Friday, November 27, 2009

Dubai real estate bust

Thursday, November 26, 2009

Bergsten: Yuan to appreciate against dollar slowly

Bergsten of Peterson Institute of International Economics talks about Chinese Yuan:

US Dollar hit 14-year low against Yen

Wednesday, November 25, 2009

Becker: U.S. should not ask China to appreciate its currency

Gary Becker analyzes why he thinks China's currency policy does more good than harm to the US:

By all accounts, President Obama's visit to China last week was pretty much a failure on all the major issues, which include China's contributions to climate change, nuclear weapons, and various aspects of the world economy. I will concentrate my discussion on two of the most important and closely related economic issues: the valuation of the Chinese currency, the renminbi, and the huge assets accumulated by China that are mainly held in the form of US Treasury bills and other US government assets.

The Chinese central bank held the value of the renminbi fixed relative to the US dollar at a little over 8 renminbi per dollar during the 1990s, and until 2005. It then allowed the renminbi to appreciate gradually to less than 7 per dollar until 2008, when it again fixed the rate of exchange between these currencies at about 6.9 renminbi per dollar. This exchange rate is considerably above a free market rate that would be determined in a regime of flexible exchange rates. So there is no doubt that China is intentionally holding the value of its currency below the rate that would equate supply and demand.

The dollar has depreciated substantially relative to other currencies since May of 2009. Since the renminbi is tied again to the dollar, the renminbi has depreciated by the same amounts, including 16% against the euro, 34 % against the Australian dollar, 25% against the Korean won, and 10 % against the Japanese yen. This substantially depreciation of the Chinese currency has made many other countries angry at China's policy of locking it to the US dollar.

President Obama apparently complained to Hu Jintao, President of the People's Republic of China, about the low value of the renminbi, and urged China to allow it to appreciate substantially. The US and other countries worry that the undervaluation of the Chinese currencyi increases the demand for Chinese exports, and reduces China's demand for imports from countries like the US because China keeps the dollar and the currencies of other countries artificially expensive relative to their currency. America and other countries hope that greater demand from China for their exports resulting from a higher value of the renminbi will help these countries resume sizable economic growth as they recover from this severe recession. They especially want to help reduce the high levels of unemployment found in many of these nations.

Indeed, in good part due to the low value of its currency, China has run substantial surpluses on its current trade account as it imports fewer goods and services than it exports. The result is that China has accumulated enormous reserves of assets in foreign currencies, especially in the form of US government assets denominated in dollars. As of September of this year, China had the incredible sum of over 2 trillion dollars in foreign currency reserves, such as US Treasury bills. This is by far the highest reserve in the world, and it amounts to the enormous ratio of more than one quarter of China's GDP of about $8 trillion (purchasing power parity adjusted).

I am dubious about the wisdom of both America's complaints about China's currency policy and of China's responses. On the whole, I believe that most Americans benefit rather than are hurt by China's long standing policy of keeping the renminbi at an artificially low exchange value. For that policy makes the various goods imported from China, such as clothing, furniture, and small electronic devices, much cheaper than they would be if China allowed its currency to appreciate substantially in value. The main beneficiaries of this policy are the poor and lower middle class Americans and those elsewhere who buy Chinese made goods at remarkably cheap prices in stores like Wal-Mart's that cater to families who are cost conscious.

To be sure, US companies that would like to export more to China are hurt by the maintenance of the Chinese currency at an artificially low value relative to the dollar. As a result, employment by these companies is lower than it would be, so that this may contribute a little to the high rate of US unemployment. But I believe the benefits to American consumers far outweigh any loses in jobs, particularly as the US economy continues its recovery, and unemployment rates come back to more normal levels.

Since the opposite effects hold for China, I cannot justify their policies from the viewpoint of their interests. Their consumers and importers are hurt because the cost of foreign goods to them is kept artificially high. Their exporters gain, but as in the US, that gain is likely to be considerably smaller than the negative effects on the wellbeing of the average Chinese family.

I reach similar conclusions about China's accumulation of their excessive reserves. The US has little to complain if China wants to hold such high levels of low interest-bearing US government assets in exchange for selling goods cheaply to the US and other countries. China's willingness to save so much reduces the need for Americans and others to save more, but is not differences in savings rates also part of the international specialization that global markets encourage? To be sure, why China is willing to do this is difficult to understand since they are giving away goods made with hard work and capital for paper assets that carry little returns.

One common answer is that China hopes to increase its influence over economic and geo-political policies by holding so many foreign assets. Yet it seems to me just the opposite is true, that China's huge levels of foreign assets puts China more at the mercy of US and other policies than visa versa. China can threaten to sell large quantities of its US Treasury bills and other US assets, but what will they buy instead? Presumably, they would buy EU or Japanese government bills and bonds. That will put a little upward pressure on interest rates on US governments, but to a considerable extent, the main effect in our integrated world capital market is that sellers to China of euro and yen denominated assets would then hold the US Treasuries sold by China.

On the other hand, the US can threaten to inflate away some of the real value of its dollar denominated assets-not an empty threat because of the large US government fiscal deficits, and the sizable growth in US bank excess reserves. Inflation would lower the exchange value of the dollar, and also of the renminbi, as long as China keeps it tied to the dollar. That would further increase the current account surpluses of China, and thereby induce China to hold more US and other foreign assets, not a very attractive scenario to China.

So my conclusion is that the US in its own interest should not be urging China to appreciate its currency- countries like India have a much greater potential gain from such an appreciation. On the other hand, I see very little sense at this stage of China's development in maintaining a very low value of its currency, and accumulating large quantities of reserves. Paradoxically, President Obama and President Jintao should each have been arguing the others positions on these economic issues.

Sunday, November 22, 2009

China's housing bubble is forming

A classic bubble is forming in China. Prick it, or deal with it after burst? 

A large bubble is forming in China's property market as a result of Beijing's credit-driven stimulus programme, one of the country's most prominent real estate developers warned.

Zhang Xin, chief executive of Soho China, one of the country's most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country's long-term growth prospects.

"Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment," Ms Zhang said. "The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried."

Ms Zhang's assessment was echoed by Fan Gang, a member of the central bank's monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

Urban property prices in 70 big and medium-sized Chinese cities rose 3.9 per cent in October from a year earlier, accelerating from September's 2.8 per cent rise, according to government figures.

Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements. 

Investment in real estate development, a key driver of economic growth, rose 18.9 per cent in the first 10 months of the year on a year earlier, a marked acceleration from 17.7 per cent growth in January-September.

Ms Zhang said the current speculation should be a serious warning for the industry and the general economy.

"In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers," she said.

"If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn't be so optimistic."

Source: FT

China's tough road ahead

China got the money.

But don't mistakenly think China will catch up with the US soon. According to estimates by Robert Fogel at University of Chicago (see graphs below), China will catch up the US around 2020 in total GDP, but only until after 2040 will China reach the same living standards, measured by GDP per capita, as the US.

Currently, the GDP per capita in China is a little over $5,000 (in PPP term), way below US average of $45,000.

(click to enlarge; source: Robert Fogel)

China's big problem is it's non-democratic. The implications are 1) China's political system is inherently unstable; 2) Political freedom and free expression of ideas are closely tied to human creativity and innovation, which is the long-term driver for a country's wealth. That's where I worry most about China.

On the optimistic side, we should know political system itself is an evolutionary system. The hope is that as Chinese are getting richer, the current political system will evolve into something similar to western democracy.

Also listen to this NPR report on "While US economy struggles, China rises".

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Warren Buffet: Squanderville vs. Thriftville

Borrow to spend like the debts won't be repaid forever. That's how we got here. That's how the US, the world superpower, jeopardizes its own currency and subjects its national security to foreign trading partners.

Also read Paul Samuelson's warning on the US dollar
and Julian Robertson on "How we put ourselves into this terrible position".

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Saturday, November 21, 2009

Who is paying taxes?

The top 5% income earners in the US bear over 60% of total tax burden.

(source: mint, click to enlarge)

Too tough to save

Mega banks survived because of government bailout and they are believed to be "too big to fail".
What about smaller regional banks, with heavy investment in CRE? It seems that they are too tough to save.

Source: WSJ

For the first time in the credit crisis, the government may have run into a problem that is too tough to bail out: commercial real estate.

The Treasury and the Federal Reserve have spent hundreds of billions of dollars shoring up the residential-mortgage market. By comparison, the government's strategy for dealing with commercial real estate looks slight. And it may have no choice but to step aside and allow an adjustment that could slow the economy and expose banks and bond investors to big losses from the $3.4 trillion outstanding in commercial real-estate debt.


Why is this sector so rescue-resistant? First, helping commercial-mortgage holders doesn't buy votes the way helping homeowners does. Second, look at where commercial real estate lies in the banking sector. In theory, the Troubled Asset Relief Program, or TARP, should have given banks the capital to absorb loan losses, including those on commercial real-estate debt. TARP injections, along with Fed-run stress tests, helped big banks with more than $100 billion in assets. But those lenders held only 29% of the $1.84 trillion of commercial real-estate debt on bank balance sheets in the second quarter, according to Foresight Analytics.

Yes, smaller banks also tapped TARP, but they weren't stress-tested in the same way, and thus are less likely to have raised enough equity to deal with commercial real estate. Banks with $1 billion to $10 billion of assets had $450 billion in commercial real-estate exposure in the second quarter, equivalent to more than 330% of Tier 1 capital. For the largest banks, that ratio was 99%, according to Foresight.

Regulators could encourage smaller banks to stock up on capital for a commercial real-estate meltdown. Yet Treasury figures show the number of banks taking TARP capital has dwindled to a trickle.

Regulators appear to be hoping that a partial recovery in commercial real-estate values could reduce the problem. They recently issued guidelines that make it easier to keep underwater loans out of bad-loan tallies, as well as encourage banks to restructure, rather than foreclose on, problem commercial mortgages. Indeed, Foresight estimates that for commercial real-estate bank loans maturing between 2010 and 2014, a 10% rise in values could cut the proportion underwater from 68% to 37%.

But even if prices did rise, banks likely are to want to pare exposure. They have little motivation to refinance commercial real-estate loans.

And investors shouldn't expect any meaningful revival of the $700 billion market in bonds backed by commercial real-estate loans, even with the Fed providing leverage to buy such securities. While popular during the bubble, these securitizations lack the sort of attributes, like large pools of loans with similar terms, to generate strong demand in saner times, said Joseph Mason of Louisiana State University.

Commercial real estate looks too tough to save.

Bank failures in historical perspective:

(graph courtesy of calculatedrisk)

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Gold rush

Analysis of recent rise of gold price (source: FT)

(click to play the video)

China's auto industry in consolidation

Shakeout in Chinese auto industry (from WSJ):

BEIJING—Changan Automobile Group Co. on said Tuesday it will take over several automobile companies now owned by state-owned conglomerate Aviation Industry Corp. of China, in a restructuring that could indicate that the consolidation of China's fragmented automobile sector is gaining momentum.

AVIC will get a 23% stake in Changan Automobile in exchange for Harbin HF Automobile Industry Group Co., Jiangxi Changhe Auto Co. and Harbin Dongan Auto Engine Co., as well as Chinese joint ventures with Suzuki Motor Corp. and Mitsubishi Motors Corp., Changan Automobile said in a statement.

Changan Automobile's parent, whose name translates as China Weaponry Equipment Group, will own the remaining 77%, it said.

Changan Automobile is already the parent company of Shenzhen-listed Chongqing Changan Automobile Co.

"This is a very reasonable merger," said Yale Zhang, an analyst at automobile-research firm CSM Worldwide. He said the restructuring helps consolidate China's mini-commercial-vehicle segment, in which Chongqing Changan holds the No. 2 spot by sales volume, followed by Changhe Auto and Harbin HF. The segment is led by SAIC-GM-Wuling Automobile Co., a joint venture between General Motors Co., SAIC Motor Corp. and Wuling Automobile Co.

The restructuring could mean consolidation in China's automobile industry, which the government has been trying to promote, is finally gaining some steam.

China currently has more than 80 automobile makers competing for thin slices of the market.

In May, Guangzhou Automobile Group Co. acquired a 29% stake in Hunan Changfeng Motors Co. to become the sport-utility-vehicle maker's biggest shareholder.

A host of other potential transactions are also under discussion in the industry.

The moves come after the central government said earlier this year it planned to encourage consolidation of its automobilemobile companies into a "big four" and "small four," to increase the local industry's competitiveness against established foreign compeition.

As part of the AVIC deal, Changan Automobile will take over Suzuki's automobile-making joint venture in China with Changhe, Jiangxi Changhe Suzuki Automobile Co., and an engine joint venture between Mitsubishi and Dongan.

The restructured group aims to sell more than 2.6 million vehicles by 2012.

It targets sales of five million vehicles by 2020 and to sell own-brand, high-end vehicles, the statement said.

Thursday, November 19, 2009

Is the Fed's independence under threat?

House panel approved auditing on the Fed (source: WSJ)


Becker: Will We Go the Way of Japan?

Gary Becker says no, unless US government policies discourage growth

Japan has had a very slow rate of growth in its GDP since 1991, averaging just a little over 1 percent. Given this slow growth, and the government's continued failed efforts to prop up their economy by running large fiscal deficits, the ratio of government debt to its GDP has risen from only about 50% in 1995 to by far the highest ratio in the developed world, at about 170% in 2008. Estimates indicate that it could rise to over 200% by next year as the budget continues to spill red ink, and may grow even much further during the next decade. Such a large debt ratio has been manageable so far only because interest rates have been very low, at about a little over 1%. But these rates have recently been rising as concern is growing about the fiscal solvency of the Japanese government.

The danger of any explicit default on this debt is minimal since it is all denominated in the Japanese currency, the yen. Any country can reduce the real value of a debt burden in its own currency by printing money to finance a good chunk of its government spending, and thereby create inflation that destroys part of the real burden of the debt. I do not expect that to happen in Japan unless the debt burden becomes intolerable down the road.

All this is background for comparisons between Japan and the US. As Posner indicates, the American ratio of debt to GDP is now about 50%, where Japan was in 1995. It is also rising rapidly as the government continues to increase its spending on banks, the stimulus package, likely also on health care, maybe subsidizing employment of the unemployed, subsidizing mortgages, and in many other ways. The ratio of federal government spending to American GDP was quite stable at about 20% for about 40 decades, but this ratio has been rising rapidly during the past year, and it is beginning to approach 30%. The government debt is not yet a great burden because, as in Japan, interest rates are low, so that annual interest payments on the debt is not a sizable fraction of total government spending.

It is unlikely that US government spending will decline during the next decade, even though some of the short term spending on banks and stimulating the economy will probably fall sharply. Any spending declines from these directions will be more than replaced by much greater spending on Medicare, Medicaid, and other government financed health programs, on social security, and on various other entitlement programs. The direct impact on the debt burden of such budget deficits can be reduced only by higher taxes or inflation. Eventually, I do expect much greater inflation in the US. The Obama administration has also been vocal about its plan to raise taxes, especially on higher income persons, as soon as the recession is clearly over and the economy is growing again. That would be a serious mistake.

The best solution to reducing the real burden of the public debt is neither inflation nor higher taxes, but more rapid growth of the American economy. This involves lower, not higher, taxes on investments and incomes of small and large businesses. It also requires greater concern about the fact that the US is falling behind many other countries in the proportion of its young population, especially males, who receive a higher education. In addition, much greater attention needs to be paid to correcting the depressing statistic that the fraction of boys who drop out of high school has been stuck at about 25% for several decades, even though the economic and other benefits of finishing high school and going to college have risen dramatically. To its credit, the Obama administration has given high priority to improving the K-12 performance of American students, especially those from minority backgrounds.

In effect, the desirable policies to stimulate growth involve a retreat from the anti-business rhetoric that pervades Congressional Democrats and some of the top players in the executive offices, and a more pro-consumer and pro-business mentality. It is necessary to maintain the minimalist anti-trust policy that developed during the 1980s and 1990s under Democratic as well as Republican administrations, to retreat from the policy that banks and other businesses, such as GM, cannot be allowed to fail when they are mismanaged.

Desirable policies also include the elimination of efforts to restore union power in the private sector, and resistance to the desires of some members of Congress to have the US retreat from a free trade policy> They also want to impose onerous regulations on businesses of all kinds, especially the more successful ones. I am perhaps particularly disturbed by the anti-immigration rhetoric of leading members of Congress since immigrants have contributed so much to the dynamism of the American economy and society.

Sizable advances in productivity and the resulting sharp economic growth can ease the burden of growing government spending, and prevent anything like the expanding debt to GDP ratio and stagnation of the Japanese economy. Can the US do it? Certainly! Will the US do it? Not with the present composition of Congress, and with the tendency of the President to allow some of the more destructive members of his political party to get their way.

Wednesday, November 18, 2009

What gold price is telling us

Looking at gold future price, I have become more worried about the US dollar lately. Are we going to have 1971-collapse of US dollar again? The sharp drop of US dollar and China potentially losing a huge chunk of its foreign reserve value remain to be the biggest risk in the system.

Guess I need to be more imaginative in this wildly uncertain world.

(click to enlarge)
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Monday, November 16, 2009

Obama's town hall meeting in China

China and the US: adversaries or friends?

Unfortunately, Obama's speech was censored in China.

Sunday, November 15, 2009

Compare retail sales in recessions

A very nice chart that puts current retail sales in the historical comparative perspective.

(click to enlarge; graph courtesy of bigpicture)

Hawks and doves inside the Fed

FT dissects the Fed:


Janet Yellen, president, San Francisco Federal ReserveVote

Leading dove on the committee. A heavyweight former senior economic adviser in the Clinton White House who recently joined the Group of 30 leading global policymakers. Expects the recovery will "look something like an L with a gradual upward tilt". Believes the output gap exerts the dominant influence on prices and that "economic slack and downward wage pressure are pushing inflation below rates that are consistent with price stability"

Eric Rosengren, president, Boston Fed No vote

Has a special interest in the problem of banks "too big to fail". Thinks the recovery is "quite capable of falling short" of market expectations. Like Ms Yellen, is worried about inflation falling too low and fears premature tightening. Says rate policy should be based on the understanding that, "We need the economy to grow rapidly enough that unemployment falls substantially and inflation settles at a rate near 2 per cent"


Donald Kohn, vice-chair, Federal Reserve boardVote

The most influential figure after chairman Ben Bernanke, Mr Kohn is an anchor against pressure from hawks. Defends the dual mandate, and a focus on core inflation and the output gap, saying the Federal Reserve act requires the Fed to consider the "level of output relative to the economy's potential" alongside the inflation rate. Thinks "the persistence of economic slack" will keep inflation subdued and worries about inflation falling too low

William Dudley, president, New York Fed Vote

Succeeded Tim Geithner as head of the New York Fed, a pivotal position in the system. Sees a recovery "less robust than desired" because of headwinds from the banking sector. Distinguishes sharply between the "how" and "when" of exit strategy, and stresses that the Fed's preferred option is not to sell its portfolio of assets back into the market. Says, "We face meaningful downside risks to inflation over the next year or two"


Ben Bernanke, chairman, Federal Reserve boardVote

The chairman defines the centre of the committee and fashioned the radical "credit-easing" strategy that is now winding down. Shares the doves' belief that there is a large output gap that will put considerable downward pressure on inflation but puts more emphasis on inflation expectations as an autonomous factor. Last year edged the Fed away from an exclusive focus on core inflation; is not indifferent to dollar weakness

Daniel Tarullo, governor, Federal Reserve boardVote

An Obama appointment with close ties to the White House, he is an expert on regulation and leads the Fed's overhaul of financial supervision including bankers' pay. Has not taken sides in the debate over monetary policy. Says pay should be viewed as a "safety and soundness" issue, and wants to avoid a "formulaic approach" to achieving this. Favours stronger capital and liquidity requirements for banks and more co-ordinated bank supervision

Elizabeth Duke, governor, Federal Reserve boardVote

The former banker has remained relatively quiet in public on monetary policy, though she is an influential voice on the banking sector and credit trends. A few months ago she judged that the "decline in lending is not tremendously large relative to the experience of past business cycle downturns" and that the credit crunch was less intense than that of the 1990-91 recession thanks to massive policy interventions

Charles Evans, president, Chicago FedVote

Has gone further than others in putting a time frame on the first rate rise – "most likely to be towards the end of 2010/11" – though that assessment is not set in stone. Gives weight to the output gap and inflation expectations. Says "resource gaps remain substantial today. That's a significant mitigating factor against inflation pressures". Also sees inflation expectations as a "powerful determinant of inflation", the stability of which cannot be taken for granted

Dennis Lockhart, president, Atlanta FedVote

Centrist leaning recently towards the dovish, with fears about the underlying strength of the recovery. Notes that "both the data and anecdotal descriptions of ground-level reality are quite mixed", with foreclosures, unemployment, income and bank failures continuing "to disappoint". Is "particularly concerned about interaction among bank lending, small business employment" and commercial property, with small businesses reliant on credit from troubled banks

Sandra Pianalto, president, Cleveland FedNo vote

A centrist with dovish tendencies, she says: "We have a lot of ground to make up before we even get back to the levels of output seen in 2007". Sees "considerable slack" and "tangible evidence" that this will help keep inflation subdued. But still sees the inflation outlook as "uncertain". Why? Inflation concerns relating to the Fed's swollen balance sheet "must be taken seriously" even if policymakers think these concerns are misplaced

James Bullard, president, St Louis FedNo vote

Centrist leaning towards the hawkish, says uncertainty over inflation is "as high as it has ever been since 1980". Still sees a lingering deflation risk but, beyond that, an inflation risk. An independent thinker, he shares some positions with doves and some with hawks. Has little time for output-gap analysis – thinks the Fed should start tightening as soon as strong job growth resumes. Favours selling assets rather than raising rates to begin with

Narayana Kocherlakota, president, Minneapolis FedNo vote

Newcomer who took office only last month. No policy views yet expressed


Kevin Warsh, governor, Federal Reserve boardVote

The DC Fed's ambassador to Wall Street, he puts more weight than others on the upswing in financial markets as a "forward-looking sign of growth and inflation prospects". Is optimistic about a "positive feedback loop" between market strength and economic activity, but is watching asset prices carefully. Warns against waiting until the economy is back to normal before raising rates and says when the Fed tightens it may have to do so rapidly

Richard Fisher, president, Dallas FedNo vote

Former ├╝ber-hawk, moving towards the centre. Thinks the recovery will look like "a check mark" with a slope "that is less than desirable and might possibly be repressed by an occasional pause". Worries that businesses will be slow to start hiring again. Says "inflation is likely to remain subdued for a time" but fears Fed guidance on rates may be fuelling the dollar carry trade, which could end in a disorderly adjustment in asset markets


Charles Plosser, president, Philadelphia FedNo vote

Thinks "the good news will increasingly outweigh the bad news" on growth and views unemployment as a "lagging indicator". Sees little near-term risk of inflation but "greater risk of high inflation in the intermediate to long term". Deeply sceptical about output gaps; says the crisis has hit potential output as well as demand. Troubled by the Fed's interventions in private credit markets and wants to get back to more rules-based policy

Jeffrey Lacker, president, Richmond FedVote

Prioritises inflation expectations and is sceptical about output-gap analysis – which he says "greatly underestimated inflation" in the 1970s. Fears ongoing Fed asset purchases will push bank reserves beyond desired levels at which point policy will become much more stimulative. Sees inflation as medium-term risk and wants Fed to tighten "when growth becomes strong enough and well enough established" – but admits it is not certain that this will come in 2010

Thomas Hoenig, president, Kansas City FedNo vote

Was first to raise the need for the Fed to tighten in a timely fashion in June, with the words "as the economy begins to recover, even at a modest pace . . . the current level of monetary accommodation will need to be withdrawn". Concerned about banks "too big to fail". Worries about excess reserves and appears keen to get away from near-zero rates. Says "moving from zero to one per cent, for example, is not tight policy"

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John Ryding: Unemployment to peak out in 4-5 months

Interview of John Ryding, Chief Economist of RDQ Economics. He painted a more optimistic picture of US unemployment outlook. For the economy to create jobs, weekly initial jobless claims need to come down to 400k range from the current 500k. The recent decline is 5,000 claims per week, so it will take 20 weeks to reach 400k level. Then unemployment rate will come down.

The question is how fast the job creation will be. It'll be a big problem for the US economy if 9-10% unemployment rate stays there for a long time.

(click on the image to play the video interview)

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David Rosenberg: Unemployment rate to reach 13%

David Rosenberg, former Chief economist at Merrill Lynch, explains convincingly why he thinks the unemployment rate may peak at 13%, eventually. He points out unemployment rate becomes a coincidental indicator, not lagging indicator, of the economy during credit deleveraging cycle.

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Saturday, November 14, 2009

Obama goes to China

Discussion on President Obama's visit to China and Asia. I think the most important issue that should be on the US policy makers' agenda should be to have a strategy to deal with China's rising in the 21st century, directing China to become US' ally, not enemy; democratic, away from the current authoritarian regime. (source: On Point of WBUR)

Is America the next Japan?

RAB Capital Global Portfolio Strategist Marshall Auerback on how the U.S. is comparable to Japan.

Roach: Preparing for the next Asia

Stephen Roach, Chairman of Morgan Stanley Asia, talks about the transformation of Asian economy.

Break up big banks

To big to fail?
Moral hazard?
Bailout money flowing to Wall Street?
The solution: break them up!

(click to enlarge; graph courtesy of James Chanos)

Interview of Simon Johnson, former chief economist of IMF. (20 mins interview from Bloomberg)

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Tuesday, November 10, 2009

Justin Lin: Yuan's appreciation can't be forced

Justin Lin, Chief Economist at the World Bank, opens fire with IMF (source: WSJ):

China shouldn't be forced to let its currency appreciate as a way to rebalance the world economy, World Bank Chief Economist Justin Yifu Lin said, staking out a strong position that runs contrary to calls from the International Monetary Fund and policy makers in the U.S., Europe and Asia.

"Currency appreciation in China won't help this imbalance and can deter the global recovery," he said in a lecture Monday at the University of Hong Kong.

Officials from the U.S., Europe and the IMF have called for China to allow its currency to strengthen as a way to get Beijing to boost domestic consumption and to rely less on exports. Such "rebalancing" is necessary, they argue, to produce more sustainable global growth.

A recent World Bank report endorsed the need for rebalancing but didn't specifically address the currency issue. World Bank President Robert Zoellick's advice to Beijing has largely been to boost spending and sustain growth as a way to help global growth.

Mr. Lin, the first Chinese national to be the World Bank's chief economist, said the lecture reflected his views "as a scholar," rather than being an official World Bank policy position. A professor on leave from Peking University, he earned a doctorate in economics from the University of Chicago in 1986 and later served as a deputy of China's People's Congress. He was appointed World Bank chief economist last year.

[Currency Control chart]

As an institution, the World Bank isn't at the forefront of currency issues, which are part of the mandate of the IMF. Even so, World Bank chief economists have sometimes crossed swords with the IMF. But it is far from clear that Mr. Lin was looking to pick a fight with the IMF. Rather, he has taken some unorthodox views on his native country, including arguing that Chinese companies "are subsidized through the lower wages" they pay workers -- echoing complaints of U.S. labor unions.

Although the U.S. current-account deficit has shrunk substantially during the recession, policy makers and economists fear that global economic imbalances could swell again as the world economy recovers and spark new problems like asset bubbles.

Mr. Lin said a yuan move upward could snuff out the global recovery. It would depress U.S. consumer demand because imported Chinese consumer goods would be more expensive. And it wouldn't shrink the U.S. trade deficit because the types of goods China exports to the U.S. for the most part aren't made domestically in the U.S. So, he said, American consumers would simply pay more for goods either from China or from another country.

On the Chinese side of the equation, Mr. Lin said, a stable yuan is critical to keeping the Chinese export economy humming, which will in turn spread economic health to other countries. "China's dynamic growth is very important to the global recovery," he said.

Mr. Lin said short-term currency moves won't fix what is wrong with the global economy. He said "structural reform" is needed. That includes the U.S. putting its fiscal house in order and China creating conditions to lower its high savings rate and to increase domestic consumption.

Sunday, November 08, 2009

Higher productivity at the expense of labor

Labor productivity grew 9.5% last quarter. This growth came at the expense of laying off workers massively, and squeezing the current workers who still have their jobs. You can complain but you dare not jump ships as the labor market is still very soft.

High productivity growth is typical at the end of recession and at the beginning of recovery. But because firms cut employees more quickly and aggressively during this recession, current workers feel especially squeezed.

The productivity of U.S. workers surged in the third quarter, as the economy resumed growing even as employers pushed forward with layoffs and cuts in working hours across a wide range of industries.

The Labor Department said the output per hour of nonfarm workers rose at an annual rate of 9.5% in the quarter, more than four times the average productivity growth rate of the past quarter-century. When taken together with the second quarter's 6.9% rise, it was the strongest productivity growth rate over a six-month period since 1961.

(click to enlarge)

The source of the productivity boom is straightforward. Firms are continuing to cut costs even as the economy heals, meaning they are getting more from existing work forces. Nonfarm output rose at a 4% annual rate in the third quarter while hours worked decreased at a 5% annual rate, the department said.

While unemployment remains high, corporate profits have bounced back from the shock of 2008. If output keeps climbing, employment should follow -- and reduce productivity growth from the third quarter's rate.

Big productivity gains are common at the end of recessions and the beginning of recoveries. The usual pattern is productivity grows first, then employment rises, and finally wages increase.

The productivity gains should prevent an outbreak of inflation even though the Federal Reserve has held short-term interest rates near zero and pumped $1 trillion into the financial system through loans and securities purchases. In normal times, so much monetary stimulus would push consumer prices much higher.

The Labor Department reported that unit labor costs -- a measure of what it costs firms to pay workers for a single unit of output they produce -- fell at a 5.2% annual rate in the quarter. They are down 3.6% from a year ago, the steepest drop since the Labor Department began keeping records in 1945.

"The combination of rapidly increasing productivity and falling unit labor costs puts downward pressure on inflation, and should make the Fed more comfortable about pursuing accommodative monetary policy amidst economic growth," J.P. Morgan economists said in a note to clients.

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The productivity of workers is a linchpin to an economy's health and growth potential. The U.S. economy went through a productivity drought in the 1970s and '80s and a resurgence in the late '90s. It slowed sharply between 2004 and 2008.

Though the latest jump could be the start of a new upturn, there are reasons to doubt that the latest rebound can be sustained. The financial shock of 2008 could debilitate a key part of the economy -- the financial sector. The regulatory reshuffling that the crisis has produced could also sap the productivity of some industries. Moreover, business investment has fallen sharply, which has held back a key driver of productivity growth in the past -- business use of new technologies.

Some analysts said businesses might start investing more now. "Faster productivity growth will support profits, and could lead to a more vigorous rebound in capital spending than envisaged," Jared Franz, an analyst at T.Rowe Price, said in a commentary on the report.

A separate report by the Labor Department suggested that the intensity of layoffs could be waning. The department said new claims for unemployment benefits decreased by 20,000 to 512,000 in the week ended Oct. 31. That is the lowest level since Jan. 3. The previous week's level was revised to 532,000. These are still high levels but appear to be on a downtrend.

The four-week moving average of new claims, which aims to smooth volatility in the data, fell by 3,000 to 523,750 from the previous week's revised figure of 526,750. That is the lowest level since Jan. 10.

The U.S. employment report for October, out on Friday, is expected to show that the jobless rate stayed close to a 26-year high of 9.8% in September.

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Saturday, November 07, 2009

US labor market update

October unemployment rate jumped to 10.2%, an important psychological threshold. The decline of employment has slowed down, but the unemployment rate will continue to rise, albeit more slowly.

Employment-population ratio dropped to the lowest level since 1983.

Compared to previous recessions, it looks like we are going to enter a "mother of all jobless recoveries" in this recession.

(graphs courtesy of calculatedrisk, as usual)

In terms of prolonged unemployment, we reached the highest level on record.

(graph courtesy of bigpicture, click to enlarge)

Now listen to Goldman Sachs' Jan Hatzius on the US job market outlook:

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Wednesday, November 04, 2009

Dollar perspective and complications

Interview of Nail Ferguson at Harvard: China's peg to the US dollar makes other export countries' export more expensive, adding pressure to currency intervention of those countries to support the dollar.

China's fixing its currency to the dollar also increases speculative activities across borders, leading the one-way bet that China's Yuan will appreciate in the future.

The first raises chances of trade protectionism; the second increases chance of an overheating Chinese domestic economy (although China has capital control, we know investors can always find their money into China).

But Chinese policy makers won't allow Yuan to appreciate because it will hurt its export sector and China's slow adjustment toward domestic consumption will take a while, longer than most thought.

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Sunday, November 01, 2009

Grantham: The market is overvalued by 25%

From Jeremy Grantham, Boston-based GMO:


Grantham recently put matters into perspective in a Kiplinger article, saying: “The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip com­panies, where valuations are most attractive.”

Here are a few excerpts from the Grantham’s newsletter.

“Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal?

“Price … does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as US stocks reach +30-35% overpricing in the face of an extended difficult environment.

“It is hard for me to see what will stop the charge to risk-taking this year. With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1,100. It can certainly happen. Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels. ‘Painfully’ is arbitrarily deemed by me to start at -15%. My guess, though, is that the US market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1,098 on October 19).

“Unlike the really tough bears, though, I see no need for a new low. I think the history books will be happy enough with the 666 of last February.”

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China must eye for its exit strategy

Qin Xiao, chairman of China's Merchants Group shares his worries about China:

China must keep its eyes fixed on the exit

China, like much of the world, is breathing a sigh of relief that economic disaster has been averted. Better-than-expected macro-economic data are driving growing optimism. But government officials and businessmen should not delude themselves: going back to pre-crisis ways would be a serious mistake.

From a macro point of view, we still have an unbalanced global economy. The US consumes too much and saves too little. China's problem is the opposite. Despite years of encouragement from government to spend more, many Chinese consumers continue to be more comfortable saving than spending. As Wen Jiabao, the Chinese premier, said just last month at the World Economic Forum in Dalian, China's economic recovery "is not yet steady, solid and balanced".

All of us applaud China's far-reaching stimulus programme. But many in China cling to the belief that the export-led model that has worked so well for 30 years will remain largely untouched after the crisis. The US consumer, after all, has always come back, most recently after the dotcom bubble burst and the terrorist attacks of September 11 2001. But the longer global imbalances persist, the more painful the reckoning. Both China and the US must do more.

China needs to play its part by increasing domestic consumption. In the long term, I am optimistic about China's consumption growth. The privatisation of large sections of China's housing market since the late 1990s has contributed to the development of Chinese consumers. The country's ongoing urbanisation, which is seeing about 20m people a year move from the countryside, will continue to power consumption. However, I am not satisfied with the current process, and China has an urgent need to speed up reform to establish a credible nationwide social safety net.

While consumer prices are mostly under control, asset price bubbles are growing rapidly because of huge liquidity injections by governments around the world. Globally, there does not seem to be an exit strategy in place to drain this liquidity from the system. Certainly, in China, stock and property bubbles are a concern.

While we have avoided the worst recession since the Great Depression, we are probably heading for another asset bubble and more financial turbulence. What can we do? Compared with pouring money into the economy, draining money from the economy is a much tougher job for central banks. The dilemma is this: if we tighten monetary policy, there is a high possibility of a "second dip" next year; and if we continue the loose policy, another asset bubble might be not far away.

I do not believe a quick, steep bounce driven by fiscal fixed investment is a good thing for China. Nor is a moderate slowdown anything to be afraid of. Monetary policy must not neglect asset-price movements. Therefore, it is urgent that China shifts from a loose monetary policy stance to a neutral one.

I am also worried about the role of governments after the crisis. There are some who say that this is a crisis of the market economy. It is not; nor is it a time to turn our backs on markets. There have been failures of regulation and oversight, particularly in the west. In China we are still developing our regulatory system. It is a time to strengthen oversight, improve governance and push for freer and more efficient markets in China and abroad.

However, there is growing concern, especially in China, that the temporary stimulus programme might evolve into permanent government control of the economy. The Chinese government should continue to loosen its grip. Prices, especially of energy but including water and food, need to be freed further. The currency needs to be liberalised. Privatisation needs to move ahead. China needs freer markets, not more state control.

Finally, protectionism is a worry. Recent actions are small in terms of the value of the goods involved. But even imposing symbolic protectionist measures to keep domestic interests happy is a dangerous strategy. Both the US and China must resist domestic pressures to restrict trade or risk igniting a wider trade war. Protectionism poses real threats to the global economy and we must be sensitive to changes in US trade policy, as US policies will largely define the future of globalisation.

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Rogers: Solving debt problem with more debt is asking for disaster

Interview of Jim Rogers (from FT)

(click on the graph to play)