Having adamantly opposed
capital controls since its founding in 1945, the IMF now has changed
its tune, sanctioning them as a way of dealing with the tsunami of liquidity
sloshing around in global capital markets. US Treasury Secretary Timothy
Geithner called this a “good start” to dealing with this problem,
blaming countries like China for driving capital into economies with
free exchange rates. But the emerging economies’ governments don’t
see it that way. They believe the IMF’s attention is focused on the
wrong players, as witnessed by Brazil’s Finance Minister assessment
(a hawk on the issue) that this is a “self-defence” measure to enable
the countries “responsible for the deepest crisis since the Great
Depression ... (that) yet have to solve their own problems ... to prescribe
codes of conduct to the rest of the world including countries that are
overburdened by the spillover effect of the policies adopted by them.”
Earlier Brazil’s Executive Director at the IMF (who of course reports
to the Minister of Finance) had expressed a similar view to a Brazilian
newspaper when he told it he objected “to countries that adopt ultra-expansive
monetary policy to get over the crisis [and] provoke an expansion of
liquidity on a global scale” then insisting on guidelines about how
recipients should behave. This looks like a replay of the Doha debate
when the emerging economies’ governments for the first time seriously
challenged the tradition whereby the developed countries arranged world
affairs to promote their own ends.
The European debt crisis
has disappeared from many people’s radar but hasn’t gone away. Italy
& Belgium, the No. 2 & No.3 Eurozone countries in debt-to-GDP
ratio terms (both well over 100%), are still growing their debt faster
than their GDP, & Spain must, over the next 30 months,“roll over”
420BN Euros of debt (vs. 270BN Euros for Greece, Ireland & Portugal
combined).
Many pundits are forecasting
a major commodity price correction. What they may be overlooking is
that as the US dollar appears less of a ‘safe haven investment’,
& inflation fears are growing, investors are seeking refuge in ‘hard
assets’, including precious metals & commodities (by all accounts
both China & India have been buying gold as if it is going out of
style).
Given the upcoming brouhaha
over the debt ceiling, it may be useful to review its recent history.
During Clinton’s second term it was constant at US$5.95TR while during
Bush 43's eight years it was raised every year but one, to US$11.32TR
by September 30th, 2008. The OMB now estimates it will have
to be boosted to US$15.48TR to accommodate the Treasury’s borrowing
programme for the fiscal year ending September 30th, 2011
(with a little room to spare).
A key problem in the
US deficit/debt debate is that polls show that most Americans consider
it to be a less important issue than the economy/jobs : they have
yet to connect the dots.
Despite the impediments
to the movement of people & goods posed by Israeli road blocks &
other obstacles, the economy of the West Bank has been booming : in
2009 it grew by 8% & in 2010 by 9%, and Prime Minister Salam Fayyad
thinks it will hit 9% again this year & could hit 13% by 2013. But
it isn’t built on a very solid foundation. For most of the foreign
capital flooded in has come in the form of loans (that must serviced)
& has gone into real estate, rather than value-adding sectors that
provide a long-term sustainable basis for growth & employment, like
agriculture or industry. Meanwhile donors are paying the salaries of
the 171,000 civil servants (one-quarter of the labour force). And if
foreign money were to quit coming, & it could do so on in an instant,
the air would go POOF out of the balloon (especially given the Israeli
stranglehold on the movement of people & goods inside the territory
& with the outside world)
Rather ironically, as
Americans’ support for the free market system has waned from 80% in
2000 to 59% last year, in Communist China it has waxed to 68% from 66%
in 2002.
One item in this week’s
edition says the US debt-to-GDP ratio is 69%. This is a flawed number.
For it excludes all moneys owed to the SS system & other ‘internal’
accounts. But this is unrealistic, certainly where SS is concerned;
for sooner or later, & more likely the former than the latter, it
will have to start cashing in its UST securities to meet its obligations
to pensioners (note that last year already it paid out more than
it took in). The real ratio is half as big again.
GLEANINGS VERSION
II
No. 406 - April
21st, 2011
S&P CUTS
U.S. OUTLOOK TO NEGATIVE ON FISCAL WORRY (Reuters)
- It said on April 18th
that, while maintaining the US’ triple-A rating, it is downgrading
its outlook to “negative” due to a “material risk” policy makers
may be unable to agree on how to cut its large budget deficits, &
a 33% chance it could cut its long-term rating within two years (i.e.
within the same time frame as the next election). The White House
wasn’t pleased, the official US reaction was “We believe S&P’s
negative outlook underestimates the ability of America’s leaders to
come together to address the difficult challenges facing the nation”
& Geithner told CNBC News “things are better than they’ve been
... you see people on both sides ... agreeing with the president that
we have to put in place some reforms to bring down out long-term deficits.”
Obviously S&P
doesn’t see eye-to-eye with Geithner; for it commented
“More than two years after the beginning of the recent crisis, U.S.
policy makers have still not agreed on how to reverse the recent fiscal
deterioration or address longer-term fiscal pressures.” And,
even using the most optimistic budget cut- & GDP growth- forecasts,
the debt will continue growing faster than GDP for some time; i.e. the
US debt-to-GDP ratio will continue to grow to levels even more incompatible
with a triple-A rating. But what must have
really irritated Washington was that following the S&P announcement
Hong Lie, a spokesman for the Chinese Foreign Ministry made a statement
saying among others that “U.S. Treasury bonds are a reflection of
the U.S. government credit and are important investment products for
domestic and international institutional investors ... We hope the US
government will earnestly adopt responsible policy measures to guarantee
the interests of investors.”
EXPERTS BACKS CHINA
MODEL (China Daily)
- Former US Secretary Henry
Paulson last week told reporters at the Boao Forum “Our (US)
problems are of our own making and we have to solve them ourselves”,
currency is not the biggest issue with regard to our deficit with China,
imports from China are not costing jobs in the US since “If we didn’t
import from China, we’d import from someone else”, and Chinese imports
help increase choice for American consumers & “keep inflation
down.”
This is not the song
he was singing 2½ years ago. The Boao Forum is an annual conference
on Hainan Island that brings together Asian business & political
leaders to exchange views on issues important to them. During the meeting
Lou Jiwei, the head of China’s US$300+BN wealth fund, expressed concern
about the outlook for the global economy with the continuing debt crisis
in Europe & US housing slump, and natural disasters setting back
the Japanese economy. This year it was marked by growing resentment
at the rich countries seeking to impose burdens on the emerging economies
while not giving them a voice in global financial decision-making (especially
as related to their monetary policies that have inundated them with
unwanted capital).
U.S. LACKS CREDIBILITY
ON DEBT, SAYS IMF (FT, Chris Giles & James Politi)
- On April 11th it
said the US lacks a “credible strategy” for stabilizing its debt,
that in 2011 it will be the only advanced economy to increase its budget
deficit though its economy is growing fast enough to cut borrowing,
& that meeting the 2010 G-20 pledge to halve deficits by 2013,
will require tough austerity measures that its economy “appears sufficiently
strong” to handle.
Obviously, the IMF
& Bernanke don’t see eye-to-eye; but its views will have greater
currency with foreign investors than Bernanke’s whose credibility
is sinking lower than a snake’s belly.
PIMCO’S BILL
GROSS FRANTICALLY DUMPING US TREASURIES
(Business Insider)
- In nine months his Total Return
Fund has gone from being 50% to 30% invested in UST securities, the
least in its 23-year history. He is concerned about inflation &
about the US Treasury for years having to raise massive amounts of new
debt to fund major deficits & he believes that the 25 year
era of generally declining interest rates is ending.
It’s an economic
truism that the value of a good in endless supply will gravitate to
zero, and UST securities are not exempt from that. Only those who can/must
match assets & liabilities should now buy bonds (PIMCO’s CEO &
Gross’ co-CIO, Mohamed El-Erian, said after the S&P announcement
“This is a timely reminder of the seriousness of America’s fiscal
issues, for the country and for the rest of the world ... The continued
failure to come up with a credible medium-term fiscal reform program
would increase borrowing costs for all segments of U.S. society” -
i.e. the Fed may lose control over US interest rates).
GEITHNER SAYS HE’S
CONFIDENT DEBT LIMIT WILL BE RAISED (Reuters)
- He told NBC’s “Meet the
Press” on April 17th he is confident Congress will raise
the debt limit & may need to do so before agreeing on future deficits,
and that “responsible people (on Capitol Hill) understand that.”
Two days earlier the House had approved the Ryan “Path to Prosperity”
Plan that would slash spending US$6TR over 10 years by cutting benefits
for the elderly (Medicare) & the poor (Medicaid),
and taxes for the rich & corporations, while Obama would do so by
US$4TR over 12 years by taxing the rich & cutting defence spending.
Let there be no mistake,
these are not real savings, just proposals to spend less than originally
intended. Both parties now have drawn lines in the sand; but they’re
like parallel lines, bound never to meet, except in infinity.
The House bill hasn’t got a snowball’s
chance in hell to pass in the Senate &, even if it did, the President
would veto it in a heart beat. Geithner’s choice of words may offend
many members of Congress, & not just Tea Party hardliners. And the
key issue is not if, when or by how much the debt limit is raised, but
how much damage will be done to the US’ & the dollar’s credibility
on the way through.
THE GRANDDADDY
OF ALL BUBBLES? (BW, Peter Coy & Roben Farzad)
- Price rises not supported
by fundamentals are evident in assets ranging from US farm land, Israeli
biotech, Australian housing & Chinese cemetery sites. Commodity
prices have soared. Global junk bond issuance is at an all-time high.
The S&P 500 trades at 22x earnings, vs. a 16x long-term average.
The Fed continues to pump unprecedented amounts of liquidity into
the system despite pressure from Beijing to start raising rates to help
relieve inflationary pressures in China (last October the Chinese
nouveau riche penchant for old wines resulted in Chateau Lafite Rothschild
1869 wine going for US$233,000 per bottle at auction in Hongkong).
But the Fed insists it’s not to blame for any of this, and that rising
oil & food prices are solely
due to “rising global demand & disruptions in supply”.
Given the recent rise
in farm product prices & the longer-term outlook for them, any assertion
that the rising price of US farm land is
“not supported by fundamentals” is questionable. And the
Fed’s claim of being blameless reminds one of Greenspan’s claims,
since wholly discredited, that the tech- & housing bubbles were
not his doing.
FED DISTANCES ITSELF
FROM HIGH OIL PRICE (FT, Javier Blas)
- It has been cranking out papers
on monetary policy & commodity prices seeking to discredit the notion
its monetary policy has caused the spike in commodity prices, &
to justify ignoring the impact of high commodity prices on headline
inflation & continuing to focus on core inflation. One by
the San Francisco Fed said it had ‘found no evidence’ QE had fueled
the rise in commodity prices & another by the Chicago Fed concluded
that therefore commodity prices could be ignored unless they spill over
into core inflation, which by definition is all but impossible.
“The lady doth protest
too much, methinks.” The Chicago Fed President & the former San
Francisco Fed President, & now Fed Vice-Chair, are Bernanke’s
dovish soul mates.
ECONOMISTS SEE
GROWTH ACCELERATING LATER IN YEAR (WSJ, Phil Izzo)
- The 56 economists surveyed
had on average cut their First Quarter GDP growth number to 2.7% from
3.6% just two months ago. But since they envisage a monthly average
200,000 new jobs to be created, and unemployment to decline to
8.3% (from 8.8% in March) & the price of oil to < US$100 by yearend,
they expect growth to pick up again in the Fourth Quarter (to a 3.6%
annual rate). One in three expects a Fed rate hike in the Fourth Quarter
(& most others in the First Quarter of 2012) as headline inflation
heads for 2.8% by Dec. 31st (though core inflation, at 1.7%,
will stay in the Fed’s comfort zone).
One can only hope
their economic forecast will be proven right, but odds it won’t be.
U.S. HOUSING STARTS,
PERMITS REBOUNDED IN MARCH (AP)
- Housing starts were up 7.2%
MoM in March to a 549,000 annual rate & building permit issuance
11.2% (a disproportionate share of both accounted for by apartments
& condos).
Unfortunately these
increases were from five decade-low levels (a
‘healthy’ level of housing starts is 1.2MM), the National Association
of Home Builders’ Confidence Index slipped to 16 in April, from 17
in March (readings < 50 indicate conditions perceived as
‘poor’), & existing home sales, while up 3.7% MoM in March from
February’s depressed levels, were down 6.3% YoY
ISRAELI PM TO PROPOSE
PEACE DEAL IN CONGRESS (WSJ, Joshua Mitnick)
- He will trot out a new Middle
East peace proposal when he addresses the US Congress next month (to
counter the Palestinian drive for global
recognition of statehood that last week was endorsed by the IMF,
the World Bank & the UN. all of whom declared it
“ready to function as a souvereign state’?), & is apparently
also contemplating the withdrawal of some Israeli forces from the West
Bank, albeit not from Israeli settlements. Israeli Defence Minister
Ehud Barak, the leader of the now truncated Labor Party, warns of a
“diplomatic tsunami” if the Palestinian drive for statehood succeeds,
& his Cabinet colleague Dan Meridor told a group of reporters &
diplomats the regional unrest has shortened the time frame for reaching
a peace deal, since it is strengthening Hamas vis a vis the Fatah-controlled
Palestinian Auhority.
Now that the
‘Palestinian statehood express has left the station’, the window
has slammed shut on Netanyahu’s ability to control the agenda &
he must start playing by the other guy’s rules (thus any withdrawal
of Israeli forces from the West Bank has lost most of its currency as
a bargaining ‘chip’ since, as one Israeli analyst has pointed out,
once the Palestinian state comes into being, keeping them there will
be a breach of international law). Meridor is Deputy Prime Minister
& Minister of Intelligence & Atomic Energy; a long-time member
of Likud, he left it in the late 90's to found the Centre Party but
lost his seat in the 2003 election. Subsequently rebuffed by Kadima,
he rejoined Likud, but only after Netanyahu had promised him a spot
high enough up on the Likud candidate list for the 2009 election to
ensure he got a seat in the Knesset.
ARTISTS ISSUE DECLARATION
FOR PALESTINIAN STATE (NYT)
- By April 19th
over 60 honoured Israeli intellectuals & artists, half of them winners
of the country’s most prestigious awards for excellence in science,
art & culture, had signed a one-page declaration endorsing a Palestinian
state based on the 1967 borders that was to be made public on the 20th.
It states, among others, that an end to Israel’s occupation “will
liberate two peoples and open the way to a lasting peace.. The land
of Israel is the birthplace of the Jewish people where its identity
was shaped ... (and) The land of Palestine in the birthplace
of the Palestinian people where its identity was formed.”
This message will
fall on deaf ears since the hardliners are neither intellectual nor
artistic, as well as wilfully deaf.
DROUGHT FORCES
IRAN TO IMPORT WHEAT (Star City News)
- The head of Iran’s Farmers
Home Association, a former Minister of Agriculture, says drought has
ravaged the winter wheat crops & that as a result the wheat harvest
will fall 30% short of the 15.5MM ton forecast, making it necessary
to resume wheat imports.
The problem, however,
goes much deeper. Much of Iran’s land mass is arid or semi-arid, and
rapid population growth has led to the growing of crops on land not
suited thereto & to husbandry practices that maximize harvests in
the short run at the expense of long-term sustainability.
CHINA’S INFLATION
TO DRIVE RATE HIKES (G&M, Carolynne Wheeler)
- Beijing has made controlling
inflation & managing growth its top priorities. So it has introduced
price controls on some food stuffs and raised interest rates 4x in the
past six-, & bank reserve requirements 9x in the past sixteen-,
months. But in March prices generally were up 5.4% YoY, a 32-month high,
& food prices 11.7%, while First Quarter GDP growth, at 9.7%, was
only marginally down. The pundits expect three more interest rate hikes
this year & price controls to be extended to more food stuffs, and
to pharmaceuticals, textiles & some household goods (price controls
have a poor record of achieving what they are supposed to, & a good
one of creating undesirable economic & fiscal side effects).
On April 17th
it did indeed further increase the banks’ reserve requirements. Beijing
is caught between a rock & a hard place; for both high inflation
& slow growth have proven to be conducive to social unrest. And
it’s getting annoyed with Washington’s endless outpourings of liquidity.
But, while there has been much talk of the inflationary aspects of skyrocketing
house prices (they are up 34% YoY to over 25x average annual earnings),
there has been less coverage of the role played in the process by Beijing’s
massive infrastructure investment programme.
RAUL CASTRO PROPOSES
TERM LIMITS IN CUBA (AP, Peter Orsi)
- The 79 year-old President
of Cuba at the end of his April 16th opening address to a
four-day meeting of the Communist Party Congress, its first since 1997,
held in conjunction with celebrations marking the 50-year anniversary
of the Bay of Pigs invasion, proposed politicians & senior officials
should be limited to two five-year terms. This came after he had enumerated
a long list of proposed economic changes that will drastically change
Cuba’s social system. And he warned major changes are needed if Cuba
is to survive, that problems have been ignored for too long & that
“No country or person can spend more than they have ... two plus two
is four. Never five, much less six or seven, as we have sometimes pretended.”
To many people’s
disappointment he specifically rejected the idea of private property.
ICELAND’S WAY
(NYT, EDITORIAL)
- During the go-go years Iceland’s
banks were the most reckless & irresponsible in the world &
when they crashed they were 10x the size of the country’s economy.
And the government’s refusal to take their debts on its books, forcing
creditors to take the hit with the benefit of hindsight is increasingly
looking to have been a smart move (although the decision to do so was
less a matter of smarts than of an inability to bail them out since
doing so was simply beyond its means). There ought to be a lesson here
for the EU & the IMF that forced bailouts on Greece, Ireland &
now Portugal that left creditors whole while saddling their governments
with unsustainable debts.
- For while Iceland experience
was not painless - its economy shrank 7% in 2009, unemployment quadrupled
& the national debt more than doubled to 100% of GDP its economy
is now starting to recover (GDP is expected to grow by 2½% this year
& unemployment has begun to decline) while in Ireland where the
government let the banks’ debts be offloaded onto the taxpayers’
shoulders, growth this year may (optimistically) be in the 2% range
& the debt-to-GDP ratio is expected to hit 125% in two years.
And the proof of the
pudding is in the eating : it is now cheaper to insure Icelandic debt
against default that it is to do so for Greek, Irish or Portuguese debt.
GREECE FACES HIGHER
BORROWING COSTS AS DEBT FEARS MOUNT (The Telegraph)
- On April 19th
it raised 1.4BN Euros of three month money at a 4.10% annual yield (up
from 3.80% tow months ago), and the yield on its 10-year benchmark bond
soared to over 14%. And while the EC issued what it called a “very
firm denial” of Greek media reports that Athens was going to reschedule
its debt, Clemens Fuest, a German Professor of Business Taxation at
Oxford University who is also Chairman of the German Ministry of Finance’s
Technical Advisory Committee told Reuters : “One must recognize realities.
I am expecting a haircut. The interest payments are breaking Greece”
(even though it has announced that it expects to raise 50BN Euros by
2015 from the privatization of the country’s power & telecom companies
& the ATEbank).
And the President of the Association
of German Public Sector Banks subsequently commented that the
banks would be able to cope with a restructuring of Greece’s debt
(taken as a sign that the banks would not oppose such a move - while
this will be helpful to Chancellor Merkel at one level, it won’t help
her much with Franz & Hildegard German Taxpayer (who detest the
idea of a single one of their hard-earned going to those lazy Greeks.