data differently, leading to differing totals.

China's 2007 trade gap with the European Union rose much faster, expanding by 46 percent to $134.3 billion, according to customs data. The United States and other trading partners are pressing Beijing to ease controls that they say keep its currency, the yuan, undervalued and give Chinese exporters an unfair price advantage, adding to China's trade gap.

Beijing has allowed the yuan to rise gradually against the dollar but some American lawmakers are pushing for punitive tariffs on imported Chinese goods unless it takes quicker action. The communist government says it is not intentionally pursuing a large trade surplus, and the flood of cash pouring into the economy from export revenues is straining the central bank's ability to control pressure for prices to rise.

In 2007, exports rose 25.7 percent to $1.2 trillion, while imports rose 20.8 percent to $955.8 billion U.S. dollars, the agency said. It gave no monthly breakdown.

China's Foreign Exchange Reserves Hit $1.53 Trillion

China's foreign exchange reserves hit $1.53 trillion at the end of 2007, up 43 percent from the end of the previous year, the central bank said Friday. The bank said in a statement on its Web site that $461.9 billion was added to the country's foreign exchange reserves in 2007.

Citibank and Merrill Lynch Hunt to Raise Capital

Citi, Merrill Look Overseas to Raise Capital Amid Continued Subprime Losses.

Two of the biggest names on Wall Street are scrambling again to secure major cash infusions from foreign governments to offset billions of dollars in losses from risky subprime mortgage securities, analysts said on Thursday.

Citigroup Inc. and Merrill Lynch & Co., the No. 1 U.S. bank and largest brokerage house, are facing potentially $25 billion worth of losses when they report earnings results next week. Both companies -- led by new CEOs eager to make their mark -- are expected to turn overseas for another injection of capital.

Wall Street's biggest banks and brokerages have been lining up investments from foreign governments to cushion against losses from bad investments in subprime mortgages, which are made to people with less-than-stellar credit, or in securities back by subprime mortgages.

Sovereign wealth funds, which are investment pools backed by governments, already have invested about $27 billion in Merrill, Citi, Switzerland's UBS AG and Morgan Stanley. The fact Merrill and Citi are going back for seconds indicates that the credit crisis might be taking a bigger toll on Wall Street than initially expected.

"The bottom line is that their losses are much more sizable then first thought, and they need capital to shore up their balance sheet," said Richard X. Bove, an analyst with Punk Ziegel & Co. "It's why they're out there looking for more."

Spokesmen for Citi and Merrill did not immediately return calls seeking comment. The search for more foreign cash infusions by Citigroup and Merrill was disclosed Thursday by The Wall Street Journal.

This time around, Citi is said to be looking for about $10 billion worth of capital, The Journal said. Abu Dhabi's state-run investment fund in November agreed to buy a 4.9 percent stake in the bank for $7.5 billion.

Merrill Lynch is looking to arrange up to $4 billion of new capital, most likely from a Middle Eastern government, The Journal said. The brokerage previously secured a $4.4 billion investment from Singapore's state-run Temasek Holdings.

"Writedowns and losses will continue to mount," Goldman Sachs analyst William Tanona said in a research report about financial institutions, adding that getting more money from sovereign funds will be "capital raising for some, preservation for others."

Citi's board was expected to meet Monday to discuss cutting the bank's dividend in half. Though the bank has denied speculation about cutting the dividend, analysts said it could save about $5 billion.

Layoffs at both Citi and Merrill also have been bandied about Wall Street during the past few weeks. Staff reductions, along with the sale of non-core assets, are among ways analysts believe Citi CEO Vikram Pandit and Merrill CEO John Thain can shore up their balance sheets.

Both institutions have said they expect big writedowns, but analysts now think the losses might be bigger than originally anticipated. Citigroup, right before ousting CEO Charles Prince, projected an $11 billion writedown -- though some analysts say it could be as high as $20 billion.

Merrill Lynch did not make any predictions about how much it might write off during the fourth quarter, though analysts project it could be up to $11.5 billion. Stan O'Neal, the brokerage's former CEO, was ousted shortly after the company took an $8.4 billion writedown.

The New York Times reported on its Web site late Thursday that Merrill Lynch is expected to disclose a $15 billion fourth-quarter writedown. The report cited unnamed people who have been briefed on the company's plans. Global banks have booked almost $110 billion of writedowns since last year because of bad bets on subprime mortgage securities, and the ensuing credit crisis.

The additional foreign investment could provoke more scrutiny in Washington, depending on its size. Generally, passive ownership stakes that don't include board seats or other levers of control and that are below 10 percent don't require approval by a federal government panel that reviews foreign investment for security concerns.

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, said Thursday he supports foreign investments in the United States "so long as they do not compromise our national security or pose a threat to our economic stability."

The committee may hold hearings on the subject later this year, a Senate aide said. The aide spoke on condition of anonymity because she wasn't authorized to speak on the record on the subject.

Dodd's committee spearheaded legislation last year that strengthened the foreign investment review process. The action came after several high-profile deals, including a planned investment in U.S. port operations by a Dubai government-owned company, sparked major controversy.

Bank of England and Korea Hold Interest Rates Steady

Bank of England Holds Interest Rates Steady at 5.5 Percent, Rejecting Calls for a Cut

The Bank of England held interest rates steady at 5.5 percent on Thursday, resisting calls for a cut amid mounting signs of a slowing domestic economy.

Economists had expected the decision would be a close call as the central bank weighed data showing poor retail sales and falling house prices against the threat of higher inflation from soaring oil prices and rising food costs.

The decision to keep rates on hold also gives the bank more time to assess the impact of last month's quarter of a percentage point cut -- the first in more than two years -- from a six-year high of 5.75 percent.

Bank of Korea Keeps Key Loan Rate on Hold Amid Worries Over Global Economy, Local Inflation

The Bank of Korea held its benchmark interest rate steady Thursday, saying it will closely monitor external risks and domestic inflation.

The central bank said in a statement that it kept its overnight call rate target for loans to commercial banks at 5 percent. The decision was unanimously forecast by a dozen economists surveyed by Dow Jones Newswires.

The last time the call rate was higher was in early February of 2001 when it stood at 5.25 percent. It was raised to 5 percent in August last year, having dipped as low as 3.25 percent in the intervening period.

The bank also said local economic growth is maintaining its momentum on strong exports and a solid recovery in capital investment, though inflation is likely to remain high in the months ahead. The consumer price index is expected to rise strongly due to both demand and higher prices for commodities such as oil, the BOK said.

In the coming months, the country's economy will continue to show firm growth on the back of sturdy exports coupled with a recovery in domestic demand. But the bank said it will continue to monitor rising uncertainties at home and abroad that could begin to weigh on growth.

The latter appeared to refer to worries of a possible economic slowdown resulting from the global credit crunch and record-high oil prices. South Korean "inflation is expected to ease in the second half of the year," Bank of Korea Gov. Lee Seong-tae told reporters, though he said it is also expected to hover near the upper limit of the bank's target range of 2.5 percent to 3.5 percent in the first half of the year.

The decision to keep its policy rate on hold came after the central bank reiterated Sunday that its main goal is to keep inflation under control. In December, consumer prices rose 3.6 percent on year, up a touch from November's 3.5 percent gain and the highest inflation since October 2004. The central bank forecast headline inflation of 3.3 percent this year, up from 2.5 percent last year.

ECB's Pleas for Restraint at Odds with Mood

Eurozone wage developments are being watched warily by the European Central Bank, which has signalled its readiness to raise interest rates if inflation shows any sign of spinning out of control.

But its pleas for wage restraint - likely to be repeated by Jean-Claude Trichet, ECB president, after Thursday's interest-rate setting meeting - have not found an echo in national capitals. The Frankfurt-based institution would risk political isolation if it made good its threat to raise official borrowing costs at a time when growth across the 15-country region is slowing and the euro is at a record high.

Meanwhile, companies' profits, not pay packets, are widely-seen as having gained most in the past few years, an argument that strengthens trade union's hands. Profits hit an all-time high of 40.7 per cent of eurozone gross domestic product in the third quarter of last year, according to UBS Investment Research.

Even talking about higher rates might appear politically provocative, especially when the US Federal Reserve and Bank of England are cutting borrowing costs in anticipation of tougher economic times. But at a six-year high of 3.1 per cent in December, eurozone inflation is way above the ECB's target - a rate "below but close" to 2 per cent.

Not yet 10 years old, the ECB is still burnishing its inflation-fighting credentials. It fears that the temporary "hump" in inflation driven by soaring oil and food prices will become longer lasting if it feeds through into higher pay settlements.

ECB forecasts, released in December, showed inflation returning back below 2 per cent in 2009. But ECB governing council members have stressed that those forecasts assume crucially that there is no general "pass-through" into wage demands. Some members last month voiced support for a pre-emptive rise in interest rates.

Mr Trichet warned senior members of Germany's ruling Christian Democratic Union last weekend that it was "essential" that wage-setting behaviour "remains unaffected by current inflation rates". The ECB would act to "ensure that such 'second round' effects ... do not materialise", he warned.

The problem for the ECB is that its fears about inflation do not fit with the political mood across the eurozone - forcing it to take a more strident tone. "Politicians are adding to the risk of 'second round' effects," says Holger Schmieding, economist at Bank of America. "That is clearly an argument for [the ECB] not even thinking about cutting interest rates."

In Berlin, and elsewhere, politicians are arguing that workers should take a larger slice of the economic cake. Nicolas Sarkozy, the French president, has promised to raise the salaries of public sector workers in return for a reduction in headcount and a reorganisation of career structures. He has also stepped up pressure on companies to talk to unions about the possibility of pay increases, threatening to withhold tax breaks and state aid if company bosses refuse to at least open negotiations with their staff.

In Italy, trade unions opened 2008-09 wage talks this week with a demand for lower taxes and more benefit payments to boost workers' spending power. Romano Prodi, prime minister, recognises the need for some tax cuts, but wants a deal with the unions that links pay with productivity and gives employers more flexibility.

Such debates have only intensified as inflation has risen, particularly in Germany where consumers appear highly sensitive to rises in food and fuel costs. The ECB had been "cornered" as a result, said Marco Annunziata, economist at Unicredit. "The erosion of purchasing power is felt strongly, so it is not surprising that governments across the European Union are sensitive to it."

Japan Economy Still Sound

Japan Economy Sound Despite Sinking Stocks, but Oil, US Economy Are Concerns, Officials Say.

Japan's economy is still on a recovery track despite recent declines in Tokyo stocks, though concerns remain about higher oil prices and a possible U.S. economic slowdown, Cabinet ministers said Tuesday.

Finance Minister Fukushiro Nukaga said he remains confident in Japan's economy despite recent declines in Tokyo stocks to their lowest levels in 18 months. "My basic view is that the economy remains in a recovery trend," Nukaga said at a news conference. "I think the recovery trend will continue."

Economy Minister Hiroko Ota made similar remarks at a separate news conference, suggesting that the government may not be as worried as business leaders about the continuing drop in domestic stock prices. The benchmark Nikkei 225 stock index was down 0.3 percent by midday Tuesday to 14,458.74, its lowest point since July 2006. The index fell 1.3 percent Monday and 4 percent Friday.

Fujio Mitarai, chairman of Japan's biggest business lobby, known as Nippon Keidanren, said Monday that Japanese stocks are "oversold" considering healthy corporate earnings and an expected acceleration in Japan's growth later this year. Worries over the yen's recent rebound against the dollar and the murky outlook for the U.S. economy, which buys more Japanese exports than any other nation, have been dragging on Tokyo stocks.

Soaring global crude oil prices are also generating concerns. "It's necessary to watch whether a U.S economic downswing and rising crude oil prices will stand in the way of growth in Japanese exports and corporate profits," Ota said.

Nukaga said the government would work hard to quickly pass its supplementary budget for the current fiscal year ending March and its national budget for fiscal 2008, both of which contain measures aimed at easing the impact of high oil prices. "(Expensive) oil could affect consumer sentiment as well as profits at small and medium-size companies," he said. "We must act to have the budget bills passed soon." The next regular parliamentary session is set to start Jan. 18.

UK Economic Uncertainty Gives Hope for Rate Cut

Uncertainty over the extent of the economic slowdown is expected to persuade the Bank of England to resist calls for an immediate further cut in interest rates when its monetary policy committee meets on Thursday.

A Reuters poll of economists last week showed that only 12 of 63 surveyed expected a rate cut this week although a larger number expected that the MPC would move rates lower in February following publication of its next inflation report.

"Our overall sense is that they probably will hold off [from cutting rates]," said Jonathan Loynes, economist at Capital Economics, noting that rising energy prices, and their knock-on impact on inflation, were likely to give MPC members pause for thought.

Last week, NPower, the gas and electricity supplier, announced it would increase prices by an average of 15 per cent, a move expected to be followed by its competitors in the industry. Rising energy prices have loomed large over central bankers in several economies, raising the spectre of inflation even as domestic growth stutters.

Inflation, Mr Loynes noted, remained a widespread concern. In a weekend interview, Gordon Brown, the prime minister, admitted more needed to be done "to break the back of inflation". He has vowed to limit public sector pay rises to below 2 per cent.

Moreover, it is not yet clear to the MPC that wage inflation is abating in response to slower economic growth. For example, the latest survey from Income Data Services showed a pick-up in pay rises last month to 4 per cent from 3.5 per cent, albeit from a relatively small number of pay deals. Far more crucial will be pay settlements agreed over the next three months which form the largest segment of salary deals. Meanwhile, Ben Broadbent, economist at Goldman Sachs, said that the economic data so far were not sufficiently gloomy to lead the MPC to conclude that a rate cut was needed right away. For example, the purchasing managers' index of business activity, on balance rose slightly last month and the key services segment showed a modest overall rise.

Even the credit conditions report from the Bank, issued late last week, offered some ambiguous messages on the economy. While secured lending to households - mortgage loans - had slowed sharply since the last survey and was expected to continue to do so, it was not clear that that was because applicants were being turned away.

Mr Broadbent said that the fall in new buyer inquiries, highlighted in the latest survey from the Royal Institution of Chartered Surveyors, suggested the drop might reflect falling demand from house buyers rather than a tightening of standards by lenders. In effect, it was not clear that home buyers were being squeezed so badly that the overall economy was in danger today, he said.

George Buckley, economist at Deutsche Bank, noted that another factor delaying a rate cut might be that although lending to households on a secured basis had tightened, it had done very little for unsecured lending - via credit cards, for example. That would suggest that consumers wanted to keep on spending.

Mr Buckley said he believed the next inflation report would give the MPC scope to cut rates, noting that historically, it was twice as willing to move rates up or down following publication of such a report than it was without one.

Asian Markets Struggle on US Worries

Most Asian Markets Sink on Worries About US Recession; Nikkei Falls to 1 1/2-Year Low.

Most Asian markets fell Monday amid worries that reports of weaker-than-expected U.S. job growth may portend a recession. Japan's benchmark index fell to its lowest in nearly a year-and-a-half while Hong Kong's stock market sank 1.2 percent and Taiwan's key index tumbled 4.1 percent.

Stocks in China and India bucked the regional trend to climb higher. But investors across much of Asia dumped shares after a sharp drop on Wall Street on Friday following the dismal jobs figures and a rise in the U.S. unemployment rate to 5 percent, fanning concerns about a slowdown in the U.S., a vital export market for Asian companies.

"Today's sell-off was due to concrete evidence that the housing market woes have finally started eroding the U.S. economy," said Masatoshi Sato, senior strategist at Mizuho Investors Securities in Tokyo. Japan's benchmark Nikkei index lost 190.86 points, or 1.3 percent, to 14,500.55 points, its lowest since July 18, 2006. That follows a 4 percent plunge on Friday, the first day of trading in 2008 in Tokyo.

Decliners included shipbuilder Kawasaki Kisen, which fell 5.8 percent, and Nippon Steel, which shed 2.8 percent. Sony rose 0.7 percent and Matsushita Electric Industrial added 0.7 percent after U.S. movie studio Warner Bros. said that it will support Sony's Blu-ray format for next-generation DVDs. Matsushita supports the format.

In Hong Kong, the Hang Seng Index dropped 340.2 points, or 1.24 percent, to 27,179.49, paring losses after earlier dropping 3 percent. "The Hang Seng Index may drop to 26,000 to 26,500 points this week. This provides a good entry point for long-term investors, given the U.S. may cut its interest rate by more than a quarter percentage point later this month," said Dao Heng Securities Ltd.

The three biggest heavyweights on the Hang Seng Index led the decline. HSBC fell 1.8 percent, China Mobile dropped 1 percent and PetroChina ended 2.3 percent lower. Most property developers returned to positive territory in the afternoon on bargain-hunting. The property subindex rose 1.5 percent. Sino Land rose 2.9 percent, Henderson Land gained 2.4 percent and Sun Hung Kei Properties ended 2.2 percent higher.

On the Chinese mainland, stocks rose as expectations of strong fourth-quarter earnings pushed up banks and property developers despite a central bank statement Friday reiterating its shift to a tight monetary policy stance. The benchmark Shanghai Composite Index gained 0.6 percent to finish at 5,393.34 points. The Shenzhen Composite Index for China's second, smaller market rose 1.3 percent to 1,528.00.

"The market will likely continue its upward trend in coming sessions, driven by ample liquidity and the absence of negative news," said Essence Securities analyst Zhu Haibin. Most banks and property developers rebounded after recent sharp falls. Shanghai Pudong Development Bank finished up 5.6 percent while Hua Xia Bank gained 3 percent.

The central bank, the People's Bank of China, on Friday reiterated its switch to a "tight" monetary policy stance in a statement following its annual meeting. China Railway soared 8.4 percent on weekend news that the company won contracts worth of 21.9 billion yuan for the construction of the Beijing-Shanghai High-Speed Railway.

Weekend's Special: The Mysterious Nazca Lines in Peru

Unique place in the world, full with mystery and mysticism, wonderful traces of immense figures and lines of spectacular perfection. Diverse scientific theories have been placed on these lines. Some theories only explain its possible construction associated to extraterrestrial beings.

The great constructions of observatories of astronomical cycles, well-known as the Nazca Lines, were used by the farmers to know and control the meteorological agrarian cycles, aside from their possible religious significance (Maria Reiche's theory).

The Nazca Lines are traced on San José and Socos desert plains, between the 419 and 465 km. of the South Pan-American Highway, with an extension of 450 square km., near the Nazca city.

The Nazca lines and figures cover a total area of 520 square kilometres. They are situated 400 kilometres south of Lima on the Pampa Colorada - a desolate plain between the Peruvian coast and the Andes Mountains. It is a rocky desert, rather than a sandy one. Its surface is covered in small stones that are dark red because they contain ferrous oxide. These have been cleared away to expose the lighter-coloured soil underneath, creating a multitude of lines.

Dozens of stylised figures have also been etched onto the desert, creating the world’s largest piece of art. The figures have each been drawn using a singular continuous line, with the largest being some 285 metres long. There are 70 figures in total. In the most part they are creatures, such as a hummingbird, llama or dog - however a flower, loom and geometric shapes can also be seen.

It has been mentioned by other researchers that many of the creatures represented are not native to the area. The most striking example of this is the 45 metre long Spider. It was identified as a member of the rare genus Ricinulei, which is only found in the most remote and inaccessible parts of the Amazon Jungle. These spiders are only 5-10 mm in length. One leg is noticeably longer – it is a protrusible tube, and at its tip is the spider’s reproductive organ, normally only visible with the aid of a microscope.

The lines are a variety of geometrical figures, trapezoids, triangles and lines, plus marine, animal and bird figures of hummingbirds, a whale, a monkey, a spider, a bird likened to a pelican, another like a condor, and one called the astronaut. They range in size up to 1000 ft (300m) across and are about 2000 years old.

The lines are thought to have been etched on the Pampa Colorada sands by three different groups: the Paracas people 900-200 BC, Nazcas 200 BC-AD 600 and the settlers from Ayacucho at about 630 AD. The Nazca were potters, like the Moche, and their pottery shows their daily life.

The drawings drew the attention of German mathematician Maria Reiche, who worked as Kosok's translator. She studied the lines from the 1940's to her death in 1998. She lived nearby, walked and photographed the lines, drew maps, developed theories, and drew the attention of the world to Nazca.

Maria Reiche developed the theory that the ancient Peruvians drew the lines to please the gods and secure their good will. She called the desert an astronomical calendar to remind the gods that the desert was dry and needed water; that crops needed blessings; that the seas needed fish. There are theories that the figures correspond to cosntellations and the annual change of the seasons. Other theories contend that the figures represent a pantheon of gods and goddesses and were the site of religious ceremonies.

Other theories, such as Erich von Daniken who argued in "Chariots of the Gods?" that they are the remains of a giant extraterrestrial airport, brought a flurry of students of the paranormal to the area. They came in such numbers that they threatened the lines and the area was made off-limits. Dr. Reiche had guards posted to make sure no further damage was done to the lines. Though they have survived 2000 years of wind and occasional rain, the lines on the desert floor cannot withstand pedestrians, horses and vehicles. The Nazca Lines are now a UNESCO World Heritage Site and one of the most popular tourist destinations in Peru.

You can see the lizard, hands and the tree figures from the Mirador, a viewing platform along the side of the Pan American highway, but the best overall sight is from a small airplane, early in the morning.

As you observe the lines, you can wonder about the various theories, including the idea that the ancient culture used them to indicate underground water sources, or the older one that the lines are caused by the physical movement of underground water. There are water channels, painstakingly built of rock walls and maintained over the centuries that carry water from the mountains to a farming oasis near the figures.

Weekend's Featured: Credit Markets Jittery May Cause Dividends Disappear

Dividends in Financial Services Sector Likely to Be Casualties of Tightening Credit Markets.

With credit markets continuing their downward spiral, investors could see their dividends disappearing in 2008. Dividend cuts or suspensions will continue to pick up among financial services firms in 2008, said Howard Silverblatt, a senior index analyst at Standard & Poor's. In 2007, fewer companies increased dividends, according to Standard & Poor's, while more companies in 2007 than in 2006 actually cut or suspended dividends.

Many investors rely on dividend payments as a source of income, and financial institutions in particular have been rich sources of large payouts. Their need to raise capital in the face of rising loan defaults, though, has made their dividends one of the first places they look to save money.

Diane Merdian at Keefe Bruyette & Woods noted that banks, in general, are offering a dividend yield that is near an all-time high when measured against the dividend yield on the S&P 500. Yields are based on a company's full year of dividends compared to the current share price.

Higher yields indicate the company might be distributing more cash to investors than it can afford. Drastic dividends cuts or outright suspensions are likely steps if companies are struggling with earnings or other cash needs. Since early July, credit markets have been in a free fall, mostly due to rising defaults on mortgages, especially subprime loans given to customers with poor credit history.

As a result of the rising defaults, investors have shied away from purchasing bonds and debt backed by the loans because of fears of mounting losses. As investors stopped buying the debt, banks and other holders of the bonds have been forced to write down their value. The writedowns -- which eclipsed $100 billion in 2007 -- have strained earnings, forcing companies to look for new ways to raise capital and preserve cash.

Silverblatt said if the credit markets continue to deteriorate and the economy further weakens, the problem is likely to expand into other areas, such as the consumer discretionary sector. Additionally, companies that would normally increase dividends each year could also put those plans on hold, Silverblatt said.

The majority of dividend raises usually comes at the beginning of the year, as companies review the last year's financials and prepare for annual meetings. Thus, companies not increasing dividends in the first two months of the year are unlikely to do so later in the year.

One of the country's largest banks, Washington Mutual, said Dec. 11 it will cut its dividend to 15 cents per share from 56 cents per share as part of a broader undertaking to conserve cash. The dividend cut is likely to save the bank $1 billion. At the reduced dividend rate, Washington Mutual's dividend yield is about 4.6 percent. Had it not cut its dividend, the yield would be about 17.1 percent.

While the dividend cut might save money, investors quickly moved to shed shares of the Seattle-based bank. Washington Mutual shares have declined 25 percent since the company said it was cutting its dividend.

More dividend cuts are likely to come as well. Many analysts are even predicting the nation's largest bank, Citigroup, will have to slash it dividend to preserve capital. "Citigroup's capital levels are so tight, it might not have a choice," but to cut its dividend, said Josh Peters, editor of Morningstar DividendInvestor. "I wouldn't buy Citigroup today counting on the current dividend rate."

Keefe Bruyette's Merdian said she believes there is a more than 50 percent chance that Citigroup, which spends $10.8 billion a year on dividend payouts, will cut its 54-cent dividend. She said if it did, the reduction would likely be around 40 percent. Citigroup's dividend yield is currently about 7.7 percent.

The dividend cut is likely necessary because billions of dollars in expected writedowns in the fourth quarter could further strain capital reserves. Citigroup already took about $6 billion in writedowns in the third quarter, and previously estimated fourth-quarter writedowns would range between $8 billion and $11 billion. In her latest update, Merdian anticipates that writedown is likely to be even larger, at about $15.3 billion.

Bush Administration Considering Tax Cuts

Administration Considering a Possible Economic Stimulus Package to Ward Off Recession.

The Bush administration, faced with a deteriorating economy and a big jump in unemployment, said Friday it was considering an economic stimulus package that might include tax cuts to ward off a recession.

On Friday, the Labor Department reported that unemployment was at a two-year high of 5 percent in December, while employers clamped down on hiring for the month. The amount of new jobs employers added to their payrolls was at a four-year low.

Officials stressed that President Bush has not decided yet to offer a proposal but was looking at a variety of options with a plan possibly being unveiled around the time of his Jan. 28 State of the Union address. "The president is always looking at options ... always talking to people and looking at data," Commerce Secretary Carlos Gutierrez said.

Bush met Friday with top economic officials including Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, who are part of the president's working group on financial markets, a group formed after the 1987 stock market crash to monitor markets.

The president was given an assessment of how the economy is behaving and how financial markets are performing after the severe credit squeeze that hit in August. A number of big financial institutions have declared multibillon-dollar losses because of rising defaults in the subprime mortgage market.

White House spokesman Tony Fratto said tax cuts were an option being considered. Bush in his first term included a tax refund of up to $300 per person to combat the impact of the 2001 recession. Private economists said another round of tax cuts would be the best approach to get money to people who would spend it.

Some suggested a one-year tax rebate of $500 might provide a sufficient shot-in-the-arm for the economy. But they stressed that the proposal would have to be passed quickly. "The critical time is the first part of this year. If it doesn't get passed until just before the November election, it will be totally useless," said David Wyss, chief economist at Standard & Poor's in New York.

Dan Danner, executive vice president for public policy for the National Federation of Independent Business, said his group and other business organizations will be lobbying for tax incentives to be included in any stimulus package. "We are very hopeful that as the administration looks at economic stimulus, they will look at the sector that has helped keep the economy afloat and that is small business," Danner said.

Former Treasury Secretary Lawrence Summers, who served in the Clinton administration, said in a speech last month that a stimulus package of $50 billion to $75 billion of temporary tax cuts and emergency spending would be needed to avoid what he said could be the worst recession since the steep 1981-82 downturn.

It was expected that Bush would combine any new tax cuts with a renewed call to make permanent his first term tax cuts, which are now scheduled to expire at the end of 2010. He warned Congress against taking steps that would increase taxes. "The worst thing that Congress can do is raise taxes on the American people and on American businesses," he said.

Analysts said any stimulus package should provide only temporary tax relief to avoid making budget deficits worse in future years. The quickest help probably will come from the Federal Reserve, in the form of another interest rate cut later this month. That was considered more likely given the jump in unemployment in December, to a two-year high of 5 percent.

Bush urged Congress to quickly pass legislation left over from last year to offer assistance to people trying to obtain mortgages or refinance to more affordable mortgages. "For those of you who are paying more and are worried about the value of your home, I understand that," he said.

China Reports Economic Output Forecast

China's Economic Output Per Person Forecast to Reach $3,000 by 2010.

China's rapid growth should boost annual output per person to $3,000 by 2010, nearly 3 1/2 times its level of a decade earlier, according to a government report cited Friday by an official news agency.

The estimate by the Chinese Academy of Social Sciences, or CASS, shows the country quadrupling year 2000 output levels earlier than expected. The official goal was to quadruple per capita gross domestic product by 2020. China's economy has expanded by more than 10 percent in each of the past five years, and 2007 growth is expected to top 11 percent once final figures are compiled.

The CASS report said economic output per person should reach $6,000 by 2020 if China maintains its current growth rate, according to the Xinhua News Agency. The report gave no figures in China's currency, the yuan. CASS would not provide a copy of the report when contacted by telephone.

The yuan has been rising against the U.S. dollar, which would raise China's economic output when measured in dollar terms. China wants continued rapid growth to reduce poverty, but it is also trying to restrain an investment boom in real estate and some other industries that leaders worry could ignite a financial crisis.

The government is promising to spread the country's prosperity to hundreds of millions who have been left behind by its three-decade-old boom. Large eastern cities such as Beijing and Shanghai have already surpassed the national per-person income level forecast by CASS for 2010. CASS said rural incomes rose by an estimated 8 percent last year, the fastest rate in 11 years, although this lagged behind the growth rate in cities by five percentage points.

EU Inflation Expected to Hold at 3.1%

Eurostat: Euro Area Inflation Held at 3.1 Percent in December.

Inflation in the countries that share the euro currency was expected to hold at a year-on-year rate of 3.1 percent in December, its highest-ever level for a second straight month, the EU statistics agency Eurostat said Friday.

Eurostat's figure is a first estimate that the agency will confirm on Jan. 16 when it reveals more details about the factors pushing up prices and give a breakdown of the figures. Thirteen European Union nations shared the euro in December. Malta and Cyprus joined the euro zone on Jan. 1, bringing to 15 the number of countries using the currency that has increasing clout over the slumping U.S. dollar.

Inflation in the euro zone has spiked in recent months, led by elevated prices for oil and food. It is now well over a guideline of just under 2 percent that the European Central Bank looks to when it decides whether to raise interest rates to boost borrowing costs. Year-on-year inflation in the currency area was 2.6 percent in October and 2.1 percent in September. It last hit 3.1 percent in May 2001, months before the euro came into circulation.

Though the December level is well above the ECB's target, the figure is not likely to cause the bank to adjust its benchmark interest rate from 4 percent when it meets next Thursday, said Aurelio Maccario, co-head of European economics at UniCredit Markets & Investment Banking in Milan.

"With inflation more than one full percentage point above the central bank's definition of price stability, it's hard to imagine the prevailing hawkish party within the (governing council) willing to concede anything in terms of policy relaxation," he said in a note to investors. "We stick to our idea that rates will remain at 4 percent for the foreseeable future with a slight tightening bias left in place."

Similarly, Matthias Rubisch, an analyst at Commerzbank in Frankfurt, said the new figure means that "the ECB will no doubt continue to talk of raising interest rates, but we do not actually expect it doing so." The ECB has left its rate untouched at 4 percent since June.

Fed Fears Worsening Credit Market

Fed Policymakers Fear Credit Market Could Worsen, Hurting Economic Growth.

Federal Reserve policymakers worried at their December meeting about the potential for a vicious cycle to develop in which credit problems could worsen. That could hurt economic growth and force the Fed to act more aggressively in cutting rates, according to meeting minutes made public Wednesday.

"Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit," the minutes said. "Such an adverse development could require substantial further easing" of rates, the minutes revealed.

Problems in the housing, credit and financial markets drove the Fed to do an about-face on Dec. 11 and slice its key interest rate yet again in the hope it would bolster an economy that was losing speed.

Fed Chairman Ben Bernanke and all but one of his colleagues agreed to trim the Fed key rate by one-quarter percentage point to 4.25 percent, a two-year low. The central bank ordered its key rate lowered three times last year; the December reduction was most recent one.

The decision to cut rates essentially marked a reversal for the central bank, which had hinted at its October meeting that the Fed's two rate cuts probably would be enough to help the economy survive the housing and credit stresses. But the economy's problems intensified after that meeting, forcing the Fed to change its stance.

"Members judged that the softening in the outlook for economic growth warranted an easing of the stance of policy at this meeting," the minutes said. "In view of the further tightening of credit and deterioration of financial market conditions, the stance of monetary policy now appeared to be somewhat restrictive," the minutes said.

On Wall Street, stocks tumbled as oil prices briefly hit $100 a barrel and a weak report on manufacturing rattled investors. The Dow Jones industrials sank by 220.86 points to close at 13,043.96.

The 9-1 decision for a quarter-point reduction in December was opposed by Eric Rosengren, president of the Federal Reserve Bank of Boston, who preferred a bolder, half-percentage point cut. Wall Street, disappointed by the quarter-point cut, took a nosedive Dec. 11. The Dow Jones plunged more than 290 points.

In Rosengren's view, the worsening housing slump, high energy prices and more cautious spending by individuals and businesses raised the risk of continued economic weakness, the minutes said. "In light of that possibility, a more decisive policy response was called for to minimize that risk," the minutes said.

Fed policymakers were concerned that rising energy prices could spread inflation through the economy. That concern figured into the Fed's decision to cut rates by a modest one-quarter point cut in December, the minutes suggested. "Inflation pressures and risks remained," according to the minutes.

To bolster the economy, many economists predict the Fed will slice rates yet again at its next meeting, on Jan. 29-30, the first regularly scheduled gathering of 2008. "The Fed minutes are a testament that the economy is extremely volatile and policymakers have some very difficult decisions to make," said Richard Yamarone, economist at Argus Research.

The economy is believed to have slowed sharply in the October-to-December quarter, probably to a pace of just 1.5 percent or less, according to analysts' projections. Economic growth in the first three months of 2008 also is expected to be weak.

Economists' big worry is that individuals will reduce spending and businesses will become reluctant to hire workers, throwing the economy into a tailspin. The odds of a recession have grown, with some economists putting it at just under 50 percent.

At the December meeting, Fed policymakers suggested all the housing, credit and financial problems have increased economic uncertainty. That has made it more difficult for the Fed to assess the country's economic outlook and give clear signals about its next move.

"The committee agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook, and members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen," the minutes said. If economic conditions were to improve more rapidly than expected, "a reversal of some of the rate cuts might be appropriate," according to the record of the meeting.

Although Fed policymakers agreed in December that rates must be cut yet again, "they also recognized that the situation was quite fluid and the economic outlook unusually uncertain," the minutes said.

$100 Oil Unlikely to Shake Consumer

Oil at $100 a Barrel Unlikely to Shake Consumers -- but Rising Prices Will Pinch Over Time.

With oil having briefly touched the once unfathomable price of $100 a barrel, consumers can expect the cost of filling their gas tanks, heating their homes -- in fact, the price of most everything -- to also keep rising.

Still, analysts don't expect record-high prices by themselves to send the economy into recession, simply because expensive as oil is, energy doesn't consume as big a chunk of Americans' budget as it did decades ago. "So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices," said David Wyss, chief economist at Standard & Poor's.

A barrel of light, sweet crude reached triple digits for the first time Wednesday, soaring 44 percent since August and 57 percent since the end of 2006. Meanwhile, gasoline prices at the pump reached a national average of $3.05 a gallon, according to AAA and the Oil Price Information Service. That's below their May peak of $3.23 a gallon but likely to go higher as the spring and summer approach. "It's just crazy, I don't know how much worse it can get," said Susan Witte, of Fairless Hills, Pa., while shopping at a suburban Philadelphia sporting goods store one recent morning.

But Chicagoan Fraz Baig was unfazed as oil approached its milestone, although rising prices are making it more expensive for him to gas up his just purchased 2008 Infiniti FX SUV. "I'm doing well financially and I'm single, so I'm not really worried," said Baig, who works in Internet technology solution sales for IBM Corp.

Rising energy prices were cited as a contributing factor in disappointing sales for the just-ended holiday season, along with the continuing slump in housing and an overall uneasiness about the economy. But economists say that generally, the jump in oil is less devastating than previous spikes because incomes have risen faster than energy costs. "The percentage (of personal income spent on energy) was far higher in 1979-80 than it is now," said Kay Smith, a macroeconomist at the Energy Information Administration.

In 1981, 14 percent to 15 percent of the nation's gross domestic product was spent on energy, according to Lester Lave, professor of economics at Carnegie Mellon University's Tepper School of Business. That's fallen to 7 percent today.

In part, that's because energy efficiency has increased. "It's just not (as) important to the economy anymore," Lave said. "Prices are not high enough so that they're going to get middle-income people to change their behavior."

Still, that could change if prices keep rising. The question is at what point do prices start to truly hurt. Lower-income families feel the effects of price increases most dramatically. With heating oil costs expected to jump 33 percent this winter, according to the Energy Department, families who rely on heating oil will have less money to spend on other things.

Diesel prices are also at record levels, which will affect the cost of food and, indeed, any goods that are shipped. Diesel hit a record price of nearly $3.50 a gallon at the end of November, according to AAA and the Oil Price Information Service.

Oil's march higher is expected to have more of an impact in the months ahead. For example, the chief financial officer of United Airlines owner UAL Corp. recently said airlines would have to keep raising fares or reduce capacity to compensate for rising fuel charges. Several carriers have announced new fuel surcharges in recent weeks.

Some analysts predict gas prices could rise as high as $3.50 to $4 a gallon next summer. And the Energy Information Administration predicts gas prices will set a new record national average above $3.40 a gallon this spring.

Many consumers have found ways to cope with higher energy costs. James Ersery, of Chicago, commutes by bus to his job as a letter carrier for the U.S. Postal Service, so he's not being hit hard by higher gasoline prices. But at home, he turns down the thermostat when he's away. Still, he shrugged off oil's rise. "Prices have been extremely high for quite some time," he said.

Barbara Binik, a Realtor in Chicago, said that while higher prices haven't significantly altered her spending habits, a larger percentage of her disposable income is going toward gasoline, and "you feel it. It's out of whack." She has cut back in small ways so far, such as by using a cheaper drive-through car wash instead of an automated one and eating out less. "I'm more careful about my spending."

Some analysts predict oil will continue to rise in the futures market, and if that's the case, $100 crude might sow the seeds of its own destruction. Many analysts believe higher prices will hurt demand, eventually. "We think it important to keep in mind that all of the economic consequences of $100 crude are bearish, not bullish" for prices, Tim Evans, an analyst at Citigroup Inc. in New York, wrote in a recent research note.

Oil prices have risen in recent years as booming economies in China and India have grown exponentially and fed the perceptions that global crude supplies are not rising fast enough to meet demand.

Political problems and labor strife in oil-producing areas have also fed oil's upward momentum. In Nigeria, political upheaval has cut oil supplies from Africa's biggest producer by 587,000 barrels a day since the end of 2005, according to Energy Information Administration estimates. Renewed violence in Nigeria helped send crude to $100 Wednesday. Any news about Iran's disputes with the West and conflict between Turkish armed forces and Kurdish rebels in northern Iraq has also sent crude soaring.

However, oil has also been pushed higher by speculators, who have come to see oil as an investment play as the dollar has weakened in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are also more attractive to foreign investors when the greenback is falling.

That has some analysts concerned that shift in speculators' strategy could just as easily send oil prices tumbling. "We are still leaving open the possibility of a major price downdraft prior to month's end," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill., in a Wednesday research note.

Market Volatility Expected to Resume in 2008

New Year Brings Many Predictions but Few Expect Fractiousness Will Disappear.

The start of a new year often brings jokes about crystal balls, but with the arrival of 2008, many investors are ruefully saying they don't need fortunetelling gimmicks -- they know that the problems that made 2007 painful and turbulent aren't going away with a change in the calendar.

The concerns about slowing economies, a weakening U.S. consumer and further tightness in the credit markets are likely to dog investors at least early on in 2008, observers say. While it is impossible to say with any certainty what will happen, few expect that the bumpy ride investors unwittingly began in mid-2007 will soon end.

A few Wall Street veterans agreed to weigh in with some of their predictions for 2008.

Will the U.S. fall into recession? "Right now, we've upped the odds," said Quincy Krosby, chief investment strategist at the Hartford, which oversees about $330 billion in assets. "We've always thought that the U.S. would be able to narrowly skirt a recession. For us the key is the employment data." She contends the economy sits at a crossroads and whether a recession occurs will depend on whether unemployment remains low and whether the housing market can bottom out. She said the Federal Reserve will also need to continue to lower interest rates.

Growth funds, which invest stocks likely to increase earnings and revenue but often don't pay big dividends like so-called value stocks, did well in 2007. Will that continue? "We expect to see large cap growth outperform," said Krosby. "It's very difficult for investors to realize that a shift has gone on. That shift took place a number of months ago when we saw the baton go from small-cap to large-cap and now to large-cap growth. Large-caps come into their own during (economic) slowdowns."

What will come of financial instruments such as mortgage-back securities made infamous in 2007 when they hurt the performance of financial stock funds? "You know Wall Street and the geniuses who created this -- they're going to create something else in its stead," said Krosby. "The demand was fostered by a global demand for yield. This is why it popped up all over the world." Funds -- even normally safe money market funds -- invested in products based on mortgages that were bundled and sold off to investors. But a weakening housing market made some of the assets underlying those investments shaky, as some homeowners found it impossible to make their mortgage payments.

Funds that invested in areas such as emerging markets like China and other overseas economies were strong in 2007. How will such funds fare in 2008? "If history repeats itself, then emerging market investors are due for big disappointment" because such spectacular growth is hard to sustain long-term, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which oversees assets of more than $55 billion. "That's probably the most gnawing question keeping me awake at night."

What kind of change might investors see in 2008 from 2007? "I think that this global market isn't quite as disconnected as investors have hoped so I think that Europe weakens and that the European Central Bank will actually find themselves behind the eight ball and so the dollar will strengthen on the back of European rate cuts," said Ablin.

Will sector-specific funds that showed strength in 2007 continue apace in 2008? "The sectors that were the strongest in 2007 could be among the weakest in 2008 on the theory that we have recessionary tendencies in the world's largest economy and Europe and Japan aren't that far behind," said Joe Battipaglia, market strategist for the private client group at Stifel, Nicolaus & Co., which has $32 billion in client assets. He contends a slowdown in the U.S. economy would dampen demand for commodities such as oil and that a correction in emerging-market stock markets like China is due.

Will large-cap funds continue to outrun small-cap funds? "I think that will continue because these companies do tend to be more globally diversified and can be more of a safe-haven than small caps," said Battipaglia.

Singapore's GDP Contracts 3.2% in 4Q But Private Home Prices Rise

Singapore's GDP Contracts 3.2 Percent in Fourth Quarter on Weak Manufacturing.

Singapore's economy contracted the first time in more than four years in the fourth quarter as weakness in manufacturing outweighed windfall growth from a construction boom, the government said Wednesday.

Singapore's economy shrank 3.2 percent from the third quarter on a seasonally adjusted annualized basis, the Ministry of Trade and Industry's advance estimate showed. It expanded 4.4 percent in the July-September quarter compared to the second.

A Dow Jones Newswires poll of economists had forecast a 4.2 percent rise in the final quarter of the year. The contraction marked the biggest decline since the 7.6 percent drop in the second quarter of 2003.

Singapore suffered from slower exports of drugs and electronics in the fourth quarter, and while services and construction remained healthy, manufacturers may be vulnerable to softer external demand this year.

Manufacturing output rose just 0.5 percent from a year earlier in the fourth quarter after growing 10.3 percent the previous three months. The sector expanded 5.6 percent for the full year in 2007. Construction output rose 24.4 percent compared to the same quarter a year ago, accelerating from 19.2 percent growth in the third quarter.

Singapore's services sector was also a key growth driver in the fourth quarter, led by financial institutions and a healthy tourism industry. The services sector grew 8.3 percent on year in the fourth quarter, matching the pace of the previous three months. For the full year, services expanded 8.1 percent.

Gross domestic product rose 6.0 percent from a year earlier, less than the 9.0 percent rise posted in the third quarter and coming in short of a poll forecast for 7.8 percent growth. For the full year, Singapore's economy grew 7.5 percent in 2007, less than the 7.9 percent rise posted in 2006.

The downturn in the fourth quarter could cause a dilemma for the island's central bank as the risk of an economic slump precludes monetary tightening even as the island faces the highest inflation since the early 1980s.

Singapore's central bank uses foreign exchange rather than interest rates to control prices because external trade dwarfs the domestic economy. Last October it said it would let the Singapore dollar appreciate at a faster pace to cap surging costs of imported food and energy. The consumer price index -- a non-core measure of costs for goods and services -- rose 4.2 percent from a year earlier in November, the fastest pace since May 1982.

Singapore's Private Home Prices Rise Despite Slower 4Q Growth

Singapore's private home prices rose almost a third over the whole of 2007 despite a slower pace of growth in the fourth quarter, the government said Wednesday. For the year, the housing price index rose 31 percent. Fourth-quarter private property prices rose 6.6 percent from the third quarter after increasing 8.3 percent in the previous three months, according to preliminary estimates from the Urban Redevelopment Authority.

No average price figures were released. Homes in the central region sold for record prices last year, and the property price inflation has also spread to less-expensive suburban areas. Prices in the core central region rose 7 percent in the quarter from the previous period, compared to the 8.3 percent increase in the previous three months.

Just outside the core central region, prices increased 7.3 percent, slightly slower than the 7.9 percent rise in July-September. Elsewhere home prices rose 7.5 percent, also slightly slower than growth of 7.9 percent in the previous quarter.

During the fourth quarter, the government withdrew a scheme that allowed buyers of uncompleted properties to defer part of the payments in a bid to slow the sector. The scheme had been implemented in 1997 when Singapore's property market crashed. It fueled speculation among investors who secured properties with minimum downpayments and quickly resold them.

About 85 percent of Singaporeans live in subsidized public housing apartments built by the government. Private developers compete to provide housing for the remaining 15 percent of Singapore citizens, along with a sizable number of foreigners that make up the rest of the city-state's population of about 4.5 million. The flash estimate issued Wednesday on home prices is based on data for the first 10 weeks of the quarter. The government will issue more detailed figures in one month.

New Year Special: Frozen Winter in Siberia, Russia

Siberia, meaning "sleeping land," is a large region inside Russia, extending from the Ural Mountains to the Pacific Ocean. The southwest area of Siberia expands into Mongolia and China, touching the north of Kazakhstan. Much of Siberia is inhabitable, covered by either permafrost or thick taiga. Eastern Siberia is well-known for its mountain ranges and water bodies, including Lake Baikal, the deepest and cleanest lake in the world. The north coast of Siberia is north of the Arctic Circle.

Until the construction of the Trans-Siberian railway at the end of the 20th century, Siberia remained inaccessible to everybody except for local nomads such as the Huns, Yenets, and Uyghurs. The creation of the railway, which runs 5,772 miles (9,288 kilometers) from Moscow to Vladivostok, opened the door for further exploration and settlements. Construction workers and agriculturalists were the first to move to the East, encouraged by a government campaign to populate Eastern Russia. By the 1930s, two Siberian cities, Omsk and Novosibirsk, had already become cultural and business centers.

Siberia is infamous for its Gulag, or labor camps, first established in 1917 but not officially recognized until 1930. The Gulags were used to house not only criminals, but also political prisoners. By 1939, there were over 1.5 million prisoners in Siberian camps. Those people who were freed after finished their sentences were not allowed to settle back in the big cities, which lead to the creation of towns all around Siberia.

Modern Siberia is progressive and thriving. While the population remains low at only three people per square kilometer, Siberia has developed a cultural presence that transcends frontiers. Novosibirsk, the largest city in Siberia and the third in the country after Moscow and St. Petersburg, houses the State Academy Opera and Ballet Theater, a large scientific research center, and a large variety of casinos, universities, and theaters.

Today, visitors come to Siberia to experience extremes. Summer on the north Coast of Siberia is only about a month long. Winter visitors can stop in Novosibirsk to see what it's like to breathe in -37 degree Celsius (-34.6 degree Fahrenheit), or head to the Altai Mountains for hiking, skiing or rafting.

Why is Siberia so incredibly cold in the winter?

The coldest places there are at similar latitudes to a large part of northern Canada, and are closer to the ocean than many other places. The official record for the coldest Northern Hemisphere temperature is -90 degrees F (-67.8 degrees C) for both Verkhoyanski and Oimekon (also spelled Oymyakon in English). Both were recorded on Feb. 6, 1922. Their part of Siberia is informally called the Northern Hemisphere's "Cold Pole."

The U.S. Army Corps of Engineers booklet Weather and Climate Extremes, which lists and discusses global weather extremes of all kinds, notes that this area is in the East Siberian taiga (northern coniferous forest) and is so cold because "it is located near the eastern end of the world's largest land mass (Asia) and blocked by mountain ranges from moderating oceanic influences."

During the winter, strong areas of high atmospheric pressure dominate. High pressure keeps the sky clear, which allows the Earth's heat to radiate away into space, and also creates light winds, which don't stir up the air to mix very frigid air near the ground with slightly warmer air higher up. While some parts of northern Canada are farther from the ocean than Siberia's "Cold Pole," mountains don't block milder air from the ocean from reaching these parts of Canada.

Both of Siberia's record-cold locations are relatively far south. Verkhoyanski is only 74 miles north of the Arctic Circle, and Oimekon is not even in the Arctic, it is 209 miles south of the Arctic Circle.

This leads to the question: Why isn't any place over the vast area closer to the North Pole than either of these two locations colder?

The answer illustrates why Antarctica is much colder than the Arctic. The Arctic is dominated by the Arctic Ocean, with land around it. The Antarctic — the region south of the Antarctic Circle — is mostly filled by the Continent of Antarctica.

While the Arctic Ocean is covered by ice in the winter, the water under the ice is relatively mild, and some of this warmth flows through the ice to make the air above the ice warmer than it otherwise would be. Even in the middle of winter, places right around the ocean, even though they are much farther north, don't grow as cold as those farther from the ocean.

By the way, the world's coldest official temperature is the -129 F (-89.4 C) recorded at the Russian Vostok Station in Antarctica on July 21, 1983.

Oil Prospect at $100 a Barrel in 2008

Oil prices of near 100 dollars per barrel caused alarm in consuming countries in 2007 and analysts forecast another tense crude market this year with triple-figure records a real prospect.

Despite a murky outlook for the world economy, crude prices are seen settling at elevated levels, spelling more pain for consumers and a steady flow of petrodollars for the world's oil exporters. From a low point of just below 50 dollars per barrel in January, prices doubled in 2007, hitting 99.29 dollars a barrel on November 21, an all-time record.

Oil forecasting is a notoriously difficult business, but few had expected such a run-up -- besides an analyst at investment bank Goldman Sachs who famously foresaw early in 2005 a "super spike" in prices to 105 dollars.

At the start of 2008, geopolitical risks, with unrest in Pakistan foremost among them, are driving prices back towards the 100-dollar level, with a colder-than-usual winter in the northern hemisphere another danger. "Political unrest around the world has once again become a major factor" for the oil market, said David Johnson, an analyst with Macquarie Securities.

Tension between the United States and Iran, the second-biggest producer in OPEC, had helped push prices higher in the last two years with traders fearful of US military action against the Islamic republic. But Iran was expected to fade as a concern in 2008 after a recent US intelligence assessment said the country had shelved its disputed nuclear weapons programme in 2003.

Oil prices ended the year Monday with a modest dip on the eve of the New Year's Day market holiday amid concerns about instability in Pakistan after last week's assassination of former Pakistani opposition leader Benazir Bhutto. New York's main contract, light sweet crude for February, fell two cents to close at 95.98 dollars, while in London, Brent North Sea crude for February delivery slipped three cents to 93.85 dollars.

Goldman Sachs, one of the most active banks in the energy market, raised its price forecasts for 2008 by 10 dollars on December 12, with average benchmark US prices now seen at 95 dollars. The price could reach 105 dollars by the end of 2008, it said.

The London-based Centre for Global Energy Studies sees an average of about 90 dollars in the first half of the year, with a spike to 100 dollars a possibility. "There are conditions in which we would see well over 100 dollars per barrel, such as a cool winter, tightness of OPEC supplies, or non-OPEC supply not growing as much as predicted," said CGES analyst Leo Drollas.

Analysts at investment bank Merrill Lynch pointed to upside risks to prices in early 2008 in research published on December 13 and they predicted average oil prices this year of 82 dollars. Some analysts said softening global economic growth, particularly in the United States, could help temper price gains, however.

"I do have some concerns about demand," said a Washington-based analyst for oil consultancy PFC Energy, David Kirsch "The global economy is weak ... and that's going to be the worry that potentially keeps you from 100 dollars," he said. The United States has been battling crises on two fronts. In the housing sector, prices are falling sharply and an increasing number of people are defaulting on home loans.

The 13-member Organisation of the Petroleum Exporting Countries is likely to remain under pressure to bring down prices this year, but the cartel shrugged off calls for more crude at a December meeting in Abu Dhabi. It is held responsible by many for the surge in prices in 2007 by restricting supplies to reduce stock levels in industrialised countries. "OPEC has not been pumping enough. It's as simple as that," said Drollas.

Kirsch at PFC said 2007 was the year of "the reemergence of OPEC" after many had said the influence of the organisation, which pumps 40 percent of world oil, had waned. He also said the "financialisation of oil," or the use of oil as an investment product for speculators and even pension funds, was a key theme of 2007 that was set to continue in 2008.

"It started late last year. We're now seeing different types of investors," he said. "Before it was primarily hedge funds, now we're seeing pension funds, which are very conservative investors, taking long-term positions in oil as part of a larger portfolio strategy." OPEC members have railed against the role of "speculative" money, which they blame for volatility and high prices.

Auld Lang Syne 2007: Happy New Year 2008!

Auld Lang Syne
by Robert Burns

Should auld acquaintance be forgot,
and never brought to mind?
Should auld acquaintance be forgot
and days of auld lang syne?

For auld lang syne, my dear,
For auld lang syne,
We'll take a cup o' kindness yet
For auld lang syne

We twa hae run aboot the braes
And pou'd the gowans fine;
we've wander'd mony a weary foot
Sin' auld lang syne

We two hae paidled i' the burn,
Frae mornin' sun till dine;
But seas between us braid hae roar'd
Sin' auld lang syne

And here's a hand, my trusty friend,
And gie's a hand o' thine;
We'll take a cup o' kindness yet
For auld lang syne

Should auld acquaintance be forgot,
and never brought to mind?
Should auld acquaintance be forgot
and days of auld lang syne?

For auld lang syne, my dear,
For auld lang syne,
We'll take a cup o' kindness yet
For auld lang syne

The Meaning of 'Auld Lang Syne'

To understand the true meaning behind "Auld Lang Syne", they would first have to know what the title means and where the poem is from.

The poem is Scottish and is written by a Scotsman, therefore the poem is written in a Scottish accent. There is a translated version provided to help the reader to understand what the poem is saying. This breakdown will be refering the original words to the poem.

There are two characters in this poem. The first character is the narrator. The narrator is recounting old memories that he and the second character shared together. The second character can be two different people. One version makes the second character to be a very close friend. The other version portrays the second character to be a wife or girlfriend. This analogy will use the first version, but has the same meaning if used for the second.

By the first read through the poem one would believe that it was talking about friendships and memories that the two people shared, but after a deeper analysis the poem begins to deepen in meaning.

Should auld acquaintance be forgot,
And never brought to mind"
Should auld acquaintance be forgot,
And auld lang syne"

This section of the poem is the narrator asking the second character if he/she wants to forget all of the great times that the two had together, long ago. Apparently, the pair seem to be having a fight over a reason that isn't worth losing their friendship.

For auld lang syne, my dear,
For auld lang syne,
We'll tak a cup o' kindness yet,
For auld lang syne.

In the refrain the narrator is begging his companion to remember the times that they have had together. The line: "We'll tak a cup o' kindness yet" is a metaphor meaning that they will become friends again and will be grateful toward each other.

We twa hae run about the braes,
And pu'd the gowans fine;
But we've wandered mony a weary fit
Sin' auld lang syne.

In this passage the narrator is using another metaphor. The Phrase, "Running about the braes (or hills in English) and pu'd the gowans" is referring to the happy and cherished memories that the pair have experienced together. The second metaphor in this stanza is talking about the weary fits, or troubled times. He is referring to the troubled and hard times they experienced. It is also saying that they should not be distressed because the two have always settled their differences in the past.

We twa hae paidled i' the burn,
Frae morning sun till dine;
But seas between us braid hae roared
Sin' auld lang syne.

This section of "Auld Lang Syne" is refers to the toils that the narrator and his friend have gone through. "We twa hae paidled i' the burn, Frae morning sun till dine" talks about how the friends worked hard, side-by-side, each day to accomplish their common goal. The phrase that talks about seas and braids is speaking of the hardships in the past. The braids and seas are metaphors for people or objects that have caused the pair troubles in their relationship.

And there's a hand, my trusty fiere,
And gie's a hand o' thine!
And we'll tak a right guid-willie waught
For auld lang syne.

These lines are used to persuade the second character to forget about what happened and to become friends again. They will drink in each others companionship and become even better friends.

And surely ye'll be your pint-stowp,
And surely I'll be mine!
And we'll tak a cup o' kindness yet,
For auld lang syne.

The last chorus is a metaphor as well. It is trying to say that the two will respect each other and stay out of each others affairs, but will be very close friends.

The entire poem is a story that is describing a situation that Robert Burns himself might have experienced. It was an ode to celebrate a reunion of friendship.