computers

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.

The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

“All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.”

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.

Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.

Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.

This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead.

“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.

“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”

As the House of Representatives worked feverishly to pass a non-binding resolution criticizing the President's conduct of the war in Iraq, a clear message was sent to terrorists throughout the world: America does not have the stomach for a prolonged fight that slowly bleeds her of her sons and daughters in uniform.

The terrorists we are fighting have known for a long time that the American public would start to question the war if they could just drag it out long enough and cause enough casualties. Bin Laden has repeatedly stated that he didn't believe the United States had the will to fight a war of attrition because we had no stomach for heavy losses.

This thought process was reinforced by our premature withdrawal from Beirut in 1983, after the bombing of the Marine barracks, and after our departure from Somalia in 1993, following a bloody battle in Mogadishu that downed two Blackhawk helicopters and killed nearly twenty Army Rangers. It was further reinforced during the 1990s by our unwillingness to put soldiers on the ground in the Balkans, choosing instead to fight a war from the air with minimal risk to American servicemen and women.

The terrorists have come to understand that if they target our public perception through the media they can influence the outcome of any fight with American forces. Our superpower status does us little good if we are unwilling to pay the price that victory demands. Extremists the world over know that if they can avoid conventional engagements and attack us at the time and place of their choosing, they will make the fight costly and increase the odds of us losing our will.

I have written before that Americans have become conditioned by quick, easy victories that involved minimal loss of American life: Grenada in 1983, Panama in 1989, and Desert Storm in 1991. We have become accustomed to “Nintendo” warfare where we watch precision-guided weapons fly into air ducts and windows to take out our enemies while leaving our forces largely untouched.

That conditioning has caused us to slowly forget the terrible costs of war. Combat is an ugly business in which military forces and civilians die brutal deaths under unimaginable conditions. We don't like to see the realities of war on the evening news and chant the mantra that the historically low casualty rate in Iraq is “unacceptable.”

Democrats, and some Republicans, have seized on this public aversion to American loss of life and have pursued measures that undermine our mission and our commander in chief. The belief that if we just leave Iraq and come home the violence will stop has somehow taken hold of the American psyche. We could not be more wrong. A withdrawal now will cost us more dearly later on.

Al-Qaeda's number two man and ideological advisor, Ayman al-Zawahiri, wrote in a letter to the late al-Qaeda in Iraq leader, Abu Musab al-Zarqawi, that the jihadist mission would not end if the United States left Iraq. The mission would change to one of spreading Islamic rule to neighboring secular governments in Jordan, Egypt, Saudi Arabia, Algeria, Morocco and Kuwait. To leave Iraq now would be to abandon our allies in the short-term only to have to help them survive in the long-term.

There are many who argue that al-Qaeda in Iraq is not the driving force behind the insurgency. They are correct. The main source of violence outside of al-Anbar Province is sectarian in nature, with Sunnis and Shiites systematically killing each other in order to consolidate as much power as possible. This is a problem that the Iraqi government must find a solution to in order to quell the bloodshed.

In al-Anbar, though, the Sunni insurgents attacking coalition forces have had to deal with foreign fighters attempting to carve out a jihadist enclave from which to further their Islamic revolution. The Sunnis have begun to fight back against the jihadists and have increasingly cooperated with American forces to root them out. But the jihadists are not finished yet. To leave Iraq now would be to leave open the possibility that Islamic extremists could indeed stake out a home in al-Anbar from which they could take their fight to neighboring countries.

Those in the Congress now leading the charge to withdraw our forces are, unintentionally I'm sure, helping the terrorists realize their goal of establishing a foothold in Iraq. By adhering to partisan politics and pandering to what is perceived to be public opinion, they are ignoring the national security interests of the United States for political gain, and reinforcing the terrorist belief that America will not stay and fight when the battles become too bloody.

Being a sports fan in Chicago is a big deal. You've got the famous Cubs fans, Sox fans, Bulls fans, maybe some Blackhawks fans, and my personal favorite… Bears fans!

Of course, not all these teams are perfect. I used to be a Cubs fan when I lived in Wrigleyville, but switched over to Sox when I realized that it was hopeless (sorry guys!). However, I've always been a Chicago Bears fan. Why? Because they are one of the most entertaining, yet sometimes depressing, teams to watch play every week.

Of course, being a fan of the Chicago Bears is like being in an unstable relationship. Sometimes it's amazing and you feel happy all week, and sometimes you're just pissed off and ready to leave. Nonetheless, there's always something to talk about with this team.

This week I'll be attending the Chicago Bears and New York Giants game. Last week they played the Buffalo Bills, with the debut from the newly acquired franchise quarterback Jay Cutler. What a very interesting game I tell ya.

So, I was watching this game on TV and got really excited, like every other fan watching this game, when Jay Cutler stepped in and threw the first pass. Unfortunately, he wasn't displaying a whole lot of his impressiveness by consistently throwing it to the now full-time wide receiver Devin Hester. One pick and nearly intercepted pass that ended up getting dropped, and not even a resulting touchdown.

Now, of course, spectators watching this game, like usual, are jumping in right away and saying the dream is lost and now us fans are screwed for this season. Sorry, but that is the biggest knee-jerk reaction I've seen to any player or team in a long time. It was only 14 plays, and most of the starters were on the sidelines smiling away, but healthy as ever.

One thing many didn't seem to observe or report from this game was that we had a lot of rookies and backup players that did very well. Of course, we were playing the Bills, so we can't jump to any conclusions just yet. However, as a long time Chicago Bears fan, I would have to say… I'm still very excited about this season.

For the next game against the Giants, a game I got tickets several months in advance for from Stubhub.com (Bears tickets go fast!!), this will be my first time ever at Soldier field. Since they will be playing the Giants, a much tougher team than the Bills, it will be interesting to see who gets played and how key players like Cutler and Hester, as well as the defensive fare against them. There probably won't be much displayed, as Head Coach Lovie Smith likes to keep his players safe from injury, but it's the second game and they have a lot to prove as a result of the mediocre display against the Bills.

I'm sure several people are speculating that Cutler will lose his glow and throw a few picks and let us down – as well as Hester getting injured or buried on some ridiculous plays. The defense will crumble and we'll get destroyed while the rookies try to save the day and Robbie Gould scores all our points with 40-50 year field goals. Whatever, I've heard all this baloney before. Can't you depressing people move to another city? I appreciate the passion, but come on!

The country needs a jobs program and needs it right now. Cash for Caulkers would be a good start. A new Civilian Conservation Corps would be another. But let's not allow a jobs program to cover over the need for real changes in the structure and core principles of our economy.

Yes, an effective jobs program can help people hold out a while longer – until necessary changes are made. It can make the unemployment rate will look better, for a while, and maybe the GDP will climb a little bit. But our low-wage, everything-to-the-top economy is not sustainable and needs to be redesigned and re-regulated. The economy has to be changed so that it works for all of us, instead of just a few.

What if the government passes a jobs bill, and these new jobs follow the current American job model of paying too little with no benefits? What if the government uses contractors, as they now do for so many government functions, and the contractors “reduce costs” by paying very low wages and no benefits, sending the rest of the cash to a few at the top? Does it really help the economy and the country to provide a bunch of low-paying jobs with no benefits, and make a few wealthy executives even wealthier? Or suppose the government starts a massive infrastructure modernization project? Does it help the economy if they hire construction firms that pay as little as possible or use Chinese steel?

Even if a government jobs effort provides good-paying jobs with good benefits, this still won't change the need to restructure the rest of our economy so that it, too, provides good pay and benefits to all of us instead of concentrating all wealth and income at the top.

As long as our economy is structured to pass everything up to a few at the top, stimuli can't work well, and jobs bills can't work well, either. Neither can anything else. In the end things will just revert to the old ways and we'll need more bailouts, stimulus and jobs programs.

The problem is that there are two economies now. There is an economy for the top few and an economy for the rest of us. And this problem is global. The world's economy is structured to send almost everything to a global top few.

Everything just goes to the top now. Companies are structured that way, jobs are structured that way, taxes are structured that way and now even our government is structured that way. Our economy has been turned into a machine that sends every dollar to an already-wealthy few. So efforts to stimulate economic recovery using traditional methods cannot work. It will just make a few at the top even richer.

We need a jobs bill because the economic system has broken down. We needed a stimulus package because the economic system has broken down. All the bailouts and jobs bills and stimulus are just one more stopgap effort to keep a broken system going, for the continued benfit of the few at the top. Changes must be made.

One barrier to fixing our broken economy problem is the structural corruption of our Congress. Every effort to help the people seems to get hijacked – and never mind working on the needed reregulating and restructuring. The recent extension of unemployment insurance, for example, included only $2.4 billion for the unemployed, but had more than $20 billion tacked on, going directly or indirectly to (owners of) big homebuilding companies. Another example, the health care reform bill is turning into a law ordering people to buy insurance from the big insurance companies. This year's big stimulus package was watered down with even more tax cuts for the few, like getting rid of the Alternative Minimum Tax.

The biggest example, of course, was last year's financial sector bailout. Taxpayer dollars saved the asses of the companies that caused the collapse and are now serving up $140 billion for financial-sector bonuses but 10% unemployment for the rest of us!

If we want to get out of this mess we have to restructure and reregulate the whole system. We have to change the structure of our economy so that regular people receive the benefits. It is time. There is no more getting around it.

Next post: some of the structural problems that must be changed.

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.

11.03am: It's not often that all three political leaders share the same stage, let alone on the economy: arguably the defining issue of the next election. Let's hope the CBI conference forces them to spell out their plans. Gordon Brown is finally in a confrontational mood, threatening to ratchet up his pressure for a transaction tax on the City. David Cameron has yet to seal the deal with the business community and Nick Clegg is riding high after weekend talk of a hung parliament. First up, Gordon Brown.

11.06am: Brown reminds the hall that this all started with the global financial crisis – ie. them, not him.

11.08am:

Choking off the recovery prematurely would be fatal

He's talking to you David.

11.12am: First mention of a global financial levy, but only as a list of options. This it not yet the determined defence of a Tobin tax we were promised.

11.14am:

Rising deficits are an inevitable consequence of the events of the last few years, but we are one of the first governments to announce plans to tackle them.

An important issue for the captains of industry in the hall, but barely a peep out of them. He'll have to do better than that.

Gordon Brown at the CBI. Photograph: Andy Rain/EPA

11.18am: More pledges to support new nuclear power; more broadband investment, more transport infrastructure etc etc. This is exactly what the business community wants to hear, but it doesn't exactly chime with the CBI's wish to get the public deficit down. I wonder why Brown doesn't make more of the irony.

11.22am: So far, it's a scatter gun list of government policy rather than a direct appeal for the support of the business community that Brown used to indulge in. I wonder if he's already given up on this constituency in his head?

11.23am: Big section on Europe from Brown. Another challenge to Cameron, who has to convince the CBI that he won't isolate British business from its biggest market.

11.27am: Finally, an announcement: an international investment conference in London next year. Some polite applause and then time for questions.

11.33am: Brown challenged on small business taxation. Tax breaks became a vehicle for tax avoidance, he insists, that's why they had to change.

11.36am: CBI chair Helen Alexander says questions have to be “very, very quick”. Brown mumbles that he has plenty of time, only to be politely informed that it's not his time they're worried about. Ouch.

11.38am: Brown says the government is setting out more plans for high speed rail in the next few weeks. Music to the ears of the CBI crowd from Manchester and Birmingham who now have to trudge down to London for their annual shindig after it stopped moving around the country last year.

11.40am: Alexander says that's it Gordon – time to get off. Polite applause, but there are other politicians to hear from now…

11.42am: Nick Clegg strides in, looking altogether more chipper after the weekend polling. His first address to the CBI as Lib Dem leader.

11.45am: Time to revisit the fundamentals of banking, says Clegg: What are they for? Good question, so rarely asked.

11.47am:

It is unacceptable that when taxpayers own so much of the banking industry, credit still isn't flowing to small businesses. Taxpayers shouldn't just be suggesting a change of policy, they should be insisting on it.

For a good chunk of the CBI audience, this is a really sore point. Business leaders seem less willing to challenge the City on this one though – curious.

11.50am: Clegg revisits the question of a levy on banking, adding one more detail than Brown did: he wants a windfall tax set at 10%. That's it though – no detail, no explanation. Funny how neither Brown nor Clegg choose to dwell on this question. They'd be surprised how many industrialists are actually with them on this one.

11.52am: A bit more on the banking levy – Clegg reckons a temporary tax on bank profits will raise about £2bn. That sounds pretty small beer given what others have been talking about.

11.56am: Clegg also talking about spending more than cuts, insisting that it would be “economic madness” to cut back on infrastructure investment at this point. There's definitely been a change in mood on this from politicians in recent days. Even Cameron has been talking about a budget for growth rather than an austerity budget once the Tories are in power. I wonder if the slash and burn talk has peaked?

12.01pm: Time for some more feisty questions from floor. Clegg asked to clarify his references to “unearned wealth” and “avoiding the trap of cutting public spending”. He pauses long and hard, “erm”.

12.02pm: Ok. Clegg dives in feet first and says that property is an example of unearned wealth, alluding to Vince Cable's plan to tax it more. Stony silence from the audience. Brave stuff, though.

12.08pm: Clegg challenged on nuclear power now. He's getting a really hard time from this audience. Brown gets a backhanded compliment when a delegate suggests he has more of a vision for business than the Lib Dems.

12.12pm: I have clearly failed miserably to be the slightest bit uplifting and visionary, admits Clegg, getting the first titter of the day from a very stony-faced audience.

12.15pm: Cameron gets a much warmer reception. Alexander says the CBI has continued to build its relationship with the Conservative party over the past year.

12.16pm:

You wait ages for one party leader and then three turn up at once.

Cameron actually raises a laugh from the audience.

12.25pm: Within 50 days of taking office, the Tories will announce an emergency growth budget, with plans to bring down the deficit, but also initiatives to stimulate business with lower taxes – a neat trick, if he can pull it off.

12.27pm: Cameron claims that the government's need to borrow money is already crowding out private sector investment, pointing to the market-beating interest rates on offer at National Savings & Investment. Nobody seems to have told him that these were pulled over the weekend . Shame, it would have been an interesting point, had it been true.

12.31pm:

The relationship between the CBI and a political party should never be entirely smooth, we should have the odd argument, but frankness matters more than ever because the government has run out of money.

He's treading the tightrope between playing to the gallery and not appearing to pander. Big applause.

12.32pm: We've got plenty of time to take questions and answers, says Cameron with a smile that suggests he saw Brown's uncomfortable moment being bundled off the stage earlier.

12.40pm: Cameron faces questions again on Tory plans to replace the FSA's supervision of the banks with a beefed up Bank of England. Business is still not convinced about this one.

David Cameron addressing the CBI conference

12.44pm: Now Cameron is facing tougher questioning on his plans to scrap Regional Development Agencies, a big issue for CBI members outside London who rate these rather more highly than the politicians do. He appears to put his foot in it for the first time with a remarkably glib answer:

I don't think Britain does have very strong regional identities

I suspect the spin doctors might want to polish this argument a bit more.

12.48pm: Cameron quits while he's still ahead and ends the Q&A to warm applause. I'm going to take a break for lunch now and return later on to see what the business chaps have to say. Stuart Rose from M&S and Stephen Hester from RBS are both up after 1pm.

1.54pm: After an undignified scrum over the hot buffet, Britain's business leaders are back to listen to some of their own rather than the politicians. On the panel now is Stuart Rose of M&S, Stephen Hester (Britain's best paid civil servant), the boss of outsourcing giant Serco and (a special guest speaker) the US boss of Pfizer, who has just reminded us that his company is the largest single supplier of drugs to the NHS.

1.57pm: The spirit of trust between business and the public has evaporated, says Jeff Kindler, Pfizer's chief executive. He might not be as dull as he sounds.

2.02pm:

The people we serve are angry. People have come to believe that the rules meant to bring order to society are meant to benefit those that make the rules. People have had enough and the backlash is real. Sometimes this criticism is warranted and sometimes it is not, but when the majority of people don't trust you, they will find a way to make you do what they want.

This chap from Pfizer is good at diagnosis, not sure where he's going with the cure though.

2.14pm: Pfizer's research centre in Kent is the largest privately-owned medical research facility in the world, apparently.

2.21pm: Stephanie Flanders conducts a straw poll of the CBI audience to see how many are feeling that the economy is ready to start to recovering: about 3 people put their hands up. This is a pretty gloomy room.

2.22pm: Hester is one of the few bankers we can get to come out in daylight hours, quips Flanders.

2.24pm: Hester says thank you to the CBI for the bail-outs.

We are crystal clear that we would not be here were it not for the support from the government and the taxpayer.

2.30pm:

We are able to lend to exactly the same proportion of customers as we did before the crisis.

A very carefully-worded boast that is no doubt meant to reassure, but I wonder how many of the business people in the audience feel that lending condtions are quite as rosy as RBS makes out?

2.32pm: Stuart Rose can't resist trying to sell. Not sure how many of the audience are interested in his dine-in-for-£10 offers though.

2.33pm: Stuart Rose on the environment:

There was a time at M&S when the only green we knew was Philip Green.

Ho ho

2.40pm: Chris Hyam presents Serco and its ilk as the answer to the world's public sector deficits.

Spending restraint can be a catalyst for transformational change, but we need bravery too. For too long we have seen the delivery of public services based on the needs of the provider rather than the user.

Can't help but think we're going to be hearing a lot more of this sort of stuff over the next couple of years.

2.57pm: My colleague Allegra Stratton helpfully passes on an interesting complaint from Labour about David Cameron's attempt to enlist international support for his economic policies. Earlier on today, Cameron implied that the OECD and President Obama were backing his view that cutting public deficits now was the best way to strengthen the economy. Labour's one-man rebutal unit, Peter Mandelson, points out that the OECD was talking about reducing deficits only “once the recovery takes hold” and that Obama has also warned about the dangers of governments doing too little. It might sound like splitting hairs, but this issue of timing is going to be one of the big dividing lines of the next few months.

3.02pm: Stephen Hester touches on one of the big questions for politicians: do the tax rules encourage companies to take on too much debt?

It is true that thanks to the tax system there is a very big difference in the cost of debt and the cost of equity and you could argue this played a big part in what happened.

Stuart Rose agrees that it is a problem.
So when is the CBI going to start the campaign?

3.05pm: They're close to wrapping up now and I'm heading off. My colleague Kathryn Hopkins is sticking around to hear what Adair Turner has to say. More thoughts from me later on what it all means.

Trading was subdued with financial markets in Japan closed for a national holiday. Oil hovered above $78 a barrel while the dollar rose against the yen and fell versus the euro.

Hong Kong's Hang Seng index was up 140.15 points, or 0.6 percent, at 22,588.44 while South Korea's Kospi was off 2.72, or 0.2 percent, at 1,617.88.

Elsewhere, Australia's index gained 0.6 percent and China's Shanghai benchmark rose 0.1 percent. Markets were lower in Indonesia, Malaysia, Thailand, New Zealand and the Philippines.

Investors are cautious because of an upcoming slew of figures on the world's largest economy including revised GDP growth for the third quarter. Many analysts expect the initial estimate of a 3.5 percent annual growth rate to be lowered.

Also due this week are reports on home sales, unemployment, consumer confidence and demand for big-ticket manufactured goods.

"Everybody is watching to see if the U.S. consumer will go out and spend," said Jackson Wong, vice president at Tanrich Securities in Hong Kong.

There's also a focus on the U.S. dollar, he said, after it regained strength amid safe haven buying sparked by Dell's gloomy business outlook and European Central Bank plans to start reining in stimulus programs.

Investors tend to seek refuge in the U.S. currency and gold when they perceive other assets such as emerging market stocks and commodities have become too risky.

Stocks, particularly in Asia, have risen dramatically from their lows in March but there are nagging doubts the global economic recovery isn't keeping up with the markets.

On Friday in New York, the Dow Jones industrial average fell 14.28, or 0.1 percent, to 10,318.16, skidding for the third straight session. For the week, the Dow fell 119 points, or 1.1 percent.

The broader Standard & Poor's 500 index fell 3.52, or 0.3 percent, to 1,091.38, while the Nasdaq composite index, dominated by tech stocks like Dell Inc., fell 10.78, or 0.5 percent, to 2,146.04.

Investors sold U.S. stocks after Dell said net income dropped 54 percent in the third quarter and warned it faced an uneven recovery.

Oil prices rose with benchmark crude for January delivery up 73 cents at $78.20 on the New York Mercantile Exchange. The contract lost 58 cents to settle at $77.47 on Friday.

In currencies, the dollar rose to 88.88 yen from 88.79 yen. The euro rose to $1.4937 from $1.4859.

On Tuesday, the MPs will probably try and reconcile the Inflation Report’s
upbeat forecasts with Mr
King’s downbeat tone at the press conference to coincide with
its publication.

But they usually ask questions on other major debates of the moment, so the
committee is likely to bring up subjects around the Inflation Report,
including the dreadful state of the public finances.

The week's other major event comes the next day when the Office for National
Statistics (ONS) will publish the first revision of figures for third
quarter gross domestic product (GDP).

The
ONS shocked City economists last month by saying that the UK
economy shrank by 0.4pc between July and September. Almost eonomist,
including those at the Bank of England (the governor among them), had
predicted an end to recession.

Since then, the publication of third quarter GDP in other countries has showed
Britain is now lagging behind other major economies which have emerged from
recession.

The ONS data was controversial, but it is by no means a certainty that it will
revise the numbers up this week, now that it has processed more information.

Better retail sales on the one hand could be cancelled out by industrial
production figures which were revised down. Even if there is an upward
revision, it is likely to be very small and leave third quarter GDP in
negative territory.

At some point during the week Nationwide is expected to publish its November
house prices survey, which is always closely watched.

Over recent months – seven out of the last eight on the Nationwide measure –
house prices have increased. Annual house price inflation is now in positive
territory, which would have been considered impossible at the beginning of
the year.

Many say that the recent rises won’t last, and that house prices will start to
dip again in 2010, albeit by a smaller margin than we saw at the beginning
of the recession.

This week at least, Nationwide is expected to say house prices rose again in
November.

MONDAY

Nothing scheduled

TUESDAY

Bank of England governor and fellow MPC members appear at a Treasury Committee
hearing on the Inflation Report, third quarter business investment figures,
BBA mortgage data

WEDNESDAY

First revision of third quarter gross domestic product

THURSDAY

CBI distributive trades survey, speech by Andrew Bailey, executive director
and chief cashier at the Bank of England

FRIDAY

Nothing scheduled

In Europe, the FTSE 100 index of leading British shares closed up 104.09 points, or 2 percent, at 5,355.50 while Germany's DAX rose 138.33 points, or 2.4 percent, to 5,801.48. The CAC-40 was 83.81 points, or 2.3 percent, higher at 3,813.17.

In the U.S., the Dow Jones industrial average was up 146.54 points, or 1.4 percent, at 10,464.70 around midday New York time while the broader Standard & Poor's 500 index rose 17.79 points, or 1.6 percent, to 1,109.17.

Sentiment was buoyed by solid economic data in both Europe and the U.S.

In Europe, figures showed that the economic recovery is gathering pace in the 16 countries that use the euro. The monthly composite purchasing managers index – a broad gauge of business activity in the manufacturing and services sector – rose to 53.7 in November from October' 53.

Any reading above 50 indicates expansion and the bigger the difference from 50 the greater the expansion – figures recently confirmed that the recession in the eurozone economy ended in the third quarter, though growth was muted.

In the U.S., the National Association of Realtors said existing home sales in October rose by 10.1 percent to an annual rate of 6.1 million units – a two and a half year high – as buyers took advantage of a tax credit. Nevertheless, the increase was way more than expected and fueled the optimism on Wall Street, which had already opened higher on the back of the strong gains in Europe.

Much of Monday's activity centered on commodity stocks as the price of gold spiked $22 an ounce, or 1.9 percent, to a new record of $1,170.

Gold was boosted by a drop in the dollar's value after U.S. Federal Reserve official James Bullard said the central bank should continue to buy mortgage-backed securities after the program is supposed to expire in March. Bullard is expected to join the Fed's rate-setting body next year.

As a result, the minutes to the last rate-setting meeting of the Fed – due to be published Tuesday – will be pored over for any clues as to whether the purchases will continue after the planned March deadline.

Any suggestion that the Fed will maintain its extraordinary monetary policy measures for longer than previously anticipated heaps pressure on the dollar – by late afternoon London time, the euro was up 0.8 percent at $1.4980, having earlier breached the $1.50 mark for the first time in a week.

The falling dollar makes gold more attractive to international investors and as a result, commodity stocks were heavily in demand, particularly on London's FTSE 100, where a number of resource companies are listed – near the top of the leaderboard were Kazakhmys PLC, Lonmin PLC and Rio Tinto PLC.

Labour's hopes of avoiding a general election rout at the hands of David Cameron's Tories will be boosted today as a new poll shows a sharp fall in the Conservatives' lead, raising the possibility of a hung parliament.

The Ipsos MORI survey for the Observer, which will cause alarm in Tory ranks and boost Labour's hope of performing a “great escape”, puts the Conservatives on 37%, only six points ahead of Labour on 31%. The Liberal Democrats are on 17%.

It is the narrowest gap between the two main parties in any poll since last December and demonstrates that, rather than powering towards a landslide victory, Cameron's party is struggling to capture the number of floating voters it needs to win a decisive mandate.

The poll, which also shows economic optimism at its highest level since 1997, suggests that Labour may be benefiting from a return of a “feelgood” factor as the country heads out of recession.

About 46% of the public now believe the economy will perform better over the next year, compared with 23% who think it will deteriorate and 28% who say it will stay the same. If the voting intentions are replicated at the next election, probably in May or June, the Conservatives will hold the most seats but fall 35 short of an overall majority in the Commons.

It would be the first general election to have delivered a hung parliament since 1974. If Labour was to cut the Tory lead to five points or fewer, pollsters say it would be likely to have more seats than the Tories.

Labour, which only six months ago was 20 points behind in several polls, pledged to make stewardship of the economy the central issue in its battle for a fourth term in office. Douglas Alexander, the party's general election co-ordinator, said: “The economy will be the defining issue at the election,” with the choice being one between “economic recovery with Labour and putting the recovery at risk with the Tories”.

Sir Robert Worcester, the founder of MORI, said: “This poll will jolt the electorate into the reality of British politics in the run-up to the election. Whether or not there has been a blip among the electorate caused by short-term events such as Labour's surprise win in Glasgow North East, it will not be easy for the Tories to gain the 117 seats they need for an overall majority, never mind the 140 they require for a working majority.”

Meanwhile, Gordon Brown's personal rating remains in the doldrums. Only 34% of people are satisfied with his performance, against 59% who are dissatisfied. David Cameron had approval ratings of 48%, with 35% against.

With the main parties set to fight an election on the economy, Brown will seek to strike an upbeat note in a speech to the CBI tomorrow. Economists and politicians will then await Wednesday's update from the Office for National Statistics, which will confirm whether the country's economy did contract by 0.4% in the third quarter.

There are also signs that retailers can look forward to a much better Christmas than last year. John Lewis, the department store chain, said the Christmas frenzy had already begun, with sales for the first part of last week 15% up on last year. David Barford, its director of selling operations, said: “This is really encouraging. Branches are noticing a definite Christmas feeling.”

The most recent unemployment figures, which showed the smallest rise since spring 2008, also provide grounds for optimism. The number of Britons out of work rose by 30,000 less than expected to 2.46 million in the three months to September, the lowest increase since May last year.

There are also signs of life in the property market. The Nationwide index has posted monthly gains in seven out of the past eight months, and mortgage approvals are on the rise. However, economists remain concerned about the dire state of the public finances – presenting whichever party wins the election with a mountain to climb.

Ipsos MORI interviewed a representative sample of 1,006 across Britain by telephone on 13-15 November. Data was weighted to match the profile of the adult population.